Uses of Knowledge in Society and Their Productive Significance

Ulrich Witt

Max Planck Institute of Economics

Jena, Germany
witt@econ.mpg.de

Paper prepared for the DIME workshop “Process, Technology, and Organization:
Towards a Useful Theory of Production”, Pisa, November 8-9, 2010

very preliminary draft - comments invited

__________________________________

*) Thanks go to Christian Zellner for discussions that helped shaping my ideas

about knowledge.

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1. Introduction

The role of knowledge for understanding innovations, technical change,

development, and the coordination of all related activities in the economy can
hardly be underrated – unless it is trivialized by the assumption of perfect
information, i.e. by assuming that all agents command flawless knowledge on
everything relevant to their decisions. As the research on innovations and technical
change has demonstrated, the creation of new knowledge and the way it diffuses
throughout the economy are of overriding importance for explaining productivity
growth and the generation of wealth (Birdzell and Rosenberg 1986, Nelson 1996,
Metcalfe 2002, Mokyr 1990 and 2002, Murmann 2003, Antonelli 2001 to mention
just a few authors). And far from consisting of perfect information, incomplete,
fragmented, and dispersed knowledge is of central importance for understanding
the role of the price system in coordinating exchange and the division of labor
(Hayek 1945).

Despite its now widely recognized importance, one obstacle for coming to
grips with knowledge and its role in the economy is the rather loose way in which
the very concept of “knowledge” is being made use of. Several interpretations,
analytical distinctions, and extensions exist that are only partly or not at all
commensurable. Hayek (ibid.), for instance, reflects on the role of (price)
information without explaining how knowledge and information relate to each
other. In the innovation literature, distinctions between different kinds of
knowledge like scientific vs. technological knowledge (Metcalfe 1998, Chap. 4) or
procedural vs. propositional knowledge (Zellner 2003) can be found; or between
knowing how vs. knowing that (Ryle 1949). Further internal vs. external
knowledge (Antonelli 1999), tacit vs. overt knowledge (Polanyi 1958) , knowledge
with the character of a public, a private, or a free good (Metcalfe 1998, Chap. 4)
and so on.

All these distinctions are relevant and, in fact, the list could be prolonged.
What seems to be lacking, though, is a comprehensive systematization of the
various facets of knowledge in an economic context, including a coherent taxonomy,
and a clarification of the problem of whether and how knowledge is measurable
either in quantitative or qualitative terms. Admittedly , knowledge is an elusive
phenomenon that is difficult to analyze with accuracy not only in economics (see,
e.g., Knorr Cetina 1999). Yet, in the economic domain, confusion at the conceptual
level seems particularly precarious given the unique and immensely important
feedback relationship between the production and growth of knowledge and
production and growth in the economy.

It seems a timely task, therefore, to clarify the conceptual problems related

with “knowledge”. This means, foremost but not only, to account for its multi-
faceted nature, to specify its relationship with information, and to address the
measurement problems. The present paper tries to make some progress here.
Unlike other contributions that aimed in a similar direction as Machlup (1980) and

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Foray (2004), the problems will for two reasons be framed here within an
evolutionary perspective. First, knowledge is a particularly significant agent in the
restructuring and growth of the economy and is itself subject to a characteristic
evolution (see Nelson and Nelson 2002). Following Metcalfe’s (2002) view,
evolutionary processes in the economy should therefore provide an excellent point
of reference for the following discussion. Second, a major source of inspiration for
these discussions is a comparison between knowledge created by evolution in
nature and the characteristics of human knowledge. In nature and the economy,
(re-) production is based on the generation, processing, and accumulation of
information. However, the very different ways in which this condition is met in the
two spheres – the different knowledge “technologies” – shed some light on
regularities and limitations inherent in the production and use of knowledge.

The argumentation is laid out as follows. Section 2 prepares the ground by

discussing the conceptual relationships between information and knowledge,
various qualitative characteristics of knowledge, and the problem of their
measurement. Section 3 turns to the evolutionary perspective on knowledge and
highlights the similarities and differences in how knowledge is generated, utilized,
stored, and copied or communicated in nature on the one hand and the human
economy on the other. Section 4 looks into the role of knowledge for productive
activities and points out how the growth of knowledge contributes to changes in the
structure of production. Section 5 makes the connection to the debate on the causal
role of knowledge growth for economic growth and explains why knowledge
ultimately sets a limit to economic growth. Section 6 offers the conclusions.

2. Signals, Information, Knowledge – How Do They Relate?

A basic component on which knowledge rests are physical signals, or better

sequences of signals. Signals are turned into information by virtue of an
interpretative code that translates a sequence of signals into the components of a
language, i.e. a syntactically ordered sequence of symbols. Note that the resulting
information can, but does not have to be, meaningful and, if meaningful, may
contain repetition. Of interest is, of course, only meaningful information. The
crucial question therefore is how a meaning, i.e. a semantic content, is attributed
to an information. Although the mental act by which the human mind
accomplished this step is still not fully understood, it seems that it is based on an
associative process (see Fauconnier and Turner 2002). Cognitive cues contained in
(pieces of) the information trigger a spontaneous recall of cognitive context already
existing in memory with which these cues can be connected.

An example can illustrate the associative act. Imagine a test person, e.g. a
first grade economics student, who is given the information (i) “labor earns a wage
and labor provides services”. The two statements in (i) have the concept “labor” in
common and jointly represent the simplest case of what is called in cognition
theory a propositional network (Anderson 2000, Chap. 5) by which the properties

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of that concept are mentally represented. Suppose the concept “labor” is a new,
unknown piece of information for the test person. Suppose further that the test
person associates the rest of statement (i) with a spontaneously recalled statement
(ii) “workers earn a wage and workers spend time and effort” – another
propositional network. The basis for this association is the cognitive cue contained
in (i) in the form of the attribute “earns a wage”. Since the propositional networks
(i) and (ii) have this attribute in common, it allows the test person to extend the
meaning of the concept “workers” o the concept “labor”. By logical inference, sense
can then be made of the “services” provided by labor, namely by identifying them
with “time and effort”.

The simple example suggests some more general conclusions. First, note that
information spontaneously activated in the associative act is in common parlance
considered part of the knowledge an agent commands. Following this
understanding, knowledge can be conceptualized as meaningful (semantically
connected) information that exists in the mind of an agent or that can be recalled
from memory or traced from extra-somatic stores for which the agent possesses the
interpretative code. Second, the fact that meaning attribution is based on an
association with already known cognitive concepts implies that newly received
information cannot be made sense of without already pre-existing knowledge. 1
Third, even though knowledge is composed of pre-existing and acquired
information, it is not only the mere sum of pieces of semantic information (each
with an own syntax). Their composition – the systematic, relational structure of the
information stored memory – is an essential feature of knowledge. Cognitive
concepts (scripts, schemas, prototypes) and propositional networks relating these
concepts to one another have been given as simple examples for building blocks
making up the relational structure. Examples of more complex ones are categorical
reductions, generic abstractions, logical implications, and intuitive theories on
causal and functional relationships.

From the very fact that knowledge is composed of information that is

organized into a more or less orderly, relational structure further insights can be
derived. One relates to the important problem of measuring knowledge. Can it be
quantified as information can be? A sequence of signals is technically easily
cardinally measurable by various criteria. By the fact that information is derived
from a sequence of signals, the same measures applying to signals can be extended
to information – whether the information is meaningful or not. Yet measures
tailored to account for sequences of signals cannot be extended to the relational
structure that organizes the information and determines syntax and semantics. It

1
By backward induction it can then be inferred that there must be some ultimate
prior concepts which are not themselves acquired (learned) and from which the cumulative
knowledge acquisition process starts. These are likely to be innate concepts, a conclusion
supporting the “embodied knowledge” conjecture (Hayek 1952, Chomsky 1965), see Carey
(2009, Chap. 2) for a recent survey.

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is possible to count the number of different cognitive concepts, say, or of different

propositional networks and nodes they contain. But the cardinal measures for each
of these items are incommensurable with those of the others as well as those that
can be constructed by counting the numbers of other building blocks of the
relational structure of knowledge.

An even greater problem arises with respect to what would actually be of

particular interests in measuring knowledge. These are the qualitative aspects of
knowledge that define its variety like more or less similarity, relevance, validity,
importance, value etc. Cardinal measurement is even less feasible here. But there
are some chances for constructing ordinal measures for both the countable building
blocks of the relational structure of knowledge and its qualitative features. In fact,
this possibility is taken for granted in the popular notion that knowledge “grows”
(in the sense of a growing variety rather than an increasing number of same
elements). Evidently, the incommensurability arguments raised against cardinal
measurement do not apply to ordinal relations between a certain variety of
knowledge a subset it contains. It is therefore possible to speak of variety growth
in the special case in which no part of knowledge that exists at one point in time is
lost at a later time, but additional parts have been added.

The incommensurability arguments do apply, however, to ordinal

comparisons of two different varieties of knowledge even if they are non-identical
pure subsets of a larger variety (unless the characteristic causing variety is
declared irrelevant). It is therefore not sufficient for statements like “X knows more
than Y” to be valid that they refer to information subsets that are countable and
belong to a larger set of elements. It is also necessary to invoke a judgement like
“all elements of the larger set are comparable” that erases any difference (for
example in comparing the vocabulary that two individuals know). Obviously, the
assessment of what are comparable sets of elements usually already involves a
tacit, meaning-based (value) judgement by the observer about the similarity and
relevance of information.

Similarity and relevance, validity, importance, and value of pieces of

information and their relational structure generally rest on the meaning attributed
to the information and the specific criteria chosen for the assessment. For example,
two pieces of information can be judged according to whether they convey the same
message or different messages. Depending on the meaning, the logical structure of
an information can be valid or invalid in the sense of being true or false. The
empirical validity may be more or less well confirmed (e.g., when based on
experiential evidence or only hearsay or conjecture). 2 Moreover, an assessment of

2
From the individual agent’s perspective, the validity of knowledge that she holds or
can access is of more or less tentative nature. Therefore the assessment of particular pieces
of knowledge can be, and implicitly usually is, based on assigning varying degrees of belief
to them. This concept is known from, and has systematically been elaborated in, subjective

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the relevance, relative importance, and value also depends on the observer’s frame
of reference and the subjectively perceived context. Logical truth and degrees of
empirical confirmation indeed seem to be widely accepted criteria for assessing the
validity of factual statements and causal and functional hypotheses. For this
reason the corresponding assessments can be expected to more easily be agreed
upon than judgements on the relevance, importance, and value of information can
be. Nonetheless, the same reasons for which the non-identical knowledge of
different agents can only ordinally, and only in special cases, be compared (without
implicit value judgements) apply here too.

What has been said about the measurability and validity of knowledge by
and large applies to both propositional knowledge and procedural knowledge (the
knowing of how to do something). However, regarding the latter, some caveats need
to be made in other respects. They result from the fact that procedural knowledge
cannot always (fully) be articulated. At least in part it comes as “tacit knowledge”
3
that is not, or cannot reasonably be, encoded in semantic information and its
relational structure. Instead it exists in the mind of an agent in the form of non-
verbal concepts of sequences of actions or practices. Accordingly, the problem of
meaning attribution poses itself differently here. In some cases it takes the form of
interpreting visual information. Unlike the procedural knowledge that an agent X
holds that cannot itself be observed by others, its expression in the form of actions
carried out by X often can be observed. On that basis, an observer Y may be able to
make inferences about the underlying procedural knowledge even without getting
any verbal explanation from X. Y can attribute meaning to the visual information
she draws from observing X’s actions by associating it with concepts Y already
knows. Indeed, it is not accidental that in illiterate societies much of the knowledge
transmission between agents and generations of agents is based on non-verbal,
observational learning taking place in this way.

3. Different Knowledge Technologies and Kinds of Knowledge

If, as has just been argued, knowledge is composed of information with a specific
relational structure, then one can as well speak of knowledge existing in a
genetically coded form in living nature as one can speak of knowledge existing in,

probability theory which, after all, was conceived as a theory of judgements on the validity
of human knowledge (Keynes 1921). It may be worthwhile to revive the insights on
personal attitudes towards the use of knowledge which this theory offers.
3
Polanyi (1958). The question of whether and, if so, when and why knowledge can be
tacit has triggered a long debate in which various other characteristics of knowledge have
been suggested as reasons, see, e.g., Polanyi (1966), Saviotti (1998), Cowan, David and
Foray (2000), Balconi (2002). Since the problem of tacitness is not relevant here except in
relation to procedural knowledge the debate will not be entered here. See, however, Witt,
Brökel and Brenner (2010).

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or accessible to, the human mind (and, to a limited extent also in the mind of
higher animals). Let a knowledge technology be defined as the way in which
knowledge is generated, utilized, stored, and copied or communicated. It is
immediately clear then that the knowledge technologies underlying genetically
coded knowledge on the one side and human knowledge on the other are
fundamentally different, the fact not withstanding that in both cases the
technology is based on distributed and interactive knowledge. (Yet the interaction
mode differs, being based more on competition in nature and more on exchange and
communication in the human domain.)

In nature, knowledge is hard-wired into the DNA and RNA strings in the
cells of the carrying organism. However, it is not the mere existence of that genetic
information that matters, but the effects that it develops. Genetic knowledge
spontaneously expresses itself physically in the phenotypic organism, i.e. in the
form of processes like those guiding the organism’s morphological development or
the controls it exerts on the life functionings. A unique property of gene-coded
knowledge is thus its “self-executing” capacity – provided the necessary chemical
energy flows are availbale. Genetic knowledge includes a copying code by which it
spontaneously reproduces itself in its physical carriers. It interprets itself (its
“meaning”) through the biophysical signal cascades it codes. The copying process
also generates new genetic knowledge in a replication of the gene code between
generations that is subject to recombination and mutation. The emergence and
dissemination of novelty is thus part of a pre-programmed, self-executing
automatism shaped together with its outcome by natural selection.

The gene-based knowledge technology basically serves one purpose: the

survival and reproduction of the carrying organism and, ultimately, that of its own.
Knowledge expression drives corresponding production processes that keep up the
life functions by transforming energy and materials appropriately. Interestingly,
the validity of genetic knowledge is not based on anything like self-appraisal of the
accomplished production. Validity is rather determined externally by the success
of the self-executing program in terms of (re-) production relative to the competitors
in its environment – hence the role of natural selection (validity in the sense of
adaptive value).

In the case of the human knowledge technology, knowledge is coded and

stored in synaptic connections in the brain in a form that is much more fluid than
nature’s hard-wired, genetic knowledge. The fact that knowledge can also be stored
outside the human brain is a major cultural achievement based on the
comparatively recently acquired capacity to encode information and its relational
structure. However, it cannot be emphasized enough that the mere existence of
knowledge stored in extra-somatic memories, develops no effect. Like in nature, an
effect only occurs when the stored knowledge is being expressed in some form of
action. Yet, unlike gene-coded knowledge, human knowledge lacks the self-
executing capacity. Putting it to use – its expression – requires the individual
knowledge carrier as a medium of action. Copying knowledge means transmitting

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it to other agents and generations of agents who need to acquire it for themselves
usually with a significant expense of effort and time before it can be put to action.
Given the limited lifetime of the carriers of knowledge this fact means that an
incessant transfer of knowledge between, and its reproduction by, successive
generations needs to be organized where in nature the inbuilt copying automatism
ensures the transmission.

There are also important differences between the purposes that the two
knowledge technologies serve. The differences explain in part the historical
emergence of ever new kinds of knowledge. Human knowledge is not exclusively
oriented towards enhancing reproductive success. In fact, it is the less so, the
economically more prosperous and less exposed to selection pressure humans have
become. For the early hominids – as for the animal kingdom up to the present day
– it can be conjectured that all non-inherited kinds of knowledge aimed at
augmenting the forms of production accomplished by means of the inherited
behavioral repertoire. For example, hunter-gatherer societies (but even more so the
emerging agricultural societies) developed know-how by which the productive
knowledge of nature that is embodied in other species could be manipulated and
instrumentalized to support the own life functions.

However, the close ties to knowledge in nature started to loosen up once

some time was set aside for creating knowledge that was not directly serving
similar productive purposes. Among them were knowledge of ritual, religious,
status-seeking, and other social practices or know how for producing spiritual and
aesthetic artefacts. With these developments the fixation of the knowledge
technology on purposes of survival and reproduction clearly diminished.
Furthermore, the slowly emerging know how of producing and using tools led to
anthropogenic production processes that did not exist in nature before. Indeed, the
very manufacturing of tools serves a purpose of its own – that of roundabout
production for which capital formation is indispensable. Crucial steps in that
direction were mechanical core inventions and devices for a tapping and controlled
application of non-anthropogenic energy (Usher 1954, Mokyr 1990).

Every major innovation enlarged the deviation from nature’s original,

productive knowledge the human kind once started with. The latter is still made
use of in agriculture and fishery. But even there the traditional know how has been
extended increasingly. it is now complemented by new, man-made knowledge of
processing, preserving, and transporting in the food stuffs industries. Most
recently, it has been expanded by the creation of know how manipulating nature’s
genetic knowledge directly. Engineering knowledge serving the production of
capital goods and intermediates has boomed not only, but most obviously, since the
days of the industrial revolution. It has benefitted the emergence of the vast new
knowledge base supporting the production of ever more differentiated goods and
services in the modern consumer industries.

However, production know how helping to transform energy and materials

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from ever new sources with ever new techniques is not the only route on which
human knowledge has expanded. The very deviation from nature’s production
mode meant that the productive activities were increasingly less coordinated by the
natural feed backs of the underlying eco-systems. The new kinds of production
based on specialization, division of labor, and trade therefore required new kinds
of knowledge: that of organization (and, one may add, of entrepreneurship), of
market, and of how to socially interact more generally (Metcalfe 2002).
Furthermore, with its success, the human economy generates and accumulates
exponentially growing amounts of wealth demanding commercial knowledge of how
to secure against risks, of banking, and of wealth administration. Likewise,
growing wealth fuels the demand of all sorts of services between men with the
corresponding service knowledge reaching from military to medical know how, from
educational to governance know how, and from the know how in arts and crafts to
the know how related to creation, administration, and coordination of knowledge
and knowledge production in science and technology.

Obviously, with each new kind of knowledge emerging in the unfolding

expansion and differentiation of economic activities, the variety of human
knowledge grows. In the case of nature’s gene-based knowledge technology, the
capacity to accumulate information together with its relational structure was a
prerequisite for the qualitative transformations that occurred in evolution. In the
case of the human knowledge technology, the development and accumulation of all
the different kinds of human knowledge seem to have been similarly crucial in
shaping the transformation of the economy as Metcalfe has claimed. The question
is how the interactions between the growth of human knowledge and the evolution
of the economy can be explained in more detail.

4. The Growth of Knowledge and the Changing Structure of Production

In the previous section the successive emergence of new kinds of human knowledge
has been portrayed as a concomitant of increasing productivity, the growth in the
variety of economic activities, and the necessary organizational and administrative
adaptations. Regarding the production side, the historical sequence in which these
activities emerged matches roughly with the historical sequence in which the
traditional sectors of the economy emerged and began to dominate: agriculture,
manufacturing industries, and service industries. It may be asked, therefore,
whether the historical restructuring of the growing economy, observable in
changing value added and/or employment shares of economic sectors, is correlated
with, or even a consequence of, corresponding changes in sector-specific knowledge
and/or knowledge technologies. This question is center stage in the neo-
Schumpeterian theories of structural growth differentials between firms and
industries (Foster, Metcalfe, and Ramlogan 2006) and between countries
(Fagerberg and Verspagen 2002). By asking more generally whether economic
growth is ultimately a consequence of the growth of knowledge (presumably in the
sense of an increasing variety) the question also motivates a good part of new

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growth theory (see Aghion and Howitt 1999).

One problem in finding answers to these questions are the difficulties

inherent in measuring the use of knowledge, the variety of knowledge, and their
growth that were already addressed in Section 2. In the innovation literature
several proximate, quantitative measures for (the variety of) knowledge have been
suggested, like patent statistics and citation statistics. Empirical tests of new
growth theory and the Schumpeterian hypotheses have tried to make use of these
measures. But there are several objections that can be raised against them. The
one that matters most here is that, if at all, these measures reflect only the
incremental change in the variety of knowledge. Even if this incremental change
could be documented completely and if a simple un-weighted summing of the
number of innovations would be acceptable, this would not give the variety of all
existing propositional and procedural knowledge relevant to specific (sectoral,
national) production processes – not to speak of measuring the extent of its use.
The simple reason is that the variety of knowledge and its growth depend on an
additional variable, viz. the share of knowledge getting obsolete or being lost over
time. Obsolescence of knowledge is not a negligible phenomenon. There are many
examples in science and technology in which existing knowledge was abandoned
because it was invalidated by new discoveries or inventions. Also a loss of
knowledge can occur, e.g. when non-codified, procedural knowledge is forgotten
because certain practices or techniques become outdated or are driven out of the
market.

Thus, while it seems a truism that human knowledge has been, and still is,
growing, this is hard to give an accurate account of. New economic activities
contingent on new varieties of knowledge and advances in information and
communication technology have brought forth a progressive expansion in the mere
volume of information stored and transmitted (for which signal-based, cardinal
measures are possible). Yet, given the insight in the previous section that stored
human knowledge is not self-expressing, these achievements do not mean much.
Knowledge encoded and stored somewhere is “dead” knowledge. Greater capacity
of transmitting encoded information from one locus to another does not change this
status (though it is a decisive prerequisite for a broader and more rapid use of
stored knowledge, see Dudley 1999). A growing variety of encoded knowledge can
develop an effect and become economically relevant only qua media which have the
capacity to express that knowledge (and have acquired it before). This is true for
both propositional and procedural knowledge.

In view of this proposition and given that a measure of knowledge itself is

not feasible, the focus can be shifted to knowledge expression activities and their
growth instead. These activities reflect propositional and procedural knowledge
that is effective or active in the economy in a given period of time. By measuring
them it may be possible to get a proximate measure for the use of knowledge in
society, though not for the variety of knowledge that is expressed. Put differently,
a change of these activities over time would have to be decomposed into changes in

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the activities expressing the same knowledge repeatedly or in parallel on the one
hand and activities expressing a changing variety of knowledge on the other hand.
Some insights seem indeed possible in this basis. In order to show this, the media
by which human knowledge is expressed need to be specified, however.

First of all, there is the medium of the human mind. A major part, if not all,
of the activities of economic agents, productive and consumptive ones, involve an
expression of previously acquired knowledge, complemented by more or less
physical and mental effort. If, for expository convenience, the effort variable is
assumed to be distributed with an invariable mean, the working time of both the
employed and self-employed agents in the economy can be assumed to map into a
measure for the knowledge that is put to an economically valuable use. However,
the human mind is not the only medium capable of expressing man-made
knowledge. A historically increasingly significant role is also played by other
media, viz. machinery, instruments, and automata which are to be distinguished
here from mere tools. The unique combination of intelligence and fine-tuned
motility has allowed humans fairly early to create tools. This presupposes an at
least latent understanding of a cause-effect relationship which the tool is meant to
facilitate and which is encoded in the shape and functionality of the tool. A wedge
, for example, made of stone or bone suggests by its sharp edge to an observer who
finds this artefact to use it for cutting or carving. Once created, the tool can thus be
seen as “storing” this technological knowledge. Yet, as all stored knowledge, it is
ineffective as long as it is not implicitly expressed by the human action of using the
tool – provided the user is capable of interpreting the encoded information, i.e. of
inferring what the tool is good for. Knowledge expression of this kind thus involves
a human mind and more or less physical labor. (Once the tool has been created by
someone, it can of course be used by someone else without any practical knowledge
about how it was produced.)

When machinery, instruments, and automata are constructed, human

technological knowledge is, in principle, encoded in a way similar to that in the
case of tools. (Depending on the quality of the knowledge that is programmed into
equipment like computers, diagnostic instruments, etc, they can represent a
substantial level of “intelligence”.) Unlike mere tools, however, the knowledge
programmed into these equipments can be made self-expressing by powering the
operation of the equipments with non-anthropogenic energy. If so, an essential
change of the human knowledge technology can be brought about. The embodied
knowledge – the same variety – can be expressed (deployed and re-used) over and
again with less or no participation of the human mind. 4 Deployment and re-use
can, of course, only express what has been programmed into the equipment by a

4
The users do not have to acquire the knowledge that has been programmed into the
equipments by their developers, except what may be necessary for occasional service and
repair. All that is required is a usually rather limited know how concerning the initiation
and control of the equipment.

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knowledgeable mind before. This constrains the deployment and re-use of

knowledge through machines, instruments, and automata to repeated, pre-
specified and standardized tasks. While the human mind that acquires knowledge
can use it for creating novelty – thus enlarging the variety of knowledge –
machines can not (see Witt 2009). For tackling the non-standardized and creative
tasks, the expression of stored knowledge by the medium of the individual human
mind is still indispensable.

Returning to the question of whether economic growth and structural change

depend on the growth of knowledge and, if so, how, a first conclusion can now be
drawn. It relates to a growing use of knowledge of same variety, postponing for the
moment a discussion of the growth in the variety of knowledge. Growth of the
former kind is the result of the progress in the human knowledge technology that
has just been described. Its significance lies in the fact that the measure for active
or effective knowledge introduced above (the working time of both the employed
and self-employed agents in the economy) needs to be adjusted so as to account for
the substitution of human knowledge expression by a self-expressing knowledge
programmed into machinery, instruments, and automata. Wherever this is
possible, more knowledge will be put to an economically valuable use than what is
represented by the input of human labor time.

This effect is mediated by investing into machinery, instruments, and

automata, i.e. capital goods. However, the scale economies result independent of
the number of capital goods from the fact that each capital good can many times re-
use productive knowledge built into it (Langlois 1999). Consider a situation in
which output is not constrained by the feasibility of materials and/or energy. In
such a situation, the bottleneck in raising output is ultimately the know how of
producing something by transforming or relocating materials with the help of
energy inputs. Raising the input of human labor time and/or of the services of
capital goods capable of re-using inbuilt knowledge – both with a constant
knowledge expression capacity per unit of time – will then lead to a larger output.
For a particular production context, such a relationship can, in principle, be
represented by a corresponding engineering production function.

However, the knowledge expression capacity is not necessarily constant over

time. By running down a learning curve, an agent just having started a new job is
usually able to express more knowledge per unit of time simply by working faster.
Yet, by the very nature of learning curves they converge in a comparatively short
time to a limit beyond which no further increases are possible. In the longer run
and on average, human agents can therefore be expected to operate close to their
knowledge expression limit. Abstracting for the moment from a possible up-skilling
(i.e. the possibility of expressing a greater variety of knowledge) this means, of
course, that the knowledge expression capacity of human labor time can in good
approximation be taken to be constant. This is different in the case of the
operations of machinery, instruments, and automata capable of re-using inbuilt
knowledge. Short-term learning curve effect may occur here too, but the essential

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effects result from technical progress in the equipments and are long term. If one
capital good can be replaced by another one with the same price but a capacity to
express (re-use) more preprogrammed knowledge (i.e. to substitute more human
time for knowledge expression), this leads to a higher level of output for
(nominally) the same capital input, i.e. an upward shift of the corresponding
engineering production function.

The substitution of the human mind as knowledge expressing medium by

equipments with inbuilt, self-expressing knowledge in the course of technical
progress is not equally possible in all production activities. The differences are
reflected in a differential change in the composition of labor and capital as
knowledge-expressing factors in firms, industries, and sectors of the economy. The
capital-labor ratio can be expected to increase over time wherever knowledge can
easily be programmed into equipment by which it can be re-used with an
increasing efficiency due to technical progress. As mentioned, this presupposes a
standardization of tasks so that the required knowledge expression can be pre-
specified – a typical precondition of mass production as it occurs in manufacturing
firms and industries. In contrast, in firms, industries, and sectors of the economy
in which non-standardized and creative tasks are a substantial part of the
production activities, the capital-labor ratio can be expected to increase less. One
may think here, in particular, of service firms, industries and the service sector.

Indeed, in recent historical times, capital-labor ratio in the manufacturing

sector has been strongly increasing, resulting even in a decline of the sector’s share
in total employment. In the service sector, in contrast, the capital-labor ratio rose
much less, and its employment share grew to such an extent that it dominates now
the shares of all other sectors. These structural changes are in line with the
conjectures presented here. The transfer of knowledge expression from human
agents to machinery, instruments, and automata hinges, of course, not only on the
extent to which a standardization of tasks is possible, but also on whether technical
progress has already made the equipments available that take over as a medium
of knowledge expression.

In this respect it is a historical fact that in the 19th century the lions’s share
of the technical improvements occurred in mechanical and chemical processing
technology (exactly what substituted human knowledge expression in those
productive activities), favoring a rising capital-labor ratio in the primary industries
and manufacturing. It was only in the mid 20th century that the electronics
revolution allowed substantial technical progress also to be made in information
processing and communication. Standardization of many information processing
and communication tasks – a substantial part of the productive activities in the
service sector – seems to have occurred earlier already. The financial sector, for
example, used standardized forms and their electro-mechanical processing in the
book keeping of transactions already at the beginning of the 20th century (Austrian
1982). However, the transfer of knowledge expression from man to machine and
the re-use of processing know how programmed into the equipments took on mass

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production forms only after the diffusion of the computer-based technology.

By historical standards this is a rather recent development. It remains to be

awaited how far mass production based on equipments capable of expressing and
re-using knowledge can be driven in the service sector. This question will be
essential also for how far the corresponding increase in the capital-labor ratio will
go there and whether it will stop or even reverse the migration of labor from the
manufacturing sector to the service sector. Much of future structural change can be
expected to depend on where the future non-standardized, creative tasks, requiring
knowledge expression by human agents, will be generated and where they will
disappear. The boundaries between the traditional sectors have been drawn with
other criteria in mind. Yet, with the rise of mass production in services industries
on the one hand and an increasing importance of R&D employment in the
manufacturing industries on the other, some crucial categorical differences
between the two sectors have already begun to vanish. A new sectorial distinction
that cuts across the current boundaries of manufacturing, services, and other
sectors, that focuses on creative industries on the one side and processing
industries on the other, may therefore be more informative in keeping track of
where structural change is heading to.

In any case, the question raised by new growth theory as to whether

economic growth ultimately is a consequence of the growth of knowledge can be
given a more differentiated answer now. The conceptual extensions developed so
far suggest to distinguish the growth of knowledge expression activities, whether
man or machine based, from growth in the variety of knowledge. As explained, the
rise first of the manufacturing sector and later of the service sector – episodes of
unprecedented economic growth – was accompanied by a substantial growth in the
expression and re-use of knowledge programmed into technical equipments, an
expansion likely to exceed by far the changes in human knowledge expression
activities in these sectors. It can even be conjectured that this growth contributed
causally to the growth of value added in these sectors and, thus, was necessary
(though surely sufficient) for the economic growth observed in the past.

The very technical change that made this growth possible also meant, of
course, that new (technological) varieties of knowledge – the very essence of
innovations – were created and actively expressed. For the reasons mentioned, it
is not possible, however, to infer from this fact that the overall variety of knowledge
that can be expressed in an economy has been growing. There may be good reasons
to assume that this did happen in terms of both stored and active knowledge. Even
so, however, it is not clear whether such a growth is a causal factor for economic
growth in the past and will continue to be conducive to future growth. To explore
these questions, further conceptual clarifications are necessary that revolve around
the variety of knowledge and its growth.

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5. Knowledge Limits to Economic Growth?

What has been left open so far is a closer characterization of the knowledge that
the agents are able to express on the job and the question of whether there have
been changes over time in the knowledge requirement due to technical progress
and the growth of knowledge. In order to address these issues a qualitative
assessment of the variety knowledge by some criterion (similarity, relevance,
validity, importance, value etc.) is necessary. As was discussed in Section 2, this
implies additional measurement problems so that at best ordinal inter-personal or
inter-temporal comparisons of knowledge varieties are possible under rather
restrictive conditions. Given these difficulties it seems straight forward to consider
here too an activity measure as a substitute for measuring qualitative aspects of
knowledge directly – this time one that relates to the knowledge acquisition
activities.

The rationale underlying such a measure is that it is possible to express only

knowledge that has previously been acquired. The hypothesis then is that time and
effort which the agents spend on learning reflect the variety of the individually
acquired knowledge. Abstracting from a certain rate of forgetting, spending
additional time on learning means to learn different things and thus to enlarge the
variety of knowledge that can be expressed. A greater or smaller variety of
knowledge is the weakest possible form of a qualitative assessment of individually
held knowledge, measuring content on the basis of a dissimilarity criterion alone.
Growth of knowledge in the sense of an accumulation of an increasing number of
dissimilar pieces of knowledge does not say anything about relevance, validity,
importance, value or even the actual meaning of the accumulated knowledge. A
measure based on such a weak criterion gains significance only by the fact that in
most cases the variety of knowledge – and, hence, the time for its acquisition – is
the greater, the higher the knowledge expression requirements.

Indeed, in practice, it can be observed that agents hired into an occupation

are supposed to command a variety of propositional knowledge and procedural
knowledge (skills) that meet the demands of that occupation. A detailed,
encompassing catalog of such demands is, however, rarely provided. Instead, a
typical educational level is usually specified and potential applicants are expected
to have attained it. The level corresponds with a certain length of training, study
time, and/or career paths and is assumed to ensure that all or most necessary
capabilities have been acquired. Usually, the higher the knowledge expression
demands of an occupation, the higher is the educational level, the longer the time
spent on the associated knowledge acquisition activities, and hence the greater the
knowledge variety.

Knowledge acquisition is, of course, costly – the more costly on average, the

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more time and effort are necessary. 5 In order to be able to put knowledge of a
particular variety to work, agents therefore have to be remunerated not only for the
knowledge expression activities which their occupations require, but also for the
preceding knowledge acquisition activities. Before this background, value
judgements of a special kind are made in the markets regarding the desirability of
the combined acquisition and expression activities: the judgements consolidated
into the prices which the demand side is willing to pay as compensation to the
agents capable of expressing the desired variety of knowledge. Since on average the
cost of acquiring the desired variety are the higher, the greater that variety,
capabilities of expressing such knowledge will only be held in the market, if the
market remuneration for the expression activities indirectly also compensates the
agents for the on average higher acquisition costs. (Where this condition is not met
– as in many domains of research and education – expression of high end varieties
of knowledge that is deemed desirable by the public must be commissioned and
compensated by public spending.)

It is an empirical fact that the level of education, i.e. the average length of
training and study time in a non-employed status, has been rising in all developed
economies (the frequently stated trend towards a “learning society” described in
Lundvall 1992). Individual knowledge acquisition requires increasingly more time
to absorb the state-of-the-art knowledge (Jones 2005). Even if not all of that
education is qualifying for a later occupation, it is likely that the increasing level
of education of the work force reflects a trend by which the variety of individually
acquired knowledge is becoming greater. At the same time, the average capital-
labor ratio in the economy, average labor productivity, and real wages per hour
worked (i.e. the time during which knowledge that has previously been acquired is
expressed on the job) has been rising dramatically. However, the increase in these
variables over time is lower, if the longer, unpaid education time is included as just
suggested.

A first insight into the relationships between the growth of the variety of
knowledge and economic growth is therefore the following. If the growth of the
average variety of knowledge has in some way been causal for raising the capital-
labor ratio, labor productivity and real wages, then its impact is much less
dramatic, when taking its rising acquisition costs into account. In aggregate growth
accounting models in which labor inputs are typically measured in paid working
time this means that a good part of the total factor productivity – usually estimated
to be a quite dramatic, unexplained residual, see Hulten (2009) – can actually be

5
The costs also depends on the quality and efficiency of education and training, on
the agents’ natural learning capabilities and their individual effort and skills, on the pace
with which individually acquired knowledge becomes obsolete or is forgotten. These factors
vary not only across agents. As a consequence of increasing efficiency (e.g. resulting from
learning curve effects) or a changing motivation they can also vary over time for each
single agents.

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attributed to the neglected rise in unpaid labor inputs for acquiring productive
knowledge.

A second insight regarding the relationships between the growth of the

variety of knowledge and economic growth can be derived from considering the
time constraint on individual knowledge acquisition activities. The cognitive
resources of the human mind are limited. Consequently, the amount of knowledge
that can both be acquired and expressed by a single agents per unit of time is
bounded. (This claim is a variant of the well known bounded rationality
hypothesis, see Conlisk 1996.) By training and supporting information technology
the individual bound can be expanded but not removed. Independent of individual
differences in learning capacities, scale effects in learning, and rates of forgetting
there is therefore a natural upper limit for the variety of knowledge that an agent
with a finite life time can acquire. Moreover, the more of this life time is devoted to
economically motivated knowledge expression activities and other activities, the
more narrowly limited is the variety one can acquire. Trivial as this universal
constraint may appear, it has interesting implications at the aggregate level for the
overall variety of active knowledge that can be expressed in an economy at a given
point in time.

The variety of encoded and stored knowledge that has been accumulated has
visibly grown (as can be seen, for example, from the ever expanding texts of
compendia describing that knowledge). At the same time each human generation
has to acquire the growing variety with its limited cognitive resources anew in
order to turn it into active individual knowledge. In response to this increasingly
more demanding challenge, the extent has grown to which knowledge is
partitioned among individuals who specialize differently in the variety of
knowledge they acquire, thus enlarging the overall variety of active knowledge
(Pavitt 1998). Nonetheless, the acquisition still seems to require increasingly more
time to absorb the state-of-the-art knowledge so that a pressure to individually
specialize further is upheld (Jones 2005). As a result of the attempt to cope with
the growth of accumulated knowledge, this process is likely to go on. Yet, it will not
do so indefinitely.

Once an extreme partitioning or specialization 6 has been reached the upper

boundary for the overall variety, that follows from the individual limitations for a
finite human population, will become binding. The overall variety of active
knowledge in an economy cannot grow beyond that finite upper bound, while the
overall variety of knowledge that is encoded and accumulated in unlimited extra-

6
An extreme partitioning would be a distribution of knowledge among the agents in
an economy such that every agent commands a different variety of knowledge except the
common core (an interpretative code) required for attributing meaning to information
communicated between individuals and for coordinating a joint expression of individually
held pieces of knowledge where this is necessary in the production process.

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somatic memories can. But since only knowledge that is expressed in some way
develops an economic effect, the possibility of an unlimited growth of encoded and
stored knowledge is economically irrelevant. 7 Hence, if, as new growth theory
seems to presume, the growth of the variety of active knowledge in the economy is
a cause of economic growth, then the existence of a knowledge constraint implies
a limit to economic growth. While the individual limits in knowledge acquisition
are trivially experienced by everyone, the limits to the overall variety of active
knowledge seem to go largely unnoticed. A reason for this asymmetry is
presumably that these limits seem far away, not least because of the fact that the
human population is still growing. If properly educated, there is still a huge
number of agents who can be included in the further partitioning of a growing
variety of active human knowledge.

6. Conclusions

This paper has made an attempt to provide a systematic account of knowledge, its
different uses, and their significance for production and growth. A concept of
knowledge and its different facets has been developed, followed by a short inquiry
into the measurement problem. The framework that inspired the discussion of the
role of knowledge was a comparison between the accumulation of genetically stored
information that is physically expressed in living organisms (genetic “knowledge”)
and the conditions under which man-made knowledge is accumulated. An essential
insight derived from that comparison was that human knowledge also requires a
medium for expressing it, a fact that is often not sufficiently acknowledged. The
media of knowledge expression that have been identified are the human mind that
expressing knowledge in the actions it triggers and machinery, instruments, and
automata which embody human knowledge that has been built into them. Several
implications have been discussed that shed some new light on phenomena like
scale economies in production, sectoral structural change, and the boundaries of
knowledge growth impacting on economic growth.

7
This verdict is valid as long as no intelligent automata exist that can acquire and
use knowledge by themselves; for a discussion of such a constellation, presently considered
utopian, see Wadman (2001).

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