Technology As Knowledge In Theory

Returning to the economic domain, technological knowledge can be regarded as a valuable asset, insofar as it is embodied in, or 'owned' by, a firm. A few inventor-entrepreneurs in the past, such as James Watt, used patents effectively to restrain competition and enforce a profitable monopoly. Later, Eli Whitney, Samuel Morse, Alexander Bell, Thomas Edison and others used patents and, occasionally, government contracts as collateral for loans or equity stock issues to private investors. The investors, being greedy and risk-averse, typically expected large returns in terms of immediate dividends. However, the sort of market where a group of university scientists can form themselves into a firm - a legal entity - and raise money from professional investors based only on ideas and abilities, leading to potentially valuable future products, is a phenomenon of the late 20th century. It is still limited to a very few advanced countries.

With rare exceptions (mainly patents), technological knowledge is not marketed or even marketable, as such. There are very few examples of firms that survived and prospered by developing and selling technologies as such, without exploiting them. In most cases, new knowledge is utilized internally to increase the productivity of the labor and capital assets of the firm, or to improve the product(s) being sold. In short, it increases the competitiveness of the firm and the quality and performance of its products, but it cannot be traded off in the short term against stocks of other assets of the firm (goods and/or money) (Ayres 2006). Thus, it plays no part in immediate decisions to buy or sell goods, or to produce or not to produce.

Many economists, reflecting on the role of specific (firm-level) knowledge in economics, have focused their attention on the interesting and important fact that formal knowledge, such as a design or a program, is hard to monopolize. Agent A can pass useful productive knowledge to agent B without losing ownership of, or access to, that same knowledge. Teaching people to read, solve equations, speak foreign languages, drive cars or how to use computers are examples of this sort. In short, many knowledge transfers are clearly not 'zero sum': it is possible to 'have one's cake and eat it, too'.13 For some reason this characteristic has been given a special name by economists: knowledge is called a 'non-rival' good, in contrast to physical products. This 'non-rival' characteristic might seem at first glance to be entirely beneficial to economic growth, since knowledge and its benefits can be transferred to others without being lost to the donors. But from an entrepreneurial perspective, there is an unfortunate consequence: the incentives to increase 'non-rival' wealth-creating knowledge by investing in R&D are lacking. If the discoverer of a new law of nature or the inventor of a new product or process cannot 'own', and thereby profit from, the rights to it, there is no obvious incentive to allocate scarce resources to do the research and development. Since knowledge cannot be monopolized indefinitely, there is no certainty of earning 'extraordinary' (that is, monopoly) profits from it. Nor is there any need to do research to defend against the possibility that a rival will acquire the knowledge first and achieve an insurmountable lead in the competitive race.

In short, R&D pays off for a sponsoring firm if, and only if, the resulting knowledge can be licensed or monopolized for a significant period of time. To create economic incentives for research and invention, patent and copyright laws have been introduced in all Western countries. In principle, such laws provide temporary monopoly benefits to owners of intellectual property, namely, inventors, composers and writers, by allowing them to demand license fees or royalties from users of the new knowledge. Indeed, the acceleration of technological progress that accompanied and followed the industrial revolution coincided with the introduction of this legal and institutional innovation. The coincidence was probably not accidental.

It is clearly beneficial to society as a whole to encourage the spread of new technical knowledge, either by licensing or other means of diffusion (via 'spillovers'), since the whole knowledge-creation activity is essentially cumulative. One invention or discovery begets others, and every cutting-edge researcher stands figuratively on the shoulders of many predecessors. It is therefore socially desirable to minimize the costs of knowledge dissemination and adoption throughout the economy. This provides the justification for limiting the life of monopoly rights on inventions to a few years, normally 17 years after the issuance of a patent, and beyond that, for providing public subsidies to education and scientific research. Understanding the complex tradeoffs involved in devising optimal public policy in this area has preoccupied many economists over the past half century.

Scientific and technical knowledge related to specific processes, products and markets is one kind of 'core' asset of firms (provided that it is not limited to a few individuals or embodied in a specific patent or piece of software). As regards material products, gains in this knowledge base are typically reflected in terms of costs and/or product or process performance measures, such as speed, power output, or power per unit of weight, fuel consumption or electric power consumption, thermodynamic efficiency, or average time-to-failure. Knowledge accumulation from exploration in the physical domain is an important aspect of the extraction industries, especially mining, oil and gas. But exploration in a different domain is no less important for other firms. Chemistry and metallurgy have created new products and processes from exploratory research. Market research is a systematic exploration of the parameters of demand for products and services. R&D can then be regarded as exploration of the possibilities for supply of products and services, whether by changing the characteristics of the product or service, or by improving the production method. Today the creation, storage and transmission of knowledge is a major human activity that comprises several sectors of the economy, employs a large number of people and generates a large fraction of the GDP.

Some kinds of knowledge, such as skills, are strictly individual. Transfer occurs, if at all, by imitation and repetition. 'Expert systems', so-called, have attempted to duplicate mechanical skills in machines, but with limited success up to now.14 Other kinds of formal knowledge are transferable between individuals, via lectures, classrooms, tutors or books. Still other kinds of knowledge are embodied in groups (or firms) rather than individuals. Social skills, like language skills, are partly informal. They cannot be taught exclusively in a classroom; such skills evolve over time, mostly through observation, imitation, learning-by-doing and experience.

Social and cultural knowledge are not easily transferred across group (or firm) boundaries, still less across national boundaries (language and culture are a big problem in this case). This sort of knowledge has both internal and external dimensions. The internal dimension is organizational and managerial, and depends on the organizational structure. It may be strictly top-down (as in a military organization) or it may incorporate a bottom-up component. Either way, it facilitates essential communication, both vertical and horizontal, shared values, shared goals and effective actions. It enables the group, whether a family, a tribe, a firm or a nation, to function efficiently and effectively as a group. The external aspect enables an organization or firm to communicate effectively and to induce fear, respect, admiration or trust, depending on circumstances; that is, to function in 'the marketplace' and in society, in a broad sense.

This social knowledge, which tends to be specific to ethnic groups, religious groups and regions, is essential for interacting successfully with others, whether in religion, regulatory functions, commerce, diplomacy or war. Although some of it can be taught, both types of knowledge - like skills - are largely the result of learning from experience. In the economic domain, the 'culture' of a firm may differentiate one firm, even firms in the same business, from another. There has been much discussion of this intangible factor among business scholars in recent years, due in part to the otherwise inexplicable fact that the majority of mergers - whether of equals or not - are unsuccessful and do not create any wealth (except for the top managers and their investment bankers).

Individuals are not always involved in production, exchange or consumption of goods or services. They have multiple non-economic roles as consumers, family members, members of groups and citizens of a country. In such roles, knowledge of neighbors, family relationships, religion, culture, history, art and literature - for instance - may constitute a significant element of personal welfare without contributing to economic productivity. Moreover, knowledge accumulation in the social sphere - for example, knowledge of how to avoid unnecessary conflicts with people from different social or cultural or religious backgrounds - contributes enormously to social welfare. Similarly, knowledge gained by experience of the successful, as well as the unsuccessful, mechanisms for achieving agreement and political stability in a multi-ethnic or multi-racial society are essential in the modern world, while contributing very little to economic productivity in the immediate sense. The economic value of this kind of knowledge lies mainly in avoiding or eliminating institutional political or social barriers to progress. By the same token, one of the challenges we face as a society is how to accelerate economic growth and increasing productivity of labor or capital without undermining established social relationships and religious beliefs in traditional societies.

Returning to economics, once again, the recognition that technical progress is a major factor in explaining economic growth is now well over a century old. Marx understood it, though he seems not to have understood the incentive structure. However, explanations of this factor are still scarce and unsatisfying. The so-called 'endogenous growth' theories that have become fashionable in recent years, starting with Romer (1986, 1987b) conceived of knowledge as a kind of unspecific, self-reproducing and evergrowing currency, applicable to the whole domain of human activity (that is, uniformly applicable across all sectors). In fact 'knowledge', in most economic models, is regarded as homogeneous, and fungible. In this branch of neoclassical growth theory, knowledge is not precisely defined or quantified, but it is implicitly attributed to society as a whole.

The theory of growth is then endogenized by postulating investment in generalized knowledge creation by entrepreneurs and by allowing for 'spillovers' from those same entrepreneurs to 'free riders' who put the new knowledge to work, creating new markets and jobs. The existence of spillovers is treated analytically in some aggregated models as positive returns to societal investment in knowledge. (Anticipating the later discussion, we argue that to explain the pattern of punctuated, structure-changing growth as it occurs in the real economy, something more is needed, namely occasional radical innovation at the sectoral or sub-sectoral level.)

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