On the Nature of Knowledge, Public and Private

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The following is an academic essay prepared for my Msc in Managment at Birkbeck University.

[Update: This essay received 70%]


The Nature of Knowledge as an Economic Good, Public and Private
by Mark Gibaud

In the 19th century industrialist society, the capacity to generate wealth was inextricably linked to physical property rights. This means that wealth generation was implicitly excludable. In the new intellectually-powered economy knowledge is the source of wealth but must be afforded a special mechanism of protection since new knowledge is expensive to create but often (though not always) easier and cheaper to imitate. It is in society’s interest to reward these creators of new knowledge so as to incentivise their ongoing efforts such that new knowledge is continually created. However, society also benefits when knowledge is freely diffused, disseminated and leveraged as shown by the Open Source Software movement. This dilemma has given rise to the debate of knowledge being an economic good, but should it be public or private, or both? This essay attempts to answer this question by further analysing the nature of both public knowledge and private knowledge and qualifies the role of intellectual property rights (IPRs). A deeper analyses the nature of the relationship between public and private knowledge is followed by the policy implications suggested by that relationship.

A ‘pure’ public good by definition is non-excludable. That is, one’s consumption of it does not prohibit another’s ability to also enjoy it. Also, it is non-rival, meaning, as more people enjoy it, there is no reduction in supply which may cause others to go without it (public goods exhibiting only one of these characteristics are not noted as ‘pure’ public goods) (Kaul and Mendoza 2003). Air, for breathing, is an example of a pure public good in that it is neither excludable nor rival, since my breathing the air does not leave less of it for you, nor can I do very much to prohibit you from enjoying it. Though there are kinds of knowledge that do not have these characteristics, the majority of scientific knowledge (including economics and the social sciences) does enjoy these characteristics and is thus a prime public good. Public knowledge generally refers to knowledge coming from academics and researchers in universities, but can also include industry ‘best practices’ like Total Quality Management or Capability Maturity Model Integration (Matusik 2002). Private knowledge on the other hand is knowledge unique to particular firms and can be wrapped up inside company policies and processes (for eg. Google’s “20% time”), and also embodied in services and products (Nelson 1992). Keith Pavitt argues compellingly for the distinction between science and technology, where technology “ecompass[es] both physical artefacts themselves, and the person-embodied knowledge to develop, operate and improve them.” (Pavitt 1987). However, the real-world actualisation of that distinction is slightly more difficult to locate. For instance, two researchers may be performing the same basic undertaking of research into a particular topic or field, but one might be working at Google Research and the other at Stanford University (Nelson (1992) makes a similar observation of engineers engaged in research at IBM, AT&T and DuPont at that time). The university researcher is motivated to publish his research and contribute to the stock of knowledge, while the Google researcher is bound to keeping the results of his research private, and allow Google to benefit from the Schumpeterian rents associated with leveraging private knowledge (Nelson 1992). This is done either through patents, in which case the knowledge is public but protected, or through secrecy, by which the knowledge stock is left bereft of the Google researcher’s new knowledge altogether (Nelson 1992). This is the distinction between science and technology implicitly proposed by the economists Sir Partha Dasgupta and Paul David when they argued that science contributes to the stock of knowledge, while technology does not (Dasgupta & David 1985). Finally, Dasgupta and David also reason (1985) that science produces knowledge that is more “general and fundamental” in nature and lacking in “immediate practical applicability” than what technological research tends to pursue. A distinction then, not so much of nature, but of goals, and a distinction that is illuminating when considering what direction public policy should take.

We have established that knowledge can be a public good. The fact that it is non-excludable and non-rival, means that it is effectively free, and no profit can thus be generated from public knowledge in and of itself (transmission costs of knowledge is a separate issue). This in turns means that there is no financial incentive to contribute to the stock of public knowledge. Thus, if left to the open market, any contribution will likely not occur and lead to a “tragedy of knowledge”, where players might deplete the stock of knowledge (as it is still profitable to embed and evolve ideas from public knowledge into private products) without any replenishment of new knowledge into that stock taking place (David 2001). For an analogy, the same problem affects pollution, where no one company will curb its carbon emissions as it then puts itself at a disadvantage with competing companies in terms of manufacturing output. In matters like these, it is a compelling argument for the state to get involved, as can be seen by the recent lobbying activity in Copenhagen recently for climate change. As knowledge itself is an input to new knowledge (Stiglitz 1999, David 2001), this public good is critical to fostering ongoing innovation, and thus it is imperative that the state facilitate the cultivation of knowledge as a public good, as it does with other public goods. But the state does not directly incentivise this creation process. Rather, academia centres around a compelling code of conduct relating to publication, scientific priority and reputation building. Scientific priority is the phenomenon whereby fame and recognition is accorded to that discoverer who published his discovery first, irrespective of whether one or more other researchers made the same discovery independently at the same or similar times. In Robert K Merton’s seminal discussion of scientific priority  (1957), he tells of some fierce battles of priority such as Galileo who, in The Assayer, “flayed four other would be rivals” in aid of protecting his discoveries. Notwithstanding with this winner-takes-all approach for scientific discoveries, a steady building of reputation is also very important to scientific researchers. Charles Darwin, the first to develop the theory of evolution through natural selection, is quoted as saying “My love of natural science . . . has been much aided by the ambition to be esteemed by my fellow naturalists.” (Barlow 1958). It would appear that the state only has to facilitate this self-promotion of the academic community in order to safeguard a continual contribution to the public stock of knowledge.

Knowledge can also be a private good. Successful companies seek to employ effective strategies to cultivate the generation, capture and dissemination (Nonaka and Takeuchi 1995, Senge 1991) of their private knowledge as this contributes directly to an organisation’s competitive advantage (Teece 2000) and is key to providing new products and services (Kessels 2001). Nelson (1992) pointed out that firms make use of intellectual property rights (mainly patenting) and secrecy to pursue profit from their organisational private knowledge. But Mansfield (1985) found that secrecy is often not very effective. He noted after studying 100 American firms that “information concerning the detailed nature and operation of a new product or process generally leaks out within about one year”. The argument that the state must safeguard some kind of reward for innovators and their product and process breakthroughs is unassailable, though precisely how and what is the subject of increasing debate. Still dominant in these times though, is the patenting system.

The patenting system intends to encourage innovation and technological breakthrough by firstly creating a temporary monopoly for the inventor or inventors such that they are rewarded for their efforts, and secondly by requiring disclosure of the knowledge that led to the new product or process, such that that knowledge may be diffused to the benefit of wider society (Griliches 1990). It asserts that firms will not invest in innovation activities if they cannot reasonably expect profits to be generated from innovative breakthroughs. If imitators should come into possession of knowledge that innovative firms have invested heavily to develop, these “free-riders” will negatively affect the motivation of firms to invest in innovation (Gault and Von Hippel 2009). It is argued that any abolition of IPRs risks a “tragedy of knowledge”, as it might benefit society at the present, since their would be an influx of new knowledge that may well be leveraged usefully. However, without any legal monopoly afforded by IPRs, there would no longer be a strong incentive to engage in expensive research and development and the creation of new knowledge would ebb away, leaving us at a relative standstill before long. Attention must be drawn, however, to the alternatives presented by, among others, Paul David (2001) such as “fair use” exclusions to the public research sector, and “compulsory licensing” which would enable the inventor to be rewarded but also society to benefit from the diffusion of the innovation. Gault and Von Hippel (2009) also cite government R&D subsidies and tax credits as helpful mechanisms to “lower innovator’s private costs” and go on to point out the Open Source Software phenomenon, where source code contributors act under agreement to engage in ‘free-revealing’ of their privately-generated knowledge in an effort to build reputations in their communities which would in turn lead to more income-generating opportunities for both that individual and their full-time employer. Products and processes that are subject to free-revealing also generate valuable feedback from the wider community so that a company might improve that product or process improving its quality and thus potentially improving profitability. De Jong and von Hippel (2009) also present ‘free-revealing’ to have similarly rewarded innovation in the process equipment industry for high-tech SME’s in Holland. It is clear that there is increasing innovation in reward systems for inventiveness and the current debate in IPR circles may well begin a steady journey towards revolutionizing the system.

Leonard-Barton asserts that “few if any companies can build capabilities without importing knowledge from outside its boundaries” (Leonard-Barton 1992). Remembering that firms on the whole seek to retain their own private knowledge, any company wanting to begin to deepen its capability has only one recourse: the public stock of knowledge. It can thus be said that in this aspect, private enterprise depends both initially and continually on the ‘communal well’ of public knowledge. In addition to the broadly applicable research that is generated in public academia, Nelson (1986) and Levitt et al (1984) found that across a wide range of sectors, there exists a dependency on the public academic infrastructure itself, in that the private sector directly values the training and research-orientated skills acquisition of future industrial researchers, as well as the academic “hive-mind” they bring with them in the form of a network of academic colleagues. It would appear that the nature of the public-private knowledge relationship is largely one of public creation and private consumption. Furthermore, it seems that there is no real risk of a confusion in roles as the institutions are, as discussed earlier, geared towards fundamentally different goals and outputs. Although he notes computer programs (Google Search started life as a university research project) and biotechnology products as exceptions, Nelson (1992) suggests that, “in most fields of technology what gives advantage to a company is a particular manifestation of a generic technology that is tailored to its own circumstance, products and processes.” Although de Solla Price (1965) sums up the intent by stating that “scientists are highly motivated to publish but not to read, whereas technologists read assiduously but are not motivated to publish”, it must be said that companies occasionally do also publish papers that contribute to public knowledge (Hicks et al. 1996).

Paul David tells us (2001) that the public good nature of public knowledge asserts that the free market cannot responsibly price that commodity such to align with the maximum benefit to society. Thus, the state has to engage in “public patronage for fundamental, exploratory research”. This is a noble endeavour but one that subject to fiscal pressure on an ongoing basis, since any ‘oversupply’ of public knowledge could be wasteful in terms of taxpayer’s money. On the other hand, the state must also govern the innovation-reward institution with an even hand. If governments overstate the benefit of innovation to private companies, the scales will tip in favour of turning public knowledge into private profits and we could advance the journey toward a “tragedy of the public knowledge commons”. Furthermore, governments would be well advised to pay close attention to the research uncovering new ways by which innovators and inventors could be rewarded, but in addition, downstream innovation is further infused than it is currently, under the contemporary IPR system.

Conclusion:
In summary, given that the over-arching goal is the betterment of society generally, through the continual upgrading of existing, and the invention of new technology, it would appear that a public-private partnership where researchers and academics “push” knowledge of a more fundamental nature and of more general applicability to the stock of public knowledge, and in turn the private sector be incentivised to “pull” from this common stock, perhaps adding it to their internal research (which is of a more focused and specified nature) to then internally develop products which embed the science into new technology, this societal goal is served the best. Consequently, public policy needs to centre around maintaining this balance. By way of simple analogy, it falls to the state to ensure that the tree of knowledge is adequately watered, such that its trunk and branches, the public knowledge, may support the growing of new leaves of private knowledge to the benefit of society at large.



References:



Barlow, N., 1958. The Autobiography of Charles Darwin. London: Collins, 119–120.

Dasgupta, P. et al., 1997. On Institutions that Produce and Disseminate Knowledge. Fondazione Eni Enrico Mattei, Nota di lavoro, 68.

Dasgupta, P. & David, P., 1985. Information Disclosure and the Economics of Science and Technology, C.E.P.R. Discussion Papers. Available at: http://ideas.repec.org/p/cpr/ceprdp/73.html [Accessed November 22, 2009].

David, P.A., 2001. A tragedy of the public knowledge ‘commons’? Global science, intellectual property and the digital technology boomerang. Research Memoranda, 3.

Debackere, K., Clarysse, B. & Rappa, M.A., 1994. Science and industry: a theory of networks and paradigms.

Gault, F. & Hippel, E.A.V., 2009. The Prevalence of User Innovation and Free Innovation Transfers: Implications for Statistical Indicators and Innovation Policy. SSRN eLibrary. Available at: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1337232 [Accessed December 15, 2009].

Griliches, Z., 1990. Patent Statistics as Economic Indicators: A Survey. Journal of Economic Literature, 28(4), 1661-1707.

Hicks, D.M., Isard, P.A. & Martin, B.R., 1996. A morphology of Japanese and European corporate research networks. Research Policy, 25(3), 359-378.

de Jong, J. & Hippel, E.A.V., 2009. Free Transfer of User-Developed Process Innovations to Producers: A typical behavior among Dutch High-Tech SMEs. Forthcoming.

Kaul, I. & Mendoza, R.U., 2003. Advancing the concept of public goods. Providing global public goods: Managing globalization, 78.

Leonard-Barton, D., 1992. Core capabilities and core rigidities: A paradox in managing new product development. Strategic management journal, 111–125.

Mansfield, E., 1985. How Rapidly Does New Industrial Technology Leak Out? The Journal of Industrial Economics, 34(2), 217-223.

Nelson, R.R., 1992. What is ‘commercial’and what is ‘public’about technology, and what should be. Technology and the Wealth of Nations, 57–71.

Pavitt, K., 1987. On the nature of technology. University of Sussex.

Matusik. S., 2002. An Empirical Investigation of Firm Public and Private Knowledge. Strategic Management Journal, 23(5), 457-467.

Senge, P.M., 1993. The Fifth Discipline: Art and Practice of the Learning Organization New edition., Random House Business Books.

Stephan, P.E. & Audretsch, D.B., 2000. The economics of science and innovation, Edward Elgar Publishing.

Stiglitz, J.E., 1999. Knowledge as a global public good. Global Public Goods: International cooperation in the 21st century, 308–25.

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