Intangible Wealth and Institutional Economics
By Arnold Kling
In a new book, a team of World Bank economists writes,
most of a country’s wealth is captured by what we term intangible capital…Intangible assets include the skills and know-how embodied in the labor force. The category also includes social capital, that is, the trust among people in a society and their ability to work together for a common purpose. The residual also accounts for all those governance elements that boost the productivity of labor. For example, if an economy has a very efficient judicial system, clear property rights, and an effective government, the effects will result in a higher total wealth and thus a higher intangible capital residual…human capital and rule of law account for the majority of the variation
In an article about the World Bank study, Ron Bailey writes,
So if every American has $513,000 in capital, where is it? The vast majority of it is amassed in our political and economic institutions and our educations. The natural wealth in rich countries like the U.S. is a tiny proportion of their overall wealth—typically 1 to 3 percent—yet they have higher amounts of natural capital than poor countries. Cropland, pastures and forests are more valuable in rich countries because they can be combined with other capital like machinery and strong property rights to produce more value. Machinery, buildings, roads, and so forth account for 17 percent of the rich countries’ total wealth. And 80 percent of the wealth of rich countries consists of intangible capital. “Rich countries are largely rich because of the skills of their populations and the quality of the institutions supporting economic activity,” argues the World Bank study.
Development economics has changed a lot in 50 years. After World War II, economists equated economic development with physical capital. One could argue that the World Bank was founded on the basis of that belief.
Robert Solow was the first to point out the importance of the “residual” in economic growth, meaning increases in the standard of living that could not be accounted for by capital. That view has been accepted for quite some time, but textbook “growth economics” still tends to consists largely of mathematical models of capital accumulation.
Even fifteen or twenty years ago, the role of institutions received little play. The new institutional economics is still somewhat under-appreciated in the profession.
It seems to me that the new World Bank study is important. The empirical work seems thorough and interesting. The fact that it comes from the World Bank, of all places, seems to underline the triumph of the new institutional economics.