A Service of Leibniz-Informationszentrum econstor Wirtschaft Leibniz Information Centre Make Your Publications Visible. zbw for Economics Eliasson, Gunnar; Fölster, Stefan; Lindberg, Thomas; Pousette, Tomas; Taymaz, Erol Working Paper The Knowledge Based Information Economy IUI Working Paper, No. 256 Provided in Cooperation with: Research Institute of Industrial Economics (IFN), Stockholm Suggested Citation: Eliasson, Gunnar; Fölster, Stefan; Lindberg, Thomas; Pousette, Tomas; Taymaz, Erol (1990) : The Knowledge Based Information Economy, IUI Working Paper, No. 256, The Research Institute of Industrial Economics (IUI), Stockholm This Version is available at: http://hdl.handle.net/10419/95060 Standard-Nutzungsbedingungen: Terms of use: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Documents in EconStor may be saved and copied for your Zwecken und zum Privatgebrauch gespeichert und kopiert werden. personal and scholarly purposes. 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Data from several IUI studies on information processing in firms and in markets are consolidated. Focus has been placed partly on the accumulation and use of human competence in production, and partly on the nature of information processing per se and the actual and potential use of modern telecommunication tech­ nology. The manufacturing sector comes out statistically as a rede­ fined and much larger economic activity than conventionally me as­ ured. In many ways the growing sh are of service production in total production reflects the increasing use of knowledge in a modern industri al economy. The project is part of a large study that the institute is carrying out for Swedish Telecom. Stefan Fölster has written Chapter II, Tomas Pousette, now at the Federation of the Swedish Cooperative Banks, and Thomas Lindberg, now at Öhman, an independent stockbroker, have written Chapter III, Tomas Pousette Chapter IV and Erol Taymaz Chapter V. Stockholm in May 1990 Gunnar Eliasson Bertil Thorngren The Industrial Institute for Swedish Telecom Economic and Social Research Contents Page I The Knowledge-Based Information Economy 9 by Gunnar Eliasson II The Information Sector in Sweden. Recent Developments in Firm Education, R & D, and Telecommunications 89 by Stefan Fölster III Services in Production and Production of Services in Swedish Manufacturing 115 by Tomas Pousette and Thomas Lindberg IV Services in Industry - An International Comparison 135 by Tomas Pousette V A Micro-Simulation Analysis of Manufacturing Firms' Demand for Telecommunications Services 157 by Erol Taymaz CHAPTERI The Knowledge-Based Information Economy* by Gunnar Eliasson * This chapter has been around in preliminary form for quite some time. I am very grateful for many useful comments along the way, especially by Richard H . Day, Frank Stafford, Bertil Thorngren and Bengt-Christer Ysander. In addition I got som e very useful comments from Paul David and Nathan Rosenberg, when the paper was presented at a seminar at Stanford University in April, 1989. Contents Page 1 The economics of innovation and information 13 2 From the printed word to modern information and communication technology - the necessity of path dependent economic growth mode lin g 18 3 The art of managing large business organizations - the corporate language 28 4 The information design sectors 33 5 The knowledge-based information economy in figures 37 6 The nature and measurability of information 45 7 The endogenous fragmentation of industri al structures, and the collapse of national measurement systems - Sundry remarks on accounting in the knowledge-intens- ive information economy 55 Bibliography 82 List of figures 1.1 Employment in business services in the United States and Sweden 67 1.2A Distribution of labor costs on functions. Large Swedish manufacturing firms 68 1.2B The industrial engine. Manufacturing and related service production 69 1.2C The information economy 70 1.3 The knowledge-based service economy 10 Sweden, 1950-86 71 1.4 Market valued and replacement valued net worth in Swedish manufacturing, 1951-85 72 List of tables 1.1 The statistical accounts of the knowledge-based information economy 73 1.2 Employment in service production in Sweden and the U .S ., 1983 73 1.3 Labor use in different countries 74 1.4 Wage and salary costs distributed on different func- tions, 1986 75 1.5 Labor quaIity distribution by occupational clusters and educational attainment 76 11 1.6 Information processing, end use classification, whole economy, value added components 79 1.7 The composition of investments and capital. The 10 largest Swedish multinationals 80 1.8 Real rate of return, 1986 80 1.9 Capital stock measurements of 10 Swedish corpora- tions, 1985 ------ 81 1'" 1 The economics of innovation and information This study brings the intellectual dimension of economic activity onto focus. The universal use of abstractions as a foundation for economic analysis, understanding and decision making occurs both explicitly and measurably as information processing and less visibly as the use of "tacit", human-embodied knowledge. The message is that abstract thinking or theory is becoming increas­ ingly more important in down-to-earth practical matters. It draws significant resources, not in the least in the form of mistaken deci­ sions. Theory is needed to organize thoughts and facts into a coherent whole. You have to impose prior restrictions on your thinking to get intellectually organized. These are priors you normally avoid think­ ing too much about. Such boundedly rationai thinktng is necessary for any businessman, and the market is a powerful test for relevance. Boundedly rationai thinking is typical for the scientist, arguing his theory, the only difference being that sciences, and notably social sciences do not have as powerful a test as the market. A scientist can live with erroneous priors much longer than the businessman. Three phenomena in particular are making life difficult for the economist today. Inputs and outputs of the economic system are increasingly transacted in imperfect or regulated markets and/or are being dominated by quaiity components that we cannot easily meas­ ure. Production technology is increasingly moving economic activities across the statistical categories we have become accustomed to. The economist's representation of a nation - a statistical system interact­ ing with the statistical systems of other nations, each being autonom­ ously controlled by a political authority - is being gradually diffused through the international integration of markets and the increasing presence of the multinational corporation. Thus, we are measuring less and less weil what is becoming economically more and more important. A particularly trick y measurement problem is the pres­ ence of "tacit" knowledge or "human embodied capital" . I am beginning this story with a dilemma facing current economic analysis in terms of a statistical measurement problem. I do this for several reasons. Neither theory nor measurement can develop with­ out each other's support. And economics will have difficulties surviv­ ing as a science without a solid (read: better) foundation in good measurement. We lack the measurement system needed to capture an advanced market economy in operation, because we lack the adequate guiding theory. 13 Before World War II economics was very much social philosophy. It was concemed with, among other things, the nature of ration al behavior in matters economics. Improved measurement helped to tum economics into an almost "hard" science. Economics still, however, has an intellectual dimension. It can be viewed from two different angles. With intellectual processes imposed on, or integ­ rated with the physical flows of production, it becomes difficult, perhaps impossible or illogical to view matters economics through the glasses of a hardware-based, economic process. This is at least the case when you study the evolving organizational forms of an economy, which is what industrial economics is concemed with. The organizational form very much controis the information processing in the economy, the mix between markets and hierarchies, the balance between goods production and marketing and distribution,