The Knowledge Economy is the Economy

When I started this blogging chapter in an attempt to find the answer to the question in the blog “What does a knowledge economy look like”, I had some half-formed ideas as to where I might go with all this, but nothing to really tie the threads together. I think I do now.

It’s a framing problem.

Here is a framing problem. Which came first, the duck or the rabbit?

Brugger and Brugger (1993) found that children shown the above figure were more likely to see a rabbit if asked on Easter Sunday, while children tested on a Sunday in October tended to see it as a duck (See this for details).

The blogs “The World is Getting More Complex – Or Is It?” and “The World is Changing Too Quickly! 1898 Version” also respond to a framing problem. It is such a truism that the modern world is getting more complex that people tend to take it as their frame and just look for (or assume) confirmation of the belief. For the most part, the idea that it may be questioned in whole or in part is rarely entertained or looked for.

The blog “Common Knowledge” in which I asked “Robinson Crusoe had a simple economy – or did he?” reflects framing problems on two levels. First, economists cannot see a resource allocation problem without framing it in terms of scarcity, and so they typically frame Crusoe’s problems in terms of scarcity, despite his eloquent and detailed protestations that he faced no such problem.

Second, Crusoe’s choices in Mankiw’s example are typical of such exercises in economics textbooks in being framed in terms of activities (providing and consuming goods or services) in which all relevant knowledge was assumed to be in Crusoe’s possession – despite the fact that in the real (that is fictional) Crusoe world he devoted a great deal of his time and resources to knowledge activity.

This in turn lead to the biggest framing issue of all – the disciplinary frame of economics itself as set out in the blog “The Complexity of Economics and the Paradox of Mankiw”. As Mankiw notes “economists … study how people make decisions; how much they work, what they buy, how much they save, and how they invest their decisions” (1998, p.4), with Mankiw describing “parents deciding how to spend their family income. They can buy food, clothing, or a family vacation. Or they can save some of the family income for retirement or the children’s college education” (1998, p.4).

The problem here lies with what we mean by “decision”, which like “innovation” is one of these words in English which can mean many things, including an act or a process. The economics frame of reference typically sees “decision” as an act or choice between competing alternatives. But in reality it can be difficult to fully specify in advance what a meal will taste like, how people will react to your new clothes, what a vacation experience will be like, and what quality of retirement or education your savings will provide. In many of these cases there may be some uncertainty as to the nature, value and or cost. This may involve the individual or household undertaking search, experimentation, review and assessment activities, and this may even continue after the initial purchase has been made. The maintenance of this artificial divide between knowledge and non-knowledge economic activity is reflected in Mankiw’s description of the parents “deciding” in his example

But, in reality in such cases it is decision as a knowledge generating and organizing process that ultimately matters for outcomes and resource costs, and indeed in many cases the actual choice stage may absorb little in the way of resources and time. For example, Hamlet is a play revolving around a decision (“to be or not to be …?”) and the whole of “Hamlet” is based on the decision process here and how its constituents and influences ebb and flow over time – and not just the period of the play, but over time that went before. A conventional economics formulation of this as decision expressed as simple choice between alternatives (once you have the knowledge as to what “be” and “not be” are here) would have led to a very short play and extremely disgruntled audiences.

The point of all this is that process – and the generation and accumulation of knowledge – can be integral aspects of economic behavior even where their presence is either ignored or underemphasized. The problem is that even where the existence of knowledge activities is recognized in economics, the convention – or frame – has been to treat them as residuals or add-ons which can somehow be treated as separable and isolatable from “normal” economic activities, as in Machlup’s early (1962) analysis of the economics of knowledge in the United States which was largely concerned with what he described as the knowledge “industries” of education, R&D, communication and information industries.

At this point the idea of writing this chapter as a series of blogs really comes into its own. After reading my blog on the Paradox of Mankiw, Professor John Foster (Economics, UQ), wrote to me that what he thought was needed was a “‘Principles of Economics, Volume 2’ i.e. the one (Alfred) Marshall never got ’round to writing”.

Now Marshall is widely regarded as the first modern economist who saw that; “knowledge is our most powerful engine of production” (Principles of Economics 4/1/2) and indeed he saw that economics itself “has … as its purpose firstly to acquire knowledge for its own sake” (Principles: 1/4/5). So, suppose we sketch a “Principles of Economics Volume 2” and subtitle it “The Knowledge Economy”; what would such a sketch contain?

“Principles of Economics Volume 2; the Knowledge Economy” would certainly build on aspects relating to knowledge activity such as bounded rationality, transaction costs, behavioral theory, evolutionary processes, complex systems, and the role of institutions. It would cover not just Machlup’s knowledge industries but most of most firms (think design knowledge, legal knowledge, marketing knowledge, etc) and most other institutions in the economy besides. It would cover innovation, hierarchy and organization where a Volume 1 like Mankiw would just cover markets. It would cover networks and alliances and entire firms not usually associated with the knowledge industries, like Nike which is essentially a design and marketing organization. Is this all economics? Well, if economics is about allocation of resources under conditions of scarcity, yes this is all about economics.

And this is where the notion of frame again becomes important. Why should John Foster’s volume be Volume 2? Suppose we switch the frame and call it instead “Principles of Economics Volume 1: the Knowledge Economy”. If we did that and reversed the order, how much of economic matters would be left over for what would be now “Principles of Economics Volume 2: the Bits of The Economy Where Knowledge Activities Are Not An Issue” – in other words, the conventional introductory economics Mankiw-type text?

The answer is, not much. It would be like a one-line Hamlet (“question: to be or not to be? – please delete which not applicable”) without the ambiguity and uncertainty. All the interesting, time consuming and resource-absorbing activities – that is, all the knowledge activities – would have been covered in Volume 1 on the Knowledge Economy. If you really do have enough in terms of quantity and quality of information to maximize your utility or profit (the conventional basic economics Mankiw frame), then the decision (choice) is already made for you, you just feed the information into your cognitive or mechanical calculator, press a synaptic or keyboard button, and watch the answer pop out. The real economy, the one where the actual work is done, the one that absorbs resources, takes time, and has real decisions (not mere choices) is the one that would have been covered in the volume on the Knowledge Economy. In short, once it is seen in its proper frame, the answer to my introductory question in the blog “What Does a Knowledge Economy Look Like?” is quite simple. The knowledge economy looks like the economy. That is because to all intents and purposes it is the economy. It is just a matter of choosing the right frame.

And of course the frame you start with will influence what you see later, which is why well-trained orthodox economists find it difficult to frame resource allocation problems as being about anything other than prices, markets, and decisions expressed as constrained maximization choices. The frame is the real economic problem, as generations of MBAs who get a proselytizing orthodox economist to teach them introductory economics could testify (and to all these MBAs I humbly beg forgiveness on behalf of my profession – sorry MBAs, you were right all the time….)

This has been a great experience and opportunity and I now have to tie these threads into something coherent. My thanks to Tim and John for letting me do all this and to those who have given valuable comments on-blog or off-blog (please keep them coming).

(P.S. if you are interested, some key words to Google here are Kahneman, Tversky – and Nudge)

Student and teacher of innovation - University of Queensland Business School - links to academic papers, twitter, and so on can be found here.

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2 thoughts on “The Knowledge Economy is the Economy

  1. Great points on the bias of framing, an issue that we really can’t escape. I would say that the previous economy was framed around standardization, but that competition and internal contradictions in standard processes exposed the limits of this frame reverting us to a more natural and complex state.

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