The Knowledge Economy: Knowledge Producers and Knowledge Users

There is widespread agreement that a defining aspect of the New Economy is the increased importance of knowledge. But what exactly does this mean? There are two important types of knowledge industries to consider: First, there are those industries whose major product is knowledge itself; then there are industries that manage or convey information.

The first group includes industries such as software, biotechnology, and information technology hardware; and occupations such as engineers, scientists, programmers, and designers, whose major output is research that translates into new products and services. These industries are driven not by machinery, skilled shopfloor workers, or even capital-although these all play a role-but rather by individuals engaged in research, design, and development. While these industries make up less than 7 percent of the economy's output, they are in many ways key drivers of the New Economy. Just as capital- and machinery-intensive industries (e.g., autos, chemicals, steel) drove growth in the 1950s and 1960s, knowledge production firms are the growth engines of the New Economy.

On the other hand, a large share of the economy is now involved in managing, processing, and distributing information. These industries include telecommunications, banking, insurance, advertising, law, medicine, and much of government and education; and occupations such as managers, lawyers, bankers, sales reps, accountants, and teachers. In these industries, effective handling and managing of information, rather than breakthrough knowledge generation, are the keys to success.

The increased importance of knowledge means that the net stock of intangible capital (e.g., education and research and development) has grown faster than tangible capital (e.g., buildings, transportation, roads, and machinery). Federally-financed intangible capital has increased from 60 percent of the value of federally-financed physical capital in 1970 to 93 percent today.¹³ This trend is equally true in business. In the 1960s and 1970s about 25 percent of the difference in average stock price earnings could be attributed to change in reported earnings. By the early 1990s, this had dropped to less than 10 percent.¹⁴ Part of this change is attributable to the fact that the worth of companies is increasingly related to intangible assets (R&D, brands, employee talent and knowledge) that traditional accounting fails to measure.

In the New Economy, intangible capital has become at least as important as tangible capital, and a greater share of the value of tangible capital is based on intangible inputs. As we have become richer, we have increasingly consumed services and goods with higher value-added content. This trend is demonstrated by the fact that the economic output of the U.S. economy, as measured in tons, is roughly the same as it was a century ago, yet its real economic value is 20 times greater¹⁵. In other words, we have added intangible attributes to goods and services, the most important being knowledge. One example is anti-lock brakes, which are the product of a generation of research and development, and are loaded with electronics. They don't weigh any more than conventional brakes, but they certainly provide a great deal more value to drivers.

 
Index Home | Introduction
SECTION I | SECTION II | SECTION III
Productivity Paradox | Knowledge Economy
Nine Myths | Data Sources | Endnotes | The Authors
 
 
The Progressive Policy Institute (PPI)
Technology, Innovation, and New Economy Project
600 Pennsylvania Ave., S.E., Suite 400, Washington DC 20003
Phone: (202) 546-0007
 
www.ppionline.org