Tariffs won’t save America’s economy—but knowledge might. In the third episode of our Trade series, Nick and Goldy sit down with physicist César Hidalgo to explore how prosperity really grows—not through tariffs or trickle-down promises, but through the accumulation of knowledge and know-how. Hidalgo explains why digital exports don’t show up in trade data, why tariffs fail, and why the future belongs to countries that invest in research, strategy, and human talent.
César Hidalgo is the director of the Center for Collective Learning, with offices at the Toulouse School of Economics and Corvinus University of Budapest. A physicist by training, he is also the founder of Datawheel, a company specializing in data visualization and distribution systems. Hidalgo is the author of Why Information Grows, a groundbreaking book on the relationship between knowledge, innovation, and economic prosperity, and his forthcoming book, The Infinite Alphabet and the Laws of Knowledge, explores the dynamics of how knowledge evolves and diffuses globally.
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Further reading:
Why Information Grows: The Evolution of Order, from Atoms to Economies
The Infinite Alphabet and the Laws of Knowledge
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Nick Hanauer:
The rising inequality and growing political instability that we see today are the direct result of decades of bad economic theory.
Goldy:
The last five decades of trickle-down economics haven’t worked, but what’s the alternative?
Nick Hanauer:
Middle-out economics is the answer because the middle class is the source of growth, not its consequence.
Goldy:
That’s right.
Nick Hanauer:
This is Pitchfork Economics with Nick Hanauer, a podcast about how to build the economy from the middle out. Welcome to the show.
Goldy:
We’ve been talking a lot about trade on the podcast, Nick, recently, and today I think we’re going to talk to maybe the only person who seems to know anything about it. I mean, at a fundamental level.
Nick Hanauer:
Yeah, I agree. Today we get to talk to our old friend, Cesar Hidalgo. Yeah. We’re huge fans of Cesar and his work and his collaborations with Ricardo Hausmann and others about economic complexity and just how the economy actually works at the most fundamental level.
Goldy:
Right. His way of understanding it is just so applicable to the arguments about trade that we’re having now and tariffs and the rest of it.
Nick Hanauer:
And Cesar wrote a book that I think you and I both agree, is one of the best on economics we’ve ever read.
Goldy:
Right. It’s a sometimes difficult little book. First of all, Cesar is a physicist by training, not an economist. And his book, Why Information Grows, it’s always the first book I recommend if you want to understand the way we think about where prosperity comes from.
Nick Hanauer:
Yeah, absolutely.
Goldy:
We’ll put a link to that in the show notes. Obviously we-
Nick Hanauer:
Goldy, remind me, did we not interview Cesar about that book at some point in the distant past?
Goldy:
We’ve talked to Cesar a number of times about the ideas in the book, but the book I think predates our-
Nick Hanauer:
Yeah. Anyway, it’ll be great to talk to Cesar as always. He’s an incredibly bright and interesting guy, so let’s get at it.
Cesar Hidalgo:
My name is Cesar Hidalgo. I’m the director for the Center for Collective Learning, which is an interdisciplinary laboratory with offices at the Toulouse School of Economics, and Corvinus University of Budapest. And I’m also the founder of Datawheel, a company that specializes in the creation of data distribution and visualization systems, including the OEC, which is one of the main platforms in the world to distribute and visualize international trade data.
Nick Hanauer:
That’s awesome.
Goldy:
Great.
Nick Hanauer:
Well, Cesar, it’s so good to see you. We haven’t chatted in a long time. We’re really excited to you on the podcast to talk about trade. Both Goldy and I have always felt like your perspective on trade and the perspectives that you evolved with Hausman, others are by far the most nuanced and smartest takes on how all this stuff fits together that we’ve seen. But, it is quite complex. Perhaps you could start and do the best that you can to characterize how you think about how this stuff fits together versus the primitive conventional view.
Cesar Hidalgo:
Yeah, so the way that we think about the geography of economic activity, and that includes trade, but includes also other things, is a process of knowledge accumulation in which the accumulation of knowledge is very difficult because knowledge is very hard. It’s multifarious, it’s non-fungible, or non-interchangeable, and therefore, the accumulation of knowledge requires to create a structure such as cities or companies where all of this knowledge can be put together. Maybe the pictorial way to tell you that is, I don’t know if you’ve heard the story of a designer called Tom Thwaites?
Nick Hanauer:
Yeah, sure.
Goldy:
Mm-hmm.
Cesar Hidalgo:
Yeah? Okay, so that story of Tom Thwaites, that he basically in 2008 had to do a master thesis in the Royal College of Arts, and his thesis was to design a toaster, but he wanted to design a toaster from scratch. He went into the mines to get the iron, he tried to get on an offshore oil rig to get the oil, and eventually he creates a toaster that it works poorly.
Nick Hanauer:
Mostly a fire hazard.
Cesar Hidalgo:
Exactly. But, it illustrates the point that the world works, not because a few people know a lot, but because a lot of people know very little, and that knowledge is distributed, and the magic of the markets is that the knowledge is put together. The way that we think about this is that when we’re looking at data on which country exports what, or which city patents on which technology, or which university patents on which research field, what we’re seeing is some sort of imperfect image of this distributed knowledge. And that’s where we start from. We start from this idea that knowledge is distributed and all of these are expressions of that distribution.
Nick Hanauer:
One of the things that you’ve elaborated on, I think very successfully, is the difference between knowledge and know-how, which is crucial, I think. Can you explain that a little bit?
Cesar Hidalgo:
Yeah, so when people talk about knowledge, it’s hard to understand what people are referring to, because it’s a word that we used to talk about many different things. In the academic literature, we have a lot of distinctions. One of them is the distinction between knowledge as a statements of fact. For example, I know that Washington D.C.’s the capital of the United States, or I know how to play the guitar. And in that case, I say I know how, because actually I’m not referring to knowledge. I’m referring to know-how, which is this capacity to make.
In other languages, we actually have two verbs. In Spanish and in French, we have different verbs for knowledge and for know-how, [foreign language 00:05:50] or [foreign language 00:05:51]. In Spanish, we have these two different verbs. [foreign language 00:05:54] Nick, I know Nick, but I can not say I know Nick like I know how Nick, yes? [foreign language 00:06:01], I know how to play the guitar. We have these two different verbs because one is knowing a verb and the other one is knowing a noun. Knowledge of facts is the one about nouns, and knowledge of verbs is know-how. And that is really hard to communicate and transmit, because it requires practice, it requires experience, it requires another form of learning, which is not simply repeating something that someone else said.
Nick Hanauer:
To make things that are value added, it requires both knowledge and know-how, and the know-how is the tricky part often, because the knowledge you can buy in a book, or look up on the internet. But, being able to do it, knowing how is of course very hard. And so, can you contrast that more sophisticated nuanced view of generating value that you described with the conventional economic view?
Goldy:
In relations to trade, Nick, you’re talking about this versus comparative advantage?
Nick Hanauer:
Yeah.
Cesar Hidalgo:
In some way, I think there are layers to economic theory, and I think all economists more or less agree on these different layers. And what happens is that sometimes we get stuck on the simplest layers simply because that’s where the dialogue is at. But, on the first layer, you can think of economic theory as a theory of decision-making. What should you do given what you have, and what you have is a static on that theory. If a country has a certain set of capacities, what should they trade based on those capacities with other countries that have a different set of capacities? And that’s the theory of comparative advantage, which is that you should specialize on the things that you’re good at, and basically buy the things that you’re not good at. But, these capacities are not static or dynamic.
Nick Hanauer:
Correct.
Cesar Hidalgo:
And a lot of what we have done over the last 20 years or so is to create both mathematical models, but also empirical work showing that these capacities are dynamic, and that they evolve according to a certain set of rules. Actually, I’m coming out with a book that is being published this November called the Infinite Alphabet and the Loss of Knowledge where I explore these rules, these principles that govern how knowledge diffuses, because that diffusion is not random. It depends on a variety of things.
And one of them is having related activities or having capacities that can be combined with others in ways that you need few new capacities to enter into a new activity or to new product. And those things help us understand these dynamics because the dynamics is not haphazard. It has a certain order. And once we’re able to measure not only what you’re able to do, but what you could be good at doing, then we are able to have a dynamic theory that can show us that countries can change over time and the laggards can become sometimes leaders.
Nick Hanauer:
And just to be clear for our listeners, I think, one of the things that was implicit in what you said is, if you want to have a country that gets generally more prosperous over time, you need to find ways to make more things, not less, right, and ideally more complicated things, not less complicated things. And that trajectory requires strategy ideally.
Cesar Hidalgo:
Yeah, it’s a lot about the quality of what you make because I think at a larger scale, we are all playing a game that is very relatable at the individual scale. At the individual scale, when you’re in an organization, there’s some tasks that people don’t want to do, everybody tries to pass them on, yes? You try to … Let’s say in the world that I live, usually new hires have to clean data, not because they’re the best at cleaning data, but because nobody else wants to clean data, yes? And the world I think operates a little bit in that way too. Everybody wants to specialize hopefully on things that they would want to do, or that they feel fulfilled at doing, but not everybody can. We all have to sometimes eat the frog, and take a bad job, or a job that we don’t like, because we are not the one that can specialize on that because there’s someone that is simply better, and they’re going to be the ones doing that job.
At the individual skill, we have a little bit that dance of passing on the task that we don’t like among each other, but at the global scale we have that as well. And there’s a few things that if you are able to produce a high quality, you would be able to specialize in them, and acquire all of the other things that might require jobs that you don’t want to do. That game, it’s happening I think at all scales. And countries that are successful are the ones that on the one hand are diverse, but actually they are, at the very end, highly specialized on knowledge intense activities. Countries like Switzerland, Singapore, Finland, certain parts of the United States are extremely specialized on knowledge intense activities that have huge productivity, generate enormous returns. And in exchange, for a few hours of thought, you can buy the labor of many, many people, because you are operating at the level in which you’re doing something that very few other people can do, and that has value that is also very scalable.
Goldy:
I’ve got a question because I’ve been thinking about this. As I understand your work, and Hausmen and others, the economy expands into adjacent product space, and that’s not random. As you said, there’s rules to that. What you can do in the future depends on what you can do now, because it’s very path dependent. And obviously, over history, in country after country, including the US, and the UK, and China, the textile industry was a big jump starter in terms of industrialization. And from there, that was an important step into modernizing into other manufacturing industries. But, once you have a highly technical and complex economy like the United States, do you still need a textiles industry, or can you jettison the less knowledge intensive industries once you’ve developed beyond a certain point? Essentially, is there a difference between developing countries and developed countries in terms of these rules and strategies?
Cesar Hidalgo:
I think the rules are rather universal, like the laws that govern knowledge diffusion are universal. But, the context that countries provide can be extremely specific, and can lead to very different outcomes. Let me give you an example, one of these rules using the textile industry as an example. Have you heard of Samuel Slater?
Goldy:
Samuel Slater? No.
Cesar Hidalgo:
Samuel Slater should be the most famous entrepreneur in America. Hopefully he’s going to be after my book because this is a guy that basically started working on the textile industry in the UK, in Derby, Cromford, in the area where the first water-powered cotton spinning mills were developed. At the tender age of 21, after working through his teens and becoming a manager in one of these mills, he escapes England pretending to be a farmer, and without even telling his mom, and leaves for the Port of New York, arrives there, finds a mill in New York, he decides that their machinery is crap, so it’s not going to work with them. He quits within the first four days, and eventually he hears from this sloop captain that there was someone in Rhode Island like a rich industrialist that was trying to develop water-cotton spinning technology.
And he goes there. He also tells them that the machine is not good, but he makes a deal with them to build the machinery in exchange for getting a share of those profits. And within a year, he has the first operating water-powered cotton spinning mill in the history of the United States, which was a technology that lots of people in the US were trying to develop at that time. This is the exact time also of the American Revolution, so just bringing the technology from the UK to the US was an act of treason.
This guy went through great risk, and he knew that he was bringing knowledge that it was going to be valuable here, and it was very hard to reproduce because all of these people in America were trying to do that and were not succeeding. And he becomes very successful. He becomes rich, of course, and then actually, he quits about 20, 30 years later, because he realizes that just like it had happened in the UK, that knowledge was spreading, and it was going to be become a dog-eat-dog race of thin margins and so forth. You have these universal mechanisms, but then, you have this absorbent capacity, which is for example, if maybe some much later will have moved to Paraguay, he wouldn’t have been able to succeed in the same way because-
Goldy:
Right.
Cesar Hidalgo:
… he wouldn’t have been able to find the industrialist that had so many of the complementary pieces that he needed to get that going. And I think in that context, a specific component is where you find a lot of the nuance and the stories of why some countries end up succeeding at some sectors and not others.
Nick Hanauer:
And you’ve developed this four part heuristic, what, where, when, who?
Cesar Hidalgo:
Yep.
Nick Hanauer:
Did I get that right, as a way to think through these strategies, correct?
Cesar Hidalgo:
Yeah, so we have a paper on the policy implications of economic complexity. What we do there is that these methods have become widely adopted by now in international development circles, expert promotion agencies, and so forth. And I thought there was a need to organize some of that literature in a framework. What is the idea of defining targets? And I think that’s what a lot of these methods help us do is to identify targets not only in terms of how desirable they are, but also how plausible they are.
I’m a big believer in markets and so forth, but we still need targets. We need strategy, we need direction. We need to rally the troops towards a certain goal. And what you can do there is to say, “Well, this country, given these capacities, might be more likely to succeed at these sectors, and maybe not so much at these others. Then you have another dimension, which is when? Is it the time to make this jump, because sometimes, countries are going to have to face the dilemma of whether they double down on what they’re good at doing right now, or whether they should attempt to develop something more risky that might provide a bigger reward, but might be harder to develop. Should they jump to artificial intelligence, or to biotech, and what time they should do that? And we find that there is a time which is optimal for countries to take those risks, which is soon before they enter this middle income trap.
As countries develop, and they accumulate capacities, there is a point in which they’re capable, but they’re yet poor, meaning that they would have a price advantage over countries that are equally capable but are much richer than them. For example, right now, if we use these measures to look at that, India is at that point, okay? India has the same economic complexity or comparable economic complexity with countries like Turkey, which are much richer than India in GDP per capita. But, India has much lower salaries. At this point, it has the capacity to enter more sophisticated activities at a lower cost, and therefore can make that jump.
Now if you don’t make that jump at that point, what happens is that your income is going to continue to grow, and that opportunity window is going to shrink, and it might even disappear. And I think Latin America had a little bit of that. Latin America was a continent that had many countries that were successful at exporting raw materials, and they went through the middle income segment, and now they’re like a stack in some cases at upper income without finding new avenues of growth, because they didn’t diversify when the opportunity came, so that’s when, when you should jump, when is the right opportunity to target unrelated activities?
Then where is about where you’re getting the knowledge? Knowledge travels through the space like in the story of Samuel Slater, travels through cultural networks, so diasporas are important also for knowledge flows, shared language, and all of those type of things. But, it also moves among related activities. You have to ask yourself the question, well, if now I want to hit that target, and I think it’s the right time, who do I’m going to get? Where do I get that knowledge? Do I get it from my neighbor? Do I have some other entrepreneurs in this country that might be able to go into that activity?
Then from the where, you eventually go into who, which are the agents of a structural change, because actually entering a new sector is something that requires a high tolerance for risk, and a lot of creativity because developing a sector in a country that sector does not exist might have idiosyncratic problems that might go beyond what you can learn from other places. That’s a little bit like the framework to think about what you’re going to hit, if it’s the right time to hit it, where are you going to get the knowledge and who’s going to own it?
Goldy:
Yeah, so we’ve been talking about trade for about 20 minutes now, and weirdly we haven’t talked about tariffs once. I know you have said that you’ve called the original sin of economics is that it starts with trade. And right now we have an administration that’s committing an original sin every few minutes. I’m wondering, in terms of your take on the Trump trade policies, is there any justification there to his tariff policies? Will this bring manufacturing jobs back home? Do we even want in the words of, is it the Secretary of Commerce Treasury, who was it Nick?
Nick Hanauer:
It’s treasury, Bessent.
Goldy:
Bessent, who repeatedly talks about how great it will be when we have millions of Americans putting tiny little screws into iPhones? Is that a sensible trade strategy of the part of the US?
Cesar Hidalgo:
I don’t think so. And I think many people, even maybe within the administration, by now they have realized that tariffs are not the way to go. And I think there’s a few arguments that I can share to add to that conversation. The first one is that the US doesn’t have as much of a trade deficit as it think it has. And the reason, for that is that the US, it’s a very big exporter in the digital sector, and those exports do not get accounted for in trade data because basically companies in the D sector open subsidiaries in foreign countries, and therefore, the best that you’re going to be able to get is a return on a foreign investment, but you don’t see a trade flow. For example, here in Europe, where I live, Amazon operates out of Luxembourg. How many engineers are building AWS in Luxembourg? I would bet not so many.
But, if I buy AWS here, well, it appears as domestic trade within the EU, because it’s located in Luxembourg. If I buy an ad on Instagram, Meta is located in Ireland. If I buy a Netflix subscription, they have subsidiaries everywhere, so the US we account, we did a paper last year in which we looked at estimates of digital trade using corporate revenue data to try to allocate these revenues, because if you look at companies like Google or Amazon, these are companies that make hundreds of billions of revenue a year, and not all of that revenue is coming from the United States. Therefore, they are involved in trade. And what we found is that the US runs a surplus of about like 700 billion a year in digital products. That’s like the total exports of France. This is not like the trade surplus of France. This is the total exports of France is the same, that basically Silicon Valley plus Seattle and New York would be exporting in terms of digital a year, which is huge.
Goldy:
That is fascinating. You’re here in Seattle where all of the AWS engineering is going on. None of that is accounted as an export even though it’s driving all of this export trade, all of this business overseas and around the world. That’s purely domestic accounting. And it doesn’t go into the trade data.
Cesar Hidalgo:
It doesn’t go into the trade data because exactly, Amazon has opened subsidiaries all over the world, so its revenue units are distributed, and they’re not buying it from Amazon, Seattle, they’re buying it from Amazon, France, Italy, et cetera, yeah.
Goldy:
Is this just an artifact of tax evasion, of our weird tax system in the US that they set up these overseas? I know Apple does this, it puts a lot of its intellectual property. What in Ireland, I think for tax reasons. Is this just a tax artifact?
Cesar Hidalgo:
I think in part it’s a tax artifact. Another example, if you want to move away from the US as a case, if you look at the Chinese internet, it operates primarily from the Cayman Islands for the west. When you look at companies like ByteDance and Tencent, they would appear as, they’re not Chinese companies. They are companies in the Cayman Islands, but of course, there are a subsidiary from a Chinese company that is based in China. I think tax purpose is definitely one of them. It distorts our statistics enormously. I think that’s the one point I think is important and that we have been missing. It’s also something that is much more easy to, much harder, sorry, to tariff, because these digital flows are paradoxically harder to trace even though they’re digital, but the physical products, because they cross a physical border, someone has to open the container and so forth, they’re actually more accounted for.
Goldy:
It turns out, Nick, we’re like, Seattle’s like the fifth-largest economy in the world. Who knew?
Cesar Hidalgo:
Well, California runs physical product trade deficits all the time, because they have a huge digital product, trade surplus. Yes, you can import whatever you want. Adobe is exporting, and Netflix, and Airbnb, all of those are exporting.
Nick Hanauer:
We’re going to go on, but we may ask you to come back just to talk about that paper. That’s just a-
Goldy:
That is fascinating.
Nick Hanauer:
It’s just a mind-boggling thing. But I think I-
Goldy:
And by the way, we’ll definitely have you back on when your book is out.
Nick Hanauer:
Yeah.
Cesar Hidalgo:
Thank you.
Nick Hanauer:
For sure. The 1.2ish trillion trade deficit that the US claims it has is probably more like 500 billion when you account for the 700 billion of digital products that we export effectively. Did I get that math right?
Cesar Hidalgo:
And it might even less, because what we see in digital, it also happens in other sectors. When the United States opens McDonald’s here in France, part of that is also exports of that intellectual property that are not accounted for in the trade balance simply because that, again, a return on a foreign investment. In digital, it’s more pronounced because in digital, you can open a foreign subsidiary with two lawyers and a mailbox while in services, you’re still going to have to employ a number of people to run that franchise.
Nick Hanauer:
Yeah, okay. Today, we’ve learned that the US trade deficit is not as bad as we thought it was. That’s important. But, given even, just stipulate that, do you think that the current approach the administration is taking makes any sense, with this one small caveat that China, of course has been taking advantage of all sorts of people and we need to push back on them to a certain degree.
Cesar Hidalgo:
Yeah, so it doesn’t make sense because there is some other component of trade, which is, let’s say, less academic, maybe even more political, more sneaky, more business, which is that trade can be very slippery. I was looking at the US trade numbers for April of this year, which they were released last week, because we published those at the OEC, so I was constructing a thread for X. And I say, “Okay, the US is importing about 20% less year over year from China,” okay? But, the US is importing a lot more from Taiwan, from Vietnam, quite a bit from Mexico. What are they importing? Well, imports of computers from Mexico, they grew up by 500% in April of 2025. Imports of computers from Vietnam grew by 1,600%. Is that Vietnam developed overnight capacity to more than 10X their production of computers, or is it that, well, you can play with this place of origin type of regulations and you send it? Well, as long as it is boxed here.
And we have seen that before the development of Malaysia, for instance, that comes in part from this Plaza Accord was in part an example of development, or at least exports coming from boxing things that were done elsewhere to be able to claim that the origin was different so you could export them to the United States. We’ve seen that before. And that slippery component of trade is the one that is hard because you can not close yourself only to China. China is fantastic at producing and exporting things, and they’re going to find other channels to send it to you. And the people in those other countries are going to be happy to be a channel for them as well.
Nick Hanauer:
Yeah, okay. But, that’s true, Cesar. But, that doesn’t mean that it doesn’t make sense to push back on their very deliberately mercantilist strategies. I grew up doing business in China, and their determination to build their industries, irrespective of whether it made economic sense on a commercial basis or not, look, I don’t fault them for it, but it’s impossible for companies or industries that are not supported by the government to compete with that. You either have to effectively be fine abandoning your industries, or you have to find a way to reasonably push back on these strategies.
Just by way of example, when I was, like you may recall, my family business was in the home furnishings business, and our competitors in China who made finished down comforters, got an 11% rebate from the Chinese government for every product that they exported, which makes it pretty hard to compete if you’re making those things in the United States, even though the labor costs are very, very low, right? It’s just effectively impossible to compete. Again, you can just say, well, to hell with it, we’ll just give it all to the Chinese, or you can find a way to push back on it. I’m very heavily in the second camp.
Cesar Hidalgo:
Yeah, so I think there are different ways of pushing back, and I think that’s where the nuance is. At least in the economic development literature, you have ways of pushing back that are more protectionist. Trade would be considered a protectionist measure, like you close yourself up, and you hope that you have a big enough domestic market, that you can do it all on your own. It doesn’t tend to work like Cuba, the Soviet Union, they went through that route. And there’s another way of pushing back, which is more export promotion, which is what places like South Korea did. And that is try to help your industry be competitive in a global market while remaining open.
And that might involve things as simple as subsidies, which can be tricky or dangerous. But also, the US, you have to remember that the federal budget of the US is about four trillion a year, so we do have a lot of firepower when it comes to the ability to spend at the federal level if we wanted to do things to help support our businesses and promote our economy. And I think the US is a big country. If we would be talking about China vis-a-vis Uruguay, maybe, yes, you have a big, but the US, I would say still should be able to face China, face-to-face, head-to-head, not with a protectionist mindset, but we’re going to be able to out-export you and out-compete you because we are leaders in technology. We attract people from all over the world. We have the best labor market maybe in the world, which is extremely flexible and dynamic, and we’re going to be able to basically move always to the next industry faster than you. I don’t think we are there yet, but I think the responsibility would be on that side at that level.
Goldy:
I wouldn’t count on our ability to attract people from all over the world anymore.
Nick Hanauer:
That was yesterday’s news.
Cesar Hidalgo:
The pendulum swings, huh?
Goldy:
Sometimes things just collapse. Sometimes that pendulum just hits you right in the head as it’s swinging.
Nick Hanauer:
Yeah, exactly.
Goldy:
And that’s what I’m afraid of right now.
Nick Hanauer:
If you were in charge of trade policy for the United States, what would you do?
Cesar Hidalgo:
First of all, I would not use this aggressive stance to tariffs. And I think I would use maybe other ways to negotiate deals that the US has, and that I think it uses in some way. When you look at trade agreements between countries, usually they’re called trade agreements, but in reality, there’s a lot that goes in. One of these levers that the US has is the ability to make it easier or simpler for people to get visas to come to the US to work, or to come to the US to do business, or to come to the US to study, and so forth. You could use that as some form of leverage if you wanted to have other countries open up. But, I would maybe focus on a policy that would not focus so much on trade itself, but on the capacities that underlie it.
And what I mean by that is that I will use some of that firepower that the US does have at the federal level, and I will be doing the opposite of what it is doing in terms of funding research, both at the universities and at the federal level. I would super power the NIH, I would super power the universities. I would super power all of that innovative capacity that the US has, and that generates good returns because the money doesn’t go to waste. It’s going to people that have the capacity, have the skills, and have the hunger to succeed. And I would let them figure out-
Nick Hanauer:
Yeah, we figure should be doubling down on all that stuff right now instead of-
Cesar Hidalgo:
Exactly, yes.
Nick Hanauer:
Yeah, it’s absolutely insane.
Cesar Hidalgo:
And forget about trade. They’re going to figure out how to export the new biotech product. They’re going to figure out how to export the new software solution. They’re going to figure out how to export the AI. Just bet on research and let the market figure out who buys it from whom.
Nick Hanauer:
Interesting.
Goldy:
Okay, so double down on research, check. We’re destroying research. Attract high quality, high skilled people, check. We’re kicking people out of the country, making it a hostile place to come. Okay, so obviously you’re not advising the Trump administration.
Cesar Hidalgo:
Unfortunately.
Goldy:
What about during the Biden administration, the increased focus on industrial policy, the investments in semiconductor manufacturing? Does that work in the US? Was that a big enough effort, or should we-
Cesar Hidalgo:
I don’t know, because, right, to me, what I see, I wasn’t so hot on the Biden administration either. I felt it was rather ineffective and largely rhetoric. I didn’t see those things actually becoming something larger as they should have given the efforts. It reminds me a lot of the Brussels administration, which sometimes they like to do this speech, and present themselves as really good, and everything, but they don’t really sink their teeth into the problems in the way that sometimes problems need. Yes, they might have been a place with good intentions, but I do think that we live in a world in which you do need decisive action, and to push in certain directions. And this administration might not be pushing in the right direction, but they’re definitely pushing in that direction. They are pushing.
Goldy:
Right.
Cesar Hidalgo:
You can not give, yes.
Goldy:
Got to give them credit for that. Nick, final question?
Nick Hanauer:
Why do you do this work?
Cesar Hidalgo:
Well, I think the reason why I do this work, it’s very personal. I grew up in a suburb of Santiago. At that time, there was of course no internet. There were a few TV channels, and there was a room in the back of my house where I live that had a bookcase with a bunch of books. And I would read about all of these famous people like Galileo, and Adam Smith, and so forth. And it was clear that none of them came from where I came. None of them came from Chile. And my idea was like, well, it can not be that everyone here is stupid. It must be something else. It must be something at the collective level that we are missing, because talent might be everywhere, but opportunity is not.
And I’ve dedicated my life to understand why talent doesn’t develop everywhere equally. I think that’s a fundamental question, because at the end of the day, the world does need development. We can worry about inequality, we can worry about climate change, but if you really travel around and you know the lives of people, there’s a lot of people that still need a lot of growth, and we need that talent to develop for that to happen. I dedicated my life to understand that question, which I think is one of those eternal questions that people have been pondering for centuries, if not millennia.
Nick Hanauer:
Well, it was fantastic to talk to you as always.
Cesar Hidalgo:
Same.
Goldy:
Look forward to your book.
Nick Hanauer:
Yeah, for sure. You’ll have to come back.
Goldy:
Because I have to tell you why Information Grows was like, that’s when everything clicked for me when I read it. Nick had gotten me started on evolutionary theory, and I was getting the connection to economics. But, when I read your book, it’s like the universe was revealed to me. It all made sense.
Nick Hanauer:
Yeah. Great book.
Cesar Hidalgo:
Thank you.
Nick Hanauer:
Underappreciated.
Cesar Hidalgo:
Hopefully this one is better. I learned how to write a lot during the last 10 years.
Nick Hanauer:
Okay.
Goldy:
I’m curious, I was recently introduced to assembly theory, and it seems to be really consilient with your work, and your ideas, and I’m wondering whether you’ve put that to work at all, if you’ve thought about that.
Cesar Hidalgo:
I haven’t explored it to the point that I would have to be able to say something smart about it. I’ve been working a lot on theory more recently, but we have our own set of mathematical tools that we’ve been developing to really put all of this together, but not assembly theory in this case, but there might be something there like a lot of the times math has a lot of multiple paths that takes you to the same place, and you eventually end up making these connections.
Nick Hanauer:
Well, Cesar, thank you again for being with us.
Cesar Hidalgo:
Thank you.
Nick Hanauer:
Always interesting. And I hope to talk to you soon again.
Cesar Hidalgo:
Well, and if you come to France, you know this is the best part of the country.
Nick Hanauer:
Okay.
Goldy:
Okay, Nick, I’m sure your big takeaway is going to be my big takeaway. What new thing did you learn today in our conversation with Cesar?
Nick Hanauer:
That was so funny. Yeah, that the trade deficit is not what it seems. And of course, it makes perfect sense.
Goldy:
That’s right. That we export data, but you can’t account for that, so data processing-
Nick Hanauer:
I got to dig up that paper. We got to dig up that paper. I want to look at it.
Goldy:
That is amazing. It’s like, here we are. You’re in London. I’m here in Seattle, home to AWS, which is the empire of data processing. And none of that is accounted for in the trade numbers, because it’s all done through subsidiaries overseas that don’t have to pay Amazon for any of this. And that, and in so many other industries where the engineering, the intellectual property, it’s all developed here and accounted for someplace else because taxes.
Nick Hanauer:
Yeah, oops, yeah.
Goldy:
Yeah. And it’s funny when you account that, when you take that into account also with the idea that one of the other things that the US exports is dollars, because we have a monopoly on the creation of US dollars, which is the world’s reserve currency. We can’t help but have a trade deficit if we’re going to be … That is pretty much definitional. When you add all that together, these things that aren’t accounted for, and the fact that we’re literally exporting dollars, that’s what people need overseas. It’s not nearly as bad as it looks.
Nick Hanauer:
Pretty interesting. As always, Cesar has a lot of really interesting perspectives and just like, yeah, you could talk to the guy for hours.
Goldy:
And from a practical perspective, of course, and we’ve all sensed this, we know this. But just, when he talks about what he would do, and it’s the opposite of what we’re doing, the two most important things are attract talent, right-
Nick Hanauer:
Yeah, of course.
Goldy:
… because that know-how is embedded in human beings. And he talks about this how knowledge and know-how, it’s hard, I think in his book, Why Information Grows, he says the word he uses is heavy, that it’s hard to move know-how geographically from one place to the other. And for 75 years, for longer, the US has been this destination for know-how, for people with talent, with knowledge, with know-how to come here to do their research, to start their businesses, to look for opportunity, to find other people in related fields that will make their visions possible as he talks about it. We are driving people away.
And of course, the other thing he says is invest in research and invest in the greatest university system in the world-
Nick Hanauer:
Not for long.
Goldy:
… greatest research institutions in the world. And here we are intentionally trying to destroy them, telling Harvard, whatever you think about Harvard, it is certainly one of the most prestigious institutions, if not the most prestigious institution in the world. You have the President of the United States saying, “Nope, you can’t have foreign students anymore. You can’t attract any of these people anymore who might set up businesses here who might do important research here. Nope, nope. Can’t have that.” We’re focusing on tariffs, which don’t work because China’s getting around that through Vietnam, and Mexico, and wherever. It’ll always find a way. We’re telling smart and talented people not to come here, that we’re going to put you in prison if you try, because there might be something a little wrong with your Visa. And you might find yourself in a Salvadoran prison camp. And we’re going to dismantle our research institutions because I don’t know, somebody insulted-
Nick Hanauer:
Because they’re woke or something.
Goldy:
They’re woke. They’re woke. That’s right, so there you go. That’s good times.
Nick Hanauer:
Yep, strategery, as George W. Bush would’ve said.
Goldy:
Again, if you want to read more from Cesar Hidalgo, we’ll have links in the show notes, including to his excellent book, Why Information Grows. Awesome.
Freddy:
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