One of the remarkable things about modern businesses and the modern economy is they invest more and more into things that aren’t there.
Traditionally the assets of businesses were things you could touch: machines, land, buildings; then vehicles, and later computers. But businesses have also invested in things that also provide long-term value, but which don’t have a physical presence: R&D, new product development, organizational design, branding.
For most of recent history, these intangible assets were something of a sideshow. Capitalism was basically about tangible capital.
But very gradually, this has been changing. And not so long ago, a milestone was reached. Since 2007, businesses in the US and the EU have invested more each year in intangible assets than in tangible ones. Investment, the pulse of the market economy, has materially (or should that be immaterially?) changed.
We – Jonathan Haskel and Stian Westlake – have been researching this curious story for some time now. And in the coming months, we’re going to be setting out our thinking and the work of ourselves and many others into a book that we hope will usefully advance the public debate on what’s going on in the modern economy. (We’re delighted that the book will be published by Princeton University Press, hopefully some time in 2017.)
We’ve set up this blog as a way to jot down occasional thoughts, fragments and ideas, and to engage with other people who are interested.
Our first starting point is that intangible investment has become more important than it used to be. Indeed, this chart shows neatly how intangible investment has come to exceed tangible investment in rich countries.
Our second starting point is that intangible investment seems, on the whole, to have different economic characteristics to traditional tangible investment. For example:
- They tend to produce lots of spillovers (if you invest in a new business process or a new product design – an intangible investment – it can be relatively easy for a competitor to copy you; if you build a new fleet of vans – a tangible investment – you get most of the benefit yourself).
- They involve high sunk costs (many physical assets are relatively easy to sell if your business fails; intangible assets like brands and IP are trickier to dispose of).
- They’re often highly scalable (if you acquire the rights to Star Wars, you can license them across the world and across a vast range of products; if you build a call centre, that call centre can only handle a certain volume of calls before you need to build another one).
- And they have a lot of synergies with particular skills (intangibles like brands and algorithms seem to be worth much more when combined with highly skilled workers).
This leads us to some interesting questions.
What effect does the rise of intangible investments have on the economy as a whole, on its sectoral structure, on total investment levels, on inequality and on growth? And how should we think about the value that intangible investment creates?
How should policymakers, managers and regulators respond to this change in the economy?
We also hope to touch on some questions of measurement and definition, explaining how intangibles have been calculated by economists and by accountants (and what might happen in the future), the development of the idea of the intangible economy (which in some senses is very old – writers were speculating about post-industrial society in the 1970s), and the relationship between intangible and technology.
We hope to use this blog to raise some of these questions as we write, and we look forward to your feedback.