Failure to Understand Value
A third explanation for humanity’s history of rotten economic performance may be failure to understand value. Modern economic theory has conclusively shown that value cannot be created when the returns of economic endeavor fail to exceed the cost of capital. This knowledge has been derived from efficient capital markets linked by rapid communications. Under these circumstances, the cost of capital is usually measurable, and economic anomalies are quickly identified and arbitraged.
The rule applies equally to modern corporations and ancient kingdoms. It is interesting to reflect that if mastery of these rules is difficult for businesses and investors equipped with thousands of accountants, mainframe computers, and mathematiciansfor-hire, with the clarity of knowing that money is the goal, how difficult it is to run an organization, say an empire, where money is only one goal. For in the end, if an empire is not an economic success, it will fall as surely as if it were militarily weak.