The Truth about "knowledge economies" - another Geckko rant

Another contrarian (well, contrarian to popular opinion) on so-called “knowledge economies”. There is a lot of areas within economic literature that relate to isses that might be considered to fall into this area. I just want to make a point on one that is getting lots of column inches in the media and also around the Pin. Vis. the apparently commonly held belief that the existance of leading edge production or R&D in an economy is a “good thing” - economically speaking.

Well the literature typically comes down with a slightly different perspective. If you consider that what people are typically claiming is that a high proportion of production oriented in these areas is what provdes for increased incomes. However, it is more commonly accepted in economic thinking that it is the consumption of such leading edge technology that provides for increased incomes.

What the hell does that mean? It means that you should not really care that they invent the interwebbie in California or design and make silicon processors in China or Taiwan. What drives higher income is the extent to which you use that technology (in conjunction with capital and labour) in your economy to produce goods and service with higher value added and hence incomes.

I can understand how the misconception occurs. When you consume technology in such a way you naturally produce goods and services of higher value (as I said) that are high technology inputs themselves. And that is the policy trap. Governments often believe they need to encourage the production and hence offer subsidies and incentives to shareholders (did anyone say Goolga, Intel, Dell etc. etc.). Same applies to encouraging the set up or trying to prop up small companies deemed to be “high tech” or “knowledge economy” or whatever. This is bad policy - it costs and is really a subsidy for the end user of the stuff being produced.

Instead there should be focus on removing any impediments to the consumption of technology. No I don’t mean more subsidies.

I other words…

Another 100 call centers is all very well, but what we really need is a good broadband infrastruture.

The real benefits will come about when Irish people can stop devoting brain cells to trying to figure out how to make YouTube work on a machine located more than 2 miles from a town center, and can devote that brainpower to making things and selling them.


Japan understood that lesson very well in the second half of the 20th Century.

Heck, they turned it into an art.

What subsidies?
I worked for a company deemed to be a HPSU (High Potential Start Up) That company certainly wasn’t encouraged or propped up by anyone (apart from the directors). At huge amount of money is spent on Enterprise Ireland, but precious little gets to where it’s actually needed.

My post was sparked by some calls on another thread in which some were suggesting that tax payers money should be used to support a failing IT company of some sort.

And nobody can deny there is massive slush going in the form of “industry” or “regional” policy in Ireland. Effectively grants, subsidies or tax credits or favourable tax rates etc.

That’s the IDA - for foreign firms operating out of Ireland.

Well, I guess my point would be that the government - via the IDA and Enterprise Ireland - chooses certain industrial sectors to concentrate on when giving state support. There’s no point in giving subsidies to companies that do natural resource extraction (mining etc.) because we don’t really have any abundance of natural resources. And there are other industries, say - for example - car and aircraft manufacture - where Ireland doesn’t really compete.

The industries we’re supporting via these state agencies are building on people with scientific and technical skills - software, pharma, biopharma etc. I don’t think this is a bad idea, there’s a lot to be said for having an integrated strategy around a focused set of industries with regard to infrastructure and education.

So, we’re not just concentrating on software because software is good for any economy to concentrate on. We’re concentrating on software because it doesn’t require much in the way of natural resources, manufacturing capability, or transport infrastructure. Software is the one of the easiest industrial sector to bootstrap in a developing economy (imho).

The problem is that the educational and infrastructural aspects of our strategy have been neglected. We don’t have the graduates any more, or the cheap power and broadband. This makes the whole strategy quite wobbly.

Oh, and yes, we should definitely be encouraging Irish business to make better use of IT to provide efficiency. Ideally, our public service would be setting the example here. PPARS anyone? Pulse? Hmmm…


The indigenous innovative parts of this economy were starved of capital (both human and financial) during the subsidied property mania.

Any now you’re telling us that helping innovative start-ups is a bad thing?

Gimme a break.

love those rants!

I’m a little unclear on what you mean… what I think it is, is that there is no point in inventing stuff, if you are not going to profit from the production of it nor innovation that results from it. With which I agree, but I may have it arsy-versy in which case I disagree :confused:

F%$K. Mortgagebroker made me lose an entire post. :smiling_imp:

What I am saying is that:

Trying to raise incomes in an economy by doing things to promote the **production **(i.e. the setting up of companies, the employment of people in companies) of leading edge technology is arse end around. Evidence is more suggestive that it is the **consumption ** of technology that increases incomes. So that means policies that try to promote production etc. are likely (in the best case) to be asimply a dead loss. At worse, they lead resources up what becomes a dead alley (e.g. government policy promoting companies likel Dell, Google, Intel etc. to set up and grow, leading directly to capital, infrastructure and labour to move in tha direction, only for it to subsequently collapse because it rests on nothing more than atificial stimulous, therby leaving a lot of people, supplier companies etc. looking for another Intel or Google etc. to transfer their expertise, capital etc. but there are none.)

Also, a point in general, governments are useless at “picking winners” in innovation or any other areas of business. Best they leave the capital in the hands of people who can take the risk and fail or succeed. Another idea well supported in economic literature.

The very specific point I was trying to make is that generally in economic terms:

Level of Prosperity = Value of output (per capita) = function of amount of labour, amount of capital and the level of technology.

We are wealthy today than our parents were because of the technology that we consume, not the technology that we produce. Thinking that you are acting to increase income by try to boost the output of high tech type stuff is flawed thinking. It is the consumption of that stuff that makes us wealthy.

In effect, it really isn’t here nor there whether you produce high tech stuff. It is more important that you use it. Hence, just because there are Intel factories in Ireland, or Poland or wherever, won’t really bring them to the top of the income league. But the places that use the products of Intel are more likely to be.

There is an issue that is sort of related but not exactly what I was talking about in that governments or any central planning functions are useless at trying to “pick winners”. Best leave capital to find its best use through trial and error. Economic literature is also strongly supportive of that premise.

Geckko, your argument may be true globally, but does it apply in a small economy like Ireland? As I said, the reason we concentrate on supporting knowledge economy stuff via IDA and EI is because we have no natural resources, and these were the easiest (imho) export industries to bootstrap.

The upshot of your argument seems to suggest that the government should be supporting all businesses (construction, medicine, manufacturing, etc.) to use IT to improve efficiencies - instead of supporting IT specifically as an industry.

That’s not a bad idea. But we need more export businesses, right? Software (as an example) is one of the easiest things to set up and export. Hence the IDA and EI support.

Eliminate VAT on software? Allow more extensive write-offs on tech investments?

This is correct. The famous Japanese ministry of industry and trade which according to the legends has created the Japanese miracle actually advised Sony against buying patents for transistor, Honda against entering car manufacturers market and the remaining car manufacturers to merge because they couldn’t compete according to the sophisticated MITI analysis. At the same time while trying to kill the future winners, they had promoted an array of industries (space, petrochemicals ship-building for example) which turned out to be complete dogs.

As to your opening point, it’s capital accumulation and increased productivity that leads to increased standard of living. Obviously, the use of hi-tech increases productivity. Capital intensive activities are the most productive ones (like hi-tech research or financial services). Manufacture of technology products is best left to sweat-shops of Asia.

There is another important aspect to what you are saying

Essentially, government policy (not just in Ireland) is to make money and other advantages available to a company if they create jobs. (eg. Fas spent Euro250,000 in 2007 for every person they placed in a job)

If companies utilise advanced technological solutions to replace jobs, they are penalised.

So, the kind of technology consumption you are alluding to is encouraged very little. (If I understand you correctly).

‘Job creation’ is engrained deeply in our mindset. It doesn’t matter how crappy the job, or if it would be better done by a robot - ‘a job is a job’ as they say.

If one were instead to concentrate on increasing productiveness (public and private benefit) with a focus on utilising technology to do that, then there is a critical political challenge to address. ie. How do you distribute the benefits of that increased productivity equitably? - At the moment, the system is set up so that the work that someone does entitles them to their share in that productivity.

Personally, I look forward to the day where our essential needs could be met through technological solutions. And the proceeds of our technologically derived productivity was distributed equitably. So that people were then absolutely free to choose the work that they wanted to do. I think if people were left alone, they would not need to be forced to work. It is an inherent thing in us. 8DD

whilst what you say does make sense, you seem to overlook various factors and are placing, perhpas to use an analogy, the chicken before the egg.

As you well know, output is a measure of production and prosperity is a function of production in excess of consumption, where income is the resultant of realisable production less consumption.

Economics will show, you can only throw certain amounts of investment capital and human capital at production before you experience diminishing returns - aka golden level of capital. Technology is the key lifter of production to a higehr level and allows the process to rinse and repeat.

For levels to be lifted, technology must evolve and improve to further push out the x-axis point of capital, be that investment capital or the human kind.

Now, for technology to improve, it must be worked upon. This process is also curtailed by the same process as above. One can argue the pros and cons of various schemes, but to move up the value chaing and become more prosperous one must improve technology. It is by improving technology that further efficiences are gained.
Let the market decide which technology is preferrable, as it has always done, but the technology choices must be put in place before that.

I agree that it is the consumption, and the ability to promote your technology over a rivals, thus ensuing the consumption of your technology that increases prosperity.

Not much point in having the best computer in your factory if you can’t have people buy them and hence consume to further allow for more technology investment and so on.

As for Ireland being a innovative country, seriously, don’t kid me. We are good at jumping on the back of technolgy but alas we dont seem to have the ability to be at the fore. So, whilst we can replicate a model developed elsewhere, this inability to innovate pushes us further down the food chain, and as such, we will always be subject to the vagaries of the innovater.

Thats my tup-pence worth…excuse the generalsations and so forth as well as the bad spelling…

I was going to make the same point as you did. Love that link you put it up before.

Let the robots do the work while we play! … &ct=title# … 5014.shtml