Advancing knowledge and the knowledge economy Dominique Foray Ecole Polytechnique Fédérale de Lausanne January 2005 Washington D.C.

Knowledge has always been at the heart of economic growth…..and there have always been organisations and institutions capable of creating and disseminating knowledge

The knowledge economy as an economy in which: – Much greater strategic importance attaches to decisions affecting resource allocation in: R&D and other modes of systematic knowledge creation The formation of intangible human capital The management of information, knowledge and expertise (socail network, codification) The organisation of market exchanges of rights to exploit knowledge –A general purpose technology (IT) provides a powerful technological infrastructure for any knowledge driven activities

ITs Efficient and effective deployment of ITs as knowledge instruments –ITs are currently revolutionizing scientific and engineering research, education and training as well as any activity involving collective actions –Unifying framework: ITs as a general purpose technology Strong complementarities between inventions in IT and co- invention of applications Substantial increasing returns to scale; considerable externalities between inventors of IT and co-inventors of applications

Institutions Emergence, adaptation and path- dependent evolution of institutions for the creation and transmission of knowledge –Unifying framework: characteristics of knowledge as a (semi) public good Diffusion is good for social well being but bad for private returns

Institutions (cont.) –Adaptation of old institutions (patent system) –New resources allocation mechanisms involving a rather different approach to rewards for and spillovers from the production of knowledge than that suggested by a conventional economic property rights analysis –New trust-building mechanisms: methods need to be devised to certify the knowledge circulating on the Internet and to facilitate interpersonal transactions –New kind of division of labor between the old (the LAM) and the new (Internet) institutions designed to collect, organize, preserve and provide access to knowledge

ITs and Institutions Technical changes and institutional changes are mutually interdependent processes Risks of discrepancies between the development of ITs and the development of proper « institutional equipments »

Integration Knowledge fragments and the need for integration –Unifying framework: knowledge division and dispersion The costs of knowledge division and dispersion The role of « integrative knowledge » -norms, standards, infratechnologies, architectures – and the development of new coordination mechanisms (modularity) Proximity, clusters

Public knowledge The importance of public knowledge –The efficiency of processes of knowledge creation and integration is fundamentally dependent on the existence of a freely accessible stock of knowledge –The role of public sector in creating knowledge infrastructure

Open and distributed systems Shaking all ingredients… –ITs –Ressource allocation mechanisms based on « openness » –Trust –Integration –Some mitigation of spatial constraints –Public knowledge..you may obtain open/distributed systems of innovation and learning –A central paradigm in the knowledge economy –Distributed systems are gaining in importance and their various organizational forms and functions have become of wider relevance in a knowledge economy

Policy The economics of knowledge policy is in its infancy Understanding the mechanisms of institutions is extremely important when we move to policy design Policies should be designed as tools to improve the working of institutions which have their own endogeneous dynamics

Empirical studies « Economists have, of course, always recognized the dominant role that increasingly knowledge plays in economic processes but have, for the most part, found the whole subject of knowledge too slippery to handle » E.Penrose The last several decades have seen a number of efforts to overcome the « unobservability » problem and make « knowledge » a quasi- measurable phenomenon Evidence-based policies are possible and necessary

Optimizing knowledge Knowledge is an economic good and we know how to characterize it We are, therefore, ready to talk of the « optimum utilization of knowledge » –« Instead of asking for the optimum optimorum, the very best of all possible alternative actions, socail and private, we may more modestly, resolve that in all actions that we decide to take we try to act intelligently, with full consideration of the pertinent knowledge available at reasonable cost » F.Machlup