Transcript Current Issues in Economy

Current Issues in Economics
Lecture 2
Knowledge and Social Capital as
production factors
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Knowledge and Social Capital as production factors
Knowledge is not new to the economy and society, sometime
has had profound historical impact changing directions of the
human history
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Knowledge and Social Capital as production factors
Answer: a horse stirrup
No stirrup
horse for communication only
With stirrup
medieval tank
but more
servicemen needed
higher costs
capture of surplus
feudalism
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Knowledge and Social Capital as production factors
How economics deals with the problem of
knowledge:
• Traditional production function
Q = f (L, K )
where Q an output of commodities, L is a
quantity of labor, K a quantity of capital
• Augmented with Total Factor Productivity
Q = f (A , L, K)
A - residual “black box” of other factors
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Knowledge and Social Capital as production factors
How different is knowledge as production
factor?
– More in use, more valuable
– Temporal scarcity when legally protected
– Temporal scarcity when unpublished
– Temporal scarcity by know-how of replication
– Scarcity by education - skills
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Knowledge and Social Capital as production factors
Types of knowledge:
• Theoretical knowledge (prime numbers’ and
modern banking)
• Technological knowledge (products and
processes)
• Tacit knowledge (embeded in peoples’ skills)
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Knowledge and Social Capital as production factors
Knowledge role in the economy:
• Knowledge as source of competitive edge
(lower costs, better product functionality)
• Knowledge as a dominating substance of a
product (e.g. DVD, apps, software)
• Knowledge as source of monopoly
(pharmaceuticals)
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Knowledge and Social Capital as production factors
• The main difference between a postindustrial
knowledge-based economy and a traditional
economy using knowledge is in the way
knowledge is generated, introduced as
innovation and rewarded
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Knowledge and Social Capital as production factors
WHO HAS MORE PRODUCTIVE KNOWLEDGE?
AN ESKIMO?
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Knowledge and Social Capital as production factors
OR A MODERN MAN?
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Knowledge and Social Capital as production factors
Modern man: but WHY?
The answer: progress in division/cooperation of
labor
• Division of labor in modern and archaic societies
• Each Eskimo could provide food, clothing and
build a shelter (igloo) but:
– “GDP” just a sum of individual efforts,
– no synergy effect,
– cooperation regulated by tradition; i.e. limited in
scope
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Knowledge and Social Capital as production factors
Division of labor and cooperation in traditional
societies
• Division of labor by professions oriented on a
single product: butcher, baker, teacher, doctor,
soldier.
• Coordination built on the voluntary or
unvoluntary exchange of products - each
participant had a product to provide
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Knowledge and Social Capital as production factors
Division of labor and cooperation in industrial
societies
• Societal value increased by linear
specialization (from Smith to Ford)
• Coordination via vertical integration and
markets
• None of professional able to produce a
product ready to use
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Knowledge and Social Capital as production factors
Division of labor and cooperation in postindustrial societies
• Functional, knowledge-based division of labor
• Coordination via markets, public
procurement, leasing, coproduction, etc.
• Societal value of labor increased by synergies
in well functioning social networks
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Knowledge and Social Capital as production factors
Functional division of labor
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Knowledge and Social Capital as production factors
PERSON BYTES
“Leibniz is said to be the last person to know everything”
• The amount of knowledge in the world has
increased tremendously, but our individual
capacity to hold it has not.
• Knowledge is now divided into chunks —
person bytes—and distributed across people.
How does the person byte economy work?
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Knowledge and Social Capital as production factors
Modern economy is based on smoothly functioning networks of
networks.
• A modern firm is a network of people with different expertise:
production, logistics, marketing, sales, accounting, human-resource
management, and so on. But the firm itself must be connected to a
web of other firms – its suppliers and customers
• Firms and households need access to networks that deliver water
and dispose of sewage and solid waste. They need access to the
grids that distribute electricity, urban transportation, goods,
education, health care, security, and finance. Lack of access to any
of these networks causes disproportional declines in productivity.
New approach to economic problem: how to coordinate to create
synergy of available resources in globally networked economy?
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Knowledge and Social Capital as production factors
Problem of development is the problem of
acquiring and using productive knowledge
• How is productive knowledge acquired?
–By individuals?
–By firms?
–By societies?
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Knowledge and Social Capital as production factors
Chicken and egg problem for knowledge based
development
• You cannot make watches without watchmakers
• You don’t want to be watchmaker if nobody
makes watches
• You cannot become a watchmaker because there
are no watchmakers to learn from
• You need not only watchmakers but also
precision machinists, marketing teams, etc.
How do societies overcome this problem?
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Knowledge and Social Capital as production factors
How individuals acquire productive knowledge?
• Increased schooling alone is not generating
the expected pay-off
• Even the science-based jobs require
apprenticeship
• The tricks of the trade are acquired from
experienced senior workers
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Knowledge and Social Capital as production factors
How do firms acquire productive knowledge?
THE BIRTH OF SUCCESSFUL INDUSTRIES
• a successful firm is established
• employees learn from the firm
• employees leave the firm to set up new firms
• spin-offs are often much more successful than
other firms…
• ... and generate a new wave of spin-offs
A CLUSTER OF HIGH PERFORMING FIRMS ARISE
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Knowledge and Social Capital as production factors
HOW DO SOCIETIES ACQUIRE PRODUCTIVE KNOWLEDGE?
–
–
–
–
Productive knowledge is place and time specific
Knowledge resides in the brains of people.
It is easier to move the brains than the knowledge
As a result, knowledge diffuses only slowly and across narrow
channels
– ... and requires teams with complementary skills
– In a world of increasing complexity, teams become more and more
intricate
– This makes the coordination problem exponentially harder
What the world needs is mobility, diversity and stability
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Knowledge and Social Capital as production factors
Bad news 1: throwing money on the problem is not a solution
R&D
Producer
Consumer
More money spent on R&D will not generate more knowledge to be
used by producers to build knowledge based economy
Embarrassing failure of Lisbon Agenda
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European Agendas
LA 2000- 2010
• to make the EU "the most competitive and dynamic knowledge-based economy in
the world capable of sustainable economic growth with more and better jobs and
greater social cohesion", by 2010
Europe 2020
• To raise the employment rate of the population aged 20–64 from the current 69%
to at least 75%.
• To achieve the target of investing 3% of GDP in R&D in particular by improving the
conditions for R&D investment by the private sector, and develop a new indicator
to track innovation.
• To reduce greenhouse gas emissions by at least 20% compared to 1990 levels or by
30% if the conditions are right, increase the share of renewable energy in final
energy consumption to 20%, and achieve a 20% increase in energy efficiency.
• To reduce the share of early school leavers to 10% from the current 15% and
increase the share of the population aged 30–34 having completed tertiary from
31% to at least 40%.
• To reduce the number of Europeans living below national poverty lines by 25%,
lifting 20 million people out of poverty
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Knowledge and Social Capital as production factors
Bad news 2 – human skills (practical knowledge)
are not so flexible as we think
• You will not teach an old dog new tricks: human
capital is very specific to the industry in which
people work
• Germany: 50% of those leaving an industry go to
related industries. Economic diversity matters
and this is not to be changed overnight
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Knowledge and Social Capital as production factors
Social Capital:
Cultural dimension:
 Trust
 Tolerance
 Dialogue
 Diversity
 Mobility
Institutional dimension:
 Good laws
 Effective institutions
 Professional administration staff
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Knowledge and Social Capital as production factors
trust index
100
90
indulgence
80
GNP/capita
70
60
50
40
30
20
pragmatizm
inn. index
Poland
10
Germany
0
UK
uncertainty
power dist.
masculinity
individualizm
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Knowledge and Social Capital as production factors
• Social capital changes very slowly and
changes may have unexpected outcomes.
• Path dependency: Longue durée
• From bonding to bridging
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Knowledge and Social Capital as production factors
Size the moment: Ireland
• Challenge: become a competitive EU member
• Opportunity: English, educated young
population, US Diaspora
• Risks: marginalized late comer in EU
• Response: Opening to ICT FDI, using EU
structural funds
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Knowledge and Social Capital as production factors
Size the moment: Israel
• Challenge: accommodate 1 million immigrants
from FSU
• Opportunity: highly educated professionals
• Risks: no market skills, disappointment
• Response: Technological Incubators Model provide support services and resources in
advancing ideas from a conceptual stage to
viable, working enterprises.
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Knowledge and Social Capital as production factors
Size the moment: Finland
• Challenge: collapse of the SU market
• Opportunity: excellent education, hard-work
ethics, Nokia
• Risks: cut-throat competition in ICT markets,
high labor costs, market rigidities
• Response: top-level ownership of KE Agenda,
Foundation for Finnish Inventions, spreading
KE beyond Nokia
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Knowledge and Social Capital as production factors
Size the moment: Republic of Korea
• Challenge: Korean war
• Opportunity: hard-work ethics
• Risks: top-down reform, social patience
• Response: state sponsored organization, R&D
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Knowledge and Social Capital as production factors
World Bank four pillars of KE:
• Economic and institutional framework - good
governance at the macro and enterprise levels.
• Human resource development – growing pool of
knowledge workers and technology literate
workforce.
• Information society - ICT infrastructure and
computer literacy.
• National innovation systems - resources,
institutions and incentives for developing and
implementing domestic and foreign innovations.
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Knowledge and Social Capital as production factors
Lessons learned:
• There is no one single model of a successful
transformation to KE. Nations respond to the challenge
of this transformation in different ways, depending on
the differences of their history and culture, national
priorities, economic status, size, geography and
population.
• Transition to knowledge-based economy is based on
conditions very difficult to meet at the same time
– strong path dependency, and
– cannot by introduced piece by piece
• The only common point is “catch the moment” and
turn weakness into opportunity
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