Grasping the intangible nettles

Second albums after a huge first hit are always tricky, but the famous econ duo of Jonathan Haskel and Stian Westlake pull it off with Restarting the Future: how to Fix the Intangible Economy, a sequel to their best-selling Capitalism Without Capital.

That title was missing a ‘Physical’ in parenthesis before ‘Capital’, because the point was to underline the relative importance of intangible capital in the economy now – everything from patentable drug formulae to reputation to social trust to the tacit know-how that makes complex organisations function. While intangibles have always been important in the economy, they now predominate in the creation of economic value. Indeed this has been the case for decades now (my book The Weightless World is 25 years old this year). Jonathan and Stian (who are friends of mine) set out the special characteristics of intangibles – fours Ss, scalability, sunkenness, spillovers, and synergies – and explored the implications.

The new book starts with the observation that all is not well in the economy, with a litany that has become all too familiar: stagnant productivity, excessive inequality, a lack of resilience, ‘dysfunctional’ competition and what they term inauthenticity. They note, too, that investment in intangibles has slowed down markedly. Their diagnosis is that while existing institutions (in the broad sense in which that term is used in economics) were able to support intangible growth up to a point, progress now will depend on institutional reform: “institutions are out of sync with the intangible economy”. In their sights for reform are institutions and policies to support better (and fund) research and development, a redesigned competition policy, improvements to the financial architecture and monetary policy, and fixing cities.

The first half of the book is diagnosis, including rejecting some alternative diagnoses. In particular, they reject the idea that markets have become too concentrated, arguing that firms’ mark-ups have not risen when their intangibles are measured properly. I must say I don’t find this persuasive, given for example the steady consolidation of service sectors (pharmacies, vets, private healthcare, accountancy firms, financial advisers….) or simply observing the steady degrading of big tech service offers (eg Amazon searches being dominated by paid-for items). Still, competition policy certainly needs (and is getting) a refresh. Nor does this mean the intangibles explanation is invalid – on the contrary, it seems to be an integral part of the way production has been restructured.

The second half of the book then goes on to recommendations for reforms of policies and institutions, all rather sensible albeit not tangling with the politics of how these changes might come about except to observe that winners from the old regime will use their power to lobby against change.

I have some other quibbles. Jonathan and Stian put James Scott (Seeing Like A State) and Ernst Schumacher (Small is Beautiful) in the same ideas basket, which seems a bit odd to me although it’s decades since I read Schumacher. I don’t really understand their argument about inauthenticity, which draws on Graeber’s ‘bullshit jobs‘ and on Baudrillard, as an economic phenomenon – I decided it was about (lack of) trust or social capital but am not sure. The chapter on competition seems to claim that the debate about big tech etc only has one proposition, namely break-up, whereas in fact there is a rich debate about reshaping competition policy and enforcement in these large scale, spillover-laden markets. It also shoehorns in positional arms races in the jobs market into the ‘dysfunctional competition’ basket, when this is ja distinct labour market phenomenon.

But these really are quibbles about an excellent book. Their fundamental point about institutions lagging the structure of the economy is spot on, as is the implication that different kinds of collective approaches are needed to the economy. In the world of the four Ss, individualism and market-knows-best policies make for stagnation and discord. A final note: the book is published as the Russian invasion of Ukraine reminds us that tangibles from tanks to wheat really matter too. Simon Schama writes in the Financial Times that Ukraine’s ‘software’ has so far held out better than anybody might have feared against Russia’s hardware. But the world of the post-1989 era is changing.

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A quarter century of weightlessness

It’s 25 years since my first book The Weightless World was published, back in 1997. We were early adopters of the online world at home, and in my job (journalism for The Independent at the time) I had been reporting on technology companies. So when approached by an agent, I knew what the subject would be. How does it stand up to the test of time?

The headline is that the central metaphor, of economic value becoming increasingly intangible, was spot on. The role of ideas and intangibles in how economies progress has become ever more apparent – watch out for the new Haskel and Westlake book on this shortly. The material intensity of economic output has declined. At the same time, I missed two big issues: energy use and climate change; and the adverse trends in concentration in digital markets & the power of big tech. The tone is more upbeat than it might be if I wrote it now, although to be fair to myself The Weightless World does flag trade-offs and the transition costs of digital adoption.

I’m most impressed with my young self in looking at the chapter headings. It was a time of higher unemployment than now so jobs are a focus, including flexibility and what we now refer to as the gig economy. As one of the jobs chapters points out, the technology offered a lot of potential for changing patterns of work but to date it had operated solely in favour of employers, not individuals. Perhaps the pandemic and WFH will finally shift that balance. Other chapters cover the impact of digital on globalisation, economic geography and clustering in cities, the need for a new social contract, the role of the third sector and reforming government. For example, I was very clear that the need for more and more exchange of ideas would enhance clustering, as has indeed happened over the past quarter century.  I even flag up the increasing scope of increasing returns.

It’s highly embarrassing reading one’s old work, so I’m not going to recommend others go back to it. This post is just to pat myself on the back for having been in on the ground floor of the digital economy. I published the book too early, probably – prescience is no use if nobody pays attention! With luck, though, digital transformation will keep me busy for the next 25 years.

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Here I am in 1996, writing The Weightless World too early

Here I am in 1996, writing The Weightless World too early

 

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Getting a grip on intangibles

One of the missing parts of the picture when it comes to measuring and understanding the economy consists of intangibles. This is a big gap, given that services make up four fifths of the UK economy, and that firms invest so much in intangibles, which account for the great majority of their stockmarket valuation. Yet it is so hard to get a grip of the implications of changes we find hard to visualize and do not measure.

A big contribution to starting to fill this gap comes from a new book by Jonathan Haskel and Stian Westlake, Capitalism Without Capital: The Rise of the Intangible Economy. It starts with a description of what the intangible economy is and how we do (currently) and could (in future) measure it. The characteristics of intangible investment are captured in four Ss: intangible assets are more likely than tangible ones to be scalable; they involve higher sunk costs; they are likely to involve spillover effects or externalities; and they exhibit synergies with each other.

Scalability comes about largely because of the non-rival character of intangible goods. Sunk costs are the result of the need for high upfront investment – with software or databases or movies for instance – and then very low marginal cost. Spillovers are present in knowledge-based goods, again due to non-rivalry – the famous Thomas Jefferson quotation, “He who receives an idea from me receives intstruction himself without lessening mine.” This is the fundamental point in endogenous growth theory. Finally, the synergies reflect the need for complementary investments (tangible ones too) to embody ideas in useful outputs.

Having set the scene, the book goes on to consider the implications of the intangible economy in a number of areas: the productivity puzzle; inequality; finance; business management; and public policy. These are explored through the lens of the four Ss. For example, does the public goods characteristic of non-rivalry imply that a greater proportion of the total investment will need to be publicly funded? Should governments encourage a switch from debt to equity financing of investment through changes to the tax system? (This chapter is set up as a series of essentially rhetorical questions – the answers are yes and yes!)

The key message is that the economy has changed and is changing its character fundamentally, yet businesses and governments have hardly begun to get to grips with the implications. After all, we are not even measuring intangibles properly. In both the winning Indigo Prize essays fixing this was one of the key recommendations – it is hardly surprising the essays included this as mine was co-authored with the head of Australia’s intellectual property agency and the other co-authored by Jonathan Haskel, but my point is that the distinguished panel of judges saw this as important.

There are some other books emphasising intangibles, such as Baruch Lev’s work on accounting, The End of Accounting being the most recent. For an introduction, though, it would be hard to do better than Capitalism without Capital, which is clear and lively and raises – without having all the answers – the relevant questions.

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Services and the singularity

I just finished an intriguing but eccentric book I’d become aware of in some way following through the thickets of reference in recently-read papers. It’s J.O.Jansson’s 2006

. Intriguing because there are some interesting insights. Eccentric because he proposes a completely new way of defining services in our mental construction of the economy. I’d love to know what others have made of this book.

[amazon_image id=”0857932179″ link=”true” target=”_blank” size=”medium” ]The Economics of Services: Microfoundations, Development and Policy[/amazon_image]

The redefinition is to step away from the idea that it is intangibility that’s the defining characteristic of services. He argues that storability and ownership mark the boundary. Intangible digital ‘services’ should be classed as goods because they can be stored in a range of formats. Wholesale and retail distribution should also be classed as the final stage of goods production because ownership of the goods remains with the distributor. Business-to-business services are purely intermediate goods. Services proper are consumer services, non-storable intangible goods with localised markets (although some are sufficiently high value that the geographic dimension is irrelevant). On this basis, Jansson-services account for about 50% (not 70-80%) of the developed economies, and have been at about this level for a century.

So I’m mulling this over. It is surely right to distinguish between different economic characteristics of different services/intangibles. The geographic dimension and its relationship to ‘unit’ value of the service is a welcome addition to the analysis. I also like the introduction of time use, and the time spent consuming a service as part of its cost.

Jansson also highlights, drawing on the fascinating work of

, the margin between personal services affected by the Baumol cost-disease and home production. He argues that as services such as health and education take an ever-greater proportion of income, there will be a switch into consumer capital investment enabling home production – I suppose in a parallel with electronic home music devices and orchestral performances, we might in aggregate spend less on education if Khan Academy or MOOCs offer an alternative.

Coincidentally, this is the 2nd thing I’ve read recently drawing on Baumol – the other was William Nordhaus’s terrific paper Are We Approaching An Economic Singularity? Surely Will Baumol ought to have had a Nobel Prize?

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