Wednesday, July 04, 2007

Wealth: It's All in Our Heads. Literally.

The World Bank released a study titled "Where is the Wealth of Nations: Measuring Capital for the 21st Century," where for 120 countries it estimates total wealth, composed of: a) Produced Capital (buildings, machinery, and equipment), b) Natural Capital (farmland, timber, minerals, energy resources like oil and coal) and c) Intangible Capital (human capital, social capital, and the quality of institutions).

As might be expected, the study concludes that, "The estimates of total wealth–including produced, natural, and human and institutional capital–suggest that human capital and the value of institutions (as measured by rule of law) constitute the largest share of wealth in virtually all countries." (See the top chart above, click to enlarge).

Note that the importance of human capital is especially important in high-income countries, like the U.S., where it constitutes 81.7% of total wealth (see bottom chart above) compared to only 2.8% of wealth from natural resources (and only 2% for high incomes as a group). In contrast, natural resources constitute 26% of a poor countries' total wealth and human capital 59%.

From the study, "The share of natural capital in total wealth tends to fall with income, while the share of intangible capital rises. The latter point makes perfect sense—rich countries are largely rich because of the skills of their populations and the quality of the institutions supporting economic activity."

Even though a country like the U.S. is incredibly rich in natural resources, so was the Soviet Union and it was a basket-case economy because it never developed and nurtured its human resources. And countries like Hong Kong and Japan have almost no natural resources, and yet are economic powerhouses because of their well-developed human capital and institutions.

As Jonah Goldberg says in his
recent column when writing about the World Bank study, "In other words, our wealth is really all in our heads. Literally."

After all, "capita" in Latin means "relating to the head, or to life," and so capitalism is the use of the head or mind to create wealth.


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