It's The Knowledge Economy Stupid:
Is It Real or Virtual?

David J. Skyrme

When politicians come up for election, their interest in foreign policy and global societal matters seem to disappear as most electors judge them primarily by one thing: the performance of the economy, which in turn affects their 'feel-good' factor. And in many countries today (though perhaps not China and some others), the economy is not doing too well. But are we looking at the right economy?

I always remember a piece written by management guru Peter Drucker in the 1980s, since it caught my attention at the time. He said that the financial markets had effectively become detached from the real economy. The trade in financial capital and foreign exchange was many times bigger than that actually needed to sustain the physical economy. Today the disconnect is even bigger with trillions of dollars of financial instruments being traded for every million or so of physical goods sold.

At one level most of us don't care that financial traders operate semi-detached to the rest of us. However, we do care at the times when they connect to our reality. As I look over my pension and other investments at this year-end, the figures are not a pretty sight, a consequence of the two-year stock market decline that will have affected many ordinary people around the world. But, at the moment it is virtual money. Indeed, most money today is what has been described as "information in motion" (sometimes moving too fast in ever-decreasing circles that it's a job to know whose looking after what). It's when you convert that information - the stock certificate, the database entry in your bank deposit account - into something more tangible, such as buying a house, or drawing an income to pay day-to-day expenses when you retire, that you do care. In effect, you have time-displaced some of your assets by entrusting it to a professional to safeguard it for your future needs, often based on a promise that it will grow in value in the meantime. But is your trust justified?

Trust in Decline

Currently, trust is a precious commodity that is suffering a credibility problem. First we had the rise and fall of the value of dot.com businesses. Many people invested in them on the advice of their financial advisers. Then we had Enron, Worldcom and other accounting cover-ups. In the UK, we have had pension mis-selling scandals, and more recently accusations that investors were urged to put their money into 'safe' investments (split-capital trusts) and 'guaranteed income bonds', which investors now find that although the income was guaranteed the capital was not. According to the Global Economy Monitor there is another "slow motion" crisis in which many people are facing a "massive shortfall" in their retirement income, yet most are not aware of it until they come close to retirement age. Even if you yourself are not in such a situation, knowing someone who is and that it could have been you that gives you a "feel-bad factor". We trusted others, not just politicians, to create an environment where our assets would be safe and where we could feel good. But, too often, our trust was misplaced.

Trust is the key theme of the up and coming World Economic Forum summit at Davos in January. Its press release (see http://www.weforum.org) is headed: "Trust will be the challenge of 2003. Poll reveals a lack of trust in all institutions, including democratic institutions, large companies, NGOs and media across the world". The least trusted institutions are parliaments/congresses (the machinery of government is trusted more), and large national and global companies. Conversely, armed forces show the highest degrees of trust (though still less than 50 per cent on balance), with education, the UN, health, NGOs, police and religious institutions having on balance a reasonable degree of trust. I'm sure we will cover the theme of trust more in 2003 (Is There a Real Knowledge Economy?

So how does this affect the knowledge economy? First, there are many differences of opinion as to precisely what it is. Sure, there is some trading purely in knowledge assets - the licensing of patents, the purchase of shares on start-ups, but this is nothing on the scale of financial trading. However, much of what we call the knowledge economy is the transfer of knowledge inputs into other economic goods and services. When we buy advice from management consultants, we expect their knowledge to be put to use in better business processes or better services, which will be reflected in an improved 'bottom line'. When a country invests in R&D, education and technology infrastructure (the initial focus of most national knowledge economy programmes) they expect it (though it often doesn't since the right 'recipes' are not used) to create greater economic wealth or (especially in Scandinavia) an improved "quality of life".

This last outcome is interesting, since more and more people assess their wealth not so much by their financial assets, but by their well-being - a cluster of social, environment, cultural and relationship factors. Companies too are developing holistic and sustainability reports that assess measures that go beyond financials (the 'triple bottom-line' - see for example The Shell Report at http://www.shell.com). Part of this well-being is sustained by a thriving knowledge economy, the exchange of valued knowledge in conversations, learned dialogue and advice from friends, but since there is no financial exchange or physical barter, this social knowledge economy is not counted as part of the real economy. In other words, many of the ingredients and recipes of our quality of life are part of a virtual economy.

At one time it was suggested that the dot.com businesses were archetypes of the new economy with new economic rules and new ways of valuing. Yet, while many pure dot.coms have faded away, the Internet is becoming a more integral part of most established businesses. If this represents a facet of the knowledge economy, then it is not as disconnected from the real economy as the financial economy. On the other hand, knowledge is not yet flowing as freely as it should and boosting the real economy as much as it could. In its 1998 World Development Report, the World Bank identified knowledge as a key driver of wealth in the developing world, citing the different economic growths of Korea and Ghana, that both had similar GDPs per head 40 years previously. But today the plight of coffee farmers in Ghana is worse than it was even a few years ago. For every $2 cup of coffee you buy, the farmer is lucky to get 1 cent. As the price of the coffee we drink has gone up, the price of the raw material has dropped. This is a consequence of a relatively free but imperfect market, with just a few large buyers dominating, and a surplus of new supplies from places like Vietnam. Yet the Ghanaian farmer is typically one of a family whose only business for generations has been to grow coffee. They feel victims of 'the system'. What they need is knowledge of how to climb up the coffee value chain, to change the balance of power in the supply chin or (may be the best) knowledge of how to diversify into more profitable businesses. As well as knowledge, they may well need some other kinds of support to make this change.

Minimizing the Disconnects

I3 Update / Entovation International News:
Current Issue - Archive - Knowledge Digest - Events - Subscribe