Services & Abstract Economies

Abstract innovations are central to the service industries that drive knowledge-based economies . In large degree knowledge-intensive service industries use abstract knowledge to trade and advise clients. Knowledge-intensive service providers tend to be advice givers (communicators), and therefore future oriented (abstract thinkers). Businesses that trade on various capital markets are good examples of the use of abstract knowledge. As suggested above, both the traded ‘commodities’ and the trading methods used in contemporary capital markets are themselves very abstract. New forms of derivatives and synthetic swing trading methods are examples of high-value abstract innovations in the finance industry. New research questions therefore surround the implications of a knowledge-based economy that is distinguished from older economies by the fact that abstract theoretical knowledge is growing in economic and social importance. Enron and Bear and Sterns were intensive users of abstract knowledge (and abstract ‘commodities’), and their intensive use of abstract knowledge contributed significantly to their downfalls. Enron and Bear and Sterns were at best savant businesses and ultimately destroyed rather than created wealth. Thus, national innovation systems need to avoid the adverse effects of the unexamined use of abstract knowledge in economic activity. This is not an argument against the use of abstract theoretical knowledge; it is an argument against the unchecked commoditisation of for example abstract financial thought (credit derivatives, collateralised debt obligations, credit default swaps, etc.). Many service providers are involved in giving clients advice about the future and have to explain complex phenomena, and abstract knowledge is essential to do these well. Abstract knowledge brings many advantages with it, but it is a ‘volatile substance’ that needs to be handled with skill, judgement, and care. 

James Wolfensohn, former president of the World Bank, in an interview with Kerry O’Brien on the 7.30 Report (1 April 2008), noted that an important causal factor in the current sub-prime loan crisis in the USA is the abstract nature of the industry. He said that those who do the innovating within banks are “a new breed of bankers with PhDs in mathematics” and they have made it possible to create wealth to an extent and in ways not seen before. On the strength of this, top managers have become over-confident in the extent to which the innovators can carry the prospects of the banks on the strength of clever ideas alone. Top managers, he suggests, have consequently abandoned sober and prudential thinking that might prevent some problems occurring, and did not see the problems the USA economy is now experiencing coming. Tellingly, Wolfensohn said the banks were trading using abstract knowledge-based methods that “frankly none of the top managers really understood”.


A knowledge communication perspective begins to illuminate how policy makers might respond to problems associated with high-value abstract innovation. At a number of levels there is a troubling lack of innovation and knowledge transparency related to these contemporary conditions. Lack of transparency is a knowledge communication failure issue. Top finance and banking managers are not adequately communicating with their innovators; regulators and policy makers are not adequately communicating with industry and consumers; and consumers caught in, for example, margin lending and sub-prime mortgage foreclosures have often not been adequately informed. There is a lack of talk between key stakeholder groups about these innovations that hinders transparency. The unasked question here is what processes will bring abstract commercial innovations into more meaningful (and transparent) communicative circulation in a knowledge-based economy or society? The answers to this question are unclear and the question poses significant commercial, policy, and research challenges.


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