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The Edgeryders guide to starting a company based on Estonia’s e-residency scheme

In early 2017 my partners and I founded a new company in Estonia, Edgeryders Osaühing. This has become much easier since the launch of Estonia’s e-residency scheme in 2014. We explained our reasons in a separate post. It took quite a lot of research to figure out how to do it: it makes sense to share it, in the hope that it will help those of you considering the same move.

Preparation

  1. Budget time and effort. In theory, starting a company through the Estonian e-residency scheme is fast and low-effort. In practice, it takes time and effort. You are, after all, dealing with a completely new (to you) legal system.  Estonian professionals are still getting up to speed with e-residency: expect glitches and misunderstandings. For us, doing it was one of those important-not-urgent things. We chose to do it on the side, with low- to no disruption of our day-by-day.  It took us about 8 months to go from decision to foundation, and another two months to get the bank account up. We spent about 1,500 EUR, including one year of assistance but excluding the e-residency charges themselves and one trip to Tallinn.
  2. Take some time to understand the e-residency scheme. It’s a novel concept, and many people misunderstand it. The main things you need to know:
    • e-residency is a government-guaranteed digital identity scheme. Through it, e-residents can access Estonian online services such as company foundation, banking, taxation. They can also sign documents and contracts.
    • e-residency does not give you the right to enter Estonia, or live in it.
    • e-residents do not pay personal income tax in Estonia, but in their country of physical residence.
    • e-residency is quite well documented (starting a company through it, not so much). The official website is a good place to start.
  3. Seek help.  Establishing a legal entity is useless unless you can use it to do actual business. As a foreigner, Estonia’s rules and regulation will look alien to you. Also, any company needs a physical legal address in Estonia, and PO boxes are not allowed.  Here is a list of business service providers you can hire to assist you and provide you with an address. If you are starting a one-man business, our Estonian friends recommend Leapin. Anything else will need an accountant: we are small and simple, but Leapin turned us down saying our needs are too sophisticated for their offer. Our accountant is Witismann and Partners, in Tallinn. They have been very patient and helpful. If you contact them, please mention us.
  4. Beware KYC. The Estonian government is committed to fast, frictionless online services. But Estonia still has international obligations to watch out for money laundering operations. In practice, banks and accountants need you to prove your identity and residency before they can take you on as a customer. This process is called Know Your Customer (KYC). Consequences for you: paperwork, with literal paper implied. This was the single most frustrating part of our experience of incorporating in Estonia.
    • At the time of writing, banks in Estonia insist on a visit to one of their branches in person. This should change, so check back on it. Every person who wants to be a user of online banking needs to visit. Our provisional solution: one of us flew to Tallinn, opened the account and got login credentials for the online banking. This makes us operational. We will add other users later.
    • All partners had to go through KYC with the accountant, but here you can do it in remote. We tried several solutions – all bad, because this is bureaucracy at its most dreadful. The least bad we found is this:
    • Authenticate a (paper) photocopy of your passport at an Estonian embassy (see below).
    • Get a utility bill in English (or Russian or Estonian – good luck with that). If this is not possible, ask your bank to write you a letter in English certifying that you have a personal account there. Make sure it shows your physical address.
    • Send your accountant the authenticated copy of the passport and the original of the bill/bank letter.

Execution

  1. Get e-residency. All partners in the company need to become e-residents. For practical reasons, it’s best to also have anyone you want on the management board to do so. Application is online and very simple, and costs 100 EUR. Once it comes through, every e-resident needs to collect her physical e-residency card in person.  Cards are not mailed, and you are not allowed to send someone else in your place. You can do this either in Tallinn or at Estonian diplomatic representations. This can be an inconvenience, because Estonia is a small country with relatively few embassies around the world (list of Estonian diplomatic missions). If you do not have one of them near, get your KYC obligations out of the way on the same day as you pick up your card.  We recommend you make 2-3 copies of your passport and get them authenticated by them while you are there. In Brussels this service is by appointment, and it costs 30 EUR per copy. Also ask the accountant if they insist on other authenticated documents, then get all the authentications done in one visit.
  2. Install, test and debug the software and the hardware. E-residency cards communicate with your computer via a card reader and some software. You should not expect this to Just Work. Take time to install, test and debug. For all its pathfinding ambitions, the Estonian government is still a government, and so it runs mostly on Windows. Mac users should restart their computers before attempting to do anything with e-residency cards. Linux users should do the same, and also look at these improved installation instructions that @Matthias wrote. The cards come with cheap card readers. In general, these work, but I already had to replace mine. Pro tip: the e-residency help desk is really great and very responsive, via email or phone.
  3. Incorporate. You can do this through the Company registration portal. The way we did it: we set up a Skype meeting with the accountant, and they guided us step-by-step. There are three steps.
    • One person fills a form called a “petition”. This is a request to the government to authorise the establishment of the new company.
    • Each shareholder needs to digitally sign the petition. You can save the process at any time in case one of the partners struggles with the tech. The last partner to sign sends the petition to the relevant authority by pressing a button on the site.
    • Pay a tax (at the moment 190 EUR). If you are working with an Estonian accountant (as you should), they take care of this for you. A few days later the government informs you that your company is now live, and you receive a registry number.
  4. Get a bank account. At the moment, three banks support the e-residency scheme, but more should be added. Before you apply to one of the three, make sure you have a business plan ready. They will ask you questions: how much money do you think you will receive? From which countries? What are your estimates based on? Where is your money going to come from? Your accountant can help you smooth things out. In our case, I think it helped a lot that I sent them a recent profit-and-loss statement downloaded from our cloud accounting platform. We bank with LHV Pank. Our Estonian friends recommend it, because it is the only Estonian bank currently in this game, so it is the fastest to adopt government innovations as they come through. But it seems all banks in Estonia offer very competitive conditions and good service.
  5. Register for VAT. Estonia has very low ceilings for operating without a VAT registration, so you will need to do this soon. Beware: whatever your turnover, you are not allowed to file quarterly returns for VAT. VAT is always monthly. To register:
    • Go to this page of the Tax and Customs Board’s website. Download the PDF form called “Application for registration as a person liable to VAT”.
    • Enter the relevant information, sign the file digitally and e-mail it to the to the TCB (kmkr@emta.ee). Processing takes about a week.
  6. (Optional) change your articles of association. When you incorporate,  the E-Registry portal generates standard articles of association for you. You have no way to customise them. But you can do it later. The procedure is this:
    • Download your own articles of association from the e-Business register. To do that, access your company’s record (for example by searching for it). Then select “Documents in the business file” from the “Choose information” drop-down menu. Then add to cart and pay (2 EUR) to download the files. Two of them are the articles of association, in Estonian (pohikiri) and English.
    • Make the changes you need on the English version.
    • Get the changes translated into Estonian. Articles of association have to be in Estonian, sorry. Save this into a PDF.
    • Log into the Company Registration portal. Choose “Submission of application”. Click on “Changing the data of an enterprise ” and choose the name of your company.
    • In the page that opens, click on the button “Start the petition for an entry regarding alteration”. You are taken to a page where you can later any data of the company. Click on “Alter the articles of association”, then  “Add the articles of association as a file”. Select the PDF you saved from you computer and click on “+Add the articles of association as a file”.
    • At this point you have created a petition, like the one you created for incorporation. Next, shareholder need to digitally sign the petition and send it to the authorities for approval.

Bali’s spirituality market

“Ecstatic dancing. Astral plane walking. Portal opening. Crystal healing. Mestrual blood drinking. Ayahuasca ceremonies. Every yoga style you can think of. You name it, they’ve got it.” I stare at Lars as I try to digest the implications of what he is saying. Lars (not his real name) is a Swede who quit his engineering job and moved here last year. He loves it here.

It’s not hard to see why. Bali is an equatorial paradise – we all know that. Warm weather all year round, beautiful nature, rich culture, and so on. As many tourist destinations, it has given rise to internal specialisation across areas. Kuta, in the south, is very popular with young Australians who like to party and drink hard. Ubud, in the center of the island, has become a sort of cultural hub. This is where Lars and I are staying.

Ubud has no beaches to offer. Its main product seems to be what Anglos call spirituality. It is a veritable supermarket for spirituality practices. It teems with counsellors, spiritual healers, gurus and teachers of various ways. Shaman, Demon Hunter and Forest Goddess are job titles here.

All this comes in a bundle with the cheap, high-quality consumer services common in Southeast Asia: massages, scooter rentals, raw-vegan cafés and restaurant, spas and so on. So you can go on your self-discovery journey and margaritas are cheap. That’s a strong value proposition, and it has fuelled impressive growth in the Ubud tourism economy. According to some estimates, tourism accounts for 60-80% of Bali’s GDP.

Tourism here in Ubud has a strong long-stay component. Many people, like Lars, stay here months, even years at a time. They work online, generally in tech; here, they can afford a much higher level of service that they would back home. Or they take a sabbatical, and again here you can live well on the cheap while you focus on spiritual renewal.

The Ubud spirituality scene is led by Westerners, not Balinese. Most high-profile operations (resorts, central restaurants, high profile yoga centers) run on Western capital. Most yoga teachers, counsellors, druids, seers, healers and goddesses are also Westerners.

This came as a surprise to me, because the Balinese are deeply religious. Agama Hindu Dharma, the island’s brand of Hinduism, is pervasive in everyday life. There are little shrines in every home, workplace and street corner, and they are all cared for every day, with small offerings of wildflowers and incense. There are also many famous temples, all with a dense calendar of ceremonies, dances, and so on. So, the Balinese have what the spirituality crowd claims to be seeking: a constant sense of the divine in their life.

And yet, spiritual interaction appears to be minimal. No hipsters join the locals at the temples; you do not see Caucasian features among the women bringing offerings to shrines. Conversely, it seems very few Balinese have decided to start a career as spiritual healers or river goddesses.

I don’t know why this happens. Maybe it’s about information: the spirituality scene markets itself (in English), whereas Agama Hindu Dharma does not. Maybe the Balinese are too invested in their religion to be comfortable with the rituals of modern-day spirituality. I suspect that the market for spirituality is a classic Market for Lemons: there is no way to say if Portal Opening is going to do it for you until you try. Worse, even after you have tried it it is hard to tell if you have actually experienced cosmic harmony. After all, most people have no experience of the real thing (if it exists). Under market pressure to cheapen the experience, the more serious swamis give up on the hapless Westerners, and are driven away from the market. Only lemons remain.  We will never know – there are no data.

But, whatever the reasons, Western dominance in Ubud’s staple service bring instability to the system. Balinese are relegated to humbler mansions: they clean your your room and wait at your table. Most of your money will go to the owner of your hotel and your guru of choice – both Westerners. For margaritas to stay cheap, their salaries cannot grow all that fast: if your server earns as much as you, long stays become unaffordable. So, I predict the increased inflow of income tourism in Ubud will not increase the salaries of service staff by much.

So, where will the money go? Probably into real estate values. Already now, according to our Balinese friends,  landlords demand five years of rents in advance when renting space on Ubud’s main street.  No local entrepreneur can access that much capital, they added. The only companies operating there are Western-owned.

So, the Ubud economy seems to be moving on an unhealthy trajectory. Most of the money generated by producing its staple service ends up with foreign companies, foreign gurus and local landlords. Service salaries for local workers need to stay low for the margaritas and the massages to stay cheap, securing the middle-class clientele. The Balinese are a gentle people, but if this go too far  social tensions might ensue.

All in all, a fun place to visit, and a beautiful culture. But not a place I want to live in long-term.

Photo credit: Wikimedia

Hidalgo and Hausmann's product space.

Policy making as risk management under complexity: five economists for the next ten years

Author’s note: this is not an academic essay. It’s more of a long, wonkish blog post, that borrows some characteristics from academic essays. If you think it should be published elsewhere, get in touch. If you want an Italian translation, ask for one. 

Abstract (TL;dr)

Public policies in the past few decades have failed on many levels. While many economists have been critic of such policies, economics as a discipline was not able to deliver a better paradigm. I examine some recent work by five authors: David Colander, Roland Kupers, Mariana Mazzucato, Eric von Hippel and Ricardo Hausmann. I argue that, taken together, their contributions herald a completely new way to think about policy making. This new paradigm is the brainchild of complex systems science. It implies that policy makers should have a new skillset, new tools, new indicators and even new goals.

1. How economics failed us

Economics has made a bad name for itself.

  • In the 1980s, the Chicago School rose to prominence with its recipe of inflation control and fiscal conservatism. It inspired the controversial reforms of the Reagan-Thatcher era, and marked the beginning of the end for the European welfare state.
  • In the 1990s, the Washington Consensus ideology pushed upon the whole world a policy toolbox of fiscal discipline, privatisation of public services and liberalisation of capital movements. These policies were responsible for the mismanagement of the financial crises of those years.
  • Then came 2008 with its Great Financial Crisis. We were plunged into a strange world. In the West, negative interest rates, quantitative easing, skyrocketing inequalities, “too big to fail”. Globally, a reduction in the number of the poorest, and the rise of China over Southern Asia and Africa.

All through this, economists have put up quite a fight. The top names in the profession have denounced the inconsistencies of the dominant doctrine. Joseph Stiglitz exposed the International Monetary Fund’s mismanagement of the crises of the 1990s. Paul Krugman explained why fiscal discipline was the wrong thing to do in the wake of 2008. The list could go on and on.

But policy makers remained unimpressed. Yes, mistakes were made. Yes, some excesses needed correcting. But in the end, no other paradigm was available. Dissenting economists had strong critiques, but weak counterproposals. In the 1930s, Keynes proposed a new paradigm. It was elegant. It was operational. It offered a new way out, and policy makers embraced it. But now? No new paradigm is in sight. Standard economics is the only game in town.

Except it is not. Over the last few years, four economists and one physicist have made groundbreaking contributions. I propose that, taken together, they form the seed of a new way to think about economic policy. In what follows, I list their main contributions. I then discuss the implications of taking them together, rather than one at a time.

2. David Colander and Roland Kupers: complex systems theory as a frame

Scholars of complex adaptive systems see the world through the lens of a process called emergence. The idea is this: simple rules of interactions between agents give rise to surprising system-level properties. These properties of the system cannot be deduced by studying its components. For example, water is a liquid at room temperature. It sloshes and shimmers and does many interesting things. A single water molecule is not a liquid: liquid-ness is not in the molecules themselves. It emerges from the interaction across billions of identical molecules.

Porting this way of thinking to policy making is difficult. The starting point is this: society and its economy are no longer seen as machines. No longer can the government push the right buttons to get them to social optima. The world of traditional economics goes down in flames. So what can the government do? There is a fundamental clash: policy is about agency, intentionality, top-down process. Emergence is the opposite of that: structure happens without designers or architects. A complex system with agency in it (for example an economy with a government) is driven by two fundamental forces, emergence and agency itself.

To navigate the dilemma, Colander and Kupers propose a government that “picks its fights”. It strives to spot emergent trends that go in the direction that it wants, then moves to reinforce them. One example they give is the trend towards physical fitness and healthy living. A complexity-oriented government would move aggressively to support it, and so save taxpayer money on health care.

This has profound implications. The main one is that the government needs a new set of core skills. Among them:

  1. It needs to be great at scanning the horizon for useful social trends. This is by no means easy: we now see fitness as a trend, but in the early 80s there was no such thing. People would see their cousins taking up aerobics or weightlifting, and shrug them off as weirdos. It took serious analytical skills to recognise it for what it was.
  2. It needs to be strong and nimble, and use strength and nimbleness as a source of moral authority. When it moves to support something, private business and the public need to know that this something is here to stay, and that support will not waver.
  3. It needs to choose, and take responsibility for its choices. No more handwaving about “leadership of the private sector”. No more bullshit about impartiality. We stand for nuclear, or against it. We stand for genetic engineering, or not. And when we choose, we stay with our choice for as long as we need to, not until the next election.

3. Mariana Mazzucato and Eric von Hippel: rethinking innovation

When we think about innovation, we think about Schumpeter’s creative destruction. Stories of innovation are stories of brave, disruptive entrepreneurs who “stay foolish” as they follow their own vision. Mazzucato shows that these stories are mostly false. Aggressive state intervention was the decisive driver in kickstarting today’s hi-tech industries: IT, biotech, nanotech, green energy. Moreover, at least for IT, the (American) state’s motives were not even economic, but related to national security.  The protagonist was the Pentagon, not Treasury. In the case of China, a similar dynamics is now playing out with green energy. The main policy driver is preventing climate change and pollution. A world-leading green energy sector emerges as a result of that policy.

In these stories, private business and venture capitalists consistently show risk aversion and short-termism. They do “me too” innovation and polish. An entire chapter of Mazzucato’s book is dedicated to Apple’s iOS devices. It turns out that all the key technologies putting the “smart” in smartphones are taxpayer-funded. It’s worth listing them here: microprocessors, DRAM, micro hard drives, LCD displays, LI-ion batteries, DSP signal processing, the Internet, HTTP, HTML, cellular technology, GPS, multi-touch screens, and SIRI. Apple added technology integration and design, but did none of the innovation heavy lifting. Mazzucato concludes that the State, not private firms, is the real disruptive agent:

In sum, “finding what you love” and doing it while also being “foolish” is much easier in a country in which the State plays the pivotal serious role of taking on the development of high-risk technologies, making the early, large and high-risk investments, and then sustaining them until such time  that the later-stage private actors can appear to “play around and have fun”.

von Hippel starts at the opposite end: what he calls “free innovation”. This is innovation developed and given away by consumers (patients, tinkerers etc.).  This is by no means marginal. It is a major economic phenomenon. It involves tens of millions of individuals in just six countries surveyed (Canada, Finland, Japan, South Korea, UK, US). Estimated free innovation R&D expenditure has been estimated for three countries, and found to be on the same scale of corporate R&D. These estimates are likely to be conservative: free innovation in services, for example, has been left out of them.

Moreover, free innovation tends to lead producer innovation. There can not be a market for something that does not exist yet. For-profit corporations only service markets, so they focus on incremental innovations. But people don’t care about markets: they innovate for themselves and their friends. Some of their innovations go viral and create markets that, later, producers supply with innovations of their own. This happens across the board: 3D printers, scientific instruments, health care, whitewater kayaking.

From opposite angles, Mazzucato and von Hippel see the same reality. Business is not the sole agent of innovation. It probably is not even the main one. What’s more, the innovation that it does do is uninspiring: low-risk integration of ideas developed elsewhere. Glass beads and trinkets. Their work dispels for good Silicon Valley’s claim that “we take high risks, we deserve our high profits”. The truth is this: all the main risks are underwritten by ordinary people. As taxpayers, they underwrite risky government-funded research projects. As free innovators, they directly develop technologies and create markets for them. What’s left for the companies is to take the goodies, make a grab for the money and (all too often) siphon profits to some tax haven. Mazzucato calls this configuration “parasitic”. She is right: it socializes the risks of innovation, but privatizes its rewards.

They also show that money is not the motivator of the best innovation. States innovate to further a collective vision (“go to Mars” or “stop global warming”). People innovate to help themselves and loved ones (“I built a wearable monitor the glucose level of my diabetic child, so she can sleep over at friends”), or just for fun.

4. Ricardo Hausmann: economic well-being as a set of capabilities

Hausmann and collaborators have succeeded in redefining what it means for an economy to be healthy. This is no small achievement. GDP is broken: bad things like illnesses, car accidents and pollution all make it go up, not down. Economists have been muttering and complaining for as long as I can remember, but GDP has stayed. In 2008, The French government even tried assembling a super-high-level commission. Headed by Amartya Sen, Joseph Stiglitz and Jean-Paul Fitoussi, it could count on the cream of the crop in the economics profession, including five Nobel laureates (Arrow, Heckman, Kahneman, Sen, Stiglitz). The results were disappointing. There was handwaving about “multidimensionality of well-being” and  “pragmatic approach towards measuring sustainability”. Everybody went right on using GDP.

Hausmann takes a different path. He thinks that a healthy economy is one that can make many things. A country that can make machine tools and aircraft and nanotubes is healthier than one that can only grow bananas, or pump oil. This has got nothing to do with how much money people in the country are making. It’s got everything to do with how resilient economies are. Economies that can make a great many things can engineer their way out of many shocks. For example, if you have good solar tech you are more robust to fossil fuel shortages.

Hausmann and collaborator Cesar Hidalgo invented product space, which makes this concept operational. The main idea is that what countries make reveal what they know. They start by international trade data, and build a graph of countries and products. If a country exports one product, the two are connected in the graph. Next, they apply graph theory to derive measures of economic diversity. To a first approximation, diversity is simply the number of products a country exports. More sophisticated measures include second- and third-order effects. For example, products that are exported by few countries (like medical equipment) carry higher diversity than products that are exported by many countries (like wooden logs).

Product space analysis gives us a single number that summarizes the economic diversity of an economy in a given year. You can then compare different economies, just like you do with GDP per capita. You can also check back every year or two to see how much diversity is growing, just as with GDP. Except that diversity-as-health makes sense, whereas transactions-as-health do not. Its underlying formal principles are also more intuitive: product space descends from network math, GDP from double entry accounting. Most people with no formal training in either find networks simple, and accounting intricate.

5. Coda: policy as long-term risk management in a complex world

Where does that leave economic policy? Each of the contributions I listed has strong, direct, operational policy implications. But I propose that, taken together, they form a whole greater than the sum of its parts. They outline a new approach to economic life, and to policy enacted upon it. This new framework stems from the 35 years long love-hate affair between complex systems science and economics. What follows is a rough, tentative approach to summarize it.

  1. We don’t have control. The world is big, complex and in constant flux. We are nowhere near to understanding it in full, let alone dominate it. The idea of computing and achieving social optima is nonsense.
  2. Focus on the “how” questions. The above looks like harmless common sense, but is has profound consequences. The main one is this: we can no longer assume markets will find the social optimum by themselves. This is not because of market failures: general equilibrium theory is discarded altogether. Markets become mere tools to allocate specific resources. This, in turn, means that economics gives up on answering the “what” question (as in “what should we do?”). It is up to humans find out, in their own messy way, what a desirable outcome looks like. Economics goes back to focusing on the “how” question (as in “how shall we get there?”), consistently with its origins as a spinoff of moral philosophy. I am grateful to Fabrizio Barca for this observation.
  3. Policy is about society-wide risk management. The policy maker’s job is to manage risk. This involves scanning the horizon for trouble (frequent) and opportunities (rare). Risk is a constant in the journey of human societies: all we can do is manage it, weighing potential gains against potential losses. Uncertainty will always be high. Companies and households, of course, do the same. The difference is that policy makers can and should do this for society as a whole, making the hard choices that individual actors won’t do, and allocating risks and rewards across society. The allocation has to be long-term sustainable. Mazzucato, for example, points out that US innovation policy is not sustainable, because its risks are borne by taxpayers and its rewards are reaped by shareholders and executives. Over the long run, this will result in political backlashes and instability, which in turn will kill the State’s ability to invest.
  4. It’s all about the skills. Upskilling your economy is the best risk management tool. The more things you can make, the greater and more diverse shocks you can withstand. Hausmann has a great quote: “don’t add value to your raw materials, add capabilities to your capabilities”.
  5. Corporations are just a tool, and not always the most effective one. Mainstream economics fetishizes companies and profit for many reasons, theoretical and otherwise. But when you think in terms of risk management, you start to see things in a new light. Suppose you, as a policy maker, believe climate change could badly hurt our societies. Suppose you plot a transition to a deep green, low-emission economy. People from business come to you and protest “this is going to hurt out bottom line, we won’t cooperate”. If you believe GDP embodies human happiness and it is your duty to maximise it, you will listen carefully. If you a risk manager, you are more likely to brush them off. Your duty is not towards shareholder value, but towards deflecting large risks. If companies won’t collaborate in building the new infrastrure you want, you will work with different tools (public sector agencies, for example).
  6. Arbitrariness is inevitable. Risk management should be evidence-based. But any risk manager will tell you that, at the end of the day, you will have to make calls. Many of these will be in terms of uncertain gains versus certain costs. Should we bail out this bank? It might save us from contagion and systemic crisis in the future, but it sure will cost us taxpayer money now. Are Arctic glaciers worth the demise of the oil industry? You get the idea. This is the core of the trade of policy making. There is no such thing as sitting back and letting social optima emerge from market equilibria. Policy makers just have to make hard calls. Which means they will sometimes (often, even) fail. There is no way to avoid this. Colander and Kuper insist on the government needing “moral strength” to do its job.

This is a high-level description. But the theory of policy making in a complexity framework is mature enough to have produced tools, practices, indicators. And boy, do they look different from what we are used to. I already mentioned product space. Both Mazzucato and (especially) von Hippel have built solid empirical methodologies to inform innovation policy. Hausmann even wrote a convincing critique of randomized control trials, the gold standard of empirical research in economics. His tool-of-choice is “crawling the design space” of policies in a decentralized fashion. Money quote:

As opposed to the two or three designs that get tested slowly by RCTs (like putting tablets or flipcharts in schools), most social interventions have millions of design possibilities and outcomes depend on complex combinations between them. This leads to what the complexity scientist Stuart Kauffman calls a “rugged fitness landscape.”

That’s what evolution does, and this is no coincidence. Hausmann is a complexity scientist himself, and thinks more like a biologist than like a neoclassical economist. The Kauffman quoted is a theoretical biologist, not an economist. Everything changes. It’s a whole new paradigm.

Conclusion. A new paradigm for policy making is warming up in the background. A lot of the foundational work has been laid out. Much work remains, but that’s no excuse not to start deploying this way of thinking right now. All we are missing is a few forward thinking national or regional governments willing to be early adopters. I think I will see such adoption in my lifetime. This is good news for everyone, but great for us economists. After decades of deadlock and frustration, it appears we, once again, have a large contribution to make. I want to end with my all-time favourite public policy quote. It is attributed to the very first complexity economist, Brian Arthur.

If you think that you are a steam boat and you can go up the river, you are kidding yourself. Actually, you are the captain of a paper boat drifting down the river. If you try to resist, you are not going to get anywhere. on the other hand, if you quietly observe the flow, realising you are part of it […], then every so often you can stick an oar into the river and punt yourself from one eddy to another.

Amen.

Reading list

  • Colander, David, and Roland Kupers. Complexity and the art of public policy: Solving society’s problems from the bottom up. Princeton University Press, 2014.
  • Hausmann, Ricardo, et al. The atlas of economic complexity: Mapping paths to prosperity. MIT Press, 2014.
  • Mazzucato, Mariana. The entrepreneurial state: Debunking public vs. private sector myths. Anthem Press, 2015.
  • von Hippel, Eric. Free Innovation. MIT Press, 2016.