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.


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 The Economics of Services. 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.

The Economics of Services: Microfoundations, Development and Policy

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 Jonathan Gershuny, 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?