11

Summary, Conclusion,
and the Way Ahead

This book is about the change in the type of investment observed in more or less all developed countries over the past forty years. We have looked at investment, the spending that businesses and governments undertake to build future productive capacity. Investment used to be mostly physical or tangible, that is, in machinery, vehicles, and buildings and, in the case of government, in infrastructure. Now, much investment is intangible, that is, in knowledge-related products like software, R&D, design, artistic originals, market research, training, and new business processes. We have explored how an intangible-intensive economy looks very different from a tangible-intensive economy because intangibles have different underlying characteristics. And we have used the logic of these underlying characteristics to try to understand slowing growth and secular stagnation, inequality, and the challenges to finance and public policy.

Along the way, we’ve tried to illustrate these changes with a combination of real-world business examples and macroeconomic data (the data are in chapters 2 and 3). Our examples have taken us to the gym (chapter 2), where Les Mills has transformed modern-day gyms to rely on not just the tangible assets of weights and treadmills, but also on the intangibles of branded exercise regimes and instructor training; innovation and innervation. We’ve looked at the EpiPen (chapters 4 and 5), and how a good that is seemingly very simple to copy has nonetheless remained a market leader by the use of intangible investments in branding and training. And we’ve looked back in history from a period of few intangibles (the eleventh century, chapter 1) to microwave ovens, body scanners, and the Beatles (chapter 4). We’ve tried also to clarify the (sometimes confusing) terms in the field: investment, capital, assets (chapter 2); knowledge, information, ideas (box 4.1); productivity and profitability (box 5.1); income, earnings, and wealth (box 6.1).

Our argument has several parts:

•  1. There has been, and continues to be, a long-term shift from tangible to intangible investment.

•  2. Much of that shift does not appear in company balance sheets and national accounts because accountants and statisticians tend not to count intangible spending as an investment, but rather as day-to-day expenses.

•  3. The intangible, knowledge-based assets that intangible investment builds have different properties relative to tangible assets: they are more likely to be scalable and have sunk costs; and their benefits are more likely to spill over and exhibit synergies with other intangibles.

•  4. These characteristics have consequences for the economy. In particular, we argue that they contribute to:

  •  a. Secular stagnation. Investment appears too low since some is unrecorded; scalability of intangibles allows large and profitable firms to emerge, raising the productivity and profits gap between the leaders and laggards; the slowed pace of intangible capital building after the Great Recession has thrown off fewer spillovers and enables less scaling, thus slowing total factor productivity.

  •  b. Inequality. Income inequality rises as synergies and spillovers increase the gap in profitability between competing companies, raising the demand for managers and leaders with coordinating skills; wealth inequality rises as cities, where spillovers and synergies abound, become increasingly attractive, driving up the property prices; esteem inequality rises as psychological traits like openness to experience become more important.

  •  c. Challenges to the financial system, specifically relating to the financing of business investment. Debt finance is less appropriate for businesses with more sunk assets; public equity markets appear to undervalue at least some intangible assets in part due to underreporting of such assets but also due to the uncertainty around intangibles; venture capital, a response to the sunkenness and uncertainty around intangibles, is currently hard to scale to many industries.

  •  d. New requirements for infrastructure. In particular, the shift from tangible to intangible assets has increased the need for IT infrastructure and affordable space in large cities, while making greater demands on our “soft infrastructure”: the norms, standards, and rules that govern collaboration and interaction among people, government, and firms.

•  5. This shift has implications for management and financial investing. Firms using intangibles become more authoritarian; those generating intangibles will need more leadership; financial investors will have to find information well beyond the current financial statements that purport to describe current businesses.

•  6. The shift also changes the public policy agenda. Policymakers will need to focus on facilitating knowledge infrastructure—such as education, Internet and communications technology, urban planning, and public science spending—and on clarifying IP regulation but not necessarily strengthening it.

It is worth reviewing in what respect these points are controversial—and where the balance of proof lies. The first point, that there has been a shift from tangible to intangible spending, is relatively widely accepted. The most controversy surrounds how to measure investment in business processes, which is intrinsically very hard, but even if we entirely disregard these types of intangibles, the increasing relative importance of intangible investment still holds. Likewise the second point, that much of this intangible spending is unrecorded, is acknowledged by those who design the accounting conventions that govern the treatment of intangibles.

The third point, namely the properties of intangibles, is more conceptual. Scalability and spillovers follow from the fundamental properties of knowledge as a good (it can be used over and over again, and it might be hard to prevent others from using it). To a certain extent sunkenness (the inability to get the specific intangible investment back after it is spent) is a consequence of the lack of markets for intangible assets and may be mitigated as markets for intangibles develop. And synergies between intangibles seem like a natural property of the power of ideas in combination.

The fourth point, the consequences for the economy, is inevitably speculative. Our aim in this book has been to propose how this important change in the capital stock of the economy could help explain certain topical economic problems and puzzles. It is unlikely that the shift to intangibles is the only cause of any of these widespread and complex phenomena, but we hope that we have shown that it may play a role—a role that for the most part has not been widely recognized.

Points five and six, the implications for management and investment, and public policy, respectively, include a range of recommendations that will be familiar to some. We do not pretend that the idea of publicly funding R&D or of paying attention to leadership in businesses is new. But we do argue that the steady, long-run rise of intangible investment puts these recommendations in context and helps managers and policymakers to prioritize. Countries are faced with a dizzying range of policy choices. We hope this book makes the case that those strategies that go with the grain of the long-run rise of intangible investment, such as those we set out here, are more likely to secure prosperity than those that go against it.