Defining the Knowledge-based Economy

This article looks at knowledge in the wider economy, and how it is likely to affect firms and individuals alike.

Here in Ireland, politicians like to speak of Ireland being one of the leading knowledge-based economies in Europe, but beyond the political rhetoric, what does this mean in real terms for organisations and individuals alike operating within such an economy

Economics views the World in two scales: macro economics are concerned with the wider economy, i.e. the big picture; while micro economics are concerned with economic affects on firms, groups or individuals. In this article, I will discuss how an emerging knowledge-based economy is likely to affect the wider economy, a firm and finally an individual.

Economic Factors of Production

The Classic Factors of Production

Factors of production are resources that are required to enable the production of goods or services in an economy. Without these factors, production cannot take place, therefore the availability of factors of production within an economy are very important. Initially three factors of production were identified:

  • Land - Land encompasses all those resources provided by nature and not by man, e.g. land, rivers, mines, forests etc. Land has two important characteristic: it is fixed in supply; and it has not cost of production. While cost may be associated with the working of land, the resource itself has no production cost due to being naturally occurring.
  • Labour - Labour is defined as the application of human endeavour in the creation of wealth. In a knowledge economy, there is a direct link between the inherent knowledge in labour and the subsequent cost of labour, which I will come back to later on.
  • Capital - Capital includes all assets that are used in the creation of wealth, e.g. factory, equipment etc. Capital assets such as heavy machinery are termed fixed assets, while cash or credit are termed liquid assets.

However, one important factor of production was initially omitted: the human controlling factor.

Enterprise: the Controlling Factor

  • Enterprise - Enterprise is the human intelligence or controlling factor of production. It organises the other factors to produce a good or service, while it also bears the risk involved in production, or reaps the rewards in terms of profit accrued.

Knowledge: the Fifth Factor

Enterprise and labour are factors that are affected by the level of knowledge contained within these factors. For example, a successful experienced entrepreneur is more likely to succeed with a new venture than an inexperienced business person straight out of business school. Therefore we can safely say that enterprise and labour obtain knowledge over time, and in the knowledge-based economy, this knowledge increases the worth of both of these factors.

Knowledge itself may also act independently of human factors of production, for example knowledge may be contained within a computer system rather than in a human mind. Such knowledge bases may contain wealth-generating information, for example details on building a valuable pharmaceutical.

If we are to study the diagram above that represents these factors at play within the economy, we can see that the relationship between enterprise and land, capital and labour is one-way, due to the fact that enterprise is exacting control over these other values. However, when we introduce knowledge as a fifth factor the picture changes.

The human factors of enterprise and labour have a two-way relationship between knowledge. Why Human factors can draw from existing knowledge stored in computer systems or other mediums, while they can also contribute to the knowledge base from their own experience, therefore increasing the value of the net accumulated knowledge.

Knowledge and the Firm

Now that we have discussed knowledge in the wider economy, it is time to look at the implications for firms and other organisations operating within the knowledge economy. IS (Information Systems) have been with large firms for decades now, accumulating large stores of data on all kinds of business processes. Much of this data sits of storage mediums and in databases, a large proportion of which is never truly utilised.

Firms are now realising that they possess large repositories of data that may yield valuable information to improve their business processes, but how can such large amounts of raw data be structured for such uses

Data in its raw form is nothing more that the unfocused bi-product of some process, e.g. goods sold at a super market check out being scanned at the register. Information is facts that are pertinent to the firm, e.g. the super market is running low on stock for certain goods, and they need to be reordered.

Knowledge is more difficult to define in this context, but can be thought of as the collected human expertise within a particular domain, e.g. how do I reorder stock While this is a trivial example, expert systems have been developed in the medical and industrial domains that attempt to collect human expert's knowledge into a computerised knowledge base, then use this knowledge to support decisions within these domains, e.g. for medical diagnosis. Such systems, along with other knowledge-based systems and data mining techniques, are helping firms to make use of the large databases that IS has created over the years.

Knowledge and the Individual

The individual operating with the knowledge economy can utilise the value of knowledge by accruing knowledge for business needs (enterprise), or obtaining knowledge through education and work experience for improved employment prospects (labour).

It is not just about obtaining as much knowledge as possible, however, and as with many things it comes down to quality versus quantity. So what is quality knowledge In basic economic terms, quality knowledge is knowledge that is likely to earn the most amount of wealth.

To give a basic example, no one would argue that a farmer works just as hard as an accountant. Both professions require lots of knowledge, training and supervision to begin with. However, an accountant can be expected to earn far more money than a farmer. Why Well, for an explanation of this we have to look at broader trends in the economy and study them over time. For example, using the basic economic principles of supply and demand: a shortage of qualified accountants, combined with a high demand from firms wanting to hire such accountants is likely to push up their asking salaries, as high demand chases after low supply. Of course, the opposite is also true where supply is greater than demand.


Knowledge economies have always been part of our lives. The difference now is that IT (Information Technology) is allowing us to accumulating and analysis this knowledge like never before.

The wealth of a country relies heavily on the wealth generating capabilities of its human factors of production, enterprise and labour. These factors in turn are dependant on their knowledge to generate such wealth; hence the term knowledge-based economy is born.

For an individual, assessing trends in the economy to determine valuable knowledge allows the individual to obtain marketable skills that allow them to generate personal wealth. Such trends by their nature do not stand still; therefore it is likely that all knowledge workers (or professionals) will have to keep an eye on their own levels of knowledge indefinitely, to ensure that they are continually improving and building upon their expertise.

John Collins

I have been writing about web technology and software development since 2001. I am the developer of the Alpha Framework for PHP, and the personal productivity app. I love open source, technology, and economics.