How Economic Networks Are Replacing Economies of Scale in The Knowledge Economy

by The Tech Labs 0

In the book, Information Rules, authors Carl Shapiro and Hal R. Varian make an astonishing statement: “There is a central difference between the old and new economies: the old industrial economy was driven by economies of scale; the new information economy is driven by the economics of networks…”

It’s an astonishing statement because, when you unpack it, you come to a whole new understanding about how civilization is changing before your eyes.

Knowledge Alone is Not Enough

In the old world, the world most people over 40 years of age know, knowledge was power, but today knowledge is connected power.

The industrial revolution is being replaced by a knowledge economy. In the industrial revolution, knowledgeable businesses were market leaders. The Westinghouse Electric Corporation flourished, for instance, because George Westinghouse pursued and deployed knowledge about electricity. With the help of Nicola Tesla, who came up with the idea of alternating currents, he was able to devise new ways of efficiently providing electricity to the world. A monopoly of knowledge expressed through an enterprise resulted in economic power.

Today, however, with the easy access anyone has to almost any information necessary to grow a business, knowledge is connected power. It’s not how much you know, but how much you can know; it’s not about how much knowledge you have acquired, but about how much knowledge you can access. Essentially, then, the knowledge economy relies on the density of its connections to access, implement, and deploy knowledge.

The Changing of The Guards

Although, it’s a subtle point to distinguish between acquired knowledge and access to knowledge, it’s a distinction powerful enough to create a new economic revolution. One way to distinguish how the old world is being replaced by the new world, how the industrial age is being replaced by the knowledge economy, is by looking at the evolution of factories.


The industrial age was built on the backbone of factories.

When Sir Richard Arkwright developed the spinning machine in England, it led to the birth of the Industrial revolution. Prior to this momentous event, manufactured products were a cottage industry. People used hand tools and simple machines to make things in their own homes.

During the 18th and 19th centuries, agrarian and rural societies became industrial and urban societies in Europe and America. Factories replaced handmade goods with mass production. With the development of the steam engine, textile and iron industries flourished; and as transportation, communication, and organizational models improved, manufacturing goods became the primary business of civilization.

However, factories replaced the hard work of farmers in an agrarian-based civilization to the brutal and dehumanizing work of factory laborers. Naturally, there were protests and revolts. In the 19th century, Luddites were English textile artists led by Mr. Luddite who sabotaged labor-replacing machinery. (Interestingly, today “luddites” refers to technophobes.) Deplorable factory conditions still exist today in developing nations, often referred to as sweat shops, but eventually even these will be replaced by something else: automation.

According to an article in SingularityHub, entitled No Humans, Just Robots – Amazing Videos of the Modern Factory:

“Modern manufacturing isn’t based on human labor; it’s based on the robot. Still, most people cannot grasp the breadth of automation in factories. We still picture plants full of human workers toiling to make our cars and furniture, just as we imagine our meat comes from animals in a barn. The truth is much more awe-inspiring, perhaps even frightening. The factories of today have some human workers, but huge portions of assembly lines are 100% mechanized.”

What is The Knowledge Economy?

The knowledge economy, however, is not about smarter robotics and improved automation-that just a small aspect of it. It’s about something far bigger. Essentially, it’s an era where all aspects of business-worker, consumers, marketplace, and companies within an industry-are interconnected by networks in a burgeoning economic ecosystem.

A robust business network often requires the efficiency of a carrier-class network to perform well in the marketplace. MegaPath, which was recently acquired by Global Capacity, describes these as “networks that combine an interconnected, physical network aggregation platform with a Cloud application that automates the design, pricing, delivery, and maintenance of network solutions.”

In a connected economy, all networks are part of a larger economic web of electronic-based relationships. A participant in this economic web can be an individual, a group, a team, or an organization.

Organizations have become complex adaptive systems that rely on a knowledge economy. In the modern age, for a business to be successful, it needs more than effective executives and persuasive salespeople, it needs to be a connected workplace to be internally productive and externally effective.

The difference between the industrial age and the knowledge economy is connectivity. In the industrial age, a loose connection between manufacturers and retailers was sufficient to prosper. In the knowledge economy, the success of any organization is based on the efficiency of its network because this is the new conduit for information, for influence, and for economic growth.

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