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 the production factors
Traditional approach to economic problem: best
allocation of scarce resources of labor and capital
• Production function
Q = f (L, K )
where L is a quantity of labor, K a quantity of
capital and Q an output of commodities.
• Augmented with Total Factor Productivity
Y = A x 𝐿𝛼 x 𝐾𝛽
A - residual “black box” not an answer but an
accounting gimmick
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Knowledge and Social Capital as the production factors
Knowledge role in the economy:
• Knowledge as a dominating substance of a
product (e.g. DVD, apps, software)
• Knowledge as source of monopoly
(pharmaceuticals)
• Knowledge as source of competitive edge
(lower costs, better product functionality)
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Knowledge and Social Capital as the production factors
How scarce is knowledge?
– more in use it becomes more valuable
– temporarily when legally protected
– scarce by costs of replication (reverse engineering)
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Knowledge and Social Capital as the 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 the 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 the 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
However, at some stage became a hindrance to
new solutions (cavalry over-lived its usefulness)
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Knowledge and Social Capital as the production factors
PERSONBYTES
• 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 —
personbytes—and distributed across people.
• How does the personbyte economy work?
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Knowledge and Social Capital as the production factors
WHO HAS MORE PRODUCTIVE KNOWLEDGE?
AN INUIT?
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Knowledge and Social Capital as the production factors
OR MODERN MAN?
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Knowledge and Social Capital as the production factors
Modern man: but WHY?
The answer: progress in division of labor
• Division of labor in the archaic societies: NONE
• Each Eskimo could provide food, clothing and
build a shelter (igloo) but societal value just a
sum of individual efforts
• Cooperation regulated by tradition
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Knowledge and Social Capital as the production factors
Division of labor in industrial societies
• Division of labor in the past centuries in
developing societies by profession oriented on a
single product: butcher, baker, teacher, doctor,
soldier.
• Economy built on the exchange of products - each
participant had a product to offer.
• Societal value increased by specialization but still
the sum of individual productivity
• Coordination mostly via market
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Knowledge and Social Capital as the production factors
Division of labor now
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Knowledge and Social Capital as the production factors
Post-industrial societies
• Functional, knowledge-based division of labor
• None of professional able to produce a
product ready to use
• Societal value of labor increased by synergies
across the economy between specialized firms
• …but only in well functioning systems
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Knowledge and Social Capital as the 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 create synergy between
available resources (positive feedbacks)
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Knowledge and Social Capital as the 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 the 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 the production factors
How individuals acquire productive knowledge?
• Increased schooling alone is not generating
the expected income 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 the 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 the production factors
HOW DO SOCIETIES ACQUIRE PRODUCTIVE KNOWLEDGE?
–
–
–
–
Productive knowledge is tacit: very hard to acquire
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 the 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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Knowledge and Social Capital as the 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 that represent just 2.8% of all
employment in the country
• Economic diversity matters and this is not to be
changed overnight
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Knowledge and Social Capital as the production factors
Bad news 3: Social capital which has profound impact on
development changes very slowly and changes may have
unexpected outcomes:
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 the 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 the production factors
Conclusion: transition to more productive
knowledge-based economy is:
• strongly path dependent and
• systemic – cannot by introduced piece by
piece
Both conditions contradictive or at least very
difficult to meet at the same time
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Knowledge and Social Capital as the 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 the production factors
World Bank 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.
• Yet, all countries have to confront similar
issues: how best to maximize the economic and
social benefits, and minimize the risks of
transformation
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Knowledge and Social Capital as the 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 the 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 the 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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