Knowledge economy

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The knowledge economy, or knowledge-based economy, is an economic system in which the production of goods and services is based principally on knowledge-intensive activities that contribute to advancement in technical and scientific innovation.^[1] The key element of value is the greater dependence on human capital and intellectual property as the source of innovative ideas, information and practices. Organisations are required to capitalise on this "knowledge" in their production to stimulate and deepen the business development process. There is less reliance on physical input and natural resources. A knowledge-based economy relies on the crucial role of intangible assets within the organisations' settings in facilitating modern economic growth.^[2]

Overview

Description

A knowledge economy features a highly

A knowledge economy emphasizes the importance of skills in a service economy, the third phase of economic development, also called a post-industrial economy. It is related to an information economy, which emphasizes the importance of information as non-physical capital, and a digital economy, which emphasizes the degree to which information technology facilitates trade. For companies, intellectual property such as trade secrets, copyrighted material, and patented processes become more valuable in a knowledge economy than in earlier eras.^{[10][11][12][13][14]}

The global economy's transition to a knowledge economy^{[15][16][1][17][18][19][20]} is also referred to as the Information Age, bringing about an information society.^[21] The term knowledge economy was made famous by Peter Drucker as the title of Chapter 12 in his book The Age of Discontinuity (1969), which Drucker attributed to economist Fritz Machlup, originating in the idea of scientific management developed by Frederick Winslow Taylor.^[22]

Knowledge-based economy and human capital

In a knowledge economy, human intelligence is the key engine of economic development. It is an economy where members acquire, create, disseminate and apply knowledge to facilitate economic and social development.^[23][24]

An economic system that is not knowledge-based is considered to be inconceivable.^[25] It describes the process of consumption and production activities that are satisfied from the application of workers' expertise - intellectual capital and typically represents a significant level of individual economic activities in modern developed economies through building an interconnected and advanced global economy where sources of knowledge are the critical contributors.^[26]

The present concept of "knowledge" originates from the

• Know-what refers to knowledge about facts. Like information, experts utilize know-what to fulfill their jobs, such as with complex occupations such as law and medicine.
• Know-why refers to scientific knowledge of principles and laws of motion in nature. It concerns the theoretical research of scientific and technological fields, which is essential for allowing innovation in the production process and products development in areas such as universities and specialized firms. It can also reduce error frequency in trial and error procedures.^[29]
• Know-who refers to knowledge of specific and selective social relations, identifying the key persons who know the solutions and can perform under difficult scenarios. Finding the right people can be more essential to innovation than simply knowing basic scientific knowledge.
• Know-how refers to practical skills, which allow individuals to do different kinds of things. Individuals share experiences in groups with uniform practices. It constitutes the human capital of enterprises.

The World Bank has spoken of knowledge economies by associating it to a four - pillar framework that analyses the rationales of human capital-based economies:

• An educated and skilled
  labour force
  is required to establish a strong knowledge-based economy, where workers continuously learn and apply their skills to build and practice knowledge efficiently.
• A dense and modern information infrastructure provides easy access to the information and communication technology (ICT) resources to overcome the barrier of high transaction costs, and to facilitate the effectiveness in interacting, disseminating and processing the information and knowledge resources.
• An effective innovation system is needed to support a great level of innovation within firms, industries, and countries, allowing them to keep up with the latest global technology and human intelligence to utilize it for the domestic economy.
• Institutional regime that supports incentives for entrepreneurship and the use of knowledge suggests that an economy system should offer incentives for better efficiency in mobilizing and allocating resources and encourage entrepreneurship.

The advancement of a knowledge-based economy occurred when global economies promote changes in material production, together with the creation of rich mechanisms of economic theories after the Second World War that tend to integrate science, technology and the economy.^[30]

Peter Drucker discussed the knowledge economy in the book-The Effective Executive 1966,^[22][31] where he described the difference between the manual workers and the knowledge workers. The manual worker is the one who works with their own hands and produces goods and services. In contrast, the knowledge worker works with their head, rather than hands, and produces ideas, knowledge, and information.

Information versus knowledge

Definitions around "knowledge" are considered to be vague in terms of the formalization and modelling of a knowledge economy, as it is rather a relative concept. For example, there is no sufficient evidence and consideration for whether the "information society" could serve or act as the "knowledge society" interchangeably. Information in general, is not equivalent to knowledge. Their use depends on the individual and group's preferences which are "economy-dependent".^[32] Information and knowledge together are production resources that can exist without interacting with other sources. Resources are highly independent of each other in the sense that if they connect with other available resources, they transfer into factors of production immediately, and production factors are present only to interact with other factors. Knowledge associated with intellectual information then is said to be a production factor in the new economy that is distinguished from traditional production factors.^[23]

Evolution

From the early days of economic studies, though economists recognised the essential link between knowledge and economic growth, knowledge was still identified only as a supplemental element in economic factors. The idea behind it has transformed recently when new growth theory praised knowledge and technology in enhancing productivity and economic advancement.^{[13][14][25][23][30][33]}

The developed society has transitioned from an agriculture-based economy, that is, the pre-industrial age where economy and wealth was primarily based upon agriculture, to an industrial economy where the manufacturing sector was booming. In the mid-1900s, world economies moved towards a post-industrial or mass production system, where they were driven by the service sector that creates greater wealth versus manufacturing; to the late 1900s - 2000s, knowledge economy emerged with the highlights of the power of knowledge and human capital sector, and it's now marked as the latest stage of development in global economic restructuring.^[10][33] In the final decades of 20th century, the knowledge economy became greatly associated with sectors based in research-intensive and high-technology industries as a result of the steadily increased demand for sophisticated science-based innovations.^[30] The knowledge economy operates differently from the past as it has been identified by the upheavals (sometimes referred to as the knowledge revolution) in technological innovations and globally competitive need for differentiation with new goods and services, and processes that develop from the research community (i.e., R&D factors, universities, labs, educational institutes).^[14][34] Thomas A. Stewart points out that just as the industrial revolution did not end agriculture because people have to eat, the knowledge revolution is unlikely to end manufacturing industries because of ongoing societal demands for physical goods and services.^[35]

For the modern knowledge economies, especially in developed countries, information and knowledge have always taken on enormous importance in the development in either traditional or industrial economies, particularly with for the efficient use of factors of production. Owners of production factors should possess and master information and knowledge so as to apply them to economic activity.^[23] In the knowledge economy, the specialised labor force is characterised as computer literate and well-trained in handling data, developing algorithms and simulated models, and innovating on processes and systems.^[34][36] Harvard Business School Professor Michael Porter asserts that today's economy is far more dynamic and that conventional notion of comparative advantages within a company has changed and is less relevant than the prevailing idea of competitive advantages which rests on "making more productive use of inputs, which requires continual innovation".^[37] Therefore, the technical STEM careers, including computer scientists, engineers, chemists, biologists, mathematicians, and scientific inventors will continue to see demand. Porter further argues that well-situated clusters (that is, geographic concentrations of interconnected companies and institutions in a particular field) are vital with global economies, connect locally and globally with linked industries, manufacturers, and other entities that are related by skills, technologies, and other common inputs. Knowledge is the catalyst and connective tissue in modern economies.^[37] Ruggles and Holtshouse argue the change is characterised by a dispersion of power and by managers who lead by empowering knowledge workers to contribute and make decisions.^[38]

With Earth's depleting natural resources, the need for

Prevailing and future economic development will be highly dominated by technology and network expansion, in particular on knowledge-based social entrepreneurship and entrepreneurship as a whole. The knowledge economy is incorporating the network economy, where the relatively localised knowledge is now being shared among and across various networks for the benefit of all network members, to gain economies of scale in a wider, more open scale.^[23][40][33]

Globalisation

The rapid globalisation of economic activities is one of the main determinants of the emerging knowledge economy. While there are no doubts on the other stages of relative openness in the global economy, the prevailing pace and intensity of globalisation are without precedent.^[10][13] Fundamental microeconomic forces are the significant drivers of globalizing economic activities and further demands for human intelligence. These forces include the rapid integration of the world's financial and capital markets since the early 1980s, which influences essentially each level of the developed country's financial and economic systems; increased multinational origin of the inputs to productions of both goods and services, technology transfers and information flow.^{[2][3][10][14][25][36]}

Worldwide examples of the developing knowledge economy include information technology in

Notes

Bibliography

• Arthur, W. B. (1996). Increasing Returns and the New World of Business Archived 2019-07-27 at the Wayback Machine. Harvard Business Review(July/August), 100–109.
• Bell, D. (1974). The Coming of Post-Industrial Society: A Venture in Social Forecasting. London: Heinemann.
• Drucker, P. (1969). The Age of Discontinuity; Guidelines to Our changing Society. New York: Harper and Row.
• Drucker, P. (1993). Post-Capitalist Society. Oxford: Butterworth Heinemann.
• Machlup, F. (1962). The Production and Distribution of Knowledge in the United States. Princeton: Princeton University Press.
• Porter, M. E. Clusters and the New Economics of Competition. Harvard Business Review. (Nov-Dec 1998). 77–90.
• Powell, Walter W. & Snellman, Kaisa (2004). "The Knowledge Economy". Annual Review of Sociology 30 (1): 199–220
• Rindermann H. (2012). Intellectual classes, technological progress and economic development: The rise of cognitive capitalism. Personality and Individual Differences 53 (2) 108–113
• Rooney, D., Hearn, G., Mandeville, T., & Joseph, R. (2003). Public Policy in Knowledge-Based Economies: Foundations and Frameworks. Cheltenham: Edward Elgar.
• Rooney, D., Hearn, G., & Ninan, A. (2005). Handbook on the Knowledge Economy. Cheltenham: Edward Elgar.
• Stehr, Nico (2002). Knowledge and Economic Conduct. The Social Foundations of the Modern Economy. Toronto: University of Toronto Press.
• The Brookings Institution. MetroPolicy: Shaping A New Federal Partnership for a Metropolitan Nation. Metropolitan Policy Program Report. (2008). 4–103.

External links

Wikiquote has quotations related to Knowledge economy.

• Legal and Regulatory Issues in the Information Economy (Wikibook)