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  • Myths of the Knowledge Society

    Posted by David Foster on November 22nd, 2009 (All posts by )

    Continuing my retro-reading of old Forbes ASAP issues. In the October 1993 issue, Rich Karlgaard, arguing that book value is of declining importance in evaluating companies, says:

    Human intelligence and intellectual resources are now any company’s most valuable assets.

    (Note that word “now”…we’ll be coming back to it)

    Rich quotes Walter Wriston:

    Indeed, the new source of wealth is not material, it is information,knowledge applied to work to create value…A person with the skills to write a complex software program that can produce a billion dollars of revenue can walk past any customs officer in the world with nothing of ‘value’ to declare.

    I think Rich Karlgaard (now publisher of Forbes) is a very smart and insightful guy. (His blog is here.) And Walter Wriston was one of the giants of banking, back when it was possible to use such a phrase without snickering. But in this case, I think they are seriously overestimating the newness of the importance of knowledge in the economy. And such overestimation has continued and increased in the years since 1993.

    The reality is that the leading companies of the much-maligned “industrial era” were themselves based on knowledge. The original Boulton & Watt steam engine business (which James Boswell visited in 1776) was based on James Watt’s design knowledge of how steam engines could be made more efficient and Matthew Boulton’s process knowledge about how they could be better manufactured. The original General Electric Company was based on Thomas Edison’s knowledge about numerous topics related to electricity. And so on.

    And it would be a mistake to believe that while these businesses may have been based on an original brilliant idea or two, everyone other than the original inventors was restricted to uncreative drone work. The truth is, any substantial and surviving business requires thousands of innovations big and small, on a continuing basis, by many people. This is not new.

    And knowledge isn’t something that only applies in laboratories, engineering departments, and executive suites…and has never been. I recently picked up an interesting autobiography by the engineer-writer L T C Holt, who grew up in the Welsh border area and worked in several factories in the 1920s and 1930s. Here’s his description of the work of a steam-hammer operator in a locomotive factory:

    A typical hammer smith was a heavily built man who wore his collarless shirt open to the midriff. His fleshy, pallid face was seamed with dirt-encrusted wrinkles…Long experience in his craft had given him powers of judgment that weemed almost uncanny. After a quick glance at the forging drawing of a cranked axle, a coupling or connecting rod, he would potter out into the steel yard to choose a suitable billet, followed by a labourer trundling a lifting bogie…In the yard he would wave (his brass rule) as cursorily as a wand over likely billets, finally striking one with it to indicate to the labourer that he had made his choice. It measured, shall we say, a foot square by two feet long and when he had forged it into a connecting rod some six feet long there would be only a small fraction of waste metal to spare.

    What this hammer smith was doing was certainly applying knowledge–largely tacit, experience-based knowledge rather than theoretical knowledge, but knowlege nonetheless.

    Walter Wriston pointed out that “A person with the skills to write a complex software program that can produce a billion dollars of revenue can walk past any customs officer in the world with nothing of ‘value’ to declare.” And this is true. But the ability for a person to carry knowledge of huge economic value in his head is by no means new. An interesting example is provide by the U.S. textile industry, which basically began in 1789 when Samuel Slater left England for America with his vast knowledge of how textile machinery operated. (In order to protect what we would now call intellectual property, emigration of textile workers was actually prohibited by British law)

    It can certainly be reasonably argued that in recent years the percentage of people in a company who are doing knowledge-intensive work has increased…Although an old-line company may have had many highly-skilled toolmakers, hammer smiths, etc, it usually had even more people who were laborers, rote assembly workers, semiskilled machine watchers, etc. But even here, it is necessary to be careful. While information technology had led to the creation of many very-high-skill jobs, it has also resulted in de-skilling of many other jobs. Is the average skill level in a large chain retailer higher or lower than the average skill level in the aggregate of small local businesses that it replaced? It’s hard to say. Many knowledge-intensive functions which were previously done locally are now centralized and/or automated: the number of people who understand how to manage inventory and re-ordered is probably considerably fewer than it was with the thousands of local stores. On the other hand, the large chain offers many very-high-skilled jobs…mathematical studies of distribution strategies, for example…which did not exist in the small-independent-retailer world.

    What is probably is to say is that–across the economy–tacit, experience-based knowledge has tended to be replaced by theoretically-derived knowledge. While Rolt’s hammer smith used his lifetime of experience to select the optimum billet for forging, that selection might now be done by an software “expert system” based on mathematical optimization techniques.

    But while the form of knowledge may have often changed, knowledge has always been the key factor in business and economic success. Here’s Andrew Carnegie, speaking in 1892:

    Let flood or fire destroy my plant from the face of the earth, but if I retain my organization, I would be whole again in six months.

    The “six months” was surely optimistic. But Mr Carnegie clearly understood that the basis of his business was not the physical assets–as important as these were–but the aggregate knowledge embodied in his organization.

     

    16 Responses to “Myths of the Knowledge Society”

    1. Nicholas Says:

      I think you’re right about this. That so few understand it is a tragedy.

      I forget who said it but I was told that any given company’s fortunes generally rest on 20-30 people who work there. These are the people with the most knowledge and talent and they really drive the company. There are many more who make meaningful contributions but these are the people without whom the enterprise would not function as it does. I suspect that’s probably been true for more than one hundred years. And in many ways it’s the success of these companies – the team work of these knowledgable employees – that drives progress in society.

      Of course this isn’t limited to the corporate realm. Linus Torvalds (along with Alan Cox, Dave Miller, and many others) have shown that a few individuals with the right talents, along with countless skillful helpers, can achieve a lot.

    2. Michael Kennedy Says:

      It has often been written that the revocation of the Edict of Nantes by Louis XIV sent the Industrial Revolution to England in the persons of the Huguenot refugees. I think that supports your point. A similar situation has been alleged in the Soviet agreement to allow the Jews to emigrate. It has been compared to a self induced prefrontal lobotomy. Both were disastrous for the country losing the basis of a “knowledge economy,” even in 1685.

    3. Jim Bennett Says:

      This is an important point that is nearly forgotten today. I suspect most early industrial enterprises had this layer of highly skilled workers whose knowledge was essential to the proper functioning of the organization. There was a period of time, essentially between the late 1800s and the passing of the Wagner Act in 1936 when the skilled workers would be unionized and the general workforce would not be — the AFL specialized in the former and the CIO was created to organize the latter. I know mould-makers in foundries were like that; I used to hear my grandfather bitching all the time about how hard it was to retain the good ones and how demanding they could be. Locomotive engineers in steam engine days were like that; I remember reading one pointing out that there were three different ways to control the speed of a steam locomotive and it wasn’t always obvious which one would work once you got above a certain speed. It mostly depended on the engineer’s judgment. And of course Moby Dick had some interesting discussions about the various shares of the profits that the different positions on a whaling ship would get; harpooners had a far higher share than ordinary seamen.

    4. Lexington Green Says:

      The whole point of Taylorism / Fordism was to dismantle this kind of knowledge, break it into small, non-expert bits, and get a docile, low-paid, easily replaced set of laborers to replicate what the highly skilled workers could do. This way, so the theory went, management could capture all the value and keep the workers under its thumb. Of course, it did not work out that way. No matter how hard you tried, you could not get away from craft skills and expert knowledge at multiple stages of the process. Regimenting one step of the process simply pushed the skilled work onto some other part of the chain. An excellent book on this subject is Philip Scranton, Endless Novelty: Specialty Production and American Industrialization, 1865–1925.

    5. Jonathan Says:

      Following on Michael Kennedy’s point, imagine how different history might have been if the Spanish monarchy and the Nazis hadn’t persecuted the Jews.

    6. RJO Says:

      I always enjoy David Foster’s posts, and I always learn a lot from them since my natural mode of thinking is about as far from business-thinking as one can get (and this is no doubt one of the many reasons I am poor).

      But, there has been a tangential issue on my mind for some time, and I was delighted to see Jim Bennett bring it up with the very example I was going to ask about:

      Moby Dick had some interesting discussions about the various shares of the profits that the different positions on a whaling ship would get; harpooners had a far higher share than ordinary seamen.

      Readers may remember this case: when Ishmael and Queequeg are signing aboard the Pequod, the payment they will receive for their work is specified in terms of a fixed percentage of the voyage’s profits:

      I was already aware that in the whaling business they paid no wages; but all hands, including the captain, received certain shares of the profits called lays, and that these lays were proportioned to the degree of importance pertaining to the respective duties of the ship’s company. I was also aware that being a green hand at whaling, my own lay would not be very large; but considering that I was used to the sea, could steer a ship, splice a rope, and all that, I made no doubt that from all I had heard I should be offered at least the 275th lay–that is, the 275th part of the clear net proceeds of the voyage, whatever that might eventually amount to. And though the 275th lay was what they call a rather long lay, yet it was better than nothing; and if we had a lucky voyage, might pretty nearly pay for the clothing I would wear out on it, not to speak of my three years’ beef and board, for which I would not have to pay one stiver.

      So I have wanted to ask two questions for some time now (and in your answers keep in mind that I’m economically ignorant):

      (1) Is there a specific technical name for this type of payment system in economics, so that if I wanted to find commentaries on it I could do so more easily? It this the same as “partage”?

      (2) Why wouldn’t a system more or less like this be a good one for non-profit organizations in particular? (I focus on them because that’s always been my primary habitat.) If universities, for example, paid people a percentage of revenue each year, then when the economy collapses, as it has recently, everyone’s salary drops by exactly the amount needed to cover the loss in revenue. If that causes some people to choose to leave, fine, but it would prevent forced layoffs. Is this a sound idea or a loony idea? (I suspect the reason it isn’t done is that the folks with the decision-making power prefer to implement layoffs since it harms them less.)

      Is this “lay” or “partage” system commonly used in any fields or industries today as a mean to calculate regular salaries?

    7. zenpundit Says:

      This was an excellent post.

      “What is probably is to say is that–across the economy–tacit, experience-based knowledge has tended to be replaced by theoretically-derived knowledge”

      It is cheaper, on average, to do so – as long as everything is going “right”. Lacking access to that tacit knowledge can be very costly when something went wrong and independent, intuitive, problem solving and initiative is required. Outside consultants or specialists charge far more to come in and fix a problem, than an old hand on the payroll who would fix problems ( or at least diagnose it) as part of his per diem rate.

    8. J. Scott Says:

      Insightful post.

      Zen said: “Outside consultants or specialists charge far more to come in and fix a problem, than an old hand on the payroll who would fix problems ( or at least diagnose it) as part of his per diem rate.” Zen you are spot on, however there is the pesky wisdom of Jesus: “A prophet is not without honor except in his hometown and in his own household.” I am a consultant by profession and I have yet to visit a client where I did not find multiple people who “knew” the solution(s) but did not have “standing” because…I read a lose Tom Peters quote recently from his seminal In Search of Excellence: “people come to work everyday with a gripe, the trick is to listen, learn and improve…”

      Awareness of the tacit and explicit is vital if we are to have integrity in our vision; only then can we appreciate the power of thought and knowledge.

    9. Michael Kennedy Says:

      RJO, have you ever read Peter Drucker’s book on non-profits ? I forget the name but he uses the Girl Scouts as an example of adapting to new circumstances and also as one of the best run non-profits in existence at the time (about 15 years ago). A modern example of shares in an enterprise, of course, is stock options. These were heavily used in new Silicone Valley ventures and made many millionaires of engineers. Microsoft is another example. Recent legislation has changed this culture by limiting the use of options.

    10. Anonymous Says:

      David Foster’s post is a welcome, much-needed repost to the “New, new knowledge economy” mantra. He’s right. It’s always been a knowledge economy. E.g., Roman engineering grew out of Greek math and science. And the Industrial Revolution was built upon the growing body of scientific and technical knowledge that emerged from the revolutionary work of Galileo, Newton et al during the 17th century. Plus ca change sort of thing. And isn’t the information that accrues over generations in a particular trade or profession, much of it implicit, also knowledge.

      There are parts of culture that evolve continuously in a general direction of “better.” Science, technology, markets come to mind. In those subsections of general human activity, we experience a cumulative progressive advance over time. But in politics, art, etc., it’s a case of plus ca change, plus ca reste le meme chose.

    11. Anonymous Says:

      David Foster’s post is a welcome, much-needed repost to the “New, new knowledge economy” mantra. He’s right. It’s always been a knowledge economy. E.g., Roman engineering grew out of Greek math and science. And the Industrial Revolution was built upon the growing body of scientific and technical knowledge that emerged from the revolutionary work of Galileo, Newton et al during the 17th century. And isn’t the information that accrues over generations in a particular trade or profession, much of it implicit, also knowledge.

      There are parts of culture that evolve continuously in a general direction of “better.” Science, technology, markets come to mind. In those domains of human activity, we experience a cumulative progressive advance over time. But in politics, art, etc., it’s a case of plus ca change, plus ca reste le meme chose.

      To say that today’s companies and today’s economies are different because the value they produce derives much more from the people within them than heretofore is to state something that is simply false. It’s always been the people.

    12. 57 channels but nothing on Says:

      ” ….better….Science, technology, markets come to mind.”

      I’m not too sure that applies to our current age. Re. “markets” consider the recent housing/credit/TARP debacle. “Science” has offered up the junk science of global warming. Our leaders don’t have ability to imagine, much lest implement, a rational market with respect to health care. Certainly the last couple of centuries has seen progress but currently the trend appears to be generally regressive.

    13. Anonymous Says:

      I agree this was an excellent post but have some different ideas come to mind about the knowledge based economy discussions I have heard.

      • Experience based knowledge will always be with us. From the sales ladies at Sears who always knew to tell my mother when a sale was coming or to keep some piece of clothes for me under their cash register in response to my mother’s request to a line worker that developed a trick that made his job easier; they bypassed the normal and expected procedures that the persons who created the way of doing things never thought of. These are not the knowledge workers I think of when I read most of the current writings on the knowledge economy today but are no less valid.

      • You can’t segregate knowledge from the rest of being human. Having work on the assembly line, I never shut off my thoughts of what I was doing because of that. Those persons around me who did so were dangerous.

      • Fordism was not the only thing defining the so called old economy. In 1913, Ford established the Sociological Department which was put in charge of administering the program and investigating the home lives of workers: “investigators from the Sociological Department visited workers’ homes and suggested ways to achieve the company’s standards for ‘better morals,’ sanitary living conditions, and ‘habits of thrift and saving’.” [ref: http://www.purselipsquarejaw.org/2004/01/ford-sociological-department.php%5D. I put it to you that the existing knowledge economy has its own version of that in the existence and actions of organizations such as ISO and IEEE among others.

    14. veryretired Says:

      Very interesting post and comments. Thank you all.

      Carnegie’s point is a direct, if unintentional, refutation of one of the fundamental tenets of marxism, i.e., that ownership of the means of production is all important, when those “means” are plants, land, or facilities of some kind.

      The mind is the only “means of production”.

      Let an entrepeneur freely assemble the right collection of minds, and organize their efforts, and you have as a result the dynamic phases of such organizations as GE or IBM or Ford, or any of the tech based powers that exploded out of the computer revolution while they were inventing it.

      What the collective vision can never seem to grasp is that the creative energy that drives innovation, and the development of improvements and advances in any field, is a totally voluntary, internally motivated force that cannot be chained to political servitude and ordered about like a servant.

      Secondly, part of the process you are describing, as I understand it, is the loss of the hands-on artisan who brought a wealth of practical experience to those judgement calls that so often leave the unknowledgeble and inexperienced shaking their heads in wonder. But part of the genius of capitalism and technology is the increasing value placed on the intellect, while numerous substitutes are found for the physical elements of work.

      The laser guided and computer controlled robots which now dominate assembly lines are the perfect example. For decades, those claiming to be defenders of labor condemned the assembly lines as being inhuman and cruel. Now that further innovation has reduced the human component, as it has in so many ares of physical work, these same innovations are condemned for costing workers these valuable and necessary jobs.

      Since its introduction, the capitalist system has consistently moved from human muscle to hman mind with artificial muscle to do the work. It is odd to see a system that so consistently raises human beings from mule to mule skinner be so constantly criticized for doing something wrong by the very self-appointed defenders of the common man who then applaud any collectivist that takes an entire population and yokes it to a communal plow.

      Far too many people have been led to believe that capitalism and free markets are about rich people and big corporations. This is untrue, and I have little interest in either.

      The point of economic freedom is that it allows the free operation of two critical human faculties—the mind to create, and the will to choose.

    15. renminbi Says:

      All great achievements are the result of collective effort,and the genius of markets is what enables people to organise themselves to accomplish great things.

    16. Seerov Says:

      There’s no way of measuring these worker’s value outside of what the firm can produce. On the balance sheet there exists the account “goodwill” which is what the firm can be sold for over the price of its assets. But this usually has to do with brand or reputation. So these great programmers can be the cat’s meow, but measuring their output is the only thing we got.