What would happen if we took all the legacy bodies of knowledge accumulated over the past 400 years and reordered them using the ideas of modern physics and information science? Maybe we could eliminate a lot of awkward, convoluted or outdated theories and practices. Perhaps we could set the stage for a new Renaissance, or what The Economist called “a Cambrian Moment” – the world-wide explosion in entrepreneurial activities.
Most sciences, including economics, have not adopted many lessons learned at more fundamental levels of scientific explorations. Our legacy economics paradigm has unnecessary constraints and gaps. We have been getting by because Nature is flexible and we have been able to find sufficient solutions to wayfinding.
In any economic system, adding just one more person, idea or product results in exponential growth in the number of possible interdependencies within the system. So far, these “network effects”have been beneficial. But with accelerating civil complexity, including exponential growth of information, ideas, publications and technologies, our wiggle room is shrinking.
Meanwhile, each individual’s capacity to process information becomes a bottleneck; each of us gets a diminishing portion of all knowledge we collectively produce. Scaling laws dictate that a diseconomy of scale will ultimately restrict growth of economic complexity.
Civilization is an experimental network system that is trying to preserve humanity against the demands of Nature, including the forces of entropy. In order to increase our management capacity, we have built clever theoretical models of how markets work, how economies grow, and how to scale and optimize production.
We also built collaborative intelligence into our bureaucracies. We are even adopting artificial intelligence to manage the volumes of data and assist us in decision-making. However, it is a mathematical probability that our collective civil complexity will outpace our individual, organizational and digital capacity to manage complexity. There is a tipping point with a general diseconomy of scale and diminishing returns on investment.
A new paradigm for managing economic development
Physicist César Hidalgo, a professor at the Massachusetts Institute of Technology’s Media Lab, takes a radically different approach in how we can manage development of our economies. In his book, Why Information Grows: The Evolution of Order, from Atoms to Economies, he argues that if we want to improve the prospects for local, regional and national economic development, we should seriously consider not only the metaphorical ecosystems but the actual physics of information.
Rather than using conventional social science theory, Hidalgo uses physics and information science to explain how everything from atoms to economies evolve and grow. This provides us with a much broader base of concepts and principles with which we can play and perhaps arrive at a super-model for development.
The new paradigm is more efficient and effective in enabling us to imagine our world, complete with technological and economic development. Hidalgo describes the economy as “the system by which people accumulate knowledge and knowhow to create packets of physical order, or products, that augment our capacity to accumulate more knowledge and knowhow and, in turn, accumulate more information.”
Hildago explains that unlike other species, humans have developed an enormous ability to encode large bodies of information outside our bodies – including information embodied in artifacts or objects that we imagine. “Cities, firms and teams are the embodiment of the pockets where our species accumulates the capacity to build [packets of] information,” he says.
Packets of information, such as those generated by an economic region, grow because these network systems use feedback loops to self-replicate and mutate. Generally, there is a reduced risk and higher return on investment by selectively following in the footsteps of success. Platforms, such as incorporation, patents, stock markets and standardized parts, all support this.
According to Hidalgo, the best measure of regional economic diversification is not GDP but the number of distinct products and processes (services) produced in a region. Further, the best region for producing a new drone would be a region that is currently producing helicopters rather than boots.
Hidalgo’s work has a sobering message for policy makers, as Eric Beinhocker, executive director of the Institute for New Economic Thinking at the Oxford Martin School, points out in his review of Hidalgo’s book. This message is: “Growth comes primarily from moving to adjacent opportunities in the product space.”
Information science can benefit regional economies
To stimulate innovation on the shoulders of existing products and processes and thereby increase regional economic diversification and growth, there should be a shared visual database of products and services produced.
Many good models and tools have been created in the information science sub-disciplines of systems science, cybernetics, and management science. Several of these models and tools, such as optimization, have been adopted by business managers.
At Wayfinders Business Co-operative, we are building a web-based platform that will incorporate these foundational concepts and principles to support not only businesses but their regional business ecosystems. Canadians can adopt these models and tools and apply them more broadly in policy, research and investment, as in:
- Government Policy: Reconstruct regional development models and policy frameworks using the concepts and tools of foundational information theory;
- Research: Collect the appropriate economic data and analyze it in the context of the more meaningful information systems models. This may involve use of machine learning algorithms and gaming simulations;
- Investment: Investors, as key stakeholders in regional development, can use information science to better shape investment decision tables and dialogue.
Better utilizing information science would help Canada to take the lead in new management strategies. This will not produce a utopia. The Laws of Nature still prevail. But at least this will buy us some time to reconfigure the way we manage our world for sustainability. On the other hand, continuing with the old strategies – including outmoded economic theories – of the 19th and 20th centuries will ensure Canada’s place as a laggard as opposed to a leader.
Originally published in Research Money Inc. August 11, 2021