Value creation of the knowledge-based kind
A key assumption has thus being established: that of a qualitative difference between natural principles for the behavior of objects (mostly physical, chemical and physiological processes) and natural principles describing the behavior of ideas and emotions (mainly neurological, psychological and cultural processes). A corollary being the impact such difference makes on the economic and social dynamics of each realm. For example, insofar products of human activity upon matter and energy are determined by space-time conditions, legal and social norms regulating production, ownership and distribution are constrained by physical possession, thus generating property laws.
In a similar vein, the wasting of industrial production lines is thermodynamically determined, resulting in diminishing returns. Insofar as work involves an energy cost, each successive unit in mechanical production lines carries a cumulative waste of and moving parts, lubricants, etc. The relative cost of each successive cycle experiences a marginal increase. Due to a relentless entropy, each single factory is inextricably subject to this constraint and has to re-invest continually in eventually replacing every mechanical component of production lines. This is unlike the latest operating system version by a software company, or hit by a pop singer, or trending topic in social networks, or breaking news by a media channel, or viral video, which may be delivered at no additional production cost thousands or millions of times. In k-based production the return of each successive unit remains constant. Such simple fact has deep implications and has drastically transformed business models. Apple’s iTunes Store, for instance, carries well over a million apps, has paid more than 13 billion to developers and by the end of 2014 set a new 75 billion downloads mark.
It is generally recognized that knowledge is a leverage to economic growth and that it has special properties such as partial excludability, non-rivalry and increasing returns (Romer,
1990; Amidon et al.,
2005; Commonwealth Department of Education and Training (
2012)). However, we still might be far from understanding its nature and harnessing knowledge-based value dynamics potential. Since 1986, Brian Loasby had realized: “It is now becoming widely recognized that many of the central unresolved problems in economics turn on questions of knowledge” (Loasby,
1986, p. 41). Even if overwhelming counterexamples to received economics views abound, only a few hints and conjectures about the new realities are available.
The poorly understood properties of represented economic objects is exemplified by cloud computing. Professor Chris Reed, from Queen Mary, London claimed: “The problem is that our understanding of property is based on material objects”, when discussing the case of an entrepreneur whose property rights over all his cloud-stored files were legally challenged, once the servicing company was confiscated by US Government (Heaven,
2013, p. 35). Reed noted that, “While the government's defense may sound ridiculous, it is on pretty firm legal ground” so long as … “Possession, which is sort of what property is all about, is irrelevant” (Heaven,
2013, p. 35). Cloud storage services, unlike physical storage, it may reside partially in several locations at once, be constantly shifting amongst server locations and be downloaded and re-uploaded continuously by many individuals far beyond the author. With such a rapid growth that it is expected to become the main world digital repository by 2020, cloud storage often leads to unforeseen scenarios (Anderson & Rainie,
2010). One such scenario has unfold regarding the legal status of acquiring (limited) use rights but not necessarily property rights in e-books and music re-selling (Streitfeld,
2013). Heaven (
2013, p. 36) concludes: “Untangling relationships with your possessions in the cloud quickly gets confusing”. Ownership is a major issue being re-defined in the knowledge economy.
The ongoing dispute over Internet state sales taxes in the USA provides another such confusing scenario. The legal definition of “nexus” has proved to be a key element in a lengthy federal regulation ordeal. Nexus denotes the extent to which a company has physical presence in a state becoming proportionally subject to local taxes on sales and income. The distinction has proven so slippery that Amazon, in a long dispute, sustained it had no physical presence in Texas, despite the fact of owning and operating for 15 years of a 630,800 square-foot distribution center. The distinction between brick-and-mortar and internet-based business became central to this dispute and forthcoming legislation. Barns & Noble, the once dominant bookstore chain, has meanwhile lost market to Amazon, that stopped claiming to be “Earth’s Biggest Bookstore”, since it is now more than that.
Thus, the universe of possibilities that determines the nature of material-based value dynamics is contained by physical reality. By far, economic theory, management practices, accountancy systems and policy making have been dominated by physical realities. As noted earlier, knowledge-based realities are with us since the dawn of mankind—i.e., since the origin of human psychological life. Management, both private and public, have been puzzled by the pervasive and often neglected role of intangibles.
Frederick Soddy, the 1921 Nobel laureate in chemistry, who anticipated the distinction required to understand the interplay between wealth and debt, between material-based and knowledge-based production, has offered one of the most perceptive insights into the distinctive bases of economics. His naturalistic monism is consistent with a complex systems perspective: “The principles and ethics of human law and convention must not run counter to those of thermodynamics” (quoted by H. Daly,
2009, p. 3). The interplay between knowledge-based and material-based value creation needs to be culturally acknowledged and assimilated. Such achievement may require a three-phase distinction between physical capital, monetary capital and intellectual capital, synthesized in a unified theory of value (Carrillo,
1998; Graeber,
2011).
So far knowledge-based realities, despite their ubiquity, have not been granted an ontological status as that of material and monetary units. Precisely because of this fact these dimensions are deemed “intangible”. The way measuring intellectual or knowledge-based capital has been tackled reflected such ambivalence. Hubbard (
2014) defaces “The Illusion of Intangibles”, showing how intangibles measurement is at the core of current misconceptions concerning the role of measures in our received industrial culture. The limits to development of knowledge societies will be set by the capacity to understand and represent collective value (Carrillo,
1998,
2006b; Stiglitz, Sen & Fitoussi,
2009; Lin,
2012; Carrillo & Batra,
2012).
Actually, money –of the printed and above all digital kind that makes by far the bulk of global wealth- is not less ethereal than ideas or beliefs. In fact, it is a promise sustained by a belief, and less substantial than software or technical procedures. Nevertheless, money has been at the core of economic life and the shaping of culture. Michael Reiss puts it succinctly: “It is not much of an exaggeration to say that the history of economics has been a history of mankind’s attempts, and mostly dismal failures, at establishing and sustaining a stable monetary system” (Reiss,
2011, p. 20). It is obvious that national accounts and the productivity these rely on are still restricted to physical assets and monetary base. The extent to which this restriction constrains the universe of management and strategic development is less obvious. Remaining by far the limits to organizational and political language, physical and monetary dimensions remain, in Wittgenstein’s criterion, the limits to the world (Gudeman,
1986).
So long as these limits are challenged by contradictions from within and realizations from outside, alternative paradigms will emerge. The worlds of formal economics, management and politics are bound to be subverted by the ever-increasing role of behavioral or knowledge-based realities and their natural weight in human affairs (Carrillo,
1998; World Bank,
2015).
As mentioned before, human production stemming from ideas and emotions, by lacking the constraints of physical production, has natural a dynamic of its own. However, no proper theory of the knowledge economy is yet available. Subsidiary theories have been advanced at the organizational level such as the Knowledge-Based Theory of the Firm. At the societal level, Development Theory has attempted to capture the novel role of knowledge, as in Endogenous Growth (Romer,
1990). Yet, most of these attempts have been isolated and short-lived. Contributions have been made at both the organizational (Sveiby,
2001; Grant
2002; von Krog & Grand,
2002) and societal levels (Romer,
1990; Asian Development Bank,
2007) to substantiate the need and prescribe specifications but there is a long way to go towards a Theory of Knowledge-Based Value Production.
Kuhnian scientific revolutions involve an increasing acknowledgment of counterexamples to prevailing paradigms, those boundary cases defying received views or new conjectures challenging prevailing theories. While a formal knowledge-based production theory has yet to be produced, some novel elements are beginning to emerge.
A deconstruction of the market economy deeply rooted in industrial capitalism was undertaken by De Long and Froomkin (
2000). They pointed out the increasingly obvious limitations of conventional market attributes to deal with knowledge-intensive production along three axes: excludability (sellers capacity to prevent access to a good), rivalry (depletion of a good caused through an agent using it) and transparency (individuals ability to choose what they want to buy). Once these three axes are disrupted through new production and distribution processes, market failures and externalities unleash (Romer,
1990; Carrillo,
1998,
2014; Amidon et al.,
2005).
In a broader attempt, the following distinctive features of knowledge based value production were recently identified by Australia’s Commonwealth Government, Department of Education, Science and Training (Commonwealth Department of Education and Training
2012): non-subtractive (several agents can use it at a given time), non-scarce (renewal capacity is the only limit to use), use independency of cost (cost remains the same no matter how many people use it), easily replicable (once having an item, as many copies as desired are possible), creation cost independency (high value outputs rendered by low cost inputs and process), rapid obsolescence (knowledge can depreciate very quickly), ease of transfer and globalization (knowledge can travel quickly and efficiently through frontiers).
Table
2 compiles distinctive attributes of knowledge-based production (Carrillo,
2006a).
Table 2
Knowledge-based production attributes
Non-excludability | Access to a good by an agent does not prevent access by another agent |
Non-scarcity | A good can be replicated indefinitely at no extra cost |
Non-decrementality | The rent value of successive product units xi, xii, …, xn, may not diminish as a function of iterations of the production cycle |
Capital/labor convertibility | Labor may simultaneously operate as capital and become the most critical factor (e.g., talent-intensive companies) |
Ubiquity | A good may be simultaneously available to anyone, anywhere |
Time and context dependency | A good may decrease in value as a function of time and sometimes may become obsolete soon after it is being released |
Connectivity | The sum value of a network increases as the square of the number of members |
Intangibility | The market value of a firm can (largely) surpass that of its book value |
Externalities | Unintended consequences, both positive and negative, can (largely) surpass the value of producing a good |
Value production principles and its impacts through culture and social organization are bound to explode as the new millennium unfolds. The continuity of human civilization might depend upon human capacity to grasp such principles and redesign coexistence terms, across nations as well as with the planet.
Hence, KBD needs not be constrained to drivers of economic growth such as R&D, innovation, competitiveness, education and intellectual property. Such constrain should be lifted also on initiatives so far regarded as knowledge-intensive: technology transfer centers, science parks, business incubators and accelerators, techno-poles, industry clusters, innovation regions and so forth. Being the current forefronts of the knowledge economy, each has a distinctive purpose and applies to well-defined realms. All were already in use by the 1980s, before knowledge-based development took off at the dawn of the new century. If KBD can be reduced to any of these concepts or even to the sum of all, then it should be abandoned since it would prove redundant (Carrillo,
2006b,
2014).
The search for an coherent model of human value is driven by the urge to capture and codify the systemic unity of net human-created worth as much as by as the realization of the growing limitations of the economic establishment. KBD must be the foundation of an economic system allowing the visualization and management of total human activity value. While science and technology, infrastructure and innovation, should be included, also should societal attributes relatively disregarded such as identity, intelligence, cohesion, resilience, transparency, equality, diversity, tolerance, renewal, attractiveness, etc.
Paradigmatic roles and institutions of the industrial culture need to be revised within this context. It becomes necessary to redraw the tacit 20th Century contract inherited from industrial societies under these considerations. A new breed of organizations redraw the political and economic world map while the economic categories in force depreciate. Emerging species such as knowledge markets, distributed work and learning, value networks, competencies and technology brokerage, knowledge citizenship, talent auctions, expertise pools, illustrate this ongoing evolutionary process.