Fritz Machlup · 2014
Fritz Machlup’s The Economics of Information and Human Capital, Volume III of Knowledge: Its Creation, Distribution, and Economic Significance, is a conceptual history of economics’ encounter with knowledge, information, education, and human capital. It is deliberately expository rather than formal, written as a guide through literatures whose technical apparatus Machlup translates into analytic prose.
I have set for myself the task of writing without a single line of algebra, even where this constraint should make it impossible to give a proper presentation of an author’s ideas.
The book’s central distinction is between knowledge as a condition or stock and information as an activity or flow. Machlup treats this semantic point as economically decisive: decisions are made by agents who already possess some knowledge and receive information that may alter expectations, choices, and action.
The semanticist will note that the verbs "to inform" and "to know" have different meanings: informing is a process or activity, whereas knowing is a state of mind.
From this foundation Machlup develops an economics of knowledge that resists reducing knowledge to an ordinary commodity. Knowledge is costly to create, organize, verify, teach, and transmit, yet once created it can often be used by additional persons at little or no marginal cost. This makes it central to production while also making it difficult to price efficiently. The tension between incentives for creation and access for use becomes one of the volume’s governing problems.
In brief, only the expectation of a positive price of the use of knowledge will secure the allocation of resources to the creation of knowledge, but only a zero price will secure the efficient use of the knowledge once it has been created.
Machlup’s survey therefore treats patents, secrecy, publication, libraries, education, communication systems, professional expertise, and public research as institutional compromises around this dilemma. He is attentive to markets for information but skeptical of any simple belief that information can be perfectly centralized or fully priced. Knowledge remains dispersed among persons and organizations; its economic significance lies not merely in possession but in its use in judgment, coordination, innovation, and decision.
The book also functions as a disciplined map of adjacent fields: uncertainty, entrepreneurship, technological change, growth, forecasting, decision theory, game theory, welfare economics, and the economics of education. Machlup’s method is classificatory but not merely bibliographic. He insists that lists of writings do not substitute for intellectual history, because ideas must be reconstructed through their problems, assumptions, and transformations across disciplines.
The latter part of the volume turns to human capital. Machlup links the topic to capital theory while narrowing its meaning. Human capital is not every cost associated with people, nor every source of increased productivity. It refers to investments embodied in persons and inseparable from them, while tools, machines, and disembodied knowledge belong to other categories.
Only built-in, nonseparable investments count as human capital; productivity-increasing instruments are seen as tangible, real capital; and productivity-increasing nonembodied knowledge is regarded as nonmaterial nonhuman capital.
This precision shapes his discussion of schooling. Education may create human capital, but it may also serve consumption, credentialing, socialization, screening, or status competition. Machlup rejects the automatic equation of educational spending with productive investment, and he is especially critical of measurements that treat years of attendance or credentials as direct evidence of learning. His treatment of schooling is therefore both economic and epistemic: the problem is not only how much education costs, but what it actually produces and how reliably that production can be known.
The volume’s lasting importance lies in its breadth and restraint. Machlup anticipates later information economics while preserving a humanistic concern with meaning, institutions, and intellectual history. Knowledge appears simultaneously as public good, private asset, organizational resource, personal capability, and social inheritance. The book’s core insight is that economic action depends on what agents know, how they become informed, what institutions govern access, and how societies value knowledge once it has been created.
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