(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.