Knowledge and the economy

Subtitle: Collaboration in innovation – A love-hate relationship

Any endeavour that exceeds the skills and resources of an individual or that entails significant uncertainty and risk benefits from collaboration. At the same time, we have a very human inclination to share only the risk, while retaining the benefits for ourselves. This desire for selective sharing defines a love-hate relationship that applies to innovation as well: pushing the limits and expanding the boundaries implies that the first naturally bears all the risk (we are very ready to share it), but he will also reap the benefits (we’d definitely like to keep this for ourselves).

I’ve looked at collaboration and competition in innovation in an earlier post, discussing the interactions between the various stakeholders. Today, I’ll focus on the reasons why collaboration is especially beneficial and particularly difficult in innovation. The benefits are best understood through the way we pursue science and develop technologies, while the difficulties originate from the very essence of knowledge and how that relates to our economy.

Why innovation needs collaboration …

Science, or more specifically the scientific method as we execute it today, is fundamentally built on collaboration between scientists. Science needs the sharing of results across the scientific community, so that ideas can be challenged, tested, and verified or falsified. A single scientist in an isolated laboratory may find the perfect solution for a global scale problem; but as long as he doesn’t share his results with his peers, that single brilliant idea might have a lot of potential, but it will not be applied as a solution. No collaboration, no progress.

In the area of fundamental or basic science, we can easily find numerous examples of intense, large-scale, even international collaboration. Just think about astronomy or space exploration. When a project is pushing the boundaries of knowledge, with significant uncertainty over the final results, there is the willingness to share resources as well as results.

Viewed through a technology lens, one source of innovation is the co-evolution of society and technology areas. In this sense, it is essential to expose a technology area to different societies in order to realise its full potential. This is again a call for international collaboration to promote innovation.

But what seems straightforward and achievable in the abstract domain of fundamental science and technology areas becomes increasingly difficult the closer we get towards concrete solutions, be it in applied sciences or in developing individual technologies. That is where innovation enters a field of distinct economic interest; the investments made must pay off, be it for the scientists and engineers (salary, royalties, reputation), the company (product sales, market share), or the society (employment, economic growth). That is the domain of patent systems, Intellectual Property Rights, or anti-proliferation policies, which are all set up to secure the interests of those who made an investment. And that’s where collaboration get’s difficult.

… and why that’s so difficult to achieve

Knowledge, its generation and application are foundational for innovation. But knowledge has a number of characteristics that make it universally useful and difficult to handle at the same time, especially in an economic context. I understand the economy as the institution that organises the exchange of goods and services: it is the market place where I can trade skills or resources I have and in return obtain services or goods that I need. And in order to make a living over a longer period of time, I need to protect my assets and ensure that I don’t deplete my resources.

Knowledge is one of the goods that can be traded in this market place, but as a resource it has quite particular characteristics. Knowledge is non-rival: it can be shared and traded without reducing the stock; I can give it to you and still use it myself. In the words of Thomas Jefferson:

He who receives ideas from me,
receives instruction himself without lessening mine;
as he who lights his taper at mine
receives light without darkening me.

As a result, this resource cannot be depleted. That’s what makes knowledge such a sought-after resource; if you have knowledge, you can keep selling it as long as you have willing customers who don’t yet have it and are willing to pay.  So far, so good.

But then comes the second important characteristic: knowledge is non-excludable: once it is created, everybody who has access can use it. That’s where every former customer of yours becomes you competitor, as he may well sell your –his– knowledge to any other customer.

Obviously knowledge and economy have a troubled relation, partly a bliss, partly a curse. In How Economics Shapes Science, Paula Stephan provides a detailed analysis of this relation, focusing on the economics of science and the challenges scientists are exposed to through the economic context of their work. Stephan highlights that from an economist’s perspective knowledge has the characteristics of a public good (being non-rival and non-excludable). Specifically, public goods invite free riders, i.e., beneficiaries of the results who did not participate in the risk of the initial investments. As public goods do not offer any incentive for an investor, the market cannot provide for them. That’s the reason why public goods –as their name suggests– depend upon public investment (think for example about infrastructure).

However, and despite knowledge having the key characteristics of public goods, not every piece of knowledge is the result of public investment. On the contrary, knowledge is often a competitive advantage in business, and it is protected against sharing, i.e., undesired collaboration. I’ve already mentioned patents, IPR, and related policies, which all are attempts at making knowledge excludable, at least temporarily.

While this seems utterly contradictory, the key to this conundrum is in that fact that not all knowledge is created equal. Rather, some knowledge is straightforward and explicit, whereas other knowledge is less concrete and more implicit. The kind is often labeled as codified knowledge, while the second is referred to as tacit knowledge. The codified portion is easily written up and shared, think about a process sequence like a recipe. Tacit knowledge hardly exists in writing, hence it is rarely shared. But it is often the essential addition to make codified knowledge deliver. Think about your grandma’s apple pie. She might give you her recipe, and you’ll diligently try and follow all the process steps, but the result just doesn’t match the original: codified knowledge itself is not all you need. But once you have the apples from her orchard, once you have the flour from her grocery store, once you use her oven, you’ll get a lot closer: it’s the tacit knowledge that makes the difference.

You will have guessed where this is going: while codified knowledge is easily shared and truly non-excludable, the related tacit knowledge can be excludable, at least partially or temporarily. And that makes it quite attractive in a business context to safeguard the competitive advantage of that tacit knowledge by protecting it through patents or IPR.

From my personal view, this is a result of our current economic system and its application to innovation and science in general and to knowledge in specific. While I believe that patents on tacit knowledge are a dead end on our way towards a knowledge economy, I do not yet see a viable approach. All I can say at this stage is that I’m convinced we’ll need to change the way in which we handle knowledge in our economy: knowledge is not just a tradeable good, it is not yet another commodity.

You will agree that the knowledge economy is a concept that is far from simple. But to my mind it’s worth a lot of further effort to fully comprehend it and to make it work. I’m curious to learn your views and ideas …