advances related to the Internet, technology is being applied in many different areas. Wladawsky-Berger predicts that, in the knowledge economy, the bulk of the innovation will increasingly be “up the stack,” occurring in applications, services, business practices, and the workings of society generally, as opposed to the hardware, goods-producing side of the economy. The technology and product innovations are now “market-facing” systems that are complicated and have to be designed and managed in a way that reflects the essential differences between machines and products, on one hand, and people and services, on the other. Technology is being applied to help people performing services do them better, which involves complicated emergent applications and systems, rather than well-behaved deterministic machines that do what people tell them to do. Part of this transition involves a world in which, increasingly, much that is needed to make progress is intangible in nature.

Wladawsky-Berger posed the question, “How can we structure a conversation about something as cosmic as the industrial and the knowledge economies and the transition between them?” He proceeded to examine how the knowledge economy differs from the industrial economy on the basis of three concepts that were at the heart of 18th century economist Adam Smith’s writings.

Division of Labor

Adam Smith observed that, when markets are big enough to warrant worrying about efficiencies and productivity, then companies and people can achieve greater productivity through specialization (instead of doing the same custom jobs, as was the practice in agriculture). This involves breaking down a problem into its components, which is all about specializing and improving processes.

The consequences of division of labor are fairly obvious when examining a big industrial project, such as designing and building a new airplane. But how does division of labor apply to the knowledge economy? Does it apply to the knowledge economy and to more intangible types of activities? The answer, according to Wladawsky-Berger, is that, more and more, people are able to apply technology, engineering disciplines, information analyses, and collaborative capabilities to the design, management, and operations of a business—and this is evident in sectors from banking to health care. In fact, he pointed out, in a lot of cases in which things are not working well—such as the health care system—it is because these things have not been done to the extent that is needed.

The same principles of division of labor, specialization of processes, technology, and automation collaboration are still critical elements of economic efficiency, but now they must be applied to very complex systems. Wladawsky-Berger described how IBM has started a major drive toward services sciences, management, and engineering, which examines this question of how to apply technology up the stack to improve production processes of services. In the case of IBM, services account for about 55 percent of revenues and, in the case of

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