Economic Clichés: Is There a ‘Knowledge Economy’?

This is a crosspost translated from Tatlin’s Toren.

In light of the upcoming elections in the Netherlands, the airwaves are filled with talk of the ‘knowledge economy’. It is often far from clear what is meant by this, moreover because it is not a term with a clearly defined meaning in economic theory. The impression therefore rises that it is a term mainly used to justify more investment in education. However, more specifically it seems to be used most frequently by liberal parties to abandon redistributional policies in favor of such investment, while still keeping up the appearance of being committed to the plight of the ‘low opportunity’ population, the importance of social mobility, and so forth. It is therefore worthwhile to analyze this term as it is used, all the more because it is such a fixed part of the arsenal of economic clichés politicians have ready to justify arbitrarily any given policy proposal.

The ‘knowledge economy’ as post-industrial society

The most immediately significant aspect of the ‘knowledge economy’ is that it is an impossibility in its literal sense. There is much ado about the historical shift in the division of labor from the heavy weight in industry to the predominance of the services sector. Such shifts have of course happened before in economic history – if the Industrial Revolution means anything, then surely its meaning rests in an analogous shift from agriculture to industrial production. But against this, two points must be noted. Firstly, the ‘services sector’ is not a clearly defined term either. It is worth remembering that in the 19th century services were also a not inconsiderable part of the economy, but at the time this concerned very different branches of the economy, particularly domestic and transport services. When labor was cheap and transport expensive, many working class men worked as teamsters and railway personnel, and many working class women as domestic labor.

Because of technological development and the rise in wages, this is now by and large a thing of the past; but it is a reminder that large services sectors are not a new phenomenon as such. One could add to this that historically the work in the home, a traditional burden for women, has never been paid at all insofar as done by the (female) members of the household themselves – yet if it had been, this would have meant in statistical terms a vast expansion of the actual ‘services sector’ in proportion to the total economy. In other cases, there is no clarity why one thing counts as industrial production and the other as a service, as in the attempts of the fast food industry to have the production and sale of hamburgers and fries relabelled as manufacturing. After all, why does working up raw materials into a finished commodity for sale count as industrial production if it happens in a factory, but not if it happens in a kitchen? And what if someone cleans and maintains the factory space, so it remains a safe and productive environment for the use of the machinery – is that services or part of production? Ultimately this particular distinction is not so important or meaningful.

A second major objection against this idea is the simple fact that anything whatever that is processed, transported, packaged, rented, sold, or speculated on must first be produced. Every single good that is used in the so-called ‘knowledge economy’ still has been made somewhere, by means of old-fashioned industrial processes. However, the elephant in the room is that this production has by and large been moved to Third World countries. Of course, the West does have some high value industry, in particular in branches where the standard production requires high enough levels of technology to justify the high wages of the workers. Nonetheless, the historical shift to a ‘services sector’ is in reality more like a historical shift of production to China, India, the Philippines, Taiwan and so forth. While we pretend here that producing stuff is a funny and outdated concept, eight year old girls manufacture our jeans and cellphones in Manila or Phnom Penh.

In the context of the ‘knowledge economy’ it is worth noting that in such countries this shift to industrial production domestically tends to come either at the expense of education or in places where education has never been within reach of the masses – for example because liberalization has made it unaffordable for them, or because the move to the cities due to domestic uneven development forces individuals into a day by day struggle for bare survival. Countries like the Netherlands also treat highly educated foreign migrants from such countries appallingly badly, so the Iraqi refugee who is a qualified doctor will be lucky if he can get a job as a cleaner in a hospital. For this reason our ‘knowledge economy’ is not just based on unequal exchange (another subject entirely), but also on the brain drain from developing countries, whose brains we do not even know to value properly. The effect of large-scale industrial production on the intellectual and creative powers of the workers of those Third World countries is in the meantime well known. One need but quote the great liberal theorist Adam Smith, who famously wrote in the language of his time:

The man whose whole life is spent in performing a few simple operations, of which the effects are perhaps always the same, or very nearly the same, has no occasion to exert his understanding or to exercise his invention in finding out expedients for removing difficulties which never occur. He naturally loses, therefore, the habit of such exertion, and generally becomes as stupid and ignorant as it is possible for a human creature to become. The torpor of his mind renders him not only incapable of relishing or bearing a part in any rational conversation, but of conceiving any generous, noble, or tender sentiment, and consequently of forming any just judgment concerning many even of the ordinary duties of private life.


The ‘knowledge economy’ as instrument of social mobility

Of course, one could argue this takes the meaning of ‘knowledge economy’ simply too narrowly. Maybe it just means the need for more education, for example sending more kids to college, so that in our high-tech societies we can enable (or maintain) social mobility. After all, is it not true that now everything is run by computers and natural sciences and engineering knowledge are more needed than ever, we need to be able to produce more and more highly qualified people? Is this not essential to keep our wages high, to prevent people getting stuck in low-paid jobs, and to maintain our productivity? Of course this is not entirely untrue, and it would be senseless to wholly deny this. But the value of education and investment therein for reducing inequality is not nearly as great as the liberal parties – fearful as they are of any serious disruption of the structure of private property – make it appear.

Firstly, it is sadly the case that inequality and poverty affect the results and potentials of education from the get-go. There exists by now a plethora of social and natural scientific research into the effects of poverty on schooling, and the results show again and again that poverty literally acts as a poison: as much as it reduces opportunities socially, it also damages the brain physically. In the newsletter of the Harvard Neuroscience Institute we can, for example, find the following:

Significant and continuing stress can have a negative impact on early brain development. The day-to-day adversity of severe poverty and parental mental health problems such as maternal depression, which has a higher prevalence among poor women, can compromise parent-child interaction. (…) Unrelenting stress in the absence of supportive relationships with adults—referred to as “toxic stress”—causes a prolonged activation of the body’s stress response system, which includes the release of stress hormones such as cortisol. Released by the adrenal gland, cortisol circulates in the brain during the body’s fight-or-flight response to stress. Under normal circumstances, cortisol has short-term benefits that help protect us from danger. When the cortisol system is repeatedly activated, however, levels of cortisol remain high and can actually damage the brain.


Maybe this seems remote from the subject of the ‘knowledge economy’, but it is not. It leads to the important conclusion that the intellectual and educational potential of children is already affected by inequality and poverty before the educational institutions properly have their effect, and therefore regardless of the nature and quality of those educational institutions. Now a second point is that the much vaunted ability of higher education to provide for higher wages, and thereby to function as a lever for increasing social mobility, contains a category mistake. It is well known from economic statistics that someone with a Bachelor’s degree from a good college will have a higher lifetime earning potential on average than someone with a degree of vocational schooling, and that person more than a high school dropout, and so forth (this is even true for much derided degrees like English or Philosophy). It seems therefore obvious to want as many people to go to college as possible. The problem is however that what goes for the individual does not necessarily go for the collective. The wage advantage of higher education is a relative advantage: the degree is only valuable when most people do not possess one. When it becomes commonplace to obtain a certain level of schooling, the wage advantage disappears. This development is already visible in most Western societies: since the massive increase in university students in the 1960s and 1970s, it is already no longer the case that a simple Bachelor’s degree equivalent is sufficient for a well-paid job. For jobs that previously only required some higher quality high school education, one may now well need a Master’s degree; and for jobs that previously required basic university schooling, one now requires a PhD at the minimum. In short, possession of higher education degrees is a zero sum game: an advantage for one is a disadvantage for the other, and it is impossible for all to receive this advantage.

This is simple to explain by observing that Western economies, like all capitalist economies, necessarily have a limited proportion of ‘good jobs’. One might consider a ‘good job’ one that pays well, allows for a certain degree of creativity at work, and one that carries a certain social prestige. A given economy unfortunately simply requires a certain number of socially necessary tasks of production, from cleaning to agriculture and from industrial production to transport. Some of these can be outsourced to China, but not all – the ‘services sector’ then seems more than anything else to mean that part of the economy which cannot easily be outsourced. At the same time, there is necessarily a limited number of jobs with a relatively high wage and with social prestige, precisely because both of these are relative terms, and therefore once more a zero sum game. As John Marsh summarizes in his worthwhile book Class Dismissed:

Regardless of how much use the poor make of their right to a good education, there are not enough decent and remunerative jobs — there are not even enough indecent and low-paying jobs — to go around. The number of heads of households living in poverty outnumbers the supply of job openings that would lift their holders and their families above the poverty threshold.


This is not something inherent to labor. It is something inherent to labor which is distributed according to a competitive labor market. If there are suddenly many more professors for the same amount of academic work, their wages and their social prestige will inevitably decline over time. The same goes for doctors, engineers, lawyers, and so forth. (There are also major gender aspects to this, but I ignore these for the sake of the argument.) Simultaneously it is impossible to replace indefinitely the labor needs of industry, agriculture, transport etc. with mechanization and technology, without this greatly increasing the wages of the remaining employees in a given branch in relative terms (which in Western Europe produces the phenomenon of the ‘Polish plumber’). This means in its totality that there is an endless shifting around of ‘good jobs’, and a constant change in the formal educational requirements of different branches of the economy; but the number of ‘good jobs’ does not proportionally increase over time.

This makes the accumulation of qualifications and degrees in the hope of providing everyone with a ‘good job’ a hopeless endeavour. ‘Good jobs’ now require many diplomas because many people can now competitively pursue them and there are few such jobs, not because diplomas generate ‘good jobs’. Even as late as the First World War, most doctors and lawyers in the United States did not need any formal qualifications at all, as few people had any higher education and therefore it was redundant as a relative demand for the purposes of competition. Now, things are different. In fact, much of the inequality in Western society is inequality within the population with higher education, not just between the higher and lower educated. This form of inequality is at best unaffected, and perhaps even negatively affected by the proposals about more investment in college educations for all. So to sum up, pursuing a ‘knowledge economy’ in which everyone can use higher education to gain the advantages that are by definition relative and zero-sum is like the desperate attempt of a dog to bite its own tail.

Knowledge as an end, not a means

Does this then mean that desiring a highly educated people is all nonsense? Not quite. What all the chatter about the ‘knowledge economy’ does not mention is the one real advantage of higher education, the one that has nothing to do with competition or the economy in a narrow sense: intellectual improvement. A highly educated population is an engaged, critical population and one much better capable to realize their intellectual and creative potential, both within and without the sphere of work. Whether this involves composing music or designing inventions, writing novels or critical analyses of the political system, it is very hard for any of these to be within the reach of the masses without higher education being common. Reducing this to a term like ‘human capital’, as is done in the economic theories consciously or unconsciously relied upon by the pedlars of the ‘knowledge economy’, is doing the real purpose of society an injustice.

Our creative and intellectual capacities ought first and foremost to be in service to ourselves, als socially creative beings, not be subject to the vagaries of a labor market in which they are merely competitively counterposed to each other. This may sound utopian, but has nonetheless a very concrete character. The less time we have to spend in work to maintain ourselves, and the better and more fully educated we are, the better we are capable of creating, designing, thinking etc. all the beautiful things for ourselves and others that make life worthwhile. It also means we have more time for each other. This is a matter of thinking differently about the value of competition, of work-time and non-work-time, and about the application of technology to these ends. A ‘knowledge economy’ is putting the cart before the horse.

1) Adam Smith, The Wealth of Nations, Book V, Chapter I, Part III, Article II.
3) John Marsh, Class Dismissed: Why We Cannot Teach Or Learn Our Way Out Of Inequality. New York, NY (2011): Monthly Review Press, p. 177.


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