The Knowledge Economy: Promise, Reality and Future

The “knowledge economy”, as it was understood in economic policy circles in the 1990s, was characterised by a dematerialisation of production processes and rapid growth in demand for skills. Under these conditions, governments with the foresight to invest in the education of their citizens would supposedly reap significant productivity gains, and the majority of the benefits would flow to skilled workers rather than owners of physical or financial capital. This chapter argues that such accounts of the knowledge economy only held true for a brief window of time, and even then, only in certain places. Drawing on sectoral-level data for 14 affluent democracies from the mid-1990s to the eve of the COVID-19 pandemic, it explores trajectories of both productivity growth and inequality. Shifts in national income from capital to labour were predominantly associated with countries specialising in knowledge-intensive services as opposed to advanced manufacturing and were most clearly visible during the early stages of the knowledge economy era. Furthermore, over time, knowledge-intensive services have tended to become more capital-intensive—an indication that new technologies such as artificial intelligence may increasingly be substituting for high-skilled knowledge work in these sectors, diminishing the range and quality of options available to would-be knowledge workers.