Tuesday, August 21, 2007

The stealth wealth...

Our privileged lives help us to overlook the most important source of wealth for our nation: intangible wealth.
The World Bank study defines natural capital as the sum of cropland, pastureland, forested areas, protected areas, and nonrenewable resources (including oil, natural gas, coal, and minerals). Produced capital is what most of us think of when we think of capital: machinery, equipment, structures (including infrastructure), and urban land. But that still left a lot of wealth to explain. "As soon as you say the issue is the wealth of nations and how wealth is managed, then you realize that if you were only talking about a portfolio of natural assets, if you were only talking about produced capital and natural assets, you're missing a big chunk of the story," Hamilton explains.

The rest of the story is intangible capital. That encompasses raw labor; human capital, which includes the sum of a population's knowledge and skills; and the level of trust in a society and the quality of its formal and informal institutions. Worldwide, the study finds, "natural capital accounts for 5 percent of total wealth, produced capital for 18 percent, and intangible capital 77 percent."

Social institutions are most crucial. The World Bank has devised a rule of law index that measures the extent to which people have confidence in and abide by the rules of their society. An economy with a very efficient judicial system, clear and enforceable property rights, and an effective and uncorrupt government will produce higher total wealth. For example, Switzerland scores 99.5 out of 100 on the rule of law index and the U.S. hits 91.8. By contrast, Nigeria gets a score of just 5.8, while the war-torn Democratic Republic of the Congo obtains a miserable 1 out of 100. The members of the Organisation for Economic Co-operation and Development-30 wealthy developed countries- have an average score of 90, while sub-Saharan Africa's is 28. "Rich countries are largely rich because of the skills of their populations and the quality of the institutions supporting economic activity," the study concludes. According to Hamilton's figures, the rule of law explains 57 percent of countries' intangible capital. Education accounts for 36 percent. [More of a great interview]
[Whole 208-page report here]

This staggering advantage we take for granted becomes most apparent when it is missing. Listen to Americans talk about foreign countries - especially under-developed ones - and the idea of social institutions that don't work hits home first.

As farmers we are very late embracing the idea of wealth that cannot be hauled in a truck. Buy as Hernando de Soto pointed out in "The Mystery of Capital" without the basic ability to prove something is yours, hidden capital sits unused. Such everyday fixtures of order have real value, and the World Bank helps to point out why the US has much to be grateful to our forebears for and much to protect.


Paul said...

I appreciate your discussion about natural capital. The challenge for me is to relate that topic to my own community and to find a way to encourage people to think of improving our lives by the wise use of natural capital.

An example of taking our "fixtures of order" for granted in our community is the overwhelmingly negative responses to proposals for any form of economic development. And, when asked to provide alternative suggestions, none are forthcoming.

My county in KS is at a crossroads, economically speaking. We lag far behind our more populous neighbors and yet are able to create a positive "economic pull" factor, meaning we attract more business activity than we lose. However, that is changing, though not for the better, as other communities are doing a better job of utilizing their natural capital and are stealing young families away from us.

My fear is we will arrive at a strategic inflection point where it will be impossible to change course, even if we wanted to.

The status quo is a safe place to be, yet an even greater danger lurks there, and that is complacency and laziness.

John Phipps said...


Thanks for reading and your thoughtful remarks. My own little corner of agriculture is similarly withering, but strangely I have come to feels less apprehensive.

I am sure it is a unique situation, so don't read too much into it, but the fact we are losing population and economic activity also means we are losing complicating factors for farming (neighbors). Technology also helps mitigate the distance issues.

I will grieve for my church and struggle harder to keep friendships fresh at greater distances, but having large swaths of America left alone for growing stuff isn't all bad.

Good luck in your efforts.