My Books, Essay #7

This should have been on your econ syllabus

Invisible Wealth is the title of the paperback version¹ of the book that I co-authored with Nick Schulz. It should have been made a supplemental reading for every first-year economics course.

Ordinary textbook economics is a model of the 19th-century economy, not the contemporary one. We write,

We used to teach that there are three factors of production: land, labor, and capital. We described an economy consisting of amber waves of grain, routine unskilled work, and belching, clanking machines inside of factories.

But most people today do not live in that economy. Instead, we work in quiet offices on land whose value has nothing to do with its agricultural fecundity, doing tasks that are highly specialized and differentiated.

Our book describes the intangible assets and liabilities that ordinary textbook economics leaves out.

We may think of the intangible assets as recipes or algorithms…

The invisible liabilities are social arrangements and political institutions. Societies are held back by government corruption, resistance to innovation, and the habit of rewarding those who expropriate wealth more highly than those who create it.

My chapters provide the theory and evidence for these factors, and Nick’s chapters transcribe interviews he did with prominent economists, including some Nobel laureates.

First, we present the evidence for economic growth and its intangible components. We include 28 tables of data.

Some of the tables document the spectacular rise in the standard of living since the Industrial Revolution. For example, average world GDP per person showed almost no change from 5000 BC to 1500 AD, but starting in 1800 it rose exponentially. Daily average calories consumed per person in Great Britain increased from just over 2000 in 1700 to more than 3000 in 1989. In 1880, the average male head of household had 1.8 hours of leisure time per day. In 1995, it was 5.8 hours.

The contrast between rich countries and poor countries also is striking. We cite a paper by David Henderson and Charley Cooper that in 28 high-income countries average annual income per person is at least $9000 but the majority of the world’s people live in countries where the average annual income per person is less than $800.

We include analysis by economists at the World Bank which says that 82 percent of the wealth in the United States is intangible, meaning wealth that does not consist of natural resources or capital equipment.

Meanwhile, in the United States, white-collar work rose from 22 percent of the labor force in 1910 to 76 percent in 2000. One hundred years ago, Americans worked mostly with things. Today, they work mostly with symbols and/or with people. To put it another way, over the course of the 20th century, we went from 3/4 of the labor force working in the textbook economy to 3/4 working in the intangible economy.

Several of our data tables came from the work of Robert Fogel, an economist and Nobel Laureate. Schulz provides a fascinating interview with Fogel, who stresses the dramatic improvements in health and living standards in recent decades.

With the kind of agricultural technology that exists in Malthus’s era, we could only feed 80 percent of the population with enough energy that they could work.

Recall that average of 2000 calories per day, with some people getting much less than that.

The poorest 20 percent of the population was slowly starving to death.

Knowledge as the intangible asset

Next, I have a chapter called “From the Meadow to the Food Court.”

The meadow, in which people are imagined like a grazing heard, is a metaphor for Malthusian subsistence. The food court, in which a plethora of recipes allows for easy substitution among ingredients, is a metaphor for the abundance generated by knowledge, the intangible asset.

That chapter is followed by interviews with Paul Romer and Joel Mokyr, two of the leading economic experts on economic growth. Both of them emphasize that growth comes from knowledge.

Romer emphasizes that knowledge is not limited in the way that natural resources are fixed.

the set of possible ideas, the set of things that are out there to discover, is just so incomprehensibly large that we’ve only begun to explore the tiniest subset of possible ideas or discoveries.

…Even if every human now alive had been trying a new mixture every second ever since the universe had been created, we would still have only tried a tiny fraction of those possible mixtures.

In 2024, I re-read this and think about the enormous potential for AI to produce knowledge and growth.

I’ll write about the rest of the book in the next essay.

1. The hardback version was titled From Poverty to Prosperity.