Towards A Competitive Malaysia #12

Chapter 3: Diamond of Development (Cont’d)

Knowledge in the Village

Knowledge has supplanted the traditional factors of production in creating wealth. Those traditional factors of land, labor, and capital are still important, but their value can be leveraged considerably through the application of knowledge.

Consider two rice farmers, Ahmad and Bakar; both equally hardworking and have the same acreage of rice fields of comparable fertility. Every year they planted the same amount of rice seeds, put in the same amount of work, and not surprisingly, reaped the same amount of harvest. Their traditional factors of production—land, labor, and capital (in this case, seeds)—are the same; hence their output (harvest) is also the same.

In the classical understanding of economics, output could only be increased by increasing the input of the factors of production. Double the land under cultivation, and you double the yield; likewise, with increasing the labor input by planting two crops in a year.

There is a limit to what could be increased with the factors of production. Increasing the area under cultivation by taking land from another farmer would not necessarily increase the community’s total yield, and the supply of new arable land is also finite. There is also a limit as to how much harder a farmer could work. There comes a point when the harder he works, the less of a proportionate increase in harvest he would get, a diminishing marginal return. If he works much harder, he would risk injuring himself and becoming no longer productive.

Revisit the two farmers, this time from the perspective of the K-economy. One day Ahmad had an insight (or learned about it somewhere) and decided to plant his rice in the evening rather than the morning, as was the tradition. He noted that when he sowed in the morning, the birds would immediately swoop down and eat some of his freshly sowed seeds. He reasoned that by planting in the evening, his seeds would have a 12-hour head start before the birds would discover them the next morning. With the overnight dew, the seeds would become swollen and be less attractive to the birds, or be covered by the moist soil. Armed with this knowledge, he changed his ways. Meanwhile farmer Bakar stuck to tradition; his ancestors had always planted rice thus and who was he to mess around with a proven formula and defy tradition.

At harvest time Ahmad indeed enjoyed a greater yield, perhaps 30 percent more than Bakar, the increase from seeds that previously would have been eaten by the birds. The two farmers still have the same input of the traditional factors of production, but Ahmad’s output is now considerably more. This increase isattributable solely to the new knowledge Ahmad had acquired. Because of that, he is now more productive (getting more for the same input).

This simple story is the essence of the K-economy, encapsulating what the new theory of economic growth says of knowledge supplanting the traditional factors of production in creating wealth.

Before we get too smug and claim that we have understood the “new growth theory” by this simple example, let me add this caution. What made Ahmad think of changing his ways by sowing in the evening instead of simply following tradition? That implies a willingness to try something new and the courage to buck tradition, or at least not put too much deference to it. It also implies something else: the willingness to learn from your environment, to be observant and receptive. More importantly, it signifies the willingness to take risks, to take new paths—to be enterprising. When Ahmad planted his rice seeds, he did not simply do it mechanically without thinking. He had observed what those birds did to his seeds, and thought of ways to solve the problem. Most of all, Ahmad had the conviction of his belief and was willing to bet his future by applying his new insight, that is, to experiment.

The remarkable aspect to this new knowledge that Ahmad had acquired is that it is not exclusive to him. Bakar and every other farmer in the village are free to benefit from Ahmad’s insight. The only gain Ahmad gets from his knowledge is the 30 percent increase in his harvest. If the other farmers were to adopt his technique, they too would get comparable results. The more people using Ahmad’s knowledge, the more the benefits would be. Unlike the traditional factors of production, the law of diminishing returns does not apply. On the contrary, we have the new law of increasing returns. There is literally no limit to the increase in benefits if every farmer in the country were to adopt Ahmad’s insight.

This explains why developed countries continue to outstrip poor countries in wealth creation notwithstanding the conditional convergence discussed earlier. They do it with knowledge (and technology, insight, wisdom). Their preexisting wealth gives them a head start in further expanding their knowledge base.

Granted, Ahmad did not gain anything more than his 30 percent increased yield from his insight, and perhaps the gratitude of his fellow farmers who were enjoying a free ride on his innovation. Nonetheless there were ways for Ahmad to capitalize on his discovery. He could follow up his observation and discover that the same effect could be achieved by soaking the seeds overnight. Or, that by adding a mild detergent to the water to reduce its surface tension, he could have the same effect by soaking for only a few hours instead of overnight, thus saving precious time. He might further discover that by mixing the seeds with solutions of bitter roots he discovered in the jungle, he made the seeds even more unappetizing to the birds, and thus further increasing his harvest.

Having discovered this secret concoction, he could patent it. Now anyone who wanted his special formula would have to pay him. Soon he would not need to be a farmer anymore but simply market his new product. He could use his land only as an experimental farm to test his many novel ideas. A few years down the line, Ahmad would have a thriving company, employing many workers, and bringing immense benefit to his community. Meanwhile Bakar was still tending to the same plot of field and harvesting the same yield as before. Yet both started out with the same resources, the same “factors of production” of land, labor, and capital. The contrasting difference in economic returns between the two is due to knowledge.

This tale may not have the happy ending I described. Ahmad may have lost everything when he changed his time of sowing. His seeds could have been destroyed by the overnight mildew. If the community had no tolerance for new ideas, Ahmad would have been ridiculed if not condemned, and forever made an example to the rest of the village on the dangerous consequences of challenging tradition.

To encourage the Ahmads, the culture must be forgiving of new ideas and methods, and those who challenge the accepted ways. The culture must go beyond mere toleration of the adventurous few who dare seek new paths, it must encourage and nurture them if society were to progress.

For those who are skeptical of my simplified fictional account, consider this. In the 1950s and 60s, there were widespread gloomy predictions of global famine as exemplified by the Club of Rome pronouncements. Thankfully, through the insight of the University of Minnesota biologist Norman Borlaug, the world was spared this gruesome fate.9 Although his work was initially on high-yield, pest-resistant wheat, it was later adapted to rice, and helped usher in the Green Revolution. The fact that he is not more well known or as wealthy as a Bill Gates is another issue. Borlaug did win the Nobel Peace Prize in 1970.

Pramoedya Ananta Toer writes in his This Earth of Mankind, “Knowledge has given me a blessing whose beauty is beyond description.”10 In this new economy, one of the blessings of knowledge is that it gives bounty beyond imagination. There is truly no limit to the creation of wealth through knowledge, ingenuity, ideas, innovation, technology, or whatever we want to call it. This is the excitement behind the insight of this new “endogenous theory of growth” which underpins the K-economy.

Revolutionary inventions like the steam engine and computers improved productivity in readily apparent ways. Inventions and innovations need not necessarily be dramatic to have an impact on productivity. Often simple and obvious (at least after they have been discovered) inventions can cumulatively be significant. The explosive growth in international trade owes as much to the insights of economists and political leaders as to that simple invention: containers. That one device did away with the battalions of dockworkers and ship handlers while reducing port pilferage and other losses. This greatly increased efficiency and reduced shipping costs, enabling consumers to enjoy cheap goods. In the past it took days to load and unload a ship, today mere hours. It is estimated that shipping costs fell from about $5.83 a ton in 1956 to a mere 15.8 cents today, a steep drop of over 97 percent.11 Phenomenal improvement!

To prepare Malaysia for this new endogenous growth, the environment must be supportive. It must encourage and nurture knowledge, and reward creativity and innovation. Malaysia must tolerate if not actively encourage those who do not pay too much deference to precedents and traditions, and those who dare venture along untracked paths, that is, our Ahmads.

Merely adding more years of schooling or more universities would not do it. For if all our students learn is to obey authorities blindly, adhere to traditions slavishly, and accept their fate passively, then I would argue that the fewer years spent in formal education the better.

The type of education that would best prepare citizens for the K-economy is one that would develop their powers of observation, harness their innate curiosity, and encourage them to experiment. They should be able to evaluate new information and think critically. In short, an education system steeped in the modern liberal tradition and well grounded in the sciences.

We must instill in citizens the attitude that it is within their power to change their condition; it is not divinely destined. Nor do they need to wait for a benevolent and paternalistic government to provide them with the answers; rather it is within them to seek the solutions. We must encourage them to undertake changes, even and especially those that may appear counterintuitive and against the accepted notion. We must tolerate if not actively encourage those who challenge traditions. This implies a willingness to tolerate some disorder, and challenges to the status quo.

We must encourage citizens to pursue paths less traveled by not denigrating or putting “guilt trips” on them. We should not view that as an expression of ingratitude or disrespect, rather an expression of their curiosity to discover the larger world beyond the familiar.

To encourage the likes of Ahmad, we must have an environment where property rights, including the all-important intellectual rights, are respected so that citizens would have the incentives to pursue their ideas and inventions.

Above all, there must be an atmosphere of freedom, the freedom to pursue dreams and ideas. If we control everything the citizens read, view, or do, then we will necessarily limit the chances of these discoveries. We do not know where, when or from whom the next brilliant spark would emerge. Nor could we predict what that brilliant idea would be. Hence we must be receptive and open, and encourage as many participants as possible.

Malaysian leaders keep harping on the urgent need to prepare the nation for the K-economy. They should also be mindful of these other equally important and supportive factors, and not simply and blindly equate the K-economy to more years of formal education.

Next: Diamond of Development