Chief Learning Officer Magazine Intellectual Capital Article Cites Ron Baker

I was honored to speak with Mike Prokopeak, Editorial Director at MediaTec Publishing, Inc., publisher of Chief Learning Officer magazine.

His article in the March 2008 issue is “Leveraging Intellectual Capital for Organizational Gain,” a topic near and dear to my heart.

Mike asked me, in some advance questions, to tell him what two lessons he would take away from my book, Mind Over Matter. It’s quite difficult to summarize a 340 page book in two lessons, but here’s what I said:

  1. There is no such thing as a natural resource.

  2. Ideas have always and everywhere been more valuable than the physical act of carrying them out.

I hope number one is obvious. The only true resource is the mind of man. Natural resources change constantly. The caveman had all the same resources we have today; the difference is we have more knowledge of how to use them effectively to satisfy our wants.

Oil used to be a nuisance to farmers, until man invented the combustion engine. Someday, we’ll find a replacement for oil—though I doubt I will live to see it—making the remaining stock valueless.

Most people understand number one. It’s number two where I have received quite a lot of push back. I thought it would be worthwhile to explain how I can make a such a broad, generalized, sweeping statement in total confidence.

According to the World Bank, 75% of the world’s wealth resides in human capital.

Engage in this thought experiment: tomorrow, we lose all of our physical resources—buildings, cars, homes, etc. How much real wealth have we lost? Would we be able to rebuild? Sure, it would take a while, and you can make an argument that we’d lose the replacement cost along with the time value of money until we were able to replace our tangible stock of assets.

But is there any doubt we’d be able to replace it? This is precisely what Andrew Carnegie meant when he once stated, in total confidence:

Take away my people but leave my factories, and soon grass will grow on factory floors. Take away my factories but leave my people, and soon we will have a new and better factory.

Ideas are what economists describe as nonrival assets—meaning more than one person can use it at a time.

Contrast this with traditional rival assets, such as a building or an airplane, which can only be used for one purpose at a time. If I give you the tie off my shirt, now you have it and I don’t; but when I give you an idea, now we both have it, can expand upon it, test it, and make it more valuable. Ideas are subject to increasing, rather than diminishing, returns.

Economists have always struggled with how to explain economic growth. Many of their models embody the physical fallacy, a world where traditional factors of production—land, labor and capital—are rival resources, innovation and entrepreneurship are treated as unexplained luck, and ideas are ignored since they cannot be quantified. Even Adam Smith, who did so much to falsify the physical fallacy, thought that only industrial work could be “productive.”

As usual, economist Thomas Sowell eloquently explains the impact on a country’s standard of living between generating ideas and the physical act of carrying them out, in his book Knowledge and Decisions:

Many of the products that create a modern standard of living are only the physical incorporation of ideas—not only the ideas of an Edison or Ford but the ideas of innumerable anonymous people who figure out the design of supermarkets, the location of gasoline stations, and the million mundane things on which our material well-being depends. It is those ideas that are crucial, not the physical act of carrying them out. Societies which have more people carrying out physical acts and fewer people supplying ideas do not have higher standards of living. Quite the contrary. Yet the physical fallacy continues on, undaunted by this or any other evidence.

Economist Paul Romer, known for his work in New Growth Theory says, “Great advances have always sprung from ideas. They don’t fall from the sky, but come from people.” He adds:

Economic growth occurs whenever people take resources and rearrange them in ways that are more valuable. A useful metaphor for production in such an economy comes from the kitchen: To create valuable final products, we mix inexpensive ingredients together according to a recipe…Human history teaches us, however, that economic growth springs from better recipes, not just from more cooking.

In other words, economic growth revolves around the human mind and its capacity for invention, discovery, and the transformation of physical objects and ideas into valuable goods and services.

Animals, too, rearrange physical objects, often with incredible precision, with birds building nests and bees constructing hives. Yet ideas are cumulative since human beings have the infinite capacity to improve upon their circumstances. We all stand on the shoulders of those who came before us, as Nobel laureate Charles Townes, the inventor of the laser, illustrated when he noted in his Nobel acceptance speech:

It’s like the beaver told the rabbit as they stared at the Hoover Dam. ‘No, I didn’t build it myself. But it’s based on an idea of mine!

Unlike animals, man creates wealth through his capacity to dream, imagine, experiment, think, and take risks. Capitalism creates wealth not just because of private property, free markets, and the profit motive, all of which existed in precapitalist times, including the biblical era. The main engine is its receptiveness to testing new ideas.

How much of your firm’s human capital is devoted to creating and testing new ideas versus merely executing old ones? If you want to create wealth and remain relevant there may be no more important question to answer.

Note: I will follow-up on this post with another that will further illustrate why ideas are always and everywhere more valuable than their mere execution.


  1. What then does this imply about the best use our social and business resources? Should higher education be more encouraged along with the work balance to make it possible? Should the government focus more on making higher education more affordable than on creating menial jobs to shore up short-term unemployment?

  2. Hi Shane,

    You ask a vitally important question, one to which I want to give a serious response. I deal with this very issue, at some length, in my book Mind Over Matter. The following is adapted from it.

    The Industrial Revolution was launched by individuals with very little formal education, with such pioneers as Thomas Edison having only three months of formal schooling, disqualifying him today from becoming a licensed engineer.

    The inventors of the airplane, two bicycle mechanics who never attended college, the Wright Brothers would most likely be denied a leadership position at Boeing today. Even Frank Lloyd Wright and Mies van der Rohe would not qualify to sit for the architect?s certifying examination under current educational requirements.

    More recently, the list of entrepreneurs who launched successful enterprises with no, or very little, college education reads like a Who?s Who of the business press??Michael Dell, Bill Gates, Steve Jobs, Steve Wozniak, among many others.

    Far more important than formal education is an economy that allows for economic experimentation, trial and error, profit and loss, secured by the liberties and freedom Adam Smith so eloquently wrote about. Thomas Sowell explains the difference between formal education and economic development in his textbook, Basic Economics:

    “Education has of course also made major contributions to economic development. But this is not to say that all kinds of education have. From an economic standpoint, some education has great value, some has no value and some can even have a negative value.

    “Large numbers of young people with schooling, but without economically meaningful skills, have produced much unemployment in Third World nations. Since the marketplace has little to offer such people that would be commensurate with their expectations, governments have created swollen bureaucracies to hire them, in order to neutralize their potential for political disaffection, civil unrest or insurrection. In turn, these bureaucracies and the voluminous and time-consuming red tape they generate can become obstacles to others who do have the skills and entrepreneurship needed to contribute to the country?s economic advancement.

    “Hostility to entrepreneurial minorities like the Chinese in Southeast Asia or the Lebanese in West Africa has been especially fierce among the newly educated indigenous people, who see their own diplomas and degrees bringing them much less economic reward than the earnings of minority business owners who may have less formal schooling than themselves.

    “In short, more schooling is not automatically more human capital. It can in some cases reduce a country?s ability to use the human capital that it already possesses” (Sowell, 2004: 192-94). [End quote]

    The spirit of enterprise is just as necessary if ideas and knowledge are to be turned into wealth creating businesses, but how do we measure the passion of Steve Jobs to change the world one desktop at a time without the authentication process of the free market to verify the result of his output?

    We can measure the literacy of the population of Cuba, but how do we go about explaining the difference between Cuba?s abject poverty and the wealth of the Cuban immigrant population in Miami, Florida?

    India has been exporting entrepreneurs who have launched successful enterprises in all parts of the world, especially Silicon Valley. According to The Economist, 20 million Indians live abroad, collectively generating an annual income that is 35% of India?s GDP. How do we explain the fact that as of 1994, 36 million overseas Chinese had produced as much wealth as the population in China itself?

    Obviously there is more to creating the knowledge economies of the future than merely subsidizing higher and higher levels of formal education. As George Gilder explained in his seminal work Recapturing the Spirit of Enterprise:

    “Economists see the rise of wealth as incremental gains in productivity, slow accumulation of plant and machinery, and investments in human capital. But, in fact, all these sources of growth are dwarfed by the role of entrepreneurs launching new companies based on new concepts or technologies” (Gilder, 1992: 164). [End quote]

    Human capital is more than just formal education. It is knowledge, experience, judgment, leadership, problem solving ability, motivation, ability to adapt, and wisdom put to use to serve others, the essential expression of wealth. Whether it is embedded in gradual accumulations over time or in the testable hypothesis of launching a new enterprise that creates a whole new industry, human capital is ultimately owned by sentient human beings.

    A dynamic economy allows for all different kinds of knowledge–formal, informal, street-wise, etc.–to be put to the ultimate test of serving others with worthwhile goods and services.

  3. I would agree that formal education is not a marketable product in itself, and attending a repository of higher education does not make you smarter or more valuable. However, higher education can and should be a place to develop a set of tools that are useful and marketable. Unfortunately, students have been filled with the idea that you should do what makes you happy rather than what makes good money.

    The bloated bureaucracies that higher up people who aspire to “public service” are a disservice to the free economy and its proper punishment of useless skills.

    Then is there any social resposibility to encourage education at all as the marketplace should govern the pursuit of adequate education to build one’s needed skillset for useful production? Should K-12 be handed back to the private sector (they would easily do a better job, but we may have issues with access for those who have little means)?

    Our economy has been shifting away from a manufacturing base to a knowledge base for some time now, and it seems that those who are left behind have been standing around with their hands out rather than upgrading their skills. It is not due to a lack of time (as they have plenty of time to complain about the easy good paying job they used to have being outsourced), but rather a lack of motivation or resources.

    Those in government are increasingly reluctant to let the market punish people for bad decisions, forcing a backend burden on the taxpayers that may be better shifted to the front end.

    An ounce of prevention is worth a pound of cure (except for when the government is in charge of the prevention).

  4. Excellent points, Shane. I think the voucher system for K-12 would definitely be superior to the current system. Teachers unions treat the educational system as a job protection program, not what’s best for the students.

    If government has to subsidize education, it should be just that, subsidize education by giving a voucher to the parents, and not particular schools.

    Schools need to be able to fail just like businesses, an essential feedback system that lets society know its resources are being wasted producing things people don’t want, or are not effective.

    I learned long ago that the purpose of an economy is not jobs, it’s to satisfy consumers. The Soviet Union didn’t have unemployment, but had massive underemployment, and a terrible living standard.

    Like Johnny Carson once joked, we could eliminate unemployment tomorrow–just assign a mailbox a security guard.

  5. Shane Eloe says:

    Most people act as if having a job is the only way to be useful and make a living. While it may be the safest, it is far from the only, and definitely not the most lucrative way to make a living. The only reason unemployment matters much to the economy is that it measures people sitting around doing nothing as opposed to doing something.

    With regard to education, the only way to bring adequate responsibility into the system is to eliminate the government’s role in education and let it be market based as most other things. Vouchers are like putting a bandaid on a gash in the femoral artery. It’s better than the current system, but not by much.

    Most privatized education is provided on behalf of religious institutions and not an objective private sector whose only interest is the best education of our nation’s children. Truly privatized education would probably prefer non-union labor and so faces further opposition from those in the current regime.

    Government education is quickly turning into government indoctrination and that indoctrination may be far more harmful than the religious indoctrination at religious schools.

    Further from looking out for the best for students, we need to evaluate what is best for the growth and success of our nation and work to put that system in place. Vocational training earlier on in life may prove to be more valuable to some than 13 years of purely academic (if that’s what you want to call it) education. It’s harder to outsource a mechanic or electrition than it is a factory worker.

  6. Shane Eloe says:

    So long as doing what makes you happy does not turn you into a liability of the state (a burden on the highly motivated and productive people through ‘sharing the wealth’ taxation policies) then I don’t care what you do. However, when you are led to believe that volunteerism with minimal reimbursement for your time or expenses constitutes a legitimate career, then go whining that the system is not fair, I think you need to re-evaluate your priorities before handout seeking.

    “the implications of unrestrained and unregulated capitalism? It just doesn?t work.”

    If by this you mean the housing market meltdown, then you need to go educate yourself on how the housing market has not been a model of unregulated capitalism, but rather government activism to encourage home ownership (whether the consumer is deserving or not).

    If you are referring to bad business decisions made by investment banks and insurance companies, I would say that unregulated capitalism has not failed, but is not being allowed to do its job: eliminate the weak and undeserving from the capital pool. Rather we have now built a huge safety net around risky decision making and will have to regulate further to keep businesses from taking advantage of the safety net by making even riskier decisions.

    If by unregulated capitalism you mean the write of of mortgage backed securities that are deemed to be nearly worthless because they are illiquid, I think we have seen the misapplication of fair value. When the market for these securities dried up, they could have been valued in an alternative fashion, such as expected cash flows, rather than being written down to nothing because of their illiquidity.

  7. Thanks for the comments Joe and Shane.

    I agree with you, Joe, about pursuing happiness, even at the expense of success. But it is precisely capitalist economies that allow such pursuits more easily, since they create more wealth. It’s hard to pursue happiness if you’re starving.

    As for unregulated capitalism, that’s not quite what we have in this country. The heavy foot of regulation is everywhere, including being the culprit for the current crisis. I’d rather be Hong Kong than France. I don’t think education should be dictated by government. I think it should be based on voluntary cooperation. You call it business, I call it liberty.

    And thanks, Shane. I agree with you. It’s actually socialism that is greedy, since people can take without giving, whereas under capitalism, one must give before one can take.

  8. Shane Eloe says:

    “the case that capitalism?s ?survival of the fittest? systems cannot support the social good”

    My only question here is: Why do charities exist? This is evidence that even capitalists have a heart and can be generous with their dollars, but would rather have control over their support of the poor and needy than have that support taxed away involuntarily by the government (and redistributed less efficiently than the charities that must EARN their support).

    “capitalism is often unable to prevent the short-term interests of individuals usurping those of the company.”

    I do not see this as an issue of a failure of capitalism, but a failure of the company to incentivise its employees in a way that encourages them to take the same long-term time horizon that is best for the company. Most compensation packages are more designed to compete for the top talent at the top positions than to ensure there is not a conflict of interest and responsibility between the manager as an individual and the manager as an agent of the company.

    At the end of the day my problem with the French system is that I am an achiever and I would feel like a sucker to waste my efforts in a system that takes the spoils of my efforts and gives it to those that don’t achieve. I would not mind getting more people involved in the work that I do so that I can work a 40 hour week instead of a 50 or 60 hour week, as their is plenty of work to go around and I would appreciate a bit more leisure. However, there seems to be less and less achievers to go around as the incentive to whine and ask for handouts becomes greater and the penalties for achieving increase.

  9. Wow, Joe, an actual Keynesian! A dying breed over here among economists. We are acolytes of Milton Friedman, Friedrich Hayek, Ludwig von Mises, Thomas Sowell, George Gilder, among other Austrians and supply siders.

    I reject your premise completely that capitalism equates to Darwin’s survival of the fittest. Hard to find an economist who believes in that analogy. Nor does it explain how wealth is created.

    The only antidote to poverty, as Adam Smith pointed out in 1776, is the creation of wealth, which was why he wanted to figure out the wealth of nations, not individuals. Capitalism produces wealth while preserving liberty. It also fosters charity, as Shane points out. Greed simply cannot explain why Bill Gates and Warren Buffett (and hundreds before them) are giving away their wealth to help the poor around the world.

    Capitalism also promotes social stability because it is based on private cooperation, not force, as in government redistribution programs. Compassion and charity cannot be compelled. There’s no contradiction between profits and serving the public. As George Gilder points out, profit is an index of altruism.

    You claim France is “vastly superior” to Hong Kong, but given its double-digit, long term unemployment, lack of dynamism and creativity, a welfare state bankrupting the economy, I have my doubts. It’s a lovely place (Paris is one of my favorite cities in the world), but in terms of economics, it’s only comparative advantage is in wine, women and song. It’s irrelevant to the world economy.

    In any event, I’m not sure your premise is correct overall for France. Harris Interactive and Eurobarometer asked citizens of several countries if they agreed with the statement: “On the whole, I am very satisfied with the life I lead.” Americans led with 58% answering yes; Brits 33%; 16% for Italians and 18% for French.

    Capitalism is not about wealth at any cost–again, I reject your premise. It’s about consumer sovereignty. Businesses only succeed if they produce something of value. Again, a capitalist–risk taker–only succeeds by appealing to the self-interest of others. It’s a very outward directed system, whereas socialism is only concerned with what I get. In effect, socialism is the ultimate greedy system.

    You say “relative poverty damages the fabric of society.” Interesting. America is probably the only place where the poor are fat. I’ve heard this social stability argument for the 46 years I’ve lived on this planet, and it simply doesn’t hold up to the evidence.

    Question: If America is such a rotten country, why do the world’s poor flock here? Do they come to be exploited? Are they “unable to think logically about their own interests,” as you said? (A very elitist view, I must say, Joe).
    Lenin said the ultimate vote is with your feet. I don’t see people lined up at French embassies around the world. What does this mean?

    I’m not surprised your the free-market guy in your department, since universities are about the only place you can find a Marxist these days. The only difference between Marxists and scientists is the scientists would have had the humanity to try it out on rats first.

    You at least are incredibly reasonable in your arguments, even though I reject and disagree with them.

    I want to live in liberty and freedom. France is not my model. Nor is Britain, or for that matter the EU.

    But I do agree with you, these discussion are fun.

  10. Thanks Joe, I feel the same way, a pleasure having you part of our community. We probably do “over think” around here.

    I think you make an excellent point about the poverty of starvation vs. the poverty of social and moral order. When I referred to Adam Smith, I was thinking of desperately poor countries like Africa, etc., which I believe need a dose of free markets, private property, non-corrupt government institutions (even us free marketers don’t deny government is needed!), etc.

    But here in the USA, where immigrants can enter and rise up in less than a generation, there is something else that must explain economic deprivation among our native poor. And this is where I think you are quite correct in pointing to cultural and moral issues.

    I also agree about the correlation between income and happiness, to a point. It’s a very difficult thing to measure, relying as it does on what people say rather than what they do (economist’s concept of “revealed preference”). I’ve read a lot of the happiness literature out there, and do think that a marginal diminishing returns sets in at some point, though I don’t think you’d make people here in the USA happier by diminishing their incomes.

    But I struggle on how to apply that limit to a Bill Gates or a Warren Buffet, who seem to me to be quite happy. I guess the answer is in their “purpose,” which is really not to make money for the sake of making money, but to create, build, leave a legacy. The clutching fist is not the symbol of capitalism, as Michael Novak has written.

    I completely agree with your last sentence, which is probably why I am poorer than I should be! But purpose to me is far more important. I just don’t want a government that prevents people from pursuing their definition of happiness anyway they see fit, whether making money or changing the world, or eliminating the billable hour.

    This, to me, is the blessing of the free market–we are free to choose, to borrow a phrase.

  11. Joe O'Mahoney says:

    Yes, I don’t feel our positions are poles apart. Interestingly, Smith himself felt his Theory of Moral Sentiments was the superior book and I do feel that a ‘moral economy’ helps the poor develop the motivation to contribute to the economy.

    On other matters, I’m currently doing a piece of research for the UK government on the challenges of the consulting industry, so found your website really useful. It’s rare to come across such well-thought out and evidenced critical opinion on this topic, so thank you!

    Right, it’s my turn to cook tonight so I should get back to the kitchen…..

    All the best


  12. Joe, I think you’re right about our positions. I’m impressed, most people don’t know about Smith’s lesser known book, which I agree is much better than his second.

    You may enjoy this book on Adam Smith. I picked it up at a bookstore while touring Oxford University. It’s a great primer on Smith, an “academic novel,” so fiction combined with scholarship:

    We here at VeraSage would be very interested in your research. We are committed to helping Professional Service Firms transform into Professional Knowledge Firms. Don’t hesitate to call on us if we can be of any help.

    Bon appetit!

  13. Joe O'Mahoney says:

    Thanks Ron, I’ll order the book – it looks interesting.

    Very kind offer of yours. In fact, whilst the research is based on the UK industry, it would be useful to have the opportunity to disseminate any findings further afield. I’ll send you a copy of the proposal I’m currently crafting.


  14. Wow, I am sorry I missed this whole exchange. Great stuff from each of you.

    One other resource for Joe would be the Acton Institute at

  15. Joe O'Mahoney says:

    Great, thanks a lot Ed. It looks like between the lot of you there’s enough to keep my brain fed for some time…..

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