Capitalism without Capital is the title of an intriguing new book from Jonathan Haskel and Stian Westlake. The book documents the rise of an economy where more and more value resides in intangibles rather than tangibles (note: intangibles doesn’t necessarily just mean digital products and services – it can also mean things like branding, design, and business processes). This isn’t the first time someone has made this observation – Charles Leadbetter’s Living on Thin Air comes to mind – but it is the first time to my knowledge anyone has taken a good run at the macro-economic effects of a less tangible economy.
The authors sum up the properties of intangible assets in terms of four “S”s: they are more scalable than tangible assets (you only need to develop software once – people can download it as many times as they like); they are more likely to represent sunk costs (if your bus company goes bust, you can sell the buses; if your app development company goes the likelihood is there’s nothing much to sell), they are more likely to involve spillovers or externalities (i.e. the person developing the good is less likely to be able to capture full value) and they exhibit synergies with each other and also with tangible assets.
From this they show that a lot of the mysterious problems that seem to ail the modern economy in fact follow fairly normally from an economy based on intangible assets. The big problem in most developed economies since the recession – the lack of business investment despite historically low interest rates – follows from the fact that spillovers and sunk costs make it harder than ever to reliably profit from investments. The there is the problem of wage inequality, a fair amount of the increasingly inequality of wages turns out to be driven by divergence in wages within sectors, which in turn tends to be driven by technology adoption. To put it bluntly, there are a few big companies which are in fact able to invest successfully – often because they are able to make synergies between products and ideas happen in ways smaller companies cannot – that are finding it easy to make ever-increasing profits and pay ever-increasing wages because they can take advantage of scalability.
Now, from this, the authors make a bunch of policy recommendations, which honestly are not nearly as interesting as the rest of the book. One of them, considering the importance of spillovers, is to increase R & D spending (see here for a quick primer on spillovers and R & D). Increasing R & D spending is relatively uncontroversial, but I think they are pulling their punches here. There are a couple of obvious places where this R & D needs to be concentrated.
The first emerges from their observations around the role of business processes in the new economy. These represent an increasingly large source of profits, particularly among larger companies, who seem to have been able to take much larger steps to re-organize work around technology than small and medium companies. If competitiveness is increasingly about business processes, then it seems relatively uncontroversial to point out that more research into business processes – as well as better training therein – might be advantageous. Yet as I pointed out back here, business schools remain a curiously overlooked point of potential investment in Canada.
The second has to do with the authors’ observation that the synergistic nature of intangible assets is putting a premium on soft skills. (Interestingly, Harvard’s David Deming has been hard at work quantifying this effect of late.) It’s not that technical skills are becoming less valuable; rather, it means that individuals with specific combinations of soft and technical skills are becoming more valuable. Conceivably, this means more Arts content in STEM programs, but presumably there would also be significant returns to actually working out how best to impart soft skills (as opposed to winging it and trusting to causally dubious statements about the value of the humanities). A country that actually had some kind of competitive advantage in soft skills would be formidable.
In short – the obvious play for the intangible economy is a big investment in things like ICT. But conceivably the smart play for economic growth – the original play, the unique play – is an investment in social science. Either way: pick up this book. It’s an important read.