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The Myth of the Knowledge Economy

The interesting, value-adding aspects of economic activity are the ones that are based on ignorance, not knowledge. At the heart of this ignorance-based economy are those economic actors who learn by doing.
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I want to be the first to advocate the ignorance-based economy. Exhortations by public officials everywhere to build knowledge-based economies have skyrocketed in popularity since the OECD first published its manifesto in 1996, accruing a whopping 40,000 articles on Google scholar alone. Unfortunately, like many sound bites, this one has more flavor than nutrition. As I help societies around the world increase their levels of entrepreneurship, I've found the "knowledge-based economy" mantra, ubiquitous as it is among public leaders everywhere, has become empty for three reasons.

  1. All economic activity is knowledge-based. Today, in 2010, what isn't? The term's original intention was to describe an alternative to economic activity based on resource extraction, commodity sales and rent-seeking. However, these activities also require and generate tremendous amounts of knowledge. Today, diamond sales require complex regulations and tracking processes, oil production must rapidly invent unique solutions to unforeseen problems, and cement pricing and distribution must be optimized with complex algorithms. Knowledge infuses all economic activity everywhere, and when something is everything, it is nothing.

  • Internet is a utility; information is a commodity. The phenomenal accessibility to information through the worldwide web and wireless communication was and is one of the implicit underpinnings of the knowledge-based economy concept. A Google of "web" yields 2.5 billion hits in .27 seconds, and when combined with "Internet", 1.5 billion in .25 seconds. There are about 5 billion mobile phone users engaged in borderless texting and other interactions. Facebook is a large country and Google is a common verb. But the ubiquity of access to information means that if you need to tell someone that they should use the web for their business, one of you is over 60, and the other is Rip Van Winkle.
  • Entrepreneurship is the scarce and valuable resource, not knowledge. Recently I reviewed a list of a university's patents up for licensing, and saw that such an effort is near-useless. The connection between molecules and money is incredibly loose and divorced from entrepreneurial drive. In other words, advanced knowledge has little economic value. I grew up in Woods Hole Mass., with its 925 residents and 54 affiliated Nobel Laureates.
  • Entrepreneurship? None. Spin-off ventures? None. Most regions would die for a tiny fraction of the IP that gets generated in Woods Hole, but Woods Hole has remained an economic anti-cluster since its founding in 1888. Venture capitalists invest in 1 out of 100 brilliant ideas they review. Technology is not what gets you to the top; business acumen, leadership ability, salesmanship, and the ability to put resources together is what realizes opportunity. Compared to technology, entrepreneurship is the scarce and valuable resource.

    The Bliss of Ignorance

    The interesting, value-adding aspects of economic activity are the ones that are based on ignorance, not knowledge. It is the ability and willingness to take action in the face of fundamental ignorance, in which uncertainty, ambiguity, and the unknown play dominant roles that will determine which economies, and ventures, succeed and fail. Good managers, leaders, and policy makers have evolved effective ways of dealing with such ignorance. Successful entrepreneurs have led the way in turning ignorance into opportunity; we can learn much from their behaviors. Entrepreneurs enter into the unknown, sometimes plunging headlong, more often than not creeping into it, toe after toe. Tom Szaky, for example, built an international "green" business, Terracycle, ignorant of the required technology for converting worm excrement into fertilizer. He was completely naïve to the ways to package and sell the product, not to mention finance his early investments. He learned by doing: by jumping in, by making small mistakes and a few big ones, and by using his native intelligence and scrappiness to invent solutions as unexpected opportunities and problems arose. Slowly, the landscape became clear. Szaky not only discovered the nature of this particular economic environment, but he also invented the environment.

    This is the way that in reality most entrepreneurs, those quintessential economic actors, work. In the past I have called this methodology, of handling ignorance by acting in the face of it, "strategic opportunism." At Babson College we term it "entrepreneurial thought and action." And at the heart of this ignorance-based economy are those economic actors who learn by doing. They embrace the learning embedded in surprise, make mistakes, improve optionality as they go along, and reframe and restructure risky situations to be less risky, in part by partnering with others who will take on some of the risk. The economic well-being of today's societies rests in encouraging entrepreneurs and fomenting their ability to deal with ignorance. If information is a commodity, is it really necessary to convince people that thinking in novel, innovative ways can lead to economic opportunity and growth? Is it necessary to persuade policy makers that investing in education and thinking is worthwhile? In 1996 a call to build the knowledge-based economy may have made sense. Not in 2010.