Entropy, order and economic growth

More diverse knowledge bases facilitate more innovations. This is why policymakers should pay more attention to supporting face-to-face collaboration across disciplinary and sectoral boundaries, writes Timo Hämäläinen.

The Second Law of Thermodynamics states that the universe is moving towards growing disorder (entropy). How is it then possible that the historical evolution of biological systems and human civilisations has been a long march towards growing complexity and order? This is the intriguing question that Massachusetts Institute of Technology professor César Hidalgo attempts to answer in his new book Why Information Grows: The Evolution of Order, from Atoms to Economies (2015, Basic Books). In short, he argues that it is the continuous growth of information, knowledge and know-how (tacit knowledge) that supports the growing complexity, order and progress of societies.

Hidalgo’s book underlines the importance of collective learning processes that take place among individuals. Each individual has limited mental capacities but, through collaboration, they can create and accumulate huge amounts of knowledge that make today’s advanced economies and societies possible. The collaboration must be intensive in order to facilitate new combinations of the individuals’ knowledge sets. Much of this interaction needs to be face to face because valuable tacit and social knowledge is “sticky”, i.e. difficult to transfer in other ways. This explains the importance of teams, collaborative platforms and cities in knowledge creation.

Hidalgo’s book has important policy implications. First he notes that the composition of a country’s exports reflects the knowledge and know-how that are embodied in the country’s population. Then he argues, with convincing graphs, that the diversity and sophistication of the country’s exports – its economic complexity – is highly predictive of its long-term growth and standard of living. This underlines the importance of proactive industrial policies that aim to facilitate the diversification and upgrading of economic and export structures. Their importance is often neglected in macroeconomic policy discourse. Hidalgo suggests that the best diversification opportunities are usually related to a country’s existing economic structure and advantages because new economic activities are hard to develop from scratch.

More diverse and advanced knowledge bases and economic structures facilitate more combinatory insights and innovations. The importance of new combinations emphasises the role of intensive long-term interaction and communication among experts with complementary knowledge. For instance, the studies of Rogers Hollingsworth have shown that Nobel Prize-winning scientific breakthroughs are usually made in organisational environments that support such interaction. Hidalgo notes that social and professional networks play an important role in knowledge creation. Thus, policymakers should pay more attention to supporting face-to-face collaboration across disciplinary and sectoral boundaries than to their traditional emphasis on R&D investments. They can create and support platforms and processes that foster collaborative networks and interaction.

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