The Rise of the Intangible Economy

In 2013, Stanstead airport was valued at £1.5 billion. A survey carried out under the orders of William the Conqueror almost a millennium ago valued the Stansted village at £11.

Even adjusting for inflation, the numbers are light years apart. What changed?

‘Capitalism without Capital‘ (by Jonathan Haskel and Stian Westlake) sets out to find that and stumbles upon a big discovery. That the change happened because of the rise of ‘intangible assets’ like data, movies, eBooks, software, brand, relationships, training etc.

The economics of intangible goods is vastly different from the manufactured goods. Let’s take the example of car production: building the 10th car costs you (almost) the same as the 1000th car.

But here’s the catch: the marginal costs for building the 10th and 1000th copy of a software is trivial. The only cost involved is towards creating the 1st copy.

Software came to included in the US’ GDP calculations only since 1999. But, today, intangibles dominate the market. In fact, a 2017 study found that tangible assets of Microsoft Corporation (like plant, equipment, etc.) constituted only 4% of their total assets.

Why doesn’t the change strike us? Because the ‘intangible assets’ are hidden in plain sight and don’t jump for our attention. Compare today’s reception area of a commercial or residential property to that which existed about 20 years ago.

On the surface, you see a security personnel, a cabin where they’re housed, and barricade-like structures. They’re still the same. But now, they have a desktop, advanced communication infra, a software solution encompassing the entire residential area, with a software-based security implemented. All these intangibles we now take for granted were absent just decades ago.

How do intangibles change the investment scenario? The book answers in 4S’s.

1. SUNK cost: In the event your investment doesn’t pay off, you don’t have physical assets to fall back on. If your new software fails, the investment cannot be recovered by selling physical assets.
2. SPILLOVERS: A company’s R&D, unless protected by patents, is readily available for competitors to poach upon. An Uber driver can also seamlessly work with Lyft.
3. SCALABLE: Unlike physical assets, intangibles lend themselves to near-infinite scaling up with trivial costs. If your software clicks, you can scale it up all across the globe without significant costs.
4. SYNERGIES: Intangibles exhibit synergies with other intangibles as well as tangibles leading to dramatically better products/services. Smartphones (hardware) work effortlessly with mobile OS like Android or iOS, apps etc. (intangibles).

The authors assert that it was during the Recession in 2008 that intangible investments surpassed tangible investments.

Here’re the reasons they believe led to the tipping point:

• Over time, labor-intensive services become costlier than manufactured goods. Since intangible investments rely on labor, the investment in intangible assets will increase too.
• New technological advances seem to be disproportionately favoring and fueling investments in the intangibles.
• Intangibles seem to improve the value add. Even manufacturing sector is increasingly shifting from tangible-intensive to intangible-intensive.
• The trend towards flexible markets and regulations are driving greater intangible investment.

The authors provide the readers with much food for thought. However, the policy implications of these changes are huge.

In a world of Capitalism Without Capital, how should the policymakers strive to fuel economic growth? The book attempts to provide a policy roadmap and brings a few contentious concerns to the surface.

A must read for all those who wish to understand the seismic changes around us and how they’re poised to disrupt the global market.