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World capital markets are saturated with savings, such that asset prices are very high as compared to historical rates of return. There appears to be a shortage of projects that earn such figures, and savers are required to make do with lesser returns.
The US, however, seems able to grow fast, employ most of its potential labour force and both improve its productivity and profitability without inducing inflation. It is argued that new projects seem less capital intensive than hitherto, that the internet will unleash untold value added, that the biotechnology revolution is just around the corner.
The US is a bright star in an otherwise dim world: 'emergent' markets are only just recovering piecemeal from their crash, Europe is slow to realise its potential, Japan is unable to grow even with effectively free money available to it.
One interpretation is that the US is suffering a bout of asset price inflation, which will end in recrimination. The other is that the US has 'discovered' a new set of economic balances, if not new rules, and that these allow things to be done that could not hitherto have been contemplated.
This paper takes a middle way. The intangibles which are being valued are immeasurable, and without measurement, proof must wait upon experience. There is good reason to believe, however, that a stock of capabilities has been built that offsets the factor demands made by individual projects. There may be 'new economy', but it has little to do wit the internet or with any other single technology. It is driven by the sheer weight of capability that is universally accessible in the relevant countries: to a new 'infrastructure'. This said, there is without doubt serious asset price inflation in some sectors, not the least representative of which is the dot-com world.
The notion that economic added value was built upon resources such as land, labour, capital and enterprise underpinned two centuries of economic thinking. Detailed assessments of how additions of a given factor increased subsequent output allowed fairly detailed assessments to be made of how economies might be expected to grow. Differences in the efficiency with which the factors were used - 'factor productivity' - pointed to the origins of differential economic performance. More efficiency, or - where the price of these could not easily come into equilibrium - cheaper factors led to greater productivity.
This idea could be embedded in one of the other Ur-concepts of economic, that of comparative advantage. An economic agent could trade with another with mutual advantage because their factor productivity taken together allowed happier mixes of output to be generated for both than for each alone. Exchange rates balanced absolute, rather than relative differences between these agents.
The stock of factors employed also underpinned the concepts around inflation, the business cycle and other non-linear affects. Where demand is in excess of capacity, prices rise. Where this is a general phenomenon, then there is a race between the curtailing of demand by prices and the behaviour generated by general confidence: using savings to consume and to invest. As we now recognise, when external agents - states, in particular - further increase the supply of money, then expansionary tendency is not curtailed by rising prices. Many systems ring in this way, however, and their control or amplification can be effected by in phase or counter-phase interventions - by injections of liquidity, through interest rate management, by other measures which affect confidence.
This linkage between factor supply, factor productivity and the gamut of links that exist between economic and social domains of variable permeability makes these important structures. We need to ask two important questions.
This has two chief features.
If we want to understand the constraints on economic activity, we need to think less of the traditional factors than on the new.
The figure shows the traditional - and no doubt, accurate - balances. At issue are two issues. The balance between productivity and obsolescence is affected by an undoubted increase in the pace with which many useful things now become outdated: skills, machinery, relationships. Increases in offsetting factor inputs and growth in factor productivity does rather beg two questions, however: the nature of these factors, and their relationship to the offsetting sources of price feedback and the overall impact of inflation. This creates two distinct questions.
There are two tightly inter-woven threads that inform these issues. One of these is concerned with the growth of - and recognition of - options, as these face those with assets to allocate. Second, the role of analysis is increasingly potent as the economies of the industrial world evolve to resemble a vast tool kit of capabilities, set in an environment which is simultaneously more predictable and more intensely informed and competitive.
A company that operates in a primitive environment needs to do almost everything for itself. Its overheads are high, both in economic and managerial terms. Much the same is true of a state that attempts to operate in a weak economy, where few skilled people or enterprises have taken charge of necessary activities. By contrast, the industrial state has a myriad of concerns, but the operational aspects of life - from fresh water provision to the safety of foodstuffs - is overseen by cross-linked networks of competence. It can delegate, and it can exploit a vast ocean of knowledge and capability is it so chooses. Firms, too, can reach out and find almost anything that they need, from sources of finance to operational arms. The virtual company, to take matters to its conceptual extreme, has to process ideas and organise operations, but can do so with the cleanest of hands. It is striking that the OECD sees organised knowledge as constituting around 60% of current business output.
Analysis and knowledge are strange entities. They are hard to make and easy to replicate. Insight, from which both flow, is both hard to make and hard to replicate, however, to the extent that it is equally hard to trade or to sell. Only its products are valuable.
Indeed, the traditional model of 'factors' as stocks, rather than as flows, may be at the root of the difficulties which we have in understanding current events. Once one could count workers, acres, bullion and this was a meaningful indicator of wealth. Input output rations were constant over time and between economic domains. Productivity changes related to the decay and rebuilding of extant stocks. Total factor productivity was a minor fudge factor which was added post hoc added when these sums failed to reconcile. One can, with less ease, enumerate intangibles and count ideas, degrees, options and thereby arrive at stocks in hand. It is, however, the way in which these are used - and not how many of them that are available - which predominantly defines the wealth that is generated. Total factor productivity dominates the calculation.
World Bank 1997
Processes by which ideas and possibilities are generated, by which poor uses of resource are checked and through which adequate activities are made better drive much of the creation of wealth in the world. Institutions and the approaches taken to public decision-taking - transparent and inclusive of understanding, secretive and exclusive in the protection of privilege - set one determinant of relative success and failure. Micro-social and -economic procedures which create insight and options, which reward sensible risk taking and drive groups towards collaboration must be an important and balancing wing to this. Both need to operate in tandem.
Insight is often a collective phenomenon, accessed by groups of people through appropriate processes and permissions. They seldom know that they have it, and it may express itself as events scattered over time and through a milieu, rather than in a predictable manner. The US investment in technology during the Second World War focused on the Pacific naval bases. That these gave rise to Silicon valley, to the Seattle phenomenon and the like was predictable in principle but not in detail. The ownership of this collective insight is hard to define: indeed, 'ownership' may be a meaningless concept. Like civilisation or culture, such manifestations may be examples of 'artificial' public goods, rather as the collectivity of nature manifests itself as balanced systems, clean air and the like.
This is, in the truest sense, 'infrastructure'. A bridge in the right place is capital productively employed; and a bridge to an obscure Scottish island, capital less likely to replace itself in the overall stock. Knowledge and the habits of working together, an ecology of finance and the law, engineering and marketing, distribution and retail that is fitted to work together is a useful stock of factors, where the most productive component is the 'ecological' fitness that these have to work with each other. The same entities, unfitted to collaborate, would be much less useful. The gestalt is, therefore, what we value: the system, the undesigned emergent property of many agencies striving for individual success.
In general, the industrial nations have built themselves an extraordinary and complex toolkit which, in varying degrees, has formed itself into this new infrastructure. Clusters of organisations have long been known to afford a high degree of success to their members: there is a good supply of experienced labour, specialised services can exist, a collective voice can be raised. What we are, perhaps, beginning to see are networked super-clusters, in which service elements can be dedicated and re-dedicated to purposes set for them by organisations that acquire flexibility and options through their use. Those working in artificial intelligence have speculated that the first true AI will exist on a processor made of people: that a society will become capable of processing slow deep thoughts that transcend the individual. It may be that science has attained this status already. That a myriad of good ideas, of experiments and reconfigured former concepts are now tried when only a few were once laboriously brought forward is unavoidable. That this is becoming systematic along axes that are more than discounted value streams is also self-evident.
All stocks of wealth are both being added to and consumed or lost through decay and obsolescence. Some decay rapidly, some rather slowly. What is regarded as 'wealth' is that which can be traded for things which its owners want. We have noted that far more can be offered in an economy which has more parts, doing ever-more specialised things in ever-more ingenious and effective ways. We should also note that the very pace at which things can be added also points to an acceleration of obsolescence.
There are forms of wealth which cannot be traded, which are 'public goods' such as clean air and managed economic tranquillity. These have an opportunity cost - in that they can be exploited, and thereby damaged - and they may cost money to maintain. There are components which are simply a matter of personal preference: as the benefits of the rural view over urban convenience, or access to consumerist choice can be contrasted with refined minimalism, so the 'wealth' of a nation can be thought of as consisting, at least in part, in the consequences of groups choices and past history: architecture that is an industrial legacy, or a living environment that has been taken a long way from its pristine condition. Those involuntarily closest to the soil are usually the most eager for concrete. These are, at least in part, discretionary situations the stocks of which have no tradable value and for which it is pointless to attach the word 'wealth'. Nevertheless, nations which have damaged natural systems or ruined former attractions through over-development have undoubtedly lost wealth, and those which have not touched pristine nature have foregone conventional wealth for something distinct, important and primal. Indeed, these are, perhaps, a part of the stock of intangibles against which effective processes operate so as to generate stocks of conventional wealth.
We can summarise the relationship of these elements as follows:
There are few 'new' things to the New Economy. Rather, there are huge changes in scale, co-ordination and capability within traditional elements. It is this change which is creating a new operating environment.
Consider the figure which was shown earlier in this text. The non-depleting, shared infrastructure and knowledge, the useful processes and habits of governance and operations that characterise the modern state create a tranche of 'virtual' capacity. This moves the balance between production and capacity at which inflation develops to the right, as the figure shows. In addition, however, better ways of operating - measured by productivity, where the thing produced is a tradable asset, but evident even when it is not - also shift the balance to the right.
There are, therefore, two kinds of intangible factors of production at work in all economies, but these are acting with particular strength in the industrial world in general and the US in particular. One of these consists of stocks of static intangible features - from knowledgeable people to large numbers of willing subcontractors - whilst the other consists of "stocks of processes". This second set of assets may combine tacit relationships and ways of operating to the formal procedures of law and governance. We tend to wrap them up as 'institutions', but it may well be that this is a restrictive and overly-directive term. Institutions may hinder, rather than assist, the actions of such processes.
The match of these features to the issues which ideas of knowledge management raise for companies is acute. Indeed, the sense that government may well be concerned, to an increasing and acute degree, with the design and management of such processes is almost incontestable. It is dramatically important to issues as distinct as the current stability of the US stock market, and to how balances are to be set in macroeconomic management, that we know how to calibrate these ideas against events and data. It remains the case, however, that companies are valued less for what they own than for what they may be able to do, and that their managers are the stewards of intangible assets which they can neither identify nor repeatedly husband. This is a dangerous situation, although one rich with the potential to make the good even better.
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