Capitalism without Capital: The Rise of the Intangible Economy.

AuthorHemphill, Thomas A.
PositionBook review

Capitalism without Capital: The Rise of the Intangible Economy

Jonathan Haskel and Stian Westlake

Princeton, N.J.: Princeton University Press, 2017, 278 pp.

In the introduction to Capitalism without Capital, economists Haskel and Westlake focus on the concept of "investment." They argue that "investment is what builds up capital, which together with labor, constitutes the two measured inputs to production that power the economy, the sinews and joints that make the economy work." Traditionally, when economists measured investment, they were measuring investment in physical goods, plants, and machinery. However, with the advent of the internet in the 1990s, the idea of a new "knowledge economy" emerged, based on what economists began to recognize as the results of research and development (R&D) and the largely nonphysical ideas resulting from it. If this new economy were to be measured by economists, the valuation of these intangible assets would need to be incorporated into their models of economic growth.

In his seminal research into Microsoft Corporation's financial accounts, economist Charles Hulten found that the traditional assets of plant and equipment were only $3 billion, equivalent to 4 percent of Microsoft's assets and 1 percent of its market value. This was a stark example of "capitalism without capital"--namely, a 21st-century corporation that develops "specific products or processes," or invests in "organizational capabilities" tbat create or strengthen "product platforms that position a firm to compete in certain markets."

Haskel and Westlake's central argument is that there is "something fundamentally different about intangible investment, and that understanding the steady move to intangible investment helps us understand some of the key issues facing us today: innovation and growth, inequality, the role of management, and financial and policy reform." There are, however, two major differences between intangible assets and tangible assets. First, most measurement conventions ignore intangible assets. As they become more important, however, we are now trying to measure capitalism without capital. For example, conventional accounting practices do not measure an intangible investment, such as developing better software, because making such a measurement is a difficult, arduous process and accountants (being cautious types) prefer not to do so except in limited circumstances (such as after the asset has been successfully developed and sold). Second, the basic economic properties of intangibles make an intangible-rich economy behave differently from a tangible-rich one. Why? First, intangible investments tend to represent sunk costs; second, they generate spillovers; third, they are likely to be scalable; and fourth, intangible investments tend to possess synergies, or complementarities, whereby they are more valuable together in the right combinations.

Haskel and Westlake present economic data for Europe and the United States that show intangible investment overtook tangible investment at the time of the Great Recession in 2008. It did so for five reasons:

* First, labor-intensive services become more expensive relative to manufactured goods, and intangible investments (such as design, R&D, and software development) depend much more on labor. Thus, over time, one would expect intangible investment spending to rise relative to tangible investment.

* Second, new technology also seems to be increasing the opportunities for businesses to invest in intangibles, and, as many intangibles involve information and communications, they can be made more efficient with better information technology (IT).

* Third, while the structure of the economy will affect the relative importance of intangibles, that effect will change over time. For example, while the service sector in the 1990s was more tangible-intensive, the manufacturing sector is now more intangible-intensive than tangible-intensive and has grown more so.

* Fourth, there is some evidence that looser regulation of product markets and labor markets encourages intangible investment.

* Fifth, market size is critical, because intangibles (such as Starbucks' brand or Facebook's software) can be "scaled up" more or less indefinitely.

The authors go through a detailed history of how economists have measured intangible investment. The first...

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