Ugo Pagano
Dipartimento di Economia Politica, Università di Siena and CEU.
"Organizational rights in
knowledge-intensive firms"
Very Early Draft.
Paper written for the European Network on the Economics of the Firm (ENEF) 2008 meeting.
Laboratory of Economics and Management, Scuola Superiore S. Anna Pisa.
September, 11th-12th 2008.
1. Introduction.
The literature considering the relative merits of capitalist firms and cooperatives has emphasized how
capitalist firms may be advantageous in capital-intensive sectors especially when capital is specific and
difficult to monitor. Labour-hiring-capital is considerably onerous in terms of agency costs when one
has to borrow large amounts of money. Capital-hiring-labour is considered to be the obvious solution in
these circumstances.
One may argue that in a “knowledge-intensive” economy organizational rights should move from
capital to labour. Knowledge is often embodied in human beings: for this reason it is more likely that,
in such an economy, knowledge-intensive labour should hire capital. As far as knowledge disembodied
from human beings is concerned, one should consider that knowledge is a non-rival good and its
marginal cost should be negligible. A firm using disembodied knowledge is not using resources that
cannot be simultaneously consumed by other firms. Firms, using intensively this type of capital, could
be rather small and be owned by workers who hire at a very low cost non-rival knowledge capital.
Knowledge-intensive firms should be characterised by free entry and by a regime of pronounced
workers rights.
However, while the labour-hiring solution can be found in some knowledge-intensive firms, this
picture does not to seem to fit modern economies. If disembodied-knowledge-capital ends up hiring
labour, other aspects of knowledge may be more important. Indeed, while non-rivalry makes
knowledge close to the economic ideal of a public good, the possibility of excluding from its use may
have opposite consequences. The acquisition of knowledge, even in the form of imitation can be very
costly. Secrecy can prevent or limit access. Finally, intellectual property rights can grant some parties a
monopoly of access, which can give cumulative advantages on the acquisition of additional property
rights.
Because of these ambiguities, knowledge-intensive firms can show much diversity and be much
influenced by the prevailing legal and institutional frameworks.
In a first best world of zero-cost market institutions, the producers of knowledge should be rewarded by
the community and the knowledge should be made available to everybody for free because the
marginal cost of additional users is zero. In real life this solution is impossible because it is impossible
to evaluate the benefits of innovations. To overcome secrecy and to favour the diffusion of knowledge,
two main systems operate. One is based on prizes, reputation and career advancements for people
disclosing interesting and useful knowledge (universities, open-software communities etc.). The other
is based on the acquisition of private intellectual property. In a knowledge intensive economy the
typologies of firms, which is going to be selected, is going to be influenced by the prevailing regime of
intellectual property rights.
In this paper we will argue that the present institutional framework of the world economy is biased in
favour of private intellectual property regime and, as a consequences, firms typologies tend to be
selected in an environment favouring solutions where non-human intellectual capital hires human
intellectual capital.
The paper is structured in three sections.
The first compares the "capital-hires-labour" versus the "labour-hires-capital" solutions in the context
of a knowledge-intensive economy.
The second considers the ambiguous nature of knowledge and compares the origins and the relative
advantages of the disclosure prize-driven system and private intellectual property and the possible
criteria for finding a boundary between the two systems in a closed economy. We argue that, in the
emerging global economy, the boundaries between the two systems are inefficiently biased in favour of
private intellectual property regime.
The third section argues that in the present institutional context of the world economy, the "capitalhires-labour" solution tends to prevail on the "labour-hires-capital" solution. This tends to generate a
particular type of organizational equilibrium where large non-human capital intensive firms hold
monopoly positions similar to those that the old corporations used to have for geographically limited
areas in the age of colonialism. In this situation, the organizational rights in the corporation and its duty
to behave take them into account can be a "third best" solution to the governance of knowledgeintensive firms.
In the final section, we conclude arguing that the "third best" solution to the governance of Knowledge
intensive firm should go together with a "second best" attempt to reform the world economy.
2. Who hires whom in the knowledge-intensive economy?
Neoclassical theory a-critically assumes a double neutrality: technology does not influence rights
and rights do not influence technology. A famous dictum by Samuelson (1957, p. 894) states this
dual neutrality of the neoclassical theory very clearly : “In a competitive economy it really doesn’t
matter who hires whom”. Samuelson thus asserts the irrelevance of firm ownership in so far as it
does not matter whether it is the owner of the machines who hires the workers, or whether instead it
is the workers who hire the machines. Neutrality thus holds in a twofold sense: whilst the various
technologies and productive forces have no influence on the efficiency of the various kinds of
ownership, the various kinds of ownership (for example control of the firm by workers or capitalists)
have no influence on the nature of the productive forces and the type of technology used.
The orthodox theory assumes a market with nil transaction costs and complete and perfectly
enforceable contracts. Therefore, workers can always clarify their conditions of employment with
maximum precision and not feel disadvantaged because they do not control the firm. A market
characterized by zero transaction costs and complete contracts will protect agents whether or not
they have property rights over the means of production. From this point of view, the characteristics
of the productive forces are not important: a competitive equilibrium with complete contracts will in
any case entail the efficient organization of production, both when the capitalist employs the
workers, and when the contract provides for the workers to rent the means of production from the
owner. The types of resources and technologies used will have no effect on the efficiency of the
controlling actor. It will always be possible to stipulate contracts guaranteeing productive efficiency
with other individuals in possession of physical and human capital. The nature of the resources
employed in production does not tend to favour particular property rights, and accordingly are
neutral.
In a world of complete contracts (in which other individuals are completely protected by those
contracts), the firm’s owners will not be able to alter the nature of the resources in their favour. They
will find that they can only formally manage a production process, which in reality is exclusively
organized by the constraints imposed by the enforcement of complete contracts. Upon realization
that they are completely protected by their contracts, workers who have no rights to the means of
production will not invest any less in human capital. For the same reason, the owners of the means of
production will feel themselves equally protected if they rent their means of production to others
rather than utilize them directly. In other words, the ownership form does not influence the types of
resources and the nature of the technologies employed. The ownership structure, therefore, does not
tend to favour particular productive forces, and consequently it too is neutral.
Discarding the hypothesis of nil transaction costs has profound effects on the neoclassical
edifice. It eliminates the twofold neutrality of rights with respect to technologies, and of technologies
with respect to rights. The mechanisms identified by neo-institutionalists – Oliver Williamson
(1985) for example – have cast serious doubt on the hypothesis that technologies are neutral in
regard to the nature of property rights and types of control over firms.
When it is impossible to write complete contracts, the characteristics of the productive forces
influence the attribution of control rights. In the presence of contractual incompleteness, those in
possession of relatively specific resources (i.e. resources which cannot be put to other uses without
losing some of their value) find themselves in a very difficult situation.
The fact that resources are specific does not constitute a problem in the neoclassical world of
zero transaction costs and complete contracts. In this case, when a resource is specific (and therefore
does not have uses alternative to its current one), it is always possible to protect oneself against
opportunism by the counterparties with a complete contract (Hart 1995).
The specificity of resources becomes a problem if it is not possible to obtain adequate
guarantees by means of a sufficiently complete contract. In this case, those with control over the firm
have greater guarantees than do other individuals. In these circumstances, because those who invest
in specific resources are made vulnerable by the absence of alternative uses, they will seek to obtain
such guarantees. Samuelson’s proposition no longer holds, because in this situation “who hires
whom” becomes important.
However, the reasoning can be reversed. Though it is true that those who possess resources
specific to a firm seek to acquire control over it, the opposite is the case as well: in situations of
contractual incompleteness, those with control rights over a firm have relatively fewer inhibitions
about developing resources specific to that organization.1
The same reasoning applies to information asymmetries. By virtue of the latter, some agents
may possess hidden private information, which makes complete contracts impossible to stipulate. If
some agents possess concealed information their monitoring becomes difficult, or even impossible;
and this distances us considerably from a world of complete contracts.
In this situation, because the technologies employed determine the distribution of information
among agents, certain attributions of property rights tend to prevail because of their greater
efficiency (relatively to the technologies employed). In particular, of greater efficiency will be the
rights attribution that allocates the rights deriving from ownership to agents difficult to control
(and/or controllable at very high costs) because they possess a greater amount of concealed private
information.2 Also this neo-institutionalist argument induces us to reject the neutrality of
technologies: changes in the technological characteristics of the productive forces alter the nature of
the information asymmetries and distribution of information among agents, thereby influencing the
nature and attribution of property rights.
However, the argument can be again reversed, and made to follow the reasoning of the radical
economists. Those who own or control organizations will not perceive their accumulation of private
information as problematic (because some of their characteristics and actions cannot be monitored
by other agents). Indeed, they will endeavour to ensure that their concealed information is not used
against them. But these actors will perceive an increase in the concealed information possessed by
other agents as disadvantageous, for this inevitably increases the costs of monitoring them. The
attribution of rights to a certain agent will therefore tend to shift information asymmetries in that
agent’s favour. Once again, the attribution of rights is by no means neutral, and it influences the
nature of the productive forces employed.
1
Initially developed by Marx in the first book of Capital, this point has been taken up by numerous ‘radical economists’:
for instance Braverman (1974), Marglin (1974) and Rowthorn (1974), Edwards (1979), Bowles and Gintis (1999).
2
This point was first made by Alchian and Demsetz (1972). See also Alchian (1987).
Summing up: while who-hires-whom does not matter in a world of zero transaction costs, it
matters in a world of positive transaction costs. Even if technology is partially endogenous, one
could argue that developments that go in the direction of making it convenient a high intensity of
non-human capital should also make the capital-hiring-labour solution more appealing, especially
when capital is specific and difficult-to-monitor (in the sense that its user induced depreciation
cannot be easily assessed by observing the state of a machine and a relevant informational
asymmetry exists between users and absentee owners of machines). In these conditions, the labourrenting-capital solution become prohibitively costly and also other solutions (such as labour
borrowing capital and buy machines) involve very high agency costs. Perhaps a limited multiplicity
of alternative technologies is available (and more could have been developed in the case of
widespread labour-owned firms). However, one can argue that the intense use of physical capital has
acted in favour of the capital-hiring labour solution.
The central question whether the intense use of knowledge in production should imply a change in
these tendencies. At the first glance, one could argue that unlike capital-intensive technologies,
knowledge-intensive technologies should have two going in favour of the labour-hiring-capital
solution:
In the first place, knowledge is often embodied in human beings and in a knowledge-intensive
economy one should expect for this reason that the labour-hiring-capital solutions should be often
advantageous.
In the second place, the knowledge that it is not embodied in human beings can be made available
to additional members of society without depriving the former users of its avaibility. Unlike a piece
of physical capital, an idea can be used simultaneously by many people without being warn out
(indeed the opposite is true: the use of ideas helps the memory and the improvement of ideas). Since
the marginal cost of using disembodied knowledge is zero, these firms should not face the renting
and borrowing agency problems, which do usually upset the labour-hiring-physical-capital firms.
From these two reasons, the advent of the knowledge economy should coincide with an increasing
comparative advantage of labour-hiring-capital firms with respect to the capital-hiring-labour firms,
and a radical departure from the organizational forms which have characterised the age of intensive
use of physical capital.
However, while the trends of some sectors seem to confirm this prediction, on the whole modern
capitalism does not seem to show a great deal of discontinuity with its recent past.
Indeed a very early insight from Karl Marx seems to provide a better representation of the
prevailing trends:
It is a result of the division of labour in manufactures, that the labourer is brought face to face
with the intellectual potencies of the material process of production, as the property of another, and
as a ruling power. This separation begins in simple co-operation, where the capitalist represents to
the single workman, the oneness and the will of the associated labour. It is developed in manufacture
which cuts down the labourer into a detail labourer. It is completed in modern industry, which
makes science a productive force distinct from labour and presses it into the service of capital.
(Marx 1967, ch. 14, section 5)
The monopolization of knowledge in the forms of IPR, which characterises many important
sectors of the economy, seems to be more consistent with this early analysis of Karl Marx than with
the potential discontinuities that we have considered. One could "save" the predicted discontinuities
by arguing that the knowledge-intensive economy is not yet sufficiently intensive to produce
widespread institutional changes. The other possibility is that the analysis of production of
knowledge considered in this section is not catching important features of this complex good. This is
the perspective that we are going to pursue in the following section of this paper.
3. Knowledge between private property and global common.
The hypothesis that the knowledge-intensive economy may involve a fundamental discontinuity in the
organization of the economy relies on the fact that, unlike physical goods, knowledge is a public good
in the sense that there is no cost in additional use by other consumers. However, pure public goods are
a mix of two ingredients: non-rivalry in consumption (which characterizes knowledge) and
impossibility of exclusion from consumption (which does not necessarily characterize knowledge).
While pure private goods involve both the possibility of exclusion of others and non-rivalry in
consumption, the two circumstances do not necessarily arise together. Indeed, goods characterised by
rival consumption and the impossibility (or very high cost) of exclusion provide examples opposite to
the case of knowledge.
There is however a link between non-rivalry and costs of exclusion.
In the case of well-defined physical objects the definition and the enforcement of exclusion can be done
“locally” by verifying that others do not interfere with the rights defined over that particular object.
The nature of the property of a computer, a car or a house is such that legal relations can be defined at
local level. Only when individuals need to interfere with the local space occupied by the physical
objects owned by other people, the respect of the property rights of others must limit their liberties.
And, as long the objects that are not visibly taken away or altered by others, an owner can safely
assume that his ownership rights are respected. The related legal positions have a local domain
geographically limited by the position in space that, at a certain moment in time, is occupied by the
material object over which the rights are defined. The material character of the good and its defined
location imply a possible overcrowding by potential consumers and are a source of rivalry in
consumption. When an individual uses the good, others cannot consume it. In this case, as long as
individual keeps under control the good in a given physical location, he can be sure that the other
individuals are not consuming it and are not violating its private property. Both the definition and
enforcement of private property are specified at local level and they are unlikely to have any relevant
implications in distant locations.
The legal positions, defining the private ownership of knowledge, have wider implications and
have often a global nature. They may involve restrictions for many individuals at various country
locations and potentially for all the individual of the world. Intellectual property rights, such as they
are currently defined by the TRIPS agreements and enforced by the WTO, have this nature. Their
ownership by some individuals involves restrictions for all the other individuals. The ownership of a
house, a car or a field involves some duties for the surrounding individuals who should not interfere
with the property rights of the owner and are, only for this reason, limited in the exercise of their
liberty. By contrast, the ownership of a piece of intellectual property implies that all the individuals in
the world have duty not to interfere with that legal position. They have to comply with the rights that it
creates by limiting their actions in their daily life in multiple ways, irrespective of the country in which
they operate.
If some individuals happen to produce (or in a relevant cases they have already
3
produced) the same knowledge on which the right is granted, their liberty to use the results of their
efforts is limited by the monopoly on knowledge that has been already acquired by others.
The reinforcement and the extension of intellectual property have been compared to the enclosure
of lands that preceded the industrial revolution.4 Also in this case, commons were turned into exclusive
private property. There is, however, a fundamental difference. In the case of land, the object of
privatization was a local common that involved the legal positions of few individuals. By contrast, the
privatization of intellectual property changes the legal positions of many individuals and has major
implications for the international standings of the different countries.
Here we have a paradox. Because of its non-rival nature, unlike land, knowledge can be used by
many individuals without decreasing its value. However, the "public good nature" of knowledge
makes its privatization much more limiting for the liberty of other individuals. Privatization turns the
ownership of a piece of public knowledge into a private property right that involves duties for all the
other individuals and has little to do with the traditional rights of exclusive consumption of the owners
of material objects.
To use Jefferson’s vivid image,5 knowledge is like the flame of a candle that can light many other
candles without decreasing its own flame. The exclusive ownership of the flame can only mean that
others are deprived of the liberty lightening their own flames. The rival nature of land implies that its
private ownership restricts the liberty of non-owners only in the few cases in which it interferes with
the (necessarily local) private uses a piece of land. The private appropriation of knowledge cannot
imply that the liberty of the non-owners should be only limited when it interferes with the consumption
3
An account of cases in which traditional knowledge is stolen by multinationals is given by Shiva (2001).
For instance, see Shiva (2001: pp. 44-48).
5
He who receives an idea from me, receives instruction himself without lessening mine; as he who lights his taper at mine,
receives light without darkening me. “Thomas Jefferson, Letter to Issac McPherson, “No Patents on Ideas,” 13 August
1813. Sometimes paraphrased as “Knowledge is like a candle. Even as it lights a new candle, the strength of the original
flame is not diminished.”
4
of the owners: because of the public nature of knowledge, this never happens. Because of non-rivalry,
one flame is never decreasing the intensity of another flame. The nature of ownership is here,
necessarily, much more restrictive: it means that non-owners have no liberty to “lighten their taper” and
use their own flame without the permission of the owner.
This is more restrictive than simply non-
decreasing the “flame” of the owner as the analogy with land would imply.
The limitation of the costless liberty to use knowledge is inefficient. It is a well-known piece of
economic theory that the non-rival nature of a good should not be the cause of an excessive restriction
of liberty but rather a reason to grant to all the individuals the liberty to lighten their own flames.
There is, however, also a well-known argument that can support this restriction: if the person that has
borne the cost of lightening the first candle is not compensated for this effort, perhaps the overall flame
of knowledge would be weaker. An appropriate incentive for the inventor requires that she becomes
the owner of the knowledge that she has discovered and that the liberty of access of others is restricted.
However, this restriction is always costly: after the first discovery, many other candles could have been
lightened, in some cases also independently, without decreasing the flame of the first candle.
The cost of depriving other candles of the flame increases when the knowledge is “basic” in the
sense that it comes upstream in the production of other knowledge or it is “complementary” to other
pieces of knowledge. For this reason, it is undesirable to subject more upstream or basic knowledge to
the restrictions of private property.
Since early times, public institutions like Universities have
provided alternative systems of compensating the producers of open-access science. Publications,
based on peer reviews, and careers and prizes that are based on these publications, are the most typical
types of incentives offered by Universities to promote effort and universal disclosure of knowledge.
Unsurprisingly, a great deal of the funding of these institutions has traditionally come from public
sources.
Where should one draw the line between more upstream knowledge produced and freely
transmitted by Universities and the more downstream knowledge that can be privately owned by its
discoverers? There is no precise answer to this question but, wherever the line lies, it will change when
we move from a closed economy, ruled by one single state, to an open economy with many
independent states.
A World Government (or, in similar way, a State isolated from the World Economy) could try to
draw the line between the production of “open access knowledge” (funded by tax revenue) and the
production of “closed access knowledge” (that is left to the profit-motive of private firms) in such a
way to maximize the benefits accruing to its citizens.
However, the real economy, which we face today, is different. No National State can be isolated
from the World Economy and no World Governments exists. In this framework, each National State
will realize that its citizens get only a fraction of the benefits of the investments in public knowledge
while some of them (and all through national taxation) can gain the full benefit of the investments in
privately owned knowledge because the benefits from the latter are not shared with the citizens of the
other countries. Thus, in an integrated world economy, characterized by internationally enforced IPR,
National States have an incentive to increase the number of “closed access science” research projects
over which private property rights are defined and move upstream the line that separates them from the
“open access science” research projects.
The over-privatization of knowledge would simply follow even from the behaviour of benevolent
world governments acting in the interests of their citizens in the present institutional framework of the
world economy. It is well likely that the tendency to over-privatize is even more vigorous because
national states are easy targets for the rent-seeking activities of global companies while international
organizations are, in turn, easy targets for both national states and global companies.
Institutions, producing and diffusing public knowledge, are increasingly seen as a “waste of
money” and there is a widespread tendency to decrease their funding. For the same reason, the same
institutions (Universities in the first place) are also under severe pressure to betray their nature of
institutions mainly dedicated to the production and diffusion of public open-access knowledge and are
pushed towards the production of private intellectual property.
The (over)-upstreaming of private property rights on knowledge can easily create inefficient
situations where, because of the monopolization of knowledge, an "anti-commons" tragedy occurs.
Whereas in the Schumpeterian framework innovation created temporary monopolies that should be
quickly exploited before imitation took place, here IPR creates long-term legal monopolies, which are
sometimes not used for production but to block the innovations of others.
In this way one may dry out the common pool of new basic knowledge which has been one of the
factors which, since the industrial revolution, the epistemic basis of technological innovation. As
Mokyr (2002) has outlined, the industrial revolution was made possible by a preceding industrial
enlightment. Much "why" knowledge had been accumulated and made easily accessible. A large pool
of "why" knowledge made it possible the development of "how" knowledge in a form such that it was
possible to move easily from one technology to another or from one "how" question to another. In
situations where the epistemic basis of technology were underdeveloped, technological innovations
were isolated answers to particular "how" questions and it was not possible to generate a continuous
process of technological innovations. By contrast, once a rich basis of "why" knowledge was made
available, it was possible to start a self-feeding interaction between why-knowledge and howknowledge. The growth of a common pool of basic knowledge is a necessary condition for the
continuous growth of technical knowledge. A delicate balance between the global common basic
knowledge and the proprietary technical knowledge must exist: the up-streaming of the proprietary
arrangements to basic knowledge may imply the self-destruction of the conditions of its growth.
While a great deal of the literature has concentrated on the arrangements and the incentives which
stimulate the growth of technical knowledge, a more challenging puzzle is how to stimulate the growth
of basic knowledge. It is true that intellectual curiosity may provide an intrinsic motive to the growth of
knowledge but to share knowledge and find common methodologies to falsify wrong hypothesis
requires very complex institutions. According to Paul David some development of the institutions of
open science has predated the industrial revolution and has been a precondition for the development of
capitalism. Pushing the frontiers of private appropriation capitalism may destroy the conditions that
fuel its own development.
In the words of Paul David (2004):
“Rather than emerging and surviving as robust epiphenomena of a new organum of intellectual
inquiry, the institutions of open science are independent, and in some measure fortuitous, social and
political constructs. They are in reality intricate cultural legacies of a long past epoch of European
history, which through them continues to profoundly influence the systemic efficacy of the modern
scientific research process”.
In this respect, the foundations of Universities marked an important change in the production of
knowledge. As Berman (1985, 159-60) has pointed out:
“What has been especially characteristic of Western Science, including legal science, since the
twelfth century is its close historical connection with the institution of university; science was born in
university and the university bestowed upon it its precarious heritage of freedom of teaching and
research……..
It takes, more than the progressive translation of the works of Aristotele to explain
why in the year 1150, possibly ten thousands students from all over Europe could be found in the town
of Bologna in northern Italy studying legal science. They were there because society made it possible indeed - made it urgent that they were there…”
Interestingly enough, Universities did not only emerge well before the advent of capitalism but also
well before the emergence of nation-states. They came about in a period when knowledge was
conceived as global common good which should also been used in the government of the global
institutions which characterized the Western Europe Middle Age. These global institutions had fierce
contrasts but they recognized that each one of them had a proper sphere of influence. Good rules should
specify the appropriate domain of their power.
In other words the Middle Age was characterized by legal pluralism, that is a common legal order
containing diverse legal systems (church vs. crown, crown vs. town, town vs. lord, lord vs. merchant).
Legal Pluralism was a source of freedom and of legal sophistication and was a decisive factor in the
foundation of Universities and the origin of Western Science. The typical questions, which emerged in
this framework of overlapping legal systems were: Which Court had jurisdiction? Which law was
applicable? How were different legal differences going to be reconciled? The independence of scholars
became a precious asset to solve these disputes.
Universities emerged as the locus both independence and fair adjudication of scholarly disputes
should emerge. They were different from the classical academies where only one school of thought
existed. Universities were based on the idea that there was some way to adjudicate truth that would
emerge through proper debates and reference to the appropriate texts. For this reason, in the Western
legal tradition, law was conceived to be a coherent whole within which all the disputes among the
various authorities could be solved. In the formative era of the Western legal tradition, natural-law
theory predominated. It was generally believed that human law derived ultimately from, and was
ultimately to be tested by, reason and conscience. This theory had a basis in Christian Theology as well
as Aristotelian philosophy. But it had also a basis in the history of the struggle between ecclesiastical
and secular authorities, and the politics of pluralism. From this point view the legal doctrines developed
in the first European Universities were much more than a simple rediscovery of Roman Law. Roman
Law had not the same pretence and the same need to constitue a coherent whole within which the
conflicts among authorities could be solved. Indeed, the phrase corpus juris Romani was not used by
the Romans but by the twelfth - and thirteenth - century European canonists. It was the twelfth-century
scholastic technique of reconciling contradictions and deriving general concepts from rules and cases
that first made it possible to coordinate and integrate the Roman Law of Justinian. The same
methodology was then applied to other disciplines and paved the way to the emergence of Western
Science.
In some respects, the institutions under which Western Science emerged are polar to those of the
contemporary economy. They came about in an era dominated by global political powers such as the
Church and the Empire, which were supposed to represent the global interests of human-kind and
accepted only limits due to their specific function. Local powers were weak, markets were not
integrated, private property had still to see the emergence of the enclosure. The why-questions
dominated the interests of people and offered a fertile ground to the growth of Universities and, in
general, to emerging institutions of open science.
The present world is characterised by an absence of global political powers and by integrated markets,
which include knowledge. In this world, which open science has so dramatically helped to create, the
institutions which make knowledge a global common are increasingly weaker than those that make it a
private good. This does not mean that open science is not giving us amazing fruits but that its progress
is slower than the one that could be achieved under more friendly institutions.
4. Biased selections and Organizational Rights.
Much economic literature assumes that the institutions of open science, which an early stage of
history gave as a present to capitalism, work for free. Typically, the Solow growth model assumes that
the growth of technological knowledge is exogenous, costs nothing and is available to all. While the
models of endogenous growth have usefully removed some of these assumptions, few contributions
have explicitly dealt with the role of the institutions of open science.
The typologies of firms, which tend to prevail in the knowledge economy will crucially depend
on the role and the relative weights of the institutions of open science and the degree of private
intellectual property rights protection. The absence of an adequate provision of public knowledge and
the over-up-streaming of private intellectual property is a likely result of the absence of adequate global
institutions for funding public research and the rent-seeking activities of the firms which seek
monopoly power on their products and the technology that they use.
In this environment the selection of firms will be biased in favour of the capital-hiring-labour
solution and it is very doubtful that the advent of the knowledge intensive economy will involve a
substantial move to the labour-hiring-capital organizational form.
At the end of the second section, we advanced the hypothesis that the intense use of non-rival
disembodied knowledge capital would imply a substantial decrease of the agency costs in comparison
to firms making an intensive use of physical capital. We can now qualify better the conditions under
which this statement may be true: if much knowledge is produced using the institutions of open
science, then the labour-hiring-capital solution is widely available. However, under the present global
economic regime this tendency may be rather weak and may well be overcome by other more powerful
factors.
If agents can hold exclusive monopoly rights on knowledge, the use of the latter is going to be
rather expensive and it is likely to increase the agency costs of labour-hiring-capital firms even in
comparison to those which make an intensive use of physical capital. Moreover, under these conditions
also another factor, favouring the labour-hiring-capital solution is going to be seriously inhibited. We
have seen that the knowledge economy should also imply a growth of knowledge embodied in human
labour and that in turn this is may increase the relative agency cost advantages of the labour-hiringcapital solution. However, when the knowledge-intensive economy turns out to be very intensive in
terms of private IPR, then many individuals may find very little incentive to invest in embodied human
capital.
As the New Property Rights approach has shown (Hart, 1995), private property of the means of
production has important incentive effects. A frictionless market for the means of production should
imply that this property goes to the most capable individuals. However, the market is far from being
frictionless and individuals are usually wealth-constrained. For this reason, causation may well work,
in a self-reinforcing manner, also in the opposite direction: the owners of the means of production have
a greater incentive to develop their capabilities and, for this reason, tend to become the best owners.
This incentive effect of ownership is much stronger for intellectual property because the right to
exclude involves a restriction of the liberty of all the other individuals to replicate similar means of
production (Pagano and Rossi, 2004).
In the case of a machine, an individual, who has learnt to work and possibly to innovate with skills
that are partially specific to the machine, is only partially damaged if he is deprived of its use. He
keeps the liberty to work with other machines or to build identical machines.
The damage is more relevant in the case in which an individual has acquired skills that are specific
to a piece of intellectual property and he is denied the access to this piece. The nature of intellectual
property implies that he does not keep the liberty to work with or to “re-discover” a similar piece of
knowledge. IPRs involve a global right to limit the access of all individuals to the use of all the similar
pieces of knowledge, including those that are independently developed. Turning a public good like
knowledge into a private good transforms a universal unlimited liberty into an asymmetric legal
position limiting non-owners’ freedom well beyond the restrictions that stem from the property rights
defined on traditional rival goods.
For some individuals the monopolistic ownership of intellectual property encourages the
investment in the skills necessary to improve the knowledge that one owns and the skills that are
developed make it even more convenient to acquire and produce more private knowledge. By contrast,
other individuals may be trapped in vicious circle of (under-)investment in human capital where the
lack of intellectual property discourages the acquisition of skills and the lack of skills discourages the
acquisition of intellectual property.
5. Conclusion.
In a knowledge-intensive economy the non-rival nature of disembodied knowledge and the
increasing embodiment of knowledge in the human capital of the individuals should and could
potentially imply a major shift from the capital-hiring-labour to labour-hiring-capital. However, this
prediction assumes that much basic knowledge is produced as public good by institutions of open
science. If much knowledge is privatised, the knowledge-intensive economy may turn out to be even
more unfriendly than the physical intensive economy to stronger organizational rights of most
individuals working in knowledge-intensive firms. Unions' protection and regulations of the
employment relation are not outdated in modern knowledge-intensive economies.
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