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In this chapter knowledge capital is seen as a specific combination of subsets of human and social capital, much as real estate capital combines physical and social capital. Knowledge capital is a key factor that drives economic growth and development. Knowledge is different from information; it is more complex and multifaceted, as it can be private or public. It can be embodied in machinery or tacit knowledge in humans, but dissemination processes cause its disembodiment. Scientific knowledge has become an increasingly important precondition for the emergence of investments in industrial research and development. The broad spectrum of new technologies in the pharmaceutical, biotechnological, information and transportation industries would have been unthinkable without earlier fundamental creativity in mathematics, physics, chemistry and biology. Scientific breakthroughs almost always occur many decades before being exploited by entrepreneurial innovators. Rogers Hollingsworth has shown that the increasing complexity of many products and production systems requires a reorganization of scientific research with a greater emphasis on multidisciplinary departments and laboratories. The possibility of exploiting advantages of a diversified scientific knowledge base also points toward increasing dynamic comparative advantages of locating universities and research institutes in large cities. Quantitative analyses of science networks show that the San Francisco Bay Area, Boston, London, Tokyo, Paris and Randstad (Amsterdam) are the most important nodes in the world of science, with Beijing, Seoul and Shanghai exhibiting the highest growth rates in science output among large cities. The advantages of dynamic interactions between scientific creativity and industrial development will reinforce the long-term sustainable growth in regions that host large-scale agglomerations of scientific research.

In this chapter we claim that all goods are durable and in this respect they are all capital goods by definition. Our claim builds on Frank Knight’s analysis: any durable good is capital and must thus have a future return that is intrinsically uncertain. It is this uncertain return that is the subject matter of entrepreneurial judgment, as Knight also explained. But it is not only goods that are capital. Labor is also capital, which is why it makes more sense to speak of human capital. And this, too, reflects uncertain future returns, in this case of investments in education. Even land is capital, since inaccessible land without network links to the rest of the world yields no return: it lacks capital value. The durability of capital and the rate of depreciation are key attributes of capital. Deterministic models show that if households and firms were to optimize these attributes, then the equilibrium growth rate would equal the real interest rate in a multi-good economy. We also show that a good’s durability determines the number of firms and thus the potential market form, in the case that production, transport and transaction costs jointly determine equilibrium. The greater the durability of a good is, the smaller its trading cost will be, other things being equal. Trade will keep expanding until there are no price differences between different locations for the limiting case of extremely durable goods. For goods with extreme durability and low transportation and transaction costs, the law of one market price will thus prevail.