1. The reorganization of production The information and service economy October 15, 2007 Bob Glushko and Anno Saxenian

2. Rethinking productive organization 1.Strategic organizational design  Mixing market, hierarchy, networks within the firm 2.Complexity economics  Economy as a dynamic, constantly evolving system

3. Strategic organizational design  Industrial era organizational model Scarce capital and high transaction costs Hierarchical authority & vertical integration  21 st century business environment Scarce talent and falling transaction costs Old model : unproductive complexity Maximize returns to people, “knowledge” workers, not capital

4. Knowledge as key asset  Peter Drucker The rise of the knowledge worker Essence of management is to make knowledge productive (a social task)  Stephen Vargo Skills and knowledge are unit of exchange; Knowledge key source of competitive advantage  How to mobilize and motivate talent?

5. 21 st c. organizational design  Bryan and Joyce model  Large scale enterprise-wide collaboration Collaboration enabled by digital technology “One-company” governance structure Clearly defined tasks and accountability Talent and knowledge marketplaces: stimulate exchanges of knowledge Replace managerial supervision with autonomy and measures of performance

6. Complexity economics  Eric D. Beinhocker The Origin of Wealth: Evolution, Complexity, and the Radical Remaking of Economics  How is wealth created? Specialization and trade, a la Smith Bottom-up, self-organized process Marvel of complexity!!

7. Explosive growth in human wealth

8. Modern growth: post-1750

9. Economic growth as evolution  Wealth creation via evolution: differentiate, select, and amplify  Evolution as an algorithm for innovation  Universal algorithm of evolution is implemented in information processing substrate of human economic activity  “Design without a designer” Evolution searches enormous design spaces for solutions fit to purpose and environment Massive system of trial and error

10. Tri-partite economic evolution 1.Evolution of physical technology 2.Evolution of social technologies Co-evolution of physical and social technologies 3. Business designs evolve via market Fuse physical and social technologies into products & services

11. A new economic model  Traditional economic theory Static, equilibrium models Sources of growth are exogenous (e.g. technology, changes in tastes, etc.)  Economy as complex adaptive system Individual agents interact, process information, create emergent structures Evolutionary system as sub-class Example: biology, cells in immune system

12. Complexity economics W. Brian Arthur, references on complexity economics  "Agent-based Modeling and Out-of-Equilibrium Economics" Handbook of ComputationalEconomics, 2006.  “Complexity Economics and the Economy” Science, 1999  "Positive Feedbacks in the Economy," Scientific American, Feb. 1990 The story of the sciences in the twentieth Century in one of a steady loss of certainty. Much of what was real and machine-like and objective and determinate at the start of the century, by mid-century was a phantom, unpredictable, subjective, and indeterminate. W. Brian Arthur “The End of Certainty in Economics” Einstein Meets Magritte Conference, 1994

13. The search for a grand theory  Hidden simplicity behind traffickings of traders and manufactories and butchers... the “invisible hand”  Economy as a gigantic machine; if we understood the working of its parts we could predict the whole.  Goal: Grand Unified Theory of economics Theory of the consumer, rational human behavior + theory of the firm = microeconomics Aggregate theory of the economy = macroeconomics  Economics as predictive science becomes mathematics (e.g. models of rational expectations)

14. The end of certainty in economics  What defined science at start of century? The power to predict The clear distinction between subject & object  What does loss of predictive power in sciences mean for economics? Other social sciences? Economics claims to be a science: a body of well- reasoned knowledge; has maintained “certainty” But is the economy like a gigantic machine?

15. Limits of traditional economics 1.Human beings not orderly machine components Finessed with “economic man”: perfectly rational being who reasons deductively on well defined problems 2.Technology destroys machine, changes entire economy Couldn’t be finessed so technology either ignored or treated as exogenous by economics. Economic man (subject) needs to operate on well-defined Problems (object) to make orderly, predictive theory possible. And well defined Problems should have well- defined Solutions

16. Economics and indeterminacy  Once you acknowledge that people don’t have complete information and well defined, predetermined preferences you encounter problems of logical indeterminacy. People create world that forms their expectations, but don’t (can’t) do so in a perfectly logical deductive way; Our ideas and preferences co-create the world that our forecasts attempt to predict, and problems are indeterminate.  Impossibility of separating subjects of the economy (the people that form it) from the object (the economy itself) creates large areas of indeterminism.  Examples: Crashes and bubbles

17. Complexity and the economy Complexity economics as non-equilibrium theory with nonlinearities, positive feedbacks: multiple equilibria, increasing returns, importance of small events.  Complex systems w/ multiple elements adapt & react to patterns created by the elements;  Natural sciences: elements (ions in a spin glass) co-create; systems evolve  Application to economics: human agents become the elements in the systems (bankers, consumers, firms, investors) but they do have strategic intent, behavior

18. Emergent effects  Complex systems are self-constituting and coherent systems driven by interaction of equals, without central authority or control.  Need to understand dynamics of the network and dynamics on the network.  Importance of phase transitions in different spheres, social to chemical to physical.