The essence of smart specialization: local economies as computational platforms (review essay)

The physical matter we are dealing with today is exactly the same that was available to our hominid Palaeolithic ancestors. What makes the difference between now and then is the way in which matter is arranged, and thus its information content. Starting from this simple but far from obvious remark, César Hidalgo’s Why Information Grows offers a fresh approach to the understanding of the functioning of economic systems which is at the same time pragmatic, conceptually elegant and innovative. The commodities that populate our everyday life are so useful because they contain a remarkable amount of information, which has been piling up across the generations, allowing us to shape matter so as to accommodate in detail our needs, our aesthetic concerns, our world views and much more. A commodity is, ultimately, an instance of ‘crystallized imagination’. The knowledge and know-how that are called for to shape matter in order to obtain the simplest of objects we are so familiar with are often so complex and entangled that they transcend the capacity of a single individual. How many humans would be able today to build from scratch a mere plastic chair, not to speak of a car or a smartphone? Even the engineers who design part of the machinery or the processes that are instrumental to create physically a commodity can do their job only because they have access to objects that incorporate, in turn, huge quantities of further information they would not be able to replicate from scratch (think, for example, of the computers and software necessary to carry out any computer-aided design/manufacturing – CAD/CAM). It is thanks to this ability that humans can turn their imagination into reality, and to transform their environment to respond (not always in the wisest of ways, in fact) to the adaptive challenges they have to tackle from time to time.

What humans have learnt to do, in particular, is to build social networks that empower a remarkably complex, sophisticated cooperation among many individuals (Turchin, 2016Turchin, P. (2016). Ultra society. How 10,000 years of war made humans the greatest cooperators on earth. Chaplin: Beresta.) in the production of information and in its material embodiment: our systems of production and distribution of goods and services, that is, our economies – which can be consequently regarded as social depositories of knowledge and know-how. The efficient functioning of an economic system, in this perspective, can be read in terms of computational capacity and effectiveness, that is, in terms of the capacity to gather all the required information to shape matter under the form of typologies and quantities of goods and services that reflect as accurately as possible the explicit and implicit requests of their potential buyers, and to allocate such informational resources accordingly into products. This is much more demanding than optimally responding to incentives: A lack of adequate computational capacity to produce certain goods cannot be compensated for by any incentive, however strong. The computational capacity of an economic system depends in turn on these individual and social knowledge and know-how assets that have accumulated in time in the agents and social networks of which the system is made. Economic inequalities across economies are thus the cumulative product of the differences in the capacity to generate information by means of knowledge and know-how, and to generate further knowledge and know-how through information. The differential incidence of such processes in different economies accounts for the huge diversity and territorial specificity of different local economies, and thus, ultimately, for their different forms of genius loci. Hidalgo’s approach has been mainly formulated at country level so far, but its potential interest for regional sciences is considerable. At the regional level, the structure of local economic interactions and their socio-cultural background are clearly linked to a specific territorial milieu, and identify a generally more focused specialization pattern as compared with the upper territorial scale. Moreover, regions can be characterized as socio-cognitive systems whose territorial element is homogeneous enough to be understood as a consistent spatial platform for social computation.

A proper understanding of these processes cannot be built upon the simple equilibrium-centred thinking that is still so popular in the economics mainstream, and calls for far-from-equilibrium models as a benchmark. The conceptual and practical consequences of equilibrium thinking are huge, and underrated in their essential misunderstanding of the scope of complex dynamic behaviour for system regulation. It is dynamic complexity that enables the economic system to perform the computations that are needed to store – and harness – huge amounts of information. Far from being an undesirable form of functional failure, out-of-equilibrium behaviour with its puzzling phase transitions is an instantiation of the system’s computational power, and therefore an intrinsic, evolutionary valuable source of dynamic adaptability. The structure of international trade may accordingly be rationalized as a self-organized system of ‘crystallized imagination’ flows, of which certain countries/regions are net exporters (i.e., the economies whose goods have a higher informational content), and others net importers – as is the case, for instance, for countries/regions that substantially exchange their raw materials for foreign manufactured goods. In these terms, the innovative capacity of an economy is basically linked to new ways to instil a certain quantity of information into goods so as to create value (that is, as an effective response to specific social requests, or as an effective elicitation of matching social requests by means of socially validated forms of creative expression). Likewise, competitiveness strategies are basically social strategies of knowledge and know-how creation that broaden significantly, and in relevant directions, the economy’s ‘source code’. The product space for a given economy, as described by the system of structural interdependencies among all its production flows, is then a sort of ‘fingerprint’, an idiosyncratic, emergent property that uniquely characterizes that specific economy, as the result of the complex interaction of a multitude of local and non-local factors. The evolution of the product space, in its natural networked representation, is therefore an accessible, cognitively parsimonious way to keep under conceptual and visual control the bewildering structural richness that can be found even in the simplest economic systems.

The essence of economic value creation is, in Hidalgo’s perspective, the capacity to leverage upon the long historical chains of embodied knowledge and know-how so as to deploy them to their full potential by means of the local, current pool of productive and imaginative skills, to devise and implement computations that are not feasible for others under the current conditions. This is tantamount to benefiting from some sort of ‘superpower’ deriving from the cumulative exploitation of the experience, skills, knowledge and know-how of countless generations of humans behind us, and gathering them into specific objects. It is this sort of ‘superpower’ that allows us to perform functions and to attain goals that would be entirely beyond our reach should we only rely upon our own capacities and skills. Once this augmentation of human capacities is fully socialized and becomes an integral part of the ordinary mode of functioning of our economies, failing to keep up to it implies a significant loss of opportunity. A mere availability of material resources that are not matched to this dynamic, intangible value creation capacity is not conducive to a sustainable developmental path. Proper developmental policies thus require a constant focus upon systematic, effectively targeted improvements of the local economy’s computational capacity, which, in view of its embodied character, amounts to making a case for what Phelps (2013Phelps, E. (2013). Mass flourishing. How grassroots innovation created jobs, challenge, and change. Princeton: Princeton University Press.[CrossRef]) calls mass flourishing: a dramatic, coordinated improvement of capability building at the social level. What makes such improvements well targeted is the smart reading of the contextual conditions (including the availability and characteristics of pre-existing knowledge and know-how assets) that make certain feasible computations more relevant than certain others – and consequently their imagination, testing and implementation. Clearly, the feasibility of useful computations is greatly enhanced by a diversified pool of cognitive resources that can effectively synergize by means of proper social interaction structures (and which does not simply boil down to the social division of labour): this is the economic rationale of variety, whose adaptive value is overlooked by parochial developmental views cherishing the preservation of local identity as a homogeneous socio-cognitive landscape. This perspective thus provides a new angle to look at smart specialization at the regional level in terms of a sophisticated, dynamic structural adaptation rather than as an ossification of traditional excellence (McCann & Ortega-Argilés, 2015McCann, P., & Ortega-Argilés, R. (2015). Smart specialization, regional growth and applications to European Union Cohesion Policy. Regional Studies, 49(8), 12911302. doi:10.1080/00343404.2013.799769[Taylor & Francis Online], [Web of Science ®]).

The territorial nature of socially accumulated and deployed knowledge and know-how (and, more fundamentally, imagination) is once again a new way of looking at familiar concepts for regional scientists: It is, among other things, a powerful generalization of the Marshallian notion of ‘industrial atmosphere’ (Keeble & Wilkinson, 1999Keeble, D., & Wilkinson, F. (1999). Collective learning and knowledge development in the evolution of regional clusters of high technology SMEs in Europe. Regional Studies, 33(4), 295303. doi:10.1080/00343409950081167[Taylor & Francis Online], [Web of Science ®], [CSA]). Should we conclude, then, that Hidalgo’s formulation is just a way to pour old wine into new bottles by rephrasing in a mathematically savvy and visually compelling way some of the basic tenets of regional science? Not quite. In fact, this approach opens up new routes to modelling and empirical analysis that are likely to spark a new cycle of investigation on some of the classical topics in the discipline, and to be conducive not only to new insights on frequently asked questions, but also to the formulation of new ones. For instance, Hidalgo’s perspective invites us to wonder about the structure of networked interaction that best fits the specific coordination and synergetic needs of a specific type of production in a specific socio-cultural context – and the answer is most likely far from being homogeneous across product, socio-cultural and geographical spaces. This is a point that does justice of the mechanistic oversimplifications of the role of embodied knowledge, know-how and imagination that are an implicit consequence of rigid idealizations of the functioning of a knowledge economy such as the creative class (McGranahan & Wojan, 2007McGranahan, D., & Wojan, T. (2007). Recasting the creative class to examine growth processes in rural and urban counties. Regional Studies, 41(2), 197216. doi:10.1080/00343400600928285[Taylor & Francis Online], [Web of Science ®]), which unsurprisingly reflect a linear, computationally poor logic of local development. Likewise, the structural properties of networks provide scope for a fruitful partial reframing of the fundamental debate on the role of transaction costs in shaping the firm versus market trade-off in terms of connectivity costs that limit the growth and functionality of social interaction structures – and thus, ultimately, in terms of social computational constraints. Clearly, the advent of a digitally networked economy opens up whole new perspectives in this regard by dramatically abating the cost of many forms of social connectivity, and allowing for whole new ways of socially distributed computation, and in particular of co-creation (Ramaswamy & Gouillart, 2010Ramaswamy, V., & Gouillart, F. J. (2010). The power of co-creation. Build it with them to boost growth, productivity and profits. New York: Free Press.). This also implies that, in a digitally connected world, not to speak of the relational complexities of hybrid man–machine environments characteristic of the emerging Industry 4.0 paradigm (Lee, Bagheri, & Kao, 2015Lee, J., Bagheri, B., & Kao, H. A. (2015). A cyber-physical systems architecture for Industry 4.0-based manufacturing systems. Manufacturing Letters, 3, 1823. doi:10.1016/j.mfglet.2014.12.001[CrossRef]), exploring and designing new connectivity platforms of social computation at the local as well as at upper geographical scales (and evaluating the welfare losses from computationally inefficient networking) is likely to become a key subfield of organization theory with crucial implications for regional development.

To conclude, there is reason to maintain that Hidalgo’s approach will become a major reference for future regional science research, paving the way to a tighter, promising interdisciplinary synthesis between economically and physically driven conceptualizations of production flows, value creation and of their territorial dimensions. We look forward to these developments with anticipation and curiosity.

Refrences, bookmarks and sources (main article): click here

Published on  Journal Regional Studies – Janbuary 2017

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