The world’s Knowledge Economy relies on intellectual capability and knowledge, rather than natural resources, agriculture or manufacturing. Services are paramount, and production is based on knowledge- and information-intensive activities that lead to a faster rate of scientific and technical development.

The leading edge of knowledge economy is seen in developed, First World countries, where new technologies have increased and improved dramatically in the past seven decades, largely because of quick-growing communication-based capabilities offered by computers and the Internet. These enable superior research and technical development that goes hand-in-hand with technical support and consulting skills.

Defining Knowledge Economy

Much has been written about knowledge economy since it was first identified in the mid-20th century, with scholars and academics failing to reach consensus on an accurate definition of the concept.

Some say that in the knowledge economy both capital and labour are sidelined, and that knowledge becomes the only factor of production. The Organisation for Economic Co-operation and Development (OECD) follows this thought-process, suggesting that the role of knowledge, rather than physical capital, natural resources, and low-skilled labour, is paramount.

Another view is that knowledge has led to new forms of activity that are based on knowledge products that are traded in the economy. Another argument maintains that it is “codified” scientific and engineering knowledge that is significantly important. And then there are those who identify Information and communications technology (ICT), and a so-called ICT revolution, as being responsible for knowledge-based economies.

At the same time, some have maintained that knowledge-based economies are “new” and that the role of knowledge has changed the way economics function. Others point out that “the economics of innovation” has always focused on knowledge and learning, even in early, undeveloped societies that existed centuries ago.

How Knowledge Economy is Measured

While some say that knowledge economy is based on a concept of “intellectual capital,” this cannot be enumerated, or accounted for like other forms of capital. So how do we measure knowledge economy?

Currently, the most reliable measuring tool is the World Bank’s Knowledge Assessment Methodology (KAM) that produces a Knowledge Economy Index (KEI) that ranks country’s abilities to “generate, adopt and diffuse knowledge” and assess whether knowledge in those countries can be effectively used for economic growth. It is an online tool that uses four pillars that represent knowledge economy. These are defined by the World Bank’s KAM as:

  1. Economic Incentive and institutional Regime (EIR) that promotes efficient use of knowledge (both new and existing) as well as entrepreneurship,
  2. Innovation and Technological Adoption represented by an efficient system of innovation within the country (ranging from universities to businesses and organisations) that can access global knowledge, adapt it, and use it to create new solutions for technological needs,
  3. Education and Training that enables the creation, sharing and use of knowledge,
  4. Information and Communication Technologies (ICT) Infrastructures that facilitate effective communication and both the processing and sharing of information.

Countries are ranked overall, and in terms of the four individual pillars. Rankings aren’t static, and interestingly, the United States has weakened in all four of the pillar indices since 1995 when it was ranked in first place overall. In the most recent (2012) rankings it has sunk to twelfth place, though it is still quite high up (sixth) in the innovation pillar.

The 2012 ranking includes a total of 146 countries, with Sweden claiming top position as the world’s most advanced knowledge economy. Finland and Denmark claim second and third place respectively, with the Netherlands, Norway, New Zealand, Canada, Germany, Australia and Switzerland sitting in fourth to tenth places.