Origins

1.01            In 1995 the World Trade Organization (WTO) began operations and the global economy was born (WTO 1994a).  Today, 2004, virtually all member states of the United Nations (UN) belong to the WTO with the notable exception of the Russian Federation.  Put another way, global regulation of political and military competition by the UN beginning in 1945 was extended to global regulation of economic competition by the WTO fifty years later.  This was possible only because of the global triumph of Markets over Marx. [A]

1.02      For the first time, virtually all nation-states agreed to abide by common rules of trade recognizing the WTO as final arbitrator of disputes and authorizing it to sanction countervailing measures against offenders of its rules.  Given the historical role of trade disputes in fuelling international conflict, the WTO compliments the UN as a bulwark of international peace, law and order. [B]

1.03      As an international legal instrument, the WTO is a ‘single undertaking’, i.e., it is a set of instruments constituting a single package permitting only a single signature without reservation.  One of these instruments is the TRIPS Agreement (trade-related intellectual properties) that constitutes, in effect, a global agreement on commercial trade in knowledge, or more precisely, in intellectual property rights (IPRs) such as copyrights, patents, registered industrial designs and trademarks.  TRIPS is, however, but one part of a complex WTO package that includes the General Agreement on Tariffs and Trade (GATT) (WTO 1994b). 

1.04      TRIPS, in turn, exists in the context of a constellation of international agreements, conventions, covenants and treaties administered by the World Intellectual Property Organization (WIPO 1967) a special subject agency of the United Nations.  TRIPS requires accession to some, but not to all, WIPO instruments.  In turn, WIPO instruments apply only to nations-states that accede to them.  Generally, acceding states provide only ‘national treatment’ to citizens of other member states, i.e., the same rights are extended as if they were nationals but the rights so extended are defined by each nation-state’s legislature.  This treatment contrasts with ‘harmonization’, characteristic of other WTO efforts, e.g., definition of subsidies.  ‘In force’ WIPO instruments,

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as well as TRIPS, also ignore and thereby deny protection to ‘non-marketable’ intellectual property rights, e.g., aboriginal heritage rights (Farrer 1994; Chartrand 1995) and collective or community-based intellectual property rights in general (Shiva 1993).  Such ignored rights, together with commercial rights that have lapsed through time, constitute the global public domain of knowledge from which any and all may freely draw. 

1.05      In 1996, the Organization for Economic Cooperation and Development (OECD), whose members constitute the First World of developed, democratic market economies, published The Knowledge-Based Economy (OECD 1996).  This initiated a period of rapid institution building, continuing to this day, in public and private sectors around the world.  A new specialty emerged – ‘knowledge management’, not to be confused with its predecessor - information management; the ‘Chief Knowledge Officer’ (CKO) is becoming an hierarchical feature of multi- and trans-national corporations; governments are creating knowledge ministries, departments and agencies; ‘knowledge audits’ are being conducted by firms and nation-states around the world (Mahorta 2000); and, nation-states themselves are designing ‘national innovation systems’ (NIS) to generate and market new knowledge (OECD 1997).  Even a standardized lexicon or vocabulary is being drafted to guide public and private sector discussion and debate (American National Standards Institute and the Global Knowledge Economics Council 2001).  Only time will tell whether all this conceptual and institutional activity is a passing policy fad or marks a true evolutionary leap in economic development and thinking.  What is certain is that knowledge is now recognized as a strategic asset in the competitiveness of nations.  What is equally certain is that the ‘Standard Model’ of mainstream economic thought is theoretically inadequate to deal with this new economy.

Index

The Standard Model

1.06            Like physics (Cottinham & Greenwood 1998), economics has its ‘Standard Model’, i.e., a generally accepted theoretical model of reality.  Like physics, it is taught in geometric, mathematical and deductive terms using standardized textbooks in first and second year university courses around the world from Adelaide, Beijing, Budapest, Cambridge, Cape Town, Moscow, Paris, Saskatoon, Stockholm to Washington D.C.

1.07            The Standard Model was developed during the last quarter of the 19th and first quarter of the 20th centuries particularly in the hands of Alfred Lord Marshall (1842-1924) at Cambridge University (Marshall 1920).  Alternatively known as the Marshallian, Neoclassical or Perfect Competition Model, it fulfils Descartes’ requirement of a science in that it uses deductive logic based on a set of key assumptions and whose conclusions are subject to both geometric and mathematical proof.  The resulting ‘paradigm’ led, I infer, Thomas Kuhn to single out economics from among the other social sciences as best approximating ‘normal science’ (Kuhn 1996, 161).

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Epistemology

1.08            Unlike the other social sciences and humanities, however, economic epistemology, i.e., theory of knowledge,  is rooted not in Platonic or Aristotelian idealism but in Epicurean sensationalism.  As noted by Marshall  (1920, 628), the most influential successor of Adam Smith (1723-1790) was not an economist but rather Jeremy Bentham (1748-1832), a radical reformer who formalized Utilitarianism as a comprehensive philosophy (Clough 1964, 605). [C]  Bentham’s epistemology is based on the radical atomic materialism of Epicurus (341-271 BCE).  He acquired this view from the De Rerum Natura (On the Nature of Things) by the Roman Epicurean poet Lucretius (99-55 BCE), whose work, unlike that of Epicurus, survived the fall of the Roman Empire and the censorial fires of the Church. 

1.09            Like Epicurus, Bentham believed that physical sensation was the foundation of all knowledge.  Knowledge, including preconceptions such as ‘body,’ ‘person,’ ‘usefulness,’ and ‘truth’, form in the material brain as the result of repeated sense-experience of similar objects.  Ideas are formed by analogy between or compounding such basic concepts (O’Keefe 2001). 

1.10            The idea that the physical brain records and processes (engrams) sensations into higher order constructs such as consciousness is a contemporary conclusion of cognitive and neuro-psychology (Freeman 1999).  It is explained through ‘circular causality’. [D]  A higher, macro or ‘transcendent’ order of physical nature results from a specific relationship between micro-parts that, once attained by chance, natural selection or otherwise, causes the resulting macro order to feed back on these parts to maintain itself.  This involves not just a mutual reinforcing feedback (homeostasis) between a whole and its parts but also maintenance of the relationship between the parts themselves.  In philosophical terms, circular causality creates a self-perpetuating epiphenomenon, i.e., a secondary phenomenon accompanying another and caused by it.  Or, in aesthetic terms, one might say: “if we can regard beauty as a certain unity of diverse elements, perhaps harmony can be understood as the relation of these parts to the whole, and rhythm as their relation to one another.” (Dorter 1973, 74-75)

1.11            That knowledge is bio-chemically fixed in bundles of neurons is also a postulate of ‘analytic philosophy’ which, through the work of Gilbert Ryle, influenced Thomas Kuhn (1996) and Michael Polanyi (1962a) in their studies of science and Fredrick von Hayek in his investigation of economics (1952).  Ryle is best known for his book The Concept of Mind (1949) which argued against the mind/body dualism or ‘the ghost in the machine’ proposed by Descartes.  These ideas, together with a fresh reading of Adam Smith, have, in turn, been adopted by economist Brian Loasby into what I will call his ‘connective theory of knowledge’ (Loasby 2003).

1.12            For Bentham sense experiences involved a unit of pleasure and pain called the ‘utile’ from which the philosophical school of thought known as ‘Utilitarianism’ emerged.  Utiles would eventually, according to Bentham, be subject to physical measurement and he proposed a ‘felicitous calculus’ of human happiness.  One corollary of the utile, however, is that custom, tradition and taste are controllable variables.  Bentham thus viewed infants as tabula rasa, i.e., blank pages, that could be imprinted or engrammed according to the best interests of society.  He wanted all children removed from their

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parents at birth and sent to publicly operated crèches where they would be engrammed with the same customs, traditions and tastes.

1.13            Even aesthetics was affected, shrinking to analysis of the pleasurable sensations evoked by a work of art.  A thing is beautiful because it pleases, it does not please because it is beautiful (Schumpeter 1954, 126-7).  This, combined with Benthamite emphasis on functionality, meant application of artistic effort was “irrational”.  In industrial design and architecture, this aesthetic reached its logical conclusion in the aphorism form follows function and in the glass and steel towers of the International School of architecture (Hughes 1981).

1.14            In the hands of Francis Ysidro Edgeworth (1845-1926) Bentham’s calculus was reduced to geometric expression subject to mathematical proof in his Mathematical Psychics (Edgeworth 1881).  As absorbed and developed by Marshall and his colleagues at Cambridge, this geometry and its related calculus permitted the erection of what became the Standard Model in economics. 

1.15            The budget constrained maximization of self-interest (pleasure) by individual consumers leads to the industry demand curve while the cost constrained maximization of profits by entrepreneurs leads to the industry supply curve.  When put together in the ‘Marshallian scissors’ of supply and demand, a determinant geometric, mathematically precise equilibrium emerges that, at one and the same time, maximizes consumer self-interest and producer profits - if one accepts certain very strict assumptions.

1.16            For our immediate purposes, three assumptions are relevant.  First, let us assume that all consumers and producers have ‘perfect knowledge’ in which case, of course, there can be no market for knowledge since everyone has it freely and perfectly.  Second, let us assume that human beings are strictly rational, i.e., they are constantly calculating and weighing the relative probabilities of present and future pleasure against present and future pain.  Third, while utiles cannot be physically measured let us assume they can be reified, i.e., an abstraction made concrete, in the form of money.  The presence of money brings pleasure; its absence brings pain.  It is ironic that the Standard Model in economics achieves what Plato, speaking about Art, feared most, that: “not law and the reason of mankind, which by common consent have ever been deemed best, but pleasure and pain will be the rulers in our State” (Plato, Book X, 1952: 433-434).

1.17            Unlike the Standard Model in physics, however, the economic model is not empirical, i.e., it does not reflect nor pretend to reflect observable reality.  Furthermore, it is not experimental, i.e., controlled conditions cannot be maintained nor results replicated.  Rather, the Standard Model in economics is normative, specifying conditions under which perfection can be attained, providing the benchmark against which economic reality can be judged, e.g., the cost of monopoly.  It is therefore a ‘theory of value’ reflecting the origins of Economics as a branch of moral philosophy (Boulding 1969). 

1.18            Beyond its normative and pedagogic uses, however, the Standard Model serves primarily as a ‘straw man’.  By changing

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component assumptions, economists use the Standard Model to generate different outcomes.  It is these outcomes, rather than those of perfect competition, that are generally compared with economic reality.  For example, it was using this method that Joan Robinson (1933) and Edward Chamberlin (1933) independently extended the model to ‘imperfect competition’ providing determinant equilibrium solutions for monopoly and monopolistic competition (but not for the dominant form of modern economic competition – oligopoly). 

 

Limitations

1.19            Nonetheless, according to the Standard Model, a knowledge-based economy is a virtual contradiction in terms, an oxymoron.  First, knowledge is treated as a public good, i.e., it is non-excludable (once ‘out there’, e.g., published, one cannot easily be excluded from knowing) and it is non-rivalrous (your consumption does not reduce the quantity available to me).  Excludability and rivalrousness are necessary assumptions of the Standard Model to internalize all costs and benefits in the market price.  Accordingly, how can something be exchanged in a market, i.e., bought and sold, if one cannot stop others from taking it for nothing and, if they do, one’s inventory is not thereby reduced?  The answer is intellectual property rights like copyrights, patents, trademarks and registered industrial designs.  Such rights, however, must be imposed by the State thereby breaking one of the implicit tenets of the Standard Model – no government involvement in the economy. [E]

1.20            Second, knowledge exhibits increasing returns to scale, i.e., if the quantity of capital and labour remain fixed but knowledge grows, output will increase continuously.  New knowledge developed endogenously within a firm or nation through tinkering and refining production processes contributes as does new knowledge developed exogenously to both.  Through increasing division and specialization of knowledge, suppliers improve the quality and/or reduce the price of inputs decreasing costs and increasing final output.  The productive effects of this division and specialization of knowledge is most apparent in what Marshall called ‘industrial districts’ (Marshall 1920, 271) [F] or what today are called ‘clusters’ (Martin and Sunley 1996, 282).  Put another way, knowledge feeds on knowledge.  As a factor of production, knowledge therefore contradicts two fundamental axioms of the Standard Model - diminishing marginal product and decreasing returns to scale.  Without these axioms, a deductively derived equilibrium price/quantity market relationship cannot be determined and therefore the profit maximizing position of a firm cannot be calculated.  Furthermore, non-diminishing marginal product and increasing returns to scale are incompatible with a perfectly competitive outcome leading instead to monopoly – the bête noir or ‘black beast’ of mainstream economic theory.

1.21            Third, technological change, generally recognized as the major contributor to economic growth and development over the last three or four centuries, is, in economic theory, the effect of any new

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knowledge on the production function of a firm or nation-state.  The nature and source of the knowledge is not a theoretical concern; only its effects on the production function.  However, new knowledge has many sources and varying effects.  It may be productive increasing output on the shop floor; it may be managerial reducing costs or increasing output or sales; or, it may be entrepreneurial realizing a vision of future markets, products and/or other opportunities.  It may flow from the natural and engineering sciences (physical technology), the humanities and social sciences (organizational technology) or the Arts (design technology).  In economic theory, however, it does not matter what form new knowledge takes; it does not matter from whence it comes; the only thing that matters, mathematically, is its impact on the production function.  With such a monotonic definition of technological change, how can one account for, let alone competitively foster, the division and specialization of knowledge that characterizes a knowledge-based economy?

1.22            Fourth, in mainstream theory, knowledge is treated as an intermediate, not a final good in consumption.  It is utilitarian, i.e., it is an input into the production of final goods intended to satisfy human wants, needs and desires.  Even if treated as a final good, however, knowledge would be subject to the mainstream injunction: “De Gustibus Non Est Disputandum”, i.e., taste is not disputable (Stigler & Becker 1977).  Knowledge may, however, be non-utilitarian and valued in-and-of-itself in satisfying the basic human need ‘to know’.  Furthermore, knowledge, expressed as taste, is critical to consumer choice through product design and hence to competitiveness.  As Marshall observed “increasingly it is the pattern that sells the thing” (Marshall 1920, 178).[G]  He also observed a close relationship between marketing and production, a relationship not formally recognized in mainstream thought (Marshall 1919, 181).  If knowledge is treated simply as an input, how can one account for ‘style’ especially in consumer goods that constitute the vast bulk of economic activity?  If knowledge is both input and output then a paradox arises: if an input is the same as the output then the production function has only one variable – you put knowledge in and you get knowledge out.  The only remaining question is: at what rate? 

1.23            Fifth, mainstream economic theory only admits knowledge generated through reason, specifically by calculation of benefit and cost, or what I call calculatory rationalism.  Optimizing behaviour, i.e., minimizing cost and maximizing output, relies on reason alone.  Among other things, this ignores Adam Smith’s conviction about moral sentiments, e.g., business trust and confidence.  Such sentiments display significant cultural differences, e.g., the Spanish economy and its siesta when businesses and shops close in the afternoon and re-open in the evening, sometimes until midnight.  Without trust and confidence, how can there be a market between many buyers and sellers, and given cultural differences, how is foreign trade possible?

1.24            Sixth, mainstream theory assumes producers and consumers possess symmetrical and/or perfect knowledge.  In the case of risk, i.e., uncertain knowledge about future states of the world, it is assumed to be expressible as a ‘knowable’ probability function and it is resolved into ‘options’, e.g., insurance (Loasby 2002). 

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When economists assume asymmetrical knowledge, i.e., when someone knows but others do not, e.g., insider trading, problems of opportunism arise and mainstream theory crosses into game theory wherein ignorance can be cured but at a price.  Only a few economists have treated true uncertainty, i.e., ignorance of future states of the world (Knight 1921; Keynes 1936; Hayek 1937; Shackle 1973, Loasby 2003).  Ignorance is, of course, the opposite of knowledge, i.e., the want of knowledge.  To deal with true uncertainty, ignorance or surprise these few admit the ‘entrepreneur’ as possessing a non-rational form of knowledge – intuition or revelation – expressed by Keynes as ‘animal spirits’ (Keynes 1936, 161).  Like some ancient priest-king, the entrepreneur ‘knows’ the future and leads his people (investors, managers, workers and consumers) into it – right or wrong - to success or failure.  In a way, prophets seek profits.  If, however, one assumes there is only certain (or probabilistic) knowledge, how can there be a market for new knowledge?  How can there be an entrepreneurial role different and distinct from that of an owner of capital, manager or worker? 

Index

Objective

1.25      In summary, the Standard Model in economics treats knowledge as a probabilistically certain, culturally blind, monotonic, rational public good that enters the production function of a firm or nation-state as an input but does not leave as a final, highly differentiated output.  Furthermore, even with this constrained conceptual framework, knowledge still generates increasing returns to scale and disruptive innovations incompatible with the perfectly competitive outcome of the Standard Model.  Given such theoretical difficulties, how is a global knowledge-based economy possible? 

1.26      My objective is to answer that question and demonstrate the inherent and inevitable complexity of national competitiveness in a global knowledge-based economy.  In the process I also hope to revivify economic epistemology and answer Parker’s questions: “Can Economists’ Save Economics?” (Parker 1993).  While this dissertation remains but a sketch, it should nonetheless be remembered that “all theory can in strictness only point out leading principles under the guidance of which practice may proceed with vigour and be enabled to attain legitimate results” (Goethe 1810, lxiii).

Index

Table of Contents

2.0 Methodology

 

Index

Table of Contents

2.0 Methodology

The Competitiveness of Nations

in a Global Knowledge-Based Economy