Knowledge economy

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The knowledge economy (or the 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 a rapid pace of advancement in technical and scientific innovation as well as accelerated obsolescence. [1] The key element of value is the greater dependence on human capital and intellectual property for the source of the innovative ideas, information and practices. [2] Organisations are required to capitalise this "knowledge" into 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. [3]


A knowledge economy features a highly skilled workforce within the microeconomic and macroeconomic environment; institutions and industries create jobs that demand specialized skills in order to meet the global market needs. [4] [5] Knowledge is viewed as an additional input to labour and capital. [6] In principle, one's primary individual capital is knowledge together with the ability to perform so as to create economic value. [5]

In a knowledge economy, highly skilled jobs require excellent technical skills and relational skills [7] such as problem-solving, the flexibility to interface with multiple discipline areas as well as the ability to adapt to changes as opposed to moving or crafting physical objects in conventional manufacturing-based economies. [8] [9] A knowledge economy stands in contrast to an agrarian economy, in which the primary economic activity is subsistence farming for which the main requirement is manual labour [10] or an industrialized economy that features mass production in which most of the works are relatively unskilled. [11]

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. [12] [13] [14] [15] [16]

The global economy transition to a knowledge economy [17] [18] [1] [19] [20] [21] [22] is also referred to as the Information Age, bringing about an information society. [23] The term knowledge economy was made famous by Peter Drucker as the title of Chapter 12 in his book The Age of Discontinuity (1969), that Drucker attributed to economist Fritz Machlup, originating in the idea of scientific management developed by Frederick Winslow Taylor. [24]


Knowledge Economy and Human capital

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 for "knowledge" is origins from the historical and philosophical studies by Gilbert Ryle [27] and Israel Scheffler [28] who conducted knowledge to the terms "procedural knowledge" and "conceptual Knowledge" and identified two types of skills: "routine competencies or facilities" and "critical skills" that is intelligent performance; and it's further elaborated by Lundvall and Johnson [29] who defined "knowledge" economically highlighting four broad categories:

In a knowledge economy, human intellectual is the key engine of economic enhancement. It is an economy where members acquire, create, disseminate and apply knowledge for facilitating economic and social development. [31] [32] The World Bank has spoken of knowledge economies by associating it to a four - pillar framework that analyses the rationales of a human capital based economies:

The initial foundation for the knowledge economy was introduced in 1966 in the book The Effective Executive by Peter Drucker. In this book, Drucker described the difference between the manual worker (page 2) and the knowledge worker. The manual worker, according to him, works with their hands and produces goods or services. In contrast, a knowledge worker (page 3) works with their head, not hands, and produces ideas, knowledge, and information.

The key problem in the formalization and modeling of knowledge economy is a vague definition of knowledge , which is a rather relative concept. For example, it is not proper to consider information society as interchangeable with knowledge society . Information is usually not equivalent to knowledge. Their use depends on individual and group preferences (see the cognitive IPK model) which are "economy-dependent". [33]


From the early days of economic studies, though economists recognised the essential link between knowledge and economic growth, it was still identified only as a supplemental element in economic factors. The idea behind has transformed in recent years when new growth theory gave praise to knowledge and technology in enhancing productivity and economic advancement. [34]

Thus far, the developed society has transitioned from an agriculture-based economy, that is, the pre-industrial age where economy and wealth is primarily based upon agriculture, to an industrial economy where the manufacturing sector was booming. In the mid-1900s, the world economies moved towards a post-industrial or mass production system, where it is driven by the service sector that creates greater wealth than the manufacturing factor; to the late 1900s - 2000s, knowledge economy emerged with the highlights of the power of knowledge and human capital sector, and is now marked as the latest stage of development in global economic restructuring. [12] [34] 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). Thomas A. Stewart [35] points out that just as the industrial revolution did not end agriculture because people have to eat, the knowledge revolution is unlikely to end the industry because society remains in demands for physical goods and services. .

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. Harvard Business School Professor, Michael Porter, asserts that today's economy is far more dynamic and that comparative advantage is less relevant than competitive advantage which rests on "making more productive use of inputs, which requires continual innovation". [36] Consequently, the technical STEM careers including computer scientists, engineers, chemists, biologists, mathematicians, and scientific inventors will see continuous demand in years to come. Additionally, well-situated clusters, which Michael Porter argues is vital in global economies, connect locally with linked industries, manufacturers, and other entities that are related by skills, technologies, and other common inputs. Hence, knowledge is the catalyst and connective tissue in modern economies. Ruggles and Holtshouse [37] argue the change is characterized by a dispersion of power and by managers who lead by empowering knowledge workers to contribute and make decisions.

With Earth's depleting natural resources, the need for green infrastructure, a logistics industry forced into just-in-time deliveries, growing global demand, regulatory policy governed by performance results, and a host of other items high priority is put on knowledge; and research becomes paramount. Knowledge provides the technical expertise, problem-solving, performance measurement and evaluation, and data management needed for the trans-boundary, interdisciplinary global scale of today's competition. [38]

Worldwide examples of the knowledge economy taking place among many others include: Silicon Valley in California; aerospace and automotive engineering in Munich, Germany; biotechnology in Hyderabad, India; electronics and digital media in Seoul, South Korea; petrochemical and energy industry in Brazil. Many other cities and regions try to follow a knowledge-driven development paradigm and increase their knowledge base by investing in higher education and research institutions in order to attract high skilled labor and better position themselves in the global competition. [39] Yet, despite digital tools democratizing access to knowledge, research shows that knowledge economy activities remain as concentrated as ever in traditional economic cores. [40]

It has been suggested[ by whom? ] that the next evolutionary step after knowledge economy is the network economy, where the relatively localized knowledge is now being shared among and across various networks for the benefit of the network members as a whole, to gain economic of scale in a wider, more open scale.[ citation needed ]


The technology requirements for a national innovation system as described by the World Bank Institute must be able to disseminate a unified process by which a working method may converge scientific and technology solutions, and organizational solutions. [41] According to the World Bank Institute's definition, such innovation would further enable the World Bank Institute's vision outlined in their Millennium Development Goals.

Challenges for developing countries

The United Nations Commission on Science and Technology for Development report (UNCSTD, 1997) concluded that for developing countries to successfully integrate ICTs and sustainable development in order to participate in the knowledge economy they need to intervene collectively and strategically. [42] Such collective intervention suggested would be in the development of effective national ICT policies that support the new regulatory framework, promote the selected knowledge production, and use of ICTs and harness their organizational changes to be in line with the Millennium Development Goals. The report further suggests that developing countries to develop the required ICT strategies and policies for institutions and regulations taking into account the need to be responsive to the issues of convergence.

See also


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