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Chapter 1: Introduction

1. The Domesday Book entry for “Stansted [Mountfitchet]” is at http://opendomesday.org/place/TL5124/stansted-mountfitchet/.

2. See Office for National Statistics 2016.

Chapter 2: Capital’s Vanishing Act

1. SNA 2008, para 10.32. If a producer also sells assets, then the measure is the new assets minus any assets sold. There is an additional complication to do with improvements to land arising from the particular treatment of land or, more generally, nonproduced assets, in national accounts. The same definition as in the SNA is to be found in the ESA 2010, para 3.124.

2. SNA 2008, 617.

3. Although he was not the first to use the term, Marx is perhaps the popularizer of “capitalism.” For him, “capitalism” is when production is organized in society such that capital (in the sense above of machines and infrastructure) is owned privately. In Capital, “capital” is used variously to describe stocks and flows associated with capital in the above sense but also in other ways, for example, working capital (money in store to pay wages), constant capital (which includes depreciation), etc. See Blaug 1978 on all this. See box 6.1 for an explanation of capital, earnings, and wealth and box 6.2 for an outline of Piketty’s model of capital.

4. The exact passing date depends somewhat on ongoing data improvements and revisions but the pattern of growing intangible importance is consistent in the data. (See, for example, Nakamura 2010.)

6. Beniger’s book The Control Revolution is full of fascinating pre-IT historical examples of intangible investment. The history of breakfast food is one such: Henry P. Crowell’s invention of Quaker Oats in 1879 required, argued Beniger, a strenuous advertising campaign to convince consumers that the food was not horse fodder. Crowell’s innovations in marketing included prizes, endorsements, and special offers (Beniger 1986, 266). Likewise, in the UK, James Spratt, the first manufacturer of dog biscuits, needed to convince skeptical consumers in the 1860s and erected the first billboard in London. His employee Charles Cruft set up the Cruft’s dog show, and Spratt’s firm advertised its biscuits as being used by appointment to Queen Victoria.

7. A more formal exploration of this relationship finds intangible investment negatively correlated with employment strictness and product market restrictions, controlling for other factors (Corrado et al. 2016).

Chapter 3: How to Measure Intangible Investment

1. A very helpful guide to measuring investment and GDP, packed with data, is from Eurostat: http://ec.europa.eu/eurostat/statistics-explained/index.php/National_accounts_and_GDP.

2. Smith, The Wealth of Nations, book 2, chapter 3.

3. Hence, we have Alan Greenspan’s remarks in 2000 on the challenges faced by the US Bureau of Economic Analysis in defining and calculating GDP: “It’s become evident that there has been an increasing technological change within our system, which has muddied the distinction between what we call capital investment and current expense. And 20–30 years ago when you built a steel plant, it was perfectly obvious what it was and it was capitalized. And when you consumed coke or ore, it was expensed. But in today’s world it has become very much more difficult to figure out whether a particular outlay is expensed and not included in the measure of the GDP, or whether it is capitalized and it is.” https://www.bea.gov/scb/account_articles/general/0100od/maintext.htm.

4. One might argue that this is all “R&D,” and we would agree: however, the official definition of R&D relates to work to resolve scientific and technical uncertainty, which typically, in spirit at least, excludes things like design and artistic endeavors. Thus, these categories are separate from R&D.

6. Such changes in the value of an asset might be due to “wear and tear,” which is what accountants usually mean by depreciation, or due to their value being reduced via the competitive process, which is what economists, following Triplett, call “obsolescence.” See the appendix to this chapter for more on this.

7. This will not be true if, for example, the distribution of returns to spending is highly skewed so that a small number of projects are very successful. Hall, Jaffe, and Trajtenberg (2005) find that patent citations have a very skewed distribution, but less is known about the skew of returns to designs, software, and marketing spending.

8. There is some data on how time is spent in the public sector. For example, O’Mahony quotes the study by Klinke and Muller (2008), who surveyed doctors in German hospitals, in which they had to indicate the amount of time spent on six different task areas. On average doctors spent 4.3 hours per working day with medical tasks; 2.1 hours with administrative tasks; 1.4 hours talking with patients and relatives; and 1.2 hours writing medical reports. If medical tasks and patient conversations are grouped into “close-to-patient” tasks, they together took up 5.7 hours of a normal working day. If administrative tasks and the writing of medical reports are classified as “patient-distant” tasks, these together took up 3.3 hours. In this way the surveys indicated a ratio of about 2:1 between direct patient services and patient administration.

9. The rule of law might be thought of as an important factor affecting the incentives to build assets but itself is not an asset directly.

10. In a famous paper, the American economist Martin Weitzman (1976) showed that while GDP is not a measure of welfare, a closely related measure, net domestic product (appropriately price adjusted) is a useful measure, if consumers are seeking to maximize their flow of consumption. The reason that investment, which is in GDP, features in a consumption-based welfare measure is that consumers value current investment since they understand, in his model, that it will yield future consumption.

Chapter 4: What’s Different about Intangible Investment?

1. Economists often call synergies “complementarities,” since the presence of one asset raises the value of another.

3. Sutton (1991) is the classic discussion of scalability and sunk costs and their effect on market structure.

5. Avinash Dixit (1992) points out that if investment involves some sunk costs, if there is ongoing uncertainty, and if the investment opportunity might occur again later, then waiting has some value: waiting will avoid sunk costs and will reveal more about the future. Dixit and Pindyck (1995) set out an example of a two-stage, sunk R&D investment project where stage one, which is very costly, reveals information about the profitability of the (less costly) stage two. A simple net present value calculation in their example reveals that stage one is not worth it, due to its high sunk costs. But if the return from resolving uncertainty is also counted, stage one can turn out to be very valuable, since it creates an “option,” that is, the opportunity to decide whether to proceed to stage two. Thus, investing in intangibles, even if they don’t directly create an asset, as in stage one, is very valuable and might be described as having what Carol Corrado and Charles Hulten (2010) call a “strategic” property.

6. The Writings of Thomas Jefferson. 1905. Edited by Andrew A. Lipscomb and Albert Ellery Bergh. Thomas Jefferson Memorial Association, 13:333–35.

7. Article I, Section 8, Clause 8 of the United States Constitution empowers the United States Congress: “To promote the Progress of Science and useful Arts, by securing for limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries.”

Chapter 5: Intangibles, Investment, Productivity, and Secular Stagnation

1. Published as Summers 2015. Summers developed his views further in a Keynote Address at the National Association for Business Economics Policy Conference, February 24, 2014, published as Summers 2014. Paul Krugman has also popularized the term “liquidity trap,” which refers to a position whereby interest rates can be lowered no further and so monetary policy, which works by adjusting interest rates and so changing investment and consumption, loses its power to affect activity.

2. There are a number of different measures of profits. One such measure is published by statistical agencies. They measure economy-wide company profits (often with sectors removed, e.g., banks or oil industries) that they divide by economy-wide commercial capital to produce a return on capital employed. (A related alternative is company profits divided by GDP, but this is not a return on capital employed, but rather the share of those profits in total incomes.) Other measures sometimes referred to as “profits” are from stock market valuations—for example, Tobin’s Q (ratio of the market value of nonfinancial corporations to the value of their tangible capital) or the market value of equities as a share of GDP.

3. One challenge to this view comes in work by James Bessen (2016). He combines company market value with data on (i) company intangibles, using R&D, advertising, and general spending on administration costs and (ii) industry data on the extent of regulation, lobbying, and rent-seeking in that industry. Like other studies, he finds a statistically significant correlation between market values and the various intangible measures and the lobbying/rent-seeking measures. However, in his data, from the 2000s, the intangible/tangible capital ratio is falling, so he concludes that intangibles cannot explain the rise in profits in the 2000s, although they can account for the rise from 1980 to 2000. As he acknowledges, however, his regulation and R&D measures are highly concentrated in just a few industries, such as pharmaceuticals and transport. Hence, he is not measuring the broader range of intangibles we use.

4. Remember that TFP measures how well firms are using their inputs (that is, output per unit of all their inputs). If they can scale them or, better yet, benefit from inputs of other firms, then TFP rises.

Chapter 6: Intangibles and the Rise of Inequality

1. They are called mules because they were a hybrid of two earlier inventions, the water frame and the spinning jenny, a nice demonstration that the synergies between intangible investments—in this case, different types of R&D—are not a recent discovery.

4. There’s a deeper reason behind this logic, which is that taxing mobile capital ends up costing the workers. How can it be that a tax bill that capital owners have to pay ends up being paid by the workers? The answer is the difference between the legal and economic incidence of the tax. The legal incidence is the identity of the party who writes the check. The economic incidence is the identity of the party whose income changes as a consequence. So, if a government taxes capital, which can move abroad, the legal incidence does indeed fall upon the capital owner who has to pay; in this example no one pays the tax since the capital all goes abroad. But with less capital to work with, workers are less productive and so their wages fall. Thus the economic incidence falls upon them.

5. Reported in Krueger 2016.

Chapter 7: Infrastructure for Intangibles, and Intangible Infrastructure

1. John Fairley paints a vivid portrait of the 300,000 horses in 1900 in London that “were sustained by an infrastructure of extraordinary organizational complexity and sophistication . . . the Great Western Railway built an equine hostelry of stables four storeys high . . . with an attendant army just as large of stablemen, farriers, vets and feed waggoners” (Horses of the Great War 2016, prologue).

2. Edgerton also points out that claims on the death of distance have been going for quite a while. He quotes George Orwell, writing in 1944, “People go on repeating certain phrases which were fashionable before 1914. Two great favourites are ‘the abolition of distance’ and ‘the disappearance of frontiers’. I do not know how often I have met with the statements that ‘the aeroplane and the radio have abolished distance’ and ‘all parts of the world are now interdependent.’ ” Orwell, “As I Please,” Tribune, May 12, 1944.

3. Economists evaluating “place-based” policies have found two important problems. First, as ever in policy, it is hard to know what the counterfactual is, that is, what would have happened in the absence of the cluster. Second, economists have continued to find evidence of “displacement.” The economists Henry Overman and Elias Einio looked at the Local Enterprise Growth Initiative, a 2006–11 UK initiative that subsidized employment in deprived areas. They found it raised employment by 5 percent in the deprived areas, but lowered it by 5 percent in the neighboring areas. Worse, when the program finished, after six years, the businesses all moved back to the original area. Thus the program spent around £418 million to move businesses temporarily about half a mile.

5. Daniel Davies and Tess Read’s book The Secret Life of Money has an excellent chapter on the economics of trade shows (D. Davies and Read 2015).

Chapter 8: The Challenge of Financing an Intangible Economy

1. In the General Theory of Employment, Interest and Money, Keynes, in chapter 12, distinguishes between speculation as “the activity of forecasting the psychology of the market” and the term enterprise for “the activity of forecasting the prospective yield of assets over their whole life. [If an] investor . . . will not readily purchase an investment except in the hope of capital appreciation . . . he is, in the above sense, a speculator. Speculators may do no harm as bubbles on a steady stream of enterprise. But the position is serious when enterprise becomes the bubble on a whirlpool of speculation. When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done.”

3. A recent CMA/FCA report found that only 25 percent of small businesses thought that “their bank supports their business.”

4. Hamlet, Act 1, Sc. 3, lines 75–76.

6. This seems to persist even when we adjust for the impact of taxes.

9. Ikenberry, Lakonishok, and Vermaelen (1995), it should be noted, argue that share buybacks create value in the short term and create even more value in the long term.

10. This is related to a famous argument made by the economists Sanford Grossman and Oliver Hart (1980), who pointed out that small shareholders will not devote resources to getting rid of poorly performing managers, but rather they will just implicitly rely on the work of others (in particular, corporate raiders) via the share price.

Chapter 9: Competing, Managing, and Investing in the Intangible Economy

1. Sarah O’Connor, “Amazon Unpacked,” February 8, 2013, https://www.ft.com/content/ed6a985c-70bd-11e2-85d0-00144feab49a.

2. Sustained advantage should not be confused with sustainability, often referred to not as a measure of longevity but of environmental concern. In many cases, however, both will be congruent goals, since legislation and public pressure will likely ensure firms want to do both. But there will always be cases where firms can, for example, raise short-term earnings by causing environmental damage (e.g., disposing of waste improperly). Likewise, the easiest way to raise short-term earnings is to renege on promises to suppliers (and maybe customers): none of these tactics is sustainable in the long term and thus we rule them out.

4. For more discussion, see the very accessible treatment by Lev and Gu (2016) and Foss and Stieglitz (2012). Kay (1993) groups the distinctive assets firms can create under three headings: innovation, reputation, and architecture (the latter being features of the organization).

6. A very lively literature asks who then should have that authority, managers, workers, or owners?

7. Reported in, for example, www.sfgate.com (http://www.sfgate.com/bayarea/article/Court-to-FedEx-Your-drivers-are-full-time-5717048.php). It is reported that although FedEx required their drivers to provide their own vans, they specified “their dimensions, shelving, and paint color.”

8. And the management survey work does try to correct for this effect: so, for example, the world management survey asks about the time horizon of targets and gives a high score if “Long term goals are translated into specific short term targets so that short term targets become a ‘staircase’ to reach long term goals.” (World Management Survey, question 10, manufacturing questionnaire, http://worldmanagementsurvey.org/wp-content/images/2010/09/Manufacturing-Survey-Instrument.pdf.)

9. There are, of course, a lot of complications over and above these general principles. First, in company accounts, intangible assets are often split into “intangibles other than goodwill” (such as the patent discussed) and “goodwill.” Goodwill is generated only externally, when a business is combined with another, for example, via a takeover. Goodwill measures the gap between what is paid for the business and the value of its tangible assets. That measure of goodwill is treated as an asset and then amortized (or, if the value of the goodwill falls in an agreed-upon fashion, called impairment, then an expense is entered for this). For UK guidance on this, see the UK Financial Reporting Council, FRS102, chapters 18 and 19. Appendix A to Lev (2001) reports the rules for the United States, which follow the same pattern, with a series of complicated exceptions in, for example, the purchase of information in a credit card portfolio, libraries of movie and TV companies, and mineral and airport landing rights.

10. As Lev and Gu (2016) point out, in 2011 HP acquired Autonomy for $10bn, much of whose value was software; but then wrote off almost all of it the following year.

Chapter 10: Public Policy in an Intangible Economy

1. The specific regulations are set out in Part 1 of the Framework, p. 89 (“London View Management Framework” 2012).

2. On the one hand, allowing some monopolies that may have generated some benefits to wag the whole competition-policy dog is unlikely to be a good policy. On the other hand, fixating on competition policy that creates a market structure with lots of small companies will not be a good policy decision since consumers will not enjoy the many benefits that come from intangible-rich (presumably big) firms. Rather, competition policy should be focused on whether a market is delivering rivalry, for example, allowing new firms or products to be introduced.