Knowledge Economy Research Paper

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One of the most fundamental properties of human social existence is distributed knowledge. While knowledge resides, in the final analysis, only in the human brain, it needs to be shared with others and distributed in order to be effective. This process embodies what is known as a knowledge economy.

Put simply, no one can know everything, and so cooperation among people consists of sharing necessary knowledge. Historically, one of the main characteristics of commercially and technologically sophisticated societies has been the fine degree to which knowledge is divided; the degree to which labor is divided is to a large extent derived from the division of knowledge. A knowledge economy is thus based on creating, evaluating, and trading of knowledge.

There are many ways to cut and classify the kinds of knowledge people need to possess and exchange. One appealing way is to divide the information up into those parts that deal with social matters and human affairs and those that concern the external environment. These roughly correspond to the spheres of exchange and production. While the sphere of exchange contains allocative knowledge such as “where do I hire a pipe fitter,” “what is the price of bread,” or “how do I purchase the stock of Microsoft,” the sphere of production contains mostly statements about the physical and biological environments in which people operate.

Technology concerns the latter sphere: it consists of information that regards natural phenomena and the rules and regularities we can formulate about them. It includes statements like “the Mississippi flows from north to south” and “it snows in the winter in Michigan” as well as Schrodinger’s wave equations. Science is a small subset of this set of knowledge, which can be termed propositional knowledge, but the hallmark of the modern age is that its relative importance in the knowledge economy has risen steadily.

Allocative Knowledge

The ways society has used information to allocate resources and reproduce itself involve some of the central questions of economic history. Information about exchange is summarized effectively in market economies by the price mechanism. In a classic article published in 1945, the economist F. A. Hayek pointed out that in market economies a mind-boggling amount of information is summarized and processed by the price mechanism. The typical consumer of a meal of sushi in Evanston does not have to know where the fish was caught, how it was processed and shipped to Illinois, and how it was cooked: by paying the price of a meal, all this information is summarized and processed by people the consumer does not know and does not have to know. On the other hand, the Japanese wholesalers processing the tuna do not have to know or care who precisely wants to eat what.

Free decentralized markets are neither tools of exploitation nor miracle cures for all of society’s ills; they are above all information-cost-saving devices. Once markets are disrupted or abolished, as happened in Marxist command economies, this information has to be processed consciously by officials, who set prices by decree rather than through competitive processes. The results have been devastating.

Money played a unique role in increasing the informational efficiency of societies, since money served as a unique unit of account and thus made exchange easier. Without a means of exchange, trade would require a double coincidence of wants, which is informationally more cumbersome. Money also provides a measure of value, thus providing different goods with a common denominator, which lubricates the exchange process. It is now widely recognized that decentralized and unregulated markets are the most efficient information-processing social tools in our arsenal. Even when they misfire and create inefficient outcomes, the remedies are often worse than the maladies.

The degree to which societies allocate resources through markets rather than through central planning or another allocation mechanism (such as intratribal allocation by the whim of the leader) and the way allocative knowledge is processed and distributed determine to a great degree the social and economic development of a society. Market economies on the Eurasian continent developed, by and large, to a greater degree than those in Africa, Oceania, and pre-1492 America. In western Europe market allocations were highly developed in Roman times but for a variety of reasons declined in the second half of the first millennium, whereas the Islamic Middle East and China were in that sense far more developed.

Parts of western Europe recovered during the Middle Ages, and markets became increasingly important in processing allocative information, with prices of both locally and internationally traded goods increasingly effective in indicating both information about the scarcity (supply) and desirability (demand) of commodities. Moreover, the same kind of decentralized market processes began to control the allocation of labor and land, extending the coordinating role of markets to the factors of production.

In the nineteenth century, even capital markets became increasingly competitive, although in those markets the processing of information was often problematic and inefficient because of informational asymmetries between lender and borrower, and the performance of different economies was often influenced by the functioning of their capital markets.

Allocational information is of course constrained by how well it can flow over communication channels. People wrote letters, and while the postal system was far from perfect, all information societies have found ways of communicating over long distances. Information is the lightest of all cargoes, but it still needs to be moved. Short of unusual forms of optical communication—like smoke signals, the Chappe semaphore telegraph introduced in the late eighteenth century, and the use of (expensive) homing pigeons— information moved with people. Until the nineteenth century, then, the speed of information flows was only as fast as a horse or a ship could travel. This limited the effectiveness of the price mechanism for many goods and services, and before 1800 or so most prices did not converge between regions, a telltale sign of less-than-perfect information flows.

With the introduction of railroads in the early 1830s and the telegraph a decade later, the age of informational globalization truly began. Interest rates and wheat prices quickly converged across the Atlantic after the transatlantic telegraph cable was laid. Despite disruptions due to political upheavals in the twentieth century, the trend toward globalized allocational information has continued. Securities and commodities markets demand that traders and investors have access to highly specific data more or less instantaneously.

The telegraph was a huge step forward, possibly the greatest discontinuity in information transmission in relative terms, but it was gradually displaced by the telephone, by teletexts of various kinds, and eventually by a vast electronic network of information that guarantees the effective operation of markets. This does not mean that these markets deliver the most efficient of all possible worlds, only that arbitrage opportunities do not persist.

Propositional Knowledge

Propositional knowledge was in many ways equally fundamental to the economic performance of society. Whereas commercial exchange societies demand a great deal of information about availability and desirability (summarized in prices), this information is not truly indispensable. On the other hand, figuring out the regularity of seasons and plant and animal life was already a knowledge requirement for hunter and gatherer societies. In some sense all modes of production— whether agriculture, manufacturing, or service (such as medical services and transportation)—involve the manipulation of natural phenomena and regularities. And effective manipulation depends on information. Every production technique involves a set of instructions on how to grow potatoes or operate a nuclear power plant. Such instructions require some prior knowledge of the phenomena on which they are based.

Much of economic history can be viewed as the slow evolution of information toward increasing specialization and a finer division of knowledge. Engineers, chemists, mechanics, and physicians controlled specialized knowledge, and as the body of knowledge expanded—at an exponential rate during and after the Industrial Revolution—finer and finer specialization was necessary. This implied that individuals needed to have better access to knowledge that was already known to someone in their society. The access to this knowledge depended historically on the technology of knowledge reproduction as well as on cultural factors.

The great discontinuity here was the printing press, which created a bridge between “town and gown” (the non-academic and the academic), but the effectiveness of the printing press as a means of disseminating information depended on the degree of literacy as well as on the nature of the books printed. As long as most books were concerned with religious issues or were romance novels, their impact on economic development was of course marginal. But in the sixteenth century a technical literature concerned with placing existing information at the disposal of those who needed it at a minimum cost started to evolve.

In other forms, too, the Enlightenment in the West was an information revolution that changed many of the parameters of information flow. Specialization had its costs: from classical times on, philosophers and scientists had moved in different spheres than people like farmers and artisans who produced useful things. As a result, economically productive people were rarely aware of best-practice science, and scientists were rarely interested in the day-to-day problems of production and did not apply their intellects to the resolution of these problems. For China, so rich in scientific knowledge, this was especially true, but it also held for classical antiquity where brilliant scientists and mathematicians such as Archimedes and Hipparchus did not bother with issues dealing with agriculture or manufacturing. This started to change in the medieval Occident, when monks often became leading scientists and technological innovators.

The gap between the two narrowed further after the European voyages, and historians date the closer communications between the two to the middle of the sixteenth century. The use of printed books to disseminate technical information coupled with rising literacy rates and the wider use of paper facilitated these bridges between people who knew things and those active in actual production. Thus, for instance, the celebrated book published by Georgius Agricola, De Re Metallica (1556), which summarized what was known at the time in mining engineering, and Jacques Besson’s Theatrum Instrumentarum et Machinarum, published in Latin and French in 1569, went through three translations and seven editions in the following thirty-five years. While these precedents were important, the true information revolution came in the eighteenth century with the Enlightenment, which eventually changed the entire process of technological progress and culminated in the Industrial Revolution.

The Industrial Enlightenment

The informational aspects of the Enlightenment are a central element of the economic and social changes triggered by technological progress. In the eighteenth century, a movement we can term the Industrial Enlightenment, led to a three-pronged change that had far-reaching economic results. First, the sheer number of serious scholars engaging in scientific research in the West increased steadily after the triumphs of Galileo and Newton, whose insights vastly augmented the social prestige of natural philosophers. Second, the research agenda of these scientists increasingly included topics that might benefit the “useful arts” such as chemistry, botany, optics, hydraulics, and mineralogy. In many of these fields, to be sure, science was too little advanced to be of much immediate benefit, but many of the promissory notes issued in the eighteenth century by scientists committed to the Baconian program of controlling nature through understanding it were honored in a later age.

Third, a central goal of the Industrial Enlightenment was to diffuse knowledge. It did so by publishing accessible and user-friendly compilations of knowledge, from books of a general nature like encyclopedias and technical dictionaries to specialized technical manuals and textbooks. The age also saw a meteoric rise in the publication of scientific periodicals, reviews, and abstracts of important work, and there is ample evidence that these periodicals were read by contemporary engineers and inventors. The paradigmatic document of the Industrial Enlightenment was no-doubt the Grande Encyclopedie, which was filled with technological information on such mundane subjects as glass-blowing and masonry, accompanied by highly detailed and informative diagrams. The need for “search engines” was felt acutely, and increasingly ingenious engines were developed.

Knowledge was also distributed through informal networks and personal contacts, to a degree we can only guess at, since most of those contacts have left few records. One such organization about which a lot is known is the Lunar Society, a private club in Birmingham, England, in which some of the best scientists of the age discussed useful knowledge with leading entrepreneurs and engineers. Hundreds of learned societies were established in Europe in the eighteenth century, and while not all could boast the quality of the minds that attended the Lunar Society or the inappropriately named Manchester Literary and Philosophical Society, they all reflected a profound change in the attitudes toward, and organization of, useful knowledge in the West.

Moreover, in this age markets for expertise and technological knowledge also emerge. Much of the work of the great engineers of the time, from John Smeaton and James Watt, consisted of what we would now call consulting. The exact impact of these changes on economic progress is still a matter of some dispute, but its coincidence with the economic takeoff in the West in the nineteenth century can hardly be happenstance.

The Explosion of Access Technologies

In the past two centuries, the role of useful knowledge in society that the Enlightenment pioneered has exploded, to the point where science can be said to have replaced religion in many areas as the central intellectual force determining social development. Modern science and the technological progress it spawned became dynamic elements in world history in the twentieth century. What is notable is not just the vast growth of knowledge of natural phenomena but also the appearance of many new social and technical means for its dissemination: the technical handbooks and dictionaries of the late eighteenth century grew enormously. Historians estimate that in 1800 only about one hundred scientific journals were published—this has grown into a gigantic mass of about twenty thousand scientific journals, not including journals in engineering and other applied sciences. Huge compilations of detailed and highly specialized information, including catalogs and databases too gigantic for any individual even to comprehend, have been put together with the help of powerful computers.

Access to this information is relatively cheap and sophisticated means exist to select the wheat from the chaff. What made this possible is a combination of changes in the organization of knowledge and the sociology of science, coupled with radical changes in the access technology. Scientists have become a self-policing community, which through complex processes of persuasion and proof establish consensuses, always challenging and at times replacing them. Markets for information have become increasingly efficient and widespread, with consultants of all kinds becoming an integral part of the “knowledge society.” In this kind of world, access to what is known by others is essential. But this world also raises many issues of verifiability, reliability, and authority.

Among the many changes in access technology, the Internet, which consists of increasingly sophisticated libraries, more specialized textbooks, summaries of scientific papers, and popularizations of scholarly textbooks, is the crashing climax of two centuries of improving access technology. Early computerized databases evolved into the search engines of today, in which mammoth amounts of knowledge can be accessed by anyone, essentially at zero cost, through such databases such as Medline and Econlit.


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