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The knowledge economy is the use of knowledge technologies (such as knowledge engineering and knowledge management) to produce economic benefits as well as job creation. The phrase was popularized by Peter Drucker as the title of Chapter 12 in his book The Age of Discontinuity, And, with a footnote in the text, Drucker attributes the phrase to economist Fritz Machlup and its origins to the idea of "scientific management" developed by Frederick Winslow Taylor.
Other than the agricultural-intensive economies and labor-intensive economies, the global economy is in transition to a "knowledge economy",  as an extension of an "information society" in the Information Age led by innovation . The transition requires that the rules and practices that determined success in the industrial economy need rewriting in an interconnected, globalized economy where knowledge resources such as know-how and expertise are as critical as other economic resources.
A key concept of the knowledge economy is that knowledge and education (often referred to as "human capital") can be treated as one of the following two:
- A business product, as educational and innovative intellectual products and services can be exported for a high value return.
- A productive asset
It can be defined as
"The concept that supports creation of knowledge by organizational employees and helps and encourages them to transfer and better utilize their knowledge that is in line with company/organization goals."
The initial foundation for the knowledge economy was introduced in 1966 in the book The Effective Executive by Peter Drucker. In this book, Drucker described the difference between the manual worker (page 2) and the knowledge worker. The manual worker, according to him, works with his or her hands and produces goods or services. In contrast, a knowledge worker (page 3) works with his or her head, not hands, and produces ideas, knowledge, and information.
The key problem in the formalization and modeling of knowledge economy is a vague definition of knowledge, which is a rather relative concept. For example, it is not proper to consider information society as interchangeable with knowledge society. Information is usually not equivalent to knowledge. Their use, as well, depends on individual and group preferences (see the cognitive IPK model) which are "economy-dependent".
The knowledge economy is also seen as the latest stage of development in global economic restructuring. Thus far, the developed world has transitioned from an agricultural economy (pre-Industrial Age, largely the agrarian sector) to industrial economy (with the Industrial Age, largely the manufacturing sector) to post-industrial/mass production economy (mid-1900s, largely the service sector) to knowledge economy (late 1900s – 2000s, largely the technology/human capital sector). This latest stage has been marked by the upheavals in technological innovations and the globally competitive need for innovation with new products and processes that develop from the research community (i.e., R&D factors, universities, labs, educational institutes).
In the knowledge economy, the specialized labor force is characterized as computer literate and well-trained in handling data, developing algorithms and simulated models, and innovating on processes and systems. Harvard Business School Professor, Michael Porter asserts that today’s economy is far more dynamic and that comparative advantage is less relevant than competitive advantage which rests on “making more productive use of inputs, which requires continual innovation". Consequently, the technical, STEM careers including computer scientists, engineers, chemists, biologists, mathematicians, and scientific inventors will see continuous demand in years to come. Additionally, well-situated clusters, which Michael Porter argues is vital in global economies, connect locally with linked industries, manufacturers, and other entities that are related by skills, technologies, and other common inputs. Hence, knowledge is the catalyst and connective tissue in modern economies.
With earth’s depleting natural resources, the need for green infrastructure, a logistics industry forced into just-in-time deliveries, growing global demand, regulatory policy governed by performance results, and a host of other items high priority is put on knowledge; and research becomes paramount. Knowledge provides the technical expertise, problem-solving, performance measurement and evaluation, and data management needed for the transboundary, interdisciplinary global scale of today’s competition.
Worldwide examples of the knowledge economy taking place among many others include: Silicon Valley in California; aerospace and automotive engineering in Munich, Germany; biotechnology in Hyderabad, India; electronics and digital media in Seoul, South Korea; petrochemical and energy industry in Brazil.
It has been suggested that the next evolutionary step after knowledge economy is the network economy, where the relatively localized knowledge is now being shared among and across various networks for the benefit of the network members as a whole, to gain economic of scale in a wider, more open scale.
Commentators suggest there are various interlocking driving forces, which are changing the rules of business and national competitiveness:
- Globalization — markets and products are more global.
- Information technology, which is related to next three:
- Information/Knowledge Intensity — efficient production relies on information and know-how; over 70 per cent of workers in developed economies are information workers; many factory workers use their heads more than their hands.
- New Media – New media increases the production and distribution of knowledge which in turn, results in collective intelligence. Existing knowledge becomes much easier to access as a result of networked data-bases which promote online interaction between users and producers.
- Computer networking and Connectivity – developments such as the Internet bring the "global village" ever nearer.
As a result, goods and services can be developed, bought, sold, and in many cases even delivered over electronic networks.
As regards the applications of any new technology, this depends on how it meets economic demand. It can remain dormant or make a commercial breakthrough (see diffusion of innovation).
It can be argued that the knowledge economy differs from the traditional economy in several key respects:
- The economics are not of scarcity, but rather of abundance. Unlike most resources that become depleted when used, information and knowledge can be shared, and actually grow through application.
- The effect of location is either
- diminished, in some economic activities: using appropriate technology and methods, virtual marketplaces and virtual organizations that offer benefits of speed, agility, round the clock operation and global reach can be created.
- or, on the contrary, reinforced in some other economic fields, by the creation of business clusters around centres of knowledge, such as universities and research centres. However, clusters already existed in pre-knowledge economy times.
- Laws, barriers, taxes and ways to measure are difficult to apply solely on a national basis. Knowledge and information "leak" to where demand is highest and the barriers are lowest.
- Knowledge enhanced products or services can command price premiums over comparable products with low embedded knowledge or knowledge intensity.
- Pricing and value depends heavily on context. Thus the same information or knowledge can have vastly different value to different people, or even to the same person at different times.
- Knowledge when locked into systems or processes has higher inherent value than when it can "walk out of the door" in people's heads.
- Human capital — competencies — are a key component of value in a knowledge-based company, yet few companies report competency levels in annual reports. In contrast, downsizing is often seen as a positive "cost cutting" measure.
- Communication is increasingly being seen as fundamental to knowledge flows. Social structures, cultural context and other factors influencing social relations are therefore of fundamental importance to knowledge economies.
These characteristics require new ideas and approaches from policy makers, managers and knowledge workers.
The knowledge economy has manifold forms in which it may appear but there are predictions that the new economy will extend radically, creating a pattern in which even ideas will be recognised and identified as a commodity. This certainly is not the best time to make any hasty judgment on this contention, but considering the very nature of 'knowledge' itself, added to the fact that it is the thrust of this new form of economy, there certainly is a clear way forward for this notion, though the particulars (i.e. the quantum of the revolutionary approach and its applicability and commercial value),remain in the speculative realm, as of now.
The technology requirements for an Innovative System as described by the World Bank Institute must be able to disseminate a unified process by which a working method may converge scientific and technology solutions, and organizational solutions. According to the World Bank Institute‘s definition, such innovation would further enable the World Bank Institute‘s vision outlined in their Millennium Development Goals.
Challenges for Developing Countries
The United Nations Commission on Science and Technology for Development report (UNCSTD, 1997) concluded that for developing countries to successfully integrate ICTs and sustainable development in order to participate in the knowledge economy they need to intervene collectively and strategically. Such collective intervention suggested would be in the development of effective national ICT policies that support the new regulatory framework, promote the selected knowledge production, and use of ICTs and harness their organizational changes to be in line with the Millennium Development Goals. The report further suggests that developing countries to develop the required ICT strategies and policies for institutions and regulations taking into account the need to be responsive to the issues of convergence.
- Peter Drucker, (1969). The Age of Discontinuity; Guidelines to Our Changing Society. Harper and Row, New York. ISBN 0-465-08984-4
- Terry Flew (2008), New Media: An Introduction
- Michael Porter, "Clusters and the New Economics of Competition." Harvard Business Review.
- The Brookings Institution. MetroPolicy: Shaping A New Federal Partnership for a Metropolitan Nation Report. (2008)
- IEEE TRANSACTIONS ON KNOWLEDGE AND DATA ENGINEERING, Automatic Fuzzy Ontology Generation for Semantic Web, VOL. 18, NO. 6, JUNE 2006
- UNCSTD (1997). United Nations Commission on Science and Technology for Development, - Report of the Working Group on ICTs for Development prepared for the 3rd Session, 12 May, Geneva, Switzerland
- Arthur, W. B. (1996). Increasing Returns and the New World of Business. Harvard Business Review(July/August), 100–109.
- Bell, D. (1974). The Coming of Post-Industrial Society: A Venture in Social Forecasting. London: Heinemann.
- Drucker, P. (1969). The Age of Discontinuity; Guidelines to Our changing Society. New York: Harper and Row.
- Drucker, P. (1993). Post-Capitalist Society. Oxford: Butterworth Heinemann.
- Machlup, F. (1962). The Production and Distribution of Knowledge in the United States. Princeton: Princeton University Press.
- Porter, M. E. Clusters and the New Economics of Competition. Harvard Business Review. (Nov-Dec 1998). 77-90.
- Romer, P. M. (1986). Increasing Returns and Long-Run Growth. Journal of Political Economy, 94(5), 1002–1037.
- Rooney, D., Hearn, G., Mandeville, T., & Joseph, R. (2003). Public Policy in Knowledge-Based Economies: Foundations and Frameworks. Cheltenham: Edward Elgar.
- Rooney, D., Hearn, G., & Ninan, A. (2005). Handbook on the Knowledge Economy. Cheltenham: Edward Elgar.
- The Brookings Institution. MetroPolicy: Shaping A New Federal Partnership for a Metropolitan Nation. Metropolitan Policy Program Report. (2008). 4-103.
- Knowledge for Development Program, World Bank
- IS-Driven Organizational Responsiveness in a Knowledge Economy
- Public Service Modernization Act – Canada
- Legal and Regulatory Issues in the Information Economy (Wikibook)
- BOOK: The Knowledge-Based Economy in Central and East European Countries
- Recent book: Knowledge and innovation processes in Central and East European economies
- The Work Foundation Knowledge Economy Programme
- Knowledge Economy in Farsi/Persian
- Pacioli Institute for a true and fair view of the knowledge-based economy