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What Is the Knowledge Economy and Why Is It Important?

The phrase “knowledge economy” has gained increasing currency in recent years, but what exactly is the knowledge economy? And where did this concept come from? In the simplest terms, the knowledge economy refers to a modern system of economics in which intellectual capital and intellectual property form a central component of both the labor and production markets. The idea can be traced to the evolving ideas about work, labor, and the creation of value in the mid-to-late 20th Century. 

But why is the knowledge economy such an important concept in today’s increasingly global economy and what role can it play in your career?

To gain the specialized skills and credentials to contribute to this knowledge economy, consider checking out the Highest Paying Business Majors

Otherwise, read on to learn more about the knowledge economy…

What is the knowledge economy?

The knowledge economy refers to the dimension of our domestic and global economy composed of intellectual abilities and property. If this sounds a little vague, the truth is, the knowledge economy has become an absolutely dominant force in modern free market economies like the one we have here in the United States. Perhaps you’ve heard it said that we are living in an Information Age, a time in history uniquely distinguished by the incredible speed, volume, and accessibility with which information can now be shared, located and leveraged. This is a raw demonstration of just how foundational the knowledge economy is to our current way of life.

According to an article from the Annual Review of Sociology, scholars define “the knowledge economy as production and services based on knowledge-intensive activities that contribute to an acerbated pace of technical and scientific advance, as well as rapid obsolescence. The key component of a knowledge economy is a great reliance on intellectual capabilities than on physical inputs or natural resources.” 

Nations fueled by knowledge economies place a high premium on education, the acquisition of specialized knowledge, the capacity for innovation, the engagement of research and development, and the embrace of ideas (as opposed to mere industrial activity). The clearest practical demonstration of the knowledge economy is the transformative impact of innovative computing technology in every aspect of our society. For instance, the advent and proliferation of high-speed wireless internet over the past two decades has altered literally every dimension of the economy from the way consumers interact with brands to the way that businesses collaborate with one another; from the way that individuals earn a living to the way that we exchange currency.

Of course, the changes visited upon our lives through the mass proliferation of web technology have been far more consequential than simply changing our shopping habits. The permeation of web technology has changed the way we engage politics, communicate with family members, seek out romantic partners, participate in community action, consume popular culture, and much more. 

And all of these changes are rooted in the manifestation of innovation from knowledge. This is a clear demonstration of how intellect, education, idea and opportunity can converge to shape everything around us. This one example underscores exactly why the knowledge economy has become such a critical dimension of the modern global economy. Couched in this concept is the very idea that we are capable of advancing by building on and capitalizing upon our collective knowledge. 

What are the different types of knowledge economy?

According to some theorists, the concept of the knowledge economy can be divided into three distinct forms—the learning economy, the creative economy, and the open knowledge economy. While few national economies fall neatly into one category or the other, these sometimes overlapping types may help us to understand the array of philosophies that can drive a knowledge economy. 

Michael Peters differentiates between the three forms of the knowledge economy in an article for the British Journal of Educational Studies, arguing that “these three forms and discourses represent three recent related but different conceptions of the knowledge economy, each with clear significance and implications for education and education policy.”

A “learning economy,” which may best describe the type of knowledge economy instituted in the U.S., is one in which education and skills are valued as meaningful assets, and in which educational credentials are shared openly between learners and hiring institutions as a way of demonstrating possession of these assets. 

A “creative economy” is one in which the values of creativity and ingenuity are prized as having real economic value. The notion of a creative economy refers broadly to an entire economic system in which creative instincts are prioritized, as opposed to merely referencing participation in endeavors traditionally considered creative. Some modern economists view this as the central characteristic of 21st Century free market economies. 

An “open knowledge” economy is one which prioritizes transparency, access, and inclusiveness to the extent that education and opportunity are attainable to the widest possible number of participants. According to Peters, an open knowledge economy “provides a model of radically non-propertarian form that incorporates both ‘open education’ and ‘open science’ economies.”

In simpler terms, an open knowledge economy is one which advances the democratization of knowledge, education, and information. 

What are the Four Pillars of the Knowledge Economy?

According to the World Bank, the Four Pillars of the Knowledge Economy are Education & Training; Information Infrastructure; Economic Incentive and Institutional Regime; and Innovative Systems. These pillars create a dynamic system in which skilled workers, innovative technology, economic opportunity, and an ongoing investment in research and learning ultimately produce a thriving economy. 

This system relies upon engagement at several different levels. For instance, the establishment of Innovative Systems depends on the existence of a free, diverse, and well-resourced network of universities, think tanks, research laboratories, community organizations, and other bodies where ideas are manifested as innovations. Likewise, a meaningful Information Infrastructure depends on the commitment that leaders, governing bodies, and private agencies make to democratizing access to information, as well as the ability of parties to share and disseminate this information.

These Four Pillars demonstrate that buy-in is required at every level, from the existence of a populace that desires, seeks and has access to education to a body of leadership that must find constructive ways of creating opportunities for this education; from the funding of public universities to the investment of private firms in new ideas to the establishment of technology for carrying these ideas to the public. The knowledge economy is built on these inherently interdependent parts, and economic success is predicated on the foundation provided by these pillars. Similarly, in economies that fail, there is evidence that these pillars have either crumbled, or have never been erected in the first place. (We’ll explore an historically significant example in the section directly below).

Why is the knowledge economy important? 

One reason the knowledge economy is so important is because knowledge is cumulative. Innovation is a reflection of one idea building off of another in the way that microchip computing helped to beget the home computer revolution; in the way that the hypertext markup language helped to beget the public proliferation of the world wide web; in the way the mass installation of fibre optic cable helped lead to the mainstreaming of the smartphone. Those economies—whether national, regional, or even just organizational—that cultivate, attract, and retain human intelligence are in a stronger position to seize on existing knowledge in order to build new, world-changing, and economically profitable innovations. 

There is strong evidence of this phenomenon by way of contradiction. Historically, nations where freedoms are restricted experience what is known as a “brain drain,” in which the best and the brightest flee oppressive conditions in search of greater opportunity. Perhaps the starkest demonstration of this occurred during the mid-to-late 20th Century when, at the height of the Cold War, those living behind the Iron Curtain experienced restrictive and often violent totalitarian rule at the hands of the Soviet Union. 

Countless scholars, students, scientists and thought leaders fled the Soviet Union and the states which it controlled by proxy, seeking opportunity in the West. Famously, the partition known as the Berlin Wall, which separated East and West Berlin for 30 years, offered clear evidence of the divergent economic outlooks for those living in the increasingly knowledge-based economy of West Berlin and those living under the oppressive conditions and limited prospects of Soviet rule in East Berlin. While those Germans on the West side of the wall flourished, those on the East side of the wall, in spite of sharing the exact same ethnic and historical backgrounds, floundered. 

It should perhaps come as no surprise then, that it was in the thick of this semi-global trend that economist Peter Drucker was credited with coining the term “knowledge economy.” The Berlin Wall was erected in 1961. In 1969, Drucker used Knowledge Economy as the title for the 12th Chapter of his groundbreaking text, The Age of Discontinuity. As the book’s title suggests, Drucker foresaw an immediate transformation of the world’s economy. According to an article from the Harvard Business Review, “Drucker had become convinced that knowledge was a more crucial economic resource than land, labor, or financial assets, leading to what he called a ‘post-capitalist society.’ And shortly thereafter (and not long before he died in 2005), Drucker declared that increasing the productivity of knowledge workers was ‘the most important contribution management needs to make in the 21st century.’”

This message was not lost on Cold War era Soviet leaders. However, the survival of totalitarian rule necessitates rigid control over information, limitations on the freedom of expression, suppression of a free press, dispensation with political opposition, restrictions over educational freedoms, and tight control over channels of research, production, and technological innovation. So even as leaders were painfully aware of the so-called brain drain, Soviet rule depended entirely upon the stifling of knowledge and the distortion of information. In some ways, Peter Drucker’s theories offered a window into the inevitable collapse of the Soviet economic structure. 

These trends demonstrated the economic peril of failing to cultivate knowledge and intelligence. The best, brightest, and most ambitious minds made their way to nations where their talents could be exercised, their opportunities fully realized, and their contributions added to an accumulating body of shared knowledge. In this way, immigration and emigration trends are an important component of the knowledge economy because they demonstrate a nation’s ability both to attract talent from around the world and its ability to retain the talent born within its borders.

Indeed, there may be some evidence from just the last five years that America’s more restrictive immigration policies, combined with the practical impediments to immigration created by the COVID-19 pandemic have had a negative impact on the nation’s broader knowledge economy. As we face down a labor shortage crisis and declining enrollment in our colleges and universities, the United States may indeed be coming face to face with tangible evidence of just how much the knowledge economy matters.

So what can we do about it? 

Well, for one thing, we need to prioritize jobs that fit into the schema of a knowledge economy, at every single level. Knowledge economy jobs draw talent from all over the word, and give homegrown talent opportunities to realize their full potential. But what exactly does that mean?

What are knowledge economy jobs?

In the simplest terms, knowledge economy jobs are those that actually give workers the autonomy and opportunity to use their intelligence. The achievements of greatest value are those that come from settings where ingenuity and calculated risk are rewarded. Peter Drucker, with no small amount of prescience, “urged executives to push decision-making and accountability all the way down through the organization as early as 1954, when he introduced the concept of Management by Objectives. And yet there is ample evidence that most organizations remain paragons of command-and-control. In a knowledge economy, top-down direction is particularly detrimental because employees are bound to know more than their supervisors do about the specialized fields in which they operate. They may also know more about the customer—his needs and desires. ‘Knowledge workers have to manage themselves,’ Drucker advised. ‘They have to have autonomy.’”

In other words, a knowledge economy job isn’t a specific line or work or a particular sector of the broader economy. Instead, it is an employment philosophy, one which actually cultivates the abilities of employers, rather than simply plugging them into labor roles. Today, in the immediate aftermath of the COVID-19 pandemic, workers are reevaluating their relationship with employment. Meanwhile, employers are struggling through labor shortages. This suggests that we are at an inflection point. Workers expect more freedom, autonomy, and personal opportunity for advancement. Employers may just have to meet these expectations if they hope to survive in this increasingly knowledge-based economy.


At the heart of the knowledge economy are education and ingenuity. Bring both to the table when you interview with prospective employers by earning a degree in a high-paying sector of the economy. Invariably, you will find that the best paying career paths are those where knowledge, intelligence and autonomy all play a major role. To learn more, check out these College Degrees With the Highest Entry-Level Salary