Knowledge Economy

A knowledge economy is an advanced economy with a high proportion of jobs and investment in information technology, research, and development. These three factors combine to form a high value-added service industry.

Key Takeaways

  • Economic yield intangible (e.g. software) rather than tangible (e.g. PCs)

  • Shift from natural resources to intellectual capital

  • Supported by research labs, government, and innovative institutions

The knowledge economy is distinguished from other economies by its focus on producing intangibles such as software, medicine, or technology, rather than tangible goods like steel or automobiles. It is also characterized by the ability of its workers to move easily between employers and across borders because their skills are transmissible.

What Is The Knowledge Economy?

The knowledge economy can also be viewed as an extension of the post-industrial, information society. This new economic reality has emerged in recent years as a result of advances in technology that have changed the nature of knowledge creation and use.

Knowledge has been transformed from an intangible asset whose value cannot easily be measured into something that is increasingly tangible, measurable, and profitable. As a result, business leaders are focusing more attention on intangible goods and services such as software programs and databases — which require human intelligence to create or deliver — and less on tangible assets such as machinery or equipment.

The focus on intangible products has led many scholars to argue that this new economic state in highly developed countries is characterized by an increasing reliance on human capital (e.g. workers with specialized skills) rather than physical capital (e.g. machinery).

From Goods & Services to Knowledge

You may be wondering what the knowledge economy is. The term "knowledge economy" is used to describe an economy that is based on producing intangible goods and services. In other words, we're no longer producing tangible products like cars or TVs — we're producing more intangible products such as software, music, and management systems.

This shift has led some to refer to our time as the Information Age or Knowledge Economy.

Working Within the Knowledge Economy

The mobility of knowledge workers makes it possible for economies to compete for their services as well as for investment and sales. It also means that these workers are able to choose where they work based on the quality of life in a given city or country. It's important for economies to be attractive places to live if they want to attract and retain knowledge workers, since these are the people who make up such an important part of a modern economy.

Products of the Knowledge Economy

A knowledge economy is defined by its focus on producing high value intangible goods and services. It's an economic system that relies on the generation, exchange, and sharing of information.

The term "knowledge economy" was coined in the late 1990s after the widespread adoption of personal computers and the Internet made it possible for people to share information more easily than ever before.

Though many people associate this term with software development, a knowledge economy is not just about software or hardware — it's also about the people who use technologies and capitalize their usage.

A knowledge economy exists when individuals have access to vast amounts of data through technology platforms like Google and Wikipedia; they can then use that data to create new insights or solve problems they've encountered in their daily lives.

Even more so than internet accessibility, there is an emphasis on higher education and skilled training across the technologies. With access to these resources at their fingertips, people are able to contribute valuable insight into our collective understanding of how things work (which we call "knowledge").

It is important to note that a knowledge economy is not just about information or technology. Rather, it is a set of institutions, organizations and practices that define how an economy produces and uses knowledge. This means that the key question for any country looking to transition into this new era of economic development will be how best to develop such an economy within their own national context.

What Is Intellectual Capital?

To begin explaining this, we have to first describe what “capital” was in the previous Industrial revolutions. In pre-industrial society, capital was natural resources and physical materials.

It’s important to remember that capital involves not just physical goods like steel or wheat, but also human labor. The production of bread required humans to grow, pick, and process wheat, for example.

Intellectual capital involves ideas, information, and technological knowledge. A knowledge economy’s intellectual capital assets are intangible, meaning in a simple sense that they cannot be physically held or touched. Intellectual capital involves things like patents, proprietary software, and copyrights.

Along with human labor comes human capital based on intellectual gains through education, skills training, and communication. Both intellectual capital and human labor are important driving resources for the knowledge economy.

What Does This Mean For Manufacturing?

So, what does this mean for manufacturers within knowledge economies? Should they pivot from goods suppliers to service providers?

…Not exactly.

See, most manufacturers still produce physical goods that are needed, like screws and steel and automobiles. However, manufacturers also must shift strategically to updating their production cycles by means of upskilling, digitization, and instant communication.

Take this quote from the paper, “Manufacturing in the Knowledge Economy” by Brian R. Gaines:

“Manufacturing as a process of fabrication is normally considered part of the industrial sector of the economy and not part of the post-industrial, or knowledge, sector. However, the knowledge economy is critically dependent on modern manufacturing technology for its existence, and modern manufacturing has come into being as a result of developments in information technologies… “Manufacturing [is] a knowledge science in which ‘knowledge’ is applied to raw materials or components to produce a product, and in which, increasingly, the knowledge is itself subject to automatic processing. This formulation allows the science of manufacturing to be extended to encompass corporate, market and socioeconomic issues within a unified framework. It also leads to an analysis of the significance for manufacturing of the knowledge level in software engineering and, in particular, of the impact of the conceptual control of information, its communication and processing through object oriented methodologies.”

Manufacturing in the Knowledge Economy, Brian R. Gaines
diagram of knowledge-based technologies in industrial manufacturing

Industry 4.0

To thrive within our current world of Industry 4.0 AND the knowledge economy, manufacturers have to center the following key ideas:

  • The connected economy requires a connected factory, with adoption of high-tech practices like big data, automation, and AI
  • Information Technologies (and their architectures) are key to a manufacturer’s continued global competitiveness
  • Developing a skilled, educated workforce through education and training is necessary to avoid labor drains and loss of tribal knowledge

The knowledge economy, especially within the manufacturing context of Industry 4.0, is nothing to be afraid of. It simply means that economic profit is quantified by intangible pushes towards innovation.

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