Rise of the Intangible Economy

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* Book: Capitalism without Capital. The Rise of the Intangible Economy. Jonathan Haskel & Stian Westlake. Princeton University Press, 2017

URL = https://press.princeton.edu/titles/11086.html

"why governments need to count innovation as an engine of profit.": What Haskell and Westlake find is that investment in intangible assets now exceeds that in tangible assets.


"Early in the twenty-first century, a quiet revolution occurred. For the first time, the major developed economies began to invest more in intangible assets, like design, branding, R&D, and software, than in tangible assets, like machinery, buildings, and computers. For all sorts of businesses, from tech firms and pharma companies to coffee shops and gyms, the ability to deploy assets that one can neither see nor touch is increasingly the main source of long-term success.

But this is not just a familiar story of the so-called new economy. Capitalism without Capital shows that the growing importance of intangible assets has also played a role in some of the big economic changes of the last decade. The rise of intangible investment is, Jonathan Haskel and Stian Westlake argue, an underappreciated cause of phenomena from economic inequality to stagnating productivity.

Haskel and Westlake bring together a decade of research on how to measure intangible investment and its impact on national accounts, showing the amount different countries invest in intangibles, how this has changed over time, and the latest thinking on how to assess this. They explore the unusual economic characteristics of intangible investment, and discuss how these features make an intangible-rich economy fundamentally different from one based on tangibles.

Capitalism without Capital concludes by presenting three possible scenarios for what the future of an intangible world might be like, and by outlining how managers, investors, and policymakers can exploit the characteristics of an intangible age to grow their businesses, portfolios, and economies." (https://press.princeton.edu/titles/11086.html)


Michael Roberts:

"The authors, by Jonathan Haskel of Imperial College and Stian Westlake of Nesta, are out to emphasise a big change in the nature of modern capital accumulation – namely that increasingly investment by large and small companies is not in what are called tangible assets, machines, factories, offices etc but in ‘intangibles’, research and development, software, databases, branding and design. This is where investment is rising fast relative to investment in material items.

The authors call this capitalism without capital. But of course, this is using ‘capital’ in its physicalist sense, not as a mode of production and social relation, as Marxist theory uses the word. For Marxist theory what matters is the exploitive relation between the owners of the means of production (tangible and intangible) and the producers of value, whether they are manual or ‘mental’ workers.

As G Carchedi has explained, there is no fundamental distinction between manual and mental labour in explaining exploitation under capitalism. Capitalism cannot be without capital in that sense.

Knowledge is produced by mental labour but this is not ultimately different from manual labour. Both entail expenditure of human energy. The human brain, we are told, consumes 20% of all the energy we derive from nourishment and the development of knowledge in the brain produces material changes in the nervous system and synaptic changes which can be measured. Once the material nature of knowledge is established, the material nature of mental work follows. Productive labour (whether manual or mental) transforms existing use-values into new use-values (realised in exchange value). Mental labour is labour transforming mental use values into new mental use values. Manual labour consists of objective transformations of the world outside us; mental labour of transformations of our perception and knowledge of that world. But both are material.

The point is that discoveries, generally now made by teams of mental workers, are appropriated by capital and controlled by patents, by intellectual property or similar means. Production of knowledge is directed towards profit. Medical research, for example, is directed towards developing medicines to treat disease, not preventing disease, agricultural research is directed to developing plant types which capital can own and control, rather than relieving starvation.

What Haskell and Westlake find is that investment in intangible assets now exceeds that in tangible assets.

And they reckon this is changing the nature of modern capitalism. Indeed, it could expose the uselessness of the so-called market economy. The argument is that an intangible asset (like a piece of software) can be used over and over again at low cost and allow a business to grow very fast. That’s an exaggeration, of course, because tangible assets like machines can also be used over again, but it’s true that they have ‘wear and tear’ and depreciation. But then software also gets out of date and also becomes ‘tired’ for the continually changing purposes required.

Indeed, the ‘moral depreciation’ of intangibles is probably even greater than tangibles and so increases the contradictions of capitalist accumulation. For an individual capitalist, protecting profit gained from a new piece of research or software, or the branding of a company, becomes much more difficult when software can easily be replicated and brands copied.


That’s why companies are keen on intellectual property rights (IPR). But IPR is actually inefficient in developing production. ‘Spillover’, as the authors call it, where the benefit of any new discovery is shared in the community, is more productive, but by definition almost, is only possible outside capitalism and private profit – in other words rather than capitalism without capital; it becomes capital without capitalism.

As Martin Wolf of the FT concludes in his analysis of the rise of ‘intangibles’, “intangibles exhibit synergies. This goes against the spillovers. Synergies encourage inter-firm co-operation (or outright mergers), while spillovers are likely to discourage it. Who really wants to give a free lunch to competitors?” So “Taken together, these features explain two other core features of the intangible economy: uncertainty and contestedness. The market economy ceases to function in the familiar ways.”

Under capitalism, the rise of intangible investment is leading to increased inequality between capitalists. The leading companies are controlling the development of ideas, research and design and blocking ‘spillover’ to others. The FANGs are gaining monopoly rents as a result, but at the expense of the profitability of others, reducing them to zombie status (just covering their debts without the ability to expand or invest).

Indeed, the control of intangibles by a small number of mega companies could well be weakening the ability to find new ideas and develop them. Research productivity is declining at a rate of about 6.8 per cent per year in the semiconductor industry. In other words, we’re running out of ideas. That’s the conclusion of economic researchers from Stanford University and the Massachusetts Institute of Technology Innovation. They reckon that in order to maintain Moore’s Law – by which transistor density doubles every two years or so – it now takes 18 times as many scientists as it did in the 1970s. That means each researcher’s output today is 18 times less effective in terms of generating economic value than it was several decades ago.

Thus we have the position where the new leading sectors are increasingly investing in intangibles while investment overall falls along with productivity and profitability. Marx’s law of profitability is not modified but intensified.

The rise of intangibles means the increased concentration and centralisation of capital. Capital without capitalism becomes a socialist imperative." (https://thenextrecession.wordpress.com/2017/12/10/capitalism-without-capital-or-capital-without-capitalism/)


Guardian editorial:

"Wealth is no longer in factories, pipelines or retail outlets. Their capital is not anchored to specific jurisdictions. That makes them hard to regulate and hard to tax. These are patterns of economic globalisation that pre-date the digital revolution. While some intangibles like software and data strongly rely on computers, others do not: brands, for example. The rise of the intangible economy can be traced to the US, when businessman Henry P Crowell invented Quaker Oats in 1879. His insight was that he needed a strenuous advertising campaign to convince American consumers that his cereal was not horse fodder.

What makes the new era different is the extent to which value has become detached from the tangible, and the corresponding social and economic consequences. This is the dynamic described by Jonathan Haskell of Imperial College and Stian Westlake of Nesta as “capitalism without capital”. In their book of that title, the authors illuminate ways in which the scale of intangibility deforms the familiar mechanisms of a market economy.

An intangible digital product or process can be replicated and shared a near-infinite number of times at no additional cost. This makes very rapid commercial expansion possible. It can also make it harder to protect intellectual property rights. This is partly why the big winners are companies that control the platforms on which content is shared, rather than the producers of that content. Another feature of this model is that it thrives on cross-fertilisation of ideas. The potential for unforeseen, lucrative synergies leads tech innovators to cluster in city hubs, of which Silicon Valley is the template. The pioneers of an intangible economy benefit from geographic intimacy, even if their work then flies weightlessly around a global network. This pattern in turn accelerates social polarisation. Those with the skills to navigate the new economy gather in high-income hotspots where housing costs soar. These citadels then become unaffordable and culturally alien to those who lack the qualifications to join the higher caste.

This is a recipe for entrenched inequality and profound frustration among the excluded. It is not hard to see how that can destabilise democratic politics. The anger of communities that felt left behind on the march to globalisation was a significant factor in the election of Donald Trump in the US and the vote for Brexit in the UK. Those votes exposed many social fault lines but one of the most consistent is disparities in education: graduates have been found to be less likely to support populist and nationalist movements than non-graduates.

Intangible capitalism generates what Haskell and Westlake call “inequality of esteem” – a chasm between haves and have-nots that goes beyond affluence and opportunity. It is a disparity in ownership of the political process. Neither side trusts the other with the power to make decisions about the collective future. The two tribes grow suspicious of elections in case the process ends up expressing the will of the “wrong” people. This is a dysfunction in the once flourishing marriage of democracy to capitalism. The two ideas are connected to the extent that the rule of law and civil rights are essential to both, but one does not automatically sustain the other.

These problems are not easily addressed by politics on the traditional left-right axis. For conservatives, it gets harder to deny the need for a more interventionist state. The laissez-faire doctrine that sees government as an impediment to progress is obsolete. The threat of capricious, unaccountable power in the intangible economy is corporate and financial. The new digital empires tend towards monopolisation and, since much of their trade is information, that means monopolising the channels by which citizens communicate with each other; an awesome power. The tech giants will continue to leech control away from the analogue democratic structures unless politicians redress the balance.

It is not obvious what effective intervention looks like. The traditional left response to inequality is redistribution by taxes and labour protection. There is a case for both remedies in a UK economy plagued by low wages and job insecurity. But those are symptoms of deeper issues to which orthodox socialist and social democratic experience might not be a relevant guide. Government can take control of failing railways or banks, but it is hard to see how the public sector could be expanded to offer a service that rivals Google or Facebook. Regulation and enforcement of anti-monopoly rules can help, but imaginative new methods of imposing civic, social responsibility on the transnational corporates must be devised.

These are vast challenges for politics in the coming years as artificially intelligent devices and invisible algorithms intrude ever deeper into our lives. It is unlikely that any one party will have all of the answers. But there are grounds also for optimism. Over time, the progressive benefits of new technology have always outweighed the costs in social and economic disruption. There is no reason to believe that the era of intangible capitalism will be different. It does not have to entrench inequality. Nor must it necessarily undermine democracy, which is a resilient idea. But it is also an idea whose survival requires adaptation and vigilance in volatile periods of political climate change. Now looks like such a time." (https://www.theguardian.com/commentisfree/2017/dec/26/the-guardian-view-on-capitalism-without-capital)