The Competitiveness of Nations in a Global Knowledge-Based Economy

Robin Cowan (a), Paul A. David (b) & Dominique Foray (c)

The Explicit Economics of Knowledge: Codifcation and Tacitness (cont'd)


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1. Introduction: What’s All this Fuss over Tacit Knowledge About?

2. How the Tacit Dimension Found a Wonderful New Career in Economics

2.1 The Roots in the Sociology of Scientific Knowledge, and Cognitive Science

2.2 From Evolutionary Economics to Management Strategy and Technology Policy

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3. Codification and Tacitness Reconsidered

4. A Proposed Topography for Knowledge Activities

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5. Boundaries in the Re-mapped Knowledge Space and Their Significance

6. On the Value of This Re-mapping

6.1 On the Topography Itself

6.2 On Interactions with External Phenomena

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7. The Economic Determinants of Codification

7.1 The Endogeneity of the Tacitness - Codification Boundary

7.2 Costs, Benefits and the Knowledge Environment

7.3 Costs and Benefits in a Stable Context

7.4 Costs and Benefits in the Context of Change

8. Conclusions and the Direction of Further Work



HHC: Index added



Industrial and Corporate Change, 9 (2), 2000 , 211-253

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3. Codification and Tacitness Reconsidered

It will be easiest for us to start not with concept of tacit knowledge but at the opposite and seemingly less problematic end of the field, so to speak, by

12. See, for example, Kealey (1996) on industrial secrecy as the suitable ‘remedy’ for the problem of informational spillovers from research, and the critique of that position in David (1997).


asking what is to be understood by the term ‘codified knowledge’.  Its obvious reference is to codes, or to standards - whether of notation or of rules, either of which may be promulgated by authority or may acquire ‘authority’ through frequency of usage and common consent, i.e. by defacto acceptance.

Knowledge that is recorded in some codebook serves inter alia as a storage depository, as a reference point and possibly as an authority.  But information written in a code can only perform those functions when people are able to interpret the code; and, in the case of the latter two functions, to give it more or less mutually consistent interpretations.  Successfully reading the code in this last sense may involve prior acquisition of considerable specialized knowledge (quite possibly including knowledge not written down anywhere).  As a rule, there is no reason to presuppose that all people in the world possess the knowledge needed to interpret the codes properly.  This means that what is codified for one person or group may be tacit for another and an utterly impenetrable mystery for a third.  Thus context - temporal, spatial, cultural and social - becomes an important consideration in any discussion of codified knowledge.

In what follows, we make extensive use of the notion of a codebook.  We use ‘codebook’ both to refer to what might be considered a dictionary that agents use to understand written documents and to apply it also to cover the documents themselves.  This implies several things regarding codification and codebooks.  First, codifying a piece of knowledge adds content to the code-book.  Second, codifying a piece of knowledge draws upon the pre-existing contents of the codebook.  This creates a self-referential situation, which can be particularly severe when the knowledge activity takes place in a new sphere or discipline.  Initially, there is no codebook, either in the sense of a book of documents or in the sense of a dictionary.  Thus initial codification activity involves creating the specialized dictionary.  Models must be developed, as must the vocabulary with which to express those models.  When models and a language have been developed, documents can be written.  Clearly, early in the life of a discipline or technology, standardization of the language (and of the models) will be an important part of the collective activity of codification.  When this ‘dictionary’ aspect of the codebook becomes large enough to stabilize the ‘language’, the ‘document’ aspect can grow rapidly [for a further discussion of this issue see Cowan and Foray (1997)].  But new documents will inevitably introduce new concepts, notation and terminology, so that ‘stabilization’ must not be interpreted to imply a complete cessation of dictionary-building.

The meaning of ‘codification’ intersects with the recent literature on economic growth.  Much of modern endogenous growth theory rests on


the notion that there exists a ‘world stock of knowledge’ and, perhaps, also a ‘national knowledge-base’ that has stock-like characteristics.  This is true particularly of those models in which R&D is seen as both drawing upon and adding to ‘a knowledge stock’ which enters as an input into production processes for other goods.  How ought we to characterize this, or indeed any related conceptualization of a world stock of knowledge?  Implicit in this literature is that this stock is codified, since part or all of it is assumed to be freely accessible by all economic agents in the system under analysis.  Unpacking this idea only partially suffices to reveal some serious logical difficulties with any attempt to objectify ‘a social stock of knowledge’, let alone with the way that the new growth theory has sought to employ the concept of an aggregate knowledge stock. [13]

The ‘new growth theory’ literature falls squarely within the tradition emphasizing the public-goods nature of knowledge.  So, one may surmise that the world stock of knowledge surely has to be the union of private stocks of codified knowledge: anything codified for someone is thereby part of the world knowledge stock.  Such reasoning, however, may involve a fallacy of composition or of aggregation.  One might reasonably have thought that the phrase ‘world knowledge stock’ refers to the stock available to the entire world.  But if the contextual aspect of knowledge and codification (on which, see supra) is to be taken seriously, the world stock of codified knowledge might better be defined as the intersection of individuals’ sets of codified knowledge - that being the portion that is ‘shared’ in the sense of being both known and commonly accessible.  It then follows that the world stock of knowledge, being the intersection of private stocks, whether codified or tacit, is going to be very small. [14]

The foregoing suggests that there is a problem in principle with those models in the ‘new growth theory’ which have been constructed around (the formalized representation of) a universal stock of technological knowledge to which all agents might contribute and from which all agents can draw costlessly.  That, however, is hardly the end of the difficulties arising from the

13. See Machlup (1980, pp. 167-169) for a discussion of ‘the phenomenological theory of knowledge’ developed by Schutz and Luckmann (1973, chs 3-4).  The latter arrive at a concept described by Machlup as: ‘the fully objectivated [sic) knowledge of society, a social stock of knowledge which in some sense is the result of a socialization of knowledge [through individual interactions involving private stocks of subjective but inter-subjectively valid knowledge) and contains at the same time more and less than the sum of the private stocks of subjective knowledge... This most ingenious phenomenological theory of the stock of knowledge in society is not equipped to deal with... the problem of assessing the size of the stock and its growth.’

14. It is clear that the availability of two operators - union and intersection - when combined with two types of knowledge - tacit and codified - leads to a situation in which ‘the world stock of knowledge’ is going to take some further defining.


primacy accorded to the accumulation of ‘a knowledge stock’ in the recent literature on endogenous economic growth.  The peculiarities of knowledge as an economic commodity, namely, the heterogeneous nature of ideas and their infinite expansibility, have been cast in the paradigm ‘new economic growth’ models as the fundamental non-convexity, responsible for increasing returns to investment in this intangible form of capital.  Heterogeneity implies the need for a metric in which the constituent parts can be rendered commensurable, but given the especially problematic nature of competitive market valuations of knowledge, the economic aggregation problem is particularly vexatious in this case.

Furthermore, the extent to which the infinite expansibility of knowledge actually is exploited therefore becomes a critical matter in defining the relevant stock - even though in most formulations of new growth theory this matter has been glossed over.  Critics of these models’ relevance have quite properly pointed out that much technologically relevant knowledge is not codified, and therefore has substantial marginal costs of reproduction and re­application; they maintain that inasmuch as this so-called ‘tacit knowledge’ possesses the properties of normal commodities, its role in the process of growth approaches that of conventional tangible capital. [15]  If it is strictly complementary with the codified part of the knowledge stock, then the structure of the models implies that either R&D activity or some concomitant process must cause the two parts of the aggregate stock to grow pari passu.  Alternatively, the growth of the effective size of the codified knowledge stock would be constrained by whatever governs the expansion of its tacit component.  Pursuing these points further is not within the scope of this paper, however; we wish merely to stress once again, and from a different perspective, that the nature of knowledge, its codification or tacitness, lurks only just beneath the surface of important ideas about modern economic growth.

Leaving to one side, then, the problematic issue of defining and quantifying the world stocks of either codified knowledge or tacit knowledge, we can now turn to a fundamental empirical question regarding tacit knowledge.  Below,

15. This view could be challenged on the grounds that knowledge held secretly by individuals is not distingushable from labor (tangible human capital) as a productivity input, but, unlike tangible physical capital, the existence of undisclosed knowledge assets cannot be ascertained.  Machlup (1980, p. 175), in the sole passage devoted to the significance of tacit knowledge, adopts the latter position and argues that: ‘Generation of socially new knowledge is another non-operational concept as long as generation is not complemented by dissemination.... Only if [an individual) shares his knowledge with others can one recognize that new knowledge has been created.  Generation of knowledge without dissemination is socially worthless as well as unascertainable.  Although “tacit knowledge” cannot be counted in any sort of inventory, its creation may still be a part of the production of knowledge if the activities that generate it have a measureable cost.’


we address explicitly whether some situations, described as rife with tacit knowledge, really are so, but for the moment we can make an important point without entering into that issue.

Some activities seem to involve knowledge that is unvoiced - activities which clearly involve knowledge but which refer only seldomly to texts; or, put another way, which clearly involve considerable knowledge beyond the texts that are referred to in the normal course of the activity. [16]  Thus we can ask why is some knowledge silent, or unvoiced?  There are two possible explanations: the knowledge is unarticulable or, being capable of articulation, it remains unvoiced for some other reason.

Why would some knowledge remain unarticulable?  The standard economist’s answer is simply that this is equivalent to asking why there are ‘shortages’, to which one must reply ‘there are no shortages’ when there are markets.  So, the economist says, knowledge is not articulated because, relative to the state of demand, the cost and supply price is too high.  Articulation, being social communication, presupposes some degree of codification, but if it costs too much actually to codify, this piece of knowledge may remain partly or wholly uncodified.  Without making any disparaging remarks about this view, we can simply point out that there is some knowledge for which we do not even know how to begin the process of codification, which means that the price calculation could hardly be undertaken in the first place.  Recognition of this state of affairs generates consensus on the uncodifiable nature of the knowledge in question.  We raise this to emphasize the important point in what follows that the category of the unarticulable (which may be coextensive with the uncodifiable) can safely be put to one side.  That, of course, supposes there is still a lot left to discuss.

It is worth taking note of the two distinctions we have just drawn, and the degree to which they define coextensive sets of knowledge.  Knowledge that is unarticulable is also uncodifiable, and vice versa: if it is (not) possible to articulate a thought so that it may be expressed in terms that another can understand, then it is (not) possible to codify it.  This is the source of the statement above that articulation presupposes codifiability.  It is not the case, though, that codifiability necessitates codification; a paper may be thought out fully, yet need not actually be written out.  Operationally, the codifiability of knowledge (like the articulable nature of a thought) cannot be ascertained independently from the actions of codification and articulation.  But, when we consider the question of the status of knowledge with reference to multiple contexts, the preceding strictly logical relations (implied by a single, universal

16. We note that activities involving ‘unvoiced knowledge’ are often assumed to involve thereby tacit knowledge.  We argue below that this is too hasty.


context) are not exhaustive categories.  Thus we see the possible emergence of an additional category: codified (sometime, somewhere) but not articulated (now, here). [17]  This observation implies that care needs to be taken in jumping from the observed absence of codified knowledge in a specified context to the conclusion that only some non-codifiable (i.e. tacit) knowledge is available or employed.

It is within the realm of the codifiable or articulable-yet-uncodified that conventional price and cost considerations come into play in an interesting way, for within that region there is room for agents to reach decisions about the activity of codification based upon its costs and benefits.  We shall discuss the factors entering into the determination of that knowledge-status more fully below.


4. A Proposed Topography for Knowledge Activities

We now proceed to examine a new knowledge topography, from which it will soon be evident that the realm of ‘the tacit’ can be greatly constricted, to good effect.  The new topography we propose is meant to be consulted in thinking about where various knowledge transactions or activities take place, rather than where knowledge of different sorts may be said to reside.  We should emphasize that as economists, and not epistemologists, we are substantively more interested in the former than in the latter.

By knowledge activities we refer to two kinds of activities: the generation and use of ‘intellectual (abstract) knowledge’; and the generation and use of ‘practical knowledge’, which is mainly knowledge about technologies, artifacts (how to use this tool or this car, or how to improve their performances) and organizations.

Given that definition, we need to clarify the distinction between knowledge embodied in an artifact and codified knowledge about an artifact.  The distinction between embodied and disembodied knowledge is a nice way for economists to capture features of intersectoral flows (of technologies), particularly in an input-output framework.  Therefore, the fact that knowledge is embodied in a machine tool is not to be conflated with the codification problem.  Knowledge about the production and the use of artifacts, however, falls within our set of issues about codification: does the use of this new tool require the permanent reference to a set of codified instructions or not?  We can put this point in a slightly different way.  From the perspective

17. In understanding these distinctions it is important to remember that we are discussing knowledge activities, and the kinds of knowledge used in them.  Thus we can observe activities in which the knowledge has been codified at some point in history but is not articulated in current endeavors.


of a producer, any artifact, from a hammer to a computer, embodies considerable knowledge.  The artifact often is an exemplar of that knowledge, and can sometimes be thought of as a ‘container’ or ‘storage vessel’ for it, as well as the means through which the knowledge may be marketed.  From the point of view of the user, however, this is not necessarily the case.  While any user will admit that the producer needed a variety of kinds of knowledge to produce the artifact, this is of little practical interest.  The knowledge of interest to the purchaser of a hammer or a PC, whether codified or not - and indeed that often is the issue - is how to use the artifact, rather than the knowledge that was called upon for its design and fabrication.  Of course, the latter may bear upon the former.

Part of the reason for this interpretation of what is to be located in our topography is simply that discussions about ‘where knowledge resides’ are difficult to conduct without falling into, or attempting to avoid, statements about the relative sizes of the stocks of tacit and codified knowledge, and their growth rates.  By and large, pseudo-quantitative discussions of that sort rarely turn out to be very useful; indeed, possibly worse than unhelpful, they can be quite misleading.  Although there is no scarcity of casual assertions made regarding the tendency toward increasing (relative) codification, the issue of the relative sizes of the constituent elements of the world stocks of scientific and technological knowledge resists formal quantitative treatment.  That is to say, we really cannot hope to derive either theoretical propositions or empirical measures regarding whether or not the relative size of the codified portion must be secularly increasing or decreasing, or alternatively, whether there is a tendency to a steady state.  The fundamental obstacle is the vagueness regarding the units in which ‘knowledge’ is to be measured.

To begin, we shall consider a topological tree structure in which distinctions are drawn at four main levels.  A tripartite branching on the uppermost level breaks the knowledge transaction terrain into three zones: articulated (and therefore codified), unarticulated and unarticulable.  Setting the third category aside as not very interesting for the social sciences, we are left with the major dichotomy shown in Figure 1:

(a) Articulated (and thus codified). Here knowledge is recorded and referred to by ‘the group’, which is to say, ‘in a socio-temporal context’.  Hence we can surmise that a codebook exists, and is referred to in the usual or standard course of knowledge-making and -using activities.

(b) Unarticulated. Here we refer to knowledge that is not invoked explicitly in the typical course of knowledge activities.  Again, the concept of a context or group is important.



In case (a) a codebook clearly exists, since this is implicit in knowledge being or having been codified.  In case (b) two possible sub-cases can be considered.  In one, knowledge is tacit in the normal sense - it has not been recorded either in word or artifact, so no codebook exists.  In the other, knowledge may have been recorded, so a codebook exists, but this book may not be referred to by members of the group - or, if it is, references are so rare as to be indiscernible to an outside observer.  Thus, at the next level, ‘unarticulated’


splits into two branches: (b. 1) in the situation indicated to the left, a source or reference manual does exist but it is out of sight, so we say the situation is that of a displaced codebook; and (b.2) to the right lie those circumstances in which there truly is no codebook, but in which it would be technically possible to produce one.

(b. 1) When a codebook exists, we still may refer to the situation in which knowledge is unarticulated because within the group context the codebook is not manifest; it is not explicitly consulted, nor in evidence, and an outside observer therefore would have no direct indication of its existence.  The contents of the codebook in such situations have been so thoroughly internalized, or absorbed by the members of the group, that it functions as an implicit source of authority.  To the outside observer, this group appears to be using a large amount of tacit knowledge in its normal operations. [18]

A ‘displaced codebook’ implies that a codified body of common knowledge is present, but not manifestly so.  Technical terms figure in descriptive discussion but go undefined because their meaning is evident to all concerned; fundamental relationships among variables are also not reiterated in conversations and messages exchanged among members of the group or epistemic community. [19]  In short, we have just described a typical state of affairs in what Kuhn (1962) referred to as ‘normal science’; it is one where the knowledge base from which the researchers are working is highly codified but, paradoxically, its existence and contents are matters left tacit among the group unless some dispute or memory problem arises.  We may analogously describe ‘normal technology’ as the state in which knowledge about artifacts is highly codified but the codebook is not manifest.

Identification of the zone in which knowledge is codified but the existence of codification is not manifest is an extremely important result.  But it poses a very difficult empirical problem (or perhaps a problem of observation).  This point is crucial in understanding the economic problem raised by the management of knowledge in various situations: when the codebook is displaced and knowledge is highly codified, new needs for knowledge transfer or storage (or knowledge transactions generally) can be fulfilled at a rather low cost (the cost of making the existing codebook manifest), whereas when there is no

18. Here we may remark that the ability to function effectively, possibly more effectively with the codebook out of sight (e.g. to pass closed-book exams), often is one criterion for entry, or part of the initiation into the group.  Not being truly an initiated ‘insider’ is generally found to be a considerable impediment to fully understanding the transactions taking place among the members of any social group, let alone for would-be ethnographers of ‘laboratory life’.

19. This often infuriates outsiders, who complain vociferously about excessive jargon in the writings and speeches of physicists, sociologists, economists, psychologists and...


codebook at all, the cost will be very high (the cost of producing a codebook, which includes costs of developing the languages and the necessary models).

This suggests that it would be useful to reconsider closely the many recent empirical studies that arrive at the conclusion that the key explanation for the observed phenomenon is the importance of tacit knowledge.  That perhaps is true, but it is quite difficult to document convincingly; most of such studies fail to prove that what is observed is the effect of ‘true tacitness’, rather than highly codified knowledge without explicit reference to the codebook.  By definition, a codebook that is not manifest will be equally not observed in that context, so it is likely that simple proxies for ‘tacitness’ (such as whether communication of knowledge takes place verbally in face-to-face transactions rather than by exchanges of texts) will be misleading in many instances.  Differentiating among the various possible situations certainly requires deep and careful case studies.


(b.2) When there is no codebook, we again have a basic two-way division, turning on the existence or non-existence of disputes.  There may be no disagreements.  Here there is stabilized uncodified knowledge, collective memory, convention and so on.  This is a very common situation with regard to procedures and structures within organizations.  The IMF, for example, has nowhere written that there in only one prescription for all the monetary and financial ills of the world’s developing and transition economies; but, its advisers, in dispensing ‘identikit’ loan conditions, evidently behaved as if such a ‘code’ had been promulgated.  Such uncodified-but-stable bodies of knowledge and practice, in which the particular epistemic community’s members silently concur, will often find use as a test for admission to the group or a signal of group membership to outside agents.

Where there are disagreements and no codebook is available to resolve them within the group, it is possible that there exist some rules or principles for dispute resolution.  Elsewhere, such ‘procedural authority’ may be missing.  This is the chosen terrain of individual ‘seers’, such as business management gurus like Tom Peters, and others who supply a form of ‘personal knowledge about organizational performance’.  Equivalently, in terms of the outward characteristics of the situation, this also might describe the world of ‘new age’ religions - in contradistinction to structured ecclesiastical organizations that refer to sacred texts.

There is, however, another possibility, which creates a three-fold branch from node b.2: it may be the case that when disagreements arise there is some procedural authority to arbitrate among the contending parties.  Recall that the situation here, by construction, is one in which the relevant knowledge is


not codified, and different members of the organization/group have distinct bodies of tacit knowledge.  When these sources of differences among their respective cognitive contexts lead to conflict about how to advance the group’s enterprise or endeavor, the group cannot function without some way of deciding how to proceed - whether or not this has been explicitly described and recorded.  Clearly, once such a procedure is formalized (codified), we have a recurrence of a distinction paralleling the one drawn at the top of the tree in Figure 1, between codified and ‘unarticulated’.  But this new bifurcation occurs at a meta-level of procedures for generating and distributing knowledge, rather than over the contents of knowledge itself.  We can, in principle, distinguish among different types of groups by using the latter meta-level codified-tacit boundary.  So the whole taxonomic apparatus may be unpacked once again in discussing varieties of ‘constitutional’ rules for knowledge-building activities.  But that would carry us too far from our present purposes.


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