Towards a competency-based economics of differentiation

The motivation for this paper is to investigate the policy implications of recent work focusing on the relative potential for economic growth as evidenced by the relative performance of one nation in comparison with another. As such, this investigation sets to one side consideration of the contribution that effective demand might make to growth in productivity and income. Instead, emphasis will be placed on growth in both the specialisation and diversification of industrial capabilities. To this end, the paper attempts to weave together Veblen's (1898) conception of cumulative causation with Herbert Simon's (1991) notions of generalized liquidity preference, Erik Reinert's arguments about the importance of diversified artisanal skills, and César Hidalgo's competency-based network analysis of international trade. The latter provides the vehicle for integrating theoretical insights with empirical analysis by treating competencies as a kind of latent variable, whose effects can be inferred but not directly measured.