Knowledge, networks and economic activity. Revisiting the network effects in the knowledge economy

Universitat Oberta de Catalunya
http://uocpapers.uoc.edu
Issue 8 | April 2009
Knowledge, networks
and economic activity.
Revisiting the network
effects in the knowledge
economy
By Joan Torrent Sellens
Economics and Business Studies
Internet Interdisciplinary Institute (IN3)
Universitat Oberta de Catalunya (UOC)
Presentation
Dr. Jorge Sainz González
Professor, Applied Economics I
Rey Juan Carlos University
uocpapers, iss. 8 (2009) | ISSN 1885-1541
María Pilar Martínez Ruiz y Ana

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Universitat Oberta de Catalunya
http://uocpapers.uoc.edu
Presentation
Jorge Sainz
The knowledge-based economy is a network economy. The part
Unlike the individual processes of the earlier technological
that networks play in society is not a new thing, but perhaps their
revolutions, network economies develop through a collective
application and study are. The survival of the Roman Empire was
process. On the one hand, their value is exponentially related
undoubtedly due to its network of roads and the ease with which
to their size. As the number of nodes or connections increases,
its culture, troops and merchandise could move about through its
so does the importance that belonging to them has for each of
territories. The industrial revolution of the 19th century, and the
their members. On the other, the networks allow tacit knowledge
fact that it extended to all four corners of the world, was thanks
to be transmitted, facilitate coordination and reduce conflicts,
to the railway network which aided the spread of technology at
getting groups to collaborate and add to each other. That is to
levels never before seen. The second great industrial revolution
say, interaction between the knowledge facilitated by ICTs is due
– that of the electric engine – was also accompanied by the
to the participation of all the individuals collaborating in the
appearance and growth of electricity distribution networks and
process and benefiting from it at the same time.
an improvement in communications and transport.
Of course, the result that networks achieve in the process
However, up until now, the network has been a complement
of production is not unique, either. Network participants reap
or, at most, an instrument, at the service of a greater objective.
the benefit of their participation according to their position in
These days, the role networks play is completely different. First of
the network. As a result, the network displays the dichotomy
al because, in the knowledge-based society, networks are intrinsic
of collective participation for the common good and one’s own
to its operation and development. Through networks, knowledge
benefit based on the agent’s influence within the network. This
is created and distributed, organisations are transformed and a
kind of situation is revolutionising areas, such as e-business,
relationship is established with technology which brings about
financial transactions or organisational management, although
changes in society.
their current potential is still far from being fully recognised.
Knowledge management is now a key factor for economic
It is in this sense that I would like to highlight Professor
development. The definition of “knowledge management” is
Torrent’s contribution: he manages to establish the basis of the
extremely loose, because it includes different concepts, such
role that knowledge plays within the network and how it is linked
as the use of technological solutions to get organisations to
to economic activity. In other words, he clearly establishes the
store, share or be able to create new knowledge by themselves;
conditions under which knowledge affects the way in which the
or the interaction between individuals which generates new
economy is organised, depending on typology.
practices through the collective use of new technologies; or the
This approach, distilled from the more traditional theories of
relationships which arise based strictly on the effective use of a
neoclassical growth, allows us to answer questions which are vital
new kind of knowledge and how it is distributed, even after it has
for our current economy, such as the role that knowledge plays
been used. In any case, we are referring to a special interrelation
in it, either as a resource or as a commodity. In the new society,
which only occurs through new technologies and which, for the
characterised by the transition from an economy of externalities
first time ever, means that the process of creating and distributing
to the network economy, knowledge is a fundamental factor
knowledge is now self-powered.
of growth and the production of knowledge has an obvious
uocpapers, iss. 8 (2009) | ISSN 1885-1541

María Pilar Martínez Ruiz y Ana
Jorge Sainz

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Universitat Oberta de Catalunya
http://uocpapers.uoc.edu
economic value. However, as the author acknowledges, it is
already represents a change in the productive paradigm, with
easy to forget the role of human capital in this technological
dynamic effects on production and wellbeing. This result in itself
whirlwind.
is at the heart of the network economy and, as in this new
Talent is not easy to replace, since it has an immediate
paradigm, it also means that once again we have an infinite
repercussion on the economy, either through its distribution
universe for future research.
throughout the network (observable knowledge) or its
incorporation as part of the network of the commodity itself
Dr. Jorge Sainz González
(tacit knowledge). In either case, wherever its own rules of
Professor, Applied Economics I
behaviour exist, its incorporation into the productive process
Rey Juan Carlos University
uocpapers, iss. 8 (2009) | ISSN 1885-1541

María Pilar Martínez Ruiz y Ana
Jorge Sainz

---

Universitat Oberta de Catalunya
http://uocpapers.uoc.edu
http://uocpapers.uoc.ed
article
Knowledge, networks and economic activity.
Revisiting the network effects
in the knowledge economy
Joan Torrent
Submission date: January 2009
Acceptance date: February 2009
Published in: April 2009
Abstract
Resumen
The progressive consolidation of a knowledge-based economy has
La progresiva consolidación de una economía basada en el conoci-
caused network effects to become a focal point of analysis into the
miento ha situado los efectos de red en el centro del análisis sobre los
changes in behaviour evinced by economic agents. This article analyses
cambios en el comportamiento de los agentes económicos. Este artículo
the changes in production and demand for knowledge commodities
analiza las transformaciones en la producción y la demanda de las mer-
arising from network externalities. The analysis reveals two distinct
cancías conocimiento derivadas de las externalidades de red. El análisis
patterns of behaviour in knowledge-based economic activity.
efectuado nos ha permitido distinguir dos patrones de comportamiento
Observable knowledge commodities are governed by the effect of
diferenciados en la actividad económica basada en el conocimiento.
direct and indirect network externalities. Also, their demand curve and
Las mercancías conocimiento observable se rigen bajo el efecto de ex-
business strategy depend on new-user entry (marginal value) and the
ternalidades, directas e indirectas, de red, y su curva de demanda y su
relative size of the network. However, tacit knowledge commodities
estrategia de negocio se sustentan en función de la entrada de nuevos
are governed by learning network externalities and their demand curve
usuarios (valor marginal) y del tamaño relativo de la red. Por el contra-
and business strategies are dependent on the value generated by the
rio, las mercancías conocimiento tácito se rigen bajo el efecto de exter-
addition of the goods themselves to the network (intrinsic value).
nalidades de red de aprendizaje, y su curva de demanda y su estrategia
de negocio se sustentan a partir del valor generado por la incorporación
Keywords
a la red de la propia mercancía (valor intrínseco).
information and communication technologies (ICTs), network
externalities, industrial economy, knowledge-based economy, demand
Palabras clave
curve, knowledge commodities
tecnologías de la información y la comunicación (TIC), externalidades de
red, economía industrial, economía del conocimiento, curva de demanda,
mercancías conocimiento
uocpapers, iss. 8 (2009) | ISSN 1885-1541

María Pilar Martínez Ruiz y Ana
Joan Torrent
Original title: Conocimiento, redes y actividad económica: un análisis de los efectos de red en la economía del conocimiento

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Universitat Oberta de Catalunya
uocpapers revista sobre la societat del coneixement
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Knowledge, networks and economic activity. Revisiting the network effects…
Introduction
This process of disruptive change is, in fact, characterised by:
a) interconnection over a network; b) investment, falling prices
These days, economic activity (production, distribution,
and the persistent and innovative use of ICTs; and c) the increasing
exchange and consumption) is undergoing a process of profound
presence of information, communication and knowledge streams
transformation, which we can summarise as having started
in the area of economics, within a context dominated by the
with the migration from an industrial economy towards a new
globalisation of economic relations. There has been a consensus
structure characterised by the decisive importance of information,
to identify this process of transition from an industrial economy
communication and knowledge streams.1 Although there are
towards a knowledge-based economy.?
several reasons for this evolution, there is a certain academic
Thus, the knowledge-based economy becomes consolidated
consensus which places responsibility for this change on a triple
through a new technical property: the symbiotic relationship
feedback interaction.2 First of all, a process of technological
between ICTs and knowledge. Or, in other words, the application
revolution led by investment and the massive use of information
of new knowledge and information to knowledge-generation
and communication technologies (ICTs). Secondly, by virtue of
and information and communication-processing devices.7 At
the dynamics of the space-time extension of the market for
present the economic application of knowledge is being used
factors and products or process of globalisation, which assume
more than ever. One example to illustrate this: during the
the capacity to situate the economic sphere on a planet-wide
second industrial revolution, scientific knowledge developed
scale in real-time. And thirdly, because of a new pattern in
the internal combustion engine which progressively became
the process of demand from economic agents, which can be
a key technology in the scheme of production. In this case,
characterised through the increased importance of intangibles
knowledge developed a technology which, once technically
in both the family and corporate expenditure and investment
applied to production processes, caused a radical change in
structures.
economic activity. In the case of the digitalisation process,
From the perspective of the interaction between technology,
we have technologies which are, as usual, based on the
economy and society, we might say that ICTs – which, broadly
economic application of knowledge to develop factors and
speaking, include the converging array of items of equipment and
products reproducibly. However – and here is the novel aspect
digital applications in the areas of microelectronics, information
of this – the effect that this knowledge has is not limited to
technologies, telecommunications, optoelectronics and the recent
the production of technology, since ICTs are also involved in
advances made in nanotechnology and biotechnology – have
generating knowledge itself. ICTs are technologies which, as
become one of the main foundations of the current process of
such, are knowledge and also expand and prolong the human
radical change in economic activity and social structure. We
mind in its knowledge-generation process. In other words,
can characterise this process of disruptive change induced by
what we have here is a social stock of know-how which uses
ICTs with three basic affirmations. Firstly, ICTs are fast becoming
knowledge as an input and which contributes directly to the
general purpose technologies,3 that is, technologies which can be
generation of knowledge as an output.8
used on a massive scale and applied systematically by economic
In short, and using a wide perspective of technological
and social agents. Secondly, ICTs are becoming the building-
processes, understood as man’s dominion over nature and
blocks of a new technical and economical paradigm,4 that is,
his social environment,9 ICTs not only affect the capacity for
they are the basis of a new, innovative substrate which radically
reproduction and control of the environment but also, more
transforms the structure of basic inputs and relative costs of
than ever, we have a technological apparatus which acts directly
production. And thirdly, ICTs are the basic infrastructure of a
on man’s dominion over himself or, more correctly, over the
new process of industrial revolution,5 that is, they are a series of
generation of his own knowledge. Contrary to manufacturing-
disruptive changes in technique and production, interconnected
based technologies, which affected manual labour, the
with social and cultural changes on an enormous scale.
application of ICTs to the apparatus of production extends and
1. Torrent (2008).
2. Kranzberg (1985); David (1990); Mokyr (1990; 2002); Castells (1997; 2004); Vilaseca (2005).
3. ?resnahan (1995); Jovanovic (2005); Albers (200
resnahan (1995); Jovanovic (2005); Albers (200?).
4. Dosi (1988); Torrent (2004).
5. De Long (2001); Atkeson (2001); ?aily (2001); ?aily (2002); Gordon (2004).
?. Pérez (2002); Rodrigues (2002); Foray (2004); Vilaseca (2005); Rooney (2005); Dolfsma (200?).
7. Castells (2000: ?2).
8. Torrent (2004: 49).
9. McClellan (1999).
uocpapers, iss. 8 (2009) | ISSN 1885-1541

María Pilar Martínez Ruiz y Ana
Joan Torrent

---

Universitat Oberta de Catalunya
uocpapers revista sobre la societat del coneixement
http://uocpapers.uoc.edu
Knowledge, networks and economic activity. Revisiting the network effects…
replaces mental labour.10 So what is the most relevant conclusion
This notwithstanding, an approximation to the classical way
we can reach from analysing this intrinsic feature of digital
of thinking with regard to political economics, which the
technologies? It seems evident that the productive application
neoclassical school of thought would later reproduce, shows that
of ICTs is associated, to a great extent, with the stock and
only Marx,11 with his study of the laws which govern the progress
dynamics of knowledge within an economy.
of capitalism (theory of exploitation and theory of accumulation),
In this sense, if we want to conduct research into the main
and Schumpeter,12 with his study of innovation and innovative
features of the process of transition towards a knowledge-
entrepreneurship waves, placed technological progress at the
based economy, we cannot obviate the important link between
centre-stage of capitalist development. Other highly-relevant
its material basis and the production factor and the commodity
authors from the classical school, such as Malthus, Smith,
– knowledge, which has the most weight in this explanation of
Ricardo, Stuart Mill and Marshall, interpreted technological
economic change. And, bearing in mind the symbiotic relationship
change as a mere instrument for achieving scale economies and
between ICTs and knowledge, this article is designed to analyse
to achieve displacement of the production function, or improved
the impact of network externalities on the economic structure
productivity. In fact, modern thinking has only contributed two
from a conceptual perspective and within an analytical context.
new, although important, ideas to the legacy of classical thought.
To do so, and after this brief introduction, we shall follow an
The first is the notion of technical progress as part of the capital
analytical process to discuss the most general aspects to the
contribution;13 and the second is the importance of education as
most specific ones. First of all, and in order to contextualise
a form of human capital incorporated within the workforce.14
the disruptive change that the transition to a knowledge-
?ased on Marx and Schumpeter’s important contributions and
based economy signifies, we shall discuss the most aggregate
breaking with the neoclassical interpretation, modern economic
approximations that social sciences have postulated with regard
analysis has highlighted the close link between long-term
to this phenomenon. Secondly, and once we have explained the
economic growth and technological innovation. The starting point
general context of the knowledge-based economy, we shall cover
for this association comes from the works of Solow and Swan.15
the microeconomic foundations, i.e. provide our analysis of the
Their exogenous economic growth model, which postulates that
particular transformations that using knowledge as an input
technical change is exogenous to economic activity, whereby the
and commodity subject to market transactions means. Thirdly,
factors which explain growth are reduced to the contribution of
after discussing the microeconomics of knowledge, we shall be
factors which already exist within an economy (the production
in a position to study one of its basic components: network
function), reaches the paradoxical conclusion that the rate of
externalities. At this point, we shall ask what impact the network
growth of income per capita in a long-term balanced economy
effects have on economic functions and market structure. The
can be explained only by technological progress. Without
article will end with the main conclusions of our analysis and
adding knowledge and technology to production (innovation),
the references used in the text.
the accumulation of capital will suffer from falling revenue
and productivity levels, i.e. the potential for long-term growth
that an economy has will fall over the long-term. The empirical
1. Technology, innovation, cycles,
exercises which compare the sources of economic growth or
paradigms and revolutions:
growth accounting exercises, confirm the importance of this
the conceptual basis of
residual element to the detriment of the accumulation of
factors to explain the long-term potential for growth that an
the knowledge-based macroeconomy
economy has. This phenomenon, often called the productivity
paradox, leads to results which are hard to accept in the light
The impact of knowledge and technology on economic activity
of conventional economic theory, since it reveals a clear gap
and society has been a matter of concern for social researchers
between the connections of the process of savings and investment
for some time now. From an economic perspective, technological
in productive factors and long-term economic growth.
progress has been one of the concepts used most frequently to
However, as the proposal regarding the exogenous
analyse the incorporation of knowledge into economic activity.
characteristic of technical change relaxed, a new approximation
10. Autor (2003); Vilaseca (2003).
11. Marx (18?7/1883).
12. Schumpeter (1934).
13. Salter (19
Salter (19?0).
14. Schultz (19
Schultz (19?1).
?1).
15. Solow (195
Solow (195?; 1957); Swan (195
; 1957); Swan (195?).
uocpapers, iss. 8 (2009) | ISSN 1885-1541

María Pilar Martínez Ruiz y Ana
Joan Torrent

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Universitat Oberta de Catalunya
uocpapers revista sobre la societat del coneixement
http://uocpapers.uoc.edu
Knowledge, networks and economic activity. Revisiting the network effects…
to the sources of economic growth became consolidated: the
into the limitations of a particular academic discipline, make
endogenous theories of economic growth. In this approximation,
research into it a necessary form of observation which goes
knowledge and technology are no longer the “manna from Heaven”
beyond conventional disciplinary boundaries. In this sense, the
and their use in production is directly linked to production factors.
interpretation of the economic fact of knowledge and technology
?roadly speaking, we could say that there are two large families
should be approached from a multidisciplinary perspective which
of endogenous economic growth models: the learning by doing
includes all kinds of innovations, not just the ones which relate
models and the human capital theories. In the former, increases
to its purer forms, within a context where they are produced
in productivity are a by-product of economic activity.1? In other
endogenously and can be related to the economic and social
words, the acquisition of knowledge is the result of normal
context within which they are born and develop.
investment and production which end up generating accumulated
The analysis of the changes in Information and Communication
experience. In this sense, the main source of economic growth
Technologies (ICTs) does not constitute an exception within the
is determined by the increasing revenues associated with the
conceptual framework of analysis which defines the traditional
features which make knowledge a public good.17 The latter group
relationships between knowledge, technology and economic
of models, however, considers that increases in productivity are
activity. Quite the opposite. The clearly feedback-produced
the result of intentional investment in education and research
link between ICTs and knowledge, both of which are key inputs
by economic agents, making technological progress a costly
and outputs of the current economic context, means that any
process.18 ?ased on these two different approaches to the
study will need to be an even more multidisciplinary form of
sources of economic growth, in the early 21st century a certain
observation. To do this, we shall now introduce two concepts
consensus was reached19 which posited that economic growth
which will be extremely useful to the progress of our analysis. The
is the combined result of the contribution of productive factors
first, the more general concept of industrial revolution, will help
and innovation in economic activity. There are two reasons
us define the process of transition towards the knowledge-based
for this. Investment and profitability are the two bases for the
economy and society. The second, the more specific concept of the
accumulation of factors; and investment and the spread of
technical-economic paradigm, will help us measure the structure
knowledge are the bases for technological progress.
and evolution of the incipient knowledge-based economy.
In spite of this consensus, which combines the classical
We have already said that one of the main distinctive
approach with the residual approach to explain long-term
features of present-day economic activity is the appearance
economic growth, a series of critical contributions need to be
and consolidation of a new kind of technology, based on the
highlighted. These refer to the importance of other forms of non-
process of digitalisation (coded representation of a signal through
technological innovation and other methods of observation to
streams of light which are identified with binary digits) which
explain this phenomenon.20 The incorporation of knowledge and
we group together under the umbrella name of information and
technology within economic activity ought to be interpreted from
communication technologies (ICTs) and which have impregnated
a specific, dynamic and relational perspective. Specific because
economic activity as a whole and social habits and practices
it is impossible to understand the complexities of technological
to a great extent. In this sense, two basic ideas stand out from
progress without becoming familiar with the technology itself,
the background. First, the idea that ICTs are at the core of
forcing us to move from a general concept to a more specific
economic and social transformation; and second, the idea that
one: from technology to technologies. Dynamic because not only
ICTs impregnate, or in economic terminology “exercise synergic
do technologies change over time but also several technologies
effects” over economic and social activity as a whole. In other
coexist at a particular moment in time. And relational because
words, ICTs are revealing themselves to be the basic material
we cannot analyse the effects of technological change without
for a process of industrial revolution, the process of transition
considering the particular context within which it is born and
towards a knowledge-based economy and society.
develops. So the fact that technological change is an extremely-
Although it is not our intention to conduct an in-depth
complicated social process which is hard to assimilate in an
analysis into the bases and particularities of the concept of
economic model and the fact that technological change is a
industrial revolution in this chapter, it is worth pausing for
phenomenon with dimensions which we cannot force convincingly
a moment to consider whether we are currently undergoing
1?. Arrow (19?2).
17. Romer (198?).
18. Lucas (1988); Romer (1990).
19. Torrent
T
(2004).
orrent (2004).
20. Rosenberg (197
Rosenberg (197?).).
uocpapers, iss. 8 (2009) | ISSN 1885-1541

María Pilar Martínez Ruiz y Ana
Joan Torrent

---

Universitat Oberta de Catalunya
uocpapers revista sobre la societat del coneixement
http://uocpapers.uoc.edu
Knowledge, networks and economic activity. Revisiting the network effects…
such a process. Historians’ analyses of technology suggest that
use. This is precisely the phenomenon which allows us to say
an industrial revolution would be based on two elements in
that the current dynamics of industrial revolution constitute
particular: 1) a series of technical changes which are fundamental
the process of transition towards a knowledge-based economy
for the production and distribution of goods, accompanied by
and society.23
– and in some cases caused by and in yet others reflecting –, but
After ascertaining that the arrival of the knowledge-based
in any case relating to; 2) a series of huge social and cultural
economy and society is a process of industrial revolution, we shall
changes.21 Within this context, a certain consensus has been
now address the approach towards the change in the technical-
reached regarding the fact that at least capitalist dynamics are
economic paradigm which hinges more around the study of its
characterised by the presence of two industrial revolutions, both
technical and productive dimension. Research into paradigms was
based on the productive development of new technologies. The
introduced into economic analysis by science historians within
first industrial revolution started in the latter half of the 18th
the context of studying scientific revolutions. We understand
century and was based on the steam engine and, more generally,
the term “paradigm” to refer to the entire series of universally-
on the process whereby tools were replaced by machines. The
recognised scientific achievements which, over a period of
second industrial revolution, which began towards the end of the
time, provide models of problems and solutions to a scientific
19th century, was based on electricity, the internal combustion
community.24 Conceiving it in terms of scientific thought can be
engine and the development of communication technologies (the
translated in terms of generalised technological progress. A series
telegraph and the telephone in particular). However, there was an
of authors who were unhappy with the traditional conception
important difference between these two processes: the different
which links technological change to economic activity has used
importance of scientific knowledge as an instrument which
the technical-economic paradigm as the jumping-off point for a
acted as the driving force behind technological development.
different perspective of the foundations of technical innovation.
Although in the first industrial revolution a degree of knowledge
According to this approach, a technical-economic paradigm is a
was instrumental in replacing tools with machines, it was not
series of linked technical, organisational and management-related
until the latter half of the 19th century that scientific knowledge
innovations, with advantages over and above the production of a
became directly linked with economic activity.
new range of products and systems, since they also include the
In this sense, we could say that the last two decades of
dynamics of cost in relation to all production inputs. In each new
the 20th century were characterised by the presence of a
paradigm a specific input, or series of inputs, can be described
revolutionary phenomenon, since the conditions of life and
as the key factor for the paradigm, characterised by a fall in
society were undergoing a change. And this revolution was
relative costs and universal availability.25 Changes in technical-
an industrial one because the development of technology
economic paradigms are far-reaching processes of transformation
for production would establish the bases for an inter-related
in the technological system, which are vitally important for the
economic and socio-cultural change. In these approaches, the
behaviour of the economy as a whole. A change of this kind refers
third industrial revolution’s process of consolidation was called
to a combination of innovative interrelations between products,
the “Information Age”.22 However, the new thing about the current
processes, techniques, organisation and management philosophies
process of disruptive change is not to be found in its grounding
which lead to a quantitative leap in the potential for productivity
in information and knowledge, which were also features of the
and competitiveness of the entire economy and which opens
first and second industrial revolutions. The truly new thing which
up new opportunities for investment and profit. In other words,
constituted the basis for the third industrial revolution was the
the consolidation of a new technical-economic paradigm means
application and use of the new knowledge generated. As we
much more than the implementation of incremental or radical
have already pointed out, the knowledge used for the productive
innovations; it is even much more than the appearance of a
application of digital technologies can also be used to generate,
new technological system which consolidates the appearance
apply and distribute new knowledge to economic activity. In this
of a new production sector. The change in paradigm means a
way, and through digital infrastructures, knowledge is both a
large-scale capacity for penetration over economic activities as
key input and a key output of the economic and social structure
a whole, leading to a radical transformation of the sources of
within a process of constant feedback between generation and
productivity and competitiveness.
21. Kranzberg (1985: 37).
22. Kranzberg (1985); Mokyr (1990).
23. Torrent (2008).
24. Khun (1971: 13).
25. Dosi (1988: 10).
uocpapers, iss. 8 (2009) | ISSN 1885-1541

María Pilar Martínez Ruiz y Ana
Joan Torrent

---

Universitat Oberta de Catalunya
uocpapers revista sobre la societat del coneixement
http://uocpapers.uoc.edu
Knowledge, networks and economic activity. Revisiting the network effects…
Under this perspective, the contemporary change in the
means analysing the behaviour and the events relating to
technical-economic paradigm (or the fifth long-term economic
the economical application of the know-how.27 Several notes
cycle of capitalism)2? can be considered to be a changeover from
regarding this:
a technology fundamentally based on cheap energy inputs to
Firstly, in spite of the fact that this is self-evident, a
another based on cheap inputs of information and knowledge
knowledge-based economy is part of the economic analysis and,
as a result of the spectacular progress made in microelectronics
therefore, uses the methodological approach of economy as a
and communications. More specifically, the technical-economic
science. This does not mean, however, that a knowledge-based
paradigm of information and communication technologies, upon
economy never uses other disciplinary approaches. Quite the
which the long-term cycle of the knowledge economy is based,
contrary, given the very characteristics of knowledge, we cannot
has three basic components as a necessary condition for it to
take an overall approach to behaviour and the economic events
occur.
deriving from it without visiting methodological, technological,
First of al , a new philosophy of production, i.e. the incorporation
sociological, psychological and philosophical aspects – to mention
of a new (or several new) productive resources, which results
just a few of the ones most frequently used in the intrinsically
in a) a variation of relative costs; b) an increase in production
multidisciplinary analysis of the knowledge-based economy.
efficiency; c) a change in entrepreneurial organisation; d) the
Secondly, and as we shall analyse in detail below, we
appearance and consolidation of new economic activities; and e)
understand the term "economic application of know-how" to
the use of these new goods and services by the other economic
be the incorporation of a wide range of either observable or
activities and agents. In this particular case, the necessary
hard-to-measure knowledge to economic activities. Therefore,
condition for the change in paradigm to become consolidated is
the knowledge-based economy is not only limited to the analysis
the massive incorporation of knowledge to the act of production.
of the economic application of scientific and technological
In this sense, we need a new production sector to appear (the
developments. Neither can it be compared, for example, to
ICT sector) and the production philosophy of the old industrial
the economy of education because these are just some of
paradigm to be revised, with new sources of long-term growth
the developments of know-how, which are incorporated into
in productivity and competitiveness over the entire economy.
economic activities.
Secondly, a new philosophy for the production of knowledge is
Thirdly, although it is part of economic analysis, the
also required. In our case, a series of new trends in the social
knowledge-based economy does not deal with analysing specific
basis of all kinds of knowledge, applied to economic activity, in
sectors or economic resources; it is much more than that. One
order to generate incremental and radical innovations, which
might think that the knowledge-based economy is equivalent, for
make better use of the new productive factor of relative low
example, to the information-based economy, but we must place
cost. Apart from this, and in order to optimise the competitive
emphasis on the fact that this is a deep, transversal concept.28
advantage of the new input, there must be a change in direction
Through the knowledge-based economy, we can analyse how the
in the investment in knowledge. This change means, among other
economic application of this resource and commodity changes
things, a wave of investment in ICT goods and services, but also
both production activities, with new goods and services and
taking advantage of knowledge-based networks (investment
changes in the existing ones, and demand activities, either
and innovation in intangibles) and the international spread of
consumer, investment or foreign-sector related. The fact is that
technology. Thirdly, new patterns of expenditure and investment
the massive manifestation of know-how in economic activity
are needed, which in our case is a demand-based boost (consumer
from the 1990's onwards, encouraged basically by the hatching
activity, investment and foreign relations) in production based
of ICTs, has changed the behaviour of the economic agents,
on the input of knowledge.
generated new activities and caused some of the existing ones
So the methodological approach adopted by analysing
to vary significantly. It is precisely in this wider sense that we
changes in the technical-economic paradigms has demonstrated
need to interpret the knowledge-based society, since knowledge
that the main condition for finding that there has been a change
has become one of the key elements of progress in productivity
in the economic substrate is the massive incorporation of the
and competitiveness and, therefore, of the growth of the economy
new resource and commodity, which determines productivity,
and material wellbeing of society.
across the entire economic panorama. Within this context,
we might say that the term "knowledge-based economy"
2?. Pérez (2002).
27. Torrent (2004: 119).
28. Vilaseca (2001).
uocpapers, iss. 8 (2009) | ISSN 1885-1541

María Pilar Martínez Ruiz y Ana
Joan Torrent

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Universitat Oberta de Catalunya
uocpapers revista sobre la societat del coneixement
http://uocpapers.uoc.edu
Knowledge, networks and economic activity. Revisiting the network effects…
2. The knowledge-based microeconomy:
focuses on the fact that information is one, if not the only, input
from scale economies
in the process whereby knowledge is generated. The information
to network economies
provides a new perspective for interpreting events or objects
and, as such, is a means or material necessary for obtaining and
building knowledge. Information affects knowledge and adds
Following on from the above analysis, which allowed us to
something or restructures it. In fact, we might even say that in
establish the conceptual bases of the process of transition
the act of knowing, an accumulative flow between three elements
towards a new technical-economic paradigm, characterised by
is established: data, information and knowledge. This stream of
the importance of streams of knowledge, we shall now conduct
generating know-how consolidates knowledge as a resource used
a more detailed economic analysis of this resource of such vital
daily by economic agents to take decisions within the economic
importance for a competitive future and material wellbeing. To do
structure. And not only that: the knowledge generated can be
so, we need to ask ourselves the following questions: Is it possible
represented economically through its production-based function.
to identify any characteristics which show how knowledge is
We could say, then, that knowledge, as a tool for production,
being incorporated into economic activity? And if so, which are
distribution, exchange and use, is economically relevant.31
they? And finally, how do they transform the structure of the
economy and the markets? Or, in other words, what role do they
These days, economic activity basically covers four types
play in building a new economic substrate which is different from
of knowledge:32 know-what, know-why, know-how and know-
the industrial economy? The answers to these questions lead us
who. As regards know-what, it is easy to see how this kind of
inevitably towards economic characterisation as a resource and
knowledge is identified with information, since it can easily be
a commodity, of knowledge and the distinction between the
segmented and represented through bit-streams. Know-what,
structure of the economy and the markets in either an industrial
then, refers to knowledge about facts. Know-why is an extremely
economy or a knowledge-based economy.
important kind of knowledge for technological development in
We understand the term "knowledge" as given in epistemology,
some areas of production. The production and reproduction of
the theory of knowledge: the human and dynamic process which
this kind of knowledge occurs within the context of specialised
consists of justifying a personal belief to the point of certainty.29
organisations, such as universities, for example. In short, know-
This vision of knowledge as a true, adequately-justified belief
why refers to scientific knowledge of the laws on how nature,
places the central problem of its theory on the issue of how we
the human mind and society develop. Know-how refers to the
justify beliefs, i.e. on the explanation of the difference between
development of a person's capabilities and attitudes. It refers,
knowledge and simple, true belief. Leaving these matters aside,
then, to the capacity that individuals interacting in the economic
the very epistemological definition of knowledge refers to two,
activity have to do things (skills). This includes a wide range of
very important elements which need to be highlighted from an
characteristics that people have and which can go from abilities
economic point of view. First, the fact that knowledge is related
and capacities to skill and talent. Finally, know-who refers to a
to human action and second, the fact that the generation of
kind of knowledge that is becoming more and more important
knowledge is a dynamic process, since it is created on the basis
and which is based on a combination of skills, including the
of interactions between individuals, groups, organisations and
possibility of social action. Currently, this kind of knowledge
societies. These two characteristics allow us to place knowledge
is very important because in the knowledge-based economy
within our own domain. That is to say, the dynamic, human action
people are considering the need to access a very varied range of
of knowledge creation can be interpreted, among other things,
knowledge (who knows what and who knows how to do what),
as an economic activity.
knowledge which is also extremely scattered. In short, know-
More specifical y, can we approach a production of knowledge?
who refers to the concept of knowledge networks and how to
To respond to this question we need to refine even further the
use them. As a result, this is what relates and causes the other
interpretation we make of knowledge from the perspective of
three to interact.
economic analysis. In this context, the first thing we need to make
We can acquire these four types of knowledge through
clear is the distinction between knowledge and information, or
different channels. Whereas know-what and know-why can
the stream of messages from which knowledge is generated.30
be gleaned from books and access to data, the other two are
Although both concepts are closely related, the economic approach
mainly gained through practical experience. Know-how comes
29. Terricabres (2001: 277).
30. Neef (1998).
31. Neef et al. (1998); Thurow (2000); Stehr (2002); Mokyr (2002); Torrent (2004).
32. Lundvall (1994); Foray (199?).
uocpapers, iss. 8 (2009) | ISSN 1885-1541

María Pilar Martínez Ruiz y Ana
Joan Torrent

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