Wealth Creation in Modern Societies

How is wealth created in societies? During a long time, economists gave the simple answer that capital, labor and natural resources were the three cornerstones of economic activity. The level of prosperity could thus be increased by working more hours, investing in more manufacturing equipment and processing more natural resources. The management consultant and author Peter Drucker, whose ideas have had major influence on the current understanding of modern enterprises, challenged this simplistic perspective already during the late 1960s. Drucker observed that many leading firms relied on the knowledge that existed amongst its employees and within the organization. Knowledge was the forgotten cornerstone that was needed to succeed.

“Knowledge is the main driver of today’s global economy”
Angel Gurría, Secretary-General of the OECD

The theory of the knowledge-based economy, based on Druckers observation, has with time gained strong support in research. As an example, at the end of the 1990s Peter Klenow and Andrés Rodríguez-Clare explored why wealth was created more rapidly in some countries than others. It was shown that the traditionally accepted theory about capital, labor and natural resources had limited ability to explain the development. The two economists found that 90 per cent of the variation of growth could be explained by how efficiently investments were being used, rather than the size of the investments.

Later studies have confirmed the link between innovation and growth: a combination of technical innovations, new ways of organizing work processes, organizational changes and innovative services are driving long-term development. Angel Gurría, secretary-General of the Organisation for Economic Co-operation and Development (OECD), has summarized this insight by explaining: “Knowledge is the main driver of today’s global economy”.

The evolution of the knowledge based society has concurred with a development in which the economy in greater degree is based on immaterial, rather than physical, value creation. A significant share of the value created in modern industries and service sectors is immaterial in its nature. Examples of immaterial value creation are new business ideas, inventions and digital content. Much like patents, design rights and trademarks these values do not take the shape of physical goods. Rather they are the result of investments in various forms of organized knowledge. Within film, music and computer game development nearly all of value creation occurs through immaterial values, since the result of the work is digital rather than physical content.

The evolution of the knowledge based society has concurred with a development in which the economy in greater degree is based on immaterial, rather than physical, value creation.

As our report discusses, immaterial value creation is however not restricted to limited parts of the economy. In modern knowledge based economies, such as the member states of the European Union, immaterial value creation is important for many businesses. For example, businesses in various field find it useful to invest in building up reputation through a trademark and a well-designed webpage. While nearly all businesses to some degree rely on immaterial values, an increasing share are strongly dependent on them. Enterprises that rely on new technologies, advanced design, digital content, service innovations and other immaterial assets often gain a competitive edge. By relying on this form of high-end value creation, businesses in countries with higher wages can compete with low-cost competitors in countries with lower wages.

The fact that modern economies are increasingly focused on immaterial value creation has many benefits. Ideas travel faster over the borders and can more easily be scaled up. There are environmental benefits with a growth model which is not necessarily about manufacturing more products, but rather focused on smart solutions and immaterial content. The transition towards this new mode of economic activity has gradually been going on since early industrialism, and seems to have picked up pace recently.

How does growth occur?

Graph 3