Capitalism Without Capital

"The real wealth of companies today isn't in the things they own, but in the ideas they create." How has the shift toward intangible assets reshaped modern economies?

1. The Economy Is Transitioning from Things to Thoughts

For centuries, economic value was tied to physical goods – land, machinery, and commodities. However, in today’s world, what powers businesses has increasingly become intangible, such as software, branding, and organizational knowledge. This change is reshaping the way we define and assess value.

Measuring value used to be straightforward, as clearly seen during William the Conqueror’s reign in eleventh-century England, where wealth was assessed by counting physical assets like pigs and mills. Fast forward to 2006, Microsoft became the world's most valuable company, yet only 1 percent of its worth was in physical items like buildings and equipment. Its brand, intellectual property, and systems were the true sources of value.

Supermarkets offer another example of this shift. While their physical setup remains largely the same as it was in the 1970s, their intangible investments in barcodes and data-driven systems have revolutionized operations, allowing them to optimize inventory, streamline pricing, and master branding.

Examples

• Microsoft’s $3 billion worth of physical assets in 2006 accounted for a tiny fraction of its overall $250 billion valuation.
• Barcoding systems transformed not only checkout processes but also stock management in supermarkets.
• Starbucks drives value through processes and branding, eclipsing its focus on physical equipment.

2. Intangibles Have Surpassed Tangibles in Investment

Economists initially overlooked intangible assets – the models for calculating GDP excluded spending on software or creative design. However, data now shows that in advanced economies, investment in intangible assets has overtaken tangible ones, demonstrating their growing prominence.

The United States began counting software development as part of GDP in 1999, adding a significant 1.1 percent to the nation's total. Economists analyzing past trends revealed that by the mid-1990s, U.S. businesses were spending more on intangibles than physical assets. Other countries like Sweden and Finland followed a similar pattern, though southern European countries lag behind.

Despite these advances, there are imperfections. UK GDP, for instance, still ignores the value of marketing and branding investments, which limits our understanding of the role of intangibles. The broader trend, nonetheless, is clear: the global economy increasingly rewards ideas over physical production.

Examples

• Intangible investments in the U.S. eclipsed tangible ones during the mid-1990s.
• Sweden’s tech-driven economy highlights its heavy intangible spending.
• UK GDP calculations exclude branding even though it affects business competitiveness.

3. Scalability: The Secret to Unprecedented Growth

Intangible assets shine because they can be scaled instantly and without limitations – a trait physical assets lack. It explains why companies like Google grow so rapidly while traditional industries find it harder to expand.

Starbucks provides a perfect lesson. Its operating manual, an intangible asset, can be used across thousands of stores worldwide without additional costs. Compare that to their coffee machines, which require physical replication to meet increased demand. Similarly, a tech company creating a software product like Angry Birds can distribute it to billions of users while incurring no significant extra cost, unlike tangible product manufacturers.

This scalability drives industry concentration. In the tech space, firms with superior intangible assets (like Google’s algorithm) dominate, leaving little room for competitors like Bing or Yahoo!. It creates a winner-takes-all landscape amplified by the speed at which intangibles grow and spread.

Examples

• Starbucks’ operating manual underpins its global consistency while remaining easily replicable.
• Angry Birds’ initial development cost spread over more than three billion downloads.
• Google’s algorithm dominance stifles competition due to its easily scalable nature.

4. The Risks of Sunk Costs in Intangibles

Intangibles present unique challenges to investors as their value is not recoverable if a business fails. This lack of tangible resale value complicates funding and adds volatility to economies.

Banks, for example, prefer lending for mortgages backed by physical assets like houses. However, lending against intangibles – such as a brand or software algorithm – is far riskier because there’s no established market for their resale. If a business fails, its brand may become completely worthless.

This sunk-cost risk can also magnify the severity of crashes. In traditional markets, businesses can sell physical goods at bargain prices during a downturn. But imagine a market collapse driven by vanishing intangible values – recovery in such cases might be impossible, amplifying economic instability.

Examples

• Physical items like factory machinery can be resold; brands or corporate processes cannot.
• Banks hesitate to lend for intangible-heavy projects due to unclear collateral value.
• Economic downturns worsen when assets like branding hold no marketable value.

5. Spillovers: The Double-Edged Nature of Ideas

One key characteristic of intangibles is their ability to spill over. Competitors can easily benefit from ideas, leading to imitation and faster industry innovation, but also discouraging initial investment.

Apple’s iPhone illustrates this. While the product revolutionized smartphones, its innovative features – like the app store – quickly spilled over to competitors like Samsung and Huawei. Similarly, employees from knowledge-based firms often switch jobs, taking valuable learning with them.

This trend forces policymakers to devise solid frameworks for intellectual property protection. Without a balance, the fear of spillovers could discourage investment altogether, reducing overall innovation. Businesses must also adopt strategies to absorb spillovers from rivals to stay competitive.

Examples

• Apple’s competitors mimicked the iPhone’s app store ecosystem.
• Employees from innovative firms transfer knowledge by changing jobs.
• Ongoing disputes over data piracy showcase gaps in intellectual property enforcement.

6. Synergies Lead to Fresh Innovations

When different intangible ideas combine, powerful breakthroughs occur, offering new ways of living or working. The intangible economy thrives on these synergies.

Take the microwave oven. Its success didn’t derive solely from Raytheon’s development of microwave tech, but from fusing it with Amana’s knowledge of household appliances. Similarly, Uber’s value came not just from taxis but from merging transportation with smartphone software to create a better service.

Such synergies often require businesses to operate close to others in collaborative ecosystems. Silicon Valley is a prime example where cross-pollination of ideas has created a virtuous cycle of innovation. Cities that enable this clustering of intangible expertise gain a competitive edge.

Examples

• The microwave oven’s household success was accelerated by combining Raytheon’s tech with Amana’s insights.
• Uber’s innovation lay in using a practical tech solution to redefine taxi services.
• Silicon Valley underscores the value of businesses operating near others for synergy.

7. Intangibles Widen Economic Inequality

The rise of intangible-intensive businesses has contributed to widening income and wealth divides. These organizations demand highly skilled individuals, creating an academic and skills premium.

For instance, U.S. college graduates now earn significantly more than individuals without degrees – the disparity has doubled since the 1980s. Wealth gaps have also emerged due to rising property prices in cities like San Francisco, hubs of intangible investments. Meanwhile, areas like Detroit, reliant on physical manufacturing, have seen declining property values.

Intangibles breed inequality by clustering wealth in regions benefiting from innovation while leaving others behind. This geographic disparity exacerbates broader sociopolitical divides, witnessed in movements ranging from Brexit to U.S. populism.

Examples

• College graduates in the U.S. now earn $35,000 more yearly than non-graduates.
• San Francisco’s property prices rose nearly 150 percent from 1980 to 2015.
• Detroit struggled economically due to its dependence on tangible industries.

8. Education and Finance Must Adapt

As intangibles dominate, traditional education and financial systems lag behind. Adjustments are needed to prepare workers and businesses for this evolving landscape.

Schools often emphasize outdated skills, but adult education offers a way to adapt to ever-changing demands. Coding, for example, might not remain relevant in a decade. Meanwhile, financing for intangibles remains problematic, as banks hesitate to back assets they can’t repossess. Singapore and Malaysia have started subsidizing loans backed by intellectual property, providing a blueprint for tackling this gap.

By updating education and finance policies to match economic realities, societies can enable smoother transitions into a world fueled by intangible ideas.

Examples

• Singapore subsidizes bank loans tied to intellectual property.
• Adult education offers workers immediate re-skilling opportunities.
• Outdated banking systems favor physical assets over intangible ones.

9. Government R&D Investment Can Tackle Underinvestment

To prevent stagnation in intangible-driven industries, public research funding plays an essential role in driving innovation where private firms hesitate to act.

For instance, DARPA-funded research has underpinned numerous U.S. technological breakthroughs. Increased university research funding in the UK demonstrated a direct correlation between government R&D investment and national productivity growth, with a three-year lag. Government leadership ensures that regions or sectors overlooked by large corporations remain innovatively active.

Public support for R&D enjoys bipartisan backing in many places, as its outcomes benefit society broadly while creating economic momentum.

Examples

• DARPA’s work has propelled U.S. tech advances for decades.
• UK university research funding led to 20 percent productivity growth over time.
• Democrats and Republicans alike support public R&D initiatives for economic gain.

Takeaways

1. Advocate for stronger policy frameworks to protect intellectual property and encourage businesses to invest in innovation without fearing spillovers.
2. Governments must prioritize funding public research and development while fostering adult education to support a dynamic, evolving workforce.
3. Recognize the significance of scalable intangible assets within businesses and strategize for success in industries dominated by ideas over things.