Understanding knowledge economy

Knowledge economy refers to an economy in which growth is dependent on the quantity, quality, and accessibility of the information available, rather than the means of production. According to Walter W. Powell and Kaisa Snellman, the key component of a knowledge economy is a greater reliance on intellectual capabilities than on physical inputs or natural resources. In other words, in knowledge economy the creation of wealth is based on knowledge and information and hence intellectual property, i.e. intangible resources.

The traditional input factors to create wealth and income are the tangible and financial resources;whereas, the intangible resources are not generally visible and its economic importance are often underestimated.Intellectual property is generated through intellectual or creative activity. Like all property, the creator of such property can lease it, license it, give it away or sell it.

Notable economists, Nelson (1959) and Kenneth Arrow (1962), described information and knowledge with reference to two related characteristics of their public-good nature.According to them, Innovation is a key driver of economic growth, but competitive markets may under-incentivize innovation because of the public-good nature of ideas.Public good are characterized as non-rivalrous consumption and Non-excludability.

Non-rivalrous consumption means that once the public good is produced it can be consumed by any one person without diminishing the resource for another person. On the other side, non-excludability nature of intangible resources refers to the fact that the cost of excluding one consumer from the use of the public good is so high that no profit-maximizing firm is willing to supply the good.

Major concern of the public good nature of intellectual property is that if inventors or innovators could not rely on some means to protect the knowledge they create, they would be at a disadvantage – since they would not be able to recoup their cost. Hence, the public good characteristics of intangible resources must be hindered to gain benefits from these resources. Intellectual property facilitates this hindrance and constitutes property on knowledge or information.

According to Schumpeter, the problem of under production of knowledge can be solved and to create an incentive to spur private agents to devote resources to innovation activities promise of a temporary monopoly power was needed. Such monopoly will permit the creator of the intellectual property to exclude others from using the intellectual property created by them without their permission.

Thereby, the intellectual property constitutes a property right in respect of certain forms or expressions of knowledge or information. However, only those knowledge or information that meets certain threshold requirements will be subject to intellectual property protection.