Knowledge has been named as the fifth factor of production besides land, labor, capital, and enterprise. The phrase “knowledge-based economy” often refers to the economies where information has a more overarching impact on countries’ economic welfare in comparison to industrial societies.
Such an economy has also some form of modern economy where there are specific changes characterized by the rapid creation of new knowledge and advancement of access to knowledge bases. Such logic is to improve efficiency, competitiveness, and novelty. It is a type of economy that focuses on the creation, distribution, and application of information and knowledge. An economy that is characterized by the appreciation of knowledge as a driving force to earning competitiveness. Also, the increasing significance of science, technology, and innovation in the creation of knowledge. Today, the knowledge-based economy is often based on the application of computer technologies and the Internet of Things. The purpose is the generation, sharing, and application of knowledge to drive economic growth.
Transition to the knowledge-based economy
In lesser-developed economies, the manufacturing and agricultural sectors tend to play a key role in the economy while developed states tend to focus on service-based sectors in driving economic growth. While most countries in the world tend to have the three types of sectors, the levels of concentration in such sectors tend to differ depending on the wealth of states. Knowledge-based activities in developed nations include technical support, consulting, and research services. The information Age shifted the global economy to be dependent on knowledge-based sectors.
The transition to this form of the economy includes some of the best practices adopted from manufacturing-intensive, service-intensive, and labor-intensive economies and added to the knowledge-based concepts to create a globalized and interconnected economy. In this knowledge-based economy, sources of knowledge such as trade secrets and human expertise tend to play critical roles in economic development and are as important just as other economic resources.
Four traditional factors of production
From an economic perspective, there are four classical factors that enhance production. These factors include
Knowledge is the fifth factor in the model of the knowledge-based economy. Land refers to resources nature provides such as forests, minerals, rivers, and land. Labor is the application of man’s effort in wealth creation. Capital is the total set of assets in wealth creation such as equipment/machinery and buildings. Enterprise is the controlling factor in wealth creation. Human intelligence works to organize other production factors and bears all the risks in production and enjoys the rewards or profits.
The Fifth Factor of Wealth Creation
Knowledge is the fifth factor that affects labor and enterprise. New ventures are likely to succeed under a successful and experienced entrepreneur compared to when run by inexperienced individuals straight from business school. This implies that labor and enterprise derive their knowledge after some period of time. In the knowledge-based economy, such knowledge increases the value of labor and enterprises as factors of production. Knowledge can also independently work without necessarily relying on human factors. For instance, the knowledge contained in computer systems can contain important wealth-generating information like details on establishing smart cities.
Land, capital, labor, and enterprise have a one-way relationship since enterprise tends to take control over the other three. The introduction of knowledge in the picture makes the relationship between labor and enterprise become two-way because human factors can always gain from existing knowledge and still contribute to the knowledge base thus increasing the value of knowledge accumulated.
Knowledge-based Economy for Firms and Individuals
Knowledge-based economies have always been a way of life for nations around the globe. However, with the existence of information technologies, more and more information accumulates for analysis making the phrase “knowledge economy” sound new. The wealth of nations depends on the potential to generate wealth and the existing human production factors, labor, and enterprise. In turn, the factors depend on the knowledge of wealth creation thus the phrase “knowledge-based economy.” Firms are increasingly discovering the value of large repositories of data in their possession.
In industry, expert systems attempt to gather human knowledge and feed it to computers. Upon processing, this knowledge can be helpful in supporting decisions such as in medical diagnosis. Systems created for such purpose, alongside other knowledge-based systems and other techniques of data mining can help firms utilize large databases created by information systems to generate wealth. For individuals working within the setting of the knowledge economy, knowledge value can exploit through the accrual of knowledge. They can use it within the business or by obtaining knowledge via work experience or education for better employment prospects.