Capitalism Without Capital

The Rise of the Intangible Economy

[Amazon Link]

Tyler Cowen listed it as one of his best non-fiction books of 2017. Arnold Kling put it on his much shorter list. Those are high recommendations, and so I did that Interlibrary Loan thing with the University Near Here, and it showed up all the way from the University of Connecticut. And…

Well, it turns out those guys are economists, and I'm not. And the authors, Jonathan Haskel and Stian Westlake, get really deep into the economic weeds. As a result, my enjoyment was limited. (But, caveat lector, Bill Gates, also not an economist, recommended it too. So don't necessarily take my word for it.)

The punchy title could have been less punchy. This is a book describing the increasing importance of intangible assets to businesses, and (hence) the overall economy. We're talking software, business methods, patents, designs, etc. As opposed to tangibles: trucks, buildings, blast furnaces, etc.

It should be clear that the intangibles are like capital. They cost money to acquire or develop, they (hopefully) are part of the mix by which the firm makes money. And yet they, in many cases are (literally) not accounted for as capital investments, which can mislead decision-makers both internal and external.

Haskel and Westlake ably list four factors in which intangibles differ from normal capital. In one of their (further) nods to punchy writing, they call them the four S's.

  1. Intangible assets are more likely to be scalable;
  2. their costs are more likely to be sunk;
  3. they are inclined to have spillovers;
  4. and they exhibit synergies with each other.

Dumbed down to my level: scalability means that once you acquire an intangible asset, you can often spread it around to the entire company at little additional cost. (You can't do that with trucks; if you need more trucks… you have to buy more trucks.)

Sunk costs: sometime assets don't work out. Tangible assets are relatively easy to dispose of on the market—someone will always buy your trucks if the price is right. But intangibles are often useless to anyone else, so you have to eat them.

Spillover refers to the difficulty of keeping your intangibles within the firm. Once you've demonstrated that something "works" to make money, people in other companies—your competitors!—will tend to notice and copy, "adapt", or (from your point of view, if not theirs) steal. Either gulp and accept this, or spend some money on lawyers.

Finally, synergies: the authors cite Matt Ridley's concept of innovation: "ideas having sex". Once the firm has a fertile breeding ground of intangibles, they can interact and combine in ways originally unexpected. (Apple, of course, is a prime example.)

All this has capital-I Implications. The inconsistent handling of intangibles vs. tangibles can cause the appearance of stagnation. They might contribute to growing inequality. A country's financial system might not handle them adequately, let alone efficiently. Infrastructure decisions can be misguided (roads and bridges vs. networks and servers). Management practices need adjustment. And government policies will almost certainly need to be dinked, although it's hard to know how to do that correctly. (Duh.)

So, it's good, very in depth. Much of it is accessible to the dilettante (me), but a lot I confess was skimmed over. I learned a lot, and one of the things I learned was: I wouldn't pass a test on the subject.