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Wednesday, June 23, 2004

In the Knowledge Lies the Wealth

Jim summarizes various aspects of the state of the world and other than expanding a little on terrorism, there is nothing else I would change in his summary. Based on the summary, Jim asks what I (or anyone else on this blog) think the president should do for the next four years.

That's a tough, multi-faceted question. However, I'll start by going out on a limb on the domestic economic front. I think the President should pursue policies that maximize growth over the short term without being too concerned about the long term.

While this may seem reckless, I think there's substantially less risk to this approach than meets the eye. The reason I think this lies in asking why we are so much more productive than we were 100 years ago.

Economic texts often describe four factors of production: labor, capital (equipment, previously produced goods, etc.), land (natural resources), and entrepreneurship. The reason we are able to produce far more today than 100 years ago is that we have more knowledge. The labor force has more information available, we have more knowledge about how to optimize capital equipment, we have more knowledge about how to find and then minimize the use of expensive resources, and we have better understanding of business processes, motivational management, marketing, and finance.

Knowledge dwarfs capital in importance when it comes to wealth creation. Imagine that there were two parallel universes. In universe A, one day all capital disappeared, but the inhabitants retained all their knowledge. In universe B, the inhabitants retained all capital but forgot most of their knowledge. I'm certain that in a few years time universe A would be far wealthier.

Germany had almost all of its capital destroyed in WWII. This is almost a perfect example of Universe A. Yes, the Marshall plan replaced some capital, but it was actually a fairly small investment. Within two decades Gernany had accumulated a lot of wealth.

Afghanistan under the Taliban is an example of universe B. They chose to suppress knowledge (other than knowledge of Islam) and even with international aid, they were living in complete poverty. They were basically choosing to live in the stone age.

So more knowledge about production and services means more wealth. And the beauty about knowledge is that it's indestructible and lasts a very long time. Sure, there's not a lot of use for the body of knowledge regarding buggy whip production any more. However, no matter what happens in the financial realm, we still have our knowledge and can recover quickly.

So where does knowledge regarding production and services come from? I think it comes from two sources: people with a need for the knowledge create it out of thin air (necessity is the mother of invention) and from people sitting around thinking with interest in some topic but with no particular need.

The first type of knowledge creation I call "pull knowledge" because I think it's similar to "pull content" on the Internet. Pull content is content that someone goes searching for on the web and they "pull" information from the sites that contain the knowledge that is interesting to them. As that person is searching, they encounter advertisements and other "push content" that's "pushed" on them. The person who sits around and thinks new thoughts needs to then push the new knowledge out into the world for it to have any effect. As a result I call that sort of knowledge creation "push knowledge."

Product development requires pull knowledge creation. Basic research is push knowledge creation. I think both types of knowledge are required for economic growth, though I'm not absolutely certain that push knowledge creation is strictly required. However, I am pretty sure that some mix of the two is optimal. A necessary condition for both types of knowledge creation is that the populace is adequately educated. Once that condition is met, pull knowledge happens spontaneously as part of a self organizing economic system. Pull knowledge is stimulated by potential demand and as a result is maximized both by minimizing the resources extracted from the economic system and keeping inhibitory factors such as regulation to a minimum. I believe economic growth strongly stimulates pull knowledge creation which then strongly stimulates economic growth.

Push knowledge doesn't happen spontaneously, and how to make it happen and pay for it has been, and will continue to be, a subject of great debate. I don't have anything to add to this debate except to say that from my narrow robotics entrepreneur perspective, it seems to be working pretty well. The research coming out the universities meets my needs and I have no complaints about the quality or quantity of work. The funding for robotics seems to come mostly from defense and defense related agencies, with some money from corporations and the NSF. The research seems to be well balanced between what is useful in the near term and what I think will be useful after ten years and more. While on paper the Universities seem to have extremely high overhead, I think that the extremely low pay for faculty just makes the overhead rates look high. I think that in the field of robotics, the system for creating push knowledge works quite well and I don't think it could be made significantly better.

So if we grow as fast as possible, we create knowledge which in turn leads to the creation of yet more knowledge and more growth. What a wonderful virtuous circle.

What if we grow too fast? What if we grow so fast that things get out of balance? What if we create some financial bubble or some other potentially catastrophic problem?

It's certainly possible. But please consider a couple of things. First, I'm not aware of any time that growth and the policies that help stimulate it ever causing any catastrophic economic problems, at least not by themselves. The Great Depression followed a period of rapid economic growth that helped create a stock market bubble and crash, but it was Hoover's tight monetary and fiscal policy that caused the depression, not the rapid growth of the 1920's. The 1987 crash hardly caused an economic blip because it was handled well from a fiscal and monetary standpoint.

The other thing to consider is that potentially catastrophic problems are always in the making and have little to do with growth. For example, the Social Security and Medicare liability issues will be even worse if there is no growth. Growth wasn't a particularly significant factor during the 16th century Dutch Tulip-Bulb bubble, but it happened nonetheless, and was followed by a long and severe depression.

Indeed, growth tends to blunt catastrophes because that catastrophe ends up being a smaller percentage of the now larger wealth of the country. So, on the growth front, I say "Let's Roll!"

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