A knowledge economy for the many or for the few?

Keith Rankin, 23 August 1999


The government's reelection strategy - codenamed Bright Future - is to convert New Zealand into a "knowledge economy". Ireland and Finland are seen as pioneering models of small country knowledge economies.

The concept of a knowledge economy is ambiguous, and I think that National Party strategists are fully aware of this. It is difficult for potential critics to oppose any plan to create a knowledge economy. Few of us would own up to preferring an 'economy of ignorance'.

Orthodox (ie neoclassical) economics assumes that, under textbook conditions of perfect competition, both consumers and producers have "perfect knowledge". But that only means that consumers know all of the spending choices available to them, know what competing firms are charging for identical products, and know about the qualitative differences between substitute products. For firms, perfect knowledge means knowing resource prices, knowing the alternative techniques for making their product, and knowing what other products they could make with the resources they command.

Thus, to a neoclassical economist, knowledge is only of use to the extent that it serves the interests of producers or the utility of consumers. Investing in more knowledge than is needed for that purpose is seen as wasteful.

Nevertheless, although it is understood in strictly utilitarian terms, knowledge in economics is a public resource. Knowledge belongs in the public domain. Attempts to inhibit the dispersion of knowledge - eg through patents - are regarded as forms of market failure.

Political proposals to create a "knowledge economy" today, however, are as much attempts to privatise knowledge than they are attempts to expand it. This process has two dimensions.

The first dimension is the creation of a 'knowledge elite' within New Zealand. It is an exclusive process of rationing knowledge to those most equipped to profit from it. Knowledge is a source of economic rent to the knowledge-rich. This process is not a matter of creating scientists instead of entrepreneurs, as Roger Kerr (Herald, 20 August) worries. Max Bradford wants to create applied scientists who sell for high prices the products of patented knowledge.

Creating a knowledge elite is a process of intervention; of picking winners, which means picking losers. Mr Bradford would like four of our seven universities and all of our institutes of technology to do less research, not more. Those outside of the elite three, as "teaching universities", would be spoonfed only the knowledge that is deemed good for them.

The second dimension of the policy to exploit privatised knowledge relates to New Zealand's competitive advantage in the global economy. The plan is for New Zealand Incorporated to gain market share in the world economy by being more knowledge-rich than New Zealand's rivals are.

This view - of the opportunistic nation state - fails to appreciate the nature of the globalisation process. Globalisation is a process that diminishes national borders and national economic plans. In practice, New Zealand's knowledge elite will have far more in common with the knowledge elites of other nations than with the knowledge-poor majority in our own land.

Ireland's present success is due in large part to opportunistic behaviour on the part of Irish policymakers. Ireland has chosen to make itself more attractive than its potential rivals to transnational corporations. It is paying them huge subsidies - in the form of tax concessions - to set up in Ireland instead of somewhere else. Ireland's success has depended on it pursuing tax policies that differ from other nations.

If the majority of nations choose to emulate Ireland's strategy, then Ireland's miracle economy will disappear. It will not reappear elsewhere. Rather, the shareholders of the companies that get worldwide taxbreaks will be the winners, and everyone else will pay through the loss of their tax-enabled social wage.

The solution that is best for the world as a whole, and therefore best for each nation in the world, is to treat knowledge as a free public resource. Knowledge creation would be understood as a component of social investment, funded by taxes. The public knowledge economy should yield an increment to the social wage that represents a return to each of us from our past social investment. Our social wage includes our health system and our social security system.

In an internationally cooperative public knowledge economy, nations do not seek to undercut each other by offering corporations tax subsidies and non-unionised labour forces. Rather, moderately high income taxes are seen as the price that all producers pay for public knowledge.

The concepts of the "knowledge economy" and the "economy of ideas" are derived from "new growth theory", also known as "endogenous growth theory" and "neoschumpetarian growth theory". The person who has done most to develop its theoretical underpinnings this decade is American economist Paul Romer. In doing so, Romer has built on the early twentieth century writings of the Austrian-American economist Joseph Schumpeter.

Schumpeter's hero was the entrepreneur in a century when entrepreneurship has been an unfashionable concept in economic theory. While Schumpeter's entrepreneurs thrive on uncertainty, people like Roger Kerr, who pay lip service to entrepreneurship, push for policies that give businesses certainty. There is no certainty in an "economy of ideas".

In Schumpeter's 1947 paper "The Creative Response in Economic History", entrepreneurs included any persons who had the ability "to get things done": "civil servants, farmers, workmen, artisans, members of the learned professions".

The writings of both Schumpeter and, latterly, Romer, are dominated by visions of publicness, of inclusiveness. It is therefore unfortunate that their fine writings should be interpreted by our government as the basis of a recipe for a divided national community and as a means by which we as a nation can gain a competitive advantage over knowledge-poor rival nations.

New Zealand touts free trade as a cooperative international solution to the world's economic problems. A policy that seeks to profit from the knowledge poverty of other nations while also creating internal divisions represents a very different ethos.

We need to create an economic order that values knowledge as public property.


© 1999   Keith Rankin

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