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The Economics of Knowledge: The Debate

about Codification and Tacit Knowledge

IRIST/GERSULP-BETA, Universit Louis Pasteur, Strasbourg BETA,
Universit Louis Pasteur, StrasbourgLIO, Universit de Haute Alsace,
Mulhouse BETA and
Universit Louis Pasteur, Strasbourg, France. Emails:, and
The aim of this paper is to shed some light on the complex relationships between codified
and tacit knowledge. This supposes a first step is to distinguish clearly the notion of
knowledge from the notion of information. A model of knowledge as a structure is then
proposed from which an analysis of the content, significance and implications of the tacit
dimension of knowledge can be derived. The paper emphasizes the importance of the
context, the modes of conversion of knowledge and the role of knowing communities when
analysing the relationships between tacit and codified knowledge.
1. Introduction
While the current literature in economics agrees on the large and rapidly
growing importance of knowledge,
either as an input or as an output of the
economic system, there are strong controversies about the ways to represent
knowledge. An important debate is related to the analytical status of tacit
To be treated as an economic good, knowledge must be put in a form that
Oxford University Press 2000 I
The belief of the increasing importance of knowledge for society is shared by many authors (e.g.
Dasgupta and David, 1994; Gibbons et al., 1994; Callon and Foray, 1997; Lundvall, 1988). The conviction
of the increasing importance of knowledge is echoed in other related disciplines. For example, Drucker
(1993) argued that knowledge is the only meaningful resource today. For Toffler (1990), the battle for the
control of knowledge (the ultimate replacement of all other resources) and the means of communication
is heating up all over the world. Reich (1991) contends that the only true competitive advantage will reside
among those who are equipped with the knowledge to identify, solve and broker new problems. The
increasing importance of knowledge even modifies how society perceives the historical dimension: Castells
(1998) shows by analyzing the diffusion of the micro-informatics that the invention of the microprocessor
has impacted on the economic context, including the labor conditions and the time scale.
allows it to circulate and be exchanged. The main transformation investigated
by economists is the transformation of knowledge into information, i.e. the
codification of knowledge. It is through this form that economists generally
measure and assess knowledge objectively (or at least comfortably). The
process of codification allows them to treat knowledge-reduced-to-informa-
tion according to the standard tools of economics.
Information is knowledge
reduced to messages that can be transmitted to decision agents. We can take
the standard information-theoretic view that such messages have information
content when receipt of them causes some action (Dasgupta and David,
1994). This approach makes it incumbent that knowledge becomes an object
with discernible and measurable characteristics. Although it is just the
tangible sign of the tremendous increase of all forms of knowledge
production, the rapid cumulative expansion of the codified knowledge-base
of society is frequently presented as a key characteristic of the development
of modern economies and has contributed to the legitimation of the approach
whereby the analysis of knowledge is restricted to its codified form. Eco-
nomics has thus traditionally taken the view that there is hardly meaningful
distinction between information and knowledge. This theoretical position
dates back to the approach suggested by some prominent economists,
such as Hayek (1945),
Nelson (1959)
and Arrow (1962). These authors
It seems that this is what Simon (1999) had in mind when he wrote: All the aspects of knowledgeits
creation, its storage, its retrieval, its treatment as property, its role in the functioning of societies and
organizationcan be (and have been) analyzed with the tools of economics. Knowledge has a price and a
cost of production; there are markets for knowledge, with their supply and demand curves, and marginal
rates of substitution between one form of knowledge and another. However, the message brought forward
by Simon is somewhat ambiguous, for he continues his statement by arguing: Knowledge is simply one
among many commodities in which our economy trades, albeit one of large and rapidly growing
importance. It requires special treatment because of its special properties. One of the main concerns of the
present contribution is precisely to determine these special properties.
Hayek conceived the problem of knowledge for society in such a way that at a given moment in time
each individual holds some knowledge and that there is a need to mobilize socially all these forms of
dispersed knowledge. He drew attention to the importance of implicit, context-specific knowledge
(knowledge of the particular circumstances of time and place) compared with the knowledge of general
rules (what he called scientific knowledge): The peculiar character of the problems of a rational economic
order is determined precisely by the fact that the knowledge of the circumstances we must make use of
never exists in concentrated or integrated form, but solely as the dispersed bits of incomplete and
frequently contradictory knowledge which all the separate individuals possess. The economic problem of
society is thus not merely a problem of how to allocate given resources . . . it is a problem of the utilization
of knowledge not given to anyone in its totality (Hayek, 1945). For Hayek, the solution to this problem
resides in the price mechanism to communicate information through the market process through which
individual knowledge is mobilized socially. Hayek raised an important issue which is the way knowledge
is efficiently shared and exchanged through interaction between agents, but considered the solution in
terms of the allocation of information provided by the price-information signals. Nevertheless, the question
left open is that the coordination of agents holding their own stock of knowledge independently is not
sufficient to achieve economic ends, especially when knowledge itself is the object of action.
Nelson (1959) and Arrow (1962) focused on the production of new knowledge, whether in the
technological domain or in the scientific one. They essentially examined the characteristics of
knowledge-reduced-to-information as a public good. For Arrow, the process of invention is interpreted
The Economics of Knowledge
clearly emphasize some key characteristics of knowledge for economics, and
deliberately focus on the fact that knowledge can be reduced to information.
They certainly do not consider the possibility that knowledge is information,
but many of the economists that they inspired did.
This view and the related hypothesis on the properties of knowledge
(transferability, rivalry and appropriability) are challenged among others by
evolutionary economists (Dosi and Marengo, 1994; Pavitt, 1997) and
sociologists of scientific knowledge (Callon et al., 1999). They highlight the
importance of the learning processes by which knowledge is produced
and underline its contextual features. Even the most codified knowledge
scientific knowledgecannot systematically be transferred (Collins, 1985).
As Callon (1999) points out, scientific knowledge is not diffused; it is
replicated with high costs, because what is replicates are the structures of
research (such as laboratories and instruments) and not the results themselves.
In other words, the knowing how (the tacit knowledge) cannot be dissociated
from the knowing about (the codified knowledge).
Schematically, two extreme positions are conflicting: on the one hand
there is the absolutist position on codification for which all knowledge can
be codified. According to this position, there could be some tacit knowledge
as an economic residual of knowledge, but this tacit knowledge could be
(at some cost) codified. Codified knowledge is thus considered as a pure
substitute for tacit knowledge. On the other hand, there is the absolutist
position on tacit knowledge for which all forms of codified knowledge require
tacit knowledge to be useful. Codified and tacit knowledge are thus viewed
as essentially complementary. The aim of this contribution is to investigate
a reasonable position on the use of knowledge in economics, by trying to
shed light on some of the complex relationships between codified and tacit
knowledge. We are interested in the process of transformation of knowledge
into a commoditywhich can be called the commodification of knowledge.
At the same time, with respect with the codification process, we also want to
emphasize the following lines of arguments.
First, codification should not be assimilated to commodification. Even if
codification is an important vector for commodification, there are cases where
knowledge may be commodified without being codified. Knowledge may
broadly as the production of knowledge which can be assimilated to information. He raised the problem
of appropriability by showing that it is difficult or even impossible to create a market for knowledge once
it is produced. It is therefore difficult for producers of knowledge-reduced-to-information to appropriate
the benefits that flow from it. There is a fundamental paradox in the determination of demand for
information; its value for the purchaser is not known until he has the information, but then he has in effect
acquired it without cost (Arrow, 1962). Again, the complexity of knowledge is clearly reduced to an
information-codified form. It is as much remarkable as this contribution has inspired public intervention
in the domain of R&D for decades.
The Economics of Knowledge
be commodified as a service such as in after-sales explanation services that
accompany the buying of complex goods (computers, for instance). One can
find numerous cases where in fact knowledge is commodified on markets in
both codified and tacit forms; for instance, in most countries driving schools
offer two kinds of knowledge products: they make sure that drivers will
know the codes (the pure codified form) and they train them through prac-
tice and experience acquisition (in a purely tacit form). On the other hand,
knowledge may be codified without becoming a commodity, as in a case of
internal operating procedures within a given organization, that are of no value
for other organizations.
The second reason for which the process of codification should be
considered carefully is the risk of completely assimilating knowledge and
information. In this paper we will insist on the need to clearly distinguish
knowledge from information. There is a need to achieve better understanding
of the mechanisms operating behind the scene of codification. We especially
stress the cognitive and organizational mechanisms mobilized by the codi-
fication process. Indeed, if economists do not consider these mechanisms (that
are usually studied by other disciplines such as psychology), there is a risk of
misinterpreting some key aspects of codification of knowledge. For instance,
certification processes aim at extracting and converting tacit knowledge into
a codified form; but in order to be used, the latter form mobilizes again
forms of tacit knowledge. It underlines that the relation between codified and
tacit knowledge is not just a question of complementarity, nor a question of
substitutability: beyond the transformation of knowledge as an object, the
codification process also raises the question of the capacity of the knower to
exploit different categories of knowledge.
Furthermore, the distinction between codified and tacit knowledge is not
the only complex dimension of the process of transformation of knowledge.
Another crucial aspect to be considered is the transformation that takes
place between individual and collective knowledge. The formation and use of
knowledge depend on the nature of the organizations and other collective
sets. Considering knowledge as resulting from a social process raises con-
siderable issues, in particular the need to understand how knowledge can
be transmitted from the level of the organization to an individual, and
reciprocally. As many authors have shown (Nonaka and Takeuchi, 1995), this
transmission requires different conversion mechanisms (tacit to codified,
codified to tacit, etc.) to operate within a given organization and between
different organizations. They clearly emphasized that the individual/collective
dimension strongly interferes with the tacit/codified dimension.
The fact that the tacit/codified and the individual/collective are the two main dimensions that drive
The Economics of Knowledge
In order to clarify the process of transformation of knowledge, the paper
is constructed along the following steps: secton 2 distinguishes the notion
of knowledge from the notion of information, and more precisely, points out
that knowledge is not a mere stock resulting from the accumulation of an
information flux. We thus emphasize that knowledge is closely dependent on
the cognitive abilities of the actors who hold it, and that it cannot be
separated from the communication process through which it is exchanged. In
section 3, we propose the building of a structure of knowledge resulting
from complementary layers (crude knowledge, knowledge of how to use
knowledge, knowledge of how to transmit knowledge and knowledge of how
to manage knowledge). This representation reinforces the understanding of
the distinction between knowledge and information, and helps to underline
the cognitive and strategic implications of the transformation of knowledge.
Section 4 investigates the content, the significance and the implications of
the tacit dimension of knowledge. Section 5 explores the conditions and the
consequences of the transformation of knowledge from the individual to the
collective level (and reciprocally). As a conclusion, section 6 draws lessons
from the above discussions and proposes some new avenues of research.
2. In Search of a Useful Distinction between Information and
Knowledge in Economics
The growing interest in knowledge in the current economic literature and the
increasing questioning of the assimilation of knowledge to information lead us
to investigate first some of the main epistemic considerations of knowledge,
in order to specify the economic meaning of it. It is certainly not the point
here to try to solve the theoretical debates of other disciplines, but rather
to acknowledge that each economic theory relies on a given epistemological
vision of knowledge. It is well known that the classical approach of economics
adopts a vision of knowledge in line with the rationalistic school in epi-
stemology. This vision allows the reduction of knowledge to information,
or more precisely allows knowledge to be considered a stock accumulated
from interaction with an information flux. We suggest in this contribution an
approach to knowledge in economics close to constructivism,
and suggest
the transformation of knowledge is materialized for instance in the different typologies of knowledge that
have been proposed by economists. Most of them refer to these two dimensions. See Annex 1.
In a constructivist approach, a behaviour, an action or a message has no objective reality: it only exists
in the subjective perception of actors belonging to the same social system. The actors cognitive structures
and their cognitive abilities to recognize, to interpret or to ignore facts become central in the way they
organize their representation of the world [for a review of the use of the constructivist paradigm, see
Whittington (1993)] (see Lemoigne, 1990).
The Economics of Knowledge
relaxing some of the classical hypotheses regarding the building of knowledge
that help to make room for introducing the tacit dimension of knowledge and
the problem of the collective building of knowledge onto the economic scene.
2.1 The Linear Model
The traditional school in economics relies on rationalism as the cognitive
approach to knowledge. Rationalism assumes the existence of an a priori
knowable external reality which is true at all times and in all places and which
is the highest grade of knowledge. Such knowledge does not need to be
justified by any sensory experience.
Absolute truth is deduced from rational
reasoning grounded in axioms (which can be assimilated to a quest for the
truth). Thus knowledge can be attained deductively by employing mental
constructs such as concepts, laws and theories. This classical definition of
knowledge as justified true belief supposes a split between the knower and
the known.
The traditional rationalistic process of the quest for knowledge can be
described by a linear process of transformation [that Winkin (1996) called the
telegraphic communication, with reference to Shannons model]: data are
turned into information, information into knowledge, and finally knowledge
is confronted with wisdom (or meta-knowledge that encompasses beliefs
and judgements). This vision of the transformation emphasizes the role of
information-processing as a critical step in the formation of knowledge for a
given cognitive entity. It also presumes that a linear process is involved in
increasing the complexity of the search for knowledge, where the first step
Conversely, empiricism argues that there is no a priori knowledge and that the only source of
knowledge is the sensory experience. Everything in the world has an intrinsically objective existence. Only
experience (sensation, reflection) can provide the mind with ideas. Knowledge of the world is to be found
in the investigation of an empirical reality and not through rational introspection. That is the reason why
such tools as language and logic are shaped to be used for the analysis of empirical reality. By linguistic
analysis, it is possible to derive the meaning of concepts that are empirically verifiable. Ones personal
knowledge is supposed in such a vision to correspond to reality.
In the classical rationalistic vision of knowledge, there is no connection between knowledge and action.
What is at stake is a spectator theory of knowledge that separates theory and practice. To a large extent,
the traditional vision of economics is based on such a position which tends to accept the separation of
economic knowledge from the economic subject. If one relaxes this classical separation, then there is room
for introducing explicitly the role and importance of learning processes related to experience in the domain
that is considered. For instance, the role of learning processes has been emphasized by James (1950) when
dealing with pragmatism. He proposed to consider the building of knowledge as an interactive relationship
between knowledge about (wissen in German, savoir in French) and knowledge of acquaintance
(kennen in German, connatre in French). Action though experience provides immediate knowledge of
acquaintance, while knowledge about is the result of systematic thought that eliminates the subjective
and contextual contingencies. This distinction has an implication in terms of social and organizational
dimensions: knowledge of acquaintance needs essentially to be gathered and integrated, while knowledge
about needs essentially to be diffused.
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consists in transforming data (considered as raw material from nature) into
structured pieces of information that are then, in a second step, channelled
into the search for knowledge. Each piece of information brings with it a
quantum of novelty (according to Shannons theory) that contributes to
increasing the stock of knowledge and the combinatorial complexity of this
knowledge stock. To a large extent this representation coincides with the con-
ceptualization of information as a flux that builds a stock of knowledge and
that serves as a foundation for a justified set of beliefs.
This elementary vision of the relationship between knowledge and
information carries some important implications:
1. The quantitative measure of information as a quantum that circulates
throughout the process raises the question of efficiency of the information
processing system. The more efficient the channels of treatment of data
and information, the more information can circulate and the more ef-
ficient the process of formation of knowledge can become because of the
ability to examine and assess different combinations of quanta. (Of course,
such a statement requires careful examination, in particular when taking
into account the question of the existence and role of noise in the trans-
mission of information or in the examination and assessment process.)
2. This representation supposesat least implicitlythat knowledge will
result from the codification and classification of information. Thus, the
quality and the accuracy of the formation of knowledge depends directly
on the features of this treatment of information.
To a large extent, most of the economic uses of the concept of knowledge are
based on such a paradigm. However, a growing number of voices now argue
that this vision is too simplistic and are calling for a change of paradigm. One
of the most significant contributions that tried to go beyond this restricted
version of the relationship between information and knowledge is Machlup
(1983). To outline his meaning, Machlup quoted the famous extract from
Boulding (1953):
We cannot regard knowledge as simply the accumulation of information
in a stockpile, even though all the messages that are received by the brain
may leave some sort of deposit here. Knowledge must itself be regarded
as a structure, a very complex and quite loose pattern with its parts con-
nected in various ways by ties of varying degrees of strength. Messages are
The last step of the process, the way wisdom (beliefs and judgements) considers knowledge, depends
on questions of methods such as falsification in the Popperian point of view.
The Economics of Knowledge
continually shot into this structure; some of them pass right through
its interstices without effecting any perceptible change in it. Sometimes
messages stick to the structure and become part of it . . . Occasionally,
however, a message which is inconsistent with the basic pattern of the
mental structure, but which is of such nature that it cannot be disbelieved,
hits the structure, which is then forced to undergo a complete reorgan-
Thus, information is fragmented and transitory, whereas knowledge is
structured, coherent and of enduring significance; furthermore, information
is acquired by being told, whereas knowledge can be acquired by thinking.
Any kind of experienceaccidental impression, observation and even inner
experience not induced by stimuli received from the environmentmay
initiate cognitive processes leading to changes in a persons knowledge. Thus
new knowledge can be acquired without new information being received.
2.2. An Interactive Model of Representation of Knowledge and
The above arguments
underline the need to come up with a distinction
between knowledge and information that is not restricted to a simple stock
or flux distinction, and also to come up with a framework that explicitly
introduces some cognitive mechanisms of individuals. This position leads us to
an epistemic approach close to constructivism. From the previous perspective,
this can be done in three steps:
1. The first step is to abandon the pure linear process of the formation of
FIGURE 1. The linear process of formation of knowledge.
To sum up, information in the sense of telling and being told is always different from knowledge in
the sense of knowing: the former is a process, the second a state. Information in the sense of that which is
being told may be the same as knowledge in the sense of that which is known, but need not be the same.
That even in everyday parlance people sense a difference can be seen from the fact that in railroads stations,
airports, department stores and large public buildings we expect to find a booth or a counter market
Information but never one marked Knowledge. Similarly in our modern economy, we find many firms
selling information services, not knowledge services. [On this very topic, it seems that what was true when
Machlup wrote it some 20 years ago is true no longer, when considering the development of knowledge-
intensive services.] On the other hand, we would frown on education programs that fill the students head
with a load of information: we want them to disseminate knowledge of enduring value and to develop a
taste or a thirst for more knowledge, not just information. (Machlup, 1983)
The Economics of Knowledge
knowledge. Knowledge not only results from a one-way cumulative pro-
cess (from information to knowledge), but requires continuous feedback
loops between the different main components involved (data, knowledge,
wisdom). Each component interacts with the others, and in particular can
inform the others (cf. Figure 2. Inform here means that one component
of the system provides to another a specific meaning and volume of
information (a quantum of novelty, in quantitative but also qualitative
terms). This vision, in line with Bouldings point of view, disconnects the
direct and exclusive relationship stock/fluxbetween knowledge and
2. The second step is to introduce explicitly some cognitive features of the
individual (that is to abandon the rationalistic hypothesis of the separation
between the knower and the known). Consequently, the different com-
ponents of the process of formation of knowledge must be reconsidered:
Data can be distinguished in terms of stimulus in the case of an
emission of data from nature, and message in the case of an emission
of data from a human emitter. The main difference between these two
kinds of data is the following: Nature does not speak, which means
that the stimuli are not being organized a priori but will be interpreted
and categorized ex post by the cognitive agent. On the contrary, messages
are organized a priori by a cognitive building such as language, categor-
ization or classification, even if they also need a further interpretation by
the cognitive agent.
The second component is constituted by the block knowledge and
representations that results from a specific structuring of data and
messages that depends on the vision of the world of the cognitive entity.
The need here to distinguish knowledge and representations comes
FIGURE 2. The interactive system of formation of knowledge and the different processes at
The Economics of Knowledge
from the need to distinguish short-term and long-term memory. If both
representation and knowledge result from cognitive structurings by
the agent, representation is contextual and temporary, and has to
do with the mental attitudes in a given context such as how to listen
to this talk, how to solve this problem, etc., which supposes a short-
term building, while knowledge corresponds to a more long-term
The third component, the vision of the world of the cognitive entity,
corresponds to its wisdom that includes its beliefs, judgements and
values. These are meta-categories which determine the nature of the
rules and the direction of the learning processes to be followed by the
The relationship between the different components of the system also
highlights the different processes at stake in the dynamics of the system:
classification/categorization, interpretation, application of rules and heur-
istics, learning processes, etc. One of the most fertile avenues of research
for social sciences has been the recognition of the role played by cognitive
mechanisms (Ancori, 1992)memory, pattern recognition, perception,
communicative skillsthat are instrumental in the interaction between
experience and practice on the one side and beliefs and judgements on the
other. In this perspective, the definition of the economic agents includes their
cognitive abilities and the split between the actor and the processes in which
he is engaged disappears.
3. The third step is that when explicitly introducing another agent, one can
pinpoint the specific needs for interaction and communication between
two agents in the formation, circulation and exchange of knowledge.
In this framework (Figure 3 below) some specific issues arise such as
the need for building common languages, common classification and
categorization of messages, and for sharing and building some common
knowledge and some collective learning processes. These characteristics
will be essential when examining the process of codification of know-
ledge, and will be analysed in more depth below.
In the rationalistic vision individual beliefs are given (Walliser, 1998) and remain unchained through
the process of quest for the truth. Agents have no cognitive features, because there is no room in this
approach for any learning process internal to the agent that would shape progressively its set of beliefs
from the experience gained in the search for knowledge: introducing a process of revision of the beliefs
implies a constructivist vision of information, which is in contradiction with the optimizing methodology
of the Game Theory (Ancori, 1998).
The Economics of Knowledge
3. Knowledge as a Structure
What comes out of the previous section is that (i) knowledge is closely
dependent on the cognitive abilities of the actors who hold it and (ii) know-
ledge cannot be considered separately from the communication processes
through which it is exchanged. A third proposal can be added, and this section
will be devoted to explaining it: knowledge demands knowledge in order to
be acquired and exchanged. This leads us to understanding knowledge as a
structure, which can be broken up into complementary layers.
A basic
stimulus (I feel heat on my skin) will only be valuable if it goes along with
the knowledge of how to use it (I will put on some light clothes), how to
exchange it (I can tell to others that the sun is shining) and how to manage
it (I should suggest to my friends that we should go to the beach before it
becomes too crowded). The example is simplistic, but is sufficient to raise
the questions we want to focus on: how is knowledge stored and how does
it trigger actions, what part of knowledge has to be codified, and where
will knowledge be diffused? To provide some answers, we propose to consider
FIGURE 3. Interaction between agents in the formation of knowledge.
At this point, in line what was expressed by Machlup, Saviotti (1998) summarized some of the main
features of knowledge: Knowledge establishes generalizations and correlations between variables.
Knowledge is therefore a correlational structure. The extent to such correlation is not infinite. Each piece
of knowledge (e.g. a theory) establishes correlations over some variables and over particular ranges of their
values. As a consequence, knowledge has a local character . . . The degree of such local character can be
measured by the span of a given piece of knowledge, that is, by the number of variables and by the
amplitude of the range over which correlation is provided. General theories will have a greater span than
a very specific piece of applied knowledge . . . Particular pieces of information can be understood only in
the context of a given type of knowledge. New knowledge, for example relative to radical innovation,
creates new information. However, this information can only be understood and used by those who possess
the new knowledge. In other words, knowledge has also a retrieval/interpretative function. In summary,
knowledge is a correlational and a retrieval/interpretative structure, and it has a local character.
The Economics of Knowledge
knowledge as a structure comprised of four different layers, ranked in order of
increasing complexity:
1. The first layer is crude knowledge. We have discussed in the previous
section the concept of data. Our main point was to substitute to this
concept the two notions of stimuli (emitted by nature) and messages
(emitted by a human being). As soon as they are perceived by an agent,
both constitute the first layer of the structure of her/his knowledge we
call crude knowledgei.e. information as an event without meaning.
More exactly: information before the building of a meaning by the
receiver, as seen by Shannon and Weaver (1949). This layer of knowledge
gathers together elements such as plain facts, messages and intuitions
(which are kinds of reflexive messages). At this elementary step we con-
sider these elements as autonomous pieces of knowledge. The point is not
to see if they have been, or how they will be, processed, interpreted or
attached to a specific context: I see a ray of sunshine, my boss told me
Im fired, the economics of knowledge is a promising research field are
examples of elements of crude knowledge. If we think of the learning of
a foreign language, the emphasis is put on grasping the word before
getting the meaning. This is obviously a rather artificial perspective, but
useful to underline a first issue: when considering crude knowledge, what
matters is the volume of knowledge to be perceived compared with the
(scarce) cognitive resources of the agents. For instance, the learning
processes in collecting crude knowledge elements will be different if they
are highly codified or if their sources are localized in time and/or space
because of organizational boundaries or rules.
2. The second layer of the structure of knowledge is the knowledge of
how to use (crude) knowledge. We want to stress two aspects: (i) how a
new piece of stimulus/message is integrated with the previous stock
of accumulated knowledge and (ii) how action and decision making are
related to crude knowledge.
Once a stimulus or a message has been perceived, the agent has to resolve
the equivocability of this new piece of knowledge. This is done by a backward
process through which the new knowledge is confronted and articulated with
previous experiences.
Weick (1979) distinguishes three processes: the enact-
ment process, in which the knower constructs, rearranges, singles out and
We refer to Weicks representation (1979) of the organizational sense-making process, although a
cognitivist would certainly disagree completely. But for economic purposes it seems also to be applicable
to individuals.
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demolishes many objective features of his/her surroundings; the selection
process, which leads to identifying, rightly or wrongly, the set of causal
relations; and finally the process of retention, which is the memorization of
the successful sense-making.
The processes described above lead to a peculiar form of historical know-
ledge, stored usually as a map of relationships between events and actions,
that can be retrieved and superimposed on subsequent activities (Choo,
1996). To this extent, action is triggered by the occurrence of a message or
a stimulus. But the link can be more or less loose. In some cases, the per-
ceived stimulus automatically releases a well-defined action, as in the case
of Pavlovian reflexes. It is the case when previous learning processes have
produced routines; and the more the routines are achieved and adapted, the
less understanding is required to justify the undertaken action.
in some situations, the crude knowledge has first to be articulated with
previous accumulated knowledge which must be retrieved and eventually
reorganized. Then, if the consequences are not clearly identified, action will
be undertaken step by step, through trial-and-error processes, in order to
collect more knowledge (crude knowledge) about its reliability.
To summarize, the second layer of knowledge sustains the retrieval property
of knowledge, shapes the knowledge by creating a meaning and stimulates
the production of knowledge of the first layer. The main point here is the
following: the appropriation of crude knowledgei.e. its integration in ones
cognitive contextis not the result of a transmission, but rather the result of
a re-engineering process. For example, when the receiver knowing blue and
green receives the message red, the result in his/her cognitive context is
not to replace blue, green by blue, green, red, but to replace blue,
green, blue and green by blue, green, red, blue and green, blue and
red, green and red, and blue and green and red. In other words, cognition
follows combinatory rules, not additive rules, as seen by Bateson (1972).
3. The third layer is related to the exchanges and interactions an agent
has to conduct in terms of knowledge. This category mainly covers
codes, languages and models, which are basically tools used to exchange
knowledge. Thus, knowing how to transmit knowledge implies obviously
the mastery of codes and/or languages. But it also includes knowledge
about the modes of conversion of knowledge that are the ways through
which individual knowledge becomes collective (and reciprocally), tacit
knowledge becomes explicit (and reciprocally), two pieces of knowledge
March and Simon (1993) defined the concept of performance programs, in which a predefined action
program allows the reduction of the requirement for cognitive resources.
The Economics of Knowledge
merge, one piece of knowledge splits into two, etc. Thus the individual
and collective levels are not independent of each other, but interact with
each other iteratively and continuously. The knowledge about how to
use knowledge clearly activates different types of conversion processes.
However, we intend to make a distinction (Steinmueller, 1999) between
on the one hand the process of extension, that is, the process of using the
representation and the reproduction process in order to extend know-
ledge, and on the other hand the process of representation (the process of
creating the codes) and the process of reproduction, that enables the
communication and the establishment of shared meaning for faithful
duplication. There is an implicit strategic dimension in the second situ-
ation insofar as the adopted codes and modes of conversion should take
into account the abilities of the receiver. And in this respect, codes, and
especially languages, are not neutral means to transmit knowledge. They
include intrinsically a representation of the world and mobilize different
amounts of cognitive resources, both for the emitter and for the receiver.
Furthermore, the strategic dimension also includes the question of the
incentives to reveal or to keep secret the code used to process knowledge.
4. The fourth and last layer of knowledge is the knowledge about how
to manage knowledge. This category corresponds to higher cognitive
functions, which shape the three previously described categories.
management of knowledge supposes the ability to modify even drastically
the context of production and exchange of knowledge. It thus encom-
passes knowledge about when, where and how to find relevant crude
knowledge. We mean here knowledge about the localization of know-
ledge as well as knowledge about the incentive mechanisms which will
bring another agent to deliver messages about what he knows. It includes
also knowledge related to the enactment, the selection and the retention
modes mentioned in the second layer. Are those processes efficient,
should they be improved (and how), are they too costly, etc.? Knowledge
is also needed for the management of communication. The choice of the
conversion modes or of the used codes will be according to the use of the
transmitted knowledge the other agents could make. The same type
of choice can insure a relative control on the appropriability of codified
knowledge. Finally, the management of knowledge also bears on the
degree of interaction between the different subcategories of knowledge.
For illustrative purposes, we can refer to the work of Gibbons et al. (1994).
The learning processes at stake come close to the Bateson (1972) third type of learning or the
deutero-learning characterized by Argyris and Schn (1978).
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They assume that the mode of production of knowledge has recently been
dramatically transformed, shifting from mode 1
to mode 2. The new mode
is characterized by a strong transdisciplinarity. It implies also a diffusion over
a wide range of potential sites of knowledge production and different contexts
of application creating some discontinuities in the fields of knowledge. Under
such assumptions, the knowledge to manage knowledge becomes a crucial
and strategic resource, able to create decisive advantages in favour of its
holder(s). It can be described by referring to topological representation of
knowledge. A given piece of knowledge has a width, which expresses its
degree of generality. This degree of generality corresponds roughly to the
number of actual users of this piece of knowledge (those who have the codes
and language to use it). A given piece of knowledge has also a depth which
corresponds roughly to its degree of complexity. When referring to the degree
of complexity here we mean that there are some pieces of knowledge that, in
order to be manipulated, require large amounts of memory and tacit know-
ledge deeply rooted in the practices of the agents concerned. Conducting an
orchestra, for instance, certainly requires more depth than fixing a nail. The
degree of tacit knowledge that needs to be accumulated and then retrieved to
be able to achieve the former activity compared with the latter expresses this
depth of knowledge. The management of knowledge can thus be seen as the
ability to adjust the width and the depth of knowledge.
We have thus tried to tackle knowledge as a structure, composed of
four interwoven layers. One aim was to avoid associating strictly one type
of knowledge (a product of knowledge) with one knowledge-based activity.
Instead, we propose to assess the differences between activities by looking at
the features of the layers we have defined. For instance, the opposition
between scientific knowledge and technological knowledge would be more
precisely addressed using common criteria: what are the sources of knowledge
in each case? Is knowledge extracted from human capital or is it collected in
the environment? Is the use of knowledge submitted to strict rules? Is there
room for ambiguity and superstitious learning? What is the degree of control
exerted on the mechanisms of diffusion of knowledge? This representation
should be helpful in pushing further the analysis of the learning processes.
Processes of different nature can be associated with each layer, and the inter-
actions between the learning processes are dependent on how the layers are
interrelated. The decomposition of the structure of knowledge should also
provide new elements in the understanding of its codification process. For
The complex of ideas, methods, values and norms that has grown up to control the diffusion of the
Newtonian model of science to more and more fields of enquiry and ensure its compliance with what is
considered sound scientific practice (Gibbon et al., 1994, p. 166).
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instance, the codification of how to use knowledge is different from the codi-
fication of how to transmit knowledge. The objectives and the impacts of the
codification are not the same, since the incentives and the strategic behaviours
of the agents differ.
However, two central issues still have to be addressed here. The first is that
of the relationship between the tacit dimension and the degree of codification
of knowledge. The second is the collective or individual status of knowledge.
These two points were implicitly present all along in the previous considera-
tions. We will see that the tacit dimension of knowledge (inherently related
to the issue of the degree of codification of knowledge) and the collective
status of knowledge are crucial features going through all the layers we have
been considering, and they have a strong impact on the understanding of the
structure of knowledge.
4. The Tacit Dimension
The distinction between explicit and tacit knowledge, which was introduced
by Polanyi (1962),
has a fundamental importance in economic terms.
The role of observable knowledge in human activities relies on a significant
amount of knowledge which remains hidden. This occult part of the iceberg
still has a strong impact insofar as it is mobilized to produce, to use and to
exchange knowledge. As this simple statement is increasingly recognized,
the concept of tacit knowledge has been used in economic literature to dress
all those pieces of knowledge which are not expressed and/or not expressible
and/or not transmittable. As underlined by Cowan et al. (1999), tacitness has
thus become both a portmanteau and a buzzword. We aim here to clarify the
concept somewhat: using our representation of the structure of knowledge,
we distinguish two aspects of tacit knowledge, impacting different degrees on
the economic activities.
First, tacit knowledge can point out specific knowledge, held and shaped
by individuals.
Secondly, tacit knowledge also corresponds to knowledge which is not
As mentioned by Spender (1996), while this reflects Jamess distinction between knowledge about
and knowledge of acquaintance, Polyani adds important nuances. Explicit knowledge is like knowledge
about in its abstractness, while tacit knowledge is associated with experience. But Polyanis notion of the
tacit is richer than mere knowledge of acquaintance, because it brings in a post-Freudian psychological
dimension, reaching beyond conscious knowledge into the sub and pre-conscious modes of knowing. His
intent was to criticize the positive norm of doing good science, that one should interact only the explicitly
rationalist and empiricist traditions by formulating logical hypotheses and doing repeatable tests.
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mobilized (at least consciously) when conducting some activities in a
given context.
Polanyi argued that scientific creativity needs a deep immersion into the
phenomena to be explained, for that alone gives rise to intuitions on how to
begin the interaction. As he wrote: I have tried to demonstrate that into
every act of knowing there enters a tacit and passionate contribution of the
person knowing what is being known, and that this coefficient is no mere
imperfection, but a necessary component of all knowledge. There is thus an
indispensable component of all knowledge that has to be taken into account
when discussing its formation. For Polanyi, science is a process of explicating
the tacit intuitive understanding that was driven by the subconscious learning
of the focused scientist. According to him, the origin of all knowledge resides
thus in individual intuition. Without being so categorical, we want to insist
on the strong specific dimension of crude knowledge, which depends on the
individuals perceptive abilities. Thus tacit knowledge in our first category
expresses the diversity of the knowledge held by different agents. In other
words, even if they are faced with the same signal or message, agents will
constitute differentiated stocks of crude knowledge, which can be considered
as tacit knowledge. In this perspective, the concept refers to the fact that what
an agent knows is ignored by all the others.
This approach toward tacit knowledge can obviously be extended to our
second category, in which knowledge is involved in the sense-making process.
More precisely, it seems that, according to Nonaka (1994), one can distin-
guish between two main elements, one cognitive, the other technical. The
cognitive elements centre on what Johnson-Laird (1983) called mental
models in which human beings form working models of the world by creating
and manipulating analogies in their minds. These working models include
schemata, paradigms and viewpoints that provide perspectives or representa-
tions which help individuals to perceive and define their world. By contrast,
the technical elements of tacit knowledge refer to concrete know-how
and rules of action/decision that apply to specific contexts. Once again, we
insist here upon the personal quality of tacit knowledgewithout taking into
account whether the knowledge is common or shared, transmittable or not.
But there is a second way to understand tacit knowledge by looking at
how cognitive resources are used. To specify this inherent relationship
between tacit and explicit knowledge, we refer to Polanyis classical example
of craftsmanship: as mentioned by Tell (1997), in order for us to operate with
explicit knowledge in our language, we consider signs, words, grammar,
formula, etc., as tools in our argument. Therefore we need knowledge in using
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these tools, the same way the carpenter needs knowledge in using the
hammer. When using a hammer to drive a nail, the carpenter attends to both
nail and hammer, but in a different way: I have a subsidiary awareness of the
feeling in the palm of my hand which is merged into my focal awareness of my
driving in the nail (Polanyi, 1962). This process, in which we are able to rely
on what we are only subsidiarily aware of, is the tacit dimension of knowing.
Tacit knowing is like letting something become a tool for our usage and
allow it to become an extension of us. This allowance is what Polanyi calls
tacit assent. The tacit assent is purely a-critical, as opposed perhaps to
articulated assent, since it means that the knowing subject surrenders to
what she or he is subsidiarly aware of. Letting something become subsidiary
to ones awareness involves what Polanyi calls indwelling. (Tell, 1997)
This means that the particulars of knowledge as described here are un-
specifiable in explicit knowledge. When attending to what is articulated, we
cannot at the same time focus on the process that makes us articulate what we
As in the previous case, tacit knowledge remains hidden. But the difference
here is the degree of intentionality in the use of knowledge.
What matters
is not the (natural) specificity of the individual cognitive abilities (which are
largely out of the control of the knower) but much more the way in which
a piece of knowledge interacts with other pieces of knowledge. As Polanyi
(1962) emphasized:
the particulars of a skill appear to be unspecifiable, but this time not in the
sense of our being ignorant of them. For in this case we can ascertain the
details of our performance as well, and its unspecifiability consists in the
fact that the performance is paralysed if we focus on these details.
Using our own analytical frame, we would say that an agent renders a piece of
knowledge tacit because he has the knowledge of how to manage knowledge.
As a consequence, tacit and explicit knowledge at a given moment in time are
two complementary forms of knowledge, but through time their combination
and composition can vary depending on the context and on the degree of
attention of the knower who determines which zones of knowledge belong to
her/his focal awareness and which zones belong to the subsidiary awareness.
The degree of intentionality of the use of knowledge draws back to the concepts of competence and
skill. It is even noticeable in the quotation of Polyani we are referring to. Although the question is of
primary importance, we do not have enough room here to work it out properly.
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For economists, the distinction between tacit and explicit knowledge has a
strong potential operational value: basically, explicit knowledge refers to
knowledge that is transmittable in formal, systematic language, while tacit
knowledge has a personal quality which makes it hard to formalize and
communicate. In our view, this distinction is not sufficient. By entering into
more details on what tacit knowledge is, we should be able to amplify its
fruitfulness. Three analytical challenges can be identified:
1. We have seen that crude knowledge and knowledge about how to use
knowledge is highly specifici.e. those categories incorporate a large
amount of tacit knowledge. On that point, what matters is the degree of
diversity generated by tacit knowledge. If knowledge is sufficiently
differentiated among agents, it raises interactions and triggers mech-
anisms for the creation of knowledge. A good illustration is provided
by the design constraints of research structures. It is admitted that
in order to be productive, a laboratory has to attain a critical mass of
researcher: the justification is to multiply the ways problems are perceived
and tackled. In other words, the organization exploits several stocks of
tacit knowledge. Nevertheless the headstone is not the transmission of
tacit knowledge (and by implication its formalization) but its coordina-
tion: researchers do not mainly need to exchange their own routines and
perception abilities, but they must devote them to a common objective.
The point we want to make through that example is that in certain
situations the constraint of tacit knowledge can be solved by co-
ordination mechanisms, rather than by a codification process.
2. A second way to approach tacit knowledge has to do with pure com-
munication. Some situations are characterized by a lack of adapted codes
or communication media. Knowledge remains tacit because the emitter
and/or the receiver have no knowledge about how to exchange know-
ledge. This is often the case for industrial know-how in production, which
cannot be capitalized because it cannot be expressed in words by the
holders of the knowledge. It thus raises the question of the creation and
the diffusion of codes, languages and models: what is the cost of the
codification process, to which extent can this process be controlled, what
are the conditions of access to the code, how can it be stored? Similarly,
the question of the excess of codification emerges. Codes, languages and
models, even if they are tools to communicate, strongly influence the
individual potentiality of knowledge creation. It follows that if the codifi-
cation does not leave enough room for ambiguity and interpretation, it
creates inertia in the production of knowledge.
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3. But knowledge can also remain tacit even if the codes to communicate it
exist. If a piece of knowledge is part of a complex structure, it remains
sticky (von Hippel, 1993). This is the case, for instance, if we look at
the knowledge held by an expert. Potentially, part of his/her knowledge
can be formalized and transmitted, but in practice it is almost impossible.
The appropriate explanation is that knowledge about how to manage
knowledge remains tacit. Like the carpenter of Polanyi, the expert knows
through long practice which knowledge has to be mobilized and which
knowledge has to be left in the background in order to act or to learn
properly. The difference with the previous situation is that under certain
conditions (common history, shared experiences, social or organizational
frame), such a form of tacit knowledge can be communicated and shared
among the members of a community; and its possession determines the
insiders and the outsiders of the community. In other words, what matters
in this case is the history of the construction of the tacit knowledge.
Managing tacit knowledge implies the modification of the time dimen-
sion (by intensifying the interactions for instance) more than the trans-
formation of the knowledge itself.
We have underlined the relative dimension of tacit knowledge. What is tacit
for an individual (or a community) can be perfectly explicit for some other
actors. In the same way, what is tacit at instant t can be rendered explicit at
instant t + 1. But there is also a relative dimension in the way to deal with
tacit knowledge. It is not solely a matter of communication. Depending on
the type of knowledge which is tacit, it is managed and valorized through
coordination mechanisms, codification processes or a historical socialization
of knowledge.
In accordance with our categorization, we have focused on tacit knowledge
because it appears at every level of the structure of knowledge. But another
transverse dimension is still missing: the picture would not be complete
without a specific investigation of the distinction between individual and
collective knowledge.
5. The Collective Nature of Knowledge
We have emphasized in the previous section the nature of tacit knowledge,
suggesting that every agent creates its own virtual reality. Indeed, each
observer will understand differently a price signal, a natural phenomenon,
a scientific result. The same objective information can lead to several
interpretations. In this perspective, we assume that the evolution of the
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knowledge structure held by an agent is dependent on embodied abilities.
The cognitive capabilities of the agents (the sense of similarity, the sensitivity
to external signals or the imagination) will strongly determine the way in
which knowledge is acquired and accumulated, and further will produce
different meanings. To this extent, processing knowledge is highly specific and
personal. The (explicit or implicit) recognition of that matter of fact certainly
explains why most of the works on the formation of knowledge concentrate
on the individual. The rationalistic approach of knowledge is essentially an
individualistic one. The quest for the truth in this perspective is a solitary
adventure. Even Polanyis ideas on knowledge are intrinsically related to an
However, the central role played by individual actors makes the formation
and the use of knowledge strongly dependent on the nature of the organ-
izational and other collective devices they belong to. As mentioned by
Spender (1996), since Simons (1957) famous critique of the rational economic
there has been wide recognition that the assumption of an atomistic and
isolated individual may not serve organizational analysts as well. There are
significant social, institutional, organizational and economic processes
which, we now recognize, can only be explained by going beyond such
presuppositions and cognitive and evolutionary economists are able to work
this ground in good effect.
Two basic reasons can be put forward to justify why individual learning
processes have to be enclosed within collective processes. The first one is
the localized nature of the personal learning processes (Stiglitz 1987). As the
specialization in the production activities requires an increase of the industrial
exchanges, the specificity of the individual knowledge structure compels
inter-personal interactions. If at a given moment in time each individual
holds some specific and/or specialized knowledge, there is a need to mobilize
socially all these dispersed elements. This was, for instance, as we have seen
in the introduction, the way Hayek conceived the problem of knowledge
for society. Beyond the limitations of Hayeks vision,
he raised an import-
ant issue which is the way this networked form of knowledge is efficiently
shared and exchanged through interaction between agents. The social
Nightingale (1998) stresses in peculiar the embodied ability to recognize similarity. This ability is
obviously evolving with learning processes, but part of it is innate, otherwise learning processes would
never take place (Pinker, 1994).
According to him, the knowledge to deal with is just the existing knowledge: agents are not
producing any new form of knowledge, so the vision is essentially static.
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communication dimension is thus crucial and must be explicitly introduced
in the building and use of knowledge. The building of a common knowledge
(Koessler, 1999), the need to set rules and languages to facilitate the collective
formation of knowledge, and the recognition that context matters in the
process of knowledge creation are characteristics that naturally emerge and
underline that knowledge results from a collective construction process (see
Figure 3).
The second reason to consider knowledge as resulting from a social con-
struction process is related to one of its peculiar properties. Knowledge is at
once an input and an output of the learning processes. In other words, it is
clear that individuals cognize and generate knowledge (once the knowledge
has been produced, the questions of rivalry, exclusion and exchange of the
output are crucial). But it is also clear that the way individuals learn starts
from, and is shaped by, pieces of knowledge held collectively by the
community they belong to. Kuhns works on the notion of paradigm are
clearly a seminal contribution to this perspective (Callon and Latour, 1991).
The Kuhnian paradigm is at once a set of representations of problems and
of procedures to solve those problems, and a social group which sticks to
this representation of the world. A similar approach is taken by Wittgenstein
(1969), who viewed language as a game of interactions played by multiple
persons following rules. This view is also dominant in the Japanese intellectual
tradition about knowledge that has been described by Nonaka and Takeuchi
(1995). As underlined by Nightingale (1998), scientists and technologists
and it is certainly also true for every human beinghave an understanding
about how the world works, received as part of a learnt tradition that only
very slowly divorces itself from the wider traditional beliefs of society.
Both arguments raise the difficult question of the connection between the
individual and the collective level: how will an individual benefit from (and
be guided by) collective knowledge, and conversely, how will the individual
knowledge be extracted and socialized. The former point implies analysis of
the relation between individual learning processes and the cognitive facilities
provided by the collective structure within which they take place. The latter
stresses the incentives schemes and the norms associated with the institutional
settings on which the socialization of knowledge depends. We do not intend
here to tackle in depth organizational learning or coordination/incentives
mechanisms, but looking to the content of knowledge still leads us to turn
the problem into organizational terms. Gibbons et al. (1994) describe em-
bedded knowledge as knowledge which cannot move easily across organ-
izational boundaries, its movement being a constraint in a given network or
set of social relations. Apart from how knowledge circulates within such an
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organization, the analysis has thus to deal with the problem of the
identification of the organizational frontiers and their degree of tightness. In
other words, the spread of collective knowledge will size the organization.
Furthermore, depending on the type of socialized knowledge, the organ-
ization will be more or less opened to outsiders; as a consequence, the
organization will exchange and produce knowledge mainly on the basis
of internal learning processes or will also be able to interact with its
In order to focus on the question of organizations as knowing entities, and
as we do for the distinction between tacit and explicit knowledge, the whole
structure we propose in section 3 can be split into collective and individual
knowledge. Let us recall once again that we do not aim here to analyse how
individual knowledge is converted into collective knowledge (and vice versa),
but rather want to emphasize the impact of the existence of differentiated
social types of knowledge.
Looking to the individual learning processes is useful to justify the
emergence of collective knowledge within organizational structures. Learning
can be described as a process built on the interplay of four cognitive pro-
cedures (Bureth, 1994): the acquisition of knowledge relies on the detection,
the memorization, the evaluation and the creation of knowledge. In this
perspective, an individual agent will find some meaningful resources at the
collective level, especially in terms of memory and of assessment.
The organization can be the depository of collective knowledge
how to use knowledge, as, for instance, in the case of behavioural rules. These
favor single loop learning and also orient and localize the knowledge
activities. Seemingly, part of the codes and the languages used to com-
municate inside the organization are stocked at the collective level. Those
shared communication tools will homogenize the way individual knowledge
is extracted by providing a basis for collective sense-making. Finally, the
socialization of knowledge about how to manage knowledge is a means to
frame coherently the individual procedures of conversion from tacit to explicit
(and explicit to tacit) knowledge. Nonaka and Takeuchi (1995) have high-
lighted the importance of the modes of conversion of knowledge, describing
it as the central phenomenon to explain the formation of knowledge.
The socialization of the different categories of knowledge provides alter-
natively a substitute or a complement to individual knowledge. They facilitate
This research field has been opened among others by Nelson and Winter (1982) in their evolutionary
theory of the firm. They refer to routines as the organizations genetic material in which the knowledge of
an organization is embedded. The organization provides the context in which the tacit and explicit bodies
of knowledge are both selected by interaction with the external economic reality and then stored into
routines available in particular to future generations of employees.
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learning processes, insofar as they relieve individual cognitive resources.
They can induce automatic retrieval of knowledge and/or pre-determined
behaviours, provide evaluation criteria, facilitate detection of knowledge
and even enhance the creation of knowledge. But in order to grasp fully the
economics of knowledge-based activities, the analysis has to pay attention to
collective knowledge in the four categories simultaneously. The importance
of distinguishing different categories of knowledge appears immediately by
looking at the socialization of crude knowledge. Collective crude knowledge
will obviously enhance the rough knowledge base on which an individual can
apply his/her cognitive capabilities. But the properties of the collective crude
knowledge (e.g. the degree of non-rivalry or of non-exclusion) are strongly
determined by the extent to which agents share knowledge about how to use,
transmit and manage knowledge. For instance, we all know that E = mc
We are all even able to exchange this piece of knowledge. But only the group
of physicists who share the whole structure of knowledge (how to use and
manage it) are able to exploit and valorize this type of knowledge.
This leads us to an important result related to the distinction between
individual and collective knowledge. Looking to how the socialization of the
structure of knowledge will be achieved pinpoints a new elementary unit in
the organizational understanding of knowledge processing. Along that line
we follow those authors working on communities of practices or epistemic
communities. Every organization is made up of many communities of
practice, or groups of people committed to the same practice, in which
learning is not a matter of conscious design or recognizable rationality and
cognitive frames, but a matter of new meanings and emergent structures
arising out of common enterprise, experience and sociabilitylearning by
The concept of epistemic community relies heavily on the socialization of
knowledge, emerging through routines and repeated interactions, rather than
encrypted in rules or in an organizational design. They comprise agents who
work on a mutually recognized subset of knowledge issues, and who at the
This, at least, is the definition offered by Wenger (1998) in his book on learning, meaning and identity
based on a detailed longitudinal study of insurance claims processors. Wenger refers to three dimensions
to define the community: the first is mutual engagement among participants, involving doing things
together, mutual relationships and community maintenance. The second is joint enterprise, involving the
negotiation of diversity among members, the formation of a local code of practice and a regime of mutual
accountability. The third dimension is a shared repertoire that draws on stories, artifacts, discourses,
concepts and historical events, reflecting a common history but still leaving space for ambiguity and new
representations. Thus a community of practicedrawing on the subconscious, interaction, participation
and reified knowledge to act, interpret, innovate and communicateacts as a locally negotiated regime
of competence (Wenger, 1998, p. 137), as shared histories of learning (p. 86).
The Economics of Knowledge
very least accept some commonly understood procedural authority as essential
to the success of their collective building activities (cf. Cowan et al., 1999).
Wenger puts forward two important aspects we take over here: first, the
social construction of knowledge not only relies on how existing knowledge
is shared, but includes also the processes through which the knowledge is
obtained. Considering knowledge of how to use, exchange and manage
knowledge is a way to do it. Secondly, the concept of community enriches the
organizational representation of knowledge-based activities. The epistemic
community is more than a coordination device insofar as it incorporates
learning infrastructures.
These embedded infrastructures of learning are
built into the routines and the daily practices of members, and feature all the
communities of practice that are to be found within and across organizations.
Wengers example of insurance claim processors should not be taken to mean
that learning of the sort he describes does not apply to top management,
strategists and scientists. Indeed, one of the remarkable early insights of
applications of actor network theory in the literature on sociology of science
was to show that incremental and radical learning in the R&D laboratory is
no different from the processes described by Wenger, locked as it is in
routines, conversations, artifacts, things, memory and stories (Latour and
Woolgar, 1979; Latour, 1986). All these authors suggest that the level of
small groups (communities) is essential to understand the process of
transformation and transmission of knowledge from the individual to the
organization (and reciprocally). This is the level where the modes of
conversion of knowledge are activated, where the translation of local codes to
organizational language (and reciprocally) is made, etc. These pioneering
works recognize that organizations evolve by adapting the bodies of
knowledge shared by their members; they recognize that the organization
must develop common rules, common knowledge, collective learning and
incentives schemes to cope with the need for circulation and creation of
Wenger identifies three infrastructures which potentially have enough novelty, perturbation and
emergence in them to sustain both incremental and discontinuous learning, and both procedural
adaptation and goal monitoring. One infrastructure is engagement, composed of mutuality (supported by
such routines as joint tasks and interactive spaces), competence (supported by training, encouragement of
initiative and judgement) and continuity (supported by reified memory locked in data, documents and
files, as well as participatory memory unlocked by storytelling and intergeneration encounters). Another
is alignment, composed of convergence (facilitated by common focus, shared values and leadership),
coordination (helped by such devices as standards, information transmission, feedback, division of labour
and deadlines) and arbitration (facilitated by rules, policies and conflict resolution techniques). The third
infrastructure is imagination, composed of orientation (helped by visualization tools, examples,
explanations, codes and organizational charts), reflection (supported by retreats, time off, conversations
and pattern analysis) and exploration (facilitated by scenario building, prototypes, play, simulations and
The Economics of Knowledge
knowledge; and that in this respect, many of these processes take place at the
collective tacit level.
This new approach of organizations based on knowledge management
appears clearly in the case of the theory of the firm, where the traditional
conceptions of the firm in terms of processor of informationbased mainly
on transaction cost theoryis now questioned by a new vision in terms of
processor of knowledge, the competence-based approach. The existence of
two alternative visions of the firm raises some fundamental questions: does
the competence approach bring a complementary or a competing view when
compared with the traditional theories of the firm, in particular the dominant
transaction-based approach? Which of the two approaches is best fitted to
explain what Casson (1998) considers as the main issues addressed by modern
theories of the firm: (i) the boundary of the firm; (ii) the internal organization
of the firm; (iii) the formation, growth and diversification of the firm; and (iv)
the role of the entrepreneur? As Langlois and Foss (1996) pointed out, we are
confronted with the choice between, on the one hand, a traditional contrac-
tual approach based on transactions, where firms and other institutions
are alternative bundles of contracts understood as mechanisms for creating
and realigning incentives, and on the other hand a qualitative coordination,
that is helping cooperating parties to align not their incentives but their
knowledge and expectations.
The concept of community of practice should open some promising avenues
of research and permit reconciliation of these two approaches by assuming
that they are complementary pieces for understanding the functioning of the
firm. Amin and Cohendet (1999) assume that firms manage competencies
and transactions simultaneously. First, they choose the domain of their core
competencies, the governance of which is specifically devoted to knowledge
coordination. Second, after having chosen the domain and directions along
which they want to create resources in the long term, they organize the
process of current allocation of resources and adaptation to the environment.
This assumption clearly signifies that there are two main governance
mechanisms to be considered by the firm: the mechanism for governing
competencies which is defined by the need to coordinate knowledge, and
the mechanism for governing transaction which relies on the need to
manage transactions. In other words, the organization of the firm requires a
dual structure of governance. In this perspective, the role of the communities
of practice would be to insure a satisfactory level of coherence of the firm
(Brown and Duguid, 1991). This hypothesis shows how the introduction
of knowledge can lead to renewed visions of traditional bodies of economic
theories, but also clearly compels the need for new economic tools.
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6. Conclusion
The above developments suggest different ways to consider the process of
codification of knowledge. The first is to consider the process of codification
within the framework of a pure economics of information for which know-
ledge does not differ from information. In this perspective economic agents
(or organizations) do not possess cognitive mechanisms, they speak the same
language and all useful economic knowledge is assimilated to knowledge-
reduced-to information. Only cost considerations prevent residual forms
of tacit knowledge to be codified. Each new piece of codified knowledge
contributes to increasing the stock of useful economic knowledge and
the combinatorial complexity of this knowledge stock. In this process of
transformation where codified knowledge progressively substitutes tacit
knowledge, the focus is on the quality of the telegraphic communication that
governs the replication of knowledge and the ability to examine and assess
different combinations of information.
The second one, the keystone of our reasoning, is that knowledge cannot
be regarded independently from the process through which it is obtained.
In this perspective, economics of knowledge differs from economics of
information in the sense that knowledge is no longer assimilated to the
accumulation of information in a stockpile. This assumption requires
integration in the analysis of, on the one hand, the cognitive capabilities of
the agents and the organizational context in which they are interacting,
and on the other hand, the different types of knowledge that are required in
order to process knowledge. It has led us to suggest splitting up knowledge
into interwoven layers (crude knowledge, and knowledge about how to use,
transmit and manage knowledge). From this model of knowledge formation,
we can reinterpret some salient features of the codification process:
1. The combination and the composition of tacit and codified knowledge
depend strongly on the context and degrees of attention of the agent or
the organization that manipulates knowledge. This means in particular
that there are contexts in which agents will be willing to spend more on
codification than other contexts in which they would not be so interested
in bearing the costs of codification. It means also that, provided that
agents master the modes of conversion of knowledge, there are contexts
in which they would rather use and rely on their tacit knowledge, and
contexts in which they would prefer to use codified knowledge.
2. In this contextual framework, it is clear that all codified knowledge
requires some tacit knowledge to be useful. If this statement implies the
existence of some minimal degree of complementarity between tacit and
The Economics of Knowledge
codified knowledge, it does not automatically lead to an absolutist posi-
tion on tacitness. In many contexts, only the tacit knowledge involved in
mastering a language is needed in order that codified knowledge can
be reconstituted as operational and generative. These are cases where
agents have just to bear the costs of learning the language to acquire the
absorptive capacities to use the codified knowledge.
3. If in this framework the relation between tacit and codified knowledge is
neither just a question of complementarity nor just a question of sub-
stitutability, it becomes relevant to look at the ways these two forms of
knowledge influence each other. It has been underlined that the existence
of a given tacit form of knowledge, of accumulated learning and habits,
and of norms will shape the ways codified knowledge is produced. But
in turn, the way codified knowledge is produced (the nature of the
codes, the types of categorization, the nature of the physical carriers of
knowledge, etc.) will also shape the ways learning processes are directed,
focused and assimilated. In that sense one can always say that the produc-
tion of codified knowledge would imply the production of new forms
of tacit knowledge. An example could be found in many industries
where the certification processes at stake affect the modes of learning
between firms, as well as the ways quality controls are conducted, etc. At
a different level, one can observe how the use of some advanced codified
manuals for learning a new language can be effective in speeding up the
(tacit) learning process by allowing simulations, verification procedures,
repetition of sentences, etc.
4. The structure of knowledge in four layers that has been suggested in this
paper also explains some nuances in the relationships between codified
and tacit knowledge. There are types of codification as well as types
of tacit forms of knowledge. Following Cowan and Foray (1997), one
can distinguish in the codification process the building of models, the
building of languages and the building of messages. The first category
essentially belongs to the management level in the structure of know-
ledge we propose, the second to the transmission of knowledge and the
third to the use of knowledge. Each category will affect the tacit form
of knowledge differently. When models and languages can be considered
as fixed, the production of codified knowledge can essentially be viewed
as a substitute for tacit knowledge. The production of new codified
knowledge will enhance the efficiency of the combinatorial properties of
knowledge as well as the possibility to retrieve knowledge. But even in
such a situation of quasi-economics of information, the context depend-
ence could be such that there could be cases in which agents would prefer
The Economics of Knowledge
dealing with tacit knowledge. When models are supposed to be given,
the transmission of knowledge is critical, the focus being on the social
communication process. The question of creation of new codes and of
their control and access becomes the central point of focus. Again there
could be contexts (the case of experts who disclose as much as possible a
knowledge which can be rather easily transmitted) where agents prefer to
focus on tacit knowledge despite the ability to use codified knowledge.
When models and languages have to be built, the role of communities
becomes essential: they are the places where new models are progressively
tested, validated and compared.
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As mentioned in the introduction, different typologies of knowledge have
been proposed by economists. Most of them refer to the tacit/codified nature
of knowledge and on the individual/collective dimension. The pluralistic
nature of knowledge leads to numerous definitions that sometimes are in
contradiction, sometimes overlap, with risk of confusion. We have tried below
to present a synthesis of the main typologies (Spender, Blacker, and Lundvall
and Johnson). Of course, such a synthesis is necessarily too schematic, because
of the variety of forms of knowledge that are difficult to encapsulate within a
general typology. We propose to present all the typologies according to
Spenders matrix (1996) (Figure 4), which is built precisely upon this
distinction tacit/codified versus individual/collective. Spenders matrix depicts
four types of organizational knowledge (objectified, collective, conscious and
The Economics of Knowledge
automatic), with regards to the above mentioned distinction. Parallel to the
work done by Spender, Blacker (1995) proposed another typology of
knowledge (encoded, embedded, embodied, encultured and embrained)
which could also be compared to a large extent with Spenders. Lundvall and
Johnsons typology (1994), which is inspired by the pioneering work of
Machlup (1983) and which distinguishes the following forms of knowledge
know-what, know-why, know-how and know-whocan also to some extent
be analysed along the distinction tacit/codified versus individual/collective.
Some comments for reading this matrix:
1. North-east quadrant: objectified knowledge (arithmetics, logic, physics
laws, etc.) is explicit, codifiable, transmittable without bias through
language and generic. It is that knowledge that constantly evolves
through the pursuit of science, which can be learnt in universities and
which serves as a platform to investigate new empirical phenomena.
Blacker refers to this category of knowledge as encoded knowledge. In
Lundvall and Johnsons typology, objectified knowledge corresponds
essentially to the know-why (referring to scientific knowledge of
principles and laws of motion in nature, in the human mind and in
2. South-east quadrant: collective knowledge (routines, rules of conduct,
etc.) is a collectively and tacitly shared knowledge that guides individual
as well as collective action, individuals representations and communi-
cations in the organization. This form of knowledge is created by
convention through the collective use in language and action. Blacker
distinguishes at this level two categories of collective knowledge: em-
bedded knowledge, which resides in systemic routines, and encultured
FIGURE 4. Typologies of knowledge from Spenders matrix.
The Economics of Knowledge
knowledge, which results from the process of acquiring shared under-
standing. There is no clear matching at this level with Lundvall and
Johnsons typology, since their conception of know-how essentially refers
to individuals (see automatic knowledge); but it is certainly at this level
that we could incorporate as a subcategory the know-who (referring to
specific and selective social relations). In particular, in a collective routine
one knows who knows what and can do that.
3. North-west quadrant: conscious knowledge is constituted of the formal
knowledge possessed by individuals. This knowledge is the one held
by professionals (physicians, lawyers, economists, etc.) who know the
ways to perform and use formal methods and are certified in doing so.
Blacker refers to this type of knowledge as embrained knowledge, which
is constituted by conceptual skills and cognitive abilities. In Lundvall and
Johnsons typology, conscious knowledge corresponds to the know-what
(referring to the knowledge about facts, and also to the knowledge
4. South-west quadrant: automatic knowledge is the personal tacit and not-
conscious type of knowledge that allows the individual to understand and
develop explicit knowledge. This refers to the tacit form of knowledge
developed by Polanyi. This form of knowledge is gained through learning.
Blacker refers to this type of knowledge as embodied knowledge. In
Lundvall and Johnsons typology, automatic knowledge corresponds to
the know-how, or knowledge of acquaintance (referring to skills).
The above matrix indicates ideal-types, every real firm being a mixture of
them. Spender acknowledged that
the weakness of the matrix is that it tells us little about how these various
types of knowledge interact and thus little about how the firm becomes a
context especially favourable to the interaction of knowledge creation and
knowledge application processes. But the modern trend is away from the
tacit and towards the explicit, from the craft to the system.
The Economics of Knowledge