In the following article LFMI’s Vice-president Guoda Steponaviciene analyses the fallacies underlying the knowledge economy, a fashionable movement regarding economic thought. The article was published in a magazine “Naujasis zidinys-Aidai” (2003 No.9).
Theory is a dry branch, my brother, many students would say with a sigh. Brain-drying physics, mathematics, economics… But are they really that dry? I am certain that any honest physicist and mathematician would have arguments to defend the vitality of these disciplines.
And what about economics, a science which, on the one hand, is entirely practical, but on the other hand, with pretence to objectivity and precision? An economist is expected to give an assessment of any phenomenon in figures. What will be the growth of economy next year? What should the farmers grow so that they do not need to be subsidised? In what areas should one start a new business? What will be the exchange rate of the dollar in half a year? What could have been the biggest amount for selling the Lithuanian Telecom (in other words: “What was its real value?”)? How much should a pharmacy earn on one box of vitamins sold? Where and how much to invest to make an invention which would guarantee wealth and global fame for the country? All these questions are the subject of economics; however, none of them has an answer we expect – precise and objective. Although answers do exist and the knowledge of economics helps us to find them, they can be only hypothetical and subjective.
This gap between the possibilities of economics and the tasks set up for it results in misunderstandings, losses and even crimes. These are the misunderstandings such as five-year-plans, long-term development economic or sector strategies, parliament or government declarations about economic priorities, national agreements, and similar exemplars of wishful thinking embodied in legal acts. Nearly all programme documents both in Lithuania and, particularly, in the European Union are started with Miezelaitis**-style human pathos but end up… in a drawer or losses. When on a large scale, this type of thinking leads to a crime: socialism was based on the assumption that economic activities can be planned and that this can be done by a knowing person – an economist (or a group of them). Apparently, they couldn’t.
However, neither a theoretical (L.von Mises, F.von Hayek) nor practical collapse of socialism (right under our own nose thirteen years ago) healed people’s temptation to measure up economic solutions, objectively and exactly. There is economic science, sophisticated methods of calculating, mathematical models, foreign experience, statistics, and even artificial intelligence after all!
These things certainly exist. But all of them are at the disposition of a certain individual in a certain place and at certain time, an individual who makes assessments with his own precision and from his own perspective. This acting live individual is the axis around which the paradoxes of the economy turn. If we accept him as the key agent in the economic process, then no pretence to objective and precise knowledge remains, and thus no contradiction. What remains is economics, a science about the activities of individuals that are aimed at achieving material benefits and its methodological key – the motive of an individual or a group of individuals.
But if we, along with Marx or independently, believe that economics is determined by “laws of development of the industrial forces that are objective and free from human will,” it is obvious that we do not assign such a role to an acting individual. In that case, the main player is the clever calculator-man, who is detached from a specific place and time and who processes the information held by all other people to provide a “scientific” answer. This answer could be fully acceptable as a decision of a single individual; however, the problem is that it has to be executed by other people whose decisions are different. In terms of the economy, it is loss-bringing because when people implement decisions, not best fit for them, resources are distributed ineffectively on the market and the overall welfare decreases. For instance, John buys the same quantity of paint for his house as his neighbour Peter. If the two neighbours’ houses are not identical, they will either lack or have too much of the paint. In both cases, it will result in losses.
So why doesn’t this contradiction come out in practice? Because people have common sense and paint their houses according to the size of their own house, not the neighbour’s. But where the consequences of the decisions are not so glaring, losses don’t come into the open. Let’s say, it is decided to invest x million of taxpayers’ money to support agriculture or to establish a technology park. These investments have measurable consequences: an average y increase in farmers’ income, a z% increase in profits of several companies or q newly established technology companies. But we do not know, and never will, what would have been the increase of income and profit, and how many new companies would have been established, if this money remained in taxpayers’ pockets. If we stick to the opinion that the key player in the economy is the acting individual, we must admit that he will know how the make the best use of his own money.
The issue of calculating and state- or scientific planning in the economy crops up periodically, when a new flag of the economic development is raised. A short time ago, such a flag was the sustainable development (continuous or otherwise “planned in order to be more even”). Its meaning and, most importantly, ways of achieving it did not actually emerge as this flag faded away and was replaced with a proudly sounding “knowledge economy.” We should admit that this trademark is a bigger success than the “sustainable development” – at least it can be translated into Lithuanian, although its meaning and ways of implementation remain rather vague.
What is understood by the knowledge economy? Of course, it is computers, telephones, and the Internet. According to the international benchmarking, the more people use these tools, the better: at home, in business, at leisure. But if each person has two mobile telephones and the offices are stuffed with the newest technologies, will that be knowledge economy yet? According to some methodologies of benchmarking, this is exactly how it would be deemed. Yet, something tells us (perhaps that dry branch of theory?) that this is not knowledge economy.
Another popular myth says that the backbone of the knowledge economy is the high-tech industry. Finland and the USA are countries which are seen as models in this respect. Indeed, the Finnish economy is based on the high-tech industry, or, to be more precise, on one company, Nokia. This might be very good as regards the knowledge; but it is very risky in terms of the economy. It is like non-diversified investment or playing va banque: if everything goes well, the results are very pleasing, but if it doesn’t, they are very painful. It is enough to have in mind that high-tech business is riskier than the average business. According to Peter Drucker, even though high technology is in fashion, companies that work in this area account for just a small part of the top lists of the US companies compiled by various analysts. Both the economic growth and new jobs are further generated by so-called old industries. Notably, they embrace more and more areas that earlier were not considered as business, for instance, private health care and education establishments.
The National Agreement (2002) in Lithuania documented the objective that 25% of Lithuania’s gross domestic product should be generated by the high-tech industry. Why 25%? As cases in the USA and Finland showed, the more is not the better. The more of the gross product is being generated by one branch of the industry, the graver will be the consequences in case of its recession. The assumption that recessions may be averted should be wiped out from our minds altogether. Building on it would be the same as hoping that the road will always go downhill, the wind will blow from the back and summer will last forever.
And why on earth should it be important that a quarter of the GDP is generated in a specific sector? A hundred litas, earned for wagon loading and producing micro schemes, looks exactly the same and can buy the same amount of goods. The above-mentioned objective can make sense only in two cases: in order to win score in the competition of benchmarking (the “catch-up-with-Estonians” syndrome) and if one believes that technology is a value per se (the “man-is-the-conqueror-of-the-world” syndrome). The first approach is typical of the politicians and state officials, the second one – of technocracy. There may be a third motive – the pursuit of high-tech enterprises for exceptional benefits (if not for the company, then at least for the sector), hoping that the state, which has set such objectives, would support or promote companies of this industry. Another postulate of the National Agreement about “the priority industries” suits well with such considerations. By the provided definition, these are the industries with the brightest prospects of development. The priorities, set top-down, are the essence of central planning: then not the market participants – ordinary people – decide where the resources should be channelled, but a certain group agrees on this issue (why is it called the National Agreement then?). The parties of the agreement have not been able to point out the criteria for distinguishing these industries. It is small wonder. Such criteria – objective and precise – do not exist anyway.
The fact of agreement is usually accepted with approval by the society: after all, this is the basis of the democracy. Still, the agreements between certain economic entities (for instance, cartel agreements) or the agreements of economic entities with state institutions (for instance, patronage) are deplorable and even punishable. So what is it that we must agree upon? It is a commonplace but we have to agree upon the rules of the game, not upon who will win or what the score of the game will be.
In terms of the knowledge economy, it would be very sound to agree on the terms, as the knowledge economy is neither high-tech nor a priority industry, nor a branch of the economy in general. The knowledge economy cannot be expressed by the number of computers or mobile telephones per capita or by the number of electronic transactions. The knowledge economy is a qualitative evaluation of the economy which indicates that a large part of the society uses knowledge in their economic activities and in this way responds to the challenges of the changing environment. They use knowledge in the way that seems best for them – maybe automatically or maybe not; they may invest into the development of technologies but they may also buy these technologies; they may publish the results of inventions in so-called prestigious publications but they may do it in the Lithuanian magazine Naujasis Židinys-Aidai just as well. And even all the economists of the entire world together will not be able to measure these phenomena objectively and accurately.
When discussing the knowledge economy, all gurus of the knowledge economy, having started from macroeconomic stability and telephony level, end with the areas that are much more difficult to measure, for example, education and favourable business environment, cultural habits and the risk level that would be acceptable for the society. US professor Brian Arthur, who has been working in the Silicon Valley for many years, referred to high technology as “deep craft.” Michael Porter, when analysing the circumstances of the formation of business clusters, emphasises the importance of the traditions of specific location for the competitiveness of the companies. Drucker sees innovation as the capacity of an acting individual to react to the changing circumstances and systematically use them for the improvement of the economic result, primarily, in management. He believes that economists cannot explain why at the end of the 19th century and lately, apparently, entrepreneurship emerged again, and why it emerged in some countries or cultures, but not in others. Drucker draws the conclusion that the birth of the entrepreneurial economy is both economic and technologic, and cultural and psychological phenomenon, and innovation is an economic-social category, not technological.
All the arguments lead to the conclusion that the knowledge economy (as any other economy) is created or not created by concrete individuals. They create it if they wish, dare and are lucky. When the majority of people in Lithuania will be wishing and daring, even if we are not on the top of the list according to the smart benchmarking, we will rejoice because that will be a sign that the teeth of the soviet mentality got blunt.
[*] (from French) – “search for an individual”; the rephrased French expression cherchez la femme – “search for a woman”.
[**] A famous Lithuanian poet during the Soviet times who created the image of the man-ruler of the world.
 K. Marksas. Kapitalas, vol. I, Vilnius, 1958.
 Drucker, P. F., Inovation and Entrepreneurship. Practice and Principles, Oxford: Butterworth-Heinemann, 1985.
 Arthur, B. W., How Growth Builds upon Growth in High Technology. Knowledge Economy Forum, Helsinki 2003.
 Porter, M. E., “Clusters and the New Economics of Competition”, in: Harvard Business Review, 1998, Nr.11-12.
 Drucker, P. F., op. cit.