Book summary “Why Information Grows: The Evolution of Order, from Atoms to Economies”: summary

Introduction

You live in a universe dominated by the second law of thermodynamics, which dictates that disorder and entropy must always increase. Yet, you observe pockets of intense order, such as complex cities, advanced economies, and intricate manufactured goods. This contradiction puzzles you when you try to explain why some nations grow rich while others remain poor using traditional economic models that ignore physical reality.

Economic development is driven by the accumulation of embodied knowledge and knowhow through social networks, acting as a physical process of information growth.

Cesar Hidalgo argues in Why Information Grows that information is not an abstract digital concept but a physical property tied to the arrangement of atoms. You will discover how human imagination gets crystallized into physical products, why individual minds are limited in their capacity, and how social networks allow societies to overcome these limits. The book explores the physics of order, the quantization of human knowledge, and the economic complexity of nations.

Read this text to answer these questions:

• How does the universe create physical order despite entropy?
• Why are human beings limited to a single personbyte of knowledge?
• How do social networks act as computers that process economic knowhow?
• Why does the diversity of products a country exports predict its future growth?

1. Information as Physical Order

Information is not an ethereal or digital abstraction. It is a physical property representing the arrangement of matter.

Information is physical order, identical to the concept of entropy shuffles in a deck of cards.

Information is incorporeal in the sense that it has no particle of its own. It resembles movement or temperature, as it must always be physically embodied. Everyday manufactured items like bicycles, streetlamps, hair dryers, and underwear are packed with information. They possess it not because they are made of ideas, but because they embody intricate physical structures.

Thermodynamics and Entropy

Claude Shannon defined information as the minimum volume of communication required to specify a message. This established a mathematical equivalence with statistical physics entropy. Shannon measured information using bits, which are yes-or-no questions needed to identify a message within a search space. More random sequences require more bits to communicate. This formula equates higher entropy with higher information content from a communication engineering standpoint.

Imagine Abby and Brian playing a guessing game using yes-or-no questions. They want to identify a 140-character tweet chosen from an alphabet of 32 characters. Each character needs 5 questions to guess. You need 700 yes-or-no questions, or bits, to uniquely identify the tweet.

Ludwig Boltzmann defined entropy as the multiplicity of equivalent states. High-entropy states represent disordered configurations that have many ways of being arranged. Entropy measures the number of microstates that satisfy a macro condition. Disordered states have high multiplicity because countless ways exist to arrange parts randomly. Highly ordered states are unique and uncommon.

A half-full stadium illustrates maximum entropy when people sit in random seats. Everyone sitting in the exact front row represents minimum entropy.

In physical systems, true information corresponds to uncommon, highly correlated configurations. These states are extremely difficult to reach by random motion. While Shannon counts bits regardless of meaning, colloquial and biological information requires rare, ordered configurations. These feature robust short-range and long-range correlations. Disorder is vastly more accessible than order because nature explores states through constrained paths.

A Rubik's cube has 43,252,003,274,489,856,000 possible states, or 4.3 x 10^19. It possesses only one perfectly ordered solution. You can solve it in 20 moves or less. DNA sequences also display non-random correlations.

Mechanisms of Information Growth

Time flows irreversibly from past to present because microscopic physical systems are chaotic. They are governed by statistical laws that move from ordered configurations to common ones. Newton and Einstein equations are time-reversible. However, large collections of particles behave according to Boltzmann and Clausius discoveries, where entropy increases in closed systems. Ilya Prigogine showed that calculating the past of a chaotic system requires infinite precision. This creates an entropy barrier that makes the past incomputable.

A drop of ink diffusing into a glass of clear water moves from a rare, information-rich state to an information-poor uniform state. This illustrates the arrow of time.

Information emerges naturally and is expected in steady states of physical systems that are out of equilibrium. Closed systems tend to homogeneous soups. Conversely, open systems driven by external energy sources like solar radiation or heat maintain out-of-equilibrium steady states. Organized structures and correlations spontaneously emerge in them after chaos.

Whirlpools form when water empties down a bathtub drain. Swirls of cigarette smoke, campfires, and boiling water convection pans show the same dynamic.

Information persists and sticks around because it is physically embodied in solids. Solids protect information from thermal fluctuations and entropy. Fluid systems like whirlpools and smoke quickly disperse. Solid structures allow information to be stored and accumulated. Biological information carriers like DNA and proteins act as aperiodic crystals. They maintain long-range correlations without repeating monotonously.

You could freeze a bathtub whirlpool with a magic wand and chisel it out as an ice crystal to trap its generated information.

The growth of information in the universe is driven by three mechanisms:

• out-of-equilibrium energy flows;
• information-storing solids;
• the computational capacities of matter.

Energy flows keep systems out of equilibrium to spontaneously generate order. Solids protect information from entropy so it can endure and recombine. Matter's ability to compute enables selective replication and explosive information growth. Whirlpools form in bathtubs, DNA molecules store genetic sequences, and human cells or societies function as distributed computers.

2. Crystals of Imagination

Manufactured products embody human knowledge and imagination as static arrangements of atoms.

You see that the economic value of manufactured products resides not in their raw atoms. Value comes from the specific physical order and arrangement of those atoms, which constitutes information. When an expensive product is destroyed in a crash, its weight remains identical. Its dollar value evaporates because the physical arrangement of its atoms is ruined. Destroying the arrangement destroys the embodied information.

A Bugatti Veyron with a sticker price of over $2.5 million loses all its value instantly when crashed into a wall. This price represents a rate of $1,300 per kilo. Compare this to pure silver at $1,000 per kilo and gold at $50,000 per kilo. A Hyundai Accent sells for $10 per kilo, while a BMW M6 reaches $60 per kilo.

Products as Amplifiers

Manufactured products are crystals of imagination because they originate as mental concepts. They are physically instantiated as ordered arrangements of atoms. Natural items exist in the world first and are imported into human minds as concepts. Engineered goods are mental exports born in human imagination before being built, embodying the creator's knowledge and knowhow.

You can compare natural supermarket apples that grew on trees to Apple silicon chips designed in Silicon Valley. Products act as knowledge amplifiers that augment your capacities. They grant you indirect access to the practical uses of expertise residing in strangers. By consuming physical products, you leverage the scientific knowledge and technical knowhow of inventors you have never met.

Using toothpaste grants you access to sodium fluoride synthesis chemistry. Playing an electric guitar uses Pythagorean scales and electromagnetic transducer knowledge. These tools liberate your creative expression and raise living standards far beyond isolation.

The Value of Resources

International trade involves an exchange of embodied imagination. A country's export structure measures the collective knowledge and knowhow of its population. Traditional trade balances can run opposite to a country's balance of imagination. Nations exporting raw materials rely on the external imagination embedded in imported industrial goods.

In 2012, Chile exported $4.6 billion mostly in unrefined copper to South Korea. Chile imported $2.5 billion in vehicles, running a positive trade balance but a negative imagination balance. Brazil exported $41 billion of products to China in 2012 while importing $33.4 billion from China.

The economic value of raw materials comes entirely from the imagination and inventions of others. Natural resources like copper or oil have no intrinsic recipes until scientific breakthroughs create global demand. Extractive economies exploit foreign creativity rather than the reverse.

German chemists Fritz Haber and Carl Bosch synthesized saltpeter in 1909. This invention crashed the Chilean natural saltpeter export economy. Chilean copper exports reached a value of $40 billion in 2012.

3. Quantization of Knowledge and Knowhow

The Limits of Individuals

Knowledge consists of explicit relationships used to predict outcomes. Knowhow is tacit computational capacity used to perform actions. You use knowledge to link entities and anticipate consequences without performing actions. Knowhow operates implicitly to allow physical execution without conscious awareness of the mechanics.

An example of knowledge is understanding that tobacco use increases lung cancer risk. Examples of knowhow include the tacit abilities to walk, recognize faces, and digest food. Knowledge and knowhow are heavier than atoms because they are embodied in human flesh and social networks rather than books.

The maximum amount of knowledge and knowhow that a human nervous system can accumulate is called a personbyte.

Because individual human capacity is finite, producing anything requiring more than one personbyte of knowledge demands teams of individuals connected through harmonious social networks. Sending ten teenagers with solar-powered laptops containing the entire Internet to a desert island would likely fail to reproduce modern society's productive knowhow.

Hiring a bunch of strangers to form a band is harder than hiring a single musician. A band requires deep connection and shared practice time to coordinate activities. Human networks have finite knowhow carrying capacity. When groups are isolated or transplanted to new environments, the lack of external assistance often leads to technological regression or failure.

Aboriginal Tasmanians abandoned bone tools and fishing. Jamestown colonists ate each other before John Rolfe arrived with tobacco seeds. Henry Ford failed to recreate a Michigan-style town in Fordlandia in the Amazon jungle during the 1920s.

It is infinitely easier to bring lithium atoms from the Atacama Desert to Korea than to transfer the knowledge of lithium batteries from Korean scientists to miners in Antofagasta and Calama.

Firms and Transaction Costs

The limited size of firms is governed by transaction costs, leading to a second quantization threshold known as the firmbyte. Ronald Coase showed that economic transactions are costly and firms exist as islands of conscious power where internal planning replaces market prices.

Firms stop growing when internal transaction costs equal external market transaction costs.

Workers moving between departments within a company respond to manager orders rather than the price system. Excessive administrative burdens and bureaucracy create large networks with many people but few personbytes, hindering knowledge accumulation.

When the bureaucratic effort required to establish a link matches or exceeds the actual task, organizations consume their available personbytes on internal approval processes rather than productive output.

Support staff in US private health care facilities spend 19 hours a week interacting with insurance providers for prior authorizations. Clerical staff spend 36 hours a week filing claims.

The estimated cost of interactions between private health care and insurance providers reaches $68,000 per physician per year. The total interaction cost in private health care is $31 billion per year, equivalent to the 2005 Dominican Republic GDP.

Administrative costs consumed 27.3 percent of the health care labor force in 1999, up from 18.2 percent in 1969.

4. Social Networks and Trust

Social structures, trust, and communication links dictate a society's capacity to accumulate and deploy knowhow.

Complex modern products cannot be built by single firms. They require large networks of firms crossing the firmbyte threshold. Because individual firms have limited knowhow carrying capacities, complex products are disaggregated into networks of firms that collaborate across borders and industries.

Apple's iPhone relies on Corning for Gorilla Glass screens, Toshiba for hard drives, and Samsung for displays. Personal computers combine parts from Intel, AMD, Seagate, and Kingston.

Oliver Williamson classified commercial links by frequency and specificity to connect transaction costs with governance structures. Transactions are separated into frequency categories and specificity categories, determining the external institutions and paperwork required to chaperone them.

• Buying a latte is a nonspecific recurrent transaction requiring almost no paperwork.
• Buying a house requires external institutional support.
• Establishing a long-term specialized supplier contract requires external institutional support.

Falling transportation and communication costs, alongside the adoption of standards and hub languages, have enabled denser global manufacturing networks. The inflation-adjusted cost of moving goods dropped by 90 percent during the twentieth century. Technology standards like USB and global hub languages like English reduced interaction frictions and facilitated global supply chains. Twelve thousand years ago, humans spoke an estimated 12,000 languages. Today, the world counts an estimated 6,000 languages spoken worldwide. Manufacturing a Barbie doll involves a collection of processes spread across twenty different countries due to low international commercial link costs.

Social Capital and Markets

Preexisting social networks rather than impersonal market forces are the primary mechanism through which people find jobs and housing. Twentieth-century neoclassical economists viewed labor allocation as a result of supply and demand equilibrium. However, sociological data shows that personal contacts, including friends and family, drive job placement and correlate with higher wages and job satisfaction.

In his study of professional workers in Newton, Massachusetts, Mark Granovetter found that nearly 56 percent of the sample found their latest job through personal contacts. According to a 1978 study, 52 percent of white men, 47.1 percent of white women, 58.5 percent of black men, and 43 percent of black women found jobs through friends and relatives. Furthermore, 45 percent of non-entry-level placements at Ernst & Young and 49 percent at Deloitte came from employee referrals.

Social networks are formed through three basic mechanisms:

• Shared social foci mean links form among people who share a focus such as classmates or workmates.
• Triadic closure means links form among people who share common friends.
• Homophily is the tendency for links to form among people with similar interests and characteristics.

Francis Fukuyama distinguishes between familial societies, where people distrust strangers and rely on family networks leading to small businesses and family conglomerates, and high-trust societies, which can form large professionally run firms and complex industries like pharmaceuticals and aircraft. Southern Europe, Latin America, and France rely heavily on state intervention for large industrial projects like Airbus or the failed Plan calcul computer initiative due to familial social structures.

Trust serves as an informal and efficient mechanism that reduces transaction costs and enables risky commercial interactions without expensive contracts. Trust and the social networks that enforce it substitute for formal contracts and enforcement procedures. This lowers the cost of creating links, allowing larger human networks to form and accumulate more personbytes of knowledge. Jewish diamond merchants in New York successfully execute private inspections before transactions because trust and implicit social networks enforce honesty without costly legal procedures.

Regional Clusters

Regional clusters differ in adaptability and long-term success depending on the porosity of their social boundaries and local institutions. Silicon Valley's dense social networks, open labor markets, and porous boundaries fostered horizontal communication and experimentation. In contrast, Route 128 relied on autarkic corporations, vertical information flow, and secrecy, leading to a lack of adaptability and decline.

Steve Jobs was able to visit Xerox PARC in late 1979 and learn about graphical user interfaces because of the porous, high-trust environment of Silicon Valley.

5. Economic Complexity and Growth

Traditional economic growth models based on aggregate factors of production leave large unexplained gaps because they disregard the identity and diversity of specific economic elements. Robert Solow advanced his model of economic growth in the 1950s. Subsequent additions like human capital and social capital failed to fully account for empirical growth data, leaving what Simon Kuznets termed a measure of our ignorance or total factor productivity. Mankiw, Romer, and Weill evaluated the period from 1960 to 1985 in empirical comparisons. Economists like Wassily Leontief and Michael Porter criticized aggregate models, noting that aggregation lumps distinct items together and fails to account for specialized factors.

An economy's long-term growth is predicted by its economic complexity metric, which measures the diversity and ubiquity of its exported products.

Economic complexity is a network-based metric measuring an economy's diversity and the ubiquity of its exported products, successfully predicting long-term economic growth. Developed by the author in 2008, economic complexity combines the number of products a country exports with the ubiquity and diversity of those products' exporters, capturing the collective knowledge and knowhow of a society without suppressing element identities. In 2000, Singapore, Chile, and Pakistan exported the same number of products, but incorporating product ubiquity and exporter diversity correctly ranks Singapore as more complex than Chile, and Chile as more complex than Pakistan. The metric uses input-output matrices and a baseline year of 1985 for comparing economic complexity versus GDP per capita, tracking predicted growth against observed growth from 1985 to 2000.

Low wages alone do not drive manufacturing migration; firms cluster in hubs like Shenzhen to tap into densely accumulated collective knowhow and operational personbytes. While countries like Indonesia with a population of 200 million, Ethiopia with a population of 80 million, and Nigeria with a population of 100 million have lower wages than China, and Ethiopia has an estimated GDP per capita of one-tenth of China, manufacturing concentrates in places like Shenzhen because those hubs possess integrated, well-oiled networks of specialized physical and human capital. Foreigners manufacturing mobile phones and electronics choose Shenzhen because it is the optimal place to build products due to its ready-to-go manufacturing capacity.

The personbyte theory posits that the complexity of an economic activity dictates the minimum network size required to execute it. Because individual human capacity to carry knowhow is limited to one personbyte, complex production demands collaborative professional and social networks, leading to predictable patterns in global trade and industrial diversification. Simpler economic activities are more ubiquitous globally while complex products require diversified economies with large collaborative networks.

• Simpler economic activities will be more ubiquitous.
• Diversified economies will be the only ones capable of executing complex economic activities.
• Countries will diversify toward related products.
• Over the long run a region's level of income will approach the complexity of its economy.

Measuring Complexity

Industry-location matrices exhibit nestedness, meaning less diversified locations produce a subset of the industries found in highly diversified locations. Simple industries requiring little knowledge and knowhow are present in almost all locations, while complex industries requiring large networks of knowledge are concentrated in a few diverse places. In 2008, Honduras exported 50 products, Argentina exported 25 of Honduras's 2008 products and 227 total products, and the Netherlands exported 48 of Honduras's products and 213 of Argentina's products.

The Product Space

Moving or developing a complex industry is analogous to assembling a jigsaw puzzle, biasing economic diversification toward related varieties. Products requiring many personbytes of knowledge represent large puzzles where missing a single piece causes failure. Consequently, locations diversify into new industries that utilize the knowledge and capabilities already present in closely related existing industries. Malaysia diversified its export structure between 1980 and 1990 from basic electronics and garments toward related industries requiring similar knowledge and knowhow.

10 Key Ideas

1. Information is physical order tied to the arrangement of matter rather than an ethereal digital abstraction, matching statistical physics entropy.
2. The universe spontaneously generates order in open systems through out-of-equilibrium energy flows, information-storing solids, and matter's computational capacity.
3. Manufactured products embody human knowledge and imagination as static arrangements of atoms, acting as knowledge amplifiers that augment human capacities.
4. The maximum amount of knowledge and knowhow that a human nervous system can accumulate is called a personbyte, limiting individual productivity and requiring collaborative networks.
5. Firms stop growing when internal transaction costs equal external market transaction costs, creating a second quantization threshold known as the firmbyte.
6. Social structures, trust, and communication links dictate a society's capacity to accumulate and deploy knowhow across borders and industries.
7. Trust serves as an informal and efficient mechanism that reduces transaction costs and enables risky commercial interactions without expensive contracts.
8. Regional clusters differ in adaptability and long-term success depending on the porosity of their social boundaries and local institutions.
9. An economy's long-term growth is predicted by its economic complexity metric, which measures the diversity and ubiquity of its exported products.
10. The personbyte theory posits that the complexity of an economic activity dictates the minimum network size required to execute it, biasing economic diversification toward related varieties.