The ultimate source of wealth
– Dykes Charles, Foundation for Economic Education www.fee.org (August 1, 1985)
What, then is ‘wealth’? For the economist, wealth is anything having economic value measurable in price. For most people, wealth means great amounts of worldly possessions. For nearly everyone, wealth is synonymous with money.
From the perspective of history, however, it is instructive to note that money has not always been the chief symbol of wealth as it is today. The concept of wealth has varied in different periods of history. For example, wealth in the medieval era was not thought of primarily as the possession of large amounts of money or material possessions, but in having power over other people. Still later, wealth came to mean the ownership of large tracts of land and great houses.
The Industrial Revolution again transformed the idea of wealth. Wealth no longer was viewed primarily as the possession of landed property, but the ownership of the means of production, e.g., factories, looms, mines, railroads. Then insidiously, over the last 150 years, the idea of wealth has changed from the ownership of the means of production to the possession of money.
George Gilder makes clear his conviction that wealth is basically a product of the human spirit and not of natural resources. He argues, moreover, that ‘riches’— money — is not the same thing as wealth. “Wealth consists,” he writes with reference to Saudi Arabia, “in assets that promise a future stream of income. The flows of oil money do not become an enduring asset of the nation until they can be converted into a stock of remunerative capital—industries, ports, roads, schools, and working skills—that offer a future flow of support when the oil runs out.” In the 16th century, Spain became ‘rich’ much like Saudi Arabia, flooded by money in the form of silver from the mines of its colonies in Latin America. “But Spain failed to achieve wealth, and soon fell back into its previous doldrums, while industry triumphed in apparently poorer parts of Europe.”
Human capital includes things like character, knowledge, skills, creativity, health, imagination and liberty. Michael Novak, an American philosopher and diplomat rightly protests that when the classical economists discussed “the components of economic wealth—land, rents, capital, and labour—they nearly always overlook the most important ingredient: practical intelligence and the organisation of personal life.”
“The cause of wealth,” Novak believes, “lies more in the human spirit than in matter.” While productive or physical capital increases the productive capacity of a people by putting the tools or resources with which to work in their hands, human capital makes possible more efficient tools, or superior resources, and organises more effective means of utilising both physical and human capital to achieve desired ends.
Reproduced by permission of Foundation for Economic Education
Charles Dykes, copyright (c) 1985, Foundation for Economic Education, The Ultimate Source of Wealth
New sources of growth: intangible assets
– OECD Report (September 2011)
In many OECD countries, investment in intangible assets is growing rapidly. In some cases, this investment matches or exceeds investment in traditional capital such as machinery, equipment and buildings. Intensified global competition, premium on innovation, ICTs, new business models, and the growing importance of the services sector have all amplified the importance of intangible assets to firms, industries and national economies.
The global economic crisis has placed a new focus on how policies might help the accumulation of intangible assets and provide new sources of growth. Concerns also exist that the crisis might undermine the financing of investment in intangible assets.
And in many emerging economies policymakers are seeking to develop the intangible assets necessary for success in high value-added activities. Evidence from a number of countries suggests faster growth in investment in intangible assets than in tangibles. The World Bank estimates that, for countries, the preponderant form of wealth worldwide is intangible capital.
Book Excerpt from “Physics of the Future” by Machio Kaku
What is replacing commodity capitalism is intellectual capitalism. Intellectual capital involves precisely what robots and AI cannot yet provide – implicit pattern recognition and common sense.
Why is this historic transformation rocking the foundation of capitalism? Quite simply, the human brain cannot be mass produced. While hardware can be mass produced and sold by the ton, the human brain cannot, meaning that the common sense will be the currency of the future. Unlike with commodities, to create intellectual capital, you have to nurture, cultivate and educate a human being, which takes decades of individual effort.
As Thurow says, “With everything else dropping out of competitive equations, knowledge has become the only source of long run sustainable competitive advantage”
Our perspective
The past century saw natural resources led economic growth in many countries, but at the same time, we have witnessed exceptional growth in Japan, South Korea and Singapore primarily driven by human capital. The journey of high economic growth rates will continue to roll on and knowledge-led revolution will reach more and more societies. The potential for change ahead is immense, for instance, the way the cost of solar energy production is coming down, an unprecedented socio-economic development awaits the developing world because ‘everywhere energy’ will drive revolution in water availability, food production, education, health and micro-enterprise.
According to a World Bank report, the preponderant form of wealth worldwide is intangible capital—human capital and the quality of formal and informal institutions in the country that nurture and shape the productivity of human capital. Rich countries are largely rich because of the skills of their populations and the quality of the institutions supporting the social and economic lives. Intangible capital also includes social capital, that is, the trust among people in a society and also trust in public institutions like an efficient judicial system and government and clear property rights.
Natural resources and physical asset led growth has been relegated to the bottom of the pyramid of wealth accumulation in nations and companies alike. The top space is occupied by intangible assets like intellectual property rights, patents, design, copyright, brand value and goodwill. For illustration, the brand value of Google and Coca Cola stands at $107 billion and $81.5 billion while their annual revenues are $66 billion and $46 billion . The value of some leading global companies, such as Microsoft, is now almost entirely accounted for by their intangible assets. In recent years, we have witnessed the valuations of patents held by fledgling companies like Blackberry, Motorola mobility (and bankrupt) Kodak at $4.5 billion, $4 billion and $500 million.
Qualcomm is the world’s largest mobile phone chip maker. Qualcomm benefits from the sale of handsets even when they don’t use its chips. The company’s ownership of CDMA technology, allows it to charge royalties on most phones connected to modern data networks. Its revenues are over $26 billion and licensing provides the company with the majority of its profit.
The wealth from intangible assets are not limited to corporates alone as examples abound of individual patent holders turning millionaires after licensing their research and development. Apart from scientists and researchers, artists are also never out of news for their million dollar book, movie or music deal. The nature of wealth is morphing – it is increasingly intangible assets, which will ensure future wealth even after death as artist John Lennon has lapped up 200 million pounds through continuous sales of Beatles songs and Einstein raked in over $ 75 million by gracing his name for scientific tools, tablet computers, pens and a line of healthy food.
The emergence of intangible assets as the centrepiece of all economic, social and national wealth can be easily explained as ‘Knowledge’ – the core of the present emerging economy is also an intangible asset.
Gazing through the crystal ball
- 3Rs (Reading, Writing, Arithmetic) were never more important. Command over the language of academics and business is a critical must! Language and math (the most universal language) competence must be well-achieved for all students in school years. Parents must remain very vigilant and proactively involved in ensuring excellence in English and math education of their children.
- There is tremendous opportunity to blend local, cultural, and historical knowledge with modern and scientific knowledge to develop more effective solution for communities across the world. The world was never more democratically poised for globally agile micro enterprises focussed on the local. Solve the ‘problems’ of your local community or any other known community as the focus of your business; real world solutions out of virtual world backbone.
- Entrepreneurship will be commonplace and the penetration of digital technologies and Artificial Intelligence (AI) will be high in all socio economic endeavours. All economic activities will have large dose of state of art technology; playing with the technologies of the time was never more important.
