Ed and I were absolutely honored to interview Dr. Thomas Sowell, certainly one of the world's greatest living economists, on The Soul of Enterprise: Business in the Knowledge Economy. Dr. Sowell is currently Senior Fellow at the Hoover Institution, Stanford University. Sowell was born in North Carolina, but grew up in Harlem, New York. He dropped out of high school and served in the United States Marine Corps during the Korean War. He received a Bachelor's degree, graduating magna cum laude from Harvard University in 1958 and a Master's degree from Columbia University in 1959. In 1968, he earned his Doctorate in Economics from the University of Chicago.

Dr. Sowell has served on the faculties of several universities, including Cornell University and University of California, Los Angeles. He has also worked for think tanks such as the Urban Institute. Since 1980, he has worked at the Hoover Institution at Stanford University. He writes from a conservative and classical liberal perspective, advocating free market economics and has written more than thirty books. He is a National Humanities Medal winner.

The new edition of his international best seller on economics, Basic Economics – 5th Edition (Basic Books, December 2015), was the focal point of our discussion.

Basic Economics is the best single volume primer on economics ever written. There are no graphs or equations, and the writing is clear, uncomplicated, eye-opening, and cogent. Ron has recommended this book to hundreds of people, most have thanked him profusely.

We discussed Dr. Sowell's early years as a Marxist, his definition of an economy and economics, early baseball tryout, the notion of a "fair" price, the illogic of the "trade deficit," his views on immigration, Thomas Pikkety's book and income inequality, and why there are only "non-economic values."

We also asked Dr. Sowell during the break what he thought of President Obama's recent policy on easing restrictions on Cuba. He was adamantly against it, and hopefully he will be writing on this topic for his syndicated column.

It's difficult to suggest one of Thomas Sowell's books over another. Be sure to read Basic Economics, 5th Edition, but if you want to venture beyond that (and you will), we've listed Dr. Sowell's books below, though not all of them. He's written two on late-talking children as well, which I hear are excellent.

Ron's favorites are: Knowledge and Decisions; A Conflict of Visions; and Intellectuals and Race.

Other Resources

Dr. Sowell's Wikipedia page.

Fred Barnes interview with Dr. Sowell.

Article by Jay Nordlinger, of National Review, on Thomas Sowell.

Follow Dr. Sowell's syndicated newspaper column on Twitter @sowellcolumn

Books by Thomas Sowell (partial list)

Say’s Law: An Historical Analysis, 1972

Classical Economics Reconsidered, 1974

Knowledge and Decisions, 1980

Markets and Minorities, 1981

Ethnic America: A History, 1981

The Economics and Politics of Race, 1983

Civil Rights: Rhetoric or Reality, 1984

Marxism: Philosophy and Economics, 1985

Education: Assumptions Versus History, 1986

A Conflict of Visions: Ideological Origins of Political Struggles, 1987

Compassion Versus Guilt and Other Essays, 1987

Preferential Policies: An International Perspective, 1990

Inside American Education: The Decline, the Deception, the Dogmas, 1993

Race and Culture: A World View (Part I of a trilogy), 1994

The Vision of the Anointed: Self-Congratulation as a Basis for Social Policy, 1995

Knowledge and Decisions, 1996 (1980 original)

Migrations and Cultures: A World View (Part II of a trilogy), 1996

Conquests and Cultures: An International History (Part III of a trilogy), 1998

The Quest for Cosmic Justice, 1999

A Personal Odyssey, 2000

Basic Economics: A Citizen’s Guide to the Economy, 2004

Applied Economics: Thinking Beyond Stage One, 2004

Black Rednecks and White Liberals, 2005

Every Wonder Why (collection of columns), 2006

A Conflict of Visions: Ideological Origins of Political Struggles, revised and expanded 2007

A Man of Letters, 2007

The Housing Boom and Bust, 2009

Intellectuals and Society, 2009

Applied Economics: Thinking Beyond Stage One, Revised and Enlarged Edition, 2009

Dismantling America (collection of columns), 2010

The Thomas Sowell Reader (collection of columns, essays, etc.), 2011

“Trickle Down” Theory and “Tax Cuts for the Rich,” (essay), 2012

Intellectuals and Race, 2013

Basic Economics: A Citizens Guide to the Economy, 5th Edition, 2015

How much does the economy weigh? Believe it or not, it weighs the same as in 1950, even though output is roughly five times larger. We are increasingly an economy driven by mind, not matter. Thomas Sowell explains how in his fantastic book, Knowledge And Decisions

After all, the caveman had the same natural resources at their disposal as we have today, and the difference between their standard of living and ours is a difference between the knowledge they could bring to bear on those resources and the knowledge used today.

Peter Drucker explained it this way:

We know that the source of wealth is something specifically human: knowledge. If we apply knowledge to tasks that we already know how to do, we call it productivity. If we apply knowledge to tasks that are new and different, we call it innovation. Only knowledge allows us to achieve these two goals.

Ed and Ron discussed the following topics during the show. For more information on this topic, see Ron’s book, Mind Over Matter: Why Intellectual Capital is the Chief Source of Wealth.

Five stages in society:

Hunters & gatherers economy
Agrarian economy
Industrial economy
Service economy
Knowledge economy—often referred to as the “Information economy,” but this is a misnomer.

There’s an enormous difference between information and knowledge. Ever since Stewart Brand, founder of the Whole Earth Catalog quipped, “Information wants to be free,” commentators have confused information with knowledge.

Again, Thomas Sowell explains why knowledge, far from being free, is enormously expensive, and the most severe constraint facing societies:

… [T]he most severe constraints facing human beings in all societies and throughout history––inadequate knowledge for making all the decisions that each individual and every organization nevertheless has to make, in order to perform the tasks that go with living and achieve the goals that go with being human.

Data, Information and Knowledge

Data. Factual information (as measurements or statistics) used as a basis for reasoning, discussion or calculation. There is no judgment, interpretation, context, or basis for action. It knows nothing of its own importance or irrelevance.
Information. Root in Latin is formare, meaning “to shape.” Peter Drucker said information is “data endowed with relevance and purpose.” It has to have a sender and a receiver, and it is the receiver, not the sender, who decides if the message is information or not. “We add value to information in various ways: Contextualized; Categorized; Calculated; Corrected; Condensed.”
Knowledge. The fact or condition of knowing something with familiarity gained through experience or association. To turn information into knowledge we need: “Comparison; Consequences; Connections; Conversation.

The Physical Fallacy:

Brains trump brawn and Bits are more valuable than atoms.

Merv Griffin has made “close to $70 million to $80 million” in royalties from the Jeopardy! theme song, which he wrote in less than a minute.

YouTube was purchased by Google for $1.65 billion.

Disney’s Snow White video release generated $800 million in revenue, $500 million to the bottom line, from a movie made in the 1930s. Compare these supposedly ephemeral products to the value of an automobile from the same decade

Disney bought Pixar in January 2006 for $7.4 billion (Steve Jobs originally paid $10 million for it in 1986). One analyst talked about the importance of retaining two key individuals from Pixar, otherwise:

If two key people leave, Disney just bought the most expensive computers ever sold.

George Gilder likes to say that knowledge is about the past, while entrepreneurialism is about the future. Albert Einstein would have agreed:

I am enough of an artist to draw freely upon my imagination. Imagination is more important than knowledge. Knowledge is limited. Imagination encircles the world.

Self Sufficiency = Poverty

One professor of economics assigns his student the class project of building something they normally purchase. Many choose beer, or electronic devices.

What they discover is it’s incredibly expensive, takes an awful amount of time, and doesn’t taste or work as well as what you can buy for a lot less.

Two works we highly recommend illustrate just how dependent we are on dispersed knowledge, in the heads of literally billions of people around the world. It takes millions just to make a simple pencil.

See I, Pencil, as told by Leonard E. Read. Also, The Toaster Project: Or A Heroic Attempt to Build a Simple Electric Appliance from Scratch, by Thomas Thwaits.

The Philosopher Alfred North Whitehead wrote: “Civilization advances by extending the number of operations we can perform without thinking about them.”

Think how much easier it is do perform many tasks that our ancestors spent far more time on.

Rival vs. Non-Rival Assets

Alvin and Heidi Toffler define characteristics of knowledge in their book Revolutionary Wealth:

Knowledge is inherently non-rival
Knowledge is intangible
Knowledge is non-linear
Knowledge is relational––ideas having sex
Knowledge mates with other knowledge
Knowledge is more portable than any other product
Knowledge can be compressed into symbols or abstractions
Knowledge can be stored in smaller and smaller spaces
Knowledge can be explicit or implicit, expressed or not expressed, shared or tacit
Knowledge is hard to bottle up. It spreads

Knowledge is like the dark matter of the cosmos—we know it is out there, but we cannot see, touch, or measure it.

Again, Thomas Sowell:

Many of the products that create a modern standard of living are only the physical incorporation of ideas––not only the ideas of an Edison or Ford but the ideas of innumerable anonymous people who figure out the design of supermarkets, the location of gasoline stations, and the million mundane things on which our material well-being depends. It is those ideas that are crucial, not the physical act of carrying them out. Societies which have more people carrying out physical acts and fewer people supplying ideas do not have higher standards of living. Quite the contrary. Yet the physical fallacy continues on, undaunted by this or any other evidence.

Three Components of Intellectual Capital (IC)

IC = Knowledge that can be converted into profits (or value); it’s an entity, not a process.

IC was classified into three categories by Karl-Erik Sveiby, in 1989:

Human capital (HC). This comprises your team members and associates who work either for you or with you. As one industry leader said, this is the capital that leaves in the elevator at night. The important thing to remember about HC is that it cannot be owned, only contracted, since it is completely volitional. In fact, more and more, knowledge workers own the means of your company’s production, and knowledge workers will invest their HC in those organizations that pay a decent return on investment, both economic and psychological. In the final analysis, your people are not assets (they deserve more respect than a copier machine and a computer), they are not resources to be harvested from the land like coal when you run out; ultimately, they are volunteers and it is totally up to them whether or not they get back into the elevator the following morning.
Structural capital. This is everything that remains in your company once the HC has stepped into the elevator, such as databases, customer lists, systems, procedures, intranets, manuals, files, technology, and all of the explicit knowledge tools you utilize to produce results for your customers.
Social capital. This includes your customers, the main reason a business exists; but it also includes your suppliers, vendors, networks, referral sources, alumni, joint venture and alliance partners, reputation, and so on. Of the three types of IC, this is perhaps the least leveraged, and yet it is highly valued by customers.

There is such a thing as negative human capital, negative structural capital, and negative social capital. Not everything we know is beneficial.

Think of the IC a thief possesses; social loss they impose is a societal negative.

Examples of negative intellectual capital in an organization: cost-plus pricing, Industrial Age efficiency metrics, Taylorism, focusing on activities and costs rather than results and value, and other forms of negative IC that have embedded themselves into the culture.

Knowledge Workers

Knowledge workers are unique:

They own the means of production
Firms need them more than they need firms—balance has shifted
KWs have unique value, not jobs
Office is their servant, not their master

Effectiveness is far more important than efficiency
Judgments are more important than measurements
•Ultimately, they are volunteers

The World Bank: in two reports, Where is the Wealth of Nations (2006) and The Changing Wealth of Nations (2010) report that 80% of the developed world’s wealth resides in human capital.

Other books and resources mentioned

The Rational Optimist (P.S.), by Matt Ridley

Dear Reader: The Unauthorized Autobiography of Kim Jong Il, by Michael Malice

Ronald Reagan, speech at Moscow State University, 1988

Text here. Ron believes this is one of his all-time best speeches. He’s basically telling the students, in a very polite way, their economy is headed for the ash heap of history, due to what he calls the information economy, but we are calling the knowledge economy.

Email us at: tsoe@verasage.com

Twitter: @edkless @ronaldbaker #tsoe