The New Economics of Knowledge

by Robert Grudin Copyright © Robert Grudin, 2007

Presentation for the Foresight Vision Gathering, Yahoo HDQ, Nov 3, 2007

The recent history of the Western world can be divided into three dominating economic models. The agrarian, land-based system of the Middle Ages was replaced in the 14th century by a money-based system that propelled the world economy through most of the 20th century. In the 1970's and 1980's, players like IBM, Hewlett Packard, Microsoft and Apple introduced a third, knowledge-based economic system, which was refined by Google into a self-sustaining tripolar Money Machine. The question now is whether Google or some other major knowledge industry will gear up to face the political and cultural challenges posed by the new economy.

Notes on the session:

Aside from the dizzying variety of supplies and services that they produce, corporations at heart are all alike. At heart a corporation is a suite of offices and a bunch of suits. What do these people mainly do? They handle knowledge. They receive knowledge from the outside world or from each other. They interpret knowledge, discuss knowledge, produce knowledge, trade in knowledge. One may say with a kind of crude accuracy that essentially business is the knowledge business.

The theory of the centrality of knowledge in economics was put forth in 1945 by economist Friedrich von Hayek (1892-1989). The implications of Hayek’s theory in terms of corporate management have been duly noted and form one aspect of the emerging field known as Knowledge Management.

Without much injustice to Hayek, one may extend his theory as follows: if corporations are intrinsically based on knowledge, the products of corporations – be they supplies or services – are themselves modules of knowledge. These products not only represent the knowledge that went into their creation but also increase or enhance their users’ knowledge of the world.

*****It is impossible to assess the character of a knowledge-based culture without first appreciating the phenomenon of Google is an enormous knowledge shop, and intellectual emporium whose users enter and prosper for free. Google’s real customers are the businesses who pay dearly to be prominently included in the knowledge that is lavished on the users. And Google does not merely dispense knowledge. It organizes, enhances, refines, decorates, demystifies, empowers and mobilizes the knowledge that is its substance. More fully than any other engine of its sort, more aptly than the proudest universities, Google realizes the character of knowledge, not just as the source of human wealth, but as the most essential form of wealth conceivable. This realization trumps Microsoft, Apple, Amazon and other internet pioneers who are materially driven and money-based.

But knowledge is much like any other commodity: oil, gold, sugar. The problem lies not only in possessing the commodity but in marketing it in an attractive and readily usable form. Universities and book publishers, who up to now have dominated the knowledge market, are strapped increasingly with problems of profitability. Try as they may, they either cannot package their knowledge effectively or, as I have argued elsewhere, they have chosen the wrong sort of knowledge to sell. Google, other the other hand, has developed an almost magical business model. It gives away essential forms of practical knowledge while selling commercial “real estate” in its broad knowledge base. Advertisers use this space to pitch their tents beside the trail of the mass pilgrimage to knowledge.

Considering Google’s tripolar money machine, it’s hard to avoid some rather extravagant comparisons. Google’s business model, in one sense resembles Felix Wankel’s legendary tripolar rotary engine (NSU RO 80, Mazda RX 7) that powers sports cars at high speeds with a minimum of moving parts. From a more anthropological perspective, it’s fair to say that Google has harnessed the key engine of a Gift Culture (the cost-free exchange of value) for a distinctly profit-making enterprise. This feat is economically unprecedented. To appropriate the power of the gift is to approximate the great gifts of nature, like sunshine and rain. By giving, Google has transcended the world of traditional economics and has become something like a force of nature. In this light one may, without offense to history or logic, discuss the Google model as an early step in post-Capitalist economics. The Achilles’ Heel of capitalism has always been the latent conflict of interest between buyer and seller, a disjunction that can be identified with the acronym BLSH (buy low, sell high). Sellers, who generally have more product-knowledge and more financial clout than buyers, are more likely to exploit this conflict, through aggressive and disingenuous marketing tactics. The Google model diffuses this conflict significantly. Its complex tripolarity includes two buyer-seller interactions that are offset by the essentially host-guest interaction between Google and its users. Three requirements must be met:

That the knowledge acquired is worth the users’ effort to acquire it

That the commerce so generated is worth the advertisers’ investment

That the advertising revenues and other revenues are adequate to guarantee Google a clear profit

If all these requirements are satisfied, then each of the three parties can serve its own best interests without diminishing the others. Indeed the Google model can fulfill the social dream of the free market by turning the satisfaction of other parties into a selfish goal.****

But Google, though rich in knowledge, is far from having closed the knowledge loop. That fulfillment can occur only if and when it widens its purview to include the social context of knowledge, the human reality that dictates the use of knowledge in an evolving world. What challenges does this world present? Suffice it to say that the technical knowledge provided by Google is currently falling under the control of people who are ill-prepared to use it. These people, as current events make abundantly clear, lack the humanistic savvy to make knowledge count in arenas like international affairs, macroeconomics, social justice, media strategies and even education. Since traditional education is falling far short of producing leaders appropriate for a knowledge culture, it figures that super-affluent players like Google may have to fill the void with educational and philanthropic programs of their own.

****Let us look at some of the ways in which corporations can be reconsidered in terms of the theory of the centrality of knowledge.

Knowledge Management and Communications. The phrase Information Age is predicated on the relatively recent development of highly effective electronic means to generate, communicate and store information. But information is not yet knowledge. In order to create real knowledge, information must be digested by human understanding and communicated effectively. It is only through such digesting and communicating that knowledge may be employed in the creation of value.

The people who digest and communicate knowledge best realize, at least intuitively, that knowledge comes to us in two distinct forms and that each form demands its own distinct type of knowledge management. As von Hayek puts it,

"Today it is almost heresy to suggest that scientific knowledge is not the sum of all knowledge. But a little reflection will show that there is beyond question a body of very important but unorganized knowledge which cannot possibly be called scientific in the sense of knowledge of general rules; the knowledge of the particular circumstances of time and place. It is with respect to this that practically every individual has some advantage over all others in that he possesses unique information of which beneficial use might be made, but of which use can be made only if the decisions depending on it are left to him or are made with his active cooperation."

Von Hayek here is revisiting philosophical ground first staked out by Parmenides and Plato, in the issue of the One and the Many. Von Hayek’s idea of scientific knowledge is analogous to the One: it is fixed, demonstrable, abstract. His idea of “knowledge of the particular circumstances of time and place” is analogous to the Many: elusive, personal and subject to change. This second form of knowledge is implicit in Michael Polanyi’s theory of apprenticeship:

"You follow your master because you trust his manner of doing things even when you cannot analyze and account in detail for their effectiveness. By watching the master and emulating his efforts in the presence of his example, the apprentice unconsciously picks up the rules of the art, including those which are not explicitly known to the master himself. These hidden rules can be assimilated only by a person who surrenders himself to that extent uncritically to the imitation of another."

How can a corporation account for both types of knowledge? By establishing a duplex infrastructure of knowledge management. Scientific knowledge will be arranged as it has always been: by communications to and from a centralized knowledge bank. Nonscientific knowledge will be nurtured by creating personal relationships via tutorial, conviviality, seminar, mentorship and internship. Scientific knowledge will be communicated via scientific symbol and strict analysis. Nonscientific knowledge will be communicated via narrative, humor and example.

If the real power of a corporation rests more in its channels of communication than in its hardware and software, other strategies are indicated as well:

-Architectural design encouraging the free flow of ideas. Corridors with windows and built-in conversation nooks. Private offices communicating not only with corridors but across a courtyard.

-Transparency from the top. Top management sets the tone by respecting employees’ intelligence, stepping up to take responsibility and adopting a policy of disclosure, while also remaining open to communications from all.

-Non-stop town meetings, via chat-rooms and interactive websites.

-The use of retreats and mini-retreats as a means of opening up new levels of dialogue.

-Campus-style facilities (library, fitness room, espresso bar, cafés, restaurants, etc.) as a way of establishing and sustaining new networks of communication.

-Communications with the outside world, coordinated by a single office.

****Strategies of this sort are unlikely to evolve out of existing conditions. They work best when implemented all at once, as they might be by an incoming CEO. What happens when these considerations are ignored – when big shots fail to recognize the centrality of knowledge – is a comedy of errors played out in terms of deficits and closings. Two of my less savory consulting jobs may be illustrative:

I once traveled to an eastern city to brief the staff of a prominent foundation that I’ll call the Bunch of Money Institute. I boarded the plane in some trepidation, for I had actually received two different invitations, one official and one from underground. The official invitation, along with a check for expenses, came from the foundation’s director. The underground invitation, along with demands for me to observe total secrecy, came from a previous director, who had learned from a spy that I was on my way. She wanted me to brief her on what I saw and heard during my visit. And what I saw and heard was rather daunting. The Bunch of Money Institute staff, who were supposed to be handling areas of knowledge critical to America’s future, were cruelly housed in a little warren of cramped and poorly interconnected offices. Corporate disregard for healthy communications was glaringly evidenced by the lack of a single conference room. The director, who busied himself with external affairs, treated staff members rather aloofly; and staff members told me at lunch that the entire foundation was a rabbit warren of competing secrecies.

Situations like this regularly develop in organizations that do not value knowledge, and when they develop they unfailingly cripple the organizational mission. Such failures in communication, moreover, are not confined to hidebound, top-down corporate structures. As I mentioned earlier, they inhere even in tiny start-ups, where the entire staff sits together in a single room. Here poor communications are a function of ignorant leadership: of CEO’s and COO’s who hoard information rather than enriching their colleagues with its power. Ironically, these executives are often oblivious to valid information that is available from the lower echelons or from outside sources. Instead, they remain intent on shoring up public relations, grasping for short-term goals and refining their mechanisms of control.

**** Knowledge as Authority. In a knowledge-based economy, respect must be awarded to the knowledgeable, not matter what their level of seniority. This presupposes a management structure flexible enough to let a junior colleague set the agenda if he or she carries moral authority on the day’s topic. This also means living by the premise that knowledge is the only dependable source of success. The following excerpt form a Lotus ad suggests the enshrinement of knowledge in the corporate value system:

"MERE MORTALS MANAGE PEOPLE AND MONEY. YOU MANAGE THE KNOWLEDGE OF THOUSANDS. When you can find the best person for the job in your global organization, that's knowledge management for e-business. When your company's best thinking is just a few clicks away, that's knowledge management for e-business. When you can bring all this together instantly, that's knowledge management for e-business. How do you do it? With that helps e-business people work together."

Lotus, New Yorker, Mar 6, '00, p. 3

Knowledgeability may be promoted not only by rewards and promotions but also by bringing the learning process onto the corporate campus as courses leading to forms of certification.

A Knowledge-Intensive CEO. The CEO of a knowledge-centered firm should not only reward knowledgeability but also should be the most variously knowledgeable person in the corporation. Only such thorough knowledgeability will enable the CEO to prioritize corporate aims and to translate the concerns of one branch to the corporation as a whole. This latter process suggests another talent required for leadership. The CEO must be an expert at demystifying knowledge: of making the achievements or concerns of one specialist available to another. We have heard time and again that CEO’s ought to be excellent communicators. Now let’s make sure that each of them has something to communicate.

A Chief Knowledge Officer. The preeminence of knowledge in business suggests that a corporation would be well served by hiring on a Chief Knowledge Officer at the rank of vice president. This CKO would be qualified in the latest methods of knowledge management, would facilitate and oversee the flow of information within the company, and would coordinate various exchanges of knowledge with the outer world, from learned conferences to advertising. The Office of Knowledge would number among its responsibilities the maintenance of the corporate library and the administration of courses and guest lecturers. Most importantly, along with the CEO, the CKO would also be responsible for establishing and upholding the values of a knowledge-based corporate culture. The CKO would remind colleagues, when necessary, that the intrinsic worth of the corporation is dependent on the good it brings to the world at large. The CKO would keep the corporate conscience alive and well. Finally, along with the CEO, the CKO would preside over a corporate culture in which the most valuable forms of knowledge are expressed in the language of ideas.

Corporate Consciousness. A young chemical company once asked me to find out exactly how it could approach a huge pharmaceutical corporation with a new application. I picked up the phone, appealed to a few contacts, and after about four hours finally reached a human voice in the giant firm’s research division. The chat was friendly enough, but along my telephone peregrinations, the body language had been eloquent: the last place on earth to approach with the results of your own research is a corporate research division. They cannot help but see your approach as a threat to their job security. The strategies recommended in this chapter make it clear that we are designing quite a different kind of corporation here: a firm whose prioritizing of knowledge gives it a form of group consciousness. This consciousness not only makes the company more effective in handling knowledge both from inside and from outside; it also provides perspective on the external social issues relating to corporate strategy. Through such a perspective a corporation can reach out for the most valuable knowledge of all: a self-knowledge that can position it in the healthiest part of the market and guard it against abuses from without and within.

The strategies outlined above are intended to open up a fresh perspective on corporate design in the 21st century. To set up a corporation centered around knowledge is, most importantly, to place that corporation in a moral universe, a context in which the behavior of any economic segment affects the well-being of the whole marketplace. “Conscious” corporations are able to look downrange and consider which strategies will strengthen and enrich the marketplace and which will not. Wise planning of this sort may sacrifice quick profit, but is more likely to lead to long-term growth. “Market Morality,” on the other hand, with its attendant opportunistic and exploitative strategies, is a sure ticket to trouble in a knowledge-based culture.

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