knowledge-economy

What Is The Knowledge Economy? The Knowledge Economy In A Nutshell

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.

Main Free Guides:

Connected Business Concepts

Economies of Scale

economies-of-scale
In Economics, Economies of Scale is a theory for which, as companies grow, they gain cost advantages. More precisely, companies manage to benefit from these cost advantages as they grow, due to increased efficiency in production. Thus, as companies scale and increase production, a subsequent decrease in the costs associated with it will help the organization scale further.

Diseconomies of Scale

diseconomies-of-scale
In Economics, a Diseconomy of Scale happens when a company has grown so large that its costs per unit will start to increase. Thus, losing the benefits of scale. That can happen due to several factors arising as a company scales. From coordination issues to management inefficiencies and lack of proper communication flows.

Network Effects

negative-network-effects
In a negative network effect as the network grows in usage or scale, the value of the platform might shrink. In platform business models network effects help the platform become more valuable for the next user joining. In negative network effects (congestion or pollution) reduce the value of the platform for the next user joining. 

Negative Network Effects

negative-network-effects
In a negative network effect as the network grows in usage or scale, the value of the platform might shrink. In platform business models network effects help the platform become more valuable for the next user joining. In negative network effects (congestion or pollution) reduce the value of the platform for the next user joining. 

Creative Destruction

creative-destruction
Creative destruction was first described by Austrian economist Joseph Schumpeter in 1942, who suggested that capital was never stationary and constantly evolving. To describe this process, Schumpeter defined creative destruction as the “process of industrial mutation that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one.” Therefore, creative destruction is the replacing of long-standing practices or procedures with more innovative, disruptive practices in capitalist markets.

Happiness Economics

happiness-economics
Happiness economics seeks to relate economic decisions to wider measures of individual welfare than traditional measures which focus on income and wealth. Happiness economics, therefore, is the formal study of the relationship between individual satisfaction, employment, and wealth.

Command Economy

command-economy
In a command economy, the government controls the economy through various commands, laws, and national goals which are used to coordinate complex social and economic systems. In other words, a social or political hierarchy determines what is produced, how it is produced, and how it is distributed. Therefore, the command economy is one in which the government controls all major aspects of the economy and economic production.

Animal Spirits

animal-spirits
The term “animal spirits” is derived from the Latin spiritus animalis, loosely translated as “the breath that awakens the human mind”. As far back as 300 B.C., animal spirits were used to explain psychological phenomena such as hysterias and manias. Animal spirits also appeared in literature where they exemplified qualities such as exuberance, gaiety, and courage.  Thus, the term “animal spirits” is used to describe how people arrive at financial decisions during periods of economic stress or uncertainty.

State Capitalism

state-capitalism
State capitalism is an economic system where business and commercial activity is controlled by the state through state-owned enterprises. In a state capitalist environment, the government is the principal actor. It takes an active role in the formation, regulation, and subsidization of businesses to divert capital to state-appointed bureaucrats. In effect, the government uses capital to further its political ambitions or strengthen its leverage on the international stage.

Boom And Bust Cycle

boom-and-bust-cycle
The boom and bust cycle describes the alternating periods of economic growth and decline common in many capitalist economies. The boom and bust cycle is a phrase used to describe the fluctuations in an economy in which there is persistent expansion and contraction. Expansion is associated with prosperity, while the contraction is associated with either a recession or a depression.
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