HONG KONG (Reuters Breakingviews) - The modern economy is an intangible economy. In “Capitalism without Capital”, economics professor Jonathan Haskel and policy advisor Stian Westlake deliver an important and thought-provoking account of why this matters. They show how current policies are inadequate to tackle emerging social and economic challenges. But the book falls short of addressing the pressing issue of how to rein in dominant tech companies like Facebook and Google.
Companies have always invested in hard-to-grasp items like research and development, design and human talent. Computers and the internet have brought spending on software and systems. The big shift is how important these factors have become for modern economies. Since the start of the 21st century, intangible investments have overtaken tangible ones in developed countries including the United States and United Kingdom.
To illustrate this phenomenon consider Apple, the world’s largest company by market capitalisation. Traditional assets such as plant and equipment account for just 9 percent of the assets on its balance sheet and a mere 4 percent of its $880 billion market value. Rivals Alphabet and Microsoft also have very little in the way of physical assets. What makes these companies valuable are factors not captured by conventional accounting, like Apple’s premium brand and supply-chain prowess.
Haskel and Westlake draw on numerous examples and economic research to bolster their arguments on how the rise of intangibles has impacted businesses, societies, labour and financial markets. Their thesis is that intangible assets have fundamentally different characteristics from physical ones. The authors call these the “four S’s”: they are scalable, have sunk costs, their benefits spill over, and they have synergies with other intangibles.
This framework leads to a thought-provoking analysis of two complex issues faced by many developed countries: the fall in investment and productivity growth in major economies – often summarised as the “secular stagnation” hypothesis – and rising wealth inequality. The growing importance of intangible assets, the authors argue, helps explain persistent low productivity and even the rise of populist political movements.
First, innovative ideas can be used and re-used in multiple places at the same time. This scalability has allowed a relatively small number of dominant firms to emerge. Companies like Facebook can build up massive user bases, making it prohibitively expensive for anyone else to compete in what become winner-takes-all markets. The remaining laggards have even less incentive to invest as the profit gap widens.
The authors rightly acknowledge that intangible investments also encourage rent-seeking practices such as patent trolling and tax avoidance. These “do no good for the economy ... but instead are about slicing the existing economic pie to the exclusive benefit of the intangible investor.” This is a particularly timely issue, given the growing backlash against big pharmaceutical groups as well as companies like Uber, which stands accused of circumventing existing regulations. The immense influence and dominance of Facebook and Google have also come under fierce scrutiny.
Second, the synergies and benefit spillovers from intangible investments mean densely-populated cities are more likely to attract top talent and companies. That in turn pushes up the value of urban real estate, which makes up a significant share of new wealth for the very rich. More speculatively, the authors suggest the people who benefit from the intangible economy tend to be more open to new ideas. Though it’s overly simplistic to attribute widening social and economic divisions to this development, the book offers a nuanced and fresh way to understand economic winners and losers.
What can governments do? The book offers some sensible if at times clichéd policy prescriptions. Governments should improve and clarify protection for intellectual property rights, adopt effective urban planning policies, and provide tax breaks and other incentives to encourage financial markets to invest in and lend more to businesses.
Haskel and Westlake’s suggestions for tackling inequality are more disappointing. To be fair, the authors admit they do not have the solution. Yet they half-heartedly suggest that policymakers should “encourage trust and strong institutions, encourage opportunity, mitigate divisive social conflict, and prevent powerful firms from indulging in rent seeking.” The question of whether governments can or should do more to curb the power of dominant tech companies is left unanswered.
There is no simple answer to how governments should respond to the challenges raised in this book. What’s clear, though, is that the current approach is not fit for an increasingly intangible world.
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