A Thought on the rate of depreciation of knowledge.

Posted in Growth, Innovation by Mike Mandel on December 13, 2010:

U.S. prosperity has always depended far more on our accumulated store of knowledge capital than on our physical investments. Knowledge capital includes accumulated education, research and development, and business-knowhow–all the intangibles that underly a modern economy.

The value of knowledge capital depends, in part, on how rare it is. The more companies or countries that possess the same knowledge (say, about how to make a commercial airliner), the less valuable that knowledge is. This is just Economics 101, applied to intangibles.

Over the past 10-15 years, the strengthening of information flows into developing countries meant that knowledge capital was being distributed much more quickly around the world. As a result, the normal process of knowledge capital depreciation greatly accelerated in the U.S. and Europe–beneath the radar screen, because no statistical agency constructs a set of knowledge capital accounts.

What we should have been doing is boosting our investment in knowledge capital creation–education, R&D, business innovation. Instead, we borrowed to support consumption.

In commenting on Mandel's post, Marginal Revolution raises the issue of the kind of economy countries possess, suggesting that some economies turn over their knowledge more rapidly than others. This is clearly true. "Traditional economies" are given that title because their rates of technological and institutional changes are relatively slow. The emerging "knowledge economy" will be one of rapid innovation and thus rapid depreciation of technology and knowledge. Development by its very nature depreciates the existing knowledge stock of the developing nation. Since so much of development involves the transfer of knowledge and technology from developed to developing nations, it thereby changes comparative advantage, contributing to the depreciation of the knowledge of the developed nation that has been transferred. On the other hand, the continuing and more rapid technological and institutional changes in the developed nations themselves also contributes to the depreciation of their knowledge bases.

It would be a great shame if our conservatives failed to promote innovation in the United States, preferring instead to interrupt technology and knowledge transfers to developing nations. For one thing, given the desperate poverty of poor people in developing nations, interfering with the development of their nations would be profoundly immoral. Moreover, while it might be possible to slow down the transfer of knowledge, it would not suffice to protect U.S. competitiveness, and failure to promote domestic innovation would surely undermine that competitiveness.