Economic Change: New Knowledge Economies

In the late 1900s, revolutions in information and communications technology led some countries to undertake a new kind of economy—the knowledge economy. A knowledge economy creates, distributes, and uses knowledge and information. Designers, engineers, teachers, and many others have jobs in the knowledge economy. In the United States, the knowledge economy is evident in the vast stretch of technology companies in Silicon Valley in California, where workers use their knowledge to create ways for other people to use theirs through technology, communication, innovation, and collaboration.

Knowledge Economy in Finland In many cases, knowledge economies have evolved with the explosion of information and communication technology. In knowledge economies, governments and investors put resources into research, education, innovation, and technological infrastructure.

Finland, for example, had been an agrarian economy in the 1950s but followed other European countries in industrializing after World War II. When the Soviet Union collapsed, Finland lost one of its main customers of manufactured goods and faced an economic crisis. In the 1990s, Finland turned a corner by entering the global marketplace, encouraging competition, and establishing the Science and Technology Policy Council to set a direction of economic growth through technology and innovation. Finland experienced great economic growth in this endeavor and led the way in the development of mobile phones. By investing in education and communications technology, Finland was able to build on its success with mobile phones and establish software companies. These industries required highly educated workers, while outsourcing hardware production to countries with lower labor costs.

Japanese Economic Growth Japan followed a somewhat different path. After World War II, Japan implemented economic policies similar to 18th-century mercantilist policies that were designed to increase exports and decrease imports, as well as policies to boost competitiveness:

• To encourage exports, the government coordinated its finance and labor policies with large corporations and gave them subsidies to help them keep their costs low.

• To discourage imports, the government used high tariffs and other trade restrictions on goods made abroad.

• To prepare its citizens to be productive workers, Japan emphasized rigorous education.

These policies, aided by large investments from the United States and other countries, turned Japan into a manufacturing powerhouse.

However, Japan’s impressive growth came at a high cost for its consumers. Low-wage workers producing items for foreign markets often could not afford to buy what they made. For example, Japanese-made cars were more expensive in Japan than they were in the United States. Over time, Japanese unions became strong enough to negotiate higher wages, and international pressure forced Japan to relax its trade restrictions. Japan’s economy diversified, and it became a knowledge economy and an international center of banking, finance, and information technology. Although Japan’s growth slowed after the 1980s, Japan remained the third-largest economy in the world in 2014, behind only the United States and China.

Closely following Japan’s economic model were four states known as the Asian Tigers—Hong Kong, Singapore, South Korea, and Taiwan. Like Japan, these states prospered through government-business partnerships, high exports, intense education, and a low-wage workforce. The success of the Asian Tigers and China raised hundreds of millions of people from poverty.