DEFINITION: The phrase “knowledge economy” refers to the consumption and production of intellectual capital insofar as these activities take an economic form.
Often, the phrase is employed more narrowly to refer to efforts to develop scientific breakthroughs and practical research for economic benefit.
A substantial portion of the business goals pursued within most advanced economies today is involved with the knowledge economy.
Within this framework, a large proportion of value may be attributed to intangible resources, such as the intellectual attainments and know-how of the workforce.
ETYMOLOGY: The term “knowledge economy” was coined by the Austrian-born American economist Fritz Machlup in his 1962 book, The Production and Distribution of Knowledge in the United States, and later popularized by the German-born American economist and author, Peter Drucker.
The English noun “knowledge” derives from Middle English knowlege, which derives from the Middle English verb knowen. The latter verb, in turn, derives from Old English cnāwan, “to know,” which is akin to Old High German bichnaān, “to recognize,” and Latin nosco, noscere, “to come to know.”
The English social-science technical term “economics” was invented in the late eighteenth century. The related noun “economy” derives from Middle French yconomie, which, in turn, derives from Medieval Latin œconomia, and, ultimately, from Greek oikonomia, “household management,” which is compounded from the Greek words oikos, “house,” and nomos, “law.”
USAGE: The chief economic activities of developing nations tend to be agriculture and low-tech manufacturing.
Highly developed nations, in contrast, allocate a greater portion of their activities to high-tech manufacturing and services. Among the latter are typically such knowledge-centric pursuits as research and development, consulting, and technical assistance.
The knowledge economy refers to the realm where scientific and engineering breakthroughs are created and traded.
From a legal point of view, this valuable information may be transformed into commercial products through patents and other intellectual property safeguards.
The scientists and research laboratories who develop these products are also integral components of the knowledge economy.
Globalization is in the process of transforming the global economy in a knowledge-centric direction, incorporating optimal approaches from diverse national economies.
Additionally, these knowledge-oriented transformations are shaping an interconnected globe in which human skills and proprietary trade insights from all nations are viewed as valuable economic assets.
On the other hand, it remains crucial to emphasize that, according to the generally accepted accounting principles (GAAP), companies are generally not permitted to list knowledge-centric assets on their balance sheets.
The concept of the knowledge economy revolves around the idea that education and knowledge—often referred to as “human capital”—represent valuable assets and marketable commodities. These commodities, when sold and traded internationally, can generate profits for businesses, individuals, and the overall economy.
The knowledge economy places significant emphasis on intellectual abilities, instead of relying on natural resources or other tangible inputs.
Advances in the knowledge economy in technical and scientific domains are driven by products and services rooted in intellectual prowess. This fact motivates public and private investment in the upstream sources of this intellectual prowess. Such advances also foster innovation downstream throughout the broader economy.
The World Bank characterizes knowledge economies by the following four fundamental pillars:
- Institutional frameworks that incentivize the use of knowledge in entrepreneurship
- Presence of an excellent education system and an efficient workforce
- Accessibility to advanced information and communication technology (ICT) infrastructure
- A dynamic innovation environment embracing private enterprises, academia, and civil society
Academic establishments, companies that engage in research and development (R&D), programmers who create innovative software, and healthcare professionals who utilize digital information to enhance treatments are all important players within the knowledge economy.
These knowledge-economy participants may transfer the results of their research to individuals in conventional sectors.
For instance, farmers may benefit from software applications and digital tools that assist with crop management, medical practitioners may advance the boundaries of therapy with procedures like robot-assisted surgery, and educational institutions may offer digital resources and online courses to students, to name only a few of the myriad spin-offs from knowledge-centric economic activity.