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What is Knowledge Economy?

A knowledge economy has been defined as a system of consumption and production based on intellectual capital. It is easy to confuse this notion with that of human capital or even technological innovation led industries, however, a knowledge economy rises above that level and encompasses an entire economic structure which is influenced by all of these factors. Any activity which involves the use of knowledge as a base tool in the production, distribution or execution of transactions of the product or service, can be included as a knowledge activity which falls within the domain of a knowledge economy.

Lesser developed countries lean on agriculture and other primary activities as their main source of income and livelihood for the population while developing countries are mostly associated with manufacturing or secondary sector activities. In such a hierarchy, developed countries are dependent on the service sector or tertiary sector as the main occupational source. All economies are dependent on certain knowledge which has been passed on through the generations for carrying out the smooth functioning of the economy. A knowledge economy is based on exactly that tradition and focuses on activities that derive themselves completely from a knowledge base. Such activities then comprise a larger economic framework known as a knowledge economy.

Although knowledge has always played an important role in economies, it has never been the sole basis for the structure and knowledge economypropagation of a particular trade as it is now emerging to be. The rising intensity and distribution of knowledge within an economy has made it come close to being a factor of production in the economy. This phenomenon and all its associated activity has been evolving steadily over the years, but has come into focus only recently with a large amount of literature and research being devoted to this concept. The rising impact that knowledge has on developing products, services, skills, sectors etc these days is the primary reason for such a concept emerging in the first place.

Factors influencing the Knowledge Economy

Though a knowledge economy has a number of components, a few have been identified as the major factors which affect the structure of a knowledge economy. These are:

Information Revolution – An essential factor associated with new found knowledge is the requirement and means available to propagate it across the world. There have been revolutionary changes in the framework of information exchange that has been made possible through media such as the Internet, televisions, and radios etc, all of which have come into existence only in the past few decades. These media make it possible to relay knowledge of nouveau inventions and discoveries as well as path breaking findings in industry, science, maths, history etc which may affect production activities globally. The Information Age has been ushered in which affects every part of the world to a significant extent. This age of information discovery and exchange creates much greater ease in the availability of ‘knowledge’ to various sectors in an economy and make the creation of a knowledge economy that much more possible. The digitalisation of information creates an environment where the fast and easy availability of this information dispels the need for re-invention, reducing the amount of investment associated with a certain knowledge base.

Globalisation – Various sources cite globalisation as one of the top factors influencing a knowledge economy. The pace and spread of globalisation today is unprecedented and is creating a highly inter-dependent global scenario. Due to recent innovations in transport and communication, the physical distances feel much smaller. However, in the context of our present discussion, globalisation is marked by the removal of barriers to international trade resulting in international flows of goods, services, technology, labour and capital. These transfers have made it impossible for any one entity to remain completely unattached to other players in the global markets. Domestic producers are no longer protected from foreign competition making all markets essentially, world markets. As the trend of world economic interaction changes, it paves new paths for knowledge to travel and create the basis of an economic structure fast coming to be known as knowledge economy.

Human Capital – The effective use and implementation of knowledge or information can only be carried out with the help of a resource called human capital. Human capital cannot be confused with wither labour or capital. It is a resource group comprising a workforce which possesses a certain skill set making it possible to use the other factors of production efficiently. The presence of a highly skilled set of individuals is essential to complete a knowledge economy’s processes. Knowledge management requires human capital.

Knowledge Economy vs Traditional Economy

A study conducted by Centre for Strategic Economic Studies, Victoria, Australia makes the following statement ‘A knowledge-based economy is so fundamentally different from the resource based system of the last century that conventional economic understanding must be re-examined.’   This brings us to the next phase of this article – the difference between a knowledge economy from a resource based one, such as our current three sector model (primary, secondary, tertiary sectors). Knowledge economy favours intellectual capital as mentioned earlier, while a traditional economic system is based on financial capital to go through the motions of economic production activities. It follows that a knowledge economy is more flexible and changes its contours along with the latest innovations and breakthroughs. However a traditional setup would be dependent on pre-existing production techniques and set methodologies. An industrial economy differs from a knowledge economy on exactly the same counts. While industrial economies aim at self sufficiency in production, a knowledge economy is open to the idea of outsourcing various activities and specialising in a few in order to reduce costs and hence have an efficient system. Both systems have their merits and there is no clear winner in the debate of which system supersedes the other.

Opportunity driven strategies are favoured in a knowledge economy as opposed to objective-driven strategies in the traditional economy. The three factors mentioned earlier – globalisation, intensity of information exchange and development of human capital, are key in developing a knowledge economy and contribute in the arguments presented in the above section. There is still considerable debate surrounding the definition of ‘knowledge’. There is no clear cut rule on what can and cannot be included in its realm. This question on the very nature of knowledge presents a glaring drawback while describing a perfect knowledge economy. Nevertheless, the concept of a knowledge economy is fast gaining popularity among the literati. While the particulars remain speculative, there is certainly a clear way forward for such a notion.

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