KNOWLEDGE ECONOMY:
DOES THE MARKET VALUE KNOWLEDGE?

By Gabriel Leandro, MBA
Economist

Nowadays, information and knowledge have become into the essential base for economies to grow and to develop. Information and knowledge represent strategic factors for enterprises because they constitute more productive factors and the more valuable assets. There is currently such a great boom of information that some people refer to this era like the information era.

Long discussions are not necessary to conclude that knowledge is highly valuable, but the problem is how much does that knowledge cost? How should it be distributed among the individuals of society? This problem become evident when arguments regarding medicine patents, free software, books, movies and music piracy, emerge and bring about worldwide controversies.

Regarding this issues there are different positions and points of view. For example, Richard Stallman the president of Free Software Foundation strongly defends free software and is against software patents. To Stallman, patents are detrimental because they benefit only the big enterprises and affect negatively the poorer countries. To others like Manuel Patarroyo, a distinguished Colombian scientist who developed a vaccine against malaria, knowledge must be universal and open to all. According to this scientist, knowledge is not patentable and he disapproves that multinationals earn millions of dollars while those who could not afford it die.

On the other hand, there are some who defend the intellectual property rights, mainly trough patents and copyrights. In this way, the owners of information (and many other producers) will be able to patent their “innovations”; this grants them exclusive right over their production thus the patent holder is protected and his innovation cannot be exploited without compensating the original creator. Some argue and state that if there isn’t such mechanism there would not be any encouragement to create and develop new products.

These patents grant to the original producer exclusive exploitation rights, constituting a monopoly. This point of view agrees with the hypothesis of Schumpeter which states that to promote the creation of monopolies is worth the trouble if in this way innovation is encouraged.

Why does the market not solve this problem?

The answer is related to the fact that knowledge brings about a number of “external benefits” which not always are taken into account by people when making decisions thus the market does not reflect them appropriately.

Economic activities generate costs and benefits. These benefits can be private or external. For example, if a person who studies in a university obtains a benefit for himself like a better, which is a private benefit. External benefits are also generated, benefits to other individuals, for example; the opportunity to be a better citizen, to find new solutions to diverse human problems and to improve communication and the performance of people in society.

To illustrate this problem regarding the valuation of knowledge and information, there is a simple example of a common situation: Imagine that you are studying in a university and you have a test next week. The content of the test is very complex and extensive however due to the hours your sacrifices and also the hours dedicated to study you could summarize all the subject matter in one page, which represent a useful tool to get a good grade in the test. When you arrive to university all your classmates want to photocopy that sheet of paper that you wrote. If you have 25 classmates probably all of them would photocopy your summary and you would have contributed with them, they will get good grade because of you. But all these represent economic losses for you, in other words if you would be a student then you would not written that summary. Why? The photocopies that your classmates have are worth the information contained, but how much did they pay for that sheet of paper? How much did they pay for the information? The truth is that they did not pay for the information itself they just pay for the photocopy. You did not get any profit from your summary. That’s why you would not considerer it as a business to be engaged in except you would get some profits that compensate all the costs implied.

There is a way for you to get profits from your paper, profits that compensate your effort. I’m taking about patenting your paper and selling it according to the demand of it. The patent will assure your right to restrict the use of it, only you will be able to photocopy and sell your paper. This opportunity would allow you cover the costs and get profits, which will encourage you to continue producing such papers but at the same time the number of people favored by your paper will be reduced this imply that the general welfare is also reduced. May be not all of you classmates will get a good grade!

What to do?

To the majority of the producers of industries like pharmaceutics, biotechnology, music, software among others, the possibility that these mechanisms that protect the intellectual property are available in their countries is fundamental to promote their growth as well as their short and long term development. On the other hand, it is also true that in the low-income countries such mechanisms could bring about negative consequences to the development and welfare because a great part of the population would be able to afford such goods and services.

As it was explained previously, the market does not provide any appropriate solution it is necessary then, government intervention. Thus, this intervention should aim the defense of property rights but at the same time it is also essential to implement mechanisms that favor the equal access to the benefits of scientific and technological development.

Some possibilities to achieve such goals are: through the participation of the private and public sector altogether, in research projects in which costs and benefits can be shared. Also, through subsidies to universities and research centers or through fiscal incentives to those enterprises that develop social impact projects like the donation of medicines to public hospitals, software to public schools, etc. The government can also regulate the prices set by producers, who many times constitute monopolies. To all theses methods, some other can be recommended depending on the situation and the goods involved.

Only in this way, even when it is not enough, we can achieve efficiency and equity becuase many people are not able to afford information and knowledge, precisely those who need these two more to enhance their life quality.