If wealth is so important, what makes a country rich? The most proximate cause is that wealthy countries have lots of physical and human capital per worker and they produce things in a relatively efficient manner, using the latest technological knowledge. But why do some countries have more physical and human capital and why is it organized well using the latest technological knowledge? In a word, incentives, which of course brings us back to Big Idea One.

Entrepreneurs, investors, and savers need incentives to save and invest in physical capital, human capital, innovation, and efficient organization. Among the most powerful institutions for supporting good incentives are property rights, political stability, honest government, a dependable legal system, and competitive and open markets.

Consider South and North Korea. South Korea has a per capita income more than 10 times greater than its immediate neighbor, North Korea. South Korea is a modern, developed economy but in North Korea people still starve or can go for months without eating meat. And yet both countries were equally poor in 1950 and, of course, the two countries share the same language and cultural and historical background. What differs is their economic systems and the incentives at work.

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Macroeconomists are especially interested in the incentives to produce new ideas. If the world never had any new ideas, the standard of living would eventually stagnate. But entrepreneurs draw on new ideas to create new products like iPhones, new pharmaceuticals, self-driving cars, and many other innovations. Just about any device you use in daily life is based on a multitude of ideas and discoveries, the lifeblood of economic growth. New ideas, of course, require incentives and that means an active scientific community and the freedom and incentive to put new ideas into action. Ideas also have peculiar properties. One apple feeds one person but one idea can feed the world. Ideas, in other words, aren’t used up when they are used and that has tremendous implications for understanding the benefits of trade, the future of economic growth, and many other topics.