Looking around the world, there are plainly societies which manage their citizens’ lives well with good rules and societies which manage their citizens’ lives badly with bad rules. Good rules reward exchange and specialization; bad rules reward confiscation and politicking. South and North Korea spring to mind. One is generally a fair and free place, where people are mostly becoming more rich and happy; the other an arbitrary, hungry and cruel place whence people are fleeing as desperate refugees whenever they can. The difference – which results in fifteen times as much prosperity per head for the South – is plainly in the way they are ruled, in their institutions.
A few years ago the World Bank published a study of ‘intangible wealth’ – trying to measure the value o f education, the rule of law and other such nebulous things. It simply added up the natural capital (resources, land) and produced capital (tools, property) and measured what was left over to explain each country’s per capita income. It concluded that Americans
can draw upon more than ten times as much intangible capital as Mexicans, which explains why a Mexican who crosses the border can quadruple his productivity almost immediately.
He has access to smoother institutions, clearer rules, better educated customers, simpler forms – that sort o f thing. ‘Rich countries,’ concluded the Bank, ‘are largely rich because of the skills of their populations and the quality of the institutions supporting economic activity.’ In some countries, intangible capital may be minute or even negative. Nigeria, for example, scores so low on the rule of law, education and the probity of its public institutions that even its immense oil reserves have failed to enrich it.