The information economy

I very much enjoyed reading Cesar Hidalgo’s Why Information Grows: The evolution of order, from atoms to economies. It’s a very original perspective on the process of secular economic growth, bringing together not only several strands of the economics literature – growth theory, institutional economics, social capital etc – but also physics, biology and information theory. So it’s certainly ambitious, and I found it largely persuasive.

Hidalgo’s first point is that we are misled by thinking of the information economy as ‘weightless’ (a term I think I coined, or at least popularised, in my 1996 book The Weightless World) into forgetting that information is nevertheless physical. “Information is not a thing; rather, it is the arrangement of physical things. It is physical order.” He links the order of the economy to the order of the universe that can exist in pockets despite entropy. Economic order comes about through information embodied in things (‘crystallised imagination’) and in the way people organise themselves to apply knowledge and know-how. The first section is rather poetic. Hidalgo describes a tree as a computer powered by sunlight. “A tree processes the information that is available in its environment.” He describes a colleague at MIT who lost both his legs to frostbite while mountaineering, and built his own prosthetics: “He is walking on solidified pieces of his own imagination.”

The book goes on to consider products imported and exported by countries in terms of ‘crystallised imagination’, which requires “an enormous amount of knowledge and know-how.” Knowledge is the set of instructions – a book describing how to play a guitar – and know-how is the practical experience enabling application – the process of learning and practising playing to produce lovely music. Hidalgo introduces the concept of a ‘personbyte’ – the limit to the knowledge and know-how that can be embodied in one individual. For an economy to go beyond that requires collective organisation. He argues against the normal economic argument that economic development is the process of acquiring the ability to consumer more goods and services. “Economic development is based not on the ability of a pocket of the economy to consumer but on the ability of people to turn their dreams into reality.” (This part doesn’t wholly convince me – it’s an appealing case but surely consumption matters too.)

The book then turns to the idea of the economy as a social and technological system for amplifying knowledge and know-how, and looks at institutional economics and the role of social capital in growth in this context. Conveying know-how is difficult, and becoming more so as time goes by and the economy becomes more diverse and complex. The “computational capacity” of the economy needs to grow, but it is constrained by the ability for knowledge and know-how to be embodied in networks of people – hence the value of trust, as it makes that easier.

Hidalgo’s work on the Atlas of Economic Complexity enters here: there is a strong positive correlation between a complexity index and long term growth (over 10 years). The falling cost of communications and the emergence of standards have increased the number of long-distance market links (instead of transactions within single firms), and this know-how transfer is made far easier by high trust, which enables larger networks. Low trust economies are often characterised by more family firms and rely more on the state to spread knowledge and know-how through its support for industries.

There is a very nice analogy of the economy as a jigsaw. “Moving a complex industry is like trying to move a jigsaw puzzle from one table to another. The more pieces in the puzzle, the harder it will be to move it, as the puzzle falls apart when we fail to move all the pieces at the same time.” It is easier to move just a few pieces to another table that already has part of the puzzle in place. Thus economies mostly grow out from their earlier set of products, which embody the know-how they already have – they already have some of the pieces. The description of this process would very much appeal to evolutionary economists.

A final point that very much intrigues me is measuring growth. Hidalgo makes the same point as the final chapter of my GDP book, that in adding things up in terms of their monetary value we are not capturing the value of diversity: three spoons are not as valuable as a knife, fork and spoon. He says that using market price denomination to aggregate implicitly assumes there is friction-free trading; but this is often not possible, especially with stock variables. He advocates looking at the disaggregated economy via input-output tables.  “The mix of products exported by a region’s industries represents a fingerprint of its productive capacities that does not suppress the identity of the economic elements involved.”

So a highly recommended read for anyone interested in economic growth and development. The insistence on the embodied-ness of knowledge and know-how is surely correct, and also a useful corrective to overly-abstract accounts of economic development, including quite a lot of the newer institutional literature (as Morten Jerven argues, this often amounts to the advice to poorer countries to “be more like Denmark”, ignoring the trajectory from here to there). It’s also a pleasure to read such a well-written economics book; from now on I’ll be envisioning the economy in terms of crystals of imagination.

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Railways and plutocrats

This is a bit off-topic i.e. isn’t an economics book, but I enjoyed Iain Sinclair’s latest, London Overground: A Day’s Walk around the Ginger Line. It’s an absolutely characteristic dyspeptic take on what’s happening in the unfashionable parts of London, the places linked by the tarted-up, more-or-less linked-up overground rail lines where Londoners can afford to live, if they’re lucky, pushed ever-further out by the tide of foreign plutocrat money drowning the housing market, leaving swathes of the city deserted because of the absentee landlords.

Sinclair’s work is an acquired taste but I love it. This is not one of his best – not up to London Orbital standard –  but it does feature one of my favourite things, a Victorian-built railway. Sinclair writes of the “functional elegance of Victorian arches” – indeed. And then there’s the anger, the anger, about the money: “Dirty money was never so bright, so blatant. So protected by the politics of no-nothing quiescence.” This week the Chancellor of the Exchequer said we should stop the banker-bashing; but I’m with the Governor of the Bank of England, saying there had been ‘ethical drift’, and the time really has come for the money people to regain their social licence to operate.

Information, information, information

Yesterday my dear husband (@ruskin147) interviewed César Hidalgo (@cesifoti) about his new book Why Information Grows: The Evolution of Order from Atoms to Economies for next week’s edition of Tech Tent (19 June) on the BBC World Service. I’m very excited about reading this book. I’ve long been a fan of The Atlas of Complexity, on which Prof Hidalgo has worked. Besides, here is the overlap of information, complexity and spontaneous order, computing and economics – what’s not to like?

Prof Hidalgo in the BBC's New Broadcasting House yesterday

Prof Hidalgo in the BBC’s New Broadcasting House yesterday

Economists will naturally think immediately of Hayek’s famous 1945 article, The Use of Knowledge In Society, which is cited in the introduction here. Although information asymmetries are huge in many areas of economics now, I still don’t think we work out often enough or in sufficient detail the implications of information mattering so much. For years – since the mid-90s – I’ve been saying to colleagues that information technology is a profoundly important deal for economic organisation and even now too often get the reaction, well we know how to handle a transaction cost reduction in our models so what’s the big deal?

Anyway, I’m immensely looking forward to reading this and will report back.

More to read

The catalogue from my own publisher, Princeton University Press, arrived in the post & is packed with books I want to read – oh dear, the in-pile is already mountainous. I did read the proofs of the new book by George Akerlof and Robert Shiller, Phishing for Phools: The Economics of Manipulation and Deception, and recommend it strongly as an alternative take on the fashionable behavioural economics. Among other enticing new titles are Martin Sandbu’s Europe’s Orphan, Empire and Revolution: The Political Life of Edmund Burke by Richard Bourke, Capitalism: A Short History by Jurgen Kocka, Political Turbulence: How Social Media Shape Collective Action by Helen Margetts, Peter John, Scott Hale and Taha Yasseri, and Robert Gordon’s The Rise and Fall of American Growth (although we’ve all read all his papers of course).

But the really big news: my own GDP: A Brief But Affectionate History will be out in paperback in the autumn!

Nothing inevitable about today’s inequality

A guest review by Gonzalo Viña

A great deal has been written about one of the scourges of our time, the rise of economic inequality in most parts of the world. Much of what has been written documents the phenomenon, deplores it and – as if with a shrug of the shoulders – offers little in the way to remedy it.

As the title implies, Inequality – What Can be Done? by University of Oxford professor Anthony Atkinson, not only documents the growing inequality gap of recent decades, but asks why we should care about it and, most importantly, what can be done about it. But the value of this book lies not so much in the recommendations but in the full frontal assault Atkinson makes on the lazy intellectual dogma that inequality is inevitable.

Atkinson’s views deserve special attention not only because he was studying inequality long before it became fashionable, but because he harnesses the evidence to show that political choices rather than economics are at the heart of whether governments should tackle the widening gulf between the very rich and the rest.

Atkinson hits at the heart of the myth that inequality is somehow impossible to stop. He argues that we are approaching levels of inequality not seen for close to a hundred years because of deliberate policy choices made in the 1980s. By that logic, policy can again be used to reduce the gap. Politicians will face difficulties, Atkinson argues, “These constraints leave room for choice. It is not the case that ‘there is no alternative’.”

Atkinson is an economist, and this book primarily concerns itself with economics, but the underlying message is that the path towards mitigating the rise in inequality is political. The first and driest part of the book runs through the evidence, showing that most economically developed countries have become more unequal, taking aim at some of the more popular arguments deployed by inequality sceptics, notably that technology and globalisation advance, remorselessly sweeping aside any attempts by governments to stop them.

The book then sets out 15 proposals for action that set ‘directions of movement’ towards putting the UK somewhere in the middle of the world’s most unequal rich countries rather than at the top end of the spectrum. Atkinson notes that change takes time and some policies will be more effective than others.

Still, much can be achieved if we – i.e. our governments – put our minds to it. A more progressive income tax system, property and inheritance taxes, establishing a living wage, the re-introduction of a universal Child Benefit would make an immediate impact. The creation of a Social and Economic Council to take into account the social impact of economic decisions, greater power for trade unions or a scheme to make the state an employer of last resort are other notable highlights. Atkinson also points to evidence that suggests that revenue-maximising top rate of income tax is just under 57% leaving, “Room to increase the top tax rate from its present 45%.”

The final section of Atkinson’s book is a pre-emptive strike against all those who are likely to rubbish his proposals. Armed with a wealth of economic and historical evidence, Atkinson prepares the ground for the clash of ideas or “national conversation” that he says needs to take place. For those saying that Europe can no longer hang on to its social model in this world of globalisation, mobile capital and technological change, Atkinson reminds us that a great deal of the social security measures we take for granted today were implemented between 1881 and 1913, the last great age of globalisation.

Similarly, Atkinson says that there is no ‘smoking gun’ to suggest that taking steps to tackle inequality reduces economic growth or reduces the size of the cake. Leaving aside the questionable mix of metaphors, Atkinson suggests that much of the existing analysis on the effects of welfare and redistribution is generally too narrow and fails to capture the full economic benefits of such measures.

Taken together, the measures that Atkinson proposes involve raising an extra £31 billion a year in tax and spending just under £29 billion year. That realignment would help take the UK back to where it was before the ‘inequality turn’ that began in 1980. Atkinson refers to such steps as bold, but they pale in comparison to the £200 billion cost (in today’s money) of the government’s sale of local authority housing to tenants since the 1980s.

This says a lot about where the political centre of gravity is today. That voters rejected more modest proposals put forward by Ed Miliband at the last election shows that much persuasion still needs to take place despite the unfinished financial crisis that began in 2008. Still, what Atkinson does is destroy the myths that make it impossible for us to have a conversation about whether or not we choose to do something about increasing inequality. He shows that we can do things differently if we want to and that governments have the power to shape and tame economic forces that the existing consensus says are unstoppable and inevitable.

Like it or not, we live in a world where food banks are more common than investment banks. “Solutions to the problems lie in our own hands.”  Thanks to this book, we should now be able to have a conversation about whether or not we choose to do something about it.

Gonzalo works as an adviser on Oxfam’s inequality campaign and views expressed here are his own. This article was originally published in Disclaimer Magazine.

Inequality was reviewed previously on this blog, and has been reviewed elsewhere including here in The Economist.