Understanding the Knowledge Economy

by | Mar 9, 2009 | Uncategorized | 0 comments

I started a conversation with Mitch Joel after listening to the Media Hacks podcast Show #4  and he urged me to blog about it, so here it is.  (If you aren’t already listening to Media Hacks, you should check it out.  In full disclosure, the minds behind the show- Mitch Joel, Julien Smith, Hugh MCGuire, CC Chapman, Chris Penn and Chris Brogan are all friends of mine, so for me, it’s like hanging out with them at a conference, with every episode getting better and more interesting.)

The latest Media Hacks started out by discussing the economy, and how the internet is fundamentally altering the old distribution networks of traditional businesses, specifically newspapers and books.  This hit a nerve with me, because I’m reading a fantastic book, Unjust Deserts- How the rich are taking our common experience and why we should take it back by Gar Alperovitz and Lew Daly.  This isn’t the lightest read around, but the information and the implications for understanding the latest disruptions caused by the Web are worth it.  Unjust Deserts starts out discussing how the accumulated knowledge we have to date, and the ability to spread that knowledge, has allowed us to maximize the amount of economic output we can get from the hard inputs into the system.

For those who may not have taken economics, or it’s been a while, the principal is this.  I can take a ball of yarn and knit it into a hat.  The inputs are the yarn, the needles and my labor- the output is a cute hat for a friend’s baby.  The value of that hat in the economy is the sum of the inputs- yarn + Needles + Labor = value.  Like in accounting, the inputs and outputs are roughly balanced.

But this one to one ratio has been changed dramatically over time.  Workers can be more productive, and we have been able to lean on what we all know in order to develop machines and means of communication that mean each of us doesn’t have to reinvent the wheel every day- we can take the word of others, build upon their work, and then add upon that, leberging what came before to add yet more value.

Like the knitting example, before we could all read and write, everybody had to learn only from the people they had contact with, and information and innovations were passed down through word of mouth only.  But once we started collecting this information together in writing, we could then let it coalesce and use this base knowledge to invent new things that built upon the old. (This is why basic literacy is so important, and why it’s also a threat to many governments, still, around the world.  You let people learn to read, then they start sharing ideas and having opinion, and then how do you maintain control??)
So, for example, basic math- addition, subtraction and the like was fine, but algebra let us start thinking about solving the unknown, and was a key factor in developing more advanced math, which then let engineering take off.  Geometry let us work out things about architecture, form and structure, that once we understood the principals, we could easily replicate and build upon that foundation.
So now what happens when we all have all the previous knowledge of mankind at our fingertips on the web?

For a long time, there was a pretty much 1 : 1 ratio of hard inputs (materials, labor, etc.) into ultimate value, like the knitting example above. Up until the 1970’s, balance sheet equity (cost to replace all the physical assets and inventory of a business) and market value for most companies had close to a one to one correlation. However, by 2001, this ratio became closer to 6:1, with the market value of companies far exceeding their balance sheet equity.  Where did all this extra value come from?  And how does this invisible value relate to the current economic implosion?
(You’ll understand market value versus balance sheet equity better if you ever watch BBC’s Dragon’s Den.  Entrepreneurs are seeking funding from a few wealthy investors, called the Dragons.  The entrepreneurs usually put extremely high values on their companies, and the Dragons frequently balk at this, since the balance sheet equity is WAY smaller than what the entrepreneurs think their company is worth.)
The secret to all this extra value is the Knowledge and intellectual property of a company. It allows us to make more output with less input. In fact, you can see this in companies like Microsoft, where the invisible, intellectual capital they control is more valuable than anything they produce that you can physically touch.

The disruption caused by the internet is all about the Marketplace of ideas and innovations. We’re all trying to do things faster and more efficiently, factoring out the traditional barriers of place and time. The value is in the knowledge and in the intangibles. It’s the intellectual property- coalescing in one spot to make new breakthroughs- that is driving most of the new value, not new mines, forests, resources, more workers, or any of the more traditional ways groups got together to more efficiently produce their “output”. This means the new economic winners will be those who learn to leverage the important pockets of knowledge in such a way to make progress, solve new problems and eek out additional efficiencies, based not on their work alone, but the cumulative knowledge now available to us all on the web.

So where’s the problem here?

Just on-time delivery, perfected by the advent of services like Fedex and other immediate transportation services meant individuals, businesses and even factories could maximize productivity until they hit the wall on what they could produce and what people would buy. (This has a nifty side effect of also making the whole supply chain extremely vulnerable to any disruptions in any link in the chain- one person along the way messes up, the whole thing collapses.)

Now in the knowledge-based economy, we’re going to hit a point , like with just in time delivery, where we can no longer take the slack and waste out of the system. We’ll eventually approach a point of ultimate efficiency, after which there won’t be any more fat to cut away. You still will only be able to go through so many emails a day at peak efficiency; any increase in speed is not necessarily going to give you a greater ROI in the end.    What then?

There are still limitations on the amount of work any one person can accomplish, even if we stand on the shoulders of giants and have access to anything we want to know with a few keystrokes into Google.  Yet, the people who understand how to take these strands and re-weave them into new industries, new products, and the new economy will have tremendous advantage.  You need to know so much more that ever before and be able to spot opportunities-meaning we need to spend time not only learning, but listening and waiting for the opportunities to fill in the blanks in needs, not just wants, of the consumers.

Next Post:  How mass customization isn’t the whole picture, but part of the whole.