Saturday 19 January 2013

Cognitive Capitalism

Economists often regard real human beings as a distraction in their theoretical models and prefer to deal with abstract, rational, equal-ability worker units instead. This certainly makes it easier to say that wealth grows out of the soil, either from the surface in terms of harvests, or a bit deeper down in the case of iron ore, coal and other natural resources. In this rather odd world picture, human beings are pretty much the same, but some have the good fortune to have fallen on rich soil, and others on stony ground.

Geography probably influences how economies get started, but whether they flourish depends on people, and how they solve problems of production and social organisation. The observation that people are different makes some theorists awkward. They are willing to concede that soils differ, but not that seeds differ. In their own lives they can plainly see that individuals differ in mental ability and application, but think it rude to mention it. In factual terms, even if we restrict ourselves to that smallest of economic groups, the family, by age 35 the brighter of the siblings earns more than the less bright sibling, and as a general rule by that age each extra IQ point results in another $810 in salary per year. Siblings in families are in the same social class, have very similar upbringings and similar advantages, so the dollar consequences of IQ differences cannot be attributed to the usual suspects: the social soil in which they were raised. People and their abilities and characters make a difference.

All problem-solving requires natural wit, and the degree to which people can exercise that wit has a causal effect on national wealth. Everyday life presents a succession of problems which require solution, and working life presents even harder problems, because many of the dilemmas are new, and require invention. Over a working life people have to learn new skills, and then abandon those skills in favour of even newer skills, without any guarantee of success. Equally, businesses have to form new combinations and new client relationships. Nations have to decide on employment law, the protection of patents, the general quality of national life and social progress, and everything which relates to the management of innovation and discovery. Nations can blossom or stagnate according to the decisions their elites make.

As a consequence, the actual intellectual level of the brightest 5 per cent of society makes an extra contribution. For example, while each IQ point increase in national ability increases GDP by $229, every extra IQ increase in the brightest 5% of the nation increases GDP by $468. If the elite make sensible and far-sighted decisions then everyone prospers, if they are unable to formulate and implement intelligent decisions then economies wither.

The cleverest cognitive elites make their peoples richer and their societies more agreeable to live in, which of itself can boost intelligence. Cognitive capitalism encapsulates this insight: smart people matter, and good ideas are the ultimate capital.

Cognitive Capitalism: The Effect of Cognitive Ability on Wealth, as Mediated Through Scientific Achievement and Economic Freedom. Heiner Rindermann and James Thompson (2011) Psychological Science 22(6) 754 –763, 2011. 


  1. If natural resources and geographical location determined everything about an economy then Japan should have been a rather poor place throughout history. However it has generally been among the more prosperous countries over the last 1500 years. Living standards in Western Europe did not exceed the level in Japan until the end of the eighteenth century.

    The average IQ of the Japanese population is 107 vs. a world average about 90. Yet few economists would consider this factor in trying to understand the differences in GDP per capita between say Japan and Brazil, the latter a country with abundant natural resources.

    Economists would instead talk of institutions. So if Brazil had had an Emperor God and a Shinto priesthood it would have been just as economically successful as Japan.

    1. Yes good points. Singapore another marshy example.