0.5 Perspectives on the role of capital in development: physical

Adam Smith published what was to become the “handbook” for capitalism in 1776: The Wealth of Nations . Since then, economists have continued to ask how we measure the wealth of nations.

For several decades, economists and policy-makers, and just about everyone else, have used GDP (Gross Domestic Product) as a measure of a nation’s wealth. But GDP is a number generated by national income accounting exercises, and is really a measure of annual income not the stock of a nation’s wealth.

Much better options have been recently developed including one developed in 2012 by Partha Dasqupta at Cambridge University. His work focuses on national wealth in 20 nations: 17 developed nations and 3 emerging nations. This type of study will eventually be extended to a more than 100 emerging nations.

In this course we speak of four types of capital, Dasgupta identifies 3 types of assets that constitute wealth. Together, these 3 are called “comprehensive wealth”, or “inclusive wealth”. They are:

1. Physical capital
2. Human capital
3. Natural capital

However, Dasgupta does not attempt to measure intangible capital (wealth) assets discussed in chapter___. These include wealth implicit in institutions prevailing in a given nation.

Definitions:

Physical Capital : (Machinery, computers, physical infrastructure including roads, harbors, bridges etc.). Physical capital is often called “produced” capital. China increased its physical capital by an almost incredible 540% from 1980 to 2008.

Human Capital : Education and skills imbedded in nations people. Human capital formation also includes longer and better lives made possible by public health programs, in disease prevention and treatment. We will see soon that not only the stock of human capital is the primary determinant of technological change. In several nations the size of the human capital stock is much greater than the stock of physical capital.

Natural Capital : Nature’s endowment of fossil fuels, minerals, fresh water fisheries and forests. Forests include pristine forests, improved forests, as well as forests degraded by humans.

Table 5-1 depicts a balance-sheet measure of wealth for some of the nations included in Dasgupta’s study. As measured, the stock of wealth in the U.S. in 2003 was nearly $118 trillion, (in 2000 prices). Emerging nations Brazil and India had wealth of $7.4 trillion and $6.2 trillion.

[link] shows comprehensive wealth per capita . The U.S. had the highest accumulation of comprehensive wealth (see [link] ). But total or comprehensive wealth per person was highest in Japan. There it is also evident that for developed countries included in [link] , wealth from human capital far exceeds wealth from all other sources. But in Saudi Arabia and Venezuela, natural capital dominates.