The Theory of Economic Complexity

Abstract

We provide a mechanistic foundation for economic complexity methods. In our model, an economy's ability to produce an activity depends on the joint presence of required capabilities. We analytically derive the Economic Complexity Index (ECI) for this model and show that it is a monotonic function of the stock of capabilities in an economy. We then explore the family of functions and conditions that are compatible with economic complexity estimates and show that multiplicatively separable production functions are incompatible with economic complexity estimates. By contrast, additive non-separable functions are sufficient regardless of whether they are log super-modular. We also show that this model explains differences in the shape of networks of related activities, such as the product space or research space. These findings solve long standing puzzles in the literature on economic complexity.