I found this part interesting and immensely thought-provoking.
"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."
- Do ordinary textbooks leave out intangible assets? A subset of intangible? Something else?
- I never thought of corruption, rent seeking, etc. as liabilities but I suppose that makes sense.
- Where does resistance to innovation fit it? Do some types of resistance fit the label "liability" better than others?
- Lots of people think of landlords as people who expropriate wealth rather than create it. Same goes for hedge funds and other high volume market traders. Are they? Who is on your list of wealth expropriators and how many are just as questionable as these examples?
- Beyond the typical intangible assets of patents, brand recognition, customer lists, licenses, trademarks or copyrights, companies also create/have/use processes and capabilities that allow them to more effectively develop and provide services and products. Using the terms "production line" and "store" as broadly as possible, when they provide products and services at a price customers want, they can be worth far more than the the value of the tangible assets and the intangible assets I listed.
"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."
To be fair, most of that sounds more like it belongs in a 2nd-semester or 2nd-year economics course, with only a few minor references included in the traditional first econ course to let you know it's coming later. You still need to learn the first ~150 years of economics before you learn the second ~75 years of economics.
Changing the list of the "three (four)" factors of production is definitely the sort of that should go into the very first econ class, though. that's just an egregiously bad mistake that is instantly obvious to any modern student.
the four factors of production being "land, labor, capital, and entrepreneurship" is obviously putting way too much work on "entrepreneurship" to be useful.
Off the top of my head, I would make the factors of production/wealth creation something like:
Other breakdowns are equally plausible. But as long as the textbook's first chapter acknowledges that it's more complicated than just land, labor, and capital, I'm fine with the first semester flat-out stating that it will be mostly focused on land, labor, and capital in the 19th century context. The other Triads or Tetrads can be covered in later classes, it'll work out.
just so you know, we do NOT say that entrepreneurship is the fourth factor of production. Maybe I did a bad job in this essay of conveying what the book is about.
I didn't mean that YOU said that, just that it was the standard 3-or-4 factor of production model I encountered in High School and College. And that it needs to be replaced, even in Intro Economics courses.
While I like the grid idea, it’s a LOT more complicated, tho also a much more truthful simplification. “Capital” includes now tangible (factories) and all intangibles. From your grid or Arnold’s book. That’s enough for Econ 101, with lots more work needed on the various specialized aspects of intangible capital.
See, to me, using the 3x3 grid as an example, "Land" should include the subset or related concepts of "Information about land" (Geographic surveys, censuses, maps, known weather patterns, etc" and also "Laws of the Land",
"Labor" should include the subsets or related concepts of "Leadership" and "Culture",
And "Capital" should include the subsets or related concepts of "Power within a Polity or Organization" and "Long-term organizational liabilities or frictions".
Ideally, you should be able to read the grid by-row or by-column to focus on different things which are closely related to each other...
Not sure how the 4x4 Grid would represent that though... I did say it was just off the top of my head.
I am reading the book right now and enjoying it quite a bit. It would be very interesting to read more reflections on what you got right and wrong, and also how you think this is applicable to the world we live in right now.
Re:, “… 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.” Should we now stop calling it “capitalism”?
You write: "For example, average world GDP per person showed almost no change from 5000 BC to 1500 AD, but starting in 1800 it rose exponentially."
I would expect GDP to increase on an exponential curve for all history. As it turns out, if you zoom out of an exponential curve far enough, they all look like hockey sticks. This makes me wonder if there really was a knee around 1800 or is that just a visual artifact.
Have you (or anyone else) plotted per capita GDP on logarithmic Y-axis so we can see if there's a change in the exponent?
Arnold, it would be great if you had PDF versions of your books that you could offer to your subscribing readers. I don’t have this one and would like it, and all of them, maybe one a year. Tho I look at my hard copy of TLP more often than my file on S&T, which I printed out (at work, allowed).
You can use other metrics than GDP to make the same point. The key point in most long-term economic histories of the world is that if you take a perfectly average lower-class peasant in an arbitrary location of earth, in 100-year increments for most of recorded history...
And then you stack up all of that average peasant's "Wealth", or that peasant's "Annual income", in a single giant pile....
From about 3,000 BC to around 1500 AD or so, the average size or value of that pile grows in a pretty much linear fashion. A 1500 AD peasant is still 'wealthier' than a 3,000 BC Peasant, but if you mark their wealth levels every hundred years, the graph pretty much forms a perfectly straight line, with a very small and gradual upwards slope, representing very slow gradual improvements built up over multiple generations.
Until sometime around 1750-1850, with the first industrial revolution and the construction of the first all-metal precision lathe, and which point, that graph begins to SKYROCKET.
There are different graphs, showing different versions of the same thing, using different methods. Some of them are more like a sine wave than a straight line prior to 1750, and talk about the "Malthusian Trap", but the key point is that skyrocketing takes off around 1750-1850, and before then, life sucked.
For example, take European First Contact with Stone-Age Polynesia, 1500-1700.
In terms of raw accumulated familial wealth, a Medieval European Serf or very-low-ranking freeman and a typical Polynesian resident aren't THAT different. the Medieval European is a LITTLE wealthier, but not by much.
Medieval European cottages are a bit bigger, a bit better built, and a bit more winterized than typical Polynesian palm hut, but if Polynesia HAD significant winters and an obvious cottage design to copy, they could afford to build something pretty similar to a Wooden European cottage if they really wanted to. The big difference would be the Fireplace/chimney.... SOME Europeans had really professional stonework done on their fireplaces, if they could afford it, or if they inherited it, or if it survived long enough without being sacked during a war, but a lot of the poorest had to make do with just stacking conveniently shaped loose rocks.
Europe had bigger herds of domestic animals, and more variety of domestic animals, but Polynesia had easier access to fish. in terms of 'access to meat', they probably come out about even.
Tool-wise... Polynesia is a LITTLE behind the average European serf, but again, not by much. Steel tools were still pretty expensive even in medieval Europe. The total difference is maybe a couple of pounds of metal toolheads per family, tops? and mostly iron, not steel? it's not a lot. Medieval European peasants still used a lot more wood and stone tools than most people realize.
small boats are about the same... by some standards, Polynesian private boat ownership might be higher-quality than equivalent European river boats and ferries. Polynesian cloth and European peasant cloth aren't that different.... they both had to weave it at home, by hand, out of locally available materials, and weren't likely to own more than one or two sets of clothing per person.
750 BC Germanic tribes in Europe and 1500 AD Polynesians are roughly the same, wealth-wise. 1500 AD German peasants versus 1500 AD Polynesians don't have a BIG wealth difference. Maybe the German peasants were 2x as wealthy, tops? it's not a lot. Prior to the first industrial revolution, Wealth was very much a pyramid... Kings and nobles get wealthy by trickle-up taxation, and how much wealth a king has is basically a function of how fertile his lands are, how many peasants live there, and how many wars he's won recently.
Polynesian Kings are poorer than European Kings mostly because European kings have way bigger populations under their control. From the common peasant's perspective, it's not that different in either scenario. But a penny's worth of taxed labor per every peasant really adds up in Europe. Or in India, or China. any of the high-population-density countries. If you're a worldwide traveling merchant of some kind, most of your time is spent riding past or sailing past peasant village after peasant village, just to visit the occasional rare concentrations of wealth in the occasional rare cities. This was back when the biggest cities in existence were maybe 1 million people, and there were only a handful of cities that big anywhere in the world.
And then the industrial revolution happened, and the life of the peasant... changed. Today, pretty much anyone in America who can afford a beater of a car possess more worked metal in that one car than most armored knights or mid-level nobles could dream of ever personally owning. a good suit of armor weighs maybe 40-80 lbs, and that's a major multi-year family investment for a fighting noble in 1500 AD. A wrecked Toyota Camry sitting in a JUNKYARD is maybe 3000 lbs of high-grade automotive steel. That's enough metal right there to afford equipping maybe 30 armored knights for the next ten years?
In 1500 AD that much high-grade steel was a REALLY BIG DEAL. for 800 AD Vikings, that much metal was pretty much exactly the same level of a really big deal. 1500 AD and 800 AD iron-age Europe were not THAT different in terms of total levels of accumulated wealth. Heck, even in 1800 AD, 3000 lbs of high-grade steel was NOT something you could afford to just walk away from. Maybe not in 1900 AD.
Where are all those quotes from? They seem to be from several different sources?
Still, it's a good argument for why there are important economic differences between "Good Laws" versus "Good (legal/governmental/democratic) Leadership", and that Denmark has BOTH. The laws as physically written are fair and simple and short, AND the Legal System can be trusted to adjudicate them quickly, consistently, and inexpensively, AND the people and government of Denmark can be trusted to invest reasonable amounts of time and effort in KEEPING things that way, and certainly NOT to begin making things needlessly and newly complex in the near future.
I found this part interesting and immensely thought-provoking.
"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."
- Do ordinary textbooks leave out intangible assets? A subset of intangible? Something else?
- I never thought of corruption, rent seeking, etc. as liabilities but I suppose that makes sense.
- Where does resistance to innovation fit it? Do some types of resistance fit the label "liability" better than others?
- Lots of people think of landlords as people who expropriate wealth rather than create it. Same goes for hedge funds and other high volume market traders. Are they? Who is on your list of wealth expropriators and how many are just as questionable as these examples?
- Beyond the typical intangible assets of patents, brand recognition, customer lists, licenses, trademarks or copyrights, companies also create/have/use processes and capabilities that allow them to more effectively develop and provide services and products. Using the terms "production line" and "store" as broadly as possible, when they provide products and services at a price customers want, they can be worth far more than the the value of the tangible assets and the intangible assets I listed.
"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."
To be fair, most of that sounds more like it belongs in a 2nd-semester or 2nd-year economics course, with only a few minor references included in the traditional first econ course to let you know it's coming later. You still need to learn the first ~150 years of economics before you learn the second ~75 years of economics.
Changing the list of the "three (four)" factors of production is definitely the sort of that should go into the very first econ class, though. that's just an egregiously bad mistake that is instantly obvious to any modern student.
the four factors of production being "land, labor, capital, and entrepreneurship" is obviously putting way too much work on "entrepreneurship" to be useful.
Off the top of my head, I would make the factors of production/wealth creation something like:
a 3x3 grid of:
Land, Labor, Capital
Information, Leadership, Power,
Law, Culture, Liabilities
Or a 4x4 grid of:
Land, unskilled labor, skilled labor, Capital
Training, Information, Processing, Entrepreneurship
Laws, Customs, Trust, Leadership
Liabilities, Inertia, Friction, Sabotage.
Other breakdowns are equally plausible. But as long as the textbook's first chapter acknowledges that it's more complicated than just land, labor, and capital, I'm fine with the first semester flat-out stating that it will be mostly focused on land, labor, and capital in the 19th century context. The other Triads or Tetrads can be covered in later classes, it'll work out.
just so you know, we do NOT say that entrepreneurship is the fourth factor of production. Maybe I did a bad job in this essay of conveying what the book is about.
I didn't mean that YOU said that, just that it was the standard 3-or-4 factor of production model I encountered in High School and College. And that it needs to be replaced, even in Intro Economics courses.
While I like the grid idea, it’s a LOT more complicated, tho also a much more truthful simplification. “Capital” includes now tangible (factories) and all intangibles. From your grid or Arnold’s book. That’s enough for Econ 101, with lots more work needed on the various specialized aspects of intangible capital.
See, to me, using the 3x3 grid as an example, "Land" should include the subset or related concepts of "Information about land" (Geographic surveys, censuses, maps, known weather patterns, etc" and also "Laws of the Land",
"Labor" should include the subsets or related concepts of "Leadership" and "Culture",
And "Capital" should include the subsets or related concepts of "Power within a Polity or Organization" and "Long-term organizational liabilities or frictions".
Ideally, you should be able to read the grid by-row or by-column to focus on different things which are closely related to each other...
Not sure how the 4x4 Grid would represent that though... I did say it was just off the top of my head.
You should link to where we can buy the book not just the title! I loved this post.
I am reading the book right now and enjoying it quite a bit. It would be very interesting to read more reflections on what you got right and wrong, and also how you think this is applicable to the world we live in right now.
Re:, “… 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.” Should we now stop calling it “capitalism”?
You write: "For example, average world GDP per person showed almost no change from 5000 BC to 1500 AD, but starting in 1800 it rose exponentially."
I would expect GDP to increase on an exponential curve for all history. As it turns out, if you zoom out of an exponential curve far enough, they all look like hockey sticks. This makes me wonder if there really was a knee around 1800 or is that just a visual artifact.
Have you (or anyone else) plotted per capita GDP on logarithmic Y-axis so we can see if there's a change in the exponent?
That's a good question, actually. I nominate you to do it.
Thanks for the shoutout to our work, Arnold. My co-author is Charley Hooper, not Cooper.
Arnold, it would be great if you had PDF versions of your books that you could offer to your subscribing readers. I don’t have this one and would like it, and all of them, maybe one a year. Tho I look at my hard copy of TLP more often than my file on S&T, which I printed out (at work, allowed).
You can use other metrics than GDP to make the same point. The key point in most long-term economic histories of the world is that if you take a perfectly average lower-class peasant in an arbitrary location of earth, in 100-year increments for most of recorded history...
And then you stack up all of that average peasant's "Wealth", or that peasant's "Annual income", in a single giant pile....
From about 3,000 BC to around 1500 AD or so, the average size or value of that pile grows in a pretty much linear fashion. A 1500 AD peasant is still 'wealthier' than a 3,000 BC Peasant, but if you mark their wealth levels every hundred years, the graph pretty much forms a perfectly straight line, with a very small and gradual upwards slope, representing very slow gradual improvements built up over multiple generations.
Until sometime around 1750-1850, with the first industrial revolution and the construction of the first all-metal precision lathe, and which point, that graph begins to SKYROCKET.
There are different graphs, showing different versions of the same thing, using different methods. Some of them are more like a sine wave than a straight line prior to 1750, and talk about the "Malthusian Trap", but the key point is that skyrocketing takes off around 1750-1850, and before then, life sucked.
For example, take European First Contact with Stone-Age Polynesia, 1500-1700.
In terms of raw accumulated familial wealth, a Medieval European Serf or very-low-ranking freeman and a typical Polynesian resident aren't THAT different. the Medieval European is a LITTLE wealthier, but not by much.
Medieval European cottages are a bit bigger, a bit better built, and a bit more winterized than typical Polynesian palm hut, but if Polynesia HAD significant winters and an obvious cottage design to copy, they could afford to build something pretty similar to a Wooden European cottage if they really wanted to. The big difference would be the Fireplace/chimney.... SOME Europeans had really professional stonework done on their fireplaces, if they could afford it, or if they inherited it, or if it survived long enough without being sacked during a war, but a lot of the poorest had to make do with just stacking conveniently shaped loose rocks.
Europe had bigger herds of domestic animals, and more variety of domestic animals, but Polynesia had easier access to fish. in terms of 'access to meat', they probably come out about even.
Tool-wise... Polynesia is a LITTLE behind the average European serf, but again, not by much. Steel tools were still pretty expensive even in medieval Europe. The total difference is maybe a couple of pounds of metal toolheads per family, tops? and mostly iron, not steel? it's not a lot. Medieval European peasants still used a lot more wood and stone tools than most people realize.
small boats are about the same... by some standards, Polynesian private boat ownership might be higher-quality than equivalent European river boats and ferries. Polynesian cloth and European peasant cloth aren't that different.... they both had to weave it at home, by hand, out of locally available materials, and weren't likely to own more than one or two sets of clothing per person.
750 BC Germanic tribes in Europe and 1500 AD Polynesians are roughly the same, wealth-wise. 1500 AD German peasants versus 1500 AD Polynesians don't have a BIG wealth difference. Maybe the German peasants were 2x as wealthy, tops? it's not a lot. Prior to the first industrial revolution, Wealth was very much a pyramid... Kings and nobles get wealthy by trickle-up taxation, and how much wealth a king has is basically a function of how fertile his lands are, how many peasants live there, and how many wars he's won recently.
Polynesian Kings are poorer than European Kings mostly because European kings have way bigger populations under their control. From the common peasant's perspective, it's not that different in either scenario. But a penny's worth of taxed labor per every peasant really adds up in Europe. Or in India, or China. any of the high-population-density countries. If you're a worldwide traveling merchant of some kind, most of your time is spent riding past or sailing past peasant village after peasant village, just to visit the occasional rare concentrations of wealth in the occasional rare cities. This was back when the biggest cities in existence were maybe 1 million people, and there were only a handful of cities that big anywhere in the world.
And then the industrial revolution happened, and the life of the peasant... changed. Today, pretty much anyone in America who can afford a beater of a car possess more worked metal in that one car than most armored knights or mid-level nobles could dream of ever personally owning. a good suit of armor weighs maybe 40-80 lbs, and that's a major multi-year family investment for a fighting noble in 1500 AD. A wrecked Toyota Camry sitting in a JUNKYARD is maybe 3000 lbs of high-grade automotive steel. That's enough metal right there to afford equipping maybe 30 armored knights for the next ten years?
In 1500 AD that much high-grade steel was a REALLY BIG DEAL. for 800 AD Vikings, that much metal was pretty much exactly the same level of a really big deal. 1500 AD and 800 AD iron-age Europe were not THAT different in terms of total levels of accumulated wealth. Heck, even in 1800 AD, 3000 lbs of high-grade steel was NOT something you could afford to just walk away from. Maybe not in 1900 AD.
Where are all those quotes from? They seem to be from several different sources?
Still, it's a good argument for why there are important economic differences between "Good Laws" versus "Good (legal/governmental/democratic) Leadership", and that Denmark has BOTH. The laws as physically written are fair and simple and short, AND the Legal System can be trusted to adjudicate them quickly, consistently, and inexpensively, AND the people and government of Denmark can be trusted to invest reasonable amounts of time and effort in KEEPING things that way, and certainly NOT to begin making things needlessly and newly complex in the near future.
Thanks.