The Characteristics of the Knowledge Economy, Part 4

In concluding this part of the E-Learning Curve Blog's series on Knowledge Work, I will describe the final characteristics that define a knowledge economy.

Systems of creation, production and distribution

The commonly-held notion that a knowledge economy is a services economy is misleading. As information and knowledge add value to basic products manufacturing and services are becoming increasingly integrated into complex chains of creation, production and distribution. At the core of the economy are goods producing industries, linked into value chains which see inputs coming from knowledge-based business services and goods related construction and energy industries, and outputs going to goods related distribution service industries[1].

Convergence or divergence

One feature of the emerging knowledge economy is increasing evidence that the nations of the world are polarizing, rather than converging, in economic terms. Standard growth theories suggest that economies subject to market forces should converge in terms of per capita GDP levels, either absolutely or relatively. But the reality is quite different.

Countries appear to be moving towards two peaks or nodes, one at high incomes and one at relatively low incomes. This polarisation of countries into different strata of economic activity and of living standards is becoming both pronounced and persistent – what is often referred to as “twin-peaks dynamics[2].” What the future will show as the knowledge economy unfolds remains to be seen, but there is little in the recent historical record to assure policy makers that market forces will deliver a continuing process of convergence to US levels. In such a world the consequences of policy failure or inaction can be dramatic.

Divergence and concentration

These same dynamics may cause changes in the industrial structure of knowledge economics. Many contend that increasing inequality can be observed at the international, national, regional, household and personal levels – that the rich are getting rich, while the poor are getting poorer. Some economists suggest that increasing returns from network economies and learning economies characteristic of knowledge economies will lead to industrial concentration – a world of winner takes all[3]. Others contend that the expansion of the knowledge driven economy will create a proliferation of material, firms and activities at all points and at all levels, suggesting that no one can expect to enjoy continued control of markets.

There may be temporary monopolies but they cannot last. And it is misconceived to think that the key lies in being at the point of delivery of the product: the low cost and ease of access to the delivery mechanism mean that the rents are driven down at the delivery level and instead migrate back up the value chain to those with genuinely scarce factors and competitive advantages[4].

Whichever proves true, the knowledge economy will see the development of new business models.

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Footnotes:

[1] Sheehan, P. Tegart, G. (Eds.) (1998) Working for the Future: Technology and Employment in the Global Knowledge Economy. Victoria University Press.

[2] Sheehan, P. and Tegart, G. (Eds.) (1998) Working for the Future: Technology and Employment in the Global Knowledge Economy, Victoria University Press, p100. See also Quah, D. (1996) ‘Convergence Empirics Across Economies with (Some) Capital Mobility,’ Journal of Economic Growth, 1(1) pp. 95-125 [Internet] Available form: http://www.jstor.org/pss/2235377 [Accessed 20 August 2008]

[3] Arthur, W.B. (1996) ‘Increasing Returns and the New World of Business’, Harvard Business Review, July-August 1996, pp. 100-109

[4] Kay, J. In: DTI (1999) Economics of the Knowledge Driven Economy, Conference Proceedings, Department of Trade and Industry, London.

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The Characteristics of the Knowledge Economy, Part 3

In yesterday's post, I began to describe in some detail the characteristics of the knowledge economy in the 21st century; in today's post I will continue to investigate some of the defining factors that identify the emergence of this economic paradigm.

Learning organizations and innovation systems

In a knowledge economy, organizations search for linkages to promote inter-organizational learning, and for outside partners and networks to provide complementary assets. These relationships help organizations

1. spread the costs and risks associated with innovation
2. gain access to new research results, acquire key technological components
3. share assets in manufacturing, marketing and distribution.

As they develop new products and processes, organizations determine which activities they will undertake individually, in collaboration with other organizations, in collaboration with universities or research institutions, and with the support of government[1]. We can say that, as such, innovation is the result of numerous interactions between actors and institutions, which together form an "innovation system."

These innovation systems consist of the information flows and relationships which exist among industry, government and academic and other institutions in the development of science and technology. The interactions within these systems influences the innovative performance of organizations - and ultimately of the economy. The ‘knowledge distribution power’ of the system, or its capability to ensure timely access by innovators to relevant stocks of knowledge, is can be seen as a major determinant of economic growth.

Strategy and location

One of the consequences of globalization combined with advances in communications technologies has been a strengthening of world competition, and the emergence of a new form of ‘global competition’. Most organizations in a dominant market position are, by necessity, multinational or transnational organizations. To compete successfully with their rivals, organizations must compete head-to-head in all markets (including their home market), and they must rapidly attain a global scale in production and/or rapidly roll out products and services into multiple markets in order to do so. In this environment, competitiveness depends increasingly on the coordination of, and alignment of a broad range of specialized industrial, financial, technological, commercial, administrative and cultural skills which can be located in many locations around the world[2].

Production is being rationalized globally, with organizations combining the factors, features and skills of various locations in the process of competing in global markets. There are three major dimensions of change involved:

• increasing national (locational) specialization
• increased international ‘fracturing’ of value chains or chains of production – witnessed in increased intra-industry and intra-firm trade
• greater line-item by line-item trade imbalances

An increasingly apparent consequence of this development in industrial ertia is substantial structural dislocation in local, regional and even national economies, and a consequent need for substantial structural adjustment.

Clustering in the Knowledge Economy

Networks and geographical clusters of firms are a particularly important feature of the knowledge economy. Organizations find it increasingly necessary to work with other firms and institutions in technology-based alliances, because of the rising cost, increasing complexity and widening scope of technology. Many organizations are becoming multi-technology corporations locating around centers of excellence in different countries. Despite improved capability for global communication, firms increasingly co-locate because it is the only effective way to share understanding[3]. Consequently, skills and life-style are becoming increasingly important locational factors.

As we enter the age of human capital, where organizations merely lease knowledge-assets, organizations’ location decisions are increasingly based upon quality-of-life factors that are important to attracting and retaining this economic asset. In high-tech services, strict business-cost measures are becoming less important to growing and sustaining technology clusters … Locations that are attractive to knowledge assets will play a vital role in determining the economic success of regions[4].

Economics of knowledge

In the knowledge economy there are new ground rules. Knowledge has fundamentally different characteristics from ordinary commodities and these differences have crucial implications for the way a knowledge economy must be organised[5]. The whole nature of economic activity, and our understanding of it, is changing.

Unlike physical goods information is non-rival – not destroyed in consumption. Its value in consumption can be enjoyed again and again. Hence, social return on investment in its generation can be multiplied through its diffusion. Ideas and information exhibit very different characteristics from the goods and services of the industrial economy. For example, much more than is the case with a frozen dinner or a haircut, the social value of ideas and information increases to the degree they can be shared with and used by others. More important, the costs associated with their production are distributed very differently over time. While up front costs associated with the production of traditional goods such as a car or house may not necessarily be high, each item is still costly to produce. The more of these one produces, the more likely one will eventually encounter scarcities that drive up production costs and reduce the size of social returns. In the case of innovation, ideas and information, however, the opposite would seem largely to be the case. While up front development costs can be very high, the reproduction and transmission costs are low. The more such items are (re)produced, the greater the social return on investment[6].

Traditional economics is founded on a system which seeks to optimise the efficient allocation of scarce resources, but because of the unique characteristics of information and knowledge the very meaning of scarcity is changing. Indeed, the scarcity defying expansiveness of knowledge is the root of one of its most important defining features. Once knowledge is discovered and made public, there is essentially zero marginal cost to adding more users[7].

More...

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References:

Sheehan, P. Tegart, G. (Eds.) (1998) Working for the Future: Technology and Employment in the Global Knowledge Economy. Victoria University Press.

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Footnotes:

[1] OECD. (1996) The Knowledge-Based Economy, OECD Paris, p. 16. [Internet] Available from: http://www.oecd.org/dataoecd/51/8/1913021.pdf [Accessed 20 August 2008]

[2] Hatzichronoglou, T.(1996) Globalisation and Competitiveness: Relevant Indicators, STI

Working Paper 1996/5, OECD, Paris, p. 7.

[3] Cantwell, J. In: DTI (1999) Economics of the Knowledge Driven Economy, Conference Proceedings, Department of Trade and Industry, London.

[4] DeVol, R.C. (1999) America’s High-Tech Economy: Growth, Development and Risks for Metropolitan Areas, Milken Institute, Santa Monica

[5] DTI (1999) Economics of the Knowledge Driven Economy, Conference Proceedings, Department of Trade and Industry, London, p.5

[6] Industry Canada (1997) Towards a Society Built on Knowledge [Internet} Available from: http://strategis.ic.gc.ca/SSG/ih01644e.html [Accessed 20p August 2008]

[7] DTI (1999) Economics of the Knowledge Driven Economy, Conference Proceedings, Department of Trade and Industry, London, p. 6.

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Characteristics of the Knowledge Economy, continued

In the 21st century, comparative advantage will become much less a function of natural resource endowments and capital-labour ratios and much more a function of technology and skills. Mother nature and history will play a much smaller role, while human ingenuity will play a much bigger role.

(New Tools, New Rules: Playing to win in the new economic game. p.101)

As I discussed in much finer detail (and in the context of e-learning rather than the economy) in this post, in my view we as a society are on the cusp of a knowledge revolution akin to the explosion of information made possible after the general availability of printed texts following the invention of movable type and the printing press in 1440.

As this century unfolds, the skills used by people will increasingly be those that are complementary with information and communication technology; not those that are substitutes.

Now read on...

What makes the emergence of the knowledge economy important is that it is, in some significant respects, different from the industrial economy we have known for most of the last two hundred years. Some of the key differentiators include:

Information revolution

The IT revolution has intensified the move towards knowledge convergence, and increased the share the knowledge stock of advanced economies. All knowledge that can be distilled as information can be transmitted globally at relatively little cost. Knowledge per se has attained more of the properties of a commodity. [1]

Flexible organization

Flexible organizations reduce waste and increase the productivity of both labor and capital by integrating worker cognition and action at all levels of their operations.In doing so they eliminate many layers of middle management, which are dysfunctional in terms of information flow[2]. Flexible organizations also avoid excessive specialization and compartmentalization by defining multi-task job responsibilities (which calls for multi-skilled workers) and by using teamwork and job rotation.

Flexible organizations merge agility and high product quality with the speed and low unit costs of mass production. They do this by more fully utilising the human capabilities of their workers.

Knowledge, skills and learning

Information and communication technologies have reduced the cost and enhanced the capacity of organizations to converge knowledge, and process and communicate information. In doing so they have substantially altered the ‘balance’ between explicit and tacit knowledge in the overall quantum of knowledge. As access to information becomes easier and less expensive, the skills and competencies relating to the selection and efficient use of information become more crucial, and tacit knowledge in the form of the skills needed to handle explicit knowledge has become more important than ever.

Information and communication technology investments are complementary with investment in human resources and skills[3]. Whereas machines replaced labor in the industrial era, information technology will be the locus of explicit knowledge in the knowledge economy, and work in the knowledge economy will increasingly demand uniquely human (and tacit) skills – such as conceptual and inter-personal management and communication skills.

Innovation and knowledge networks

The knowledge economy increasingly relies on the creation, distribution and use of knowledge assets. The success of enterprises will become more reliant upon their effectiveness in creation, harvesting, absorption and utilization of knowledge.

A knowledge economy is driven by the acceleration of the rate of change and the rate of learning of the contributors to the economy, where the opportunity and capability to get access to and join knowledge-intensive and learning-intensive relations determines the socio-economic position of individuals and firms[4]. Companies must become learning organizations, continuously adapting management, organization and skills to accommodate new technologies and grasp new opportunities. They will be increasingly joined in networks, where interactive learning involving creators, producers and users in experimentation and exchange of information drives innovation.

More...

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References:

Sheehan, P. Tegart, G. (Eds.) (1998) Working for the Future: Technology and Employment in the Global Knowledge Economy. Victoria University Press.

Thurow, L. (1991) New Tools, New Rules: Playing to win in the new economic game. Prism.

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Footnotes:

[1] This post is primarily drawn from Sheehan, P. Tegart, G. (Eds.) (1998) Working for the Future: Technology and Employment in the Global Knowledge Economy. Victoria University Press.

[2] Oman C. (1996) The Policy Challenges of Globalisation and Regionalisation, Policy Brief No. 11, OECD Development Centre, OECD, Paris, p. 19. [Internet] Available from: http://www.oecd.org/dataoecd/51/8/1913021.pdf [Accessed 20 August 2008]

[3] Soete, L. (1997) Macroeconomic and Structural Policy in the Knowledge-based
Economy. In: Industrial Competitiveness in the Knowledge-based Economy: The New Role
of Governments, OECD, Paris, p. 136.

[4] David, P. Foray, D. (1995) ‘Accessing and Expanding the Science and Technology Knowledge Base,’ STI Review, No 16, OECD, Paris.

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Characteristics of the Knowledge Economy

In their paper Working for the Future: Technology and Employment in the Global Knowledge Economy, John Houghton and Peter Sheehan discuss the "impacts" (p.8) of globalization and as the foundation for the Knowledge Economy. They assert that

...firms are increasingly required to adopt global strategies to deal with the new realities. Global competition in all major markets between competitors from all major countries, the increasing multinational origin of the inputs to production of both goods and services, the growing intra-industry and indeed intra-product nature of world trade and the interdependent role of the various elements of globalisation are all contributing to a transformation of the global economy.

(1998, p.8)

The emergence of the knowledge economy can be characterized in terms of the "increasing role of knowledge" (p.9) as a factor of production and its impact on skills, learning, organization and innovation. These, then, are the key circumstances and characteristics in the development of Globalized Knowledge Economy:

• There is an enormous increase in the codification of knowledge, which together with networks and the digitalization of information, is leading to its increasing commodification.
• Increasing codification of knowledge is leading to a shift in the balance of the stock of knowledge – leading to a relative shortage of tacit knowledge.
• Codification is promoting a shift in the organization and structure of production.
• Information and communication technologies increasingly favour the diffusion of information over re-invention, reducing the investment required for a given quantum of knowledge.
• The increasing rate of accumulation of knowledge stocks is positive for economic growth (raising the speed limit to growth). Knowledge is not necessarily exhausted in consumption.
• Codification is producing a convergence, bridging different areas of competence, reducing knowledge dispersion, and increasing the speed of turnover of the stock of knowledge.
• The innovation system and its ‘knowledge distribution power’ are critically
  important.
• The increased rate of codification and collection of information are leading to a shift in focus towards tacit (‘handling’) skills.
• Learning is increasingly central for both people and organizations.
• Learning involves both education and learning-by-doing, learning-by-using and learning-by-interacting.
• Learning organizations are increasingly networked organizations.
• Initiative, creativity, problem solving and openness to change are increasingly important skills.
• The transition to a knowledge-based system may make market failure systemic.
• 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.

More...

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References:

Sheehan, P. Tegart, G. (Eds.) (1998) Working for the Future: Technology and Employment in the Global Knowledge Economy. Victoria University Press.

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