Knowledge Isn’t Just Power, It’s Also Wealth

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Let’s consider a syllogism: Knowledge is power, power equals wealth, so knowledge equals wealth.

Is this true? Author George Gilder thinks so. His book Knowledge and Power: The Information Theory of Capitalism and How it is Revolutionizing our World, proposes that (in Bill Bonner’s apt phrase) “the economy is fundamentally a learning system, not a way for distributing wealth.”

In Gilder’s view, new information (i.e. knowledge) enables us to do things better, i.e. increase productivity. New knowledge is what creates value.

New knowledge is always surprising, and it naturally disrupts “business as usual.” So those earning money from business as usual must suppress the disruption arising from new knowledge to maintain their incomes/profits.

Bonner summarizes the conflict between vested interests (cronies and zombies) and those with new knowledge in this lively fashion: “In an economy, the person who is the source of most important new information is the entrepreneur. He is the fellow who takes risks and builds a new business.

The cronies want to stop him, before he undermines the value of their old assets and old business models with new information. The zombies want to drag him down, leeching on him so greedily that he runs out of energy.”

Gilder views vested interests limiting new knowledge as the real threat to the economy. This is the danger of “regulatory capture,” when vested interests bribe the state (government) to erect barriers to competition to maintain monopolies and rentier privileges.

But what’s missing from this view of the economy as a learning system is that value flows to what’s scarce, and information is abundant.

In other words, only very specific kinds of knowledge are scarce–the kind that create new goods, services and business models.

These new models are precisely what destroys not just “bad” cronyism but “good” jobs. What’s scarce is ideas that automate existing processes.

As Michael Spence and co-authors Andrew McAfee and Erik Brynjolfsson observed in their 2014 essay, Labor, Capital, and Ideas in the Power Law Economy, neither capital nor labor have scarcity value in the age of automation and nearly-free credit. “Fortune will instead favor a third group: those who can innovate and create new products, services, and business models.”

Value in the knowledge economy is not distributed equally. The return on abundant human labor and capital are very low, while the scarcity of skills and knowledge that create new products, services, and business models drives most of the gains to the creative class: “The distribution of income for this creative class typically takes the form of a power law, with a small number of winners capturing most of the rewards. In the future, ideas will be the real scarce inputs in the world — scarcer than both labor and capital — and the few who provide good ideas will reap huge rewards.”

Learning–the acquisition of skills and knowledge–is difficult and costly. Developing new ideas and applying them in the real world is an uncertain process and therefore risky.

From this perspective, rewards flow not just to what’s scarce but to what is inherently risky. Since most ideas fail to reach fruition, new ideas that succeed in boosting productivity are intrinsically scarce.

In other words, there is no risk-free way to identify and exploit scarcity in a knowledge economy in which vast troves of information and knowledge are free and have no scarcity value.

The wild card here is knowledge is increasingly unownable and therefore it cannot be kept scarce for private gain.

It seems that while knowledge may be powerful in terms of empowering the learner to improve their own lives, knowledge can only generate wealth if it is scarce and ownable.

Ironically perhaps, the ideas that are scarce are those that disrupt “business as usual” by automating what has not yet been automated.


Charles Hugh Smith
for Of Two Minds

P.S. Ever since my first summer job decades ago, I’ve been chasing financial security. Not win-the-lottery, Bill Gates riches (although it would be nice!), but simply a feeling of financial control. I want my financial worries to if not disappear at least be manageable and comprehensible.

And like most of you, the way I’ve moved toward my goal has always hinged not just on having a job but a career.

You don’t have to be a financial blogger to know that “having a job” and “having a career” do not mean the same thing today as they did when I first started swinging a hammer for a paycheck.

Even the basic concept “getting a job” has changed so radically that jobs–getting and keeping them, and the perceived lack of them–is the number one financial topic among friends, family and for that matter, complete strangers.

So I sat down and wrote this book: Get a Job, Build a Real Career and Defy a Bewildering Economy.

It details everything I’ve verified about employment and the economy, and lays out an action plan to get you employed.

I am proud of this book. It is the culmination of both my practical work experiences and my financial analysis, and it is a useful, practical, and clarifying read.

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