Knowledge vs human capital
A distinction that may be worth clarifying is that between “embodied human capital” – ie, the skills and abilities possessed by people – and “knowledge” – the accumulated stock of ideas themselves, which may be embodied in people, physical capital, blueprints, scientific texts etc. Both are important for growth, but knowledge is arguably more important for driving long-run growth, and is the main focus of this paper[6].
Although knowledge and human capital can be distinguished conceptually, clearly there are important links and complementarities between them. For one, human capital is an important input into the creation, acquisition and application of knowledge – a more educated workforce is more likely to identify, understand, develop and implement useful new ideas (see Dowrick, 2002). Secondly, possession and understanding of knowledge is one of the defining features of human capital – although not the only feature.
Tacit vs codified knowledge
Another distinction that is often made with regard to knowledge is that of “tacit” versus “codified” knowledge. Like excludability, this distinction may be more of a continuum – Cowan, David and Foray (2000) argue that the set of knowledge that can really not be codified is small. Rather, the decision whether or not to codify knowledge depends on the economic costs and benefits of doing so. A decision to codify is usually made to facilitate transfer of knowledge, and so will depend on the value of being able to undertake this transfer.
Summary
To summarise, the characteristics of non-rivalry and varying degrees of non-excludability that are typical of knowledge create problems for a competitive market system to achieve efficient production and use of knowledge. Non-rivalry leads to increasing returns to scale and a tension (even assuming it is possible to create IP and effectively exclude others from accessing it illegally) between optimal incentives to create knowledge and to disseminate it. Prices need to be at or above average cost for the former, but must be equal to marginal cost for the latter. Where it is not possible to exclude others from accessing knowledge, spillovers will mean social rates of return exceed private rates with consequent underproduction and inefficiency. As we will see later, any solution that is used in practice is a compromise in the face of the fundamental tension described above.
Notes
- [6]Reasons for supposing that knowledge is more important for driving long run growth are that: (1) the accumulation of human capital has finite boundaries for each individual, due to the limitations of human capacity; and (2) human capital, unlike knowledge, is rivalrous in the sense that each person's time is limited. For both these reasons, human capital is likely to be subject to diminishing returns and is therefore unlikely to sustain productivity growth indefinitely over time (see Dowrick, 2002). However there are clearly important complementarities between the accumulation of human capital and the creation and use of knowledge.
