The “Knowledge Filter” and the New Economy

28 May 2010 at 2:21 pm 3 comments

| Dick Langlois |

I recently ran across a paper by Bo Carlsson, Zoltan Acs, David Audretsch, and Pontus Braunerhjelm called “The Knowledge Filter, Entrepreneurship, and Economic Growth.” It’s actually a 2007 paper, part of a series these authors in various combination have been writing about the idea of a “knowledge filter.” The standard story about knowledge (in the new growth theory, but long before that as well) is what I think of as the R&D sausage-machine: one pours inputs like capital and labor into the meat grinder of R&D and out comes knowledge, which shifts the production function. In a series of papers, Carlsson et al. have argued that there is a “filter” somewhere within the meat grinder that determines how effectively the inputs get turned into useful knowledge. Although I’m sympathetic to criticism of the sausage machine story, you can imagine why I don’t think the knowledge-filter idea helps much: it’s just another black box that can be sized to fit whichever facts (stylized or real) one has at hand. Why not do away with the model altogether and instead think hard about the structure of knowledge and how it has interacted with institutions and organizational forms?

In fact, of course, that is what the authors actually do to some extent in this paper: one can read it without having to buy into the “filter” part. What caught my attention, in fact, is that this paper is ultimately an argument about the causes of the New Economy, and I am a collector of such arguments. The authors seem completely innocent of the large Post-Chandlerian literature on this topic, and they try to explain the transition from the large Chandlerian firm to more specialized entrepreneurial units strictly in terms of trends in R&D and knowledge creation.

[T]he industrial revolution was based in part on turning knowledge into economically useful knowledge and … university education and research in the United States became practically and vocationally oriented (in comparison with European universities), partly through the land-grant universities established in the mid- to late 19th century. In the early part of the 20th century, corporate research and development labs began to emerge as major vehicles of basic industrial research. Virtually all of the funded research prior to World War II was conducted in corporate or federal labs. In conjunction with a rapidly increasing share of the population with a college education, this made for high absorptive capacity on the part of industry and, as a result, a “thin” knowledge filter. In subsequent sections we discuss the emergence of the research university, the dramatic increase in research and development spending, and the shift of basic research toward the universities, especially during and following World War II. During the 1960s and 1970s, this led to a thickening of the knowledge filter in the form of an increasing need to “translate” basic (academic) research into economic activity. New firms have increasingly become the vehicle to translate research into growth; this can be seen in the greater role of small business and entrepreneurship from the 1970s onward.

Interesting. But I see two serious problems with this. First off, it misunderstands and vastly oversells the research labs of the mid-twentieth century. In most cases these were not drivers of innovation but absorbers of ideas invented outside the company by networks of smaller inventors — much like today. And when they did perform genuinely basic research, as in the case of Bell Labs, they were not at all tightly coupled to application. These labs were good at systemic development, that is, developing technologies that required a lot of disparate pieces to be created and put together. Color TV at RCA is an example. But they were not good at generating genuinely new useful knowledge or at more modular kinds of innovation — or, at least, weren’t as good as diffuse networks of inventors. In fact, as I mentioned in my previous post, the concentration of research (and patents) in the labs of RCA arguably slowed innovation in radio and consumer electronics generally. This leads to my second point: it’s not clear that one can explain everything just by looking at knowledge and R&D. There is actually a lot similarity between the regime of government funding of research through Land Grant institutions and the post-War grant system of Vannevar Bush: it was always channeled through the universities. Changes in government funding thus can’t really explain why there were large R&D labs at one time and small entrepreneurial firms at another. For that one has to think about issues of organization that go beyond the R&D function.

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3 Comments Add your own

  • 1. srp  |  28 May 2010 at 9:23 pm

    Apropos of my comment on the “assumptions in management” thread, it’s hard to see how a shift in the legal governance structure of R&D could be explained without some reference to shifts in transactions costs of some kind. Otherwise we just have an explanation of the sizes and geographical loci of R&D teams rather than an explanation of who pays the bills and owns the output.

    BTW I have an R&D sausage machine in my garage. I must not be using it right, though, because all that comes out of it is actual sausage.

  • 2. Michael E. Marotta  |  31 May 2010 at 7:48 pm

    While I am ideologically predisposed to accept the claims, I must ask for some kind of empirical evidence. Can you recommend histories of the labs themselves, GE, Bell, any of the universtiies?

    I agree on a priori grounds that channeling public money into universities is likely to be unprofitable. I concur that patents as we know them now retard progress and my classic case (as a pilot) is the Wright Brothers and their “wing warping” versus Curtiss’s “flaps.” But, again, I need more proof, merely to make sure that I am not standing so far in right field that I am to the left of the foul line.

    What about Edison’s lab? Did it not develop commercial products? Was it different from GE and Bell or were its flaws glossed over by a narrative?

    For hardline ideology, I point to Ayn Rand’s caricature of the “muscle mystic” the materialist who believes that possession of a factory will make him a capitalist, that occupation of a laboratory will make him a scientist. The mundane expression is the conceit that by “investing in pure research” products will appear like milk and honey from a rock.

  • 3. Michael E. Marotta  |  31 May 2010 at 7:57 pm

    … just a short PS:
    In asking about Bell and GE, 50 and 100 years ago, are we overlooking Apple, Microsoft, and — more to the point — their tens of thousands of independent developers? The WWW came from CERN, but it was not CERN project, of course, but rather a hack. We stand today on the shoulders of the Hayes SmartModem, Ward Christensen’s XModem, and Dennis Hayes’ “Smartmodem.” Perhaps we should be studying them, rather than Bell Labs.

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