What drives economic growth?
250 years ago, wealth came from the soil. Economies were driven by agriculture. In The Wealth of Nations when Adam Smith explains the advantages of free trade he illustrates the point with an agricultural example, noting it’s better for everyone to trade Scottish wool for Portuguese wine, than for Scots to use greenhouses and mirrors to make their own wine.
A century later wealth came from industry. Railroads crossed the country, connecting mines and mills and markets. Titans like Rockefeller and Vanderbilt and Leland Stanford endowed universities to perpetuate their legacies, and the money to do this came from their oil, steel, and railroad enterprises. Karl Marx argued in Das Kapital that their fortunes really belonged to the workers that labored in the factories, rather than to the factory owners.
After World War II, information drove the economy. IBM and Intel figured out how to process more information more quickly. Companies can’t function any more without computers to process their purchasing, production, and payrolls. By learning how to process information, technology entrepreneurs like Bill Gates and Larry Ellison become some of the wealthiest people in history.
Today, however, wealth seems to come from ideas. The iPhone isn’t just a phone, it’s the idea of having a globally-connected computer in our pockets. World-class universities are crucial to economies now because they encourage people to originate and develop new concepts and creations. But who owns these ideas?
Almost 100 years ago Universal Studios hired Walt Disney to create a new form of entertainment—the animated funny animal film. He developed a new character, Oswald the Lucky Rabbit, which became a major hit. In 1928 Universal tried to cut Disney’s pay by 20%. An economic downturn was coming, they thought, and they “owned” Oswald. Disney would have no choice, they thought. But Disney did. He quit. The next year he introduced Mickey Mouse. And after that, Disney Studios came out with the first animated feature film, Snow White.
The famous “Heigh-Ho” sequence from Snow White. Source: Wikipedia
Who owns an idea isn’t nearly as important as the ability to create an idea. Disney Studios now goes to great lengths to protect the intellectual property of its characters. But their value pales in comparison to what has been created by other authors, later—Luke Skywalker, Vito Corleone, Scarlet O’Hara. And authorship isn’t limited to literature. You could say that Steve Jobs “authored” the iPhone, that Bill Rasmussen “authored” ESPN, that Ben Graham “authored” value investing. While there are legal rights to the creations (and their associated cash flow), no one owns the creators.
For our economy, today, it’s creators who generate value. The people who really shape an economy are the ones who can change what an economy makes.
Douglas R. Tengdin, CFA
Chief Investment Officer