Early in my undergraduate days over sixty years ago, I came across the assertion that the most valuable economic resource is knowledge. At first sight, this didn’t strike me as very plausible. Wasn’t it land and natural resources, as the physiocrats of the French Enlightenment had concluded in the eighteenth century? Or labour, as the Marxists taught us? And what about the production factor capital, the machinery that made labour so much more powerful?
What is knowledge?
I was fortunate in that I came into personal contact with the great economist-philosopher Friedrich Hayek (1899–1992), as well as his friends Fritz Machlup (1902–83), Gottfried Haberler (1900–95) and Karl Popper (1902–94). These Viennese scholars clarified for me what the abstract and many-sided concept of “knowledge” is and what a crucial role it plays in cultural and economic development.
These inspiring teachers used to spend their summers in the 1960s and early 1970s in the German-speaking parts of Europe, often as academic visitors to the universities I attended. Like migratory birds, they arrived in the summer months, most from the United States where they had moved to evade the Nazi dark age. In their youth during the 1920s, they had been students and young professionals in Vienna, which is why their brand of thinking about human nature, economic interaction and governance was labelled “Austrian Economics”. They focused on the individual, the diversity of individual aspirations and the benefits of freedom within easy-to-understand rules systems. The “Austrians” drew heavily on what the great minds of the Enlightenment had taught, such as John Locke, David Hume, Adam Smith, Baruch Spinoza and Wilhelm von Humboldt. Their philosophy and policy recommendations were of course very much at odds with the then prevalent mechanistic and collectivist Keynesian brand of economics.
This essay appears in September’s Quadrant.
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“Knowledge”, I learnt, consists of tested, useful ideas—useful for realising the diverse, changing and complex aspirations of millions of different people. Bits of new information are gradually integrated by rational thought and practical testing into systems of related ideas which constitute knowledge. The information must be based on observed facts. Knowledge may need to be adjusted when circumstances change. An important point is that most knowledge is held in the brains of numerous individuals. Some is made accessible to others when recorded in textbooks, research reports, technical manuals, statistics, legislative and practical publications, or YouTube tutorials. Much valuable knowledge is also incorporated in capital goods.
But not all knowledge can be easily written down to be shared with others. For example, the skills of a gymnast—how to move the body to achieve a specific routine—can only be learnt by patient trial and error and could probably never be spelled out in a manual. Such skills can only be acquired and refined by training and practical experience. In many walks of life, skills and experience are crucial.
Knowledge relates not only to technical matters, but also to tested knowledge about how to organise communal life and govern a community or a nation. Thus, moral norms, work habits, legislated rules and constitutions form a very important part of a society’s stock of knowledge.
One of the key points that the Austrians made is that dispersed, specialised knowledge can normally be exploited best by the voluntary co-operation of individuals. This depends on trust and trust-enhancing rules (institutions), such as the rule of law and free markets in which individual property rights can be exchanged. I learnt from my inspiring “Austrian” teachers that knowledge is a production factor, just like physical capital, natural resources and labour. It can be produced, which comes with “transaction costs” and risks. And knowledge assets can be wasted. In combination with other production factors, knowledge (or “human capital’) can overcome situations of scarcity. Indeed, the long history of the human race can be seen as a sequence of more and more knowledge creating better physical capital, tapping into more natural resources, empowering labour and overcoming or at least alleviating the deleterious side effects of economic growth. From the Austrian standpoint, knowledge is the focus of human endeavour and progress. And the good news is that, over the long term, the stock of human knowledge is potentially unlimited. Time and again, bottlenecks will arise; but then incentives and rewards help to overcome the bottlenecks. The Austrian worldview comes with optimism.
How does knowledge grow?
The stock of knowledge, which a community owns, grows when people are driven by curiosity or self-interest to risk exploring new ideas and concepts, individually or in co-operation with others. A social climate that favours individualism, enterprise, risk-taking, trust, independence and rivalry (competition) has always been conducive to the growth of knowledge. Where the gains from risk-taking and investigative discipline can be appropriated thanks to secure private property rights, knowledge tends to flourish.
For me and my fellow students, Hayek’s 1968 lecture “Competition as a Discovery Procedure”—originally given in German at the Kiel Institute—offered signal, indeed electrifying insights. The spontaneous order of free markets advances discoveries like no other system yet invented and distributes knowledge to people who can make good use of it. Competition is more important for mankind’s well-being than the collective, political promotion of new knowledge, though R&D promotion by governments can also help.
Sometimes, new knowledge begins with a scientific discovery, which may then lead to a technical invention. The next step—from invention to innovation, the useful application of knowledge—is much more difficult, for it requires proof of commercial feasibility. Can the costs be controlled, can sufficient demand for the new item be elicited and will market prices be high enough to ensure profitability? Can sceptical bankers be convinced that the results will be profitable? Many a splendid idea has faltered at the hurdle of commercial feasibility! However, this linear model of innovation—from discovery to invention to innovation—is in reality much less important than innovations that come from learning by doing, from piecemeal, cumulative improvements in response to feedbacks from buyers. It was such piecemeal innovation that led within a mere hundred years from the Wright brothers’ shaky aeroplane to the Dreamliner.
How useful knowledge spreads
In our lifetime, the stock of useful knowledge has grown exponentially, not only because more people live on Earth, but also because most live longer and communicate more widely and systematically with others. Trade in goods and services has always spread knowledge. Thus, the trade over the Silk Road in the thirteenth and fourteenth centuries under the Pax Mongolica spread useful knowledge from advanced East Asia to underdeveloped Medieval Europe: knowledge of paper and printing, the compass, gunpowder, even such mundane ideas as noodles and the wheelbarrow. (Remember these fun facts for a trivia night: the Gothic cathedrals were built without wheelbarrows; throngs of wheelbarrow-pushing coolies did Armaguard’s work in old China.) The West Europeans didn’t merely copycat the imported bits of knowledge, but cleverly perfected them. Without better compasses and more potent gunpowder, they could not have conquered the world. And without paper and printing, the knowledge explosion after 1500 and the religious and scientific ferment of the Reformation and Renaissance would not have happened in the ways they did.
The knowledge revolution after the end of the European Middle Ages gained additional momentum when a “New World” was discovered beyond the Atlantic and the first caravels rounded the globe. The agricultural and horticultural resources of the Americas enhanced the life opportunities of Europeans immeasurably—potatoes, corn, tomatoes, papayas, pineapples, beans, cacao, chillies and new dyestuffs. In return, the Americans gained from the horses, donkeys, sheep, cattle, bananas, onions, tea and numerous other agricultural gifts of the old world, apart from ideas of how to run community life without the practice of human sacrifice, so deeply entrenched in the civilisations of Mexico and Peru. This is not the place to moralise about the benefits and demerits of colonialism, but to note how exploration and globalisation led to enormous long-term net gains for mankind, even when this came so often with pain.
The stock of useful knowledge thus grows by people researching, experimenting, learning, practising and trading. If risk-taking individuals can compete using their novel ideas, and this is not distorted by political power and coercion, they have a good chance to become a long-term force for the good, whatever the immediate “losers” in the competitive game may feel. This requires a positive attitude to what is new, as well as looking forward and getting on with it, rather than fatalism and dwelling on the past.
In the 1960s, economists and political operators increasingly embraced the cultivation of knowledge as a central tenet of economic growth theory. One concept that was popularised by the OECD, the club of rich industrialised nations, was the concept of “Third Factor Growth” (TFG). US economist Edward Dennison had developed a simplistic (“un-Austrian”) model, which indicated that inter-temporary and international differences in economic growth were not so much due to inputs of the production factors labour and capital, but to a residual (inelegantly termed “third factor”): improved knowledge. TFG became a tool to promote R&D and industry policies, and was sometimes used to argue against market interventions. That argument is still being played out in Australia by the Productivity Commission, though with limited effect. The peculiar model assumptions and the degree of abstraction behind TFG have meant that the arguments carried less firepower than the “Austrian School” would have with its more realistic arguments.
Knowledge is a perishable asset
Thus, knowledge has been the main driving force behind the unprecedented growth of the global economy since 1945. Land has been opened and crops have been made more productive by new knowledge (think of the Green Revolution); new inventions have tapped new natural resources and improved the effectiveness of energy resources and capital goods; labour has become more skilful; and human interaction—frequent assertions to the contrary—has become less violent and more predictable (Steven Pinker in The Better Angels of Our Nature provides empirical evidence about this often ignored fact). In addition, the loss of knowledge by death has slowed as life expectancies have expanded due to breathtaking advances in medical knowledge. World peace—by and large—has made it possible to spread useful knowledge among nations and apply it in an atmosphere of trust and shared rules of the game (institutions).
Whilst our biological endowments are passed on automatically in our genes, the passing of our knowledge assets requires teaching and learning. It has become a big industry, as has the export of knowledge to foreign parts. Some of this is fun, but much is painful and costly. It may even come with occasional failures. The ancient Greeks were probably the first in history to organise teaching and training professionally in academies and gymnasia. In other words: they invented schools. Elsewhere, and persisting often to this very day, the passing of knowledge from one generation to the next happens informally within the family or the clan. The young learn from their fathers and mothers or close relatives. In Western Europe, bans on cousin marriage by the Catholic Church ensured that learning within the narrow frame of clannishness was limited: the young married outside the clan and learnt from different families. Apprenticeships took teenagers into other families and firms. Travel in search of new masters opened young minds to new influences. The degree of mobility between professions and the countryside and towns in Europe far exceeded what was the norm in the Middle East, India or China. This served to “fertilise” the cultivation of useful knowledge in the West (Joseph Henrich’s new book, The Weirdest People in the World: How the West Became Psychologically Peculiar and Particularly Prosperous, makes this important point.)
Bits of useful knowledge of course get lost or are degraded all the time. Memory loss, retirement from productive work and death are ceaseless drains on the knowledge that a community owns. Some of it also becomes obsolete or depreciates when competitors deploy more useful knowledge. Sometimes, knowledge is even wilfully destroyed—think of iconoclasm, book burning and the incarceration or mass murder of intellectuals by the likes of the Khmer Rouge. A notorious example was the decree by newly elected Ghanaian president Kwame Nkrumah, a hero of the revolutionary Left, to destroy all research archives and seed banks of the West African Agricultural Research Institute, because it was a reminder of colonialism.
The depreciation of some of the knowledge stock by market competition is often resented, as old monopolies fall by the wayside and costs for acquiring supplementary information and skills have to be incurred. If knowledge progresses in leaps and bounds, much structural change occurs. And if that process accelerates in unprecedented ways, so that predictability is lost, resentment and resistance to novel knowledge may grow. More and more people then embrace defensive positions. The speed and spread of structural changes in the wake of the knowledge revolution since the 1960s are becoming intolerable for many, and collective action to slow the pace is gaining growing electoral and business support.
Dangers to the cultivation of knowledge
Since knowledge is a perishable asset, it needs to be constantly nourished and cultivated. This was well understood by the leading lights of the Enlightenment; it also inspired generations up to the middle of the twentieth century. Then, around the 1960s, the basic philosophy of education and knowledge changed. Time-tested bourgeois virtues and the “Three Rs” were more and more sneered at. Knowledge and education were regarded not as investments in material advancement, but as consumer goods. Enthusiastic teachers and dedicated lecturers were overwhelmed by a flood of bureaucratic busy-ness. Competing was increasingly seen as inhumane, since it requires discrimination and we are now all meant to be equal. An egalitarian “sharing mentality” is now favoured by most in the education establishment, above all in the public sector, since many parents and the electorate increasingly take economic growth for granted. Productive effort is no longer considered the main source of a good living standard. Instead, all must now be equal, irrespective of intelligence, effort and luck. The great Austrian-American economist Joseph Schumpeter foresaw this and considered it a danger to democracy and prosperity.
Redistribution by the visible hand—by taxing and subsidising, intervening and regulating—has become a central function of government. Yet, egalitarianism stifles competition. Alas, many now deem the spontaneous capitalist order with its strictures and disciplines obsolete or objectionable.
Ironically, at the very time when these macro-sociological shifts occurred, science and innovation became more and more the concerns of public policy. Ever bigger groups of the population were channelled into higher education, so that standards had to be lowered to avoid high failure rates. The effort of universities to attract a profitable clientele from places with less educational preparation and a lesser command of English added to the degradation of tertiary education. As education policy was more instrumentalised, the OECD came up with the idea of internationally comparable PISA studies. In the hands of education bureaucrats, the intended purpose was soon perverted: weak students and schools were promptly eliminated from the surveys so as to make nations look better. China nominated only elite schools in Shanghai. How to lie with statistics! And how to pervert proper teaching by an increased emphasis on mere techniques to pass tests.
New developments throughout the West now hinder the processes of discovery and exploitation of useful knowledge even more.
The new electronic technologies have come with enormous opportunities for the generation and distribution of knowledge (think Wikipedia, GPS and near cost-free global communication). But they have also come with downsides to knowledge creation. In the social media, previous quality controls and tests of veracity by established experts often fall by the wayside. Until recently, editors and book publishers exerted some central controls to ensure veracity and quality; radio and television stations took care with what they broadcast. Now, everything goes. In the decentralised social media, even the most bare-faced lies can be distributed and are believed by some. Anonymous participants can demand the highest moral standards of others, while acting opportunistically themselves. The gendering of language reminds me of gauche efforts by Stalinist regimes to give the language a socialist character. They failed. The woke brigade now engages in virtue signalling and applies utopian criticism to those who need to act. As a result, fewer and fewer time-tested beliefs and bodies of knowledge are taken to be certain and are widely shared. National forums where communal opinions are formed have lost their role. Moral disorientation and social fracturing are the result. All this has created confusion and insecurity, which hinder the cultivation and sharing of knowledge assets.
Electronic interconnectedness has also reduced our privacy, creating stresses. Valuable private knowledge is exposed to internet spying and cyber theft. Extortion rackets have shown how vulnerable the new cyber universe has become. Attacks on cyber security go for the jugular of knowledge societies. We must now beware constantly of criminal scammers and targeted disinformation. All this has raised the transaction costs of knowledge search and testing; none of it is conducive to knowledge generation as understood by the Austrian School.
An example of the mayhem that can be created with the new communication technologies is the emergence of identity politics. Although the predictions of the Communist Manifesto have long ago turned out to be ideological nonsense, the ideology of class conflict has been revived in our time in the guise of identity politics. Too bad that the proletariat, which Friedrich Engels hypothesised, soon became a skilled workforce; workers soon owned their houses and holidayed in the sun. So, the neo-Marxists of our day had to rescue the ideology of class conflict by finding new, potentially revolutionary identities. Efforts to rescue the ideology from the onslaught of facts have included Black Lives Matter and the #MeToo movement. Identity politics is based on assumptions about human nature diametrically opposed to what the “Austrians” taught.
The stock of our productive knowledge is now threatened by climate policies. Since the beginning of time, knowledge about how to gather energy for human uses has been at the core of progress. Since our distant forebears lit twigs to make their food more nutritious, fend off wild beasts and warm themselves, new knowledge has made access to energy ever easier and cheaper. In great steps forward, successive generations tapped energy in more concentrated forms, requiring relatively less investment per kilojoule gained. Before long, we may even realise the dream of boundless electricity from nuclear fusion.
But now, out of left corner, political establishments in affluent, high-cost countries and the United Nations have started a massive political drive for “decarbonisation” and, on top of that, even want to ban clean, secure nuclear power generation. Global temperatures have of course always varied, but rises are now attributed mainly to the human quest for cheaper energy. The political economist in me suspects that UN bureaucrats see climate policy as a way to world government, and the leaders of ageing high-cost welfare states try to defend their dwindling competitive advantage over China and other new industrial countries by forcing everyone to shift to expensive, unreliable sources of energy. Unreliable wind and sunshine will force us to commit huge investments to gather a few kilojoules. I herewith out myself as a climate sceptic.
Reliance on unreliable, costly low-grade energy would not only be a drastic break in the multi-millennial trend of powering human endeavour. It would also amount to the destruction of huge amounts of time-tested useful knowledge about what drives modern civilisation. Many trajectories of knowledge development would be disrupted and many of the West’s competitive strengths would be lost. Our knowledge lead and the lifestyle to which we have become accustomed would disappear. The decarbonisation drive will fail.
The push by collectivist politicians, such as Joe Biden and Angela Merkel, to even raise the “Paris targets” clashes with apparent and understandable resistance from Beijing, Delhi and Moscow. Besides, how could these governments be held to whatever promises they might make at the next UN talkfest?
The climate push threatens Australians in particular. We enjoy unique competitive advantages in energy resources and are a major exporter of coal and gas. Massive write-offs of expertise in these activities would diminish our living standards and jobs.
One of the big disappointments of my life has been the politicisation of science—once dedicated to rational endeavours to find objective, checkable truths about nature. Science has now been completely corrupted, as researchers bias their methods and findings lest they lose grants from governments and big business. Climate models exaggerate prospective global warming, and any extraordinary weather event is attributed to human malfeasance. The history of global climate variations over millennia is blatantly disregarded. Unsurprisingly, the wider public no longer trusts scientists and their capacity to generate fact-based knowledge which would raise living standards.
The mass immigration of ignorant, poorly educated people now lowers the average quality of a nation’s skill endowment, and therefore its economic potential. If “welcome culture” is combined with welfare payments to illegal immigrants, the handicap will be extended by generations. Indeed, where certain clannish communities from the Third World congregate, a nucleus of rejection of the open society, its work habits, knowledge culture and moral standards becomes entrenched. New immigrants, who were in the first place attracted by our knowledge-based society, frequently persist with the traditional tribal habits and mindsets that kept their home countries in poverty. Resulting losses of social cohesion are bound to erode the assets of knowledge and skills.
The psychological burdens caused by recent fast structural changes and the openly aggressive attitudes of the People’s Republic of China have given rise to widespread calls for greater national self-sufficiency. Yet, globalisation has been one of the greatest spreaders of knowledge in world history. It has benefited both the technology-and-industry leaders and the importers of direct investment and productive knowhow. A reversal of this trend—even for understandable political and strategic reasons—is bound to inflict massive productivity and income losses. It is also likely to slow the spread of that key production factor: knowledge. The disintegration of the world economy in the 1930s (and its dire consequences in the 1940s) should stand as a warning. Public debate overlooks just how specialised modern economies have become and just how many experts have to co-operate to produce the plethora of goods and services we now depend on. Those who demand that we must become self-sufficient, for example, in steel, ignore just how many thousands of different steel qualities and products are in use. We cannot simply convert a mill that turns out corrugated iron, fence posts and barbed wire into one that delivers high-tensile, anti-magnetic steel for next-generation submarines. Australians who argue for more self-reliance should also be reminded of the drawn-out sad saga of costly subsidies for car assembly plants.
And then there will be inflation. The Covid pandemic has served finance ministers and central bankers as an excuse to jettison restraint on public debt. The volume of money is now being inflated to unprecedented heights. The public-debt burdens will not be repaid from future productivity gains and taxes, but will instead be lightened by inflation. Someone ought to produce a television series on the great inflations in history: how the late Roman empire and the Ming dynasty in China were weakened by inflation; how the cumulative influx of precious metals from the Americas converted Spain’s “Golden Age”—a period of cultural and scientific flourishing and enterprise—into a protracted era of bankruptcy and futile asset speculation; how the hyper-inflation of the early 1920s diverted the admired scientific and industrial energies of the Germans and Austrians into destructive resentments and conspiracy theories. Inflation inevitably distorts market signals. Economic calculation becomes harder and less knowledge is discovered. In all these cases, genuine wealth and job creation gave way to frenetic asset speculation, redistribution of wealth from the poor to the rich, and hence social tensions and impoverishment.
These are some of the warning signs that many facets of the modern knowledge society are becoming dysfunctional. The great student of the rise and fall of civilisations Arnold Toynbee concluded that civilisations decline and fall because they become dysfunctional and weak in maintaining cultural dynamism. Are the above indications signs of where the West is inevitably headed?
Stagnating or weakened civilisations have often also been dealt the death blow by outside influences: invasions, epidemics and natural catastrophes. The Vandals and Goths did their bit to terminate the decadent late Roman era. A long Dark Age began until the “Carolingian renaissance” drew on half-forgotten knowledge from Athens, Rome and Jerusalem to rekindle cultural vigour, and in the eleventh century the Papal Revolution laid the foundation of the extraordinarily durable phenomenon of Western civilisation. It endured and flourished like no other because at its core was the decentralised search for knowledge and the capacity to tackle crises by rationality and inventiveness.
Can the West tackle the challenges?
It is valid to ask whether the aggressive enmity of a resurgent Communist China or waves of illegal immigrants will now play the role that the Goths and Vandals did in Roman antiquity.
Coming generations face a period of tribulation. Everything will depend on a revival of our time-tested values and the decentralised search for ideas on how to cope. The West still has a scientific and technological lead over China, and the institutions of free markets and democratic governance still constitute a potential for creative dynamism, likely to outpace collective top-down approaches to knowledge generation. The collective approach may work well in copying those higher up the knowledge ladder, but exploring the unknown at the knowledge frontier is a different matter altogether. The recent experience of how Western science and enterprise were mobilised to discover and distribute Covid vaccines is encouraging. Likewise, possible energy bottlenecks and the deleterious consequences of economic growth can be best addressed by novel technical solutions, if only our communities embrace an enlightened spirit of compromise and co-operation. This point cannot be proven to the satisfaction of the Jeremiahs. But the “Austrian mindset” would help.
It is still possible to imagine a revival of the creative dynamism and innovative drive that have been the West’s hallmarks since the Enlightenment. It is also possible to imagine that new industrial countries that adopt a capitalist-democratic constitution will join in efforts to find solutions and avert hostility. One may even speculate about how future generations in China will think about centralism and nationalist antagonism versus a policy stance akin to what brought unprecedented economic success in the PRC’s “Golden Years” between 1980 and 2010. Whatever the totalitarians in Beijing and Moscow or the reactionary tribal warriors in the Middle East may come up with to cause us harm, our record still inspires hope for a renaissance of our creative energies.
It helps for citizens and leaders to be educated in the “Austrian Weltanschauung”. Not the least reason for elevating knowledge to the central agent in civilisational evolution is that it protects us from misanthropic pessimism and defeatism. Instead, it encourages humane, optimistic problem-solving and a measure of self-confidence.
Professor of Economics emeritus (UNSW) Wolfgang Kasper was educated in Germany and elsewhere in Europe, but made Australia his base in the early 1970s. He thanks Professor Jock Anderson, Washington DC, for unwittingly provoking him to pen this essay.