Other characteristics
A number of other characteristics of knowledge have been discussed in the literature, including the cumulative nature of knowledge (also referred to as recombinance), uncertainty, and lags.
Knowledge is also characterised by a dependence on past knowledge, by uncertainty, and by long lags before practical application.
In our view, non-rivalry and non-excludability are sufficient to create the possibility of economic problems around knowledge. However, the other characteristics of knowledge listed above may add to the risk of suboptimal investment in knowledge production and dissemination. Below we briefly summarise the issues raised.
The Cumulative Nature of Knowledge
An important feature of knowledge is that it is an input not only into the production of final goods like pharmaceuticals and software, but also into the production of further knowledge. As Sir Isaac Newton famously said, “If I have seen far, it is by standing on the shoulders of giants”.
The cumulative nature of knowledge establishes another channel whereby new knowledge can benefit society and the overall benefits may be large, long-lived and widely dispersed across the economy (Nelson, 1959). In turn this increases the risk of underinvestment in knowledge creation given the difficulty of identifying (and recouping costs from) the beneficiaries. It also implies that benefits are likely to be difficult to predict in advance, which adds to uncertainty around knowledge production.
Uncertainty
Both the production and distribution of knowledge are subject to considerable uncertainty. By definition, firms involved in knowledge creation do not know exactly what they are attempting to produce, how best to achieve it, or even whether or not they will succeed. Similarly on the demand side, knowledge consumers may not understand exactly what they are buying until after it is purchased (Arrow 1962). For these reasons, investment in knowledge creation is a highly risky undertaking.
The presence of uncertainty does not of itself imply market failure, since markets have developed sophisticated contract mechanisms for dealing with risk allocation. However, these mechanisms are imperfect and tend to be subject to moral hazard problems (for example, insurance against the risk of a research project not succeeding will adversely affect the researchers’ incentives to succeed). This may be more problematic in the case of knowledge production than for other types of goods, due to the difficulties of assessing risk, measuring outcomes, and asymmetric information (Tisdell 1995). It is also likely to be particularly acute for basic research that is primarily an input into further knowledge.
Lags
The long lags that are often involved in knowledge production and use may further exacerbate the problems discussed above. For example, the length of time between commencement of a research project and production of usable knowledge may increase the risk and uncertainty associated with investment in knowledge creation. Also, the fact that there may be a long lag – perhaps decades – between the development of a body of knowledge and a particular application adds to the difficulty of identifying and recouping costs from the beneficiaries.
