Knowledge Based Economy

Question:

What is the concept of a Knowledge Based Economy and how does it impact the Information Economy as a whole?

Definition:

Knowledge Based Economy: The term “knowledge-based economy” stems from this fuller recognition of the place of knowledge and technology in modern Organization for Economic Co-Operation and Development economies. 1

What is the Knowledge Based Economy?

“The new source of power is not money in the hands of a few but information in the hands of many.” 2 Living in an information age where the knowledge content of daily goods and services are growing as never before, one must acknowledge the issues concerning the transformation of the US and global economies into a new Information Economy. A more definitive concept of the Information Economy is what is referred to as the Knowledge Based Economy or KBE. A KBE economy is one that is empowered by Information and Communication Technologies, the Internet, and digital technologies that are based on economic and business principles. The Knowledge Based Economy is characterized by the need for continuous learning of both codified information and the competencies to use this information. This being stated, knowledge is now the driver of productivity and economic growth, leading to a new focus on the role of information, technology and learning in economic performance.3 The knowledge content of today’s goods and services is vastly more important than it was in the past decades. The assimilation and synthesizing of this new information to generate valuable knowledge is now an integral part of business operations. Understanding the concept of the Knowledge Based Economy and the tools of the Information and Communication Technologies in which the producers and consumers in the Information Society use as a way to relate to each other are paramount notions in gaining a keen perspective on the social constructions, implications, and commercialization impacts on the Information Economy.

Some key characteristics of this new economy, innovation, rapid productivity growth, and new business ventures, are closely related to the increasing role of knowledge in production. The acquirement of information to increase the financial acumen of businessmen is hardly a new idea. Whether it is Henry Ford’s mass manufacturing system, McDonald’s fast food standardized assembly, or Wal-Mart’s national/international retailing structure, the new information revolution is from the emergence of advanced digital technologies. The potential for the mass low cost replication of digital products on a global scale offers enormous productivity gains. The ability of companies to appropriate these gains may be limited by the intensity of competition. The effect of extreme scale economics in driving competition in the digital economy has been exacerbated by the influences of network externalities and competition for standards. Network externalities are the effects on a user of a product or service of others using the same or compatible products or services. Positive network externalities exist if the benefits are an increasing function of the number of other users. Negative network externalities exist if the benefits are a decreasing function of the number of other users. 4 Networks of consumers and producers are a common feature of many information based markets giving rise to network externalities, where the value of a product to a user depends upon the number of other users of that product.5 Network effects encourage convergence around a single technical standard, reinforcing the tendency to a single firm or coalition of firms to establish dominant market leadership. A good example of this would be the varying digital music formats between Apple iTunes, Windows Media Player, and RealPlayer’s multimedia player to play one’s music on their computer. This is further aided by the deflated unit costs as well as limited product life cycles brought about by the rapid increase in technological change. This brings about an inherent problem in this new economy, which is the pace at which technology evolves, making present products obsolete in a shorter manner than previously, because of the constant development of newer products. This in turn makes it a riskier proposition for businesses to excel and become market leaders because of the high churn rate due to an erratic market presence. The combination of extreme scale economics, network externalities, and fast-paced innovation creates “winner-take-all” markets where each competitor is willing to incur substantial losses to gain the change to emerge as the industry winner. In analyzing the Knowledge Based Economy it is important to understand the social constructions that arise. Because of the attributes the KBE possess, it is to be assumed the some of the following statements would ring true; enterprise will lead to self-efficacy, innovation will lead to invention, and intention will lead to aspiration. It would also be safe to presume that because the main commodity is now information, knowledge would lend itself to replace other established commodities and assets such as land, capital, and physical resources as a means for competitive advantage. It would also be presumed that at the heart of the development of knowledge economy is continuing innovation. Because it is innovation derived, it will ultimately lead to a successful economy, resulting in an increase in wealth, employment, and social equality. Some defining characteristics of the Knowledge Based Economy are as follows:

• Advances in scientific and technical knowledge ultimately enabling an Information and Communication Technologies (ICT) revolution
• Digitization and informatization, which reduce transaction costs and increase productivity
• An increase in intensified competition between enterprises and nation via new product designs, marketing methods, and organizational forms
• The continual restructuring of economies to cope with constant change.

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This could be further characterized by the fact that the KBE need not be constrained by geographic proximity; the current technology offers much more possibilities for sharing, archiving and retrieving knowledge, the most important capital in the present age. These characteristics and attributes lead to the inevitable knowledge gaps between the individuals who are prepared for the transition and those who are ill equipped. The impacts of perceived knowledge gaps include the drive to support education, lifelong learning, investment in R&D, and the constant development of new technology. Understanding the core components of the KBE will better equip one to understand its nature.

The Workings of a Knowledge Based Economy

Human creatures are inherently intrigued by their own curiosity and desire for consumables. Sociobiological studies of human behavior find clear and consistent evidence of spontaneous curiosity and hoarding, characteristics we share with most primate species.7 The Knowledge Based Economy is a great infrastructure because it allows us to quench these primitive urges of obtaining wealth by exploring and taking advantage of our curiosity. Because people are inventive and inherently curious, they tend to want to better themselves in the ways of internal and external development. It has been found that markets trigger these developments and thus multiply all of the innovations. Markets in turn reward people who commercialize ideas and inventions that others value. They give others incentives to copy these ideas in other places, and improve them if they can. Business is conducted by putting your knowledge to work in the form of commercializing your commodity. This commerce is brought about by obtaining and being able to decipher knowledge. It is important to know what opportunities exist out there and how one’s own knowledge can be valuable to business applications that exist. People are full of knowledge; they consume, digest, and accumulate data and information every second of every day of their lives. Their ability to acquire information and take that information and transform it into constructive and useful knowledge has an “economically meaningful cost.”

In the KBE an individual has to actively seek out information and take what they can from it. One must analyze information and soak up the essence of what it is they are reading and restate it in their own words with an emphasis on communicating to individuals the information one has decoded. This entire process is time intensive, requires the ability to digest the material, compare it to previously obtained and synthesized knowledge, and the added sustenance by which to power the individual collecting the information. In comparison, concentrated thought is as difficult and arduous as one conducting manual labor. With manual labor, one can see the physical strain and pain another goes through to accomplish a task at hand, however with demanding thinking it is harder to gauge the mental toll one goes through to synthesize information into usable knowledge. Having come to this conclusion, it is more difficult to manage individuals to think versus individuals to do assembly line work. The only proven way to get people to create knowledge, work that is both hard and difficult to measure, is to give them clear monetary incentives based on results rather than effort. For a company to be knowledge based, it has to give employees these incentives to create knowledge with commercial value.8 Free market capitalism has been found to be the only way to organize a society and effectively create and put into action the value of knowledge.

The KBE market sets up a situation in which individuals can capture the “commercial value” of their knowledge having a direct relation to an increase in innovation leading to an increase in reward. Profound thinkers are a valuable commodity to have in one’s business. The management who employ these “thinkers” want to engage in an environment that allows them to have free and unlimited access to information, where they can take full advantage of the valuable knowledge the thinkers possess. The KBE allows aspiring entrepreneurs to take full advantage of the free enterprise economy by protecting their intellectual property rights from which they profit from what it produces.

It is essential to note that in a KBE, the level of importance rests solely on the business who can innovate first. It is no longer enough to appeal to the budget conscious consumer by implementing cost saving measures; one must now raise “consumer value” meeting their unmet expectations. When a business has a leading innovation, it will enjoy gaining “more valuable outputs from the same old inputs.” Gaining more value will lead to a higher pay for the employees, a lower price for the consumer, and give the investors a better return on their stocks. The main point to note is that in a KBE, the power resides in the people. To get the most amount of knowledge from individuals in this economy, one must have complete and total access to all the information channels and markets. By being more and more connected to different information streams, an individual can ascertain a valuable knowledge to generate higher profits in whatever business venture they enter. The capacity of the knowledge worker to utilize their knowledge for power is the essence of what the Knowledge Based Economy is concerning.

It is imperative to understand that knowledge management is composed of different types of knowledge which lend it to varying characteristics. The distinction between knowing how and knowing about corresponds to the tacit/explicit distinction. While know-how is primarily tacit is nature, knowing about is primarily explicit—it comprises facts, theories, and sets of instructions.9 Tacit and explicit knowledge can affect management in the way each is transferred to individuals in the company. Explicit knowledge is easy to transfer, where tacit knowledge is more of a costly, arduous, time consuming transfer. With explicit knowledge, one would have a hard time to engage in a competitive manner against rival companies, however with tacit knowledge; the problem is less with competing firms and more of communication of knowledge within the firm.

Another important aspect of the types of knowledge and how management utilizes each is the recognition of how the knowledge within a company is developed and applied. Knowledge can either be increased through increasing consumption and storage or individuals in the company can apply the knowledge the company already has obtained. Each type of knowledge contribution can be seen as either a knowledge generation or a knowledge application. The ability to effectively and efficiently store the information and retrieve the information from the databases is a key input when organizing, accessing, and communicating the information. Knowledge sharing and replication involves the transfer of knowledge from one part of the organization (or from one person) to be replicated in another part (of by another individual). Knowledge integration represents one of the greatest challenges to any company. What is important in the KBE is the ability to produce a good or service that utilizes the combined knowledge of an array of people. This is effectively done by implementing a defined organizational process to efficiently achieve the business’s main objective. In discussing the value of the knowledge workers, they must distinguish between internal information creation and the search to identify pre-existing knowledge from outside sources to acquire and assimilate the new useful knowledge into their business plan.

After the KBE is ripe and fully functional, the growth tends to be self-sustaining and self-reinforcing. A process known as “positive feedback” happens when the KBE reaches this point and this is where the process begins of knowledge breeding more knowledge. This feedback process comes about in four distinct ways.

• First, in a society where firms compete to innovate, the general information flow is bound to be large and innovation skills plentiful.
• Second, ideas and innovations developed for one job often have applications in others.
• Third, widespread knowledge makes investing in more knowledge less risky and therefore more attractive.
• Fourth, innovation frees up society’s resources, its raw materials, labor and capital. 10

It is important to note that knowledge is different than other inputs in economics for two main reasons. One reason is that it is intangible in nature and one can not trade knowledge as they might gold, diamonds, or furs. Because of this reason there has been a number of intellectual property issues that arise to protect one’s assets.

The second reason that knowledge is different than other economic inputs is because knowledge has the ability to be consumed more than once without any degradation in quality. Since this is the case, it is somewhat puzzling since you have a potentially profitable and usable commodity that can be extorted universally with it’s second characteristic of being able to be replicated. Theft is almost guaranteed for this universal application and the only way to protect the owner’s stake is to seek a strict enforcement of intellectual property rights. How can an innovative firm both retain exclusive control over its proprietary knowledge and apply that knowledge on as wide a scale as possible? The answer is that the innovative firm must grow very large very quickly. 11 This growth can be in both scope and scale. This need for rapid expansion is probably why periods of rapid technological advancement, like the beginning and end of the 20^th century, the 1920s and the 1960s saw waves of corporate takeovers. Mergers and acquisitions are the most straightforward way for a firm to get very large very quickly. 12 despite the fact that a knowledge-based economy is essentially a service economy. It provides knowledge to serve the global economy, and collects a hefty return. A KBE’s capital increases if it generates more ideas, and applies them on a wider scale and scope. Its people can earn more without putting in more hours or by saving more. On the other hand, non-knowledge-based economies collect only basic returns for commodities sold, hours worked and money saved. 13 Knowledge has always been the driving force for social and economic progress. A KBE has a number of interesting characteristics that set it apart from other economies. The main focus in the Knowledge Based Economy is the need to innovate and utilize new and pre-existing knowledge. Competition relies less on price-cutting mechanisms and more one on knowledge-intensive goods. It is important to note that technological developments have forever changed the way one handles information. The processing power has grown leaps and bounds year after year, giving knowledge workers better tools to mine and acquire information. The fact that individuals have a greater access to a quality education increases the number of people qualified for the information intensive sectors. Investment in new technologies and capital mobility has increased substantially, further supporting a stable and surging KBE.

The ability to acquire and assimilate knowledge for productive and economic growth is the essential foundation for a Knowledge Based Economy in an information society. Innovation, rapid productivity, and growth are key characteristics of this new economy. An exchange is made between the consumer and the information to create knowledge in the KBE. To capture the “commercial value” of their knowledge, workers actively seek and synthesize information to formulate a usable commodity for their individual industries. This usable commodity leads to “innovation” and innovation leads to a distinct advantage over the competition. Human capital is the key element in a knowledge-based company. Having the ability to innovate and see high-returns for knowledge based information is why the free-market economy works hand and hand with the KBE. The KBE feeds the desire to be curious as well as fuels the desire for a better life. Because of the commercialization of information and the impact it has had on society, the KBE has had a profound influence on the Information Economy and has set precedent for information being the most valued commodity.

1http://members.shaw.ca/competitivenessofnations/Anno%20OECD.htm