The Knowledge Economy/Society: The Latest Example of "Measurement Without Theory"?

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DEPARTMENT OF ECONOMICS
COLLEGE OF BUSINESS AND ECONOMICS
UNIVERSITY OF CANTERBURY
CHRISTCHURCH, NEW ZEALAND
The Knowledge Economy/Society: The Latest
Example of “Measurement Without Theory”?
by Les Oxley, Paul Walker, David Thorns, and Hong Wang
WORKING PAPER
No. 03/2008
Department of Economics
College of Business and Economics
University of Canterbury
Private Bag 4800, Christchurch
New Zealand

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WORKING PAPER No. 03/2008
The Knowledge Economy/Society: The Latest
Example of “Measurement Without Theory”?
by Les Oxley1†, Paul Walker1, David Thorns2, and Hong Wang2
26th February 2008
ABSTRACT: The world has embraced a set of concepts (knowledge driven growth)
which are seen as the ‘core of future growth and wellbeing’ without any commonly
agreed notion of what they are, how they might be measured, and crucially therefore, how
they actually do (or might) affect economic growth and social wellbeing. The theory of
how the mechanism works lacks important detail.
Keywords: Knowledge Economy; Knowledge Society; Human Capital; Theory of the
Firm
JEL Classifications: D8, D21, L22, L23, O31
Acknowledgements: We are grateful to Philip Gunby for his comments on a previous
draft. Thanks also to Glenda Park, Seamus Hogan, Arthur Grimes, Paul Brown, Jeff
Cope, Philip McCann and others who attended the “Information & Knowledge Economy
Workshop” in Wellington, 19 February, 2008.
1
Department of Economics, College of Business and Economics, University of
Canterbury, Private Bag 4800, Christchurch 8140, New Zealand.
2 School of Sociology and Anthropology, University of Canterbury, Private Bag 4800,
Christchurch 8140, New Zealand.
† Author for correspondence; Email les.oxley@canterbury.ac.nz

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“But the decision not to use theories of man’s economic behavior, even
hypothetically, limits the value to economic science and to the maker of policies, of
the results obtained or obtainable by the methods developed. This decision greatly
restricts the benefit that might be secured from the use of modern methods of
statistical inference.”
Tjalling C. Koopmans, ‘Measurement Without Theory’, The Review of Economic
Statistics, 29(3): 172, August 1947.
“. . . as we know, there are known knowns; there are things we know we know. We
also know there are known unknowns; that is to say, we know there are some things
we do not know. But there are also unknown unknowns - the ones we don’t know we
don’t know.”
Donald Rumsfeld, Department of Defence news briefing (transcript) February 12,
2002
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Introduction
In the United Kingdom the “Knowledge Economy” is/was seen as the core policy for
economic growth. In the US, they have/had the ‘Digital Economy’, the ‘New Economy’
or the ‘Innovation Economy’. Australia created the “National Office for the Information
Economy” as an agency to stimulate economic growth. Add to these, the ‘Information
Society’, the ‘Network Society’ and the ‘Learning Society’ and we have a potentially
confusing mix of terminology, potential drivers and importantly, consequences of action
and inaction. In New Zealand the central importance of the drive for a Knowledge-based
economy was recently reiterated by Hon Dr Michael Cullen in his 2006 address to the
AUS conference where he stated that “Our aim is a high income, knowledge based
economy, which is both innovative and creative and provides a unique quality of life to all
New Zealanders”. He further noted that “the innovation that drives higher productivity
comes from investment in science and technology; it comes from research and higher skill
levels” (Cullen 2006).
Debates around the need to establish a knowledge society (and the implications of
not doing so) emerged during the 1990s, as the impact of ICT based upon the creation,

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recording, and distribution of knowledge and information became increasingly clear, as
did the significance of New Zealand developing its own identity as a knowledge society
within an increasingly global information network. “Knowledge Wave” and “World
Summit on the Information Society (WSIS)” conferences championing education and
Information Technology as the ‘magic bullets’ to create successes for all. The Knowledge
Society should grow, so the argument goes, so that the economy grows and with it the
welfare, health and wellbeing of all. “Knowledge” is assumed to be good for everyone
(how can more knowledge be bad?) and we should strive to create ways to increase its
quantity and quality, (perhaps) focussing specifically on science-based education.
The gloss may have been taken off some of these notions and expectations due to
the dotcom and stock market crashes of 2000-2002, but Alcaly (2003: 3) claims:
“ [w]hile the euphoria of the late 1990s, like the melancholia that
displaced it, was far overdone, there was always a more fundamental sense
in which the economy of the 1980s and 1990s truly was new, a
characterisation that has not been undermined by the corrections that
inevitably, and temporarily, slowed its growth in the first few years of the
twenty-first century.”
When one digs deeper, however, the gloss does peel.
The world has embraced a set of
concepts (knowledge driven growth) which are seen as the ‘core of future growth and
wellbeing’ without any commonly agreed notion of what they are, how they might be
measured, and crucially therefore, how they actually do (or might) affect economic
growth and social wellbeing. The theory of how the mechanism works lacks important
detail. In economic theorising and policymaking, the relationship between knowledge,
economic growth, and knowledge economy and knowledge society are not clearly
articulated. In both academic and political debate, terms like knowledge economy,
knowledge society and new economy, etc., are used interchangeably, but are they and do

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they have the same structural/causal interpretations/consequences? The current state of
academic knowledge has not adequately and systematically addressed these fundamental
issues.
Economic theory provides potential answers to part of the puzzle via ‘modern
growth theory’ championed by Romer (1986, 1990), and Lucas (1988), which recognise
the crucial importance of ‘knowledge embodied in human beings’, ‘human capital, as an
engine for growth’, ‘Research and Development sectors’, etc. However, this economics-
based literature, though typically ‘theoretical’, is often too narrowly defined to consider
social issues and hence not well placed to consider the knowledge society. It does,
however, suffer from some significant ‘problems of measurement’1, but more
fundamentally the emergence and domination in production of ‘knowledge only firms’
have the potential to challenge the textbook microeconomic ‘theory of the firm’ based on
the work of Grossman and Hart (1986, 1987) and Hart and Moore (1990).
From a sociological perspective the knowledge society is, to some, the latest form of
accumulation to become a significant part of economic wealth generation. The ‘theory’
underpinning the analysis is a mix of technological/economic ‘determinism’. The
knowledge society leads to the "emergence of new forms of economic production and
management” Castells (1996). To others, however, knowledge is an enabling concept
leading to a culture of innovation which creates the knowledge society.
Recent analysis
of social inclusion, social connectedness and social cohesiveness leads to an increased
emphasis on education, human capital theories and schemes to reconnect those who have
‘fallen out of the system” and arguments around dependency. However, the current state
of sociological thinking on the contours of the knowledge “society” remains rather
indistinct and certainly lacks robust measures see, McLennan (2003) and Jessop (2000).
1 See Woßmann, (2003).

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The “current state of knowledge” on the knowledge society, therefore comprises a
range of partial, typically discipline specific and determined, limited views, thoughts and
concepts. No robust measures of its size and importantly contours exist, and hence no
rigorous, scientific analyses of its effects on wellbeing have or could have been
undertaken.
What of the benefits and costs of the ‘new’ knowledge economy/society? Will those
without specialised information processing\transformation skills remain ‘outside the
knowledge club’ whilst those with these skills benefit at their expense. Just who will be
the ‘winners and losers’?
Many commentators have suggested a link between the computer revolution and
increasing wage inequality. As Katz (2000: 217) points out,
“[w]age inequality and educational wage differentials have expanded
substantially in the United States over the past two decades. This widening
of the wage structure has coincided with the rapid computerization of the
workplace. Thus, it is not surprising that many labor market analysts have
tried to draw a causal connection between rising earnings inequality and
increases in the growth rate of the relative demand for more-skilled workers
driven by technological and organizational changes associated with the
computer revolution.”
Driven by the increased access to information resulting from the ever expanding reach of
Information and Communication Technologies (ICTs) more new information can be
created by those with ‘knowledge-creation capacities’ than has been the case in the past.
This may enable a new production paradigm less constrained by traditional diminishing
returns to scale (the New Economy), but the distribution of resulting gains remains an
unresolved issue.
Those talking of the ‘New Economy’ or ‘Goldilocks Economy’ seem to be alluding

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to what they perceive as a shift towards a post-industrial economy driven by the adoption
of new technologies and business practices which expand the role of human capital in
production. If knowledge, either disembodied or embodied in human capital, is the source
of new economies of scale in production, then the lack of it in ‘economically poorer’
economies may actually exacerbate the ‘knowledge divide’ despite the appearance that the
information\digital divide is narrowing. Accessing ‘knowledge’ we would argue
necessarily requires accessing the creators\assimilators of knowledge and these are
inherently ‘human’ and not technologies alone. ICTs and people are complements, not
substitutes.
If we accept we are in a knowledge economy\society, how large is it? How do we
measure knowledge? What of their effects on the economy and society? Is it even
meaningful to try and measure these things if we have no generally agreed upon
definitions of knowledge, information, the knowledge economy\society? The meanings
attached to knowledge and information in the literature are vague and imprecise. As for
the idea of a knowledge or information economy\society, there are, seemingly, as many
definitions as people writing about them. Some authors suggest that there is no coherent
definition, at best we are dealing with an often used metaphor, rather than a well thought
out concept.
To progress debate on the knowledge economy/society, in this paper we will raise a
number of questions/challenges and propose a number of routes to the answers. In section
2 we will briefly consider the existing literature on the knowledge economy/society.
Section 3 will consider what is crucial in the search for ‘measurement’, the distinction
between ‘information’ and ‘knowledge’. This will be followed in section 4 by a review of
how we currently attempt to measure what amounts to the impact of ICTs and considers
the challenges a knowledge-based economy poses for System of National Accounts-type

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statistical framework. Section 5 returns to a core element of the theme of our paper,
‘measurement without theory’. Here we consider what modern economic theory has to
say about the ‘theory of the knowledge firm’ and generally find it lacking. Section 6
considers some ‘potential points of departure and potential for progress’ and section 7
concludes.
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What is the knowledge economy\society?
The emergence of a debate about the arrival of the “Knowledge Economy and Society’
came when industrial societies began to be restructured and transformed into ones with a
greater dependency upon “information” based areas of activity. One of the earliest authors
to emphasise the importance of knowledge to society was Machlup (1962). Writers such
as Drucker (1959, 1969, 1994) and Bell (1973) saw this as part of a move towards a “post-
industrial” economy and society. The initial focus on “information” shifted in the 1970s to
a greater emphasis on “knowledge”. This was accompanied by a re-emphasis on ‘human
capital’ as an individual good, which enhanced the earning capacity of the individual and
recognised more strongly their contribution to overall wealth generation. This stimulated
attention to innovators, entrepreneurs, and knowledge managers as the key to economic
growth and change. Increased attention to the rights and capacities of the individual within
society more generally, as part of a wider liberalization and deregulation of economic and
social activities, also gathered strength during the latter decades of the 20th century
(Giddens 1991, 2001, Beck 1999). The linkages between the increased importance of
knowledge as the reason for economic growth and wider social transformation became a
theme in much of the writing that emerges. For example Stehr wrote that: “. . . central to
my thesis is that the origin, social structure and development of the knowledge societies is
linked first and foremost to a radical transformation to the structure of the economy”

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(Stehr 1994: 122).
Economists typically (but not exclusively) focus more narrowly than sociologists
upon the changed role of knowledge in economic activity see Boulding (1966), Arrow
(1962), Stiglitz (1999) and Cowan, David and Foray, (2000). The OECD for example,
define a knowledge based economy (KBE) as “. . . economies, which are directly based on
the production, distribution and use of knowledge and information” (OECD 1996: 7). In
both the work of sociologists and economists it is the importance of the digital
technologies, the Internet, computers, information and globalised networks that these
technologies enable that have been stressed. It is now the “age of speed”. Time and space
have been compressed (Harvey 1989, Virillio 2004). There is an increasing shift of
activities to computers rather than these being carried out in specific locations. Testing of
products can now be done through simulation on the computer. People can work from
home (Felstead et al 2005, Leonard and Thorns 2006). People can create virtual worlds in
“my space” and live out their lives in cyberspace. Whilst not all are involved in these
activities it does extend the range of possibilities and gives more prominence to ‘mental’
labour rather than physical labour carried out in discrete places. Knowledge is now seen
as the primary source of competitiveness and the desire of governments is increasingly to
create innovative and ‘smart citizens’. Extending what constitutes knowledge to the
“cultural and creative” sector is now incorporated into the discourse on the knowledge
society as this sector has gained increased recognition as a potential contributor to
economic growth.
One problem with the knowledge society debate is that there seems to be as many
definitions of the knowledge economy\society as there are authors writing about it. Smith
(2002: 6-7) asks “[w]hat does it mean to speak of the ‘knowledge economy’ however? At
the outset, it must be said that there is no coherent definition, let alone theoretical concept,

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of this term: it is at best a widely-used metaphor, rather than a clear concept. The OECD
has spoken of knowledge-based economies in very general terms, as meaning “those
which are directly based on the production, distribution and use of knowledge and
information”. This definition is a good example of the problems of the term, for it seems
to cover everything and nothing: all economies are in some way based on knowledge, but
it is hard to think that any are directly based on knowledge, if that means the production
and distribution of knowledge and information products.”
Foss (2002: 48) argues that, “[w]hatever we think of this journalistic concept [of the
Knowledge Economy], it arguably does capture real tendencies and complementary
changes.” What might these ‘new’ tendencies be?
“We define the knowledge economy as production and services based on
knowledge-intensive activities that contribute to an accelerated pace of
technical and scientific advance, as well as rapid obsolescence. The key
component of a knowledge economy is a greater reliance on intellectual
capabilities than on physical inputs or natural resources” (Powell and
Snellnllan, 2004).
Here the ‘modern’ emphasis seems to be on ‘knowledge’ ‘accelerated technical and
scientific advance’ and ‘greater reliance on intellectual capabilities than physical inputs or
natural resources’.
For an economist the question has been, Is the “Knowledge Economy” a new
economic paradigm, with new fundamentals or is it just “hype”? Is this all new? Marshall
(1920: Book IV Chapter 1 page 115) states that “[k]nowledge is our most powerful engine
of production; it enables us to subdue Nature and force her to satisfy our wants.” But the
importance of knowledge to the economy goes much further back. When discussing the
question, What happened to the Neanderthals? Tudge (1998: 25) argues
“[t]he Cro-Magnons . . . got to know the habits of the animals they hunted

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