For countries in the vanguard of the world economy, the balance between knowledge and resources has shifted so far towards the former that knowledge has become perhaps the most important factor determining the standard of living - more than land, than tools, than labour. Today's most technologically advanced economies are truly knowledge-based.
For the last two hundred years, neo-classical economics has recognised only two factors of production: labour and capital. Knowledge, productivity, education, and intellectual capital were all regarded as exogenous factors that is, falling outside the system. New Growth Theory is based on work and knowledge as an intrinsic part of the economic system.
Technology and knowledge are now the key factors of production
" New economic theory differs from neo-classical economic theory in several important ways:
" Knowledge is the basic form of capital. Economic growth is driven by the accumulation of knowledge.
" While any given technological breakthrough may seem to be random, new theory considers that new technological developments, rather than having one-off impact, can create technical platforms for further innovations, and that this technical platform effect is a key driver of economic growth.
" Technology can raise the return on investment, which explains why developed countries can sustain growth and why developing economies, even those with unlimited labour and ample capital, cannot attain growth. Traditional economics predicts that there are diminishing returns on investment. New Growth theorists argue that the non-rivalry and technical platform effects of new technology can lead to increasing rather than diminishing returns on technological investment.
" Investment can make technology more valuable and vice versa.
" New economic theory argues that earning monopoly rents on discoveries is important in providing an incentive for companies to invest in R&D for technological innovation.
What is the knowledge economy? "A knowledge-driven economy is one in which the generation and exploitation of knowledge play the predominant part in the creation of wealth". In the industrial era, wealth was created by using machines to replace human labour. Many people associate the knowledge economy with high-technology industries such as telecommunications and financial services.
What Is Knowledge?
He who receives an idea from me receives instruction himself without lessening mine; as he who lights his taper at mine receives light without darkening me.
Unlike capital and labour, knowledge strives to be a public good. Once knowledge is discovered and made public, there is zero marginal cost to sharing it with more users. Secondly, the creator of knowledge finds it hard to prevent others from using it. Instruments such as trade secrets protection and patents, copyright, and trademarks provide the creator with some protection.
Know-why and know-who matters more than know-what
There are different kinds of knowledge that can usefully be distinguished. Know-what, or knowledge about facts, is nowadays diminishing in relevance. Know-why is knowledge about the natural world, society, and the human mind. Know-who refers to the world of social relations and is knowledge of who knows what and who can do what. Knowing key people is sometimes more important to innovation than knowing scientific principles. Know-where and know-when are becoming increasingly important in a flexible and dynamic economy. Know-how refers to skills, the ability to do things on a practical level.
Knowledge gained by experience is as important as formal education and training
The implication of the knowledge economy is that there is no alternative way to prosperity than to make learning and knowledge-creation of prime importance. There are different kinds of knowledge. "Tacit knowledge" is knowledge gained from experience, rather than that instilled by formal education and training. In the knowledge economy tacit knowledge is as important as formal, codified, structured and explicit knowledge.
According to New Growth economics a country's capacity to take advantage of the knowledge economy depends on how quickly it can become a "learning economy'. Learning means not only using new technologies to access global knowledge, it also means using them to communicate with other people about innovation. In the "learning economy" individuals, firms, and countries will be able to create wealth in proportion to their capacity to learn and share innovation Formal education, too, needs to become less about passing on information and focus more on teaching people how to learn.
Life long learning is vital for organizations and individuals
At the level of the organisation learning must be continuous. Organisational learning is the process by which organisations acquire tacit knowledge and experience. Such knowledge is unlikely to be available in codified form, so it cannot be acquired by formal education and training. Instead it requires a continuous cycle of discovery, dissemination, and the emergence of shared understandings. Successful firms are giving priority to the need to build a "learning capacity" within the organisation.
The Importance of Intellectual Capital
Intellectual capital is a firm's source of competitive advantage
A firm's intellectual capital - employees' knowledge, brainpower, know-how, and processes, as well as their ability to continuously improve those processes - is a source of competitive advantage. But there is now considerable evidence that the intangible component of the value of high technology and service firms far outweighs the tangible values of its physical assets, such as buildings or equipment. The physical assets of a firm such as Microsoft, for example, are a tiny proportion of its market capitalisation. The difference is its intellectual capital.
The Importance of ICT
ICT releases people's creative potential and knowledge
What about information and communication technologies (ICT)? ICT are the enablers of change. They do not by themselves create transformations in society. ICT are best regarded as the facilitators of knowledge creation in innovative societies. The new economics looks at ICT not as drivers of change but as tools for releasing the creative potential and knowledge embodied in people.
However, the ICT sector has a powerful multiplier effect in the overall economy compared with manufacturing. A 1995 study of the effect of software producer Microsoft on the local economy revealed that each job at Microsoft created 6.7 new jobs in Washington state, whereas a job at Boeing created 3.8 jobs. Wealth-generation is becoming more closely tied to the capacity to add value using ICT products and services.
The New Economics of Information
The rate of technological change has greatly increased over the past thirty years. Three laws have combined to explain the economics of information. The first law holds that the maximum processing power of a microchip at a given price doubles roughly every 18 months. In other words, computers become faster, but the price of a given level of computing power halves. The second Law - the total bandwidth of communication systems will triple every 12 months - describes a similar decline in the unit cost of the net. The third Law holds that the value of a network is proportional to the square of the number of nodes. So, as a network grows, the value of being connected to it grows exponentially, while the cost per user remains the same or even reduces.
While this Law has been applied to the Internet, it is also true of telephone systems. There can be no doubt that the cycle of technology development and implementation is accelerating and that we are moving inexorably onward, out of the Industrial Age and into the Information Age.