Book Reviews Business and Technology

A New Age of Inequality

Jonathan Haskel and Stian Westlake’s ‘Capitalism Without Capital: The rise of the intangible economy’ reveals enormous new potential for businesses. It also explores the dangers.

That investment in so-called ‘intangible assets’ now exceeds investment in ‘tangible assets’ is cause enough for reflection. But that such a dramatic shift in our economy has gone largely unnoticed is ever more unnerving.

Haskel and Westlake’s book, ‘Capitalism without Capital: The rise of the intangible economy’, starts by addressing the alarming paradox we see in our society. For decades now we’ve been told the principal role of technology is to cut costs and with it productivity will rise. It might be automating jobs that no longer need workers to complete and be paid for, or needing to pay for less physical equipment because all your files are stored almost free of charge on the cloud. Or that all your expensive software can now be replaced by an app that’s free.

But it seems that cost-cutting hasn’t increased productivity. GDP statistics show the UK’s productivity growth has barely got off the ground since the financial crash ten years ago. The Bank of England has dropped the base interest rate to a record low and still GDP remains stagnant.

At least part of the answer lies in the fault of GDP, failing to capture intangible assets, assets that lack physical substance and are therefore near-impossible to quantify. In previous decades, assets were far easier to evaluate. Buildings, computers, vehicles and other machinery – all physical pieces of equipment you bought for a set price. But there are also intangible assets that are becoming increasingly important for businesses. Software, data, marketing, training, R&D and ideas can now all, because of technology, spread more rapidly than ever before.

‘Capitalism Without Capital’ primarily points out how intangible assets fill all four of these criteria, conveniently labelled “The four S’s”. They are all scalable, whereby they can be ‘replicated ad infinitum for next to nothing’. Music on Spotify, for instance, once it’s released onto the site, costs almost nothing as it’s listened to millions of times over. Second, they all have ‘sunk costs’, meaning that the investment is often little use to anyone else and ‘sinks’ with the value of the company – unlike, say, an office building which would be of use to most businesses. Hardly any cash can be earned from it afterwards if all goes pair-shaped.

Third, intangibles have ‘spillovers’, where the fruits of its investment often go to more than just the discoverers. Xerox, for example, were first to develop computers with Graphical User Interface (GUI), but Apple and Microsoft ended up with all the money.

cwc11Finally, they have ‘synergies’, the benefits of having spillovers essentially, where two ideas in tandem generate more than both would individually. Each component of the Epipen, for example – the R&D, design, branding and marketing – is almost useless without the rest. But if you combine it all, it sells big.

As Haskel and Westlake reassure, with the UK and US aside, intangibles have yet to fully catch on across the world. But the implications it explores are far-reaching nonetheless.

On the corporate landscape, scalability means the rise of intangible assets will continue to exacerbate the gulf between the market leaders and laggards. Those that succeed can reproduce their successes globally; they are then also more able to merge with or chew up their competitors. Facebook, Amazon, and Google are just a few applicable in this regard. The majority of firms that don’t make it, on the other hand, can’t even sell off most of their assets to other hopefuls. Competition is arguably the biggest loser.

The rise of intangibles also goes a long way to explaining the curious investment levels of late – since the crash, business investment has been surprisingly low despite high profits. With synergies allowing some firms to draw up huge market shares, laggards have less incentive to invest, fearing their frontier firms will snatch the profits from their assets.

But rising inequality is not just between firms themselves. It’s also about wealth between people. In the kind of economy where synergies and spillovers from intangibles become integral for growth, the population densities in cities mean they look set to grow handsomely. Unfortunately, though, rural areas are in danger of being left behind. The dramatic rise of political extremism, far more prevalent in rural areas, shows only too well how the fallout has already begun.

The effect of intangibles on education is slightly less clear cut. On the one hand, one could say technological proficiency is now a non-negotiable in an economy dominated by tech firms. But equally, as the UK in particular drives to a more service-based economy, soft skills are also coming into play. Success in the new economy will go to more than those with the right creative and technological talent, but also the leaders who are able to organise it all.

Indeed Haskel and Westlake leave no stone unturned when continuing exploring the wave of intangibles, here on the challenges to policymaking. First and foremost, that the tools we currently employ to measure intangible assets are dangerously incomplete. Today, GDP still ignores investment in market research, branding and training – intangible assets that companies are now spending huge sums of money on.

Moreover, the even broader questions countries should be debating are touched on. Should competition policy be addressed? To that end, should trademark and patent laws, that exclude others from using a certain technology, be relaxed? How should taxation policies change to cater for the multinational corporations stashing their profits in havens? Or how can we stimulate an economy where, whilst partly in the measurements, investment (and with it growth) is stagnating?

For all the questions raised, perhaps inevitably, few answers are provided. In describing GDP’s flaws little is given in the way of a credible alternative. Nor are many other solutions provided to the remaining conundrums we face going forward. Ultimately, for Haskel and Westlake, to recognise this seismic shift is one thing. To have the answers is quite another.

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