The (Intangible) Wealth of Nations

Ronald Bailey has a fascinating essay on “Intangible Wealth” in this weekend’s WSJ. This should be required reading for any discussion of foreign aid or economic development.

If one simply adds up the current value of a country’s natural resources and … capital, there’s no way that can account for that country’s level of income.

The rest is the result of “intangible” factors — such as the trust among people in a society, an efficient judicial system, clear property rights and effective government. All this intangible capital also boosts the productivity of labor and results in higher total wealth.

Citing a World Bank study, “Where is the Wealth of Nations?: Measuring Capital for the 21st Century,” Bailey gives us:

The bottom line: “Rich countries are largely rich because of the skills of their populations and the quality of the institutions supporting economic activity.”

What the World Bank economists have brilliantly done is quantify the intangible value of education and social institutions. According to their regression analyses, for example, the rule of law explains 57% of countries’ intangible capital. Education accounts for 36%.

Overall, the average per capita wealth in the rich Organization for Economic Cooperation Development (OECD) countries is $440,000, consisting of $10,000 in natural capital, $76,000 in produced capital, and a whopping $354,000 in intangible capital. (Switzerland has the highest per capita wealth, at $648,000. The U.S. is fourth at $513,000.)

By comparison, the World Bank study finds that total wealth for the low income countries averages $7,216 per person. That consists of $2,075 in natural capital, $1,150 in produced capital and $3,991 in intangible capital. … In fact, some countries are so badly run, that they actually have negative intangible capital.

Fair Game for Regulation?

James Surowiecki does a decent job of trying to deflate the libertarian dream. I was reading his recent New Yorker essay on commercial aviation and began to wonder whether we must acquiesce in government interference in certain large markets.

I can think of two major reasons commercial aviation may not be suitable for free market operation — i.e., operation without government regulatory interference. However, both of these causes are themselves the product of government involvement in the industry.

The larger of the two is Air Traffic Control. All jet aircraft are subject to the air traffic control system. The sky is a public commons, but nobody is willing to let people put a metal missile up there flying near the speed of sound without a reasonable system for avoiding collisions with other sky users. Until recently, the only practical solution to this problem was a common ground-based air traffic control network. The ATC system is ridiculously inefficient, but it meets the standards of safety demanded by the public.

If the ATC problem were attacked today any number of private industry organizations could solve it with decentralized, economical, and efficient technology. (I recently saw just one such example, called ADS-B, on trial in Alaska.)

The second problem is security, which I have previously discussed, and for which I have proposed a generalized framework for resolving.

Is Freedom More Trouble Than It’s Worth?

Could it be that most people would rather surrender their freedom to a paternalistic government than take responsibility for their own welfare?  Is it human nature to yearn to breath free, or are human beings naturally so lazy that they would surrender their natural rights for a promise of an easier life?

This blogger argues that the libertarian ideal of free individuals undertaking voluntary and mutually-beneficial contracts is just too difficult for the average man.  She would rather pay taxes to a government bureaucracy and let it tell her what to do.

This is the other thing I don’t get about small government types. You protest so vociferously that government takes choices away from you. But a whole lot of choices are BORING. If I never once think about car bumper safety standards for 25mph crashes, I will never miss it. … I don’t want to figure out how much coliform bacteria I can tolerate on my spinach, given my health. I don’t want to do that even if it saves me money. I don’t want to figure out what goes into paint in nephews’ toys. I don’t even want to handle my health care.

A compelling argument if you leave out the obvious alternative, which is that individuals can voluntarily pay others to advise and manage their welfare if they are not inclined to do so themselves.  It’s easy to say, “Have government take care of it.”  But it’s also immoral, since a government solution is almost always both inefficient and coercive.  (Hence my preference: Ask whether government can avoid doing it.)

Is private regulation possible?  Who pays for it, and who ensures its integrity?  Fortunately our nanny state has still left a number of niches for private solutions to flourish.  These offer diverse examples of how safety and purity can be preserved without the intervention of a government bureaucracy.

  • Non-profits like Consumer’ Checkbook and Consumers Union thrive on providing unbiased consumer advice to subscribers.
  • For-profit information bureaus (like or Castle Connolly) and publishers (most specialty magazines) provide reviews and advice.
  • Sellers pay independent organizations to certify the quality of their products — e.g., UL, ISO, S&P, Moody’s.  The latter two links are to articles that make a compelling case for the integrity of seller-sponsored ratings.

Is Microcredit Efficient?

Microcredit has a certain libertarian allure: It imagines that everyone is a potential entrepreneur and that the only thing that stands in the way of a typical impoverished human being is access to capital. A developing country may lack the legal and physical infrastructure to support large-scale industry, but any individual with a will and a way can produce something of value and prosper by that.

The reality may be quite contrary: Not every person is capable of producing excess value on their own, or of realizing that value through trade. It may be that we really do require healthy markets, exceptional industrial leaders, and economies of scale to turn raw human capital into valuable production.

This argument is made in compelling fashion by Aneel Karnani in this month’s Worth (adapted from a longer essay available in SSI Review):

Most clients of microcredit are not entrepreneurs by choice; they would gladly accept a factory job at reasonable wages if one were offered.

… Job creation is not enough. We also have to increase productivity so that wages are high enough to enable employees to rise above poverty. One way to increase productivity is to encourage enterprises that are large enough to achieve economies of scale. Rather than lending $200 to 500 women so that each can buy a sewing machine and make garments, we would be better served by lending $100,000 to an entrepreneur with managerial capabilities and business acumen to help her set up a garment manufacturing business employing 500 people. This type of business can exploit economies of scale, deploy specialized assets and use modern business processes to generate value for both owners and employees.

A Demon of Our Own Design

A recent vacation afforded me the rare opportunity not only to catch up on my piles of industry periodicals, but also to read two books cover to cover.

First was Rick Bookstaber’s most recent book, A Demon of Our Own Design. Fortunately, has saved me the trouble of further comment with a thorough and accurate review. (Barry Ritholtz also managed to get the first chapter online.) Unlike many books, this one is worth reading in full. My one-line conclusion after reading it: The more you try to control risk with complex instruments or regulations, the less you will be able to predict how your attempts at control will fail — but they will fail.

Second was Alan Weisman’s The World Without Us. This was a sweeping sample of the impact of humans on the biosphere, as well as of the uncanny ability of the biosphere to recover from extreme impacts. In spite of the author’s occasional indulgence in liberal/anti-human jabs, the book contains a wealth of diverse examples that actually reinforce the thesis that the capacity of man to impact the biosphere is quite limited. In fact, there are really only two things that humans have definitively done that will have any lasting impact on the planet:

  1. Humans have hunted most large and tasty animal species to extinction. However, most of this occurred ages ago as primitive humans migrating through the Americas and Pacific islands encountered large animals that had apparently not evolved to fear these versatile hominid predators.
  2. Humans have produced artificial materials (plastics and other large molecules) that the biosphere is incapable of consuming. These could conceivably survive like artificial elements for many eons. Their long-term impact on the biosphere is unknown, but some hypothesize that organisms will eventually evolve that are capable of digesting them.

The third major human activity that bothers many environmentalists involves our propensity to dig up and concentrate toxic elements — like heavy and radioactive metals — that used to lie dispersed underground. However, visits to disaster sites like Chernobyl show us how quickly nature can rebound. The most remarkable message I took away from this book is that no matter what we do, natural processes will quickly work to break it down and bury it.

On my vacation I visited a glacier, which drove that point home: Nothing can stop the fact that during the next ice age massive sheets of ice will flatten and bury everything in their way. Nature’s primer.

QOTD: Regulation

CAFE standards are an excellent case study in counter-productive regulation. From Crandall and Singer’s essay on the subject:

The purpose of regulation is to curb behavior that is profit-maximizing but generates some external cost to society.

No country can expand its wealth by employing people in activities that entail more costs than benefits.

Any call for regulation must be based on a market “failure” — that is, failure of private markets to provide the proper incentives for contributing to social value. In the case of the current call for increases in CAFE, the market failure is generally identified as global warming or national security. But CAFE is a horribly inefficient mechanism for reducing carbon emissions because it does nothing to reduce emissions from power plants, older vehicles, home furnaces or industrial facilities. Nor would it apply to any emissions outside the U.S. Even if one accepts the debatable proposition that less reliance on oil would improve our national security, we should focus our attention on all oil consumption, not just that used in new vehicles. The cost of trying to reduce the harmful external effects of any form of consumption by arbitrarily taxing just 5% of it is extremely costly. A smaller tax on a much wider tax base always reduces the distortions caused by the tax.

QOTD: The Bluest State

From Guy Darst’s review of Jon Keller’s The Bluest State: How Democrats Created the Massachusetts Blueprint for American Political Disaster:

[A]lthough Massachusetts does not suffer alone from its notorious affection for liberalism, it is the incubator for “Massachusetts viruses” that infect the national Democratic Party. The viruses come in many forms: “addiction to tax revenues and a raging edifice complex couched in disrespect to wage earners; phony identity politics without real results for women and minorities; reflexive anti-Americanism in foreign affairs; vain indulgence in obnoxious political correctness; self-serving featherbedding; NIMBYism; authoritarian distortion of the balance of governmental power, all simmered in a broth of hypocritical paternalism.”

Ask What Your Country Can Not Do For You

John Semmens offers an example of how government can do better by regulating private businesses to provide a service than by trying to provide the service itself:  State motor vehicle departments get in the way of licensing and certifying drivers when all we really need the government to do is to ensure that every person on the road has enough money to pay for the damage he could reasonably cause in an accident.  (This theme was touched on earlier w.r.t. weapons.)

Assign responsibility for vehicle safety inspections and licensing drivers to the one institution with the most to gain from keeping bad drivers and unsafe cars off the road: the insurance industry.

Worth reading in full.