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.