I recently came across this paper by Noble Laureate economist Joseph Stiglitz “Public Policy for a Knowledge Economy.” Written back in 1999, it provides a great framework for describing the knowledge economy. Much of the discussion focuses on the characteristics of knowledge, covering what we have come to understand as the central properties: non-rivalrousness; low to zero marginal cost of replication and dissemination; spillovers and externalities; increasing returns. These, he asserts, have a profound impact on economics:
But just as the importance of land in production changed dramatically as the economy moved from
agriculture to industry, so too does the movement to a knowledge economy necessitates a rethinking of economic fundamentals. Knowledge is different from other goods: it has many of the central properties of a public good, indeed of a global
public good. While government has a key role in protecting all property rights, its role in intellectual property rights is far more complicated: the appropriate definition of these rights is not even obvious. And in the knowledge economy, the dangers of a monopolization are perhaps even greater than in industrial economies.
He also talks about this affects the market for information:
Knowledge and information differ from other commodities in a number of other ways, which result in markets for information and knowledge differing markedly from markets for other commodities. For instance, by definition, each piece of information is different from every other piece of information: intrinsically, information cannot satisfy the essential property of homogeneity that characterizes competitive markets. For forms of knowledge (information) that are not protected by patents, there are real problems in market transactions: How can I sell the knowledge? I have to tell you at least something about what I will disclose to you, something that you presumably did not know before; thus, in the process of trying to engage in a market transaction, I lose some of my property. In practice, markets for knowledge and information depend critically on reputation, on repeated interactions, and on trust.
Some of the paper’s policy recommendations are still relevant — such as the importance of education, especially STEM, creativity & higher order cognitive skills. Some are returning to relevance, such as a re-look at the issue of “industrial policy.” As Stiglitz noted:
the debate has been framed in the wrong way. The objective of the government is not to pick winners, but to identify externality-generating innovations. While critics of industrial policy recognize the necessity of government support for basic research, they fail to note that there is no bright line between basic and applied research; many applied research projects generate large externalities. The objective of government policy is to identify winning projects with large externalities. In this, they have had a history of notable successes.
Later he concludes that point by saying:
The fact that knowledge is, in central ways, a public good and that there are important externalities means that exclusive or excessive reliance on the market may not result in economic efficiency. For those of us who believe in the power of market forces, the challenge is to find the best “partnership” between the private and public sector–an assignment of roles and responsibilities not dictated by the paradigms of the past that are unsuited to the knowledge economy of the future.
Unfortunately, some of his points have been lost in the past decade. I would point specifically to this statement:
Economic models that ignore information imperfections and knowledge creation give us poor guidance since so many institutions can only be understood as adaptive responses to informational problems. Only by seeing the central role of informational imperfections can we hope to design and preserve robust institutions. Similarly, understanding the subtleties of tacit and local knowledge as well as the dynamics of knowledge sharing or hoarding will do much to determine the competitiveness of a company or an industry or a country.
We have seen the results of assuming away market imperfections and of ignoring the subtleties of tacit knowledge and knowledge flows (including the importance of trust). We can only hope that these points will become relevant to the policy debate once again.
The Intangible Economy 