Let's Hear It for the Ignorance Economy!

Sooner or later the economists were bound to discover knowledge. Towards the end of the 1950s they discovered technical progress. About the same time as TV became acquainted with Napoleon Solo, Robert Solow became the toast of the economics profession for this miraculous discovery. He was rewarded with a Nobel Prize in due course but has lately been consigned to the gallery of has-beens for his lack of respect for the current orthodoxy of deficit hysteria. Somewhat earlier a few economists had sort-of discovered information, under the guise of "transaction costs". Ronald Coase became a belated laureate recently for this. A little later an economist named Gary Becker led the discovery of humans (dubbed "human capital"). He, too, got his Nobel and is still right-wing enough to command attention. Now they have discovered knowledge. Who is leading this burst of inspiration? Step forward, Paul Romer (no relation to Richard).

All of this would be of little consequence were it not for: (1) the status of economists as cultural shamans, and (2) the inevitable leakage of economic theory into the world of media. Now entering the lexicon of the scribblers of the financial press, a group whose self-esteem is only exceeded by the tenuousness of their grasp of any concepts more advanced than "buy low, sell high", we have the Knowledge Economy, along with established favourites, the Information Age, Global Competitiveness, and Free Trade.

Out of a job? That's because you've not invested enough in your Human Capital. You're being left behind by the ineluctableforces of the Information Age – Free Trade and Global Competitiveness, of course – as they move into the future world of the Knowledge Economy. And there's nothing you can do! Try repealing gravity.

In any event, you should want to hasten its coming. A world in which knowledge itself is the ultimate commodity. What could be better? Well, possibly, an evening of Maggie Thatcher reading selections from the collected works of Frederick von Hayek, to a specially composed accompaniment by James Last. If that prospect fails to excite you, you may wish to read the heretical words which follow.

The thread that runs through all of these economic nostrums is the account provided by orthodox ("neoclassical") economics of how goods are made. The central concept is the Production Function. Take x units of capital and y units of labour and you get q units of output. Solow's big discovery was that when (for the U.S.) you added up the value of output and compared its growth to the
growth of the capital and labour ("factor") inputs, there was a huge discrepancy.

He could not account for about two-thirds of the growth in output (economists refer to this – with a straight face – as "the residual"; when you eat only one slim slice of Aunt Penelope's squid and dandelion quiche you can tell her to give the residual to the neighbour's pet alligator). The subsequent confirmation of this finding throughout the world remains probably the only solid empirical fact available to economics. Solow's explanation: the aforementioned technological progress.

This was and remains as appetizing to economists as yesterday's oatmeal. In the absence of some other explanatory breakfast, ever the pragmatists, they eat. Over the years there have been the equivalent of the Tommy Lasorda nutri-breakfast – different ways of accounting for "the residual" – but after the novelty wore off it was back to the porridge.

This brings us to the latest assault on the residual, courtesy of Paul Romer. In effect, the labour factor is reformulated, by adding a "new" quality – knowledge. In practical terms, this means trying to explain more of the variance in the observed residuals of different countries over time by including such variables as level of schooling of the workforce, number of PhDs, etc. As a serious intellectual attempt to address a real issue, the "knowledge factor" makes a good pun. Every economy makes use of whatever knowledge people have about the world. Ignorance Economy is not as snappy but just as meaningful. Alternatively, the idea of the Knowledge Economy is simply hubris. We have such a lot of knowledge, us moderns. Again, we also have such a lot of ignorance. Why have not only academics but also the financial scribblers paid such interest to such vacuity? What Romer is really saying, in economic code, is that the economic system now has the means to turn
knowledge into a commodity – that is, an item of commerce. The point at which this theorizing intersects with the corporate catechism of Free Trade, Globalization, Get Government Off Our Backs, etc., is through Intellectual Property.

One of the less noted but more important aspects of GATT and NAFTA is the system of international controls that has been introduced on ideas that are subject to corporate control – that is, intellectual property. What this means is that corporations can claim ownership of software, genetic engineering, pharmaceutical preparations, etc. What this also means is that these powerful achievements of human thought will be employed primarily to garner profits and only incidentally to improve the lot of humankind.

A final irony is that some economists dub the residual the "extent of our ignorance". So, in effect, Romer has simply relabelled ignorance as knowledge. The residual is now the extent of our knowledge of our ignorance. Nevertheless, do not despair. The Worldwide Empire of NEW IMPROVED HEAD will help you decode the incantations of the economic priesthood. In the spirit of Clemenceau, we may say that knowledge is nothing but the elimination of ignorance and that there is no ignorance more potent than the ignorance that does not know that we know nothing.

Let's Hear It for the Ignorance Economy © 1998, Hector LaPaunche