If Knowledge Is Power, Is It Also Wealth?

February 9, 2016

Ironically perhaps, the ideas that are scarce are those that disrupt "business as usual" by automating what has not yet been automated.

Let's consider a syllogism: Knowledge is power, power equals wealth, so knowledge equals wealth.

Is this true? Author George Gilder thinks so. His book Knowledge and Power: The Information Theory of Capitalism and How it is Revolutionizing our World, proposes that (in Bill Bonner's apt phrase) "the economy is fundamentally a learning system, not a way for distributing wealth."

In Gilder's view, new information (i.e. knowledge) enables us to do things better, i.e. increase productivity. New knowledge is what creates value.

New knowledge is always surprising, and it naturally disrupts "business as usual." So those earning money from business as usual must suppress the disruption arising from new knowledge to maintain their incomes/profits.

Bonner summarizes the conflict between vested interests (cronies and zombies) and those with new knowledge in this lively fashion: "In an economy, the person who is the source of most important new information is the entrepreneur. He is the fellow who takes risks and builds a new business.

The cronies want to stop him, before he undermines the value of their old assets and old business models with new information. The zombies want to drag him down, leeching on him so greedily that he runs out of energy."

Gilder views vested interests limiting new knowledge as the real threat to the economy. This is the danger of "regulatory capture," when vested interests bribe the state (government) to erect barriers to competition to maintain monopolies and rentier privileges.

But what's missing from this view of the economy as a learning system is that value flows to what's scarce, and information is abundant.

In other words, only very specific kinds of knowledge are scarce--the kind that create new goods, services and business models.

These new models are precisely what destroys not just "bad" cronyism but "good" jobs. What's scarce is ideas that automate existing processes.

As Michael Spence and co-authors Andrew McAfee and Erik Brynjolfsson observed in their 2014 essay, Labor, Capital, and Ideas in the Power Law Economy, neither capital nor labor have scarcity value in the age of automation and nearly-free credit. “Fortune will instead favor a third group: those who can innovate and create new products, services, and business models.”

Value in the knowledge economy is not distributed equally. The return on abundant human labor and capital are very low, while the scarcity of skills and knowledge that create new products, services, and business models drives most of the gains to the creative class: “The distribution of income for this creative class typically takes the form of a power law, with a small number of winners capturing most of the rewards. In the future, ideas will be the real scarce inputs in the world -- scarcer than both labor and capital -- and the few who provide good ideas will reap huge rewards.”

Learning--the acquisition of skills and knowledge--is difficult and costly. Developing new ideas and applying them in the real world is an uncertain process and therefore risky.

From this perspective, rewards flow not just to what’s scarce but to what is inherently risky. Since most ideas fail to reach fruition, new ideas that succeed in boosting productivity are intrinsically scarce.

In other words, there is no risk-free way to identify and exploit scarcity in a knowledge economy in which vast troves of information and knowledge are free and have no scarcity value.

The wild card here is knowledge is increasingly unownable and therefore it cannot be kept scarce for private gain.

It seems that while knowledge may be powerful in terms of empowering the learner to improve their own lives, knowledge can only generate wealth if it is scarce and ownable.

Ironically perhaps, the ideas that are scarce are those that disrupt "business as usual" by automating what has not yet been automated.

This essay was drawn from Musings Report 12. The weekly Musings Reports are emailed exclusively to subscribers and major contributors ($50+ annually).

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