Sunday, October 24, 2010

The Origin of Wealth

I've been reading the book "The Origin of Wealth" by Eric D. Beinhocker.
In general, I find it to be a great read.
I'm really excited that there are economists out there who are trying to actually understand how humans build economies. The author makes a strong case that dropping assumptions of perfect rationality is a must in any economic theory.

I also like see that economists are now using computer games (simulations) to predict general economic trends. While the computer games must eventually be replaced with mathematical formulas, I think that the "Sugarland" simulations do a great job of helping us see the world anew, and without that "seeing the world anew" we don't know where to start to be able to come up with equations that closely approximate human behavior.

I love his chapter on behavioral economics, in which he reminds us that Adam Smith wrote "A Theory of Moral Sentiments" before "On the Wealth of Nations" and that Adam Smith did realize the complexity of human behaviors. We aren't just selfish. We are also social creatures. We sometimes are "altruistic punishers", i.e. we will go out of our way to punish those who we think are gaming the system or free-riding, even if it's not in our economic self-interest.

I also love the chapter on game theory. There's a graph on page 232 that shows which "game theory strategy" dominates versus time if the "game theory strategy" can evolve.

The strategies start simple (such as "always trust the opponent" or "always distrust the opponent"), but they evolve to higher levels (such as "start off by trusting, but if it opponent screws you, then screw them back.)

Eventually, they evolve either further to "start of by trusting, but if it opponent screws you, then screw them back, but then watch them for 'N' moves to see if they go back to being nice."

This is how the simulations worked out, there was no design for this to happen, it just happened! If the equations allow for differentiation, selection, & amplification. I think that we should learn from this example, but we should also remember that there is no optimal solution to the game theory problem. Ultimately, there's no way to know what is the optimal strategy because the rules of the game are continuously changing; the Earth is not stagnant. There is no right political philosophy. One philosophy may be better (on average) during certain times, but others may be better (on average) during other times throughout history. But since there's no way to test all political philosophies at the same time, there's no way to argue that one philosophy is better than another. All we can say is that right now, a particular philosophy has more adherents that another philosophy.

I think that Eric Beinhocker gets most things right, but he's a little off with his idea of "Fit Order." He states on pg 316, "All wealth is created by thermodynamically irreversible, entropy-lowering processes. The act of creating wealth is an act of creating order, but not all order is wealth creating."

He seems to miss the fact that the point of life is to increase the entropy of the universe. The meaning of "order" is confusing, and therefore I personally try to stay away from it. However, entropy is a well-defined term (both for systems in equilibrium and out of equilibrium.)

The structure we see due to life is due to the structure & symmetry inside of the equations of nonlinear, non-equilibrium thermodynamics.

Wealth, as I understand it, is related to the capability to do work (measured in kJ) and it is related to the fact that life has the ability to store available work (such as chemical exergy) to overcome activation barriers that would take too long to overcome without the stored work, and in the end, the entropy of the universe increases faster than it would have without the life structure. The structure (or fit order as Eric calls it) is the means to the end, not the end in of itself.

When you defined wealth in terms of exergy, you can avoid the problems in Eric Beinhocker's definition of wealth, and you can avoid this idea of fit order (neither of these terms are measurable.)

So, in conclusion, I'm a big fan of the book, but I have a problem with his definition of wealth as "fit order."

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