[Guide to the Market Economy] Knowledge and Experience Are Capital

Before the 19th century, the rich were landlords; in the 20th century, they were capitalists.

In the 21st century, the rich are those with knowledge and ideas.

At an automobile factory in the United States, a machine on the production line kept malfunctioning. The company’s engineers investigated it carefully for several months, but they could not even identify the cause of the breakdown, let alone repair it. Left with no other choice, the American company asked a well-known German automobile expert to fix it. After carrying out various observations and analyses for a while, the German specialist drew a single line in pencil on one part of the broken machine. “Take this apart, open it up, and reduce the number of circuits in that section to nine.”

What Happened at the American Factory

When they followed his advice, the machine really did start operating normally again. Pleased with the result, the automobile company asked for a repair estimate. The German expert, however, charged no less than $10,000. The American engineers were stunned. They thought demanding $10,000 for drawing a single line was excessive. In response, the German said this: “Drawing the line is worth only $1. But knowing where to draw it is worth $9,999.”

In the age of industrialization, labor was centered on physical work, while mental work was secondary. In other words, in a world centered on capital, workers handled physical labor and managers handled mental labor. But as mechanization and automation weakened the importance of physical labor, the distinction between the two gradually became blurred. Now the center of gravity in labor is also shifting from the physical to the mental.

The Difference Between Physical Labor and Mental Labor

Physical labor and mental labor differ in many respects. Their forms are different, their outputs are different, and the way their performance is evaluated is also different. Physical laborers are assessed either by time worked (hourly wages) or by the physical quantity they produce. For that reason, physical labor is relatively easy to evaluate objectively.

The human brain, however, is different from muscles. No two individuals ever possess exactly the same intellectual abilities. Even engineers who graduated from the same college of engineering vary enormously in their capabilities. That is because, even if they were educated under the same curriculum, what each person understood and absorbed can differ. Doctors and lawyers who passed the national medical exam or the bar exam also differ in competence from one person to another. That is because the knowledge accumulated through work and different job experiences—tacit knowledge—is different for each individual.

The German engineer who rescued the American automobile company from a difficult situation also had his own unique knowledge and experience. He discovered the cause that the American engineers could not identify, which shows that not all engineers are the same. The intellectual capital each engineer possesses is different. The market value of an outstanding knowledge capitalist is whatever he asks. Just as no one could really dispute the German engineer when he charged not $1 but $10,000 for a single line.

If the ability demonstrated by the German engineer had belonged to the realm of physical labor, no one would have expected him to outperform others so dramatically. Suppose the job had not been repairing the machine but carrying it. A person with exceptional strength might be able to carry two or three times as much as an average person, perhaps even five or six times as much. He could probably demand proportionately greater compensation. But as long as he is human, he could not carry 10,000 times more than others. If the added value produced by muscle remains a matter of gradual difference, the added value produced by knowledge creates transformative difference.

The Rich Change with the Times

Before the 19th century, the rich were large landowners such as kings and nobles. In the 20th century, the rich were capitalists who ran giant factories. Then who are the rich in the 21st century? If you remember that the means of production have evolved from land to capital and then to knowledge, the answer is clear. The rich of the 21st century will be those who possess knowledge, ideas, and creativity.

Knowledge capital may be invisible, unlike land or factories, but it creates far more added value. In the age of industrialization, physical laborers were literally laborers, but knowledge workers are unique beings: because they possess knowledge as capital, they are half laborer and half capitalist in character. If the knowledge you possess is infused with distinctive experience and value, your own worth, too, may become whatever price you choose to name.

● Please remember

Before the 19th century, the rich were large landowners such as kings and nobles. In the 20th century, the rich were capitalists who ran giant factories. Then who are the rich in the 21st century? If you remember that the means of production have evolved from land to capital and then to knowledge, the answer is clear. The rich of the 21st century will be those who possess knowledge, ideas, and creativity.

Sung-no Choi, President of the Center for Free Enterprise (CFE)

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Original title: [시장경제 길라잡이] 지식과 경험이 자본이다

Author: Sung-no Choi

Date: 2019-10-07

Source: https://www.cfe.org/bbs/bbsDetail.php?cid=column&pn=12&idx=21936