Production, Know-How, GDP, Globalization
Hidalgo is a statistical physicist, who wrote Why Information Grows. He uses a country’s diversity / uniqueness of exported products as a stand-in for the knowledge networks present in that country, then uses a modeling jujutsu to find the economic complexity index (ECI) of a country. In summary, comparative advantage is false; what matters is the diversity of products, the exact opposite of comparative advantage style specialization on products. Because diversity allows the invention of more products, a country gets richer.
I replicated Hidalgo’s research here, data, Python code included. The jujitsi move is excellent. Economists, take note. All I hear from them is “if this goes up, that comes down, this comes down the other thing goes up”. Angle of the dangle is inversely proportional to the heat of the meat. Eheheheh.Seriously. More physicist in economics! Economists apparently have physics envy, so if there are more physicist in economics, they are already physicist, they won’t have any envy.
Hidalgo debunks many other theories of development theories - institutional quality, human capital (in terms of years spent in education) are not as important as ECI. Globalization is not a cure-all. Your country might be one one piece in a sophisticated pipeline, so you are “globalized”, but that doesn’t give you any leg-up in anything. I am not talking single country / company to produce a car from scratch - I am saying a country must have, in different companies / regions, all pieces that can combine to a car because that means this country has a level of productive know-how, tacit knowledge that can produce high-margin products. Especially the products highest in product complexity list list needs to exist in a country, one company, or many. But same country.
It all comes down to what a fresh-out-of-college (or college dropout) budding enterpreneur needs. If you were such a person, had an idea on, say, a new car battery, would you be better off being in proximity to defense contractors, solar panel, drone makers, or rice farmers, and bottlers of Coca Cola?
USA is in good shape in this sense. Sure there are income inequalities, no universal healthcare, but these problems are technically easy to fix.
Tacit knowledge is key. As someone who worked / works on transfering massive knowledge to others I can attest to this. We know more than we can tell. There is a certain .. way an expert approaches problems, the way you expect certain issues, others not, when you get gung-ho, when not, the order you expect things to occur, how much relevant info you hold in your head vs. when you look things up, how we use tools, when we drop them, or develop them from scratch - these are things that are incredibly hard to teach, because I guess they are intricately coded, in a complex graph form in our heads or something -any attempt to textualize it means introducing a certain flattening, and this knowledge is not that. It ain’t flat.
Tacit knowledge can only be transferred while working side-by-side, this is another (perhaps bigger) reason why local networks are critical.
Here is another paper that says “moreover, it seems that trade openness and population growth do not have a statistically significant impact on growth”
[From The Atlas of Economic Complexity] “The amount of knowledge that is required to make a product can vary enormously from one good to the next. Most modern products require more knowledge than what a single person can hold. [..] Accumulating productive knowledge is difficult. For the most part, it is not available in books or on the Internet. It is embedded in brains and human networks. It is tacit and hard to transmit and acquire. It comes from years of experience more than from years of schooling. Productive knowledge, therefore, cannot be learned easily like a song or a poem. It requires structural changes. Just like learning a language requires changes in the structure of the brain, developing a new industry requires changes in the patterns of interaction inside an organization or society.[..]
The Atlas of Economic Complexity attempts to measure the amount of productive knowledge that each country holds. Our measure of productive knowledge can account for the enormous income differences between the nations of the world and has the capacity to predict the rate at which countries will grow. In fact, it is much more predictive than other well-known development indicators, such as those that attempt to measure competitiveness, governance and education.
Consider the case of Singapore and Pakistan. The population of Pakistan is 34 times larger than that of Singapore. At market prices their GDPs are similar since Singapore is 38 times richer than Pakistan in per capita terms. Under the classification we use in this Atlas, they both export a similar number of different products, about 133.
How can products tell us about the conspicuous differences in the level of development that exist between these two countries? Pakistan exports products that are on average exported by 28 other countries (placing Pakistan in the 60 th percentile of countries in terms of the average ubiquity of their products), while Singapore exports products that are exported on average by 17 other countries (1 st percentile). Moreover, the products that Singapore exports are exported by highly diversified countries, while those that Pakistan exports are exported by poorly diversified countries. Our mathematical approach exploits these second, third and higher order differences to create measures that approximate the amount of productive knowledge held in each of these countries”
Question
The idea of comparative advantage says country A should specialize on product X, country B on product Y. They trade with eachother and both would be better for it.
Wrong
Hidalgo’s analysis says both countries should produce (in varying amount of course) product X and Y, because IMO only then can a third inventor, seeing and making use of a richer manufacturing base producing X and Y can come up with product Z.