Review Of 'Why Information Grows' By Cesar Hidalgo

Aug. 22, 2015 5:56 AM ET3 Comments
Hazel Henderson profile picture
Hazel Henderson
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Summary

  • Hazel Henderson reviews the book, Why Information Grows, in light of economic models.
  • The book shows how Hidalgo goes beyond economics to predict the success of emerging markets.
  • It explores how energy is the main factor of economies rather than land, labor and capital.

Why Information Grows: The Evolution of Order, from Atoms to Economies by Cesar Hidalgo, Basic Books, Philadelphia, PA, 2015

This brilliant book, Why Information Grows, clarifies why economists don't understand the processes of economic growth, and why their models underlying finance continue to lead to malinvestment and misallocation of capital and resources. Author Cesar Hidalgo is a Chilean polymath who leads the Macro Connections group at MIT's Media Lab. He dissects the traditional economic approaches to the modeling process of economic growth, from Robert Solow's admission of a gap in understanding productivity to Wassily Leontief's input-output models, from Schumpeter's creative destruction to Ronald Coase's theory of the firm and Paul Romer's approach to human capital. Hidalgo soon transcends the entire economic model, as I did in my own work, and moves to more fundamental physics, thermodynamics, information and decision theory, seeing the basic factors of production as I did: matter, energy and information - with information as the key to how human societies use energy and resources to evolve.

Hidalgo starts with planet Earth as a "pocket" of evolving information, sheltered from entropy by the daily shower of free photons from the Sun, and how living species developed the technology of photosynthesis to capture and store this energy. These fundamental processes leading to the explosion of life forms and increasing complexity, knowledge and know-how are the basis of human societies and economic development stored in today's multiplicity of ordered systems and structures. This essentially biological and physical view of economic growth demolishes standard economic theory's "factors of production": land, labor and capital. As I pointed out in Politics of the Solar Age (1981), Nobelist chemist Frederick Soddy tried to correct economists in his 1921 paper before Britain's Royal Society that energy was fundamental to all three of these factors and to human social evolution. Using the example of the steam engine, Soddy pointed out that it was driven neither by land, capital, technology or labor but by the coal: "past sunlight stored by plants."

Hidalgo builds on these basics by citing Ilya Prigogine's discovery of how such far-from-equilibrium systems as planet Earth used incoming energy to create structures that stored information, and how order could grow from chaos. Human societies and economies are such dissipative structures using energy to create and store information which is inherent in all their products, infrastructure, and their human and social capital. I recall Prigogine's contributions, along with those of French mathematician René Thom, in modeling these evolutionary processes in catastrophe theory: the dynamics of non-equilibrium systems and the seven ways they evolved into new states in my Mapping the Global Transition to the Solar Age. Needless to say, economists are left in the dust in these explorations of how human systems evolve, store information and build knowledge and know-how - the key to understanding economic development.

Hidalgo's model focuses on 3 key processes underpinning economic growth and development, all of which involve producing, storing, replicating and accumulating useful information: 1) capturing energy flows; 2) storing information, knowledge and know-how in solid forms, e.g., DNA, as well as products - from toasters, cars and jet planes to that in human minds and our social networks and organizations; and 3) the ability of matter to compute (for example, all living species compute, from trees and insects to humans). Other scientists, including Fritjof Capra and Luigi Luisi in their The Systems View of Life and Francesco Varela and Humberto Maturana, refer to these computations as "cognition" and "autopoesis", whereby living organisms self-organize and reproduce themselves.

Hidalgo creates measures to predict which countries will develop greater complexity by using "personbytes" and "firmbytes" as measures of the capacity of humans and their firms and networks to manage information. As economies become more complex, human networks become key to further economic development. These networks are best facilitated by trust, which turns out, along with cooperation, to be the most efficient way to foster, store and create information, knowledge and technological know-how. For example, such a perspective sheds light on why the founders of Google (GOOG) (GOOGL) needed to extend their enterprises into the broader network: the Alphabet holding company.

I hope economists and asset managers take the time to read this book, which is a mind-expanding exercise. No economist or asset manager can fully understand how economies grow and why some decline without these broader disciplines. Economists won't know how to tell the difference between emerging economies without understanding these basics of physics, thermodynamics, information theory and biology. This wonderful lucid book Why Information Grows can lead to better investment strategies, as well as a deeper understanding of technological choices and the prognoses for the future of many developing countries and emerging markets.

This article was written by

Hazel Henderson profile picture
239 Followers
Hazel Henderson D.Sc.Hon., FRSA, is the founder of Ethical Markets Media, Certified B Corporation and producer of its TV series. She is a world-renowned futurist, evolutionary economist, a worldwide syndicated columnist, consultant on sustainable development, and author of The Axiom and Nautilus award-winning book Ethical Markets: Growing the Green Economy (2006) and eight other books. Her editorials appear in Wall Street International Magazine and many other media partners, including Other News, and her book reviews appear on SeekingAlpha.com. Her articles have appeared in over 250 journals, including (in the USA) Harvard Business Review, New York Times, Christian Science Monitor; and Challenge, Mainichi (Japan), El Diario (Venezuela), World Economic Herald (China), LeMonde Diplomatique (France) and Australian Financial Review. Since becoming a full-time media executive in 2004, Hazel has stepped down from many of her board memberships, including Calvert Social Investment Fund (1982-2005), the Social Investment Forum and the Social Venture Network. She has been Regent's Lecturer at the University of California-Santa Barbara, Horace Albright Chair in Conservation at the University of California-Berkeley, and advised the U.S. Office of Technology Assessment, the National Academy of Engineering, and the National Science Foundation from 1974 to 1980. She remains on the International Council of the Instituto Ethos de Empresas e Responsabilidade Social, Sao Paulo, Brasil; serves on the Program Council of FORUM 2000, Prague, Czechoslovakia, founded by the late President Vaclav Havel; is a World Business Academy Fellow; an active member of the National Press Club (Washington DC), and a member of the Association for Evolutionary Economics. She is an Honorary Member of the Club of Rome. She shared the 1996 Global Citizen Award with Nobelist A. Perez Esquivel of Argentina. In 2007, she was elected a Fellow to Britain’s Royal Society of Arts, founded in 1754. She leads the Transforming Finance initiative, created the Green Transition Scoreboard®, co-developed with Calvert the GDP alternative renamed the Ethical Markets Quality of Life Indicators, co-organized the Beyond GDP conference for the European Commission, and funded three Beyond GDP surveys, finding strong support worldwide for ESG metrics in national accounting. In 2010, 2012, 2013, and 2014, she was honored as a "Top 100 Thought Leader in Trustworthy Business Behavior" by Trust Across America. In 2012, she was honored with the Reuters Award for Outstanding Contribution to Development of ESG & Investing at TBLI Europe. In 2013, she was inducted into the International Society of Sustainability Professionals Hall of Fame.  Her 2014 monograph, Mapping the Global Transition to the Solar Age, published by ICAEW and Tomorrow’s Company, UK, is available for free download from www.ethicalmarkets.com.

Disclosure: I am/we are long GOOG. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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