Day By Day

Tuesday, October 09, 2007

Intangible Wealth

The World Bank recently undertook a major study into the wealth of nations -- the question of why some nations prosper and others don't. There is a rich literature on this subject that I intend to summarize someday here and there is a lively, and often acrimonious, debate among historians and economists as to just what factors drive development.

The World Bank study contributed an important piece of information to the debate. It showed that the same institutional factors applied in different cultural contexts produce different results. To put it simply, a Mexican worker who works in the United States is five times more productive than he would be doing exactly the same work in Mexico. In short, culture counts. In fact it counts far more than anything else.

The World Bank economists found:
If one simply adds up the current value of a country's natural resources and produced, or built, 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. In fact, the World Bank finds, "Human capital and the value of institutions (as measured by rule of law) constitute the largest share of wealth in virtually all countries."
A commentary in Reason explains the implication of this finding:
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.
Read it here.

This places a number of disturbing recent trends in a new and unsettling context.

As Michael Barone points [here] our our academic institutions are more interested in indoctrinating students than in educating them.

Robert Putnam has charted the decline of trust in the American culture, not just mistrust of our public institutions, but also of each other. [here and here]

Vast portions of the permanent government, not just the intelligence services, are largely dysfunctional.

Anyone who reads the paper or watches TV understands the decline of our political institutions. Polling by the Gallup organization shows that the public has little or no trust in nearly all of our national institutions [here].

The courts have seriously eroded property rights in recent decades. [here]

Investors, not just in the U.S.] are increasingly losing faith in our financial institutions. [here]

I could go on and on, and you can probably add several more points just off the top of your head.
The key observation is that every one of our major organizing institutions -- political, cultural, religious, economic, educational..., all of them, is or is widely perceived as being thoroughly corrupt.

This is a very serious problem because our continued existence as a functioning society depends upon mutual trust, and that trust is rapidly disappearing.

Who to blame? The media, tenured radicals, corrupt politicians and other public figures, overweening government, lawyers, the list goes on and on and so will the debate. What is more important is that we begin to seek ways to overcome the adversarial approach we bring to all aspects of our public discourse and to identify areas of common concern and agreement. But in a time when we cannot even agree on matters of national security, is such a concord possible?

I sincerely hope so, but fear not.