Introduction:

It is common now-a-days to refer to the modern economic era as the “knowledge economy”. A generation ago under the influence of the wide spread use of computers and lowering costs of telecommunications globally it was often said that we had entered the “information age”. The “knowledge economy” refers to the production and distribution of knowledge products, while the “information age” refers to the ease with which bits of information can be transmitted to users throughout the globe. There are obvious connections, but there are also significant differences.

Knowledge and information are not identical, but distinct (though related) concepts. In the field of economics the distinction is not always respected. It can be argued that knowledge is precious, but what exactly knowledge is varies from paper to paper in the field. Knowledge is often treated as a scarce commodity that is bought and sold on the market and thus is the object of search and acquisition. Knowledge can also be treated as a resource to be utilized in the production process, or in the consumption decision.

Knowledge can also refer to the signals that are communicated and “new discoveries” within the economic system. Substitute the word information where we have used knowledge and there are economic models that have attempted to depict that function. Knowledge and information are treated as synonymous in most day-to-day analytical exercises in economics. But they are not the same concept.

In this essay we survey the use of knowledge in economics and argue that knowledge should be treated one way rather than another. In other words, we see our purpose as both positive and normative. First, we want to show how some economists have treated knowledge in their analytical depictions of the economy. Second, we argue that some efforts by economists are more successful than others at capturing the role that knowledge plays in the economy. We especially emphasize F. A. Hayek’s work and his challenge to the economics profession in mid-20th century. What we do not do in this essay is provide a detailed discussion of the role of knowledge in the economy. That is a different topic, and one that we believe F. A. Hayek has contributed more to our understanding than any other economist. We start from Hayek’s challenge to all economists to capture the use of knowledge in society in their economic models of reality.2 It is in accessing how well different economists have addressed Hayek’s challenge, or failed to address it, that is our primary concern.