Not so long ago, the bulk of the wealth of the world was made up of tangible stuff. Iron. Oil. Gold.

In a memorable moment of the 1967 movie The Graduate, the future was plastic. Today, the wealth of the world is harder to pin down, isn't it? Brands. Technology. Contracts. Relationships. Does catching Pokemon count as wealth? How about TikTok views?

Our wealth is our people

Nobel prize-winning economist Gary Becker took a special interest in the growing capacity of people to create value, even from nothing. He estimated that the value of America’s human capital exceeds the value of its tangible capital assets at least threefold. That is, the world's wealth isn't found in stuff, but in the knowledge, talent, and skills of people.

This relatively recent shift can be quantified in the marketplace using the S&P 500 index, a measure of the market value of 500 large companies. In the mid-1970s, more than 80% of the market value of the S&P 500 could be attributed to tangible assets. By 2005, the ratio had flipped – 80% of the value was intangible, and the trend continued. In 2020, intangible assets accounted for 90% of the value of the S&P 500.

Creating intangible value is often called knowledge work. As this shift occurred, the labor market responded strongly. The shift is happening everywhere.

In America, wealth is becoming more concentrated

Today, most of the lifting in construction and shipping is done by forklifts and cranes, which need but one skilled operator. Tasks that can be automated are progressively being automated, which is changing the job market. In the past, the jobs vulnerable to outsourcing were mostly associated with manufacturing — the economy of "stuff." But technology made knowledge work portable, too. Facing this competition, the jobs that can pay a middle-class wage increasingly require a high level of intellectual adaptability, which the labor market has largely interpreted as a product of college education.

This competition has probably contributed to the long trend toward concentration of wealth. Economist Thomas Piketty, who has brought particular focus to this trend, assembled long-term data about income inequality in America. Since the 1980's, he shows, economic gains have concentrated in the "top 1%" of households. The share of the "bottom 50%" has steadily eroded.

Research by McKinsey, a consulting firm, estimates that the racial wealth gap in America suppresses the overall economy by billions of dollars per year. The growing concentration of wealth in America is less evident in other economies. (See chapter 1 of the World Inequality Report for a comparison to Western Europe.)

The World is Flat: knowledge work is portable, too

Increasingly, when young people graduate from high school they need the same knowledge and skills to be career-ready as they do to go to college. All over the world, people are getting the educational preparation they need to compete in a global market for creative jobs that pay well.

Only about a third of California residents over age 25 have earned a Bachelor’s degree or more.

College in America is expensive, both in terms of direct costs and in terms of time. Analysts worry that America is not producing enough college graduates to keep up. Only about a third of California residents over age 25 have earned a Bachelor’s degree or more. As the US has become a knowledge economy, the earning potential of educated workers has exploded, while that of less-educated workers has stagnated.

The next lesson examines the terrible cost of failing to educate students.

Updated November 2024