The New Economics: Harnessing Complex Adaptive Systems for Business Growth

The new science of complex adaptive systems in economics has transformative potential for business. This new science reveals how competitive entrepreneurial exploration of new technologies, products, and services can drive continuous economic growth. Think of it as a new law of economics, centered on the roles of value and selection in evolving entrepreneurial systems.

Traditional economics has struggled to identify unifying laws. However, the science of complex evolving systems provides a fresh perspective. An evolving system comprises many interacting components that increase in diversity, distribution, and patterned behavior over time. This seems to contradict the second law of thermodynamics, which states that natural phenomena become increasingly disordered over time.

A New General Law of Economics

By applying the principles of complex evolving systems, we can identify a new general law of economics: the emergence of new economic value over time, driven by competitive entrepreneurial discovery.

Characteristics of Evolving Systems in Economics

Analyzing the economy as a complex evolving system reveals three key attributes:

Resource Configurations: There are countless ways to combine resources and inputs into new configurations.
Discovery Processes: These processes generate new configurations.
Selection: Certain configurations persist due to their value.

Increased order in such a system results from selection: some configurations have advantages that make them more likely to endure. Similarly, the economic system evolves through the selection of advantageous configurations.

The Economic System as an Evolving System

In economics, new configurations emerge from the diverse resources and capital structures. Entrepreneurship drives the discovery process by experimenting with new combinations. The end-user market then selects for value, ensuring that only the best configurations survive.

Therefore, the three characteristics of evolving systems—component diversity, configurational exploration, and selection—are fully demonstrated in the economic system and underpin the law of increasing value. This law can be generalized: economic systems with many interacting agents display an increase in diversity, distribution, and patterned behavior when numerous entrepreneurially generated configurations are subjected to value selection pressure. Value is the universal basis for selection in economic systems.

Three Orders of Value Selection

Foundational Value: Configurations evolve to a point where they can self-maintain, with no need for reorganization or recombination. This value is associated with reliability, repeatability, trust, reputation, and ethics.
Adaptive Value: Entrepreneurship drives knowledge building and information processing, supporting the creation of new configurations. Economic entities adapt dynamically to market changes, leading to growth, innovation, and competitiveness.
Evolutionary Value: In complex systems, entirely new functions can be imagined and created, opening up new possibility spaces. This value is associated with the ability to invent new functions continuously.

Selection as the Key to Evolution

Selection is the primary enabling constraint in this model. A system will evolve, or increase value creation, if many different configurations are subjected to selection for value. For this to occur, markets must be free to select, entrepreneurs must be free to innovate, and selection pressures must be allowed to intensify.

Underlying Principles

Information Richness: Greater and faster flows of knowledge and data can open new possibility spaces for value creation.
Selection Pressure: The competitiveness of the market system is crucial for driving value creation.
Potential to Evolve: Systems vary in their potential to evolve. Increasing current value can enhance future value potential.
Rate of Change: The evolution rate can be influenced by increasing the number and diversity of interacting agents, the number of different system configurations, and the selective pressure on the system.
Interdependence: Evolving systems are overlapping and interdependent. Information transfers within these systems create an “information field.”
Value Selection: Systems that select based on Foundational, Adaptive, and Evolutionary Value will see increased value creation.

Understanding and applying these principles can help young professionals navigate the complexities of modern business economics and drive continuous growth and innovation.