Definition of knowledge
Knowledge can be thought of as a type of instruction or recipe that sets out how a good or service can be produced. It is an input to a firm’s production function.
A complex concept like “knowledge” is difficult to define precisely. However, based on our reading of the literature, the most useful working definition for the purposes of this paper is that knowledge isa type of instruction or recipe that sets out how a good or service can be produced (see, eg, Jones 2004). Such an “instruction” should be interpreted broadly – it could be a blueprint for a particular good, a method of providing a particular service, a generic production process or organisational structure, and so on.
According to this definition, knowledge is effectively another resource that a business can use in production, alongside physical capital, labour/human capital, and other inputs. Knowledge can then be interpreted as contributing to how productive the other inputs are.
Note that a physical good such as a computer is not knowledge under this definition, even though everyday usage might refer to it as ‘technology’. However, it certainly depends on knowledge, in the sense that it was constructed according to a particular set of instructions or recipes (for example, the design of the computer chip, the chemical formula for the plastic etc).
While this definition of knowledge does not capture every characteristic of knowledge that we may think is important, it does capture many of the features that are important from an economic perspective, and that make knowledge different from other types of goods[1]. These characteristics are discussed in the next section.
Before proceeding, it is worth clarifying the distinction between knowledge and innovation. The easiest way to separate them is that innovation is a process whereas knowledge (as defined here) is a “thing” – an idea, instruction or recipe. Put another way, innovation is “the successful development and application of new knowledge” (OECD, 2005), which covers both the creation of knowledge/ideas, and the application of these ideas to develop and implement new products and processes. The relationship between knowledge and innovation is discussed in more detail later in the paper.
Notes
- [1]Another economically important form of knowledge that we ignore in this paper is “knowledge” that is not an input to production but something that people consume directly. The cleanest examples are pieces of music, film, games software or text in digital form. Such examples share similar characteristics to sets of instructions or recipes and differ similarly from ordinary consumer goods such as wine and clothing. With the rise of digital technology such goods are becoming increasingly common and important in the economy.
