Episode #4 - The Economy in Mind

How much does the economy weigh? Believe it or not, it weighs the same as in 1950, even though output is roughly five times larger. We are increasingly an economy driven by mind, not matter. Thomas Sowell explains how in his fantastic book, Knowledge And Decisions

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.

Peter Drucker explained it this way:

We know that the source of wealth is something specifically human: knowledge. If we apply knowledge to tasks that we already know how to do, we call it productivity. If we apply knowledge to tasks that are new and different, we call it innovation. Only knowledge allows us to achieve these two goals.

Ed and Ron discussed the following topics during the show. For more information on this topic, see Ron’s book, Mind Over Matter: Why Intellectual Capital is the Chief Source of Wealth.

Five stages in society:

  1. Hunters & gatherers economy
  2. Agrarian economy
  3. Industrial economy
  4. Service economy
  5. Knowledge economy—often referred to as the “Information economy,” but this is a misnomer.

There’s an enormous difference between information and knowledge. Ever since Stewart Brand, founder of the Whole Earth Catalog quipped, “Information wants to be free,” commentators have confused information with knowledge.

Again, Thomas Sowell explains why knowledge, far from being free, is enormously expensive, and the most severe constraint facing societies:

… [T]he most severe constraints facing human beings in all societies and throughout history––inadequate knowledge for making all the decisions that each individual and every organization nevertheless has to make, in order to perform the tasks that go with living and achieve the goals that go with being human.

Data, Information and Knowledge

  1. Data. Factual information (as measurements or statistics) used as a basis for reasoning, discussion or calculation. There is no judgment, interpretation, context, or basis for action. It knows nothing of its own importance or irrelevance.
  2. Information. Root in Latin is formare, meaning “to shape.” Peter Drucker said information is “data endowed with relevance and purpose.” It has to have a sender and a receiver, and it is the receiver, not the sender, who decides if the message is information or not. “We add value to information in various ways: Contextualized; Categorized; Calculated; Corrected; Condensed.”
  3. Knowledge. The fact or condition of knowing something with familiarity gained through experience or association. To turn information into knowledge we need: “Comparison; Consequences; Connections; Conversation.

The Physical Fallacy: 

Brains trump brawn and Bits are more valuable than atoms.

Merv Griffin has made “close to $70 million to $80 million” in royalties from the Jeopardy! theme song, which he wrote in less than a minute.

YouTube was purchased by Google for $1.65 billion.

Disney’s Snow White video release generated $800 million in revenue, $500 million to the bottom line, from a movie made in the 1930s. Compare these supposedly ephemeral products to the value of an automobile from the same decade

Disney bought Pixar in January 2006 for $7.4 billion (Steve Jobs originally paid $10 million for it in 1986). One analyst talked about the importance of retaining two key individuals from Pixar, otherwise:

If two key people leave, Disney just bought the most expensive computers ever sold.

George Gilder likes to say that knowledge is about the past, while entrepreneurialism is about the future. Albert Einstein would have agreed:

I am enough of an artist to draw freely upon my imagination. Imagination is more important than knowledge. Knowledge is limited. Imagination encircles the world.

Self Sufficiency = Poverty

One professor of economics assigns his student the class project of building something they normally purchase. Many choose beer, or electronic devices.

What they discover is it’s incredibly expensive, takes an awful amount of time, and doesn’t taste or work as well as what you can buy for a lot less.

Two works we highly recommend illustrate just how dependent we are on dispersed knowledge, in the heads of literally billions of people around the world. It takes millions just to make a simple pencil.

See I, Pencil, as told by Leonard E. Read. Also, The Toaster Project: Or A Heroic Attempt to Build a Simple Electric Appliance from Scratch, by Thomas Thwaits.

The Philosopher Alfred North Whitehead wrote: “Civilization advances by extending the number of operations we can perform without thinking about them.”

Think how much easier it is do perform many tasks that our ancestors spent far more time on.

Rival vs. Non-Rival Assets

Alvin and Heidi Toffler define characteristics of knowledge in their book Revolutionary Wealth:

  1. Knowledge is inherently non-rival
  2. Knowledge is intangible
  3. Knowledge is non-linear
  4. Knowledge is relational––ideas having sex
  5. Knowledge mates with other knowledge
  6. Knowledge is more portable than any other product
  7. Knowledge can be compressed into symbols or abstractions
  8. Knowledge can be stored in smaller and smaller spaces
  9. Knowledge can be explicit or implicit, expressed or not expressed, shared or tacit
  10. Knowledge is hard to bottle up. It spreads

Knowledge is like the dark matter of the cosmos—we know it is out there, but we cannot see, touch, or measure it.

Again, Thomas Sowell:

Many of the products that create a modern standard of living are only the physical incorporation of ideas––not only the ideas of an Edison or Ford but the ideas of innumerable anonymous people who figure out the design of supermarkets, the location of gasoline stations, and the million mundane things on which our material well-being depends. It is those ideas that are crucial, not the physical act of carrying them out. Societies which have more people carrying out physical acts and fewer people supplying ideas do not have higher standards of living. Quite the contrary. Yet the physical fallacy continues on, undaunted by this or any other evidence.

Three Components of Intellectual Capital (IC)

IC = Knowledge that can be converted into profits (or value); it’s an entity, not a process.

IC was classified into three categories by Karl-Erik Sveiby, in 1989:

  1. Human capital (HC). This comprises your team members and associates who work either for you or with you. As one industry leader said, this is the capital that leaves in the elevator at night. The important thing to remember about HC is that it cannot be owned, only contracted, since it is completely volitional. In fact, more and more, knowledge workers own the means of your company’s production, and knowledge workers will invest their HC in those organizations that pay a decent return on investment, both economic and psychological. In the final analysis, your people are not assets (they deserve more respect than a copier machine and a computer), they are not resources to be harvested from the land like coal when you run out; ultimately, they are volunteers and it is totally up to them whether or not they get back into the elevator the following morning.
  2. Structural capital. This is everything that remains in your company once the HC has stepped into the elevator, such as databases, customer lists, systems, procedures, intranets, manuals, files, technology, and all of the explicit knowledge tools you utilize to produce results for your customers.
  3. Social capital. This includes your customers, the main reason a business exists; but it also includes your suppliers, vendors, networks, referral sources, alumni, joint venture and alliance partners, reputation, and so on. Of the three types of IC, this is perhaps the least leveraged, and yet it is highly valued by customers.

There is such a thing as negative human capital, negative structural capital, and negative social capital. Not everything we know is beneficial.

Think of the IC a thief possesses; social loss they impose is a societal negative.

Examples of negative intellectual capital in an organization: cost-plus pricing, Industrial Age efficiency metrics, Taylorism, focusing on activities and costs rather than results and value, and other forms of negative IC that have embedded themselves into the culture.

Knowledge Workers

Knowledge workers are unique:

  • They own the means of production
  • Firms need them more than they need firms—balance has shifted
  • KWs have unique value, not jobs
  • Office is their servant, not their master
  • Effectiveness is far more important than efficiency
  • Judgments are more important than measurements
  • •Ultimately, they are volunteers

The World Bank: in two reports, Where is the Wealth of Nations (2006) and The Changing Wealth of Nations (2010) report that 80% of the developed world’s wealth resides in human capital.

Other books and resources mentioned

Dear Reader: The Unauthorized Autobiography of Kim Jong Il, by Michael Malice

Ronald Reagan, speech at Moscow State University, 1988

Text here. Ron believes this is one of his all-time best speeches. He’s basically telling the students, in a very polite way, their economy is headed for the ash heap of history, due to what he calls the information economy, but we are calling the knowledge economy.

Email us at: tsoe@verasage.com

Twitter: @edkless @ronaldbaker #tsoe