14 June 2012

Where Does Wealth Come From?

This post is a part of an ongoing discussion of innovation policies at the conceptual level, which will eventually lead into a much more empirically focused set of discussions. For me, these posts are about ensuring that I am clear on the concepts that I am discussing, which draw upon a wide literature in (so far) economics, sociology, policy sciences and S&T policy.

Last week I presented a definition of wealth as the accumulation of valued outcomes. Here I ask, where does wealth come from?

This question is necessary to ask and answer if we wish to make collective decisions that lead to greater wealth. Any one who offers a judgment on questions of policy -- that is, decisions focused on attaining valued outcomes -- operates with some conception of the mechanisms through which we attain wealth, whether explicitly or implicitly held. This post is my attempt to lay out a coherent and simple explanation of how I would answer this question.

In a particular context or setting, wealth comes from four sources:
Effort -- This is closely related to the conventional economics concept of labor (and perhaps some economists define labor exactly in this manner), but by effort I mean work not workers. Effort is action.

Resources -- Tangible and intangible assets, which include (importantly) energy, and other environmental and human attributes. This is closely related to some conceptions of "capital" as used by economists (and, again, perhaps some economists use exactly this definition).

Luck -- There are some consequences that are simply the result of factors beyond our intentional actions. These would include, for the individual, a genetic predisposition to good health or a Monet found at a garage sale, and for a nation, bountiful energy resources. Luck can be good or bad with respect to valued outcomes.

Innovation -- Here I mean the Solow residual (in economics terms). In plain language, it is what Peter Drucker defined as "change that creates in a new dimension of performance" or what Joseph Schumpeter defined as "any “doing things differently” in the realm of economic life."
I emphasize the importance of context or setting, which is characterized by some existing combination of effort, resources, luck and innovations (i.e., wealth). From a policy perspective, we do not get to choose the initial context from which decisions are made, that setting is the consequence of history and contingency. What matters is what we do given a particular context.

From the perspective outline here, should we wish to attain greater wealth the most important lever is innovation, which of course can influence effort and resources (i.e., thereby changing aspects of the current context). Luck is largely (but not entirely) not subject to such influence.

The purpose of outlining such a conceptual model of where wealth comes from, in the words of Karl Marx, " is not merely to understand the world, but to change it." Comments, criticisms welcomed and encouraged.