On Thursday 15 February the Institute for Policy Research welcomed Professor Jonathan Haskel, Professor of Economics and Director of the Doctoral Programme at Imperial College Business School, and Stian Westlake, Senior Fellow at Nesta and Adviser to the Science, Innovation and Universities Minister, to discuss the growing importance of intangible assets to the economy. The event, titled Capitalism Without Capital: The Rise of the Intangible Economy after the duo’s new book on the subject, took place at the University of Bath.
After a short introduction from IPR Director Professor Nick Pearce, in which he foreshadowed some of Westlake’s conclusions about the contribution of intangible assets to secular stagnation and populist politics, Westlake spoke on the broad context. He highlighted pressing questions surrounding the global economy – why is productivity and investment low while profits are high? Why is inequality increasing? And why are there growing disparities between locations we might define as liberal citadels and the ‘left-behind’?
The reason, Professor Haskel posited, is that the nature of investment is changing – and has for decades been moving away from tangible investments like buildings, machinery and vehicles to intangible investments like research, training, data, software and marketing. This change has not been adequately captured in measures like GDP or traditional accounting systems because such apparatus were designed with tangible investments in mind. Nonetheless, global investment in intangibles proportionally has been growing since the early 20th century, and overtook tangible investments at around the time of the financial crisis.
Nonetheless, the pattern of investments is always changing and has changed constantly throughout history, Professor Haskel admitted. So why should a move towards intangible investments interest us? The reason he presented centred on what he put forward as the four characteristics of intangibles: scalability, sunkenness, spillovers and synergies. Intangible assets are more scalable than tangible ones; a building can only hold so many people, but a design, a piece of software or a film can be scaled without limit and with little cost. Their sunkenness comes from the fact that they are harder to recover value from if a firm loses liquidity – a vehicle can be sold on when a company goes bust, but its training methods can’t. Their value spills over to other actors because they are hard to protect – like the design of an iPhone, which has been widely copied – and they are synergistic, in that bundles of intangible assets tend to complement one another and increase their combined value.
Westlake then delineated how the predominance of assets with these qualities could explain some of the economic, social and political phenomena observed in recent years. First, with particular regard to the development of tech giants, he explained how the gap between leading and laggard firms would be exacerbated by an emphasis on intangibles: large firms can capitalise on synergies between intangibles and spillovers from others’ investments, and enjoy scalable opportunities – while small firms are discouraged from investing by their sunkenness and their inability to protect the investment. Since intangible assets can also be contested (copyrights, for example), people who can resolve such contests are in high demand – the heroic entrepreneurs, the business leaders and the politically connected.
When combined with the influence intangibles may be having on cities – which we could expect to become more important to industry and more sectorally diverse – this goes some way towards explaining the division between liberal citadels and left-behind areas, and consequently the rise of populist politics. Inequality of property prices therefore contribute to wealth inequality, and gaps between firms to income inequality – and all driven by a growing dependence on intangible investments.
In closing, Westlake touched on the possibility of increasing public investment in intangibles – publically funded research and training are already popular, but some areas (such as public broadcast) are more problematic, and some (such as software) have yet to receive much attention. There might be an opportunity here, but he cautioned that it might not be straightforward to realise; given the cultural divides that intangibles may have created, investing public funds in their development might not be politically sustainable.
The session closed with questions from the floor moderated by Professor Pearce.