Characteristics of knowledge

Using the definition of knowledge as an instruction or recipe, we can now turn to look at some of the key characteristics of knowledge, and the possible implications of these characteristics.

Non-rivalry

The most important characteristic of knowledge is non-rivalry, which means that one person’s use of an idea does not preclude another person using it at the same time.

From an economic perspective, the most important characteristic of knowledge is non-rivalry, since it is this characteristic that implies increasing returns to scale in production (described below) and the potential for knowledge spillovers (or externalities). In turn, these suggest that markets on their own may be insufficient to achieve the optimal outcome for society in terms of resources devoted to knowledge production and dissemination.

Non-rivalry simply means that one person’s use of the good does not diminish another’s use. As Jones (2004) puts it: “Once the design of the latest computer chip has been invented, it can be applied in one factory or two factories or ten factories. The design does not have to be reinvented every time a new computer chip gets produced.”

Jones (2004) (referencing Romer, 1990) provides a simple illustration of how non-rivalry leads to increasing returns to scale. As a simplified representation, we can think of a firm as something that produces output from a number of inputs – knowledge, capital, labour, and so on. The key point is that we need only double the standard inputs (capital, labour, etc) to double the amount of output. We do not need to double the stock of knowledge because knowledge is non-rival: the existing chip design can be used in the new factory by the new workers. However if we do double the existing stock of knowledge (in addition to doubling the standard inputs), the output will more than double, ie we get increasing returns to scale.^[2]

Increasing returns to scale can create problems for a competitive market to reach the best outcome for society. In a competitive market, the price of a computer chip would reflect the prices of all the standard inputs, leaving nothing left over to compensate the idea.[3] In this case, few ideas would be produced because their creators would not be rewarded.[4]

Fixed and marginal costs

Another way to understand how non-rivalry leads to increasing returns to scale is to tackle things from the cost side. First we need to keep in mind that increasing returns and average costs that decrease with the scale of output are two sides of the same coin. Then we note that a non-rival idea costs resources (often significant resources) to create for its first use but subsequent uses are possible at zero marginal cost, since it can be simultaneously used by many people or firms. An initial high fixed cost and low constant marginal costs generate decreasing average costs or increasing returns to scale.

It is important to note that while the marginal cost of production (or use) of an existing idea is zero, this does not necessarily imply that transmission of the idea is costless. For example, think of a design for a computer chip, which is transmitted via a blueprint. Additional copies of the blueprint might be required, and these have a cost and are rivalrous – so would be included as standard inputs in the simplified representation of a firm above. Similarly, if human capital is needed as an input (eg, only trained scientists can understand and implement the design from the blueprint), this also has a cost and is rivalrous. In order to double production, we would need to double the amount of capital, unskilled labour and the number of trained scientists. But we still don’t need to double the actual knowledge (ie the design), which is non-rival^[5].