Think of the disruption Open Source Software has caused in corporate IT. The struggle to get a grip on the Total Cost of Ownership for Linux systems versus Windows systems has been an ongoing drama of claims and counterclaims about the “cost of free” and productivity of systems administrators. What should be a tractable problem remains a hot bed of controversy.

If we can’t solve a highly constrained TCO issue, how do we make the leap to macro-scale economics? Nonetheless, the health and welfare of IT are close to the heart of many now trying to determine economic and social policy.

This is particularly true in Europe where data from national economic accounts concerning a country’s Gross Domestic Product (GDP) are linked to strategic decisions shaping European Union (EU) policies. Such data served as the main information input in the creation of the Maastricht criteria for Europe’s Monetary Union. Such data also comes to the forefront when it comes to policy decisions by the European Commission (EC) as it attempts to deliver on the Lisbon objective to become the most dynamic, competitive, and knowledge-intensive economy in the world by 2010. To this end, our leap turns out to be far more interesting in terms of what is not known than what is known.

The construct that vexes Alan Greenspan and troubles many economists is that what’s really new about the 21st century economy is that we can no longer rely on tangible assets and the representation of production as a purely physical process to project the rate and direction of economic change. In other words, there is no “new economy,” but there is a set of “new economic drivers” and these drivers are the “knowledge assets” that economists have long described as soft, immaterial, or intangible.

At a time when there is a dearth of confidence in the ability of accountants to provide an accurate picture of corporate performance, economists now admit that their ability to track the economic assets starting to drive the economy is limited, which means so is their ability to measure economic progress. The problem rests with those intangible assets. Long the accountancy equivalent of a miscellaneous category, any growth attributed to this category was simply referred to as “residuals.” Today, economic growth is showing up strongly in these residuals and is actually declining in the sector of the economy that is measured by official statistics. The fraction of the economy for which productivity data can be deemed reasonably accurate is now pegged at less than 30%.

To alleviate this problem the European Commission funded a multi-disciplinary initiative under the Information Society Technologies program to gain a deeper understanding of the issues surrounding the measurement of intangibles in the modern economy. Called PRISM, this group is conducting market-oriented policy research into intangible assets and investments such as software, brands, licenses, copyrights, and R&D as drivers of the creation of competitive advantage and economic value. Their charter extends to the evaluation of emerging conceptual business models and market practices. The goal is to identify priority areas where the current corporate, market, and regulatory systems need to be refined in order to achieve the Lisbon knowledge-economy objective.

To this end, PRISM held a special conference in London last week. At that conference, significant attention was centered on breaking away from the best of 19th century thinking about classifying economic goods. At center stage were the black and white dichotomies set up long before anyone had ever heard of intellectual property, let alone human capital. In general, accountants consider any expenditure that does not lead to an asset, which is clearly identified and quantified in financial market-value terms, as an expense and not an investment. The belief is that the insistence of accountants on financially valuing everything leads to arbitrary distinctions between fixed assets and expenses and impedes the disclosure of information.

More germane to the Open Source Software movement, a great deal of attention was paid to potential indicators to what was dubbed the “new-look” economy. In particular, a not-so-surprising, but still important correlation factor that helps to better explain both growth and the disparities across countries is the investment in Information and Communication Technologies (ICT). The data for this relationship comes from the Organization for Economic Co-operation and Development (OECD) and their recent paper Investment in Knowledge.

To get a rough indication of a nation’s investment in knowledge, the OECD focuses on public and private spending on higher education, investment in software, and expenditure on R&D. Using this formula, Sweden, the United States, Korea, and Finland are the four most knowledge-based economies, as their investment in knowledge amounts to 5.2-6.5% of GDP. What’s more, the ratio of investment in knowledge to GDP in Sweden, Finland, and the United States is more than two-thirds of the ratio of investment in machinery and equipment to GDP.

Another important point that the OECD highlights in its Growth Project suggests that for ICT to make any lasting improvement in productivity and economic growth, such an improvement must come from the application of ITC goods and not from the production of ICT goods. In other words, countries that do not produce ICT can benefit from it just as much as those, like the US, that have a substantial ICT production industry. The only stipulation is that the right complementary skills and training are in place.

All of this resonates well with the adoption of Open Source. Software investment costs are typically the second largest component in the OECD’s investment in knowledge metric. For developing countries, Open Source is the only way to keep abreast with the United States and the Nordic countries. Failure to keep up could accelerate divergence rather than convergence in the world’s economies. More importantly, the recognition that the local application of ICT goods along with the development of new local skills and training will improve local productivity growth just as much as producing those goods should be a familiar argument for Open readers.

This is precisely the argument that Edgar Villnueva Nuñez used in his staunch defense of a Bill in the Peruvian Congress to make Free Software the standard in government offices. In a rebuttal to a challenge from Microsoft's General Manager in Peru, Dr Villnueva wrote "With free software one creates more technically qualified employment and a framework of free competence where success is only tied to the ability to offer good technical support and quality of service, one stimulates the market, and one increases the shared fund of knowledge, opening up alternatives to generate services of greater total value and a higher quality level, to the benefit of all involved: producers, service organizations, and consumers. "

Equally important, the economic activities that Dr Villnueva is envisioning are precisely the sorts of activities that economists have been lumping into intangibles: training costs, organizational restructuring, and business process redesign. Computer systems both enable and demand wide-ranging changes in corporations before those corporations can become fully productive. To get a sense of the magnitude of the impact of this gray area, consider that the US may have created over $1 trillion of computer-related intangible assets over the past decade. In 1998, investments in computer–related assets, both tangible and intangible, may have constituted as much as 10% of GDP.

Clearly the numbers are significant. With upwards of 10% of GDP misclassified, or worse unaccounted for, any economic analysis will be distorted at best. As a result the concluding observation of Richard Youngman's paper Charting the Development of the 21st Century Economy  noted:

The empirical work cited above demonstrates that there is much work that needs to be done before we can even come close to being able to measure human capital in accordance with the OECD (1998) definition – namely, the "knowledge, skills, competences and other attributes embodied in individuals that are relevant to economic activity."