The Enigma of Knowledge

Knowledge is a resource, a factor of production—like labor, capital, land or natural resources, and so-called knowledge economies depend on it. Alfred Marshall referred to two—basic—factors of production, nature and man; man (as a factor) he subdivided into labor and capital; and capital was further grouped into classes like organization or knowledge: “Capital consists in a great part of knowledge and organization. ... Knowledge is our most powerful engine of production; it enables us to subdue Nature and force her to satisfy our wants. Organization aids knowledge.” Knowledge in its various forms has always been part of economies, of course, and it has been discussed in the literature of several disciplines (including economics), but the concept really gained weight only after 1985 when another notion, globalization, won ground. Globalization is a by-product of the Third Industrial Revolution and the associated transformation of economies. With the relative prominence of the tertiary sector in the Western World, knowledge gained the status of a key resource. Knowledge, and knowledge accumulation and transmission, is an object of investigation of disciplines like psychology, philosophy, education, sociology, political science, geography, history or information sciences, but it has actually played a relatively peripheral role within economics, in spite of the recent hype regarding knowledge economies. In fact, classical economics and equilibrium theory pretty much ignored knowledge in their concepts of homo œconomicus and the perfect market: knowledge was not to be included as a formal factor of production. Indeed, it had to be treated as an externality, as a spillover ( frequently referred to as the MAR-spillover, after Alfred Marshall, Kenneth Arrow and Paul Romer). Concepts like space (proximity) or agglomeration (central when analyzing knowledge production, research productivity, scientific development, technological innovation, economic growth, etc.) could not find a main role in classic economic analysis and were relegated to its fringes, to regional sciences or economic geography. Outside the framework of classical economics, knowledge is often difficult to spot because it is subsumed under concepts like educational attainment, research finding or patenting activities: indeed, the Journal of Economic Perspectives ( from 1996 to 2013) lists only eight articles that address the concept of a knowledge economy (but 500 articles on education, 8 documents on research funding, and 48 documents on patents). Knowledge needs to be inferred. In 1937 Friedrich Hayek delivered his presidential address on “Economics and Knowledge” before the London Economic Club. In this lecture, he essentially asked to what extent (1) economic analysis makes use of “assumptions and propositions about... knowledge possessed by the different members of society”; and (2) “to what extent formal economic analysis conveys any knowledge about what happens in the real world.” The first question addresses appropriate (or infeasible) levels of abstractions, and the second refers to economics as an empirical,