Monday, February 6, 2012

…Greek inclusion

By kay.e.strong

Reuters ran Analysis: Euro zone strugglers lack innovate knack ahead of today’s Greek debt deadline (6 Feb).

The 911 version:  Using R&D expenditure and patent filings per million inhabitants as proxies for innovative capacity, the writer concludes Greek ranks dead last relative to fellow Euro zone nations.  As an innovation laggard Greece is seen lacking in ability to spawn growth sufficient to sustain their debt load.  Andrew Wyckoff, director of an OECD think tank, catalogs software, human capital development in knowledge-intensive sectors, intellectual property and organizational know-how of companies as complementary elements of innovations.  Overhauling the underlying Greek business environment to enhance its international competitiveness is the solution of choice with government directing the process through business-friendly policy changes.

In Adam Smith’s story On the Nature and Causes of the Wealth of Nations the secret of wealth generation revolved around the division of labor with specialization, learning by repetitive doing, productivity, and competition playing the lead character roles in the story.

But a story with a new twist challenges conventional wisdom. Research out of Harvard’s Center for International Development argues that the richest countries are those with the most complex economies—and actually produce the greatest diversity of goods (Harvard Magazine. Complexity and the Wealth of Nations). Using network science, the researchers have complied their findings in The Atlas of Economic Complexity: Mapping Paths to Prosperity < >.

The social accumulation of productive knowledge and its recombination into a more diverse and sophisticated variety of products is the main ingredient for growing prosperity. The researchers, Richardo Hausmann and Cesar Hidalgo argue that accomplishments of the past two centuries are a product of our getting smarter—not individually, but collectively. 

“Modern societies can amass large amounts of productive knowledge because they distribute bits and pieces of it among its many members. But to make use of it, this knowledge has to be put back together through organizations and markets. Thus, individual specialization begets diversity at the national and global level. Our most prosperous modern societies are wiser, not because their citizens are individually brilliant, but because these societies hold a diversity of knowhow and because they are able to recombine it to create a larger variety of smarter and better products.”

The income gap between nations is expressed as a gap in social accumulation of productive knowledge and evidence by the differences in the product space of nations. Products are emblematic of the level of productive knowledge. Where the divergence between the total amount of knowledge embedded in society and that held by each member of society is narrow, economic complexity is low as is living standards.

“The secret to modernity is that we collectively use large volumes of knowledge (in producing products), while each one of us holds only a few bits of it. Society functions because its members form webs that allow them to specialize and share their knowledge with others.”

Markets and organizations are nodes in those webs making us collectively wiser.

Accumulating productive knowledge is about more than book smarts—explicit knowledge. It involves growing tacit knowledge through deep specialization (personbytes) and modularized chunking at the individual and organizational level and through our networks of organizations.

Doing so, complexifies the economy.  A nation’s mix of productive output reflects its level of economic complexity.  Nations make products on par with their accumulated social productive knowledge space.  

“Complex economies are those that can weave vast quantities of relevant knowledge together, across large networks of people, to generate a diverse mix of knowledge-intensive products. Simpler economies, in contrast, have a narrow base of productive knowledge and produce fewer and simpler products, which require smaller webs of interaction. Because individuals are limited in what they know, the only way societies can expand their knowledge base is by facilitating the interaction of individuals in increasingly complex webs of organizations and markets. Increased economic complexity is necessary for a society to be able to hold and use a larger amount of productive knowledge, and we can measure it from the mix of products that countries are able to make.”

Viewed from this perspective, the Greeks have a scaffolding problem.  For prosperity-sake they need to reach deeper into their product space but lack the requisite match in the patterns of interaction inside their organizations and own society. Drawing them deeper into the complex webs of organizations and markets of more prosperous neighbors is a practical means to overcome the scaffold problem for nations like Greece.  Learning by interacting holds more promise than a sterile bailout package.

Kay Strong, Ph.D., Southern Illinois University, M.T., University of Houston, M.A., Ohio University; Associate Professor at Baldwin-Wallace College; Areas of expertise: international economics, contemporary social-economic issues, complexity and futures-based perspectives in economics. E-mail:

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This blog lives under the auspices of the Department of Economics whose mission has been to hold high the lantern beaming an "economic way of thinking" onto the world. Selfishness, rationality and equilibrium have been central to the teaching of an economic way of thinking rooted in the Renaissance. And, in this regard, the department has faithfully stayed the course. The intent of this blog, thinking out loud..., however, is to entertain exchanges which may challenge the centrality of economics as we teach it.