The information economy

I very much enjoyed reading Cesar Hidalgo’s

. 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.

[amazon_image id=”B00R3C1V0Q” link=”true” target=”_blank” size=”medium” ]Why Information Grows: The Evolution of Order, from Atoms to Economies[/amazon_image]

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

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 

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

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.

Share

Information, information, information

Yesterday my dear husband (@ruskin147) interviewed César Hidalgo (@cesifoti) about his new book

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.

[amazon_image id=”0241003555″ link=”true” target=”_blank” size=”medium” ]Why Information Grows: The Evolution of Order, from Atoms to Economies[/amazon_image]

Share

Grass roots

There’s an interesting evaluation of Jane Jacobs in The Architectural Review, arguing that her fabulous book 

misses the real target in attacking ‘planners’ instead of developers, and discounting the scope for state involvement. This made conservatives fond of her, essay author Sharon Zukin argues. But it concludes warmly: “Jacobs’s challenge to maintain the authenticity of urban life still confronts the fear of difference and the hubris of modernising ambition. At a time in which local shopping streets are the target of attacks against a broader alienation, we urgently need to connect her concern with economic development and urban design to our unsettled social condition.”

[amazon_image id=”067974195X” link=”true” target=”_blank” size=”medium” ]The Death and Life of Great American Cities (Vintage)[/amazon_image]

The essay cites the famous ‘sidewalk ballet’ in the second chapter in

:

“Under the seeming disorder of the old city, wherever the old city is working successfully, is a marvelous order for maintaining the safety of the streets and the freedom of the city. It is a complex order. Its essence is intricacy of sidewalk use, bringing with it a constant succession of eyes. This order is all composed of movement and change, and although it is life, not art, we may fancifully call it the art form of the city and liken it to the dance — not to a simple-minded precision dance with everyone kicking up at the same time, twirling in unison and bowing off en masse, but to an intricate ballet in which the individual dancers and ensembles all have distinctive parts which miraculously reinforce each other and compose an orderly whole. The ballet of the good city sidewalk never repeats itself from place to place, and in any once place is always replete with new improvisations.”

Echoes of course of that other grassroots philosopher Adam Smith. Not only: “It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest,” from

, but also this from
:

“The man of system…is apt to be very wise in his own conceit; and is often so enamoured with the supposed beauty of his own ideal plan of government, that he cannot suffer the smallest deviation from any part of it… He seems to imagine that he can arrange the different members of a great society with as much ease as the hand arranges the different pieces upon a chess-board. He does not consider that in the great chess-board of human society, every single piece has a principle of motion of its own, altogether different from that which the legislature might choose to impress upon it.”

  [amazon_image id=”0143105922″ link=”true” target=”_blank” size=”medium” ]The Theory of Moral Sentiments (Penguin Classics)[/amazon_image]   [amazon_image id=”B00JVST6CA” link=”true” target=”_blank” size=”medium” ]The Wealth of Nations[/amazon_image]

Share

The El Farol problem goes digital

I saw this tweet and it immediately reminded me of Brian Arthur’s El Farol equilibrium story.

AdamRFisher
Please develop an app that simulates Waze recommendations to assess which routes will open up based on everybody else follow Waze.
13/05/2015 07:12

For those who don’t know it, El Farol is a bar in Santa Fe, where Arthur is based. It has great Irish music but the problem is that it’s no fun if the bar gets too crowded. What is the outcome in this situation where people are trying to choose based on beliefs about what others will choose? There is no ‘deductively rational’ solution to this choice problem. In his paper, Arthur writes: “If all believe few will go, all will go. But this would invalidate that belief. Similarly, if all believe most will go, nobody will go, invalidating that belief. Expectations will be forced to differ.” Simulating behaviour of 100 agents repeatedly shows that mean attendance at El Farol quickly converges to 60, but with large swings from period to period, and changing identity of those attending – it isn’t always the same 40 with a varying number of extras. “while the population of active predictors splits into this 60/40 average ratio, it keeps changing in membership forever. This is something like a forest whose contours do not change, but whose individual trees do. These results appear throughout the experiments, robust to changes in types of predictors created and in numbers assigned.”

The Waze problem looks similar. If you see congestion on your planned route, you’ll switch to an alternative – perhaps – for you also have to predict how many other people will switch too, and whether the initial congestion will stay or vanish if there are enough other users of similar apps.

Later work on El Farol found one game theoretic solution: individual agents adopt a mixed strategy, whereby each has a fixed probablility of choosing either El Farol or an alternative bar. Another is that after a period of learning, agents sort themselves into groups, those who always go and those who always stay home. But I don’t think these work for Waze-style congestion problems which are not repeated.

Indeed, real-time apps are surely creating more of these kinds of co-ordinated decision problems.

Brian Arthur’s book

is a nice introduction to his work.

[amazon_image id=”B00SLUR9HI” link=”true” target=”_blank” size=”medium” ]Complexity and the Economy: Written by W. Brian Arthur, 2014 Edition, Publisher: Oxford University Press, USA [Hardcover][/amazon_image]

Share

Markets in stories

Yesterday I attended a very interesting conference, on Non-Equilibrium Social Science, which stands for making economics more realistic and interesting – looking at the economy in terms of non-linear dynamic systems. As ever at a good conference there were some great opportunities for conversation – and book recommendations. I came away with Marion Fourcade’s

, and W.E.G.Salter’s
, and William Hazlitt’s 1805
.

[amazon_image id=”0691148031″ link=”true” target=”_blank” size=”medium” ]Economists and Societies: Discipline and Profession in the United States, Britain, and France, 1890s to 1990s (Princeton Studies in Cultural Sociology)[/amazon_image]   [amazon_image id=”1144113512″ link=”true” target=”_blank” size=”medium” ]An Essay On the Principles of Human Action: Being an Argument in Favour of the Natural Disinterestedness of the Human Mind..[/amazon_image]

Also, after hearing him speak, David Tuckett’s

. His argument was, in a nutshell: “Financial markets are markets in stories.” He classed as standard models both the rational choice and ‘behavioural’ approaches to decision making, because both assume there is an objective reality about which an optimum can in principle be known or calculated. Instead, Prof Tuckett argued, the decision problem is one of making any sense at all of how to act now on the basis of information now about an ontologically uncertain future. His answer is that we act on the basis of ‘conviction narratives’ which are collective interpretations of what today’s ‘facts’ (all based on our sense perceptions) mean for tomorrow. He described some empirical work looking at the stories that run in financial markets, as extracted from unstructured texts such as newswire reports, brokers’ notes and Bank of England reports.

[amazon_image id=”0230299857″ link=”true” target=”_blank” size=”medium” ]Minding the Markets: An Emotional Finance View of Financial Instability[/amazon_image]

This is intriguing. It certainly chimes with my unease (as in my Tanner and Pro Bono lectures) about the way economists talk – especially in the context of policy – as if they are omniscient outsiders, not part of what they are analysing. My question – which Prof Tuckett agreed is still-unexplored territory – is how reality interacts with our narratives, sometimes changing them. I’d like to have followed up by asking if the idea is a 

paradigm shift, but in the domain of financial markets, or economic life in general, rather than scientific exploration.

Another conference highlight was Bridget Rosewell on the inadequacy of our standard cost-benefit approach for deciding whether or not to go ahead with transport infrastructure projects, inadequate because they use a comparative static, equilibrium framework for something that is bound to change the dynamics of the economy. She gave many examples of projects that would never have passed a modern cost-benefit assessment, from Bazalgette’s London sewers to the Jubilee Line Extension and – as she is scrupulous – an example of one that wasn’t making it in terms of her tale of self-fulfilling visions that deliver the benefits they subscribe. (This is the fantasy airport on Boris Island, which she supports.) Bridget touches on this infrastructure question in

.

[amazon_image id=”1907994149″ link=”true” target=”_blank” size=”medium” ]Reinventing London (Perspectives)[/amazon_image]

Share