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  • RERUN–Myths of the Knowledge Society

    Posted by David Foster on April 4th, 2013 (All posts by )

    (Originally posted November, 2009. See also this 2010 post: “Protocols” and Wealth Creation.)

    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 seemed 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 Holt’s hammer smith used his lifetime of experience to select the optimum billet for forging, that selection might now be done by a 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.

    Original CB discussion thread here.

     

    9 Responses to “RERUN–Myths of the Knowledge Society”

    1. Gringo Says:

      Which shows that the Marxist labor theory of value- where drone workers contribute all the value to a manufactured product -was just nonsense. An illiterate on the assembly line didn’t know jack about the science or engineering behind the product he was assembling.

    2. Bill Brandt Says:

      In the last year or so I have been reading the blog writings of Neptunus Lex (thanks to your referral David) I have learned so much about Naval aviation. And the thought came to me – with the dissolution of Grumman Aerospace – a main supplier of the Navy of carrier-based planes for generations – how much of that specific expertise about the unique requirements of a carrier aircraft has been lost?

      Particularly with the problems this new F35 has had.

      Just as an aside a video I posted to the lexicans – http://thelexicans.wordpress.com/2013/03/30/0-100-in-2-5-seconds/ – learning that when a plane catches the arresting cable, the entire fuselage flexes – imagine designing a plane with that in mind – flexing 1000s of times over its life, keeping it together for the vast range of its flight envelope. I would suspect Grumman had a good relationship with Navy procurement officers over the many decades. The officers knew that Grumman people knew really want was involved in the design of aircraft for their unique requirements.

      As to specialized programmer’s knowledge – a discussion I’ve had for years – unless you know the business – or how the users really want to interact with it – your knowledge is useless.

      How many of you have tried using a program where is was obvious the writers demanded you fit a square peg into a round hole?

      Most of you, I would surmise.

    3. Richard Torre Says:

      Of course, you know well that another writer was observing similar processes and defining same as The Wealth of Nations.

      Yet, today our Nation blinks “illegals” that carry the nonsuch knowledge, and retard the the visa process for those with valuable, productive knowledge.

    4. Mike K Says:

      “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.”

      When I was in college, I was supported by a scholarship that was funded by USC alumni who worked for Sears Roebuck. One alumnus got me a part-time job at a Sears store since my scholarship only covered tuition. I worked at several different stores over two or three years, then got a job at Douglas Aircraft which involved programming an IBM 650 computer. The Sears experience taught me how useful computer knowledge could be for a big chain store.

      At the Sears “Boyle Street Store” in Los Angeles, the west coast catalog store was co-located with the largest retail store in the west, maybe in the entire chain. I worked in several different departments since I was in a sort of part-time management training program. I worked in hardware and sporting goods and the warehouse for a time. One of the last departments I worked in was the section that traced warehouse inventory and ordering.

      That section had four or five little old ladies who kept track of warehouse inventory and ordering on a set of index cards. All of them were long time employees. That was the day of the profit sharing program where the elevator operator might have more shares of stock than the store manager. These little old ladies all had four weeks of vacation due to seniority. Their card files were complex enough that no one took over their jobs when they went on vacation. Since they had had four week vacations for years, the warehouse inventory was often a year behind and ordering was a similar exercise of imagination. When I went to the warehouse, we had no idea what was in there.

      This was the largest Sears store in the country. I imagine that the situation was duplicated in a lesser scale all over. I wasn’t surprised at Sears’ later troubles.

    5. Smock Puppet, 10th Dan Snark Master and Burlesque Entertainer Says:

      }}}} The “six months” was surely optimistic.

      No, this was a prior era when 12h workdays with no “goof off” time allowed. I can believe it.

    6. Smock Puppet, 10th Dan Snark Master and Burlesque Entertainer Says:

      }}} As to specialized programmer’s knowledge – a discussion I’ve had for years – unless you know the business – or how the users really want to interact with it – your knowledge is useless.

      How many of you have tried using a program where is was obvious the writers demanded you fit a square peg into a round hole?

      As a programmer, you’re missing the boat. A REAL programmer knows far more than just about programming. He HAS to learn a fair percentage of his target craft as well. Not enough to be an expert — just enough to understand
      a) what the expert wants
      b) how to tease the needed information about making what the expert wants out of the expert.

      THIS takes more than mere coding skill, and it isn’t something you generally have within 5 years of college…

      As to your question, well, that’s HIRING MANAGERS. HR, these days, is run by lackwit idiots who know nothing of their target profession, and, as a result, do two things:
      a) fail to grasp that it takes more than 5 years out of college to get REALLY GOOD.
      b) think they can create a Chinese menu of requirements and actually find someone competent at fulfilling them who isn’t an ex-employee. The common term for this is “Looking for a Purple Unicorn”.

      The end result is that real talent often gets overlooked and does not get the job. Someone who has all the paperwork requirements does.

      Trust me, I’ve been out of work as a programmer too long to not know otherwise. The only way a talented programmer gets a job these days is if they Know Someone. Credentialed Hacks are the main hire.

    7. Smock Puppet, 10th Dan Snark Master and Burlesque Entertainer Says:

      Mike: The problems with centralized ordering systems, though, is that they often get woefully out of whack.

      There’s a local Wal-Mart that has constantly had entire SECTIONS of shelves that are empty. And this is (now was) the GOOD local store out of three. Their computers have no idea what is there or not, due to errors in the inventory records, either due to “shrinkage” or other problems. I’ve been halfway tempted at times to do a blog titled “The Empty Shelves Of Wal-Mart” to see if it’s a local thing or not, as I suspect it’s not.

      Talking to the managers, they say it’s out of their hands, they have nothing to do with stocking the shelves, it’s all done from the home office.

      The other issue with this is that there’s no provision for locally-specific products. Either things created locally that have a local-interest flair, which only someone FROM that area might grasp would sell as well as any other item being placed on the shelves — or things that will SELL locally because of “unique” local qualities — e.g., This is Florida. Wal-Mart stops STOCKING fans for most of Dec-Feb, in favor of only space heaters, which probably makes sense further north but it does get “warm” here even in the winter, and makes fans a year-round sales item. But the central computers — and whoever sets up their ordering process — doesn’t have a clue about that.

      This is kind of relevant. I went to Wal-Mart looking for utility suction cups for a purpose I had. Wal-Mart had EXACTLY one lousy brand/style of suction cup, which is such a crappy one that — I kid you not — would not stick to GLASS. No, not even if you wet it before applying. I’m dead serious, I did exactly that, it popped off on its own, while under no load at all, from a piece of clean glass. I went to Lowes (hardware)… they had the exact same piece of garbage. WTF?

      I finally managed to find what I wanted at Target. I NEVER used to consider Target. They were just a more expensive version of Wal-Mart… But not any more. Now Target is much more likely to get considered as an option, when I don’t feel like fighting the hassles of the crowds at WM, or when I don’t KNOW WM has what I want.

    8. Mike K Says:

      Smock, the was the strength of Wal Mart but I understand that the corporate culture has shifted quite a bit the past few years. They have definitely swerved left politically and there are many who think the results don’t make sense. If you are going to have a central order and inventory system, it had better be good.

      The Sears example is just my first connection of computer skills and business. That was about 1960. At the time, or shortly after, I was recruited by IBM to do some work in health care but it seemed that it would only be inventory stuff as computers were far too primitive at the time.

    9. Bill Brandt Says:

      Mike – I think 3 things can kill a business – (a) lack of capitalization, (b) A/R and (c) bad inventory control .

      Had a wonderful hardware store in town – an institution. Old wooden creaky floors, and somethings on the racks that had 40 year old price tags. I think other factors here caused its demise but I remember the old price tags.