What Is the Knowledge Economy?

The knowledge economy is a system of consumption and production that is based on intellectual capital. In particular, it refers to the ability to capitalize on scientific discoveries and basic and applied research. This has come to represent a large component of all economic activity in most developed countries. In a knowledge economy, a significant component of value may thus consist of intangible assets such as the value of its workers' knowledge or intellectual property.

Key Takeaways

  • The knowledge economy describes the contemporary commercialization of science and academic scholarship.
  • In the knowledge economy, innovation based on research is commodified via patents and other forms of intellectual property.
  • In the Information Age, the global economy has moved further toward the knowledge economy.

The Knowledge Economy Explained

Less developed countries tend to have agriculture and manufacturing-based economies. A developing country has manufacturing and service-based economy, and 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.

The Bayh-Dole Act of 1980 was a major turning point in the treatment of intellectual property in the U.S. because it allowed universities to retain title to inventions or discoveries made with federal R&D funding and to negotiate exclusive licenses. 

In the Information Age, the global economy has moved toward the knowledge economy, bringing with it the best practices from each country's economy. Also, 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 are considered important economic resources. However, it is important to note that generally accepted accounting principles (GAAP) do not allow companies to include these assets on their balance sheets.

The modern commercialization of academic research and basic science has its roots with governments seeking military advantage.

Knowledge Economy and Human Capital

The knowledge economy addresses how education and knowledge, that is, "human capital," can serve as a productive asset or business product to be sold and exported to yield profits for individuals, 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:

  1. Institutional structures that provide incentives for entrepreneurship and the use of knowledge
  2. Availability of skilled labor and a good education system
  3. Access to information and communication technology (ICT) infrastructures
  4. A vibrant innovation landscape that includes academia, the private sector, and civil society

Real World Example

Academic institutions, companies engaging in research and development (R&D), programmers developing new software and search engines for data, and health workers using digital data to improve treatments are all components of a knowledge economy. These economy brokers pass on their knowledge and services to workers in more traditional fields, such as farmers who use software applications and digital solutions to manage their farm crops better, advanced technological-based medical care procedures such as robot-assistant surgeries, or schools that provide digital study aids and online courses for students.