The term “knowledge economy” was first coined in the 1960s by Peter Drucker. The management consultant used the term to describe a shift from traditional economies, where there was a reliance on unskilled labor and primary production, to economies reliant on service industries and jobs requiring more thinking and data analysis. The knowledge economy is a system of consumption and production based on knowledge-intensive activities that contribute to scientific and technical innovation.
Understanding the knowledge economy
This transition has accelerated because of an increasing reliance on computerization, big data, and automation in most developed nations. Indeed, knowledge economies are characterized by the presence of a higher percentage of skilled employees whose careers require specialist knowledge or expertise.
It is important to note that in a knowledge economy, human expertise is the productive asset or business product that can be sold or exported for a profit. These somewhat intangible knowledge-based assets are known as intellectual capital.
The four pillars of the knowledge economy
According to the World Bank, four pillars comprise a knowledge economy framework. Collectively, these pillars must be in place before an economy or country can add value to products and services using intellectual capital:
An institutional regime with economic incentives
An economic and regulatory environment that supports the free flow of knowledge and encourages entrepreneurship is central to the knowledge economy. Regimes should be open to international trade and be free from protectionist policies that inhibit competition and innovation.
Educated and skilled workers
Knowledge economies place unique demands on labor who must acquire more skills and experience over their working lives. Continuous learning fosters social cohesion, reduces crime, and improves income distribution. This learning process may occur in a formal university or non-formal community context.
An effective innovation system
This means there must be a collection of firms, universities, research centers, consultants, and other organizations that help a country acquire, create, disseminate, and use knowledge. This collaborative effort provides an environment that nurtures research and development, innovation, and progress.
Information infrastructure
Knowledge is next to useless if it cannot be disseminated throughout a population. Information infrastructure describes the effective communication, dissemination, and processing of information and technology. In theory, the flow of knowledge and information around the world increases collaboration, productivity, and output.
What does a knowledge economy look like?
A knowledge economy is to some extent self-sustaining and is supported by innovation, research, and rapid technological advancement. The workforce is extremely computer literate and there is an emphasis on the development of artificial intelligence and algorithms to create accurate business and financial models.
According to Harvard Business School Professor Michael Porter, competitive advantage in a knowledge economy means a company must be flexible, responsive, and innovative. What’s more, it must devote a considerable percentage of its resources toward research and development.
Key takeaways:
- The knowledge economy is a system of consumption and production based on knowledge-intensive activities that contribute to scientific and technical innovation. It was first described by management consultant Peter Drucker.
- According to the World Bank, the four pillars of a knowledge economy are an institutional regime with economic incentives, educated and skilled workers, an effective innovation system, and information infrastructure.
- The knowledge economy is to some extent self-sustaining as companies race to secure a competitive advantage via research, development, and innovation. This helps them remain flexible and responsive in dynamic modern markets.
Connected Economic Concepts

Positive and Normative Economics


































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