What is 'Knowledge Economy'

The knowledge economy is a system of consumption and production that is based on intellectual capital. The knowledge economy commonly makes up a large share of all economic activity in developed countries. In a knowledge economy, a significant part of a company's value may consist of intangible assets, such as the value of its workers' knowledge (intellectual capital), but generally accepted accounting principles do not allow companies to include these assets on balance sheets.

BREAKING DOWN 'Knowledge Economy'

Lesser-developed countries tend to have agriculture and manufacturing-based economies, while developing countries tend to have manufacturing and service-based economies, and developed countries tend to have service-based economies. Most countries' economies consist of each of these three major categories of economic activity but in differing proportions relative to the wealth of that country. Examples of knowledge economy activities include research, technical support and consulting.

In the Information Age, the global economy moved towards the knowledge economy. This transition to the Information Age includes the best practices taken from the service-intensive, manufacture-intensive and labor-intensive types of economies and added knowledge-based factors to create an interconnected and globalized economy where sources of knowledge like human expertise and trade secrets are crucial players in economic growth and are considered as important as other economic resources.

The knowledge economy addresses how education and knowledge — generally called "human capital — can serve as a productive asset or a business product since innovative and intellectual services and products can be sold and exported and can yield profits for the individual, the business and the economy. This component of the economy relies greatly on intellectual capabilities instead of natural resources or physical contributions. In the knowledge economy, the production of services and products that are knowledge-based provides rapid acceleration in the technical and scientific fields, making way for more innovation in the economy as a whole.

Knowledge Workers vs. Manual Workers

The concept of the knowledge economy was first used by Peter Drucker in his 1966 book "The Effective Executive." In this book, the difference between a knowledge worker and a manual worker was discussed. According to Drucker, the manual worker uses his hands and other physical capabilities to produce and provide services and other goods. On the other hand, a knowledge worker uses his head and produces knowledge, information and ideas that may be beneficial for the overall system of the business or that may be the key source in building the business in the first place.

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