Describing the knowledge economy

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.

Select tweets 7/21/12 – 7/29/12

Select tweets and retweets from the past week:
21 Jul Joseph E. Stiglitz ‏@joestiglitz
Joseph Stiglitz: Creating a Learning Society (pdf) @LSEpublicevents #video #lecture
Retweeted by Ken Jarboe
22 Jul Jonathan Low ‏@jondlow
JCPenney to Embrace Mobile, Self Check-Out, Eliminate Clerks
Retweeted by Ken Jarboe
23 Jul Ken Jarboe ‏@IntangibleEcon
From Old Taboo to New Consensus: ‘Industrial Policy’ and ‘Competitive Industries’ parts 1 and 2:
23 Jul IAM magazine ‏@IAM_magazine
The #JackDaniels #trademark team create real value for their company and show others the way to go.
Retweeted by Ken Jarboe
23 Jul Mary Adams ‏@maryadamsICA
Economists understand the key role of intangible capital in economic growth. Why don’t accountants and managers?
Retweeted by Ken Jarboe
23 Jul Ken Jarboe ‏@IntangibleEcon
Navy money will get new tech in the field faster Rapid Innovation Fund for technologies that can be operational quickly
23 Jul Ken Jarboe ‏@IntangibleEcon
A Nation That’s Losing Its Toolbox misses the point: mass production and craftsmanship were never connected . . .
23 Jul Ken Jarboe ‏@IntangibleEcon
. . . see other NYTime story on How a Cellphone’s Case Can Imitate Its Maker which highlights DIY in electronics . . .
23 Jul Ken Jarboe ‏@IntangibleEcon
. . . revolution in manufacturing taking place with kids building robots and the “do it yourself” going hi-tech . . .
23 Jul Ken Jarboe ‏@IntangibleEcon
. . . and see more on DIY at TED Talk 2011 – Marcin Jakubowski on the Global Village Construction Set…: via @youtube
24 Jul Matt Yglesias ‏@mattyglesias
How high taxes brought us Xerox PARC, Bell Labs, and the other postwar corporate research centers:
Retweeted by Ken Jarboe
24 Jul Ken Jarboe ‏@IntangibleEcon
Berkeley to Join the Free Online Learning Partnership EdX More on the online university movement
24 Jul Ken Jarboe ‏@IntangibleEcon
Inclusive Wealth Report 2012 An attempt to measure human capital along with tangible assets . . .
24 Jul Ken Jarboe ‏@IntangibleEcon
. . . TIMEBusiness on the Wealth Report 2012 “An optimistic take on our national debt nightmare”
25 Jul Daniel Pink ‏@DanielPink
If we’re serious about learning, should everybody get 5 days of paid training every year? (via The Pink Blog)
Retweeted by Ken Jarboe
25 Jul Mary Adams ‏@maryadamsICA
Focusing on intangibles on the balance sheet is silly On average, TNW only 20% of value
Retweeted by Ken Jarboe
25 Jul Future Tense ‏@FutureTenseNow
Obama was right: The government created the Internet, says @fmanjoo
Retweeted by Ken Jarboe
24 Jul Richard Florida ‏@Richard_Florida
Leading Creative Class States: DC, Mass, Maryland, Conn, Virginia, Colorado, New Hampshire, NY – @AtlanticCities –
Retweeted by Ken Jarboe
24 Jul Richard Florida ‏@Richard_Florida
Public Policy for an innovation economy … RT @sciam: Cuts Loom for U.S. Science –
Retweeted by Ken Jarboe
25 Jul Ken Jarboe ‏@IntangibleEcon
NYTimes: Congress to Examine Data Sellers Think of data as assets to be managed by the individual
25 Jul Ken Jarboe ‏@IntangibleEcon
NASA scores high on innovation … New report on innovation in Fed agencies. SEC scores the lowest
26 Jul Ken Jarboe ‏@IntangibleEcon
Google account of Motorola price $5.5B tech $2.6B goodwill $730M cust. relationships $670M other $2.9 cash acquired …
26 Jul Ken Jarboe ‏@IntangibleEcon
… “goodwill, Google explained, is ‘primarily attributed to the synergies expected to arise after the acquisition.'”
26 Jul Ken Jarboe ‏@IntangibleEcon
WSJ: Online-Reputation Services Promise to Erase Negative Feedback, but Tactics Are Questioned . . .
26 Jul Ken Jarboe ‏@IntangibleEcon
. . . maybe companies should fix the problem behind the complaint and not just try to deal with the social media impact
26 Jul Mary Adams ‏@maryadamsICA
Excellent article! RT @eujournalists: How can you ensure the most favorable outcome for M&A?: With intangible capital
Retweeted by Ken Jarboe
27 Jul Ken Jarboe ‏@IntangibleEcon
Brookings: Long-Term Unemployment: Anatomy of the Scourge UI not the problem; training & job sharing part of solution
27 Jul Ken Jarboe ‏@IntangibleEcon
IP Finance: Mega-Patent Portfolio Sales: Chimera or Here to Stay? Good set of questions about what is driving deals
27 Jul Ken Jarboe ‏@IntangibleEcon
WSJ: Apple, Google Line Up to Bid for Kodak’s Patent will the competition push the value to & beyond the $2.6B level
28 Jul Ken Jarboe ‏@IntangibleEcon
To Build Creative Cities, the Sky Has Its Limit by Richard Florida Not density but the right type of density
28 Jul Richard Florida ‏@Richard_Florida
Density & Creativity – Bacon’s Rebellion –
Retweeted by Ken Jarboe
28 Jul Ken Jarboe ‏@IntangibleEcon
Q&A: Why Is Jack Daniel’s Legal Team So Nice? More on the Jack Daniel’s approach: not pushovers but polite to start
29 Jul IAM magazine ‏@IAM_magazine
#Google and co will surely not to want to lose out on the #Kodak #patents to #Microsoft, #Apple and IV. @IVinvents
Retweeted by Ken Jarboe
29 Jul David Martin ‏@monkeyking67
Kodak looks to patent auction to boost funds – – Technology M-CAM comments on Kodak again in FT
Retweeted by Ken Jarboe

2Q 2012 GDP – and waiting for better measures

News from BEA this morning is that the economy slowed in the April-June period. GDP grew by only 1.5% in the second quarter, compared with 2% in the first quarter and 4.1% in 4Q 2011. The 2Q 2012 growth rate was basically in line with economists’ forecast of 1.3% (according to the Wall Street Journal).
Declining spending by Federal, state and local governments continues to be a drag on GDP growth, although not as large as in earlier periods. Consumer spending increased, but at a slower rate. Spending on durable goods actually declined. Nonresidential fixed investment (i.e. business spending) grew at slower rate as well — up 5.3% compared to a 7.5% increase in 1Q 2012. The good news is that equipment and software increased by 7.2% compared to an increase of 5.4% in the previous quarter. And, as I have noted before, the data has a basic problem in that it does not give us any guidance on investment in intangibles other than software. So we do not know whether companies have increased or decreased their investments in important areas such as human and organizational capital.
That is about to change — at least a little bit. BEA has plans for a major revision in the GDP calculations next year. Two big changes will help make the GDP data more accurate: capitalization of research and development (R&D)and capitalization of entertainment, literary, and artistic originals (movies, music, books, art work, etc.) Currently, both R&D and the cost of creating entertainment, literary, and artistic originals are treated as a direct expense. Under the new system, they will be treated as investments, as they should be since they have long paybacks not just immediate returns.
As part of this shift, investments in these items with be specifically captured in the nonresidential fixed investment data. There will be separate data for software (now a subcategory of equipment), R&D, and entertainment, literary, and artistic originals. This should allow us to get a better picture of the I-Cubed Economy.
It might also help economist better forecast future growth. Right now, the predictions are constrained by the industrial age thinking and metrics. Take for example this quote from a recent Wall Street Journal comment on another piece of data: “New orders for nondefense capital goods excluding aircraft–which many economists consider a proxy for business investment–fell 1.4% in June from a month earlier.” (emphasis added)
But business investments in tangibles is smaller than investment in intangibles and between 60% to 80% of company value in their intangible assets. Given that, why would a measure of only a fraction of business investment – and in a category that is shrinking in importance as a value driver – be an accurate indicator of the health of the economy. Yes, investment in plant and equipment is important just as a manufacturing base is important. But investments in intangibles are just as, if not more, important — including for the manufacturing base. And we aren’t reporting those investment in intangibles in our GDP data. That is like trying to drive a car with most of the windows covered. It can be done – kind of. But it is very dangerous.
Likewise, not having correct data about our Information-Innovation-Intangibles Economy is dangerous for policy making. The new BEA changes will help. But they are only a step in the right direction.
Final note: the BEA data on GDP is the “advanced estimates” subject to potentially large revisions. The next revision will be released on August 29.

New National Academy study on innovation

The Board on Science, Technology, and Economic Policy (of the National Academy of Sciences) has issued a new report on innovation: Rising to the Challenge: U.S. Innovation Policy for Global Economy. The result of a multiyear endeavor, the report brings together a number of studies of national innovation systems and builds upon earlier Academy studies.
The report does a good job of describes how the technology-based innovation system has shifted in the past few decade. Importantly, it raises the issue of commercialization in the context of capturing economic value and enhancing national advantage. These are vital concerns that must be added to the national debate on innovation. It is not enough to have a thriving R&D sector. Government policies and actions are need to insure that activity is translated into public benefit.
The report lists a number of specific policy recommendations ranging across a number of areas such as support for R&D, workforce development & education and trade & investment. These are captured in four core goals:

1. Monitor and learn from what the rest of the world is doing: The United States needs to increase its understanding of the swiftly evolving global innovation environment and learn from the policy successes and failures of other nations. It is generally recognized that there is much to be learned from the rest of the world in science. This is equally true with regard to innovation policy. See Recommendation 1.
2. Reinforce U.S. innovation leadership: It is very important that the United States reinforce the policies, programs, and institutions that provide the foundations for our own knowledge-based growth and high value employment. These include measures to strengthen our research universities and national laboratories, renew our infrastructure, and revive our manufacturing base. See Recommendations 2, 3, and 4.
3. Capture greater value from its public investments in research: The United States should improve its ability to capture greater value from its public investments in research. This includes reinforcing cooperative efforts between the private and public sectors that can be grouped under the rubric of public-private partnerships, as well as expanding support for manufacturing. See Recommendations 5 and 6.
4. Cooperate more actively with other nations: In an era of rapid growth in new knowledge that is being generated around the world, the United States should cooperate more actively with other nations to advance innovations that address shared global challenges in energy, health, the environment, and security. See Recommendation 7.

My one critique is that they limited themselves to technology-based innovation. Having said that, the four core goals can easily encompasses non-technological innovation as well.
There is one specific policy recommendation I would like to highlight. I has long argued for a more pro-active role for procurement as an innovation policy (see earlier postings). As I noted before, government as a demanding customer can create the “thin opening wedge” — new products and services that have a specialized use. Once that specialized use is established, the product or service can be refined and adopted to a broader customer base. The demanding customer in fact becomes a co-creator.
Thus I was very pleased to see this aspect of innovation policy specifically addressed:

Leverage government procurement: Federal agencies can use their purchasing power to help drive domestic commercialization of emerging technologies. The U.S. government has done this many times previously in industries such as semiconductors, computers, and aerospace. Federal and state agencies can help build domestic markets for important new
technologies for electric-drive vehicles, energy-efficient buildings, solidstate lighting, and next-generation photovoltaic cells. Procurement rules of Federal agencies and armed forces should be reformed to put more emphasis on providing incentives for spurring innovation in products and processes that result in continuous performance improvements and lower long-term life-cycle costs (vs. up-front costs). Government agencies also should accelerate innovation by providing early-stage financial support for small companies that can address national needs. (Recommendation 5j.)

There are lots of other good recommendations in the report. Let us hope that policymakers read the report carefully and implement its recommendations.

Select tweets 7/16/12 – 7/22/12

Select tweets and retweets from the past week:
15 Jul john seely brown ‏@jseelybrown
Is higher education prepared for this emerging movement/disruption? I hope so.
Retweeted by Ken Jarboe
16 Jul Gensler ‏@GenslerOnCities
What factors determine growth trajectories of individual cities? UK study of cities in 1901 breaks it down.
Retweeted by Ken Jarboe
16 Jul Ken Jarboe ‏@IntangibleEcon
Economist: America’s economy: Points of light versus WSJ: Plains, Midwest Can’t Lift U.S. Economy
16 Jul Ken Jarboe ‏@IntangibleEcon
WSJ: Next 3-D Frontier: Printed Plane Parts Real breakthrough will be making things that can’t currently be made.
16 Jul Ken Jarboe ‏@IntangibleEcon
Is the Job Market Suffering from a Skills Gap? : The New Yorker … via @NewYorker
16 Jul n Jarboe ‏@IntangibleEcon
Lifeguard’s ordeal is parable about outsourcing Really more about the dangers of Fordist/Taylorist approach to services
17 Jul Ken Jarboe ‏@IntangibleEcon
ForeignPolicy: Why the future of manufacturing is in America – not China But will robots & 3D printing produce jobs?
17 Jul Leslie Ziegler ‏@lesliejz
Design Thinking has its own documentary, featuring IDEO’s David Kelley and other pioneers (thanks, @GHideas)
Retweeted by Ken Jarboe
17 Jul Ken Jarboe ‏@IntangibleEcon
Nat Academy of Science: Education for Life and Work: Developing Transferable Knowledge and Skills in the 21st Century:
17 Jul Ken Jarboe ‏@IntangibleEcon
BBC News: Who ‘likes’ my Virtual Bagels? An experiment in internet advertising.
17 Jul IAM magazine ‏@IAM_magazine
If #IP really is a new currency, how can we know what it is worth?
Retweeted by Ken Jarboe
17 Jul Jonathan Low ‏@jondlow
Knowledge Capitalism
Retweeted by Ken Jarboe
18 Jul David Wessel ‏@davidmwessel
Can better use of info technology help slow the rise in college tuition? Just might. My column
Retweeted by Ken Jarboe
18 Jul Ken Jarboe ‏@IntangibleEcon
WSJ: Some U.S. Firms Move to ‘Reshore’ MIT study shows trend: protect IP and be closer to customer (key intangibles).
18 Jul Ken Jarboe ‏@IntangibleEcon
Top Universities Test the Online Appeal of Free The continued rise of an alternate form of higher education
19 Jul Ken Jarboe ‏@IntangibleEcon
Two views on Galaxy v. Ipad: UK via WSJ and US via Wash Post
19 Jul Clyde Prestowitz ‏@clydeprestowitz
What the Candidates Should Do About U.S. Manufacturing via @HuffPostBiz
Retweeted by Ken Jarboe
19 Jul Mary Adams ‏@maryadamsICA
Must-see from #TEDxBoston: Andrew McAffee talking about technology, jobs and innovation–incredibly scary and exciting
Retweeted by Ken Jarboe
19 Jul Jim Spohrer ‏@JimSpohrer
Civilization rapid-rebuild starter-kit Prelude to new integrated engineering discipline
Retweeted by Ken Jarboe
19 Jul IAM magazine ‏@IAM_magazine
Close to $19 billion of #patent deals done in last 12 months, says Business Week. But be careful with those numbers!
Retweeted by Ken Jarboe
20 Jul Ken Jarboe ‏@IntangibleEcon
NYT: The Trouble With Online Education A UVA professor’s defense of the face-to-face (yes even large lectures).

Structural or cyclical? Yes, still

Once again, the debate over the nature of our economic woes is erupting on the fault line of a structural versus cyclical slowdown — see Krugman & Delong on one side and Sachs & Atkinson. We saw this debate last time in early 2011 (see earlier posting). So let me repeat a little of what I said back then.
My answer to the question as to whether it is cyclical or structural is yes. It is both. There is a huge demand component to this recession. Financial markets froze; consumer spending and business investment plummeted. No one can or should deny that. Thus, steps to stimulate economic growth were necessary, and apparently successful.
But every recession in the past three decades has been structural. Jobs were permanently lost in some sectors and new jobs created in others. As I’ve stated before, the recession of the early 1980’s was the first recession of the I-Cubed Economy where workers were not placed on temporary layoff but permanently fired. Companies and workers were “downsized” rather than laid-off. Involuntary part-time work was the response of people downsized.
This was part of the switch away from the industrial economy. In the industrial economy, temporary lay-offs were the way of buffering the labor force from cyclical downturns. Workers were kept around for the next upturn — with either union-based or government-based unemployment payments to maintain family income until the recall.
In the I-Cubed Economy, that process has disappeared. Workers have to find new jobs — often in new industries. Cyclical downturns now lead to structural changes. And structural changes aggravate cyclical downturns.
While both are at work in the current situation, the differences between structural and cyclical has large implication for economic policy. If cyclical, the solution is to stimulate demand. If structural, then a different set of policies is called for. The problem is that this either/or rhetoric distracts us from doing what is needed — both/and.
There is also a slightly more dangerous part to the debate — on both sides. Both arguments can be used as an excuse to do nothing. If the recession is simply cyclical, then we just have to wait for the cycle to play out and the recovery to take hold. If anything is to be done it should be limited to traditional industrial-age solutions, such as tax cuts and accelerated depreciation. [FYI – see recent posting on the value of accelerated depreciation in a knowledge economy]. On the other side, the argument is that there is little government can do about structural unemployment. The market needs to sort itself out – maybe with some help in the long run from some worker retraining programs.
But there are policies we can undertake that would have the dual benefits of raising demand and building a stronger competitive foundation. For example, tying to unemployment benefits to job sharing and worker training. Under most proposed job sharing plans, workers would reduce hours with portion of the workers’ lost wages covered by unemployment insurance (UI). Rather than reduce their hours, we should use those hours for training. It can be on-the-job training or classroom training.
As either an alternative or in conjunction with UI payments, companies could be given a tax credit for the cost of the training — for both direct costs and the payroll cost of those workers participating in the training. The program could even be taken a step beyond a tax credit. As with a recent change to clean energy tax credit, the tax credit could be front loaded by either offering payments in lieu or allowing monetization of the tax credit in the financial markets (see earlier posting). This way, small businesses would get the money as they need it to pay the workers in the training program.
In this way, those “lost” hours from job sharing aren’t lost at all. They are an investment in future growth. The knowledge credit covers both the short term problem of maintaining incomes in a downturn and the long term problem of improving skills needed to maintain competitiveness. This would have the dual effect: It would increase our human capital — a major input to the innovation ecosystem. And it would immediately increase consumer demand as companies would use the funds to pay workers to take classes (thereby creating more employments slots for others to fill the working hours of those in the classes).
The much touted but never-considered-seriously National Infrastructure Bank is another example of a programs that would address both cyclical and structural issues.
Access to capital is another issue. The Small Business Administration (SBA) notes that borrowing by small businesses remains slow. We could to do more help small businesses get access to financing through using their intangible assets as debt collateral. In a number of reports (and posting on this blog), we have discussed examples of intangibles being used as loan collateral (for example, see Maximizing Intellectual Property and Intangible Assets: Case Studies in Intangible Asset Finance and Intangible Asset Monetization: The Promise and the Reality). In fact, I like to point out that this has been going on for a long time. The first trade secrets case in the United States involved the debt on a bond secured in part by a secret chocolate-making process in 1837. In 1884, Ara Shipman loaned Lewis Waterman $5,000 to start a pen-manufacturing business, secured by Waterman’s patent.
As I’ve argued for before, there are two action that SBA could take:
•  Develop SBA underwriting standards for IP. SBA should work with commercial lenders to develop standards for the use of intangible assets as collateral, similar to existing SBA underwriting standards. Allowing IP to be used as collateral will increase the amount of funds a company, such as one in the high-tech sector, would qualify for.
•  Create an IP-backed loan fund. Other nations have developed special programs to encourage IP-based finance. The U.S. should set up similar programs on a pilot basis, ideally run by the SBA to take advantage of its lending expertise. Technical support could be provided by the U.S. Commerce Department’s National Institute of Standards and Technology (NIST). Such a direct lending program would be a step beyond SBA’s current loan guarantee programs–direct lending is needed to jumpstart the process. Once the process of utilizing IP as collateral is fully established, the program could be converted to a loan guarantee structure.
These two action would begin to unlock the debt financing option for high-growth companies.
We also need programs to stimulate entrepreneurship, to help companies, especially small and medium size businesses embrace design thinking — and the 21st Century linkage between manufacturing and services. Done right, these programs could inject financing into SMEs for immediate benefit while transforming their businesses.

Getting it backwards on trade

Here is an interesting quote from the head of the U.S. Chamber of Commerce Tom Donohue in today’s Wall Street Journal on the issue of trade with China:

“If you don’t buy products from outside the country, you can’t sell products to people from outside the country,” Mr. Donohue said.

That is like saying you have buy stuff in order to earn money. Just backwards. We need to focus more on the earning part of the equation — which will allow us to then buy stuff. What Mr. Donohue should understand is that if you don’t sell products to other countries, you can’t buy products from outside. When you focus on just buying products from outside, you run a trade deficit. And you have to borrow money from those countries to pay for the stuff you buy — which puts you in a deeper financial hole since you have to spend more money paying the interest on that debt. Exactly the hole the U.S. finds itself in today.
To get out of the hole will require understanding that the rule of the economy have changed. We can compete in the old industrial age of mass production against countries that can do mass production combined with cheap labor and currency manipulation. we need to regain markets – both home and abroad – by increasing our skill and knowledge intensive production. And that does not mean simply selling more knowledge services. As we have noted numerous times, our manufacturing needs to become more intangible-intensive if we are to better compete (see for example the Athena Alliance Policy Brief–Intellectual Capital and Revitalizing Manufacturing).
But to start, we must understand the first law of holes: when you find yourself in a hole, stop digging! Unfortunately, it seems like some want to keep digging.