Introduction
For centuries, our economy has been built on tangible assets - things we can see, touch, and count. From the days of William the Conqueror assessing his kingdom's wealth by counting pigs and cows, to the industrial revolution's focus on factories and machinery, physical capital has been at the heart of economic growth and value creation. But in recent decades, a profound shift has been taking place. Increasingly, the most valuable assets in our economy are intangible - things we can neither see nor touch, but which nonetheless drive enormous value.
Jonathan Haskel's "Capitalism Without Capital" explores this seismic change in the nature of our economy and its far-reaching implications. The book delves into how the rise of intangible assets is transforming businesses, reshaping entire industries, and presenting new challenges for policymakers, investors, and society at large. By understanding this shift, we can better navigate the opportunities and risks of our evolving economic landscape.
The Shift to Intangible Assets
The Supermarket Revolution
To understand how profoundly our economy has changed, consider the humble supermarket. At first glance, today's supermarkets might not look all that different from those of the 1970s. You'd still see aisles lined with shelves, freezers full of frozen goods, and checkout counters at the front. But beneath this familiar surface, a revolution has taken place.
The introduction of barcodes, for instance, has transformed how supermarkets operate. Far more than just speeding up the checkout process, barcodes have enabled sophisticated inventory management systems, data-driven pricing strategies, and complex promotional campaigns. Supermarkets have invested heavily in branding, marketing, and customer loyalty programs - all intangible assets that drive their success far more than any physical infrastructure.
The Rise of Intangible-Heavy Companies
This shift is even more apparent when we look at today's most valuable companies. When Microsoft became the world's most valuable company in 2006, with a market capitalization of $250 billion, its physical assets accounted for a mere $3 billion - just 1% of its total value. The vast majority of Microsoft's worth came from intangible assets like software, intellectual property, and organizational systems.
This pattern repeats across the tech industry and beyond. Companies like Apple, Google, and Amazon derive most of their value not from factories or equipment, but from their software, algorithms, brands, and unique organizational capabilities. Even traditional industries are becoming more intangible-intensive, with companies investing heavily in research and development, design, and process improvements.
Measuring the Intangible Economy
Recognizing and measuring this shift has been a challenge for economists and statisticians. Traditional economic measures like GDP were designed in an era dominated by physical capital and have struggled to capture the value of intangible investments. It wasn't until 1999 that the United States began counting software development as an investment in official economic statistics, for instance.
Despite these challenges, economists have been able to reconstruct historical data on intangible investments. Their findings show a clear trend: in the United States, investment in intangible assets overtook investment in physical assets in the mid-1990s. The UK followed suit in the late 1990s. While the picture varies across different countries, the overall direction is clear - developed economies are increasingly built on intangible capital.
The Unique Characteristics of Intangible Assets
The rise of intangible assets is more than just a shift in where companies invest their money. Intangible assets have fundamentally different characteristics from physical assets, and these differences are reshaping how businesses operate and how our economy functions. Let's explore some of these key characteristics:
Scalability
One of the most significant features of intangible assets is their scalability. Physical assets typically have clear capacity limits - a factory can only produce so many widgets per day, a truck can only carry so much cargo. But intangible assets can often be used over and over again with little additional cost.
Consider Starbucks. While its coffee machines are important, the company's real value lies in intangible assets like its brand, its operating procedures, and its organizational know-how. Once Starbucks develops these assets, it can deploy them across thousands of stores worldwide at minimal additional cost. This scalability allows intangible-intensive businesses to grow rapidly and achieve enormous scale.
The tech industry provides even more dramatic examples of scalability. The developers of Angry Birds invested heavily in creating the game, but once it was complete, they could sell billions of copies with almost no additional cost. Similarly, streaming services like Spotify can deliver the same song to millions of listeners simultaneously, something that would have been impossible in the era of physical records or CDs.
This scalability has profound implications. It allows some businesses to grow incredibly large very quickly. It also tends to create "winner-take-all" markets, where the company with the best scalable assets can dominate an entire industry. This helps explain the rise of tech giants like Google, Facebook, and Amazon.
Sunkenness
Another key characteristic of intangible assets is what economists call "sunkenness." This means that the costs of creating these assets are often irrecoverable. If a company invests in a new factory and things don't work out, it can usually sell the factory and recover some of its investment. But if a company invests heavily in research and development or brand building, and the resulting products or marketing campaigns fail, that money is essentially lost.
This sunkenness makes investing in intangibles inherently riskier. It also creates challenges for financing intangible-intensive businesses. Banks are often reluctant to lend against intangible assets because they can't easily seize and sell these assets if the borrower defaults. This can make it harder for companies focused on intangibles to secure funding, potentially leading to underinvestment in these crucial areas.
The sunk nature of intangible investments also has implications for economic stability. When a bubble bursts in a tangible-heavy economy, affected businesses can usually sell off assets at a discount, allowing for some value recovery. But in an intangible-heavy economy, a bursting bubble might lead to more severe crashes, as failed businesses have few recoverable assets to sell off.
Spillovers
Intangible assets are also prone to what economists call spillovers - benefits that accrue to parties other than the original investor. When a company develops a new technology or business process, it's often difficult to keep that knowledge entirely secret. Employees move between companies, taking their knowledge with them. Competitors can observe and imitate successful strategies.
Sometimes these spillovers are relatively straightforward. When Apple introduced the iPhone, other smartphone manufacturers quickly adopted many of its innovations. But spillovers can also be more subtle and far-reaching. The development of the smartphone, for instance, enabled the creation of entire new industries around mobile apps and services.
Spillovers create both challenges and opportunities. For individual companies, they can be frustrating - why invest heavily in developing new ideas if competitors can easily benefit from your work? This concern can lead to underinvestment in research and development. On the other hand, spillovers can drive broader economic growth and innovation. When ideas and knowledge flow freely, they can combine in unexpected ways, leading to new breakthroughs.
Managing spillovers is a key challenge in an intangible economy. It requires robust intellectual property laws to protect innovators, but also mechanisms to encourage the beneficial spread of knowledge. Companies need to be adept at both protecting their own intangible assets and capitalizing on spillovers from others.
Synergies
While spillovers can be seen as a negative side effect of intangible investment, synergies represent a more positive aspect. Intangible assets often become more valuable when combined with other assets or ideas, creating new innovations or efficiencies.
The development of the microwave oven provides a classic example of synergy. The core technology - using microwaves to heat food - was discovered accidentally by engineers working on radar systems. But it took the combination of this technology with expertise in household appliances to create a product that consumers actually wanted. The fusion of different types of knowledge and expertise led to a transformative innovation.
In the modern economy, we see synergies at work in companies like Uber. The idea of connecting drivers with passengers isn't new, but by combining this concept with smartphone technology, GPS, and sophisticated algorithms, Uber created a service that transformed urban transportation.
The potential for synergies in an intangible economy has important implications. It encourages collaboration and the cross-pollination of ideas. It also helps explain why innovation tends to cluster in certain geographic areas - when many intangible-intensive businesses are located near each other, it's easier for ideas to combine in unexpected and valuable ways.
The Impact on Businesses and the Economy
The unique characteristics of intangible assets are reshaping how businesses operate and how our economy functions. Let's explore some of these impacts:
Rapid Growth and Industry Concentration
The scalability of intangible assets allows some businesses to grow at unprecedented rates. Companies like Facebook, Google, and Amazon have achieved enormous scale in a fraction of the time it took traditional companies to reach similar levels of dominance. This rapid growth can bring benefits in terms of efficiency and innovation, but it also raises concerns about market concentration and the power of large tech companies.
In many intangible-intensive industries, we're seeing a trend towards "winner-take-all" or "winner-take-most" markets. Once a company establishes a dominant position based on superior intangible assets - whether that's a more efficient algorithm, a stronger brand, or a larger network of users - it can be very difficult for competitors to catch up. This can lead to increased industry concentration and potentially reduce competition.
Changes in Investment Patterns
The sunk nature of intangible investments is changing how businesses approach investment decisions. Investing in intangibles is inherently riskier because these investments are harder to recover if things go wrong. This can lead to a more cautious approach to investment, particularly in uncertain economic times.
At the same time, the potential for large returns from successful intangible investments can encourage a "go big or go home" mentality, particularly in sectors like tech and biotech. This can lead to a more polarized investment landscape, with some companies making huge bets on intangible assets while others remain more conservative.
New Financing Challenges
The rise of intangible assets is also creating challenges for traditional financing models. Banks and other lenders are often hesitant to lend against intangible assets because they're difficult to value and can't be easily seized and sold if a borrower defaults. This can make it harder for intangible-intensive businesses to secure funding, particularly in their early stages.
This financing gap has led to the rise of alternative funding sources, such as venture capital, which are more comfortable with the risks and potential rewards of intangible investments. It's also driving innovation in financial products and practices, such as intellectual property-backed lending.
Increased Importance of Networks and Ecosystems
In an intangible economy, the ability to manage spillovers and create synergies becomes crucial. This is leading many companies to place increased emphasis on building and maintaining networks and ecosystems. Rather than trying to do everything in-house, successful companies are often those that can effectively collaborate with partners, tap into external sources of innovation, and create platforms that others can build upon.
This shift is visible in the strategies of many tech giants. Companies like Apple and Google have created vast ecosystems around their products, encouraging third-party developers to create apps and services that enhance the value of their platforms. Even in more traditional industries, we're seeing increased emphasis on open innovation and collaboration.
New Measures of Value
The rise of intangible assets is challenging traditional methods of valuing companies and measuring economic activity. Financial statements and conventional accounting practices, designed for a world of physical assets, often struggle to capture the true value of intangible-intensive businesses. This can lead to mismatches between a company's book value and its market value, and can make it harder for investors to accurately assess companies.
Similarly, traditional economic measures like GDP may not fully capture the value created by intangible investments. This is leading economists and policymakers to explore new ways of measuring economic activity and value creation in an intangible economy.
Societal Implications
The shift towards an intangible economy isn't just changing how businesses operate - it's having profound effects on our broader society. Let's explore some of these impacts:
Rising Inequality
One of the most significant and concerning impacts of the intangible economy is its potential to exacerbate economic inequality. This happens through several mechanisms:
Skill-biased technological change: Intangible-intensive businesses often require workers with high levels of cognitive and social skills. These jobs tend to be well-paid, while many lower-skill jobs are being automated or devalued. This contributes to a growing wage gap between high-skill and low-skill workers.
Scalability and winner-take-all markets: The scalable nature of intangible assets allows successful companies to grow enormously, generating huge wealth for their founders, top employees, and investors. This concentrates wealth in the hands of a relatively small group of people.
Geographic concentration: Intangible-intensive industries tend to cluster in certain areas (think Silicon Valley), driving up property values in these locations. This contributes to wealth inequality as property owners in these areas see their assets appreciate rapidly.
Financing advantages: Those with existing wealth are often better positioned to invest in risky but potentially high-reward intangible ventures, allowing them to capture a larger share of the returns from the intangible economy.
These factors combine to create a situation where the benefits of the intangible economy are not evenly distributed, potentially leading to increased social and economic divisions.
Changes in the Nature of Work
The intangible economy is reshaping the nature of work in fundamental ways:
Skill requirements: There's an increasing premium on cognitive, social, and creative skills that complement intangible assets. This is driving demand for higher education and continuous learning.
Job instability: The fast-paced nature of the intangible economy, where innovations can quickly make existing skills obsolete, can lead to greater job instability and the need for workers to constantly update their skills.
New work arrangements: The intangible economy is facilitating new forms of work, such as remote work, gig economy jobs, and project-based employment. While these can offer flexibility, they also often come with less job security and fewer benefits.
Automation: As more routine tasks are automated, there's a shift towards jobs that involve complex problem-solving, creativity, and interpersonal skills - areas where humans still have an advantage over machines.
Challenges for Education Systems
The rise of the intangible economy presents significant challenges for education systems:
Rapidly changing skill requirements: Education systems need to prepare students for a world where the specific skills needed in the job market may change rapidly. This puts a premium on teaching adaptability and learning how to learn.
Emphasis on creativity and social skills: While traditional education often focuses on knowledge acquisition, the intangible economy requires greater emphasis on creativity, critical thinking, and social skills.
Lifelong learning: With the pace of change in the intangible economy, education can no longer be something that ends in one's early twenties. There's a growing need for systems that support lifelong learning and regular skill updates.
Interdisciplinary approaches: Many innovations in the intangible economy come from combining ideas from different fields. This suggests a need for more interdisciplinary approaches in education.
Intellectual Property Challenges
As intangible assets become more central to our economy, issues around intellectual property (IP) become increasingly important and complex:
Patent systems: Current patent systems, designed primarily for physical inventions, may not be well-suited to protecting and encouraging innovation in areas like software or business methods.
Copyright in the digital age: Digital technologies make it easier than ever to copy and distribute creative works, challenging traditional copyright models.
Trade secrets: With the value of many businesses tied up in intangible knowledge, there's increased emphasis on protecting trade secrets, which can conflict with the desire for knowledge spillovers that drive broader innovation.
International IP disputes: As intangible assets become more important, disputes over IP are becoming a major issue in international trade relations, as seen in ongoing tensions between the US and China.
Urban Development and Geographic Inequality
The tendency for intangible-intensive industries to cluster in certain areas is reshaping our cities and contributing to geographic inequality:
Superstar cities: Cities that attract intangible-intensive industries are seeing rapid growth in high-paying jobs and property values, while other areas may stagnate.
Urban planning challenges: The concentration of intangible-intensive industries in cities is creating new challenges for urban planners, from housing affordability crises to infrastructure strains.
Rural-urban divide: As economic activity concentrates in certain urban areas, many rural and smaller urban areas are being left behind, exacerbating political and social divisions.
Policy Implications
The rise of the intangible economy presents numerous challenges for policymakers. Here are some key areas where new approaches may be needed:
Investment Promotion
Given the tendency towards underinvestment in intangibles due to spillover effects, governments may need to take a more active role in promoting investment in areas like research and development:
Increased public funding for R&D: Government investment in basic research can help fill the gap left by private sector underinvestment.
Tax incentives: Governments can use the tax system to encourage private sector investment in intangibles, such as R&D tax credits.
Patent box regimes: Some countries have introduced "patent box" tax regimes that offer lower tax rates on income derived from patents and other IP, to encourage innovation.
Education and Skills Policy
To prepare workers for the intangible economy, education and skills policies may need to evolve:
Emphasis on adaptability: Education systems should focus on teaching students how to learn and adapt, rather than just imparting specific knowledge.
STEM education: While not neglecting other areas, there's a need to encourage more students to pursue science, technology, engineering, and mathematics (STEM) fields.
Adult education and retraining: Governments may need to invest more in adult education and retraining programs to help workers adapt to changing skill requirements.
Competition Policy
Traditional competition policies may need to be rethought in light of the winner-take-all dynamics often seen in intangible-intensive industries:
Network effects: Regulators need to consider how network effects in digital platforms can lead to market dominance.
Data as a competitive advantage: Policies may need to address how control over large amounts of data can create barriers to entry for new competitors.
Merger scrutiny: There may be a need for increased scrutiny of mergers and acquisitions in intangible-intensive industries, even when the companies involved are not direct competitors.
Intellectual Property Policy
IP policies may need to evolve to better suit the needs of an intangible economy:
Patent reform: There may be a need to reform patent systems to better handle software and business method patents.
Copyright in the digital age: Policies need to balance the rights of creators with the potential for digital technologies to enable new forms of creativity and innovation.
Trade secret protection: There may be a need for stronger protections for trade secrets, balanced against the benefits of knowledge spillovers.
Financial Regulation
Financial regulations and accounting standards may need to adapt to better handle intangible-intensive businesses:
Intangible asset valuation: There may be a need for new standards and practices for valuing intangible assets.
Lending against intangibles: Regulators may need to consider how to enable and regulate lending against intangible assets.
Reporting standards: Accounting standards may need to evolve to better capture the value and risks associated with intangible assets.
Urban and Regional Policy
Policies may be needed to address the geographic concentration of intangible-intensive industries:
Cluster development: Governments might seek to develop clusters of intangible-intensive industries in different regions to spread the benefits more widely.
Affordable housing: Policies may be needed to address housing affordability in cities that attract intangible-intensive industries.
Support for left-behind regions: There may be a need for policies to support economic development in regions that are not benefiting from the growth of the intangible economy.
Conclusion
The rise of the intangible economy represents a fundamental shift in how our economic system operates. Intangible assets like software, data, intellectual property, and organizational capabilities are becoming the primary drivers of value creation and economic growth. This shift brings with it enormous potential - for rapid innovation, for new forms of value creation, and for solving complex global challenges.
However, it also presents significant challenges. The unique characteristics of intangible assets - their scalability, sunkenness, tendency to create spillovers, and potential for synergies - are reshaping business models, investment patterns, and competitive dynamics. They're contributing to rising inequality, changing the nature of work, and concentrating economic activity in certain geographic areas.
Navigating this new economic landscape will require new thinking from business leaders, policymakers, and individuals alike. We need new approaches to investment, to education and skills development, to competition policy, and to measuring economic value and activity. We need to find ways to harness the innovative potential of the intangible economy while ensuring its benefits are widely shared.
The transition to an intangible-intensive economy is still in its early stages, and its full implications are yet to be fully understood. But by recognizing this shift and starting to grapple with its consequences now, we can work towards shaping an economic future that is both dynamic and equitable.
As we move further into this new era of capitalism without capital, the ability to understand, create, and leverage intangible assets will become increasingly crucial for business success and economic prosperity. Those individuals, companies, and nations that can master this new economic reality will be well-positioned to thrive in the decades to come.