The rise of intangibles. Capitalism without Capital.

Stian Westlake (full disclosure, is a friend) and Jonathan Haskel have written a book: Capitalism Without Capital: the rise of the intangible economy.

They argue: Why Intangible Investment Is Different Now - there is nothing inherently unusual or interesting from an economic point of view about a change in the types of things businesses invest in. Indeed, nothing could be more normal: the capital stock of the economy is always changing. Railways replaced canals, the automobile replaced the horse and cart, computers replaced typewriters, and, at a more granular level, businesses retool and change their mix of investments all the time. Our central argument in this book 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. We shall argue there are two big differences with intangible assets.

First, most measurement conventions ignore them.  (Me: I shall come back to this as it has important implications for investing)  []


They further argue:

(1) intangible investment tends to represent a sunk cost. If a business buys a tangible asset like a machine tool or an office block, it can typically sell it should it need to. []

(1a) Intangible assets are harder to sell and more likely to be specific to the company that makes them. []

(2) intangible investments generate spillovers.

(ME: I'm think they should also consider halo or anti-halo effects: due to reputational effects of many intangible investments.  Potentially employees are often not attracted by the state of equipment but are attracted by brand, reputational value, strength of R&D and thought leadership etc.)

“The tendency for others to benefit from what were meant to be private investments—what economists call spillovers—is a characteristic of many intangible investments.”

(3) Intangible assets are also more likely to be scalable.

(4) intangible investments tend to have synergies (or what economists call complementarities) with one another: they are more valuable together, at least in the right combinations.

My view / also suggested: intangibles are much harder to measure (as well as being ignored)

In fact long time readers will know two quotes  I like to repeat:

Not everything that counts can be counted, and not everything that can be counted counts.  (Not attrib. Einstein but probably William Cameron)

Do not fall for the McNamara Fallacy.

(The first step is to measure whatever can be easily measured. The second step is to disregard that which can not be easily measured or to give it an arbitrary quantitative value. This is artificial and misleading.

The third step is to presume that what cannot be measured easily really is unimportant. This is blindness.

The fourth step is to say that what cannot be easily measured really does not exist. This is suicide.)

The authors concentrate on spillovers.  I'm noting halo as I have feedback from companies suggesting that the company's focus on eg sustainability is attracting a certain kind of top tier  graduate and this allows the company to select what it thinks is best.

The authors discuss in the book:

“how the shift to intangible investment helps us understand four issues of great concern to anyone who cares about the economy: secular stagnation, the long-run rise in inequality, the role of the financial system in supporting the non-financial economy, and the question of what sort of infrastructure the economy needs to thrive.”

They aim at “ government policymakers, businesses, and investors.”

So I will concentrate on the investor point of view in my next post, as my best area of expertise. But do read the book if interested in their take on this!

I note a little overlap with a recent book, Wealth of Humans, by Ryan Avent, who also notes the rise of the intangible economy.  Avent gives an example from journalism:   it is hard for a journalist to move from the FT to WSJ or The Economist – it takes time to learn about the unwritten rules, processes, structures and values of the new firm even though the actual job may be very similar.

Historically the value of the firm =  Physical capital + a residual (knowhow, processes etc.)

And the physical capital dominated the valuation.

Now the value of a firm = Physical capital + human capital + social capital + intangibles

Human capital is the skills and technical ability of your people.  These are transferrable skills. Social capital is how those people fit together and is firm specific and not transferrable.  It is hard to quantify and might impossible to  measure in a meaningful way.

Today, the intangibles dominate the value of the firm.   Check out the book : Capitalism Without Capital: the rise of the intangible economy.

Implications for investing? The importance of intangibles and ESG in my next post.

If you'd like to feel inspired by commencement addresses and life lessons try:  Neil Gaiman on making wonderful, fabulous, brilliant mistakes; or Nassim Taleb's commencement address; or JK Rowling on the benefits of failure.  Or Charlie Munger on always inverting;  Sheryl Sandberg on grief, resilience and gratitude or investor Ray Dalio on  on Principles.

Cross fertilise. Read about the autistic mind here