What is Knowledge Economics?

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Knowledge Economics is a theory that explains how ideas help societies progress. Generally, economists study what adds value to a society. Traditionally these gains (or losses) are measured by GDP (gross domestic product).  So, one might be tempted to say that Knowledge Economics is the study of how knowledge adds to a nation’s GDP.  But, knowledge has some unusual qualities, so simply estimating its value through contributions to GDP does not capture its entire value.

Ever use Google to search for something?  How much did you pay?  Nothing.  Because Google is benefitting from the data patterns you contribute.  They use these patterns partly to sell to marketers, but they also use the patterns to build new products – possibly to sell back to you.  I just paid my bill for additional storage on Google Drive.  So, if you are giving value to Google to produce new products, how much did Google pay you?  Nothing.  Unlike industrial products, knowledge doesn’t have to go through markets in order to be exchanged.  Therefore, it does not always show up as adding to GDP.

Doesn’t go to market?

That’s right.  The reason why GDP (or similar measures) are so widely used is that they tend be a decent measure of the national productivity.  If GDP rises, the wealth of a country grows.  Assuming that wealthier countries are happier countries and that financial wealth is some reasonable measure of happiness (ok… not a great assumption, but it is THE assumption that economists make to validate measures like GDP), then GDP ought to be a realistic measure of whether things are better or worse for a country.  But, if knowledge does not always get exchanged through capital (money) markets, then, Knowledge Economics begins to define national prosperity as national prosperity not always measured by money.

OK.  This isn’t entirely new. During the agricultural era, agricultural products were exchanged without going to market.  If you grew many extra carrots and your neighbor was good at making shoes, you might exchange carrots for shoes.  So, in a purely agricultural (generally small-farmer, small crop) economy, GDP is not a good measure of productivity and wealth.  Nor does it capture the value of home production – such as nurturing children, drawing water or tending a home garden.

This is not generally true for industrial goods.  You can’t really take a case of freshly home-canned peaches over to your neighborhood car dealer and trade them in for a new car.  Largely, industrial goods have to go through markets to be exchanged.   So, for large, industrial economies and/or those with large industrial farms, exchanges are made through markets.

But, knowledge gets exchanged through networks.  You are learning right now as you read this blog – gaining knowledge (hopefully something useful and accurate).  No one is paying me to do this blog (actually I’m in Nigeria as I write this) and I’m not paying you to read it.  Once you read it, you might forward it to some of your friends.  If it becomes popular, it will spread through growing networks – not markets.  I’m doing this because I’m starting a new development innovation hub and one of the first things everyone asks me is “what is Knowledge Economics”? I need to explain that and many other concepts – might as well refer them to a blog.  You might be reading this for various reasons – curiosity, a professional desire to stay current, a student to improve performance, or a businessperson wishing to advance her business with up-to-date information.  People create, learn and distribute knowledge for a variety of reasons – power, prestige, learning, exchange of ideas, validating value, building personal or professional networks, building social capital AND money.  Only money generally goes through capital markets.

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Counting knowledge productivity

Knowledge Economics got its biggest push when Paul Romer introduced the theory of Knowledge Economics in 1990 (Romer, 1990).  This work just won him the 2018 Nobel Prize in Economics.  In his first iteration of the theory, he proposed that societies improve their well-being not through industrialization, the Green Revolution, or even the Digital Revolution and the like.  Rather, he proposed that human creativity, innovation and adaptation (ideas as he called them) which drove societal innovations.  People invented new ways of doing things. The industrial revolution may have changed the way a society produced goods, but it was the ideas underlying the industrial revolution that transformed society. Industrial changed followed the new ideas.

In so doing, Romer made two important points.  First, social well-being remained a primary focus, but productivity now had to be examined in light of maximizing creativity and innovation.  Second, ideas were an economic “good,” but ideas have substantially different economic properties than material goods (or services).  A central assumption has been that most goods behave according to laws of scarcity – the more you made or demanded, the harder it was to get enough of the raw materials.  Prices rise as a result. If you want to make billions of cell phones, then the cost of titanium might go up around the globe.  But, the more knowledge is produced, the greater the supply.  Once a team has built one “app,” for example, it knows more and works better as a team to build the next app.  Knowledge is always expanding.

The fact that knowledge is distributed through networks and does not have to be exchanged through capital markets is also different from industrial products.  In 1978, a medical group discovered that, by adding sugar and salt to water, the body would absorb the water much faster (Lancet, 1978).  Before this discovered, many people, particularly infants, died before they could get to rural clinics and be rehydrated using IV drips.  It is estimated that this new information, now widely spread, saves about a million lives a year (World Health Organization, 2002).  This increased value to societies does not go through markets and its value to society is not included in measures of GDP.

The American Economic Association defines the field Economics as: “the study of scarcity, the study of how people use resources, or the study of decision-making” (American Economic Association, n.d.). Knowledge Economics will clearly change this definition.  Knowledge is a resource to people and societies – used by Google, Twitter, Uber and poor people on the African Sahel who have a young child who has become dehydrated.  Its unique properties have spawned a wide variety of researchers to begin studying its many aspects, from how to define it, how it spreads, to how its digitization changed its features.  Its economic properties are still being discovered.  What we can be sure of – it has always been a force in changing societies and, in this networked world, it is becoming a major force.  And, it certainly is not a scarce resource.


American Economic Association. (n.d.). What is Economics? Understanding the discipline. Retrieved February 3, 2017, from https://www.aeaweb.org/resources /students/what-is-economics

Lancet. (1978). Water with sugar and salt. Lancet, 2: 300–301.

Romer, P. (1990). Endogenous Technological Change. Journal of Political Economy, 98(5), 71–102.

World Health Organization. (2002, May 8). New formula for oral rehydration salts will save millions of lives. Retrieved April 26, 2013, from http://www.who.int/ mediacentre/news/releases/release35/en/

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