Economic Complexity Theory

I have been meaning to finish a long post on the implications I see in economic complexity theories coming out of MIT.  The basic theory is that economies are best thought of not in large terms of GDP or even exports per se, but in terms of the capabilities exports represent.  These capabilities can then be thought of as the raw materials for future exports and economic activities.  As a short NYTimes piece last spring described it:

Hidalgo and Hausmann think of economies as collections of “capabilities” that can be combined in different ways like an Erector set to produce different products. An Internet retailer, for instance, cannot function without some kind of electronic-payment network. It also needs a working system of postal addresses — not every country has one — as well as reliable mail. Because these capabilities cannot be easily identified and observed, Hausmann and Hidalgo track the silhouettes that the capabilities cast upon trade statistics. If a product is a significant part of a country’s exports, it offers evidence that the country has certain kinds of related capabilities.

The sticking point is what those mean.  In general they seem to break it down according to a distinction relevant to the statistical physicist (Hidalgo) behind the endeavor: capabilities are related to economic development as potential is related to kinetic energy.  If a country has a lot of capabilities and a low per capita GDP, then they are presumed to have high potential energy, waiting to explode into GDP growth.  On the other hand, if a country has high capabilities and high per capita GDP, its already kinetic activity has little upward potential (outside of discovering cold fusion).

As with most attempts to equate economics with physics, this one has all sorts of cultural, political and social blindspots, but it is an interesting set of abstractions that may be fun to play with.  The scholars at MIT have written a book – free on their website, of course – outlining this theory.  But real fun is in playing with their data on the MIT Media Lab website.

Experiments like this seem to illustrate just how difficult it is to predict future growth.  But they might also offer some insight into how it might be generated.  It would seem the best idea would be to help people within your country develop tacit knowledge and deep competencies and capabilities.  If only we had some sort of institutions where these kinds of things could be developed – some sort of publicly supported infrastructure of higher education. Hmmmm.

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