Knowledge Economy

What is the 'Knowledge Economy'?

The knowledge economy is a system of consumption and production that is based on intellectual capital. The knowledge economy typically represents a large component 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). However, generally accepted accounting principles (GAAP) do not allow companies to include these assets on balance sheets.

BREAKING DOWN 'Knowledge Economy'

Less developed countries tend to have agriculture and manufacturing-based economies while developing countries tend to have manufacturing and service-based economies. Developed countries tend to have service-based economies. Most countries' economies are composed 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 service-intensive, manufacturing-intensive and labor-intensive types of economies. In addition, knowledge-based factors create an interconnected and global economy where sources of knowledge, such as human expertise and trade secrets, are crucial factors in economic growth and considered important economic resources.

The knowledge economy addresses how education and knowledge — typically 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 individuals, the businesses and the economy. This component of the economy relies greatly on intellectual capabilities instead of natural resources or physical contributions. In the knowledge economy, products and services that are based on intellectual expertise advance technical and scientific fields encouraging innovation in the economy as a whole.

The World Bank defines knowledge economies according to four pillars: institutional structures that provide incentives for entrepreneurship and the use of knowledge, skilled labor availability and good education systems, ICT infrastructure and access and a vibrant innovation landscape that includes academia, the private sector and civil society.

Example of a Knowledge Economy

Academic institutions, companies engaging in research and development, programmers developing new software and search engines for data and health workers who use digital data to improve treatments are all examples of components of a knowledge economy. These brokers in an economy pass on their knowledge and services to workers in more traditional fields. For example, farmers may use apps and digital solutions to manage the crops on their farm.