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The (Intangible) Wealth of Nations September 30, 2007

Posted by federalist in Economic Policy, Markets.
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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.

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Comments»

1. Gnarlodious - October 4, 2007

“The Intangible Wealth of Nations” struck me as a lot like growing a garden. The “The Intangible Wealth of Dirt” in the garden is a dynamic cycle, and every good gardener knows how critical it is to keep that cycle invested.

The natural resources of the garden are sunlight, water and seeds. The commonwealth is humus, worms and the continual cycle of decay and nutrients. Take a pile of mineral earth or clay, and invest a few years of compost and worms, and you get a productive garden that looked hopeless at the beginning.

Thom explained that you can dump resources on a nation and watch them all evaporate because that nation has less than a 50% level of “Intangible Wealth”. Likewise raw dirt can absorb loads of resources with no long term improvement. This is a fact that makes many a potential gardener dazed and confused, because resources alone do not create health. It is the cycle of death and rebirth that is the source of the productive garden.

That is why old-timers, hippies and dirt worshippers have the best gardens. They understand that productivity is non-reductionist. Can’t be quantified. Can’t be analyzed. The cycle of healthy soil takes constant replenishment. Sure you can reap a harvest a few years without investing, but after so long the soil will be depleted and unhealthy. Good soil is like a buffer, like a savings account.

Just like the Commonwealth.

2. federalist - October 18, 2007

Alex Tabarrok observes, “A child born in the United States already owns an immensely valuable asset, namely the right to live and work in the United States.”


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