Knowledge is a fundamentally different kind of economic asset

You have probably heard of the the Knowledge Era. You know that we shifted from the Industrial to the Knowledge Era sometime in the recent past. What you may not understand is the implication of this shift for economics–and for your own organization.

The big difference comes from this simple fact: Knowledge is infinite. Yes, you heard me correctly. Knowledge is an infinite asset. Giving it away or selling it does not diminish your supply of knowledge. This infinite nature of knowledge conflicts with one of the most basic assumptions of the economics that most of learned in school: the concept of scarcity which says, “If you have 100 shirts and sell one, your inventory decreases.” Knowledge assets do not follow this basic principle.

Take software for example. If your company writes a knowledge product like a piece of software, you can sell that software for an infinite number of times without running out of software. If you deliver the software via a disk, you may run out of disks but that does not mean you ran out of software. The value of your software is not diminished just because you sell it to a lot of people. In fact, your software will probably improve over time because you can make revisions based on the experience of your users. That means that the more users, the greater the potential for the software to actually improve over time.

Economist Paul Romer is one of the first proponents of New Growth Theory that tries to address the fundamental challenges to traditional economics that have arisen in the knowledge economy. He explains that if you have a scarce, physical resource, pricing will be driven up by that scarcity. The value of knowledge is different. It is more about utility. Romer says that the value of a knowledge asset “is proportional to the size of the market in which you can sell it.”

This is a really important concept. If you master it, this is the idea that will separate you from all other companies in your field. It is the challenge for which your company will be striving from this day forward. What Romer is telling us is that knowledge (not just software) does not become an economic good until it solves a problem in a way that people are willing to pay for the solution. Once you identify a solution, then the only limit to the value of that knowledge is how many people need the solution. Put another way, there are no physical constraints to the value of knowledge; the only limit is demand.

It sounds obvious. And not that different than physical goods. People only buy something they need or want. But you can run out of physical goods. You don’t run out of knowledge. Plus, there’s the fact that knowledge is a very malleable product. It can be shaped into so many forms that there are many more possibilities for getting paid. And it’s more scalable. As long as you can continue to provide value, there are no limits to scaling your business based on the economics of knowledge. The key to this is intangible capital management, learning to built structural capital that embodies the best thinking and knowledge of your organization, your people and your external partners.

From Intangible Capital: Putting Knowledge to Work in the 21st Century Organization