Cesar Hidalgo on tacit knowledge and social networks

Coase, in the 1930s goes to a presentation from a professor in the department of commerce in LSE (London School of Economics) and this professor says, ‘Well, the normal economic system works itself out’ and Coase, as he said in his Nobel Prize acceptance speech, thought that that was total BS because he thought that in reality the world was made of a lot of islands of conscious power, that were firms, that work in some form of, you know, centralized planning, which the price system was not playing such an important role.

The price system played a role between firms. But within the firm, that important heritage or that important networks that are formed that had to make decisions not based on the supply and demand that is signaled by price systems but based on more social mechanisms that might involve that knowledge that each person has about the capacities about someone else, the way that they will react to other things, you know, and ultimately those units are fundamental.

That was Cesar Hidalgo on EconTalk. This conversation speaks to that infinitely complex boundary between internal and market coordination, and within the firm these decisions are commonly called “make-buy” decisions.

Cesar Hidalgo, director of collective learning group at MIT media lab.

Here’s a bit more on how coordination, even when it is within the firm, is perhaps most resilient when it emerges from the bottom-up.

Russ: So, in the 1990s there was a big fad in management education about trying to utilize the knowledge that was in a firm that was greater than the knowledge of any individual person in it. Or, to think about how to maintain the knowledge when there was turnover.

Cesar: Exactly. And that’s a little bit of the theme of the book: How do we get to accumulate this vast amount of knowledge?… So, if you think about the world, you know, 3 billion years ago…it was populated by, you know, mostly unicellular organisms. And at that time, the type of things that those uni-cellular organisms could achieve were relatively primitive for today’s standards.

And the thing is that those unicellular organisms had a finite capacity to compute, because any system that is finite in the amount of matter and energy that they are able to embody is going to be finite in its capacity to compute, too. There are actually physical laws that tell you, given the amount of matter and the amount of energy available to a system, how much computation that system can complete.

But that finiteness was not the end of the growth of order and information in our planet. At some point, those unicellular organisms figured out how to become multi-cellular. And those multicellular organisms were able to accumulate amounts of knowledge that were much larger than one of the unicellular organisms could ever achieve.

By the same token as humans, we are also finite in our capacity to accumulate knowledge and knowhow… We know very few things. And the way that we transcend our finite capacity to accumulate knowledge is by accumulating that knowledge collectively.