What Is the Knowledge Economy? Definition, Criteria, and Example

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Adam Hayes, Ph.D., CFA, is a financial writer with 15+ years Wall Street experience as a derivatives trader. Besides his extensive derivative trading expertise, Adam is an expert in economics and behavioral finance. Adam received his master's in economics from The New School for Social Research and his Ph.D. from the University of Wisconsin-Madison in sociology. He is a CFA charterholder as well as holding FINRA Series 7, 55 & 63 licenses. He currently researches and teaches economic sociology and the social studies of finance at the Hebrew University in Jerusalem.

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Updated January 22, 2021
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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 applied research.

The knowledge economy represents a large share of the activity in most highly developed economies. In a knowledge economy, a significant component of value may 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.
  • The knowledge economy lies at the intersection of private entrepreneurship, academia, and government-sponsored research.
  • Knowledge-related industries represent a large share of the activity in most highly developed countries.
  • A knowledge economy depends on skilled labor and education, strong communications networks, and institutional structures that incentivize innovation.


Understanding the Knowledge Economy

Developing economies tend to be heavily focused on agriculture and manufacturing, while highly developed countries have a larger share of service-related activities. This includes knowledge-based economic activities such as research, technical support, and consulting.

The knowledge economy is the marketplace for the production and sale of scientific and engineering discoveries. This knowledge can be commodified in the form of patents or other intellectual property protections. The producers of such information, such as scientific experts and research labs, are also considered part of the knowledge economy.

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.

Thanks to globalization, the world economy has become more knowledge-based, bringing with it the best practices from each country's economy. Also, knowledge-based factors create an interconnected and global economy where human expertise and trade secrets 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 in 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.

Example of a Knowledge Economy

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 the results of their research to workers in more traditional fields, such as farmers who use software applications and digital solutions to manage their crops better, advanced technological-based medical procedures such as robot-assistant surgeries, or schools that provide digital study aids and online courses for students.

How Big Is the Knowledge Economy?

Because it is not a clearly-defined category such as manufacturing, it is difficult to put an exact price tag on the global knowledge economy. However, it is possible to gain a rough estimate by gauging some of the major components of the knowledge economy. In the United States, the total intellectual property market is worth $6.6 trillion, according to the U.S. Chamber of Commerce, and IP-intensive industries account for over a third of GDP. The market size of the country's higher education institutions accounts for an additional $568 billion.

What Are the Most Valuable Skills in the Knowledge Economy?

While higher education and technical training are obvious assets, communication and teamwork are also essential skills for a knowledge-based economy, according to the Organization for Economic Cooperation and Development. Since it is unlikely that any single knowledge worker can generate groundbreaking innovations alone, these interpersonal and workplace competencies are essential to surviving in a knowledge-based workplace.

Which Country Has the Biggest Knowledge Economy?

The factors of a knowledge economy are measured by the United Nations Development Program's Global Knowledge Index, which replaced the World Bank Knowledge Economy Index after 2012. This metric scores each country based on "enabling factors" for the knowledge economy, such as education levels, technical and vocational training, innovation, and communications technology. According to the latest issue, Switzerland is the top-ranked knowledge economy with a total score of 71.5%. The next two are Sweden and the United States with scores of 70.0 each.

Article Sources
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  1. GovTrack. "H.R. 6933 (96th): Government Patent Policy Act of 1980."

  2. The World Bank. "The Knowledge Economy, The Kam Methodology, and World Bank Operations," Pages 5-8.

  3. Ibis World. "Colleges and Universities in the US."

  4. Global Innovation Policy Center. "Why Is IP Important?"

  5. OECD. "Competencies for the Knowledge Economy," Page 1.

  6. Knoema. "Global Knowledge Index."

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