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can be considered the residual, that is the excess output that cannot be explained in
equilibrium conditions.
Following Griliches (1979), technological knowledge enters directly a standard Cobb-
Douglas production function with constant returns to scale:
Y
= (
I
f
T
g
) where
f
+
g
= 1
(7.3)
C
=
cI
+
sT
(7.4)
dY
/
Y
=
A
(7.5)
where for the sake of simplicity
I
is a bundle of tangible inputs,
c
are their costs,
T
is
technological knowledge and
s
its cost, and
A
measures total factor productivity growth
stemming from pecuniary knowledge externalities.
Total factor productivity growth can be explained by means of positive pecuniary
knowledge externalities, because knowledge is a production factor both for the produc-
tion of goods and for the generation of further knowledge, and it is characterized by non-
exhaustibility and its production function is shaped by the complementarity between
external and internal sources knowledge.
The working of pecuniary knowledge externalities is compatible with equilibrium con-
ditions at the i rm level while at the aggregate level the system is far from equilibrium.
As long as pecuniary knowledge externalities are found, the typical system dynamics,
stemming from the positive feedback generated by knowledge non-exhaustibility and
knowledge complementarity, implemented by good knowledge governance mechanisms,
are at work at the system level.
The application of the notion of pecuniary externalities to the economics of knowl-
edge makes it possible to appreciate and identify both the positive and negative
ef ects of knowledge appropriability. The tradition of analysis based on the contribu-
tions of Arrow (1962a) has focused the negative ef ects of the non-appropriability of
knowledge in terms of missing incentives to the generation of new knowledge. The
tradition of analysis paved by Griliches has appreciated the positive ef ects of the non-
appropriability of knowledge in terms of the uncontrolled spillover of knowledge from
'inventors' to third parties. The two approaches however have rarely been integrated
in a single framework. This is possible when the dual role of knowledge as both the
output of an intentional economic process and an input in the production of both new
knowledge and other goods that use knowledge as an intermediary factor is appreciated
(Antonelli, 2008b).
The understanding of the dual role of knowledge as an output and an input makes it
possible to use the notion of derived demand. The non-appropriability of knowledge, as
sketched by the dotted supply and demand schedules of Figure 7.3, has ef ects both on
demand and on supply. The ef ects on the derived demand side are negative, as the prices
for knowledge are lower than they would be with a pure private good characterized by
full appropriability and exhaustibility, and push downward the position of the demand
curve (see in Figure 7.3 the shift of the derived demand curve from the bold to the dotted
line), but the ef ects on the supply side are positive as they push downward the supply
curve as well. The costs of the production of new knowledge are in fact lower - with
