How Wealth Has Changed : Planet Money : The Indicator from Planet Money The world has changed, and nearly two thirds of global wealth is human capital. Policymakers and politicians may not understand just what that means for global politics.

How Wealth Has Changed

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UNIDENTIFIED PERSON: NPR.

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CARDIFF GARCIA, HOST:

Hey, everyone. This is THE INDICATOR FROM PLANET MONEY. I'm Cardiff Garcia. Today's episode starts with a simple statistic. Right now the economy of the state of California is bigger than the economy of the whole world back in 1870. That statistic comes from Charles Kenny. He's a senior fellow at the Center for Global Development, and he is our guest today. Charles, welcome to the podcast.

CHARLES KENNY: Thanks so much for having me, Cardiff.

GARCIA: So, Charles, I think a statistic like this might strike some people as fairly normal. I mean, there's been a lot of economic growth in the last century and a half. But you have kind of an interesting observation to make about that data point. What is it?

KENNY: So it's true that California is quite a big state, but it's a small part of the world. It's about 0.3% of the world's land surface, and it's home to about 0.5% of the world's population. And that you can achieve that much output with that small a share of the world's land and population, I think, tells you something about what's behind prosperity and economic growth.

GARCIA: Yeah. In other words, what's behind the way in which the world creates wealth now versus how it created wealth back then in the 1870s?

KENNY: Absolutely.

GARCIA: OK, and we're going to cover that right after the break.

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GARCIA: OK, we're back with Charles Kenny, senior fellow of the Center for Global Development. Charles, you brought us this breakdown of what wealth in the global economy looks like right now. So let's just go through the numbers real quick, OK? When you think of wealth in the global economy, how do you break it down? Where are the silos here?

KENNY: So when I'm thinking about wealth, I'm thinking about, you know, what is it that makes income? And I'm breaking it down into three categories. And actually, I should say the World Bank broke them down into three categories - thank you very much, World Bank - into produced capital, which is things like roads and buildings and factories, natural capital, things like land and oil and gold - so land and the stuff under it. And then you've got the rest, which the World Bank recently has come to call human capital but can be thought of - what's behind that is education but also technology and ideas and inventions.

GARCIA: So knowledge, basically - learning.

KENNY: Yeah, so the knowledge of how to make an internal combustion engine or how to make a solar panel or the knowledge of property rights or education.

GARCIA: OK, so we've got these three categories. I'm going to use different words than produced and natural capital because most normal people don't use that. I'm just going to break it - I'm just going to call it shorthand. I'm going to call it land stuff and intangible wealth - OK, so things...

KENNY: OK.

GARCIA: ...You can't touch. So how much of the global economy is physical stuff?

KENNY: Physical stuff is about a quarter - 27%.

GARCIA: OK, so not much. And then what about land?

KENNY: It's about 9%.

GARCIA: Nine percent. And then the rest of it - ideas, learning, et cetera?

KENNY: It's nearly two-thirds. It's 64% of total global wealth.

KENNY: OK, so almost two-thirds of the wealth in the world is something you can't see. It's ideas. It's knowledge. And that is different from how the world used to work, right? I mean, this is the idea behind that data point about California having a bigger economy now than the whole world economy back in 1870.

KENNY: Yeah, that's right. So the difference between the land and factories and equipment and ideas is if I'm using the land to farm, to, you know, grow cabbages, you can't use it to grow cabbages. I've got that. If I'm using the factory to produce widgets, you can't use the factory to produce widgets. With ideas, that's not the case. So if I have the idea of the internal combustion engine and you have the idea, we can both have the idea of the internal combustion engine at the same time. And, indeed, with some ideas and technologies, the more of us who have that idea, the better it is. So take the example of double-entry bookkeeping.

GARCIA: This is an accounting concept that's very useful that spread out all over the place. Right.

KENNY: Sorry. Probably, yeah. If only I'm using that accounting concept, it doesn't really make sense to anybody. If the whole world's using it, if we all have the same accounting standards, they're much more valuable to each one of us individually for keeping track of where our money is and how we're spending it and so on. So ideas are non-zero-sum. If you're using the land, I can't use the land. If you're using the idea, I can use the idea at the same time, and actually, that can make the idea more valuable to the both of us.

GARCIA: Yeah. And something that's interesting about this is that this also concerns how countries deal with each other. So back in the 1800s, say, when land was a huge part of the global economy, agriculture, you know, might have even been, for part of 1800s, the majority of the global economy. It was more of a zero-sum world because if one country had land that had great crops and produced a lot of food, that meant that that country was richer than other countries. And so there were these kinds of imperial, you know, conquests and squabbles over land itself. Now the thinking is that because most of the wealth in the world is ideas, knowledge, learning, and that's not zero-sum, cooperation is sort of what's called for. This is kind of an interesting theme that you bring up. Can you tell us a little more about it?

KENNY: Yeah, sure. So in the 19th century, people fought wars over land and what was under it or on it all the time. There were wars over guano, the bird poop, in the 19th century because it was a valuable form of fertilizer. Japan at the start of the Second World War - one of the reasons that it went to war was to try and guarantee a source of oil. So sort of through history, you know, a lot of conflict has been over these zero-sum resources. As they become less important to what makes you a wealthy, successful, prosperous country, you know, the reasons to fight over this smaller and smaller part of overall wellbeing goes down. I'm not saying it's going to lead to instant global peace, but I think it's been one factor behind the decline of war and, I think, one factor behind, you know, growing sort of realizations that, actually, the world works better when we work together than it does when we all try going our own separate ways.

GARCIA: Yeah. It strikes me that maybe policymakers have not caught up to that evolution, right? I mean, think about what you're saying here, you know? We still have countries trying to protect their technological edge rather than sharing it with each other, and the current tensions between the U.S. and China are maybe the best example of that at the moment but not the only example. And so this cooperation that you say is more suitable to the modern economy is not a cooperation that I always necessarily see going on.

KENNY: That's absolutely true. So it is sometimes, and especially sort of in Washington, seen as a race. You know, who gets more patents, and who's got more of the technological edge? But it really shouldn't be about that. We all benefit from technologies invented elsewhere, including in the United States. I mean, imagine July 4 without fireworks. Fireworks were invented in China. And so we've got to get over this sense that it is a kind of a competition. It really is more about cooperation. And, indeed, our tightening of intellectual property rights, like patents as part of global trade deals recently, I think has been a mistake for us but, you know, also with a cost to the world. It favors a few firms that have existing patents over the interests of everybody else in the United States and in the rest of the world. And it's increasingly foolish as the United States becomes a smaller part of the global economy.

So at the moment, about 70% of all the research and development done worldwide is done outside the United States. That number is going to grow. And if we keep on treating this as a competition, we're going to miss out on that 70% because we're going to encourage other people to behave the same way. So I accept that we haven't moved all the way to viewing the world as cooperative, and indeed, the last few years have seen us moving backwards, if you will, in that sense. But I think it's foolish.

GARCIA: Charles Kenny, thanks so much for being on the podcast.

KENNY: Thanks so much for having me.

GARCIA: This episode of THE INDICATOR was produced by Darius Rafieyan. It was fact-checked by Brittany Cronin. Our editor is Paddy Hirsch, and THE INDICATOR is a production of NPR.

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