What's the economic engine of the 21st Century? It's not exploitation of natural resources – which, according to one recent report, accounts for only 5% of our nation's wealth. It's not factory-style production – that's only another 18%. It's "intangible capital" – our education, our system of laws that creates a predictable society, ingenuity, and the ability to convert ingenuity into tangible products. These represent more than three-quarters of our nation's wealth.

The United States is being broken up economically by "The Big Sort" – a sorting of states and metropolitan areas into economic winners and losers. The losers are the ones that exploit natural resources or manufacture products. The winners are the ones with lots of intangible capital.

But are farming, mining, and manufacturing states and towns destined for the dustbin? Not necessarily – if they can find a way to capture wealth from these activities when and where it's created and put it to long-term use locally.

Part of the reason that California is a wealthy state is that we've been doing this consistently here for a century and a half. Wealth from the Gold Rush was plowed into the transcontinental railroad, which created more wealth, which endowed Stanford University, which in turn spawned Silicon Valley, which has generated vast amounts of investment capital and philanthropic wealth that is stimulating the next generation of economic growth.

The flip side of this approach is what might be called the "colonial" strategy. Investors in the centers of finance put money into natural resources and production in other parts of the world, but then remove the wealth and take it back to the financial center. This is one of the reasons that London is rich and Africa is poor. In America's Big Sort today, the winners are London – rich with capital -- and the losers are Africa – bereft not only of jobs but, more important, without wealth either.

For the losers in the Big Sort, the solution – if there is one – lies in strengthening the place-based institutions such as universities, hospitals, and other institutions that can't easily leave. These are the institutions that will create the intangible capital of the future through research breakthroughs, and they can also serve as the recipients of philanthropic wealth. In this way, even the Big Sort losers can focus on creating enough wealth so that they are Silicon Valley in a small way, rather than Africa in a big way.

-- William Fulton

To read a longer article in Governing magazine by William Fulton on this topic, click here.