The information economy

I very much enjoyed reading Cesar Hidalgo’s [amazon_link id=”B00R3C1V0Q” target=”_blank” ]Why Information Grows: The evolution of order, from atoms to economies[/amazon_link]. 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 [amazon_link id=”B00OX8YWZE” target=”_blank” ]Atlas of Economic Complexity[/amazon_link] 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 [amazon_link id=”0691156794″ target=”_blank” ]GDP[/amazon_link] 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 [amazon_link id=”1783601329″ target=”_blank” ]Morten Jerven [/amazon_link]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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Information, information, information

Yesterday my dear husband (@ruskin147) interviewed César Hidalgo (@cesifoti) about his new book [amazon_link id=”0241003555″ target=”_blank” ]Why Information Grows: The Evolution of Order from Atoms to Economies[/amazon_link] 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]

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Taking information seriously in economic policy

Earlier this month I wrote about Joe Stiglitz’s Jean-Jacques Laffont speech at the Tiger Forum, which was based on his new book with Bruce Greenwald, [amazon_link id=”0231152140″ target=”_blank” ]Creating A Learning Society: a new approach to growth, development and social progress[/amazon_link].

[amazon_image id=”0231152140″ link=”true” target=”_blank” size=”medium” ]Creating a Learning Society: A New Approach to Growth, Development, and Social Progress (Kenneth Arrow Lecture Series) (Kenneth J. Arrow Lecture Series)[/amazon_image]

Stiglitz won his Nobel Prize for his massively important work on asymmetric and missing information – how this shapes institutional structures, including markets. His Nobel Lecture is well worth the read.

This book builds on the information-based approach, and links it to other work on endogenous growth theory, which sees the process of growth as a cumulative process in which knowledge builds on earlier knowledge. This makes ideas (including those formalized as ‘intellectual property’) and people (to whom ideas are attached) the key to economic development. Stiglitz and Greenwald introduce industrial policy to endogenous growth models. They cover, among other areas, trade policy, intellectual property regimes, industrial strategy, and competition policy. It’s a somewhat technical book – there are quite a few equations and models at I would say advanced undergraduate level –  although one could skip those bits and still follow the argument.

I agree with the authors’ motivation for this book. They write: “Everyone today speaks of the innovation economy or the knowledge economy, and there have been important advances in the analysis of, say, patents and patent races, and network externalities, to take but two examples. But the full implications …. for the neoclassical model have still not been taken on board. And the implications for policy have been even less absorbed into mainstream thinking.” They go on to point out that it is 40 years since Stiglitz’s work on information questioned fundamentally standard economics results such as the existence of equilibrium, or the uniqueness of equlibrium, but little has changed in the standard approach. I doubt that any ‘mainstream’ economist would challenge the importance of the results on asymmetric information, non-linearities in growth and so on, so it is a puzzle that so few have taken the implications seriously. No doubt the answer lies in the sociology of the profession and academic incentive structures. My sense is that this is now changing.

This book takes the implications of information externalities forward into specific policy areas. It argues that not only can we not presume that a market economy is efficient, but also that industrial and trade policies can demonstrably increase social welfare. “Learning externalities are pervasive and it is a mistake not to take them into account.”

While not agreeing with every specific policy prescription they make, information, knowledge, learning – whatever you want to call it – definitely does change the prism for assessing structural economic policies. Maybe Prof Stiglitz will next write the popular book that makes this shift in perspective accessible to the policy world.

Prof Stiglitz and me at the TSE TIGER Forum

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Information underload

In his classic book [amazon_link id=”014016734X” target=”_blank” ]Darwin’s Dangerous Idea[/amazon_link], Daniel Dennett said: “A scholar is just a library’s way of making another library.” I’ve always loved that inversion of conventional thinking about causality, and sometimes even muse that as friendly bacteria in the gut are to humans, we humans are becoming to computers or the internet.

[amazon_image id=”014016734X” link=”true” target=”_blank” size=”medium” ]Darwin’s Dangerous Idea: Evolution and the Meanings of Life (Penguin Science)[/amazon_image]

The line from Dennett is quoted in James Gleick’s [amazon_link id=”0007225741″ target=”_blank” ]The Information[/amazon_link]. It’s been a very enjoyable read, covering some of my favourite territory in a well-written way. This includes the long-run effects of the  telegraph, Charles Babbage and Ada Lovelace, Alan Turing’s codebreaking work, Norbert Wiener and cybernetics, Claude Shannon’s information theory. The book had some angles that were new and quirky – for example, I like the point that lots of newspapers named themselves The Telegraph, following on from The Bugle, but none chose The Telephone. I liked it that Turing and Shannon had met in 1943, one devising codes and the other breaking them, but because of wartime secrecy had been unable to discuss their work. There’s a good section on Godel’s incompleteness theorem and why this relates to computation, although drawing quite a lot on Douglas Hofstadter’s [amazon_link id=”0140289208″ target=”_blank” ]Godel, Escher, Bach[/amazon_link] and [amazon_link id=”0465045669″ target=”_blank” ]Metamagical Themas[/amazon_link].

Overall, though, there was little that’s new here (at least if you share my obsessions and have read so many other books on this territory, from Tom Standage’s [amazon_link id=”0753807033″ target=”_blank” ]The Victorian Internet[/amazon_link] to George Dyson’s [amazon_link id=”014101590X” target=”_blank” ]Turing’s Cathedral[/amazon_link]), and I could not find really find a line of argument. There’s a general theme that everything is about information, right down to genetic code and the meaning of life; that information is the fundamental idea that should shape how we think about the physical universe and all of life, rather than energy. Maybe. There’s a long section on entropy that tries to underpin this thought. But I think that just as our forbears saw everything via mechanical metaphors, information is the framing metaphor of our times.

So, an enjoyable, meandering read, ideal for a flight. But not, for me, living up to the praise heaped on it by other reviews such as this in The Guardian or this (rather more tempered) one in The New York Times. And of course it won the Royal Society Winton Prize, a major achievement. So maybe it’s just me. I wouldn’t discourage anybody from trying it.

[amazon_image id=”0007225741″ link=”true” target=”_blank” size=”medium” ]The Information: A History, A Theory, A Flood[/amazon_image]

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The tough life of the corner office

[amazon_link id=”0446571598″ target=”_blank” ]The Org[/amazon_link] by Ray Fisman and Tim Sullivan has a subtitle that many people might consider to be a contradiction in terms: The Underlying Logic of The Office. A majority of us work in offices, and we know it isn’t logic so much as emotion or perhaps just habit that drives things. Often, indeed, the emotions of the kindergarten playground.

Nevertheless, Fisman and Sullivan have achieved that rare feat of writing a book about management and organisation that offers genuine new insights, and is a good read as well. I thoroughly enjoyed it.

The key moment of illumination comes early in the book when they write: “Jobs that stay inside the org are the hard ones: hard to measure, hard to define and hard to do. If they were easy, we’d hire contractors to do them for us, and the market, with prices working their magic, would work just fine at getting the job done.” The way to understand orgs – and why so many are so badly run – is that the work people do in them is characterised by information asymmetries and transactions costs.

The book applies the principles of information economics to many examples of organisations ranging from the US Army and the Baltimore Police Department to Apple and Citigroup. It also covers issues such as organisational culture, rocketing executive pay, merger mania, innovation (they recommend the ‘skunkworks’ approach) and the like, bringing in other areas of economics as needed – game theory, economics of ‘superstars’, behavioural psychology.

For example, take the pay spiral. The chapter begins by recounting John Thain’s extravagance – $1,400 for a waste paper basket in an office remodelling that cost $1.2 million. It moves onto Henry Mintzberg and others documenting that what CEO’s do is get interrupted by people who want to talk to them, in between all the meetings. They have little time alone and certainly don’t spend time poring over data and documents to make a rational calculation about the best thing for the business to do. Decisions are based on the CEO’s judgements about information conveyed verbally by a selection of other people. The skill of the CEO is gathering and weighing soft information.

Relatively few do this well. After all, running an org is really difficult, as already described. So slightly greater skill in doing so is amplified into significantly greater pay: a good CEO decision will be really valuable financially to a big company. Just like Hollywood stars, a slight edge makes an individual executive a hot property in the CEO jobs market. The market rewards them correspondingly. Remuneration committees embed this upward spiral because they have interlocking memberships – not necessarily the same individuals, but connected in a social network. Besides, the Remcos believe that their guy is better than average – the Lake Woebegone effect – so deserves better than average CEO pay. And the spiral continues.  So this chapter uses various parts of the economics toolkit to explain the excessive pay phenomenon. CEOs are doing difficult work, are valuable to their orgs – and they’re still overpaid.

For, contrary to popular belief, management is in general a good thing. The authors cite evidence that better managers deliver better outcomes in the public sector, where administrators and managers tend to be reviled  – in terms of exam results in schools or survival rates in hospitals. One of the most striking bits of evidence is the massive increase in productivity in an Indian textiles firm given $250,000 of free consultancy advice by Accenture (49 firms turned down the offer, showing what they thought of management consultants). The key to the improvement was installing systems for tracking inventory and monitoring performance – reducing, in other words, the information asymmetries that had held back the business.

The book is packed with great examples. Fisman is Professor of Social Enterprise at Columbia Business School, and was the co-author of another terrific book, [amazon_link id=”0691144699″ target=”_blank” ]Economic Gangsters[/amazon_link] (with Ted Miguel). Sullivan is editorial director of Harvard Business School Press.

Their bottom line is that managing an organisation is intrinsically difficult. “If there’s one message to take away from this book, it’s that a glass half full may be the best you can hope for.” That is so much more plausible a conclusion than conventional management books that advocate one gimmick or another.

Even with this note of realism, though, the principles and examples set out in The Org will help anybody who manages anything think through the specifics of their own organisation, and maybe improve its management a little. And even small improvements are well worth having.

[amazon_image id=”0446571598″ link=”true” target=”_blank” size=”medium” ]The Org: The Underlying Logic of the Office[/amazon_image]

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