Tag: social technologies

How economies evolve

The economy is a mechanism by which different solutions are developed, tested and amplified. The mechanism of evolution to achieve this is to increase variety, select appropriate and fit designs and amplify them. Where the efforts of many competing solution developers are tested, i.e. where there is continuous competition for the most appropriate solution, designs are continuously refined through this process. This process is repeated at different levels within an economic system:

  • At the level of individuals, where their cognitive capacities allow them to generate and select between a variety of alternative ideas. They then try to convince others of their ideas, both informally and formally. Factors that contribute to the ability of individuals to generate alternatives include experience and education, but the cultural and social contexts are also important factors that make certain ideas even possible to consider.
  • Within organisations, where appropriate ideas, often in the form of routines or identifiable modules, are selected from a variety of alternatives and then acted upon.
  • At a more aggregate level in the society, where the offerings of different organisations that are deemed appropriate or desirable are selected by other actors. More successful designs thus gain prominence and more resources are allocated to create them, re- allocating resources away from less successful designs.

In the economy, the market takes on the role of the selection mechanism at the level of the society. In the market, the creativity of companies in solving important problems in a society are tested. Markets provide incentives for businesses to increase variety by trying new ideas. They also provide the tness function for selection by having multiple similar businesses compete for the demand of the customers. Finally, markets provide means to shift resources from un t to t designs, which leads to ampli cation. Good ideas are adapted and integrated into a wide range of different contexts.

Economic evolution occurs in different spaces. Nelson and Winter (1982) proposed that an economy changes due to an ongoing process of co-evolution between social and physical technologies [1].  Beinhocker (2006) adds a third space that he refers to as ‘business plans’.

The economy evolves through a co-evolution of physical and social technologies as well as business plans. While variety is created in all three of these domains, it is business plans that are eventually put to the test of selection in the real world.

Beinhocker (2006) describes the three co-evolutions as follows.

Physical technologies are methods and processes for transforming matter, energy and information from one state into another in pursuit of a goal or goals; they enable people to create products and services that are worth trading. A physical technology is not only the physical object itself, but both the design of the thing and the instructions and techniques to make and use it. The ability to learn how to use, make and adapt the physical objects is critical.

Physical technologies generally consist of modules that can be combined, re-combined and adapted in novel ways. Physical technologies are cumulative; each new breakthrough or novel arrangement creates a new building block and exponentially increases future development options as the stock of ‘modules’ or building blocks’ increases.

Central to the use of physical technologies is the ability to combine and recombine existing elements in different contexts. This requires creativity and the ability to learn and adapt.

An example of a physical technology is the use of a smartphone in a small business. The entrepreneur would not only have to acquire the physical phone itself, but also master the use of the phone. Furthermore, it needs to be integrated into management processes, for example by adapting how the company manages time by using the shared calendar function.

Social technologies are methods, designs and arrangements for organising people in pursuit of a goal or goals; they smooth the way for cooperation and trading products and services. For example, the ability to organise people into hierarchies, such as companies or other organisations, which can allocate resources to specialised functions and which can learn, is a social technology.

Like physical technologies, social technologies are modular. They can be captured as routines (for example administrative procedures), arrangements (for example a joint stock company) or even values (for example valuing team members’ opinions). As such, they are also cumulative, and each new module opens new possibilities for a variety of new combinations.

Social technologies are closely related to the concept of institutions in economics, but they go further. While North (1990:3) describes institutions as “the rules of the game in a society”, Beinhocker (2006) includes other aspects in his description of social technologies, such as structures, roles and processes.

Beinhocker (2006) argues that the real driver for increasing productivity in the Western world was changes in how companies organise and manage themselves, in other words, innovation in social technologies. This innovation is not just shaped by good managers inside a company, but also by the society’s de nition of such changes. For instance, an important social technology is the system of laws and regulations and how they are enforced in a society. Laws and regulations make it easier for strangers to cooperate, work together and trade.

Of particular interest for economic development are the social technologies in the form of institutions that emerge to reduce the costs of cooperation, search for and nd relevant information, and try new ideas. While some of these institutions may be associated with markets, or be seen to be ‘market supporting’, there are many that are hard to even directly associate with enterprises and markets. These institutions take the form of organisations that increase the ability of a society to learn, adapt and change, such as the educational system, or documentary programmes on public television. Depending on the sophistication of the economy, more of these organisations exist to fulfil an extremely diverse range of functions. Not all of these organisations are public organisations.

 

While some institutions that the economy needs to develop effectively could be associated with markets, or be seen to be ‘market supporting’, there are many that are hard to even directly associate with enterprises and markets..

This wide range of organisations are generally not at the centre of attention of development programmes. Market development programmes often focus narrowly on institutions that are directly relevant to specific sectors. They take into account certain institutions related to supporting functions and rules, but ignore the importance of institutions that are less obvious but nevertheless critical for the long-term viability of a market system. Examples of such institutions are organisations involved in all forms of education, technology development or industry promotion (such as standards bodies, testing facilities, etc.) that disseminate formal knowledge or create routines in the forms of regulations that can be adapted in other settings. In some cases, market development programmes might be aware of a range of formal supporting institutions, but still choose to work exclusively with enterprises at the micro level to upgrade them.

A range of organisations, often publicly funded, play the role of enabling discovery, reducing costs of exploration, and transforming codified knowledge into regulations, standards, organisations and development programmes. These organisations are often overlooked by development programmes.

A key challenge in economic development is to understand why certain kinds of institutions, both in the private sector but also the public sector, do not emerge on their own.

Business plans are developed by enterprises and other organisations that are competing for resources, acceptance and buy-in in the economy. Business plans play the critical role of melding physical and social technologies together under a strategy and then operationally expressing the resulting design in the real world. From an evolutionary perspective, the purpose of business plans is to discover what is pro table, ef cient or even possible in a given economic context.

According to Beinhocker (2006), a business is a person, or an organised group of people, who transform matter, energy and information from one state into another with the goal of making a profit. One could broaden this de nition and see businesses in the wider sense as public or private sector organisations, such as small enterprises, large rms, government departments and non-governmental organisations, which compete for resources. Business plans are thereby developed and implemented by the management team of these different types of hierarchies. These strategies could be formally captured in documents and plans, or could be more informal. The process of developing these business plans depends on factors from within the hierarchy, but it also draws on capabilities beyond the hierarchy in the broader institutional landscape.

While business plans create variety, there are two different methods of economic selection: ‘Big Men’  [2] and markets (Beinhocker, 2006). ‘Big Men’ mechanisms are associated with hierarchies and power, both on the level of individual companies and society at large.

 

In these hierarchies, selection is mandated rather than based on tness for purpose. This often leads to choosing poor business plans over good ones because they are chosen to conserve power in the hierarchical structure and/or to bene t the people in power.

Business plans create this variety for evolution to select from. There are two different methods of economic selection: ‘Big Men’ and markets. These two methods often build two layers of selection.

In reality, there is a dual layer system of business plan selection at work. The majority of economic decisions are still made by hierarchies – the hierarchies of rms, corporations and other organisations. Only small parts of designs are subsequently put to the test in a market.

This process creates an iterative loop of searching for ideas involving option generation, testing and selection. It starts within management structures and ultimately plays out in markets. Hence market economies are systems of competing hierarchies, with the visible evidence of this competition being the competence of management processes to create variety and pre-select designs to put to the test in markets.

Ampli cation of selected business models occurs as selected models are rewarded with more resources and are widely copied by others. Central to this process are enterprises, but they do not act alone. They are supported by a rich environment of organisations, formal and non-formal institutions and a broader societal context which shapes the market that serves as a selection mechanism.

Markets are important from an evolutionary perspective, but for different reasons than traditional economics teaches – namely being a mechanism for ef cient resource allocation. Markets

  • are evolutionary search mechanisms
  • provide incentives to create variety
  • provide a tness function and selection process
  • provide means to shift resources from un t to t, thus amplifying good solutions for survival.Beinhocker (2006:294) concludes: “Markets win over command and control not because of the ef ciency of allocation, but because of the effectiveness at innovation in disequilibrium”. Markets work because they enable a decentralised search and discovery process for solutions that meet the requirements of a speci c economy or society.

Notes

  1. Arthur (2013: p.14) defines technology as a “means to human purposes”, which could include not only industrial processes, machinery, medical procedures and algorithms (referred to as physical technologies), but also business processes, organisations, laws and institutions (social technologies). Thus technology is about knowledge of how to achieve things.
  2. The term ‘Big Men’ goes back to the concept of a ‘Big Men Society’ in the prehistory of humans, primates, where males competed with each other for sexual access to females. Later in human development, it was usually Big
    Men who led tribes and thereby also dominated decisions on economic affairs, providing the selection mechanism to choose one business plan over another one. Even today, much of the corporate world is still dominated by Big Men and not that many Big Women. Nevertheless, the latter can obviously play an equally important role in shaping selection

References

ARTHUR, B.W. 2013. Complexity Economics: A Different Framework for Economic Though. Santa Fe Institute.

BEINHOCKER, E.D. 2006. The Origin of Wealth: Evolution, Complexity, and the Radical Remaking of Economics. Boston, MA: Harvard Business School Press.

NELSON, R.R. & WINTER, S.G. 1982. An Evolutionary Theory of Economic Change.Cambridge, MA: Belknap Press of Harvard University Press.

NORTH, D.C. 1990. Institutions, Institutional Change and Economic Performance. New York: Cambridge University Press.

Directed and emergent order

A system can be defined as a set of interconnected elements that form a coherent whole with a distinct pattern of behaviour. These elements or agents can be as diverse as animals, cells, humans, organisations or businesses. In contrast to an aggregate, in a system the properties of the elements depend on the systemic context within which they are located. In other words, the system consists of the elements and, in turn, the elements are influenced by the systemic whole (Juarrero, 1999). For example, as part of a community people shape the way things work in the community but their individual behaviours are in turn shaped by the rules and norms of the community they create. This phenomenon is called emergence.

Kurtz and Snowden (2003) describe in their paper two different types of order in natural systems: ‘directed order’ and ‘emergent order’.

A machine: an example of a complicated system with directed order.

Directed order describes a system where “the relationship between an action and its consequences is knowable by bringing in relevant expertise” (Hummelbrunner & Jones, 2013:2). In this space, solutions can be designed as it is clear what the problem is and an agreement can be found on how it can be fixed. These systems can be highly intricate and analysis difficult, which is when they are called complicated. In complicated contexts, the system can be taken apart, defective individual elements can be fixed or optimised and then the system can be put back together. This can be seen for example when a car engine is fixed or when parts of a solar power generation plant are optimised. This works because the functionality of the system is given by the sum of the functionality of the parts. Taking the system apart and fixing or optimising parts individually leads to improved performance of the overall system. If one part fails, these systems often malfunction completely.

A market: an example of a complex system with emergent order.

Emergent order is different. In these systems “there is a fascinating kind of order in which no director or designer is in control but which emerges through the interaction of many entities” (Kurtz & Snowden, 2003:464). Emergent order gives the system abilities that individual components do not have. Most abilities that we attribute to complex systems are emergent properties, such as consciousness emerging from a system of individually unconscious neurons; intricate patterns in the murmuring of hundreds or thousands of starlings emerging from individuals that follow simple rules and only receive signals from their immediate neighbours; a set of rules and norms emerging from a community of individuals living in close proximity; and so on.

Emergence is a process of the elements self-organising into a qualitatively novel state of interrelation, and hence a higher-level order. Emergence occurs when previously uncorrelated elements or processes in the system suddenly become coordinated and interconnected (Juarrero, 1999). An example of this process is the emergence of impersonal exchange in economies. Interrelations between individual market actors over time lead to the establishment of institutions that allow for impersonal exchange. Yet societies have not simply decided to design these institutions and put them in place from one day to the next – rather, they have evolved over time.

Under emergent order, causality is not predictable because the structure of these systems is not fixed but continuously created by the interactions of the actors. The structure changes with the behaviour of the actors in the system. The behavioural choices in turn depend on the structure. This feedback loop creates continuous, dynamic adaptation. Interventions change the system in a way so a repeated intervention will lead to a different result. Hence an understanding of the causal relations for each change can only be gained in hindsight and not through foresight. Snowden (2011) therefore describes emergent order as being only retrospectively coherent. In other words, the causality between an intervention and its effect can only be assessed once it has been implemented. In such systems, analysis and intervention have to merge into a process of continuous trial, learning and adaptation.

Typically in these situations, “there is not only considerable disagreement about the nature of the situation and what needs to be done, but also about what is happening and why. The relationship between an action and its consequences is unknowable beforehand, depending considerably on context” (Hummelbrunner & Jones, 2013:2). These systems are called complex systems or complex adaptive systems.

The current overall functionality of the system has emerged because of the way the components currently function or behave, whether they are perceived as working correctly or being broken. Complex systems often continue to work when one component fails as each part continuously adapts to the functioning of the other parts to preserve the overall functionality of the system. Optimising individual parts will have unintended and unpredictable effects on the functioning of the overall system.

The description of complexity and complex systems builds the basis of the understanding of the economy as presented in complexity and evolutionary economics. Social technologies and effective institutions emerge without a central director or designer and provide an emergent order for human interaction. Effective institutions are the reason humans can achieve capabilities that are not accessible to the individual. For example, institutions are needed to coordinate specialised knowledge in an industry. The institutional landscape co-evolves together and the institutions are consequently strongly interrelated. Optimising them in isolation will have unintended and unpredictable effects on the overall system.

References

HUMMELBRUNNER, R. & JONES, H. 2013. A Guide to Managing in the Face of Complexity. ODI Working Paper. London: Overseas Development Institute.

JUARRERO, A. 1999. Dynamics in Action: Intentional Behavior as a Complex System. Cambridge, Massachusetts; London, England: MIT Press.

KURTZ, C.F. & SNOWDEN, D.J. 2003. The new dynamics of strategy: Sense-making in a complex and complicated world. IBM Systems Journal, 423 462-483.

SNOWDEN, D.J. 2011. Good fences make good neighbors. Information Knowledge Systems Management, 101-4 135-150.

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