9.0 Production Function

It is safe to say that enterprise which depends on hopes stretching into the future benefits the community as a whole. But individual initiative will only be adequate when reasonable calculation is supplemented and supported by animal spirits, so that the thought of ultimate loss which often overtakes pioneers, as experience undoubtedly tells us and them, is put aside as a healthy man puts aside the expectation of death.

John Maynard Keynes,

The General Theory of Employment, Interest and Money: Chapter 12 The State of Long-Term Expectations, 1936.

HHC

Draft in Progress

Table of Contents

9.01 Having demonstrated that personal & tacit, codified and tooled knowledge coalesce into three economic factors of production (codified & tooled capital, personal & tacit labour and toolable natural resources) bought, sold or freely appropriated from the public domain as legal qubits IPR, the question arises: How are such inputs combined to produce outputs (the Person, Code & Work), or put another way, what is the production function of a knowledge-based economy? The concept of the production function is one of the most important and elegant contributions of economics to human thought. It is the recipe of inputs (factors of production) for the output of a firm or nation and is defined “by a given state of technical knowledge” (Samuelson 1961, 570). [A] In symbolic form, a production function may be stated as:

9.02 This reads: Output (Y) is some function (f) of capital (K), labour (L) and natural resources (N) in a given time period (t). In effect, the state of technical knowledge, or technology, is implicit in the ‘f’ of the equation. It is the recipe. How much of each input, in what combinations and under what conditions can ingredients be mixed to produce maximum output and minimize cost? It is also time specific, i.e., it has vintage. For a knowledge-based economy, each parameter can

now be stated in terms of knowledge. I will briefly review the nature of inputs and outputs and then the relationship between knowledge and technological change and then between knowledge and government

9.03 As previously defined (7.0 Outputs & Inputs) traditional factors of production – capital, labour and natural resources - can be expressed in terms of knowledge. Labour is personal & tacit knowledge somatically fixed in an individual as neuronal bundles of memories and the trained reflexes of nerve and muscle. It comes in three forms: productive, managerial and entrepreneurial.

9.04 Capital can be expressed as codified and tooled knowledge, i.e., knowledge fixed or tooled in an extrasomatic matrix. Alternatively, capital is “knowledge imposed on the material world” (Boulding 1966, 5), or, “frozen knowledge” (Boulding 1966, 6). It comes in many forms including:

· codified knowledge in the form of human-readable information management systems and databases, operating manuals and libraries as well as associated intellectual property rights such as copyrights, patents, registered industrial designs and trademarks; and,

· tooled knowledge in ‘hard-tooled’ physical plant and equipment plus related ‘soft-tooled’ knowledge such as machine-readable computer & genomic programs, standards and techniques.

9.05 Initially a natural resource may appear as simply part of the environment – animal, plant, mineral, etc. With new knowledge, however, such an environmental artifact may be recognized as toolable into goods and services serving human purpose, i.e., toolable natural resources.

9.06 At any point in time there is a given stock or quantity of factors of production. In the Standard Model, such stocks are treated as static or fixed until additional factors are acquired, hired or purchased. In a knowledge-based economy, however, a stock of knowledge is not static but rather dynamic and organic, exhibiting mutation, change and increase even with no additional factors. For example, even without new capital plant and equipment, through experience labour will learn to use existing equipment more effectively and to tinker with it (known as ‘development’) to adjust it to better serve the purpose at hand or extend its ‘rated capacity’.

9.07 In this way, a stock of inputs to a knowledge-based economy is more like financial capital than physical capital. The English word ‘stock’, in its financial sense, is not found in other Teutonic languages except by adoption. Its origin is obscure linking a trader's capital to a trunk or stem from which gains are the outgrowth (OED, stock, VI).

9.08 The economic value of knowledge lays in its ability to satisfy the human biological need to know:

a) directly, as final goods or services satisfying physical or carnal as well as intellectual, emotional and intuitive needs to know; and/or,

b) indirectly, through intermediate or producer goods used in the making of final goods and services and which either become part of the final product or lose their identity in the production process.

9.09 Knowledge takes three final forms as an output valued in-and-of-itself – the Person, the Code and the Work. As previously argued (7.0 Inputs & Outputs), I restrict the meaning of:

ii - Code to extra-somatic knowledge carrying semiotic meaning fixed in a non-utilitarian matrix including works of Art; and,

iii - Work to extra-somatic knowledge tooled into a utilitarian matrix carrying the function of a toy.

I am compelled to use the word ‘toy’ because there appears to be no word in the English language denoting a work valued in-and-of-itself with no other purpose or utilitarian value. One plays with a toy; one works with a tool. Ultimately, however, a Code or a Work has meaning or function only through the agency of a Person. In this sense, the Person is the ultimate output of a knowledge-based economy.

9.10 Knowledge outputs serve three primary functions. First, an knowledge output may serve knowledge-for-knowledge-sake. In the philosophy of science this is usually associated with the research community embracing universities, colleges and affiliated research institutes. The importance of university or academic research lies in the ability of its practionners to undertake independent studies not restricted by immediate applicability. [B] In aesthetics, specifically in the nonprofit fine arts, it is associated with art-for-art’s-sake. As previously demonstrated, however, both art and science impose epistemological limits. In the natural sciences knowledge by sight is dominant with all other senses suppressed. In aesthetics the distant senses of sight and sound are dominant with the contact senses of taste, touch and smell traditionally suppressed. In economics, however, knowledge-for-knowledge-sake is not subject to any epistemological filter other than the human ‘need to know’. This includes entertainment and toys as well as culturally variable and changing forms of ‘forbidden knowledge’ such as carnal knowledge of taste, touch and smell, e.g., sex, drugs & rock’n roll.

9.11 Second, an output may serve as knowledge-for-decision. In the societal guidance mechanism (public, profit and nonprofit), such outputs support public policy development and program application as well as private product development, innovation, production and marketing.

9.12 Third, an output may serve as knowledge-for-ethos reinforcing or disestablishing, e.g., revolutionary tracts, the characteristic spirit and beliefs of a nation, community, firm or individual. The citizen is motivated by the need to know about his or her world. How wide or

narrow this world is varies between individuals and the times in which they live. The ethos is the world of Walter Lippman’s Public Opinion and “the pictures in our heads”, i.e., that part of the world that we have not or cannot experience directly through our native senses (Lippman 1927). Such outputs, usually codified but sometimes tooled, in effect, constitute the public domain of a knowledge-based democracy. As has been seen (8.0 Rights to Know), the importance of the public domain cannot be under-estimated (Lange 2003).

9.13 In the Standard Model, technological change refers to the effect of new knowledge on the production function of a firm or nation. 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 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.

9.14 In response to technological change, the production function for existing output may shift upwards or downwards, i.e., technology can be lost as happened with the fall of Rome. The quantity and/or cost per unit output may increase or decrease. Alternatively, an entirely new production function may emerge with innovation of new and/or elimination of old products, processes and techniques. Technological knowledge does not only accumulate; it also withers away if not transmitted to subsequent generations. The later is most apparent with respect to traditional craft methods (White & Hart 1990).

9.15 In the 20th century, technological change became recognized as the most important source of economic growth, i.e., increase in output – absolutely, or, per capita. Our understanding of such change, however, remains limited. We do not fully understand why some things are invented and others are not; why some are successfully innovated and brought to market, and others are not. The contribution of technological change has, in theory, traditionally been treated as a ‘residual’, i.e., after measuring total growth of output, the contribution of an increased quantity and quality of capital, labour and natural resources are factored out and the residual is called technological change. Technological change, in this sense, is a residual amounting to an error term, or, a measure of our economic ignorance. [C]

9.16 Furthermore, in the Standard Model technical knowledge is treated as a public rather than a private good. Thus when new knowledge is published or otherwise made known, others cannot be easily excluded from acquiring it, i.e., it is non-excludable. Furthermore, when shared, the quantity of knowledge is not reduced, i.e., it is non-

rivalrous. In fact, the more knowledge is shared, the more knowledge is created. In this sense, knowledge exhibits increasing returns to scale.

9.17 The effects of technological change on the production function are conventionally broken out into two dichotomous but complimentary categories: disembodied & embodied; and, endogenous & exogenous technological change.

9.18 Disembodied technological change has implicitly dominated economic thought since the beginning of the discipline. It refers to generalized improvements in methods and processes as well as enhancement of systemic or facilitating factors such as communications, energy, information and transportation networks. Such change is disembodied in that it is assumed to spread itself out evenly across all existing plant and equipment in all industries and all sectors of the economy.

9.19 Conceptually embodied technological change traces back to Adam Smith’s treatment of invention as the result of the division of labour (1776). It refers to new knowledge as a primary ingredient in new or improved capital goods. The concept was refined and extended by Marx and Engels (1848) in the 19th and by Joseph Schumpeter’s ‘creative destruction’ (1942) in the 20th century. No attempt was made, however, to measure it until the 1950s (Kaldor 1957; Johansen 1959). And it was not until 1962 that the term ‘embodied technological change’ was introduced into the economic lexicon, and by contrast, disembodied change formally recognized (Solow 1962). [D]

9.20 The concept of embodied technological change emerged out of the ‘scientific’ research and development (R&D) efforts of the Second World War followed by post-war organized industrial R&D programs. This experience demonstrated that scientific knowledge could be embodied in specific products and processes, e.g., the transistor in the transistor radio. Conceptual development of embodied technological change has, however, “lost its momentum” (Romer 1996, 204). Many theorists, according to Romer, have returned to disembodied technological change as a force locomotif meaning: “Technological change causes economic growth” (Romer 1996, 204). [E]

9.21 While embodied/disembodied refers to the form, endogenous and exogenous refers to the source of technological change. Such a distinction is current as the ‘internalist/externalist’ debate in the history, philosophy and sociology of science (Fuller 1992). The source of exogenous technological change is outside the economic process. New knowledge emerges in response to factors such as the curiosity of inventors and pursuit of ‘knowledge-for-knowledge-sake’. [F] In effect, exogenous technological change, from the point of view of the firm or nation, falls from heaven like manna (Scherer 1971, 347).

9.22 By contrast, endogenous technological change emerges from within the economic process itself - in response to profit and loss. For

Marx and Engel, all technological change, including that emanating from the natural sciences, is endogenous. Purity of purpose such as ‘knowledge-for-knowledge-sake’, like religion, was so much opium for the masses cloaking the inexorable teleological forces of capitalist economic development. The term itself, however, was not introduced until 1966 (Lucas 1966) as was the related term ‘endogenous technical change’ (Shell 1966). [G]

9.23 Endogenous change is evidenced by formal industrial R&D programs. It also involves minor modification and improvement of existing and new capital plant and equipment called ‘development’ (Rosenberg & Steinmueller 1988, 230). [H] In this way industry continues the late medieval craft tradition of experimentation. R&D varies significantly between firms and industries. At one extreme, a change may be significant for an individual firm but trivial to the economy as a whole. On the other hand, ‘enabling technologies’ such as computers or biotechnology may radically transform both the growth path and the potential of an entire economy. How to sum up the impact on the economy of the endogenous activities of individual firms remains, however, problematic.

9.24 With respect to the nation-state, endogenous and exogenous technological change have a different meaning. They refer to whether the source is internal, i.e., produced by domestic private or public enterprise, or external to the nation, i.e., originating with foreign sources.

9.25 Out of the decades’ long debate over embodied vs. disembodied and endogenous vs. exogenous technological change, a ‘new’ theory emerged in the 1980s called the New Growth Theory. Initiated by Paul Romer (1986), it is explicitly endogenous and implicitly embodied.

9.26 Like other ‘new’ forms of economics such as the New Institutionalism (Coase 1992), New Economic History (North & Thomas 1970), New Economic Geography (Krugman 1983; Martin & Sunley 1996) and the New Economics of Science (Dasgupta & David 1994), New Growth Theory appears, at least to this observer, as an exercise in re-calibrating the Standard Model to include descriptive, empirical, institutional and historical evidence previously excluded because of its qualitative rather than quantitative nature.

9.27 While welcomed, the professional urge remains to fabricate such ‘new’ evidence into quantitative proxy indicators to be plugged into mathematical models. Romer thus calls for more sophisticated mathematical modeling without expectation of testing because “these kinds of facts tend to be neglected in discussions that focus too narrowly on testing and rejecting models” (Romer 1994, 19-20). So much for Positivism even in econometrics!

9.28 Beyond admitting additional sources of evidence, new growth theory introduces the concept that technological change involves non-rival ‘ideas’ that can “be stored in a bit string” (Romer 1996, 204), implicitly referring to computer programs, a form of soft-tooled

knowledge. [I] His concept, however, presents, to my mind, a confusion between information and knowledge and a failure to acknowledge the distinction between the short-run and long-run with respect to intellectual property, i.e., between knowledge being in the private domain in the short-run but the public domain in the long-run.

9.29 With respect to information and knowledge, the ‘bit’ abstracts from content and fails, as has been demonstrated, to provide a homogenous unit measure of knowledge, or what Kenneth Boulding called ‘the wit’ (Boulding 1966, 2). With respect to intellectual property, in the short-run technical knowledge is rivalrous to the degree that copyrights, patents and other state-sponsored intellectual property rights provide protection. In the long-run, however, all intellectual property rights expire and knowledge enters the public domain where non-rivalrousness exists. Given new technical knowledge is continually being copyrighted and patented, one faces an ever moving horizon between rivalrousness and non-rivalrousness, a horizon that can never be reached. Or, put in terms of Lord Keynes’ famous dictum: “In the long run we are all dead” (Keynes 1923).

9.30 As with most theoretical debates that concerning technological change in economics involves antagonists favouring mutually exclusive positions. To this observer, it appears everybody is right – to one degree or another, at one point in time or another place in space. Technological change can be disembodied in that the production function can be materially affected by systemic changes in facilitating factors such as communications, energy, information processing and transportation. The impact of the ‘B2B’ or business-to-business internet fits this category. In David’s terms, such networks constitute techno-economic regimes predominantly external to the individual firm and/or country (David 1990). Similarly, technological change can be embodied, e.g., the transistor in the transistor radio. It can also be endogenous resulting from the internal R&D programs of firms or exogenous resulting from activities elsewhere in society, e.g., in the universities or elsewhere in the world. In this sense, the production function of a knowledge-based economy rests on the composite effect or quintessence of disembodied, embodied, endogenous and exogenous technological change.

9.31 This composite effect of technological change can be expressed as a quibit of disembodied, embodied, endogenous, exogenous technological change called a FLX (pronounced ‘flex’). I coin the phrase by recovering a word from Newton’s original but now obsolete term fluxion meaning “the rate or proportion at which a flowing or varying quantity increases its magnitude” (OED fluxion, 5). The modern term is ‘differential’. I also adopt and adapt the term corresponding fluxion or “rates at which two interdependent quantities may change simultaneously” to the rates of four quantities, i.e., a qubit of technological change and its continuous effects on the production function of a firm or nation-state. At any point in time all four forms of technological change are at work affecting the production function. In this sense, unlike the Standard Model, there is no short-term in a

9.32 However, the FLX can be lumpy and uneven. It can also be negative in that ‘de-industrialization’ can occur whereby knowledge moves ‘off-shore’ and is lost to a nation or firm or through ‘de-skilling’ whereby traditional praxis is embodied in a new instrument and similarly lost but this time to a machine. Such a loss of knowledge is somewhat analogous to the ‘Kuhnian loss’ experienced in scientific revolutions in the shift from one paradigm to another (Fuller 2000). On the one hand, output may be increased or costs reduced; on the other hand, however, there is a loss of knowledge as domestic production is replaced by foreign or advanced machine production. This is one reason for not using the conventional term ‘flow’ which conveys a sense of constancy. Exogenous changes like innovation of a new general purpose engines may transform the entire economy (David 1990, 335). On the other hand, endogenous tinkering on the shop floor, the ‘D’ or development in ‘R&D’, generally may only contribute only to the specific firm. A FLX is a measure of all four types of technological change or ‘new knowledge’ as it affects the production function of a nation or a firm. Such new knowledge may emerge from the NES as physical technological change, from the HSS as organizational change, from the Arts as design change or some combination thereof. It may also enter the production function in the form of any or all of personal & tacit labour, codified & tooled capital and/or newly recognized toolable natural resources.

9.33 In the Standard Model of economics there is no government. Under conditions of perfect competition all costs are internalized by producers in the market price. There are no uncosted externalities like pollution. In turn, the consumer paying the market price internalizes all benefits. There are no external benefits as with a public good. There are, in fact, no costs or benefits external to the market transaction. There is, therefore, no need for government in the economy. Ironically, the Standard Model shares this conclusion with Marxism. Under conditions of perfect communism there will be a ‘withering away of the State’. In Leninist terms, there will be no role for the Party as a revolutionary vanguard because the revolution would have happened.

9.34 In a knowledge-based economy, however, government is not a necessary evil that will eventually disappear. Rather it is a positive necessity for such an economy to exist. This is most evident with respect to the privatization of new knowledge through legislated intellectual property rights. Government plays, however, at one and the same time, five different roles, that of: Custodian, Facilitator, Patron, Architect and Engineer of the national knowledge-base.

9.35 The Custodial State is directly responsible for access to and conservation of the national knowledge-base. This is evidenced by institutions like national archives, museums, libraries and arts centres. It

is also evidenced by cultural patrimony legislation controlling the export of ‘national treasures’ and by departments of government mandated to protect, preserve and promote national culture, e.g., Heritage Canada or, in French, Patrimoine Canada. Through intellectual property legislation, government is also responsible for the preservation and extension of the public domain or national knowledge-base.

9.36 The Facilitator State supports production and conservation of knowledge through ‘tax expenditures’, i.e. taxes foregone or forgiven. Government can choose not to tax certain types of income and/or expenditures made by citizens because relevant activities are considered merit goods. A merit good is a good or service whose consumption or production is encouraged on the basis of non-market value judgments. It is the opposite of a demerit good or service, e.g. smoking or, at the extreme, crime. As with ‘public goods’, of which merit goods are a subset, the private market cannot profitably provide the quantity or quality government requires. A charitable donation made by an individual or an organization is an example of tax expenditure. In this case government mandates that a donation to a ‘recognized’ charity should, in whole or in part, be subtracted from income tax due to the government. Donations in support of the nonprofit arts (Arts), education (HSS) and scientific (NES) research including medical research (Practices) are knowledge-based examples as are donations to religious (Revelation) and sports (Sensation) institutions. To the degree a charitable organization is engaged in knowledge production it is relevant to a knowledge-based economy. Exemption from income tax of copyright income earned by resident artists (not legal persons) in the Republic of Ireland (Eire) is an example relevant in all knowledge domains.

9.37 The Facilitator supports diversity rather than specific knowledge domains or disciplines. Specific standards are not established by the State because the Facilitator relies on the preferences and tastes of corporate, foundation and individual donors. The policy dynamic is random in that tax expenditures reflect the changing tastes of private donors. The United States has traditionally relied most heavily on facilitating private giving rather than direct public spending as, for example, in most western European states. Arguably, however, a convergence of funding patterns is being established on both sides of the Atlantic (Chartrand 2002).

9.38 The strength of the Facilitator lies in the diversity of funding sources. Individuals, corporations and foundations choose which knowledge domains and disciplines to support. The Facilitator also has weaknesses. First, once tax exempt status is granted, standards of excellence are not required. Second, the State cannot easily target priority activities. Third, valuation of donations-in-kind, a common practice in the Arts, e.g., a painting donated to a museum or art gallery, is problematic. Fourth, the Facilitator cannot necessarily restrict benefits to domestic knowledge-based communities, e.g. reconstruction of the Versailles palace was funded in large part through tax-exempt

contributions made by American taxpayers to the Versailles Foundation in New York City (Le Figaro 1980). Fifth, it is difficult to calculate the cost of tax credits and expenditures to government (Wilson 1985, 17).

9.39 The Patron State funds the production and conservation of knowledge through arm's length councils in all knowledge domains and some practices, e.g., the Canadian Institute for Health Research (CIHR). The government determines how much total support to provide, but not which organizations or creators to receive that support. A council is usually composed of a board of trustees appointed by the government. Having been appointed, however, trustees fulfill their grant-giving duties independent of the day-to-day interests of the party in power, much like the trustee of a blind trust. Granting decisions are generally made through a system of peer evaluation.

9.40 The grant-giving council supports creativity, discovery and invention with the objective of promoting standards of excellence. The policy dynamic of the Patron State is evolutionary, responding to changing trends and paradigm shifts expressed by knowledge-based communities themselves through peer evaluation.

9.41 The very strength of the arm's length council is often perceived, however, as its principal weakness. Fostering excellence is sometimes seen as promoting elitism. It may also result in knowledge that is simply not accessible to the general public, or their democratically elected representatives. In most Patron States there are recurring controversies in which politicians, reflecting popular opinion, express anger and outrage at support for various knowledge-based activities perceived, at the time, to be unacceptable such as child pornography in the guise of Art or fetal tissue research. With an arm's length council, however, politicians can claim neither credit for success nor responsibility for failure. Great Britain is the prime example of the Patron State.

9.42 The Architect State funds knowledge production and conservation through ministries, departments and specialized agencies. Bureaucrats, in effect, make grants. The Architect supports knowledge as part of its general social welfare objectives based on the historic tradition in western European culture since the fall of Rome. It was first practiced by the Church in praise of God then of Monarch & Nobility and today, of the citizen and culture of a nation-state. Since the arrival of ‘democratic’ government, the Architect role in the Arts, for example, has evolved from ministries of church affairs and culture to ministries of education and culture to a separate and distinct ministry of culture, and sometimes back again.

9.43 The Architect tends to support ‘established’ standards and practices rather than creativity, discovery or invention. The policy dynamic of the Architect is revolutionary. Inertia usually results after the entrenchment of established standards developed at a particular point in time. This, in turn, often leads to stagnation as has been observed with respect to the Arts in France (The Economist, August 3, 1985, 77-84).

This, in turn, may lead to a ‘revolution’ with the old guard thrown out and a new guard entrenching itself to repeat the revolutionary cycle. The ‘Tomato Revolution’ in Dutch theatre in the 1970s and its subsequent evolution demonstrates the dynamic (Chartrand & McCaughy 1989).

9.44 The strength of the Architect role is that government can target support according to its priorities. The weakness is that long-term funding can lead to creative stagnation. The most recent example of the Architect is design and development of national innovation systems. In these systems nonprofit academic institutions partner with government and private for-profit actors to create networks of specialized research centres in priority domains, disciplines, sub-disciplines and specialties (OECD 1997). Such centres are intended to facilitate commercial exploitation of new ‘academic’ knowledge and enhance the competitiveness of the nation. At the regional and local level this policy fosters ‘clusters’ of knowledge-based activities to benefit from increasing returns to scale first identified by Marshall as ‘industrial districts’ in the late 19th and early 20th centuries (Marshall 1920, 271). The contemporary incarnation is part of a ‘New Economic Geography’ (Martin & Sunley 1996, 282).

9.45 The Engineer State owns selected, critical and commanding means of knowledge production and conservation. Five examples will demonstrate. First, each nation state, irrespective of ideology, owns and regulates (subject to international treaty) the electromagnetic spectrum and related media of communications including broadcast licensing within its borders. Each consciously plans and decides how this resource will be allocated to further its national purpose. Second, Article XX sub (a) and (f) of the General Agreement on Tariffs and Trade (GATT), now part of the WTO single undertaking, recognizes that a country can control the flow of cultural materials in and out of its borders. In Islamic countries, this ‘morals clause’ is used to stop Western media and its ‘alien’ portrayal of women. In France - and most of Western Europe - ‘cultural filtering’ took the form of quotas on movie screens before the Second World War and then, after the war, film & television to assure ‘national content’ is available.

9.46 Third, each nation-state controls the privatization of knowledge and the status of the public domain through IPR legislation. Without such government action a market for new knowledge would be restricted by the public good nature of knowledge. As previously noted, the law is a cultural artifact, i.e., it varies in principle and practice between countries and cultures. IPRs therefore vary significantly between countries. Furthermore, unlike other internationally traded goods and services subject to harmonization under the World Trade Organization (WTO), IPRs are subject to the milder constraint of ‘national treatment’. This means a Nation-State must extend to foreigners the same rights it grants its own citizens but such rights need not be, and generally are not, the same – nation to nation. This ‘degree of freedom’ allows government to use IPR legislation as a 21st century equivalent of railroads and transportation infrastructure that made the Industrial

Revolution possible (Paquet 1990). The decision of Canada to exclude intellectual property from the North American Free Trade Agreement means that the government of the day either recognized the role of IPRs as critical policy instruments in a knowledge-based economy, or they simply were reserving judgement.

9.47 Fourth, each nation-state (at least among First World countries) owns and operates its own knowledge producing facilities. These include central statistical agencies, cultural facilities like that National Arts Centre, research laboratories, etc. While such publicly funded knowledge logically falls into the public domain, many governments have instituted ‘cost-recovery’ policies that price such knowledge out of the reach of many creators and researchers. In Canada, this policy has led many to rely upon American data sets for which the U.S. government does not charge or charges a modest access fees (Chartrand Spring/Summer 1997).

9.48 Fifth and finally, national security considerations are also applied by government to restrict access to certain types of knowledge in both the private and public sector. As the connexion between academic, for profit and public institutions matures under the umbrella of a national innovation system, it can be expected that such restrictions will increase reducing the flow of ‘free’ new knowledge. This is, alas, understandable given the growing problem of state-sponsored as well as private sector economic and military espionage. Examples include:

the long history of state-sponsored economic espionage by France (Whitney & Gainsford 1996) [K];

strategic considerations in development of ‘National Information Infrastructure’ (O’Connell & Tomes 2004) [L]; and,

international controversy over the Echelon satellite surveillance system (operated by the United States, United Kingdom, Canada, Australia and New Zealand - effectively the Anglosphere) that collects virtually all electronic communications on the face of the planet that can then potentially can be used for economic, political and/or military espionage purposes (Dailey February 24, 2000). [M]

9.49 Putting the pieces together, we have the output of a knowledge-based economy taking the marketable forms of the Person, the Code and the Work. Each either embodies, fixes or tools knowledge into a material matrix - personal, non-utilitarian or utilitarian. The Person, however, is duplex, i.e., it is both an output and the final consumer or user of Code and Works. These output results from combining (subject to four distinct types of technological change, the FLX, as well as government policy and practice) factors of production or inputs of personal & tacit labour, codified & tooled capital and toolable natural resources. The symbolic logic of the production function of a knowledge-based economy is presented in Exhibit 3: Production Function.

[A] “Definition of the “production function”: the technical relationship telling the amount of output capable of being produced by each and every set of specific inputs (or factors of production). It is defined by a given state of technical knowledge. (Samuelson 1961, 570)

[B] “Within the university ... you can study without waiting for any efficient or immediate result. You may search, just for the sake of searching, and try for the sake of trying. So there is a possibility of what I would call playing. It’s perhaps the only place within society where play is possible to such an extent.” Jacques Derrida (b. 1930), Columbia Quotations, #16117

[D] JSTOR Economics keyword search April 2003. HHC - The related term ‘embodied technical change’ first appears in 1964 (Nelson 1964). The first reference to ‘disembodied technological change’ also appears in 1964 (Fei and Ranis 1964) while ‘disembodied technical change’ appears somewhat earlier in 1962 (Colm, Cornwall & Smithies May 1962; Solow June 1962).

[E] “Implicitly, it modeled technology as designs for machines. This line of work lost its momentum, perhaps because of the difficulty people had in reconciling what is known about machine design with an initial cut that makes technology a public good… Recent generations of neoclassical growth theorists have not followed up … and have contented themselves with a force locomotif explanation: ‘Technological change causes economic growth.’” (Romer 1996, 204).

[F] JSTOR Economics keyword search April 2003. HHC - The term ‘exogenous technological change first appears in 1970 (Starrett 1970). However, the related term ‘exogenous technical change’ appears in 1952 (Hanson 1952).

[G] JSTOR Economics keyword search April 2003. HHC - The term ‘endogenous technological change first appears in 1966 (Lucas 1966) as does the term ‘endogenous technical change’ (Shell 1966).

[H] “Development, of course, covers a range of activities whose content differs widely from one industry to another. It generally includes the designing of new products, testing and evaluating their performance (which in some industries may involve the building and testing of prototypes, or experimentation with pilot plants), and inventing and designing new and appropriate manufacturing processes. In each of these activities, the role of minor modifications and small improvements that better integrate design and production, establish closer feedbacks from users to suppliers, and more effectively “tune” existing production methods, are critically important. Individually, each of these modifications and improvements will bring about some slight reduction in cost or improvement in performance. Their cumulative effects may, however, be immense.” (Rosenberg & Steinmueller 1988, 230)

[I] “New growth theorists now start by dividing the world into two fundamentally different types of productive inputs that can be called “ideas” and “things.” Ideas are nonrival goods that could be stored in a bit string. Things are rival goods with mass (or energy). With ideas and things, one can explain how economic growth works. Nonrival ideas can be used to rearrange things, for example, when one follows a recipe and transforms noxious olives into tasty and healthful olive oil. Economic growth arises from the discovery of new

recipes and the transformation of things from low to high value configurations.” (Romer 1996, 204)

[J] HHC: Technically, the short-run is that time period in which at least one factor is fixed. Increases in other factors leads to eventually diminishing marginal returns to such increases in inputs.

[K] “In an interview on NBC’s Exposé in September 1991, Pierre Marion, a former Director of the French intelligence service, stated that: “It would not be normal that we do spy on the (United) States in political matters; we are really allied. But in the economic competition, in the technological competition, we are competitors; we are not allied.” (quoted in Whitney & Gainsford 1996, S627)

[L] “In defense policy, the 1990s information-edge thesis appeared in different guises. Concepts such as information superiority, dominant battlespace knowledge, and decision superiority emerged as key elements of joint doctrine. National security strategy discussions focused on national information highways and critical infrastructure protection — key components of sustaining information-edge capabilities. In the most significant intelligence organizational reform of the decade, the National Imagery and Mapping Agency (NIMA) was founded with the mission of “guaranteeing the information edge.” By the end of the decade, the Department of Defense, the Central Intelligence Agency, and other national security agencies presented strategic plans aiming to sustain and expand America’s information edge while planning for increased volumes of information gathered from an increasingly diverse range of sources.” (O’Connell & Tomes 2004)

[M] HHC: Concerning a European Union report by Duncan Campbell, the Times reporter notes several alleged examples including: “… information learned through Echelon had been given to Boeing and the old McDonnell Douglas when they were trying to win a $6 billion contract from Saudi Arabia. His report said the spy network had intercepted calls between Airbus, the European consortium, and the Saudi airline and government officials.” (Dailey February 24, 2000)