Knowledge Stocks vs. Flows

Last year, a blog at Harvard Business Review talked about “knowledge flows vs. stocks.”


The idea, briefly, is:

  1. Knowledge creation and transfer is happening faster and faster.
  2. Stocks of knowledge are outdated faster than they can be capitalized upon.
  3. Therefore, the flow is where the value is.
  4. But to have access to the flow, you have to participate (which, among other things, means you have to be in geographical proximity).

I think this is a compelling way of looking at the world. It’s true (in some industries) that knowledge of how to do things is progressing faster than that knowledge can be “locked in place” by the organization.

If the organization attempts to control the knowledge – or its flow – it will fail; both because the flow cannot be controlled (by any individual), and because attempting to control it will introduce friction, making the organization(‘s employees) fall behind the cutting edge of the flow – and thus behind where they need to be.

However, I think the analysis is misleading – because it’s incomplete; the domain of analysis is too limited.

What constitutes a knowledge flow is a transaction – a series of transactions – of knowledge between people. Knowledge is unusual because it’s a non-rival good; therefore, new knowledge is highly valued, where old knowledge has little value (assuming no artificial controls on knowledge, e.g. patents).

A “stock of knowledge” is analogous to capital, which you could trade in the knowledge flows. However, because knowledge is non-rival, a knowledge stack shared is no longer a competitive advantage (everyone can use it).

So, while the more knowledge you have (the larger your “stock”) the more value you can add to the knowledge flows, the more you have to lose.

The people who have something to gain from a knowledge-flow market are those who create knowledge, not those who have accumulated knowledge. Think universities, not libraries.

Of course, it may be necessary to have a large knowledge stock to be able to create valuable knowledge (it’s almost guaranteed).

So having a knowledge stock becomes a necessary prerequisite to entering the knowledge flow economy. But creating more knowledge is the way to survive in the knowledge community.

Now, companies with knowledge stocks typically fail to capitalize upon them in time. If you have a stock of knowledge larger than what is publically available, and a knowledge flow market starts outside of your organization, you have no reason to join it (sacrificing the value of your knowledge stock). But the entire purpose of a knowledge-flow market is to increase the volume, increase the innovation – so, essentially by definition, they will devote more resources to creating more knowledge faster. Thus, over time the value of the knowledge stock will decline in comparative value – as the accumulated knowledge in the flow market catches up, then eventually overtakes it. .

(Yes, you can prevent this by investing in knowledge creating to “out-compete” with the knowledge flow economy. Good luck justifying that to stock brokers, though).

The article makes the point that you can’t participate without contributing knowledge. This is true, but it’s misleading (though accurate) to talk about the “free rider problem.” Instead, think of the flow as transactions – and a transaction cannot occur unless both parties agree. If you don’t offer anything, then you don’t get anything.

The currency is just different – it’s knowledge, not money.

Now, the larger picture: This is only possible if the cost of transferring knowledge is very low (thanks, Internet).

If the cost of transferring knowledge is high, then the value is not in knowledge creation, it’s in knowledge aggregation. An aggregation of knowledge is a “stock” of knowledge. As the cost of knowledge communication, the value of the aggregation diminishes because the cost of aggregating also drops.

Now, in some industries, you can also apply technology to perform automatic aggregation and organization of knowledge (such as Google, with the internet). This is not the case with all knowledge, of course.

The governing principle, then, is cost. If the cost of knowledge communication is high, then aggregation is expensive – and therefore value. If it’s low, then the expensive component is the knowledge creation – so that’s valuable.

This explains the distinction the authors make between “tacit” and “explicit” knowledge (which they do, actually, just not clearly). Tacit knowledge requires experience, education, etc. This makes it hard to transfer. But it’s actually pretty easy to get: there may not be many opportunities to get the right experience, but you rarely have to pay for it. The cost of education is likewise dropping (more and more info available online).

In contrast, explicit knowledge is easy to transfer but hard to make. You can go and look at info from the Human Genome Project. But it was damn expensive to get.

The framework of knowledge flow, stock, tacit and explicit knowledge – is not changing. The economics, the logic underlying the system, is remaining constant. What is changing are the value – and on a case by case basis. Yes, the world is different; but the more things change, the more they stay the same.

As a plug, the authors bypass one of problems that cheap knowledge communication introduces: discrimination. A problem that the “knowledge explosion” introduces is the explosion of junk knowledge. So, which knowledge is more valuable than other knowledge? If knowledge is being created so quickly, how to you determine which knowledge to use?

It’s the new version of the aggregation problem: knowing what knowledge to use. You only get one chance.

It’s this question which drove me to my self-determined major.

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