The Competitiveness of Nations
in a Global Knowledge-Based Economy
2nd Draft March 2005
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Epithet
The delicacy or
coarseness of a tool has an important effect on the task which can be done
with it; we do not cut out cataracts with a buzz-saw or cut down trees with a
scalpel. Mathematics clearly has a
bias on the side of delicacy and exactness. Where the task requires delicacy, this is
all to the good. If however the
empirical universe which we are trying to know is not delicate, too great a
reliance on mathematics may be misleading, if it is not checked by good
judgment about the nature of the empirical universe itself.
Kenneth Boulding
The
Limitations of Mathematics:
An Epistemological Critique, 1955. |
1. In 1995 the World Trade Organization
(WTO) began operations and a new global economy was born (WTO 1994a). Today, 2005, virtually all member states of
the United Nations (UN) belong to the WTO with the notable exception of the
2. 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]
3. 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 Trade-Related Intellectual Properties and Services Agreement (TRIPS) that constitutes, in effect, a global agreement on 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 the complex WTO package that includes the General Agreement on Tariffs and Trade (GATT) (WTO 1994b).
4. 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, 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) including rights to traditional ecological knowledge or (TEK) as well as 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.
5. In 1996, the Organization for
Economic Cooperation and Development (OECD), whose members constitute the
6. 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, however, is that the
‘Standard Model’ of economic thought is theoretically inadequate to deal with
this new economy.
1. Economics has what I will call a ‘Standard
Model’, i.e., a generally accepted theoretical
model of reality. It is taught in
geometric, mathematical and deductive terms using standardized textbooks in
first and second year university courses around the world from
2. 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
1. Unlike the other humanities & social
sciences, economic epistemology, i.e.,
theory of knowledge, is rooted not in Platonic or
Aristotelian idealism but in Epicurean sensationalism. As noted by
2. 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).
3. 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, cause 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: “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)
4. 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) in which he argues 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).
5. 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 customs, traditions 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 parents at birth and sent to publicly operated crèches where they would be engrammed with the same customs, traditions and taste.
6. 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
7. 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.
8. A budget (income and prices) constrains maximization of self-interest (pleasure) by individual consumers for whom we can derive the industry demand curve while from the cost constrained maximization of profits by entrepreneurs we can derive 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.
9. 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 1952, 433-434).
10. Unlike the Standard Model in sub-atomic physics (Cottinham & Greenwood 1998), 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).
11. Beyond its normative and pedagogic uses, however, the Standard Model serves, as it will in this dissertation, primarily as a ‘straw man’. By changing 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).
1. 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). It is also 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]
2. 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 the production process contributes as does new knowledge developed exogenously to both. Also, through increasing division and specialization of knowledge, suppliers improve the quality and/or reduce the price of inputs decreasing cost and increasing final output. The productive effects of this increasing division and specialization of knowledge is most apparent in what Marshall calls ‘industrial districts’ (Marshall 1920, 271) [F] or what today we call ‘clusters’ (Martin and Sunley 1996, 282). Put another way, knowledge feeds on knowledge.
3. As a factor of production, knowledge therefore contradicts two fundamental axioms of the Standard Model: (i) eventually diminishing marginal product, i.e., if at least one factor is held constant then addition of a variable factor yields eventually diminishing returns or marginal product, and, (ii) decreasing returns to scale, i.e., even if all factors are variable in the long-run, as the size of the firm increases eventually diminishing returns kick in. 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.
4. 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 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 cost 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 foster, the division and specialization of knowledge that characterizes a knowledge-based economy?
5. 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 final 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
6. 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
7. 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). When economists assume asymmetrical
knowledge, i.e., when someone knows
but others do not, e.g., insider
trading, then problems of opportunism arise and mainstream theory crosses into
game theory wherein ignorance can be cured but at the price of the Standard
Model itself. 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 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, modern prophets, i.e., CEOs, seek profits. If, however, one assumes there is only
certain (or probabilistic) knowledge, how can there be a market for new, i.e., unknown, knowledge? How can there be an entrepreneurial role
different and distinct from that of an owner of capital, manager or
worker?
1. In summary, the Standard Model treats knowledge as a probabilistically certain, culturally blind, monotonic, rational public good that enters the production function of a firm or nation as an input but does not leave as a final, highly differentiated output. Even within this constrained framework, knowledge generates increasing returns to scale and disruptive innovations incompatible with the perfectly competitive outcome of the Standard Model.
2. Due in part
to the inadequacies of the Standard Model, policy debate about the
knowledge-based economy exhibits, at least to this and some other observers
(Cowan, David, Foray 2000), a certain ‘thinness’ of content and context. The purpose of this dissertation is to
‘thicken’ this debate and foster more appropriate national adaptation to what
is the mutagenic environment of a knowledge-based economy. Quite simply: knowledge feeds on knowledge.
3. Given the inadequacies of the Standard Model and the thinness of debate, a methodology is required to reach beyond the disciplinary frontiers of economics to collect, compile and collate ‘knowledge about knowledge’. My solution is ‘Trans-Disciplinary Induction’ or TDI used to harvest knowledge about knowledge from the event horizons of five disciplines of thought and interdisciplinary fields of study including sixteen of their sub-disciplines plus etymology, i.e., the origin and meaning of words. In the process I also hope to revivify economic epistemology (Parker 1993). While this dissertation is but a sketch, “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).