It seems that every time we pick up a newspaper or business journal, the term knowledge economy is being discussed.  But what exactly is the knowledge economy and have we in fact migrated from an industrial economy to a knowledge economy?  If so, how do we know? If not, are we somewhere on the path to a knowledge economy and if so, where along the path are we?

To answer these questions one could consider the factors of production in this changing economy, i.e. capital and labor. The Cobb-Douglas function, considered to be the basic production function in microeconomics, states that output is a function of both capital and labor.  Within this function, capital and labor have a very basic definition. Labor is defined as the workers employed in the particular area of production being analyzed, and capital is defined as the stock of goods used in the means of production, such as machines, buildings, tools, etc.  But are these measurements relevant in today's economy?With the structure of the U.S. economy changing from an industrial base to one that is service oriented, many might consider the new economy to be a "knowledge economy", an economy where information is both the commodity and activity.  In today's economy, workers are no longer restricted to a factory floor or Dilbertian cubicle.  Since workers can operate from anywhere in the world given in part the ubiquity of the Internet, the traditional roles of capital and labor have changed.  The question to ask then is, how do capital and labor function within this globalized and decentralized economy?  

Since the pace of production in this new economy cannot simply be measured by the output of a factory, the focus must be shifted towards improving the capital available to the knowledge worker.  With knowledge being the output in this new economy, investments in capital should be used to improve the productivity of the knowledge worker.  Investing today should focus on streamlining the working environment of the knowledge worker to eliminate existing inefficiencies and to progress in areas where the worker already excels.  

We'll look at this very issue and continue the discussion next week.  Thanks to Basex Analyst Sachin Analyst who helped research this topic with me.