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.
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