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Ron Baker: I got a question for you. Ed Kless: Fire away, sir.  Ron Baker: All right. How much does the economy weigh?

Ed Kless: Dang! There's got to be a lot of trans fats in the economy, so I'm thinking it weighs lots. 

Ron Baker: I didn't mean people, Ed. We know they've gotten probably heavier over the time. In the spirit of last week's show, let me put that into some context. How much do you think the economy weighs today compared to 1950? By the way,  this was a question that Alan Greenspan used to use on audiences to completely stomp them. 

Ed Kless: Yeah, I really have no idea how much the economy weighs, sir, so no clue. 

Ron Baker: Would you guess heavier or lighter, the same? 

Ed Kless: If you've come here in the 1950, it's got to be heavier than 1950, got to be. 

Ron Baker: When I first read this, that's exactly what I thought. He just gives one example of the SKUs, the Stock Keeping Units, of just New York City being 10 to the 10th power, just in New York. The answer, Ed, is that it weighs the same. Even though output compared today or even the time that Greenspan did this, which was, I don’t know, 2000 or something, it's seven times more the output in real dollars than it was in 1950, and yet it weighs the same. 

Ed Kless: Dang! Okay, so you're talking about basically like, "Okay because now a book isn't a book; it's a kindle thing and music." All right, this is starting to make sense now if you switch to the digital thing. 

Ron Baker: Right, if you compare atoms to bits, the atom being the physical world or the bits being the digital world, I guess, or the atoms being the physical world. Yeah, we can put an entire library on a little nano iPad or whatever and think about theJukebox or think about your old record collection; or think about all the newspapers that used to be delivered on everybody's doorstep and now you just go online and read them and like you said, books.  I found that to be very interesting, but what it does illustrate is something that ...  I mean, this goes back to Adam Smith and some of the other of these economists that we talk about, that the real economy is in mind. It's not in Adam's. It's not in physical things. It's in our minds and that's really the point. 

Ed Kless: Hence, the title of our show, Ron, Economy in Mind. As you debated me on this when we were talking about this, not 'of mind' but 'in mind', specifically because of that reason.

Ron Baker: Well that reason and another, which we'll talk about probably a little bit later in the show and I definitely want to justify that. I also would like to point out Thomas Sowell, who you know Ed, as one of my favorite all-time economists. I think he's a fantastic historian of economic ideas and he wrote a great book in1996 called Knowledge in Decisions and he said this, "After all, the caveman had the same natural resources at their disposal as we have today, and the difference between their standard of living and ours is a difference between the knowledge they could bring to bear on those resources and the knowledge used today."  When I read that, I was like, "Wow! What an interesting way to think about it."  The caveman had oil, but he didn't have a combustion engine. What created the combustion engine was man's creativity, imagination and knowledge.

Ed Kless: Yeah. I guess up until the late 1800s, oil was a problem to be dealt with. It came up through the fields and the guck; we need to get rid of the guck. 

Ron Baker: It was a nuisance. If you were a farmer and you didn't know what to do with this guck. Like we say, if we ever find a replacement for oil, its value is going to go back to zero. I mean, we used to use whale oil until Rockefeller save the whales.  You won't see green peace giving him any credit for it, but he certainly did.

Ed Kless: Yeah. No, absolutely. Yeah. The other thing is if you back to your example of NewYork City and New York City, my hometown, the reason why all of the homes in Manhattan are up on a stoop is because to get over the smell from the horse dung.

Ron Baker: That's right. Yes, that's right. That's wild. If you just think a sweep of history real quick, obviously, we were a hunter-gather economy at one point and then we transformed into an agrarian economy and then of course, we had the IndustrialRevolution and then some time around, I believe in the 1920s, we became a service economy.  In 1959, Peter Drucker along with another economist, identified the trend that was happening and they actually coined the term, separately, the "knowledge economy" and of course, that's the subtitle of our show, Business in theKnowledge Economy, so we wanted to take some time to explain what exactly that means and how profound and tectonic I think that shift is, Ed.

Ed Kless: Well sure. Going back to your example of the stages of society, what was the carbon footprint of early men? When you have hunter-gatherer, with the amount of land that you need in order to sustain a small population is just enormous. It wasn't until men then tamed, tamed that the surroundings and became an agrarian.  Can you imagine that the conversation between Og and Grog? "All right, Grog, I got this idea. We're just going to stay here all winter, but we're going to save some of the seeds and we're just going to plant it in front of the cave next year hen the spring comes around." Og is going to be like, "Hell, dude. Good luck with that. Me and the rest of crew, we're moving."  Again, we talked a little bit about this on previous shows, but this was the risk;  the high risks that the first entrepreneurs, in this case, farmers, were taking.

Ron Baker: Right, exactly. sometimes you hear today the description of we're in an information economy and I think this goes back to that guy, Stewart Brand, whois the founder of the Whole Earth Catalog; he's an icon out here in California because I think he's from here. His line is, "Information wants to be free," and we certainly see that on the web today. However, there's a big difference between information and knowledge.

Ed Kless: Oh, a huge difference. I think there's a huge difference between those two things. In fact, the way that I kind of and I extrapolated this from Peter Drucker when I teach a class and this is mostly about implementation, but it really doesn't matter in this context is that the base of this pyramid is data.  All companies have data, lots and lots of data. Before the computers, this data existed on index cards and through your paper throughout the system. They all had this data and then on top of the data, we then had information. That information is really a subset of the data and any kind of most reports that business owners get would be an information type report. They're seeing the trial balance and all of the stuff, so those are the information type reports.

Ron Baker: Like a financial statement.

Ed Kless: A financial statement, yeah. Anything and most things that come out of computer systems, but there are and I think this is getting to your point, there isa difference then between information then what I would call a knowledge report, because they're can and be reports that come out of systems that I think are knowledge-based. The way that I'd have to find out and I know this is probably not exactly correct, but knowledge is information to which you've applied some kind of a theory or thinking. Two examples I'll use here I think on a practical basis for businesses out there's any kind of a cash flow projection report. That's a knowledge report because what you're doing is you're basing it on a theory. Well if we get paid in the average days to pay and we’re going to pay our people on time then this is what the cash flow is going to look like. The theory, of course, is that we're going to get paid in an average days to pay and we're going to pay our people.  The other one that I think a lot of people use in a CRM system is a sales projection or a pipeline report. It says, "Okay, here's the date, this is the size of the deal, $50,000; this is the date we think it's going to close and this is the percentage chance that we think this has of actually closing." If you take all of those in aggregate, you can actually project theoretically what your revenue is going to be for a given period.  That would be the example of knowledge. By the way, on the top of the pyramid,  I put wisdom and I don't think we'll ever get to wisdom reports.

Ron Baker: Yeah. Yeah. I like that definition and I like applying a theory to information, kind of can turn it into knowledge, because data and to some extent, even information, is only by definition about the past. This is something that GeorgeGilder loves to say, he even says, "Knowledge is about the past, but entrepreneurial is about the future," and that's where we get dynamism and innovation and all of that.  Just to bounce off what you said, the way and a mind is much more simplistic than yours, but the way I use to explain the difference between that information and knowledge was saying, "Look, if all you had in front of you was a list of phone numbers with no contacts, no names, just phone numbers, that would be data. If you had Yellow Pages, they gave it some contacts, names, addresses,  businesses, all of that, then yes, that's information; but then, if you start asking people for word of mouth recommendations about plumbers or this or that,  then that's more knowledge. That's the simple way that I use to think about it.

Ed Kless: Right. So talk about this knowledge is not free then.

Ron Baker: Yeah and again, another great line from Thomas Sowell's book, Knowledge andDecisions, he says, "The most severe constraint facing human beings in all societies and throughout history is inadequate knowledge for making the decisions that each individual in every organization has to make." That's fascinating because it really is a constraint, I mean knowledge is actually very expensive.

Ed Kless: Yeah and what I want to point out here, though, because this is important and I see this and I know someday we'll do a show on this, is that when Sowell was here, he's talking about knowledge; he's not talking about data.

Ron Baker: Correct.

Ed Kless: He's not talking about data that's why I wanted to make that distinction earlier because I see a lot of people in the customers that we work with, they have this fixation on data. If we just have more and more data that that's somehow a substitute for knowledge and if you go with the idea that knowledge is really information to which you're applying a theory, well no amount of data is ever going to solve that. You still have to apply thinking in a theory and your belief about a future to any decision that you're going to make in any context.

Ron Baker: Right. I think, Ed, and not to get off the topic here, but I think this is one of my problems with the whole big data craze is it's great to analyze all these billions of bits of data, but it’s a reflection of the past. It doesn’t necessarily tell us our future. We can't collect data on something that's new.

Ed Kless: Correct. Now, let's be cautious here because I think a lot of people say, "Oh,  you're against big data," no.

Ron Baker: No, no.

Ed Kless: What we're against is the over obsession with looking at the data and not making some predictive assumptions about the future. Right?

Ron Baker: Correct.

Ed Kless: That's what people get hung up on. What we're seeing and saying is that people sometimes get stuck in this obsession with data. I think it's almost, in some cases, like a substance abuse problem, I mean it really is.  I want to let you know that in addition to the Soul of Enterprise [inaudible00:12:46], you can also tweet us at #tsoe, so any Twitter feeds and we are monitoring that #tsoe feeds, so feel free to tweet us and let us know what you think of the show.  On the way back, we said that we were going to talk about the physical fallacy and one of my favorite stories about that is the Merv Griffin and the theme song to Jeopardy. Merv Griffin was the producer of the show and this was whenJeopardy first came on, I think back in the, I guess '60s it was. Somebody said,  "Well we need some music for the time when people are writing down their answers during Final Jeopardy." So Merv being the savant that he was, sits down at the piano and he knocks out nah-nah-nah-nah-nah-nah-nah. I think his estate is still getting checks and last I checked around it was between $70 and $80million just from the theme song.

Ron Baker: Isn't that amazing? It tells you the power of an idea and I think this is one of the most possibly counter-intuitive points that economists have been making for centuries, is that real wealth does not reside in physical things. It resides in imagination, creativity and innovation, ideas, if you will, rather than things that are just physical. It kind of runs against our intuition, doesn't it?

Ed Kless: It sure does, but if we see it over and over again in business, I mean just recently,  WhatsApp, was bought for I don't know, $17 something billion. WhatsApp was four guys and a contract programmer in Georgia, the country not the state. 

Ron Baker: Right.

Ed Kless: Unbelievable.

Ron Baker: Yeah. When you can create a company with what, 50 employees or whatever it was in total that they had and be bought for $17 billion, that might be more than the market cap of Boeing or some other massive company. That tells you the world has definitely changed from an atom to a digital or bit-type economy to an economy in mind.  One of my favorite examples, Ed, is if you just look at Gone with the wind. Here's a movie, it's on whatever, on tape; it was produced in 1939, would you rather have to write your own, that movie, or would you rather have ... I don't know,  think of the most expensive car from 1939, which by the way, I had to look that up because I was fascinated. Sure enough, the most expensive car is an AutoUnion Type D Audi Grand Prix. It sold for roughly 12 million Euros.  Even that, I rather have the Gone with the Wind, but that's just an idea, that's just service. It's not something physical and yet it contains much more wealth.

Ed Kless: Absolutely. There's just example after example of this. The way we want to bring with them down to I think the every day thought process in businesses is we have to make sure that we carve out some time for ideas, for thinking. First of all,  growing our knowledge, our intellectual capital, which we’ll talk more about later, but allowing people to think about things, to create some of these ideas and give it a shot.

Ron Baker: Right and I think that's what Einstein when he said, "Imagination is even more important than knowledge." Isn't that where all innovation comes from imagination or tinkering around or just dreaming? And that's how we get all these great new products and services.

Ed Kless: Right. The key is that these ideas when they're shared, even if a particular idea is bad, it doesn’t mean that when somebody talks about it or speak about it, that it can't be improved upon by somebody else who says, "Well that might not work,  but if we tweak it a little bit here, it could potentially turn into this whole other thing."  We need to make sure that we're doing that and I think that's buried a lot in businesses today; just sit there, do your job, don't talk, don't give us any thoughts; we got to keep those young millennials in check, Ron, because they keep coming up with these ideas and thinking around us.

Ron Baker: Right. Right. The old joke in the factory, in the Henry Ford Factory, was, "Hey you guys, stop talking and get to work," but in the knowledge economy, it may be the exact opposite. It might be, "Hey guys, get to work, start talking."

Ed Kless: Absolutely.

Ron Baker: Because when you start talking with each other, it's like ideas having sex.

Ed Kless: I love that phrase. It's a Matt Ridley, right?

Ron Baker: Yeah, the Rational Optimist. You bring up another really interesting point, Ed,  that if you think about knowledge, the way I first heard this described is it's anon-rival asset as opposed to say a rival asset. If I give you the tie off my shirt,  well that's a rival asset; now you have it and I don't; but if I give you an idea or knowledge, now we both have it. I don't lose it when I give it to you and now you can take it, improve upon it, tweak it, make it more valuable for your organization or your customers. It might even come back to me in some type of form. In other words, there's no law of diminishing returns with knowledge. The more you give it away, the more it actually increases.

Ed Kless: Yeah. Even Thomas Jefferson recognized this. He talked about the idea of a candle, if you take my entire candle from me, then I don't have light; but if I just light your candle with mine, well then we both have light and it doesn't diminish mine either.  This is so hard for people to get their mind around because the law of diminishing returns is so in trenched in business thinking today and I think we get stuck on that thinking that we have to protect these ideas.

Ron Baker: Right. I wonder if that goes back to caveman times where, "Hey. If you got to the berries first, there was less for me," but that's not the way it works with knowledge.

Ed Kless: No. It's almost the exact opposite, but it is, it's not obvious and the phrase, of course, that is counter-intuitive. It's counter-intuitive. this is a lot of smart people. We've talked about economists in the last couple of shows on this, but they didn't see this coming, this economy of the idea. They didn't see the knowledge economy coming. Adam Smith and all, they believed in this diminishing returns stuff because quite honestly, that's the way it had been for Millennia.

Ron Baker: Right. If everything surrounds you is represented in atoms and it's hard not to think that the world is zero sum, but it's turned out that not at all like that and it's definitely an economy in mind.

Ed Kless: Absolutely. I mean we have example after example of this but let's talk a little bit about something, a book, that you recently read, Ron, and I don't think we'll be able to get through the whole thing in this segment, so we'll probably start and come back. Talk about the class project.

Ron Baker: Yes. There's an economist to illustrate how knowledge is dispersed throughout the economy. No one of us is smarter than all of us and how a free market handles knowledge is one of the absolutely amazing things about it. To make this point, there's an economics professor at George Mason University who assigns a class project to his undergrad econ students and he says, "I want you to make something from scratch that you normally buy."  Now you could imagine a bunch of college students, they're going to do things like maybe a radio, maybe an MP3 player, a lot of them do beer. Can you imagine that? What they figure out, Ed, is that hey, not only is this a pain and it takes a lot of time and a lot of shoe leather and driving to get all these things,  but it costs a fortune and the quality is awful.

Ed Kless: Yeah, I can just imagine that. By the way, a quick side note there, my wife is a Texas A&M Texas Aggie, so we're grooming my son for Texas A&M , but there's a secret hope that he ends up going to George Mason University, too. 

Ron Baker: Oh, good, good. That's good. I vote George Mason.

Ed Kless: Yeah, there you go.

Ron Baker: So there's no baseball team there, is there?

Ed Kless: No. Football, see here it's football.

Ron Baker: Okay.

Ed Kless: All right, so a toaster from scratch that's what this guy ended up doing?

Ron Baker: Yes. This guy wrote a book; his name is Thomas Thwaites and he was a design student in London and he wrote this book called "The Toaster Project," I just got done reading this and it's just a great book.  The first thing he says is, "Well I wanted to make something from scratch, so I just picked a typical run of the mill household appliance, a toaster." So he goes down to an appliance store and his logic is, "If I picked the cheapest toaster, that will have the fewest parts and it will be the easiest to replicate."  He buys a toaster for I don't know, it's like four pounds, it's like eight bucks, roughly and he takes it apart. There's something like 157 parts in this toaster,  you can ever start to break down those and now all of a sudden you're at over400 parts. Ed, said there was 38 different materials, 17 were metal, 18 plastic, I mean he goes on and on and on with all the different types of components in this thing.  The other thing he said was, "It's not really true that we can make anything from scratch," and this is the line that really stuck with me, Ed, from the book; he quoted Carl Sagan and Carl Sagan said, "Well, if you want to make an apple pie from scratch, the first thing you have to do is invent the universe."  It's probably not realistic to think you can make a toaster from scratch. He ran into all these problems, can I use the electricity and all of this because then that you have to make your own electricity. Given those parameters, he went out, he spent nine months, he traveled 1,900 miles, he went to different mines up in Scotland and Ireland to get metal. He even contacted British Petroleum to get some petroleum to make the plastic for the outer cover. He goes into detail on how he did all these and he's got pictures in his book.  It's a great book. I really enjoyed it. At the end of the day, it cost him $1,837 and it took him nine months and it didn't work. And we're talking it is a toaster that you and I can walk into Target and buy for eight bucks.

Ed Kless: Wow! Wow!

Ron Baker: It's just an incredible story and it just shows you how dependent we are even for something as simple as a toaster. There's a great essay and this book was in the of spirit of that essay. The essay is by a guy named Leonard Reed and it's called "I,  Pencil" and it's written in the voice of a pencil.  It basically starts off by saying, "As a pencil, nobody in the world knows how to make me." Now that sounds like an astonishing statement, but it's not. Millions and millions of people are needed to make a pencil and everything that goes into it. 

Ed Kless: Yeah and this goes back to the other thing, I mentioned Matt Ridley points this out in his book, Rational Optimist, this idea that a handaxe and a computer mouse are, effectively they look the same. Show a picture of them from a distance, you couldn't necessarily tell one versus the other, especially if it's a wireless mouse. They're designed to fit the human hand. The big difference, of course, is that the handaxe could be something that can be crafted by one person and maybe there was specialist, a handaxe building or making; but ultimately it could be created by one person. The knowledge for that was then passed on from person to person to person, but it's a one to one relationship.  It wasn't until we realized that if we'll be beginning to share this stuff, this idea,  this knowledge that is shared, it increase where we able to create the computer mouse, which is similar to your toaster or I, Pencil. There's no way that an individual could possibly make it.

Ron Baker: Right. Right.

Ed Kless: I just wanted to mention because Ron is very much a shy person and won't say this, but a lot of the stuff that we’re talking about here is in one of his fantastic books called "Mind Over Matter" which when I first read it just blew my mind. I personally think, Ron, that's your best book, but let's not [inaudible 00:25:36] on that.

Ron Baker: Well is say this, Ed, it was definitely the hardest book to write because as you know, this is a very, very complex topic to get your head around because it is so counter-intuitive.

Ed Kless: Yeah. No, absolutely. Tell us a little bit about implicit and tacit assets, Ron,  because I think that's a big input into this.

Ron Baker: Yeah. The difference between tacit knowledge and explicit knowledge, explicit knowledge is something that you can get out of a book, you can it out of a PowerPoint presentation, a spreadsheet, a podcast, that would be ...

Ed Kless: A radio show? 

Ron Baker: A radio show, that's explicit knowledge. Tacit knowledge is sticky. It's that stuff that's in your head. It's all the little tricks of the trade. It's the craftsman's way of knowing when to break the rules or whatever. It's that tacit knowledge that's so expensive.  If you're an expert in something, I mean a deep, deep expert and you go on to Wikipedia; now Wikipedia is a great example of an incredible database of explicit knowledge, but if you've got a lot of tacit knowledge about a particular topic,  you'll see a lot of gaping holes in Wikipedia, won’t you?

Ed Kless: Oh, yeah. I have great example of this that I use around my house all the time.  My wife and I, we're staying with friends up in Kansas City, this was I don't know,  five or six years ago I supposed, it might be even be longer than this; at one point, we get up and we needed to make another pot of coffee, right?  Our friends goes to refill the coffee pot. They had positioned their coffee pot in such a way that it was within striking distance of the hose from the sink, so that you can just pull the hose from the sink to fill the coffee pot, the tank to run through and make the coffee. This just struck me as just absolute genius. How many times do you say do, go fill the coffee pot, bring it over then dump it in,  right? It's just maddening, no, no, no, you move your coffee pot to within striking distance of the hose.  Well I got to tell you that I think of them, first of all, every time I do it, which is just about every day and then also, the other thing that's cool is I have done this in front of other people who have said, "I'm going home and moving my coffeepot."

Ron Baker: That's a great thing about an idea. 

Ed Kless: Right, but no expert on making coffee is going to tell you that. It's not going to show up in the research anywhere, it's not going to be in the data.

Ron Baker: Right. If I read a book by Tiger Woods or Jack Nicklaus on how to play golf their way, that's explicit knowledge, but if you gave me the opportunity to go play around with either of them, that's tacit knowledge because I'm going to get into all sorts of situations that aren't explained in their book and that's that tacit knowledge and that's the stuff that's really, really valuable. That's really what Thomas Sowell was arguing when he said that knowledge is actually the biggest constraint. It's not ubiquitous and it's not free.

Ed Kless: What putting this into practice in organizations, small and medium businesses today, I think one of the keys is to have and you've told me this, Ron, this idea of having a chief knowledge officer. You might not call them the CKO, but we need of to have somebody who knows what everyone knows. There's a code I think about HP, if somebody knew what HP knew, we would be in really good shape and they'd actually try to solve for that problem by creating somebody who knew what they knew.  This is not someone who is on mission and I'm the president who knows everything. They just know what other people know and I think that that's something that every business needs to start to put into practice is who knows what we know around here.

Ron Baker: Right because intellectual capital unlike physical capital or physical assets,  because they're non-rival, they can be in more than one place at one time. We can all read Harry Potter's book at the same time without diminishing it for anybody else, then it starts to make sense to think about intellectual capital in a breakdown and the best breakdown I've seen is by this guy named Karl Sveiby,  he's Australian I believe, in 1989, he broke out intellectual capital to three components.  He said, "Every business has human capital, stop to gets in the elevator every night and goes home. Every company has structural capital and you can thing of-that as everything that stays in the four walls after the people leave. Then you've got social capital, which is the company's customers." A company's brand is part of its social capital. Alumni, people that they do business with, their vendors and things like that.  I found that framework really, really useful to think about in terms of how do you leverage, because knowledge, it's an entity; it's not a process, it's an entity.  It's the interdependence of these three types of intellectual capital that can really create some serious wealth for your customers.

Ed Kless: In a sense, isn't social capital ... Your grandmother probably told you it's not what you know, it's who you know, right?

Ron Baker: Yeah, yeah, absolutely. That is a big part of it and what's really fascinating, Ed,  and this is something that the economists back in the day wouldn't have seen as dramatically as we see it now, is human capital, according to the World Bank is80% of the developed world wealth, 80%.  If you think about it, that means that if you're in a knowledge business and I would say almost every business has got some component of knowledge, but certainly like professional firms, that means 80% of your ability to create wealth resides in your people and the company does not own them.

Ed Kless: No, no, not at all. Am I extrapolating this out too much, though? When I heard that 80% thing, I was completely blown away by it, but the way that I have internalized it is this and I'm curious as you think of my thinking is off. If that's true, if 80% of the world's wealth is in our knowledge, well that means that if we actually did have a let's call it a systemic financial crisis of absolutely epic proportion where we lost all financial wealth, which I don't think can possibly happen if we lose all financial wealth; but let’s just say that, that we would still as a species be able to continue as long as we continue to have our knowledge about the past. We could sustain that, we could sustain that colossal financial collapse, but what we couldn't sustain would be a disease that gives us amnesia.

Ron Baker: I think you're absolutely right, if you think about it. If you were to decimate our physical infrastructure, I don't know, like the neutron bomb. What was that bomb that only destroyed ...

Ed Kless: Yeah. Yeah. It only kills people.

Ron Baker: But it keeps the buildings intact. Well if you reverse that, whatever it would be.  No, we would be able to rebuild as long as you don't lose that knowledge and that's what so key about knowledge is because you can't lose it. You transfer it and it only grows.  By the way, the World Bank is the entity that did the studies on 80% of the world's wealth residing in human and there's two studies. The first one's calledWhere is the Wealth of Nations and the second is the Changing Wealth ofNations.  Folks, just so you know, after every show, if you visit verasage.com, you'll see a nice show summary and we post all the books we mentioned, the reports liket his, we'll have links up there on everything that we talked about to give you some additional context and further reading and resources that you can check on.

Ed Kless: Yeah. This just amazes me, though, this idea that 80% is in our knowledge. At first, I doubted that is [inaudible 00:34:20], but the more and more I think about it, the more I think that it makes complete and total sense. I mean after all, what is a brand, right? Knowledge that oh, I can trust that. I know that if I'm going togo in a McDonald's, I'm going to get a fast, barely edible meal, but I'm going to get it fast. Right?

Ron Baker: Right. Yeah and something else that we should probably mention, too, is not all knowledge is good. In fact, not all of this components of intellectual capital are good. Some of them were negative, like there's negative human capital, negative structural capital. In the example I love about this is Castro's Cuba. Here's a guy who has expropriated in all the wealth, the physical wealth thinking, "Oh, I'm going to make the greatest city in the world," and he ended up doing that but he did inMiami because all the human capital left. He created a great city in Miami and left Castro's Cuba to rot because he didn't understand. He believed in the physical fallacy, basically.

Ed Kless: Right. But don't businesses do this to ... I mean obviously, a much lesser extent than Castro, when they, let's call it castigate, almost try to, the people who used to work for him. Somebody leaves the organization and they just become likeMoses in the 10 Commandments, "Strike Moses' name from every obelisk."  Anything that went wrong in the past 10 years, we blame on the guy who just left and I constantly see this happen. I was like, "Unless the guy or gal was really a fool, why are we doing this to them? Why aren't we trying to maintain the relationship long-term, because you'll never know when this is going to be an example to use social capital that allows us to continue to connect.

Ron Baker: Absolutely and Ed, for all the talk about and all the hard times that we give to professional firms, one thing that they do absolutely right and almost all of them do this, is they maintain an alumni network and they cultivate those relationships. They don't castigate you as you leave. They know you're probably going to go somewhere that can refer them future business and they understand the value of that social capital and they invest in it heavily.  Even my prior accounting firm, Pete Marik, has an incredible alumni network that's quite active and actually provides a lot of value.

Ed Kless: Yeah and I see that all of the time. It's funny you say that the professional firms get it, which is true in that particular case, but where it's not true is that they're among the last to adapt social media.

Ron Baker: True.

Ed Kless: Which to me is just the most modern form of social capital, that's all that is. It's anew form of social media. I do social media not because it's cute, but because it'sI think the best form of social capital that's ever been invented by mankind.

Ron Baker: Yeah, absolutely. When we come back, Ed, from this short break, let's discuss knowledge workers because they're an integral part, obviously, of the 80% of a company's ability to produce wealth and knowledge workers have some differences.  Ed, let's talk about knowledge workers because we hear this term a lot. PeterDrucker, again, he was the one who coined this term in 1959. He started to see a big influx into the labor force of people who basically work with their minds, not their muscles and he coined the term knowledge workers.  What makes the knowledge worker unique as say opposed to an industrial worker or service worker is the biggest thing and certainly not the only thing, butI think that the defining thing is they own the means of production and what a tectonic shift that is.  If I worked for Henry Ford back in the day, he owned the means of production; I went into his factory, I worked to the rhythms and cadences of his assembly line.  Today, I don't have to go into an office. I can sit in a Starbucks and do a full day's work as indeed what JK Rowling wrote the first Harry Potter novel sitting in a coffee shop. That's the difference with knowledge workers, you own the means of production.

Ed Kless: Yeah and I have actually heard it said that way, that the way that you can tell if you're a full on knowledge worker is instead of bringing your coffee to the office,  you can bring your office to the coffee.

Ron Baker: Right. Absolutely. I think the other point that Drucker made on knowledge workers is the balance of economic power has shifted, organizations need them more than the knowledge workers need the organizations, because obviously these people have 80% of the capacity to create wealth that walks around with them. The best that companies can do is rent it. Ultimately, these people are volunteers.

Ed Kless: Yeah and this is the distinguishing characteristics that I see between the service worker and the service economy and the knowledge economy or those can call the experience economy, whatever phrase we want; we've been calling it knowledge so we'll stick with that. This idea that it's the worker who owns this means of production, in as true service organization; let me use the airlines as an example or a hotel, you still have to go to the airport; you still have to go to theMcDonald's; you still have to go to the place of business.  With an accounting firm, with a law firm, with an IT firm, you don't have to got there anymore. That knowledge, that value is with the person. Again, it's spiritual not rather than physical.

Ron Baker: It's much like when we invest, Ed. Your 401K or whatever portfolio you have,  you're going to invest your financial capital into those places that you'll get a fair,  economic return but you'll also be treated well. You won't invest in Castro's Cuba because he might take your assets away, but it's the same thing for a knowledge worker, they're actually investing their own intellectual capital into a company and therefore, they're going to go where they're pretty well compensated, of course, but also where they're treated with respect and dignity.  Of course, this is our problems with Taylorism. You didn't treat the worker with respect and dignity and he has no place in the knowledge economy.

Ed Kless: No, no. Just to continue this thought on this, this social capital ideas, as you are aware, Ron, the Sage Company I work for, our conference is next week. This is always my most exciting week at work because I get a chance, first of all, to prepare for the talks that I'm going to do and gain greater knowledge; but then I get a chance to share it all with people and to have their knowledge who had been preparing all the stuff, be shared back with me. It's like this big explosion of knowledge that I quite literally have to spend the next month or two digesting.

Ron Baker: Right. It's an incredible enhancement to social capital, too. I haven’t attended as many summits as you have, but I still have relationships with people that I met at summit years ago.

Ed Kless: Yeah. Yeah.

Ron Baker: So very good stuff. We'll talk about structural capital, that's the stuff that stays in the company after all the human capital leaves and we’ll talk a little bit more about that next week because we're going to share with you what we believe is probably the most significant knowledge tool ever devised by man, which is the after action review.  Let's talk a little bit about social capital, Ed, because one of the things that's interesting about human capital and social capital is neither of them are owned by the company. So a knowledge firm is actually a very assetless organization. It really doesn’t own the assets because you can't own human capital.

Ed Kless: Well, even you own your own, that's it. That's it.

Ron Baker: Yeah, that's right and you're actually investing it into the organization. When you think about a brand, I always ask audiences who owns Coca-Cola's brand and if you talk to lawyers, accountants, they'll say, "Well the shareholders." That's true legally, but from an economics standpoint, it's obviously the customers who own the brand because look what happened with new Coke.

Ed Kless: Yeah, they almost destroyed it.

Ron Baker: Another aspect of social capital that's very important is values that we transmit from one generation to another. Alvin Toffler used to stomp and crack up audiences with the following question, "What's it worth to your organization that your people were potty-trained?"

Ed Kless: A lot.

Ron Baker: Yeah.

Ed Kless: Actually the same answer that I gave to how much does the economy weigh.

Ron Baker: Yeah. Yeah. It’s one of those great questions. A couple of other things to illustrate this I think very starkly is if you look at North and South Korea. You can obviously look at that satellite image at night where North Korea is completely blacked out.

Ed Kless: My iPad. My screensaver on my iPad reminds me of this.

Ron Baker: Ed, there's an even better picture, one that came out of the Space Station that's even more dramatic. Here you have two countries that are the same language,  the same culture, same history and look at the dramatic difference.  I think it's because one respects freedom and dignity and liberty and unleashes their people to be their best and one is just a tyranny of materialism and a great example of the physical fallacy. They have all the natural resources up in NorthKorea. They have the mines and all these natural resources but they don't have the knowledge to get it out and do anything with it.  I think that is a great illustration of the physical fallacy versus the knowledge economy that we’ve been talking about.

Ed Kless: It was only really unleashed in the South in about 1980. Before that, they were certainly freer, I supposed, but in some ways equally oppressive. It's only once they figured it out, "Oh, this is what we have to do in order to grow this," that they made the mistake.  It is a great example, Ron, of the negative social structural and human capital.  This is just evil. I just read a book called "Dear Reader" and I almost spent too much time on it, we could do a whole show on it. This is the unauthorized autobiography of Kim Jong Il in which it shows you how evil the thinking is and they're not crazy. One of the other things that the author, Michael Malice, points out is that we have to stop thinking of these people as crazy; they're not crazy.  There is a logic to it, they're just evil.

Ron Baker: Right. Right. I've read that book, too, and it was a fascinating book, you're right.  The other thing, if you really want a stark image of the knowledge economy, I think it's President Ronald Reagan's best speech that he delivered in 1988, so towards the end of his presidency, at Moscow State University, which wasMikhail Gorbachev's, that's where he went to school. He's standing in front of a bust of linen and a mural of the Russian Revolution and he's basically telling the students that your country is destined for the [inaudible 00:46:06] of history. He doesn't say that bluntly, he says it very nice but he's explaining basically, what he calls the information economy that's actually the knowledge economy.  He actually quotes this book that was written in 1982 called the Economy inMind by Warren T. Brookes, who's no longer with us. He's probably one of the reasons, Ed, along with George Gilder, that I wrote my book, Mind over Matter,  and probably why we're doing this show.

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