I was always fascinated by economics... but every time I tried to study it I was put off by the sheer idiocy of it all. Pretty much every founding principle of economic theory is complete and utter crap, and it infuriated me that educated people bought into it. Economists totally tarnish the nobility of the Nobel Prize...
That was before I picked up the amazing book The Origin of Wealth, which is about a new field called complexity economic theory. Complexity theory states pretty clearly that "traditional" economic theory is crap... and replaces it with a vastly more enlightened model. The economy cannot be modeled with automatons with perfect knowledge buying widgets; its based on the principles of complex, dynamic, evolutionary systems... and has many emergent properties that are impossible to predict, although clearly not random. Its pretty academic, but if you have a basic understanding of physics, computer modeling, and evolutionary biology, its a must read.
Anyway, In the book the author tries to answer the only economic question worth asking:
- How is wealth created?
Traditional economic theory states that by specializing in a trade -- or a product -- you can create wealth... I make axes, you make clay pots, we trade, and wealth is created... but why? What is this thing we call "wealth," and how exactly does trading and commerce create it?
We should emphasize here that the economy is not a zero-sum game... Many used to believe that there is a fixed amount of wealth in a country, determined by the natural resources a country has, its labor, and its ability to turn the two into wealth through technology. Nope. The economy is not a big pile of gold. People shouldn't have to lie, cheat, or steal to get their share... That philosophy is called mercantilism (thanks solistics), and is rejected even by traditional economists... although tradition economists could never get the math to work out to explain how wealth was actually created...
To illustrate further... On occasion, a king, a country, or an organization stops innovating, and simply coasts on the capital from previous glories. At this point, the local economy does resemble a zero-sum game, and no economic progress is possible. In fact, if the competition (ie, other countries) continues to innovate, the organization will get poorer. Throughout history, closed societies (North Korea, Fundamentalist Muslim nations, Ancient Sparta) failed economically, whereas their "open" counterparts (South Korea, Dubai, Ancient Athens) became economic powerhouses.
Throughout history, zero-sum thinking has caused wealth to stagnate... whereas sharing, cooperation, and innovation always generated new wealth. By following win-win situations, new wealth can be created almost by definition... But how on earth does it work? What could explain it all?
Wealth Is "Fit Order"
The author put forward a pretty cool theory: wealth is fit order. By this, he means that wealth has little to do with natural resources, capital, or labor... its not even so much about technology. Instead, wealth and knowledge are fundamentally the same thing!
Note: raw data is insufficient to create wealth... This difference is partially semantic, but it's important. Knowledge needs to be transferable and useful to others. Thus your religious faith and supernatural beliefs have personal value to you, but no economic value... In fact, they can have serious negative value if you listen to shady preachers or TV psychics...
True wealth only occurs when a piece of physical technology and a piece of social technology mix into a "business plan." In addition, implementing the plan needs to create higher levels of order from available raw materials... pedantically speaking, a plan must be thermodynamically irreversible, decrease local amounts of entropy, and thus consume lots of energy. I have my doubts if this is a requirement -- deleting embarrassing emails and demolishing buildings can alone increase wealth -- but for now I'll agree.
In the next step, the information -- or "order" -- is tested out in the "economy" to see if it is "fit". Beinhocker provided a wealth (har!) of data demonstrating that the economy is an evolutionary system, which means it adheres to a basic evolutionary algorithm:
40 GOTO 10
This is survival of the fittest. Most ideas are slight variations on existing ones, and on occasion you see radical new ones. The radical ideas are more likely to fail, but every once in a while they completely change the economic landscape.
If the business plan is copied by others, it replicates. Now, sometimes the business world is trendy, and people copy ideas for no good reason... but if the idea lasts over a few years, it can be considered fit. Fitness, naturally, is dependent on your environment: a polar bear is a rock star on the ice, but wouldn't survive long in the Sahara...
Fit order creates wealth.
Skeptical? Consider this: did the invention of marketing create wealth? How about public relations? What about customer service, or human resource departments? Do any of these things produce physical objects of material value? NO! But do they produce wealth? YES!
How do we know? Well, corporations that adopted good practices in these "service" areas outperformed their competitors. They got better employees, better customers, better products, and better market capitalization. In the dog-eat-dog world of capital markets, companies with these services attracted and generated more capital. If additional wealth wasn't generated by these activities, no corporation would implement them for long.
Clearly, service industries generate wealth just as agriculture and manufacturing. Simple as that!
All of these are examples of fit order. Marketing is a good way to make a bad piece of technology sell better, or to help inform people about good technology. Public relations keep you out of trouble when the news is bad, and helps you toot your horn when the news is good. Customer service ensures your customers are happy, and willing to pay a premium for your product. Finally, good human resources ensure you locate and retain the best employees.
The job of a computer geek is even more abstract... we string together ones and zeros into applications that make our customers feel stupid, then we mock them. By some bizarre chain of events, the economy appears to prize this career over the creation of food... Similarly, school teachers are vital for our next generation, but they don't make nearly as much money as sports stars... Adam Smith called this the diamond/water paradox: water is essential to human life but is nearly free, whereas diamonds have little to no value and yet cost a lot... Price is all about supply and demand, and has little to no bearing on the actual value of something.
Ummmmm... So Why Does Google Owe You Anything?
If Beinhocker is correct, and there's a direct correlation between wealth and knowledge, then public data stores like Google are modern wealth-creation engines... This idea in general was covered by The Economist and Jimmy Guterman at O'Reilly recently, but I don't think either understood the full implications...
When the modern banking industry began, very few people saw it as the wealth-creation mechanism that it was. Many saw it as a wealth protection and re-distribution system. Investors saw them as a "safe" place to put their money. Bank managers understood profit, loss, and risk... which meant charging the right interest in order to make a profit for the bank and its investors... however, many still regarded the economy as a zero-sum game.
Since Google stores so much information, they can mine it to find new kinds of ideas, new concepts, and create new knowledge. Thus, they can sift through the cruft and chaos on the web to find the order. Since Google tracks everything, they can watch trends, and monitor the popularity of certain ideas. Thus, they have their fingers directly on the pulse of what kind of order is fit.
If wealth is actually "fit order," then giving information to Google is like putting money in a bank, but not getting interest! That's why Google owes me money... or at the very least they owe me a few good ideas. However, I already have more ideas than I need, so I'll settle for a pony.
The Economist compared Google to some of the original banking families... not because they do the same things, but because they both wield tremendous power. Well, Google indeed holds the same power... not by coincidence, but because Google is creating wealth in the same way the Rothschilds and the Warburgs did. It by no means a coincidence that they wield the same power: if Google was not instrumental in the creation of wealth, they would be on the ash-heap of history by now.
An older article in The Economist asks how a company like Google can be so big, and yet claim to not be motivated by money. I believe the answer is simple: Google isn't motivated by cash; Google is motivated by wealth. Cash is only one mundane variation of wealth, which becomes less and less useful every year. What use is your gold in a world with Star-Trek replicators? It isn't worth nearly as much as your ideas are... and desktop replicators are closer to reality than you may know...
As such, Google might just understand things about the new economy that others fail to grasp... or perhaps they just stumbled ass-backwards into one of the greatest wealth generation systems since J.P Morgan.
Either way, good for them.
And gimme my pony.