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Capitalism without Capital The Rise of the Intangible Economy (Jonathan Haskel, Stian Westlake) - Haskel, Jonathan, Westlake, Stian

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Matheus Puppe

· 51 min read

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  • Colin Matthews, CEO of the British Airports Authority (BAA), was frustrated that valuers were assessing BAA’s airports to break up the company per UK competition authorities’ orders.

  • In 2012, valuers measured and counted assets at Stansted Airport to determine its worth for potential buyers. They used standard accounting methods to value tangible assets like the terminal, tarmac, parking lots, etc.

  • The valuation seemed quintessentially modern with its privatized airport, accountants/lawyers, and financial logic.

  • However, the valuation method used was actually centuries-old, tracing back to the Domesday Book’s accounting of lands and assets in 11th century England.

  • This traditional method focuses on tangible, physical assets. But today’s economy is increasingly based on intangible assets like R&D, software, brands, organizational capital, etc.

  • Accounting rules have not caught up, so the market value of companies increasingly exceeds their book value.

  • The authors argue we are moving to a form of “capitalism without capital” as intangible investment overtakes tangible. This has major implications for productivity, inequality, management, policy, and more.

  • To understand the modern economy, we must better measure and understand intangible assets and investment. The authors aim to explain the rise of intangibles and its significance.

Here is a summary of the key points about intangible investment from the passage:

  • Investment has traditionally been thought of as tangible - things you can touch like buildings, machinery, etc. This made sense for a long time.

  • But the economy now depends more on intangible assets - ideas, knowledge, software, brands, organizational processes, etc. These are still investments because companies spend time and money to build them up, even if they aren’t physical.

  • Economists like Corrado, Hulten and Sichel recognized the importance of intangible investment in the “new economy” of the 1990s/2000s. They developed ways to measure intangible investment across the whole economy.

  • Initial research found intangible investment was very high, especially for companies like Microsoft which were valuable but had few traditional assets. There was excitement about understanding the “new economy.”

  • But interest waned after the 2008 financial crisis, as economic debate shifted to more pressing issues of crisis response and stagnation. The intangibles agenda stalled.

  • There has been growing investment in intangible assets like software, research and development, brands, and organizational capital. However, conventional accounting practices often do not measure these as long-lived capital assets.

  • As intangible investment has become more important, this means we are trying to measure capitalism without fully counting all the capital.

  • Intangible assets have different economic characteristics compared to tangible assets like machines and buildings:

  1. Intangible investments tend to be sunk costs that can’t be resold.

  2. Intangible assets generate more spillovers - others can benefit from them more easily.

  3. Intangible assets are more scalable.

  4. Intangible investments have greater synergies and complementarities with each other.

  • Because of these differences, the rise of intangibles means the economy is starting to behave differently than when it was dominated by tangible investments.

  • Understanding the shift to intangible investment can help explain major economic issues today like stagnation, inequality, the role of management, and the need for policy and financial reforms.

Here are brief definitions of some key economic terms related to investment, assets, and capital:

  • Investment refers to the acquisition of new assets that will provide value over time. This includes things like purchasing new equipment, developing new products, building infrastructure, training employees, etc.

  • Assets are resources or rights owned by a business or individual that have economic value. Assets can be tangible (physical things like equipment, buildings) or intangible (non-physical things like brands, intellectual property, organizational processes).

  • Capital refers to assets that contribute to the production of goods and services. Capital can also be tangible or intangible.

In essence, investment means acquiring assets that increase capital to support production. Investments in both tangible and intangible assets have always occurred, but the share of investment going toward intangible capital has increased dramatically in recent decades. This shift toward intangible investment is a key trend that has reshaped the modern economy.

Here is a summary of the key points about assets and investments:

  • Investment refers to spending by businesses, government, or nonprofits that creates a fixed, long-lived asset. This is different from investing in stocks/shares or households buying appliances.

  • A fixed asset provides productive services over time. Capital and labor are called factors of production.

  • Investments can be tangible, like buildings, or intangible, like software, R&D, and business processes.

  • Intangible investments have grown steadily in importance in many industries like retail and gyms. 40 years ago gyms were mainly equipment, now brands and software are key assets.

  • Supermarkets have invested more in supply chain software, branding, market research over time compared to buildings and checkouts.

  • Economists have been reluctant to count intangibles as investment, though some like software are now included. The growth of intangibles is a key part of the story of capital’s vanishing act.

Here is a summary of the key points about the growth of intangible investment:

  • Intangible investment has grown steadily over time relative to tangible investment in developed economies like the US and UK. By the 1990s-2000s it overtook tangible investment.

  • There are differences across countries - Mediterranean countries like Italy and Spain have lower intangible investment, while Nordic countries, the US, and UK have higher levels.

  • Reasons for the growth likely include:

  • Baumol’s cost disease - services like intangibles become relatively more expensive over time compared to manufactured tangibles

  • Technology increases opportunities for productive intangible investment e.g. IT enables more efficient organizational capital

  • Intangibles like R&D and branding have increasing returns to scale, so extra investment yields over-proportional returns

  • Globalization enabled intangibles to be exploited across wider markets, increasing returns

  • Deregulation in services increased competition and need for intangibles like organizational capital

  • The shift to services in developed economies increased demand for intangibles over tangibles

  • Germany’s development of R&D, along with its spread to the US, made commercial R&D more systematic and worthwhile. Systems like lean manufacturing (Toyota’s Kanban) also increase returns on organizational investments.

  • Code repositories and social technologies help programmers collaborate, increasing returns on software investments.

  • Country data shows some correlation between intangible investment share of GDP and IT’s share of tangible investment, but the rise of intangibles likely has multiple causes beyond just IT.

  • Intangible intensity has grown in manufacturing, not just services. Globalization encourages developed countries to specialize in intangible-intensive manufacturing.

  • Less regulation encourages intangible investment more than tangible. Flexible labor markets facilitate organizational changes needed for new intangibles.

  • Government R&D spending correlates with market sector intangible spending across countries. Public co-investment matters.

  • Intangible investment is higher as a share of GDP in more developed countries, perhaps due to financial resources and science base needed.

  • Bigger markets increase payoffs for intangibles like brands and R&D. Globalization expands market size.

Here is a summary of the key points about how investment is measured and why:

  • Measuring investment is critical for calculating GDP, as investment spending contributes to a country’s total output and production capacity.

  • When GDP was first developed in the 1940s, investment was limited to physical capital like machines and equipment. Spending on things like R&D and worker training was treated as a business cost rather than investment.

  • In the 1960s, economists like Fritz Machlup and Zvi Griliches began arguing that knowledge spending and intangibles like R&D should be counted as investment, as they have lasting benefits. But statisticians did not change how investment was measured.

  • In the 1980s, the puzzle of slow productivity growth despite IT investment led economists to rethink measurement. Robert Solow quipped that computers were everywhere except in the productivity statistics.

  • This prompted greater study of intangibles. Economists realized traditional national accounts were not capturing important new forms of investment in knowledge, data, software and organizational improvement.

  • Better methods to measure intangible investment were developed in the 1990s and 2000s, showing its rising importance. Intangible investment is now recognized as vital for growth, competitiveness and living standards.

  • In the 1980s-1990s, some economists noted that official statistics were not fully capturing new types of investment, especially related to information technology. Statistical agencies began making innovations like quality-adjusting computer prices and including software as investment.

  • This prompted interest in broader “intangible” investments that were not physical but could still be valuable, like organizational knowledge. Academics like Baruch Lev and Robert Hall wrote about this, as did policy figures like Leonard Nakamura.

  • In the early 2000s, Carol Corrado, Charles Hulten and others systematically developed frameworks to define and measure different types of intangible investments. This led to the first estimates for the US, UK, Japan and other countries.

  • Gradually statistical agencies also began incorporating some intangibles like software and R&D into official statistics and national accounts, significantly raising measured investment and GDP.

  • By the 2000s, the idea that businesses invest significantly in intangibles beyond just tangibles took hold, prompting efforts to define and measure these new investment types.

Here is a summary of the key points about measuring investment in intangibles:

  • Finding spending on intangibles can be done via surveys that ask firms about their purchases of assets like software, databases, etc.

  • For intangibles produced in-house, like software written internally, estimates have to be made based on labor force surveys and industry consultations.

  • Not all spending creates a long-lived asset, so adjustments have to be made based on industry evidence to estimate the share of spending that is investment.

  • Spending measures are in nominal terms. They need to be converted to real investment figures by adjusting for inflation and quality change over time. This is challenging for intangibles where price indices are hard to construct.

  • The result is a measure of real investment in intangibles like software, R&D, design, training, etc. This can be compared over time and to investment in tangible assets.

  • There are still limitations in measurement, like uneven treatment across countries for databases. But measurement has improved substantially, allowing intangibles to be counted as investments in national accounts.

  • Statistical agencies face challenges in measuring the prices and investment in intangible assets like services, software, and R&D. Different methods are used, such as assuming prices follow general patterns, breaking services into component parts, or using time-based surveys.

  • Adjusting for changes in quality over time is especially difficult for things like software that improve rapidly. Statisticians try techniques like correlating quality attributes with price changes.

  • Some argue that things like branding, organizational development, and training are not real investments, but there are good counterarguments:

  • Branding is not just a zero-sum game between companies - it can grow the overall market.

  • Organizational development that creates lasting improvements should count as an asset. Well-run firms don’t waste money on useless projects.

  • Training develops human capital for the employee, but firms use contracts and custom systems to capture some of the benefits.

  • Overall, market discipline means successful firms are unlikely to spend on things that don’t produce assets of lasting value. Statistical agencies have to be careful in definitions, but these categories belong in investment.

  • Economists have made increasing efforts over time to measure a wider range of investments, including intangible investments.

  • In the 2000s, Corrado, Hulten, and Sichel developed the approach currently used for measuring intangible investments. This includes investments in software, R&D, design, training, organizational development, and branding.

  • There are some objections to treating intangibles as investments, such as that some knowledge comes into a firm at no cost. But overall the trend of rising intangible investment is widely accepted.

  • Conceptual issues remain around measuring public sector intangibles and aspects of quality of life. But progress has been made in isolating knowledge investments like R&D.

  • Measuring the stock of intangible assets involves assessing investment flows and depreciation. Depreciation includes both decay (physical degradation) and discards (loss of value due to competition).

  • Overall, economists have made major strides in measuring a wider range of investments, especially intangibles. But open questions remain around measurement and definitions.

Here are the key points about how intangible assets differ from tangible assets:

  • Scalability - Intangible assets can often be used repeatedly or “scaled up” at very low marginal cost, while tangible assets are subject to capacity constraints. For example, a piece of software or recorded music can be used over and over again with little added cost.

  • Sunkenness - Investments in intangibles are often largely “sunk” - meaning that they have little resale value if the project fails. For example, R&D, branding, and organizational development investments may not be recoverable if a business exits a market. Tangible assets like machinery are generally easier to sell off.

  • Spillovers - The benefits of investments in intangibles often “spill over” to other firms beyond the investor. For example, advances in R&D or new organizational practices can be copied or learned from. The original investor may not be able to fully capture the returns.

  • Synergies - Combining different kinds of intangibles can lead to benefits greater than the sum of their parts. Bringing together technological ideas with branding, design, and marketing capabilities can lead to major innovations. These synergies between intangibles are often large and unpredictable.

In summary, these four S’s - scalability, sunkenness, spillovers, and synergies - make intangible investments fundamentally different from tangible investments in terms of incentives, business models, and overall economic outcomes. An economy reliant on intangibles behaves differently than one based on tangibles.

Here is a summary of the key points about scalability from the passage:

  • Intangible assets like knowledge and ideas are scalable - they can be used repeatedly and in multiple places at the same time, unlike physical assets.

  • Once an intangible asset is created, like software or an organizational process, it can be used over and over again at little additional cost.

  • Economist Paul Romer used oral rehydration therapy as an example - the knowledge of how to use sodium and sugar to rehydrate children can be applied widely, while physical investments like water pumps are limited.

  • Romer’s “New Growth Theory” recognizes that knowledge is scalable and can be applied repeatedly to drive economic growth, in contrast to traditional models that treated technology as an external force.

  • The scalability and repeat use of intangible knowledge assets is a key property that distinguishes them from rival physical goods. This scalability allows intangibles to be a source of growth.

  • Other examples given include Starbucks using the same operating manual in all stores in China, the Angry Birds app being downloaded over 2 billion times, and an aircraft engine manufacturer reusing the same engine design.

In summary, the scalability of intangible knowledge assets, allowing repeated use with low marginal cost, is a key economic property that differentiates them from rival physical goods. This scalability makes intangible capital a driver of economic growth.

  • Intangible investments like R&D, brands, and organizational processes are often highly scalable - they can be leveraged across large markets with little incremental cost. This scalability stems from the “non-rivalry” of ideas that allows them to be reused endlessly.

  • Scalability enables some intangible-intensive companies like Google and Facebook to achieve vast size and market dominance. It also tends to lead to “winner-takes-all” competition as runners-up struggle to compete with near-infinitely scalable assets.

  • Intangible investments are often “sunk costs” - if a project fails, the costs are difficult or impossible to recover by selling off the assets. This is because intangibles like brands and processes tend to be firm-specific and lack secondary markets.

  • The irrecoverable nature of sunk intangible costs makes them hard to value and finance, especially with debt. Banks prefer tangible assets that can be seized and resold if needed.

So in summary, the scalability and sunk nature of intangibles fundamentally shape markets and financing in an intangible-intensive economy.

  • Intangible investments like R&D and branding tend to generate spillovers - benefits that spill over to other companies beyond the investor. This is because intangibles like ideas are non-rival (can be used by multiple parties) and non-excludable (hard to prevent others from benefiting).

  • R&D is a prime example, as it is relatively easy to copy or imitate ideas and innovations, unless legally protected by patents or copyrights. Apple’s iPhone design and ecosystem spilled over to benefit competitors like Samsung.

  • Organizational innovations can also spill over, like McKinsey’s new model of management consulting which came to dominate the industry.

  • Training spillovers happen when trained employees take their skills to new employers.

  • Tangible assets like property or equipment tend to have fewer spillovers due to their physical nature - it’s much harder to simply take and use someone else’s tangible asset.

  • But intangible assets have more contested property rights historically, as ideas and knowledge are inherently harder to control and exclude others from using. Patents and copyrights are less secure than property deeds.

  • Intangible assets like knowledge and ideas tend to “spill over” and benefit other companies, unlike physical assets. This makes companies less willing to invest in intangibles.

  • Spillovers matter for three reasons: they discourage investment, they create a premium on managing spillovers well, and they shape the geography of modern economies.

  • Companies use various strategies to maximize benefits from their own intangibles and exploit spillovers from others, including legal methods like patents and reciprocity through knowledge sharing.

  • Tangible property has a 3,500 year head start on defining ownership norms compared to intangible property. This contributes to greater spillovers for intangibles.

  • The ability to attract spillovers from others’ investments in intangibles is as important as maximizing the benefits of one’s own. Being well-networked and knowing the field becomes more important.

Here is a summary of the key points about why intangible assets exhibit synergies:

  • Ideas tend to build on and combine with other ideas, creating synergies and new innovations. This is seen in examples like the microwave oven, which combined existing technologies in new ways.

  • Intangible assets like ideas, designs, and business processes show strong synergies with information technology like computers and smartphones. Companies that combine IT investment with organizational changes and intangible investments in areas like supply chain management see significant productivity benefits.

  • The synergies between intangible assets encourage more open innovation, where firms look outside their boundaries for new ideas and collaborations. This is the opposite effect of the spillover problem, which encourages companies to hoard intangibles.

  • Synergies make the value of intangibles greater when combined, so there is incentive to share and access more ideas. This has led to trends like open innovation between firms, academics, and startups.

  • The synergies between intangible investments are often unpredictable, arising across domains in unexpected ways. This makes the innovation process more serendipitous.

  • Overall, the synergies unique to intangible assets encourage collaboration and openness, in contrast to the spillover effect. Taking advantage of these synergies is increasingly important for innovation and growth.

Here is a summary of the key points about intangible investments from the passage:

  • Intangible investments like R&D, design, and organizational know-how differ from tangible investments in several ways:

  • They tend to be scalable - their costs do not rise proportionally with production. This means their returns can be very high if successful.

  • Their costs are often sunk - they cannot be recovered if the project fails. This increases the risk.

  • They generate spillovers - their benefits spread to other firms and the wider economy. Firms must balance openness to gain synergies against appropriating returns.

  • They exhibit synergies - ideas can complement and boost the value of related ideas. This encourages coordination and clustering of research.

  • Due to these properties, intangible investments exhibit:

  • Uncertainty - the potential for very high or very low returns makes outcomes harder to predict. Sunk costs and spillovers also contribute.

  • Contestedness - the spillover of benefits leads firms to compete over controlling and benefiting from intangibles.

So intangible investments differ substantially from tangible assets. Their scalability, sunk costs, spillovers, and synergies make their returns more uncertain and make them more likely to be contested between firms and institutions.

Here is a summary of the key points about secular stagnation and its symptoms:

  • Secular stagnation refers to persistently low levels of business investment and economic growth, despite very low interest rates that should encourage investment.

  • Symptoms of secular stagnation include:

  1. Low business investment that has not recovered since the 2008 financial crisis, even though interest rates are very low.

  2. Low interest rates, which central banks have not been able to raise through traditional monetary policy.

  3. High and rising corporate profits, suggesting profitable investment opportunities exist.

  4. Increasing inequality of profits and productivity between frontier/leading firms and laggards. The most productive firms are pulling away from the rest.

  5. Slowing productivity growth, with frontier firms maintaining growth but other firms lagging behind.

  • This combination of symptoms is a puzzle for economists, as low investment despite low borrowing costs and high profits defies standard economic logic.

  • Proposed explanations include lower demand for investment due to technology exhausting easy discoveries, but this is hard to confirm in the data. The rise of intangibles may offer an alternative explanation.

  • There has been a growing gap in performance between top firms and others across industries, starting before the financial crisis. This is seen in accounting data on firms.

  • Labor productivity growth has slowed down in developed countries. This is not solely due to lower investment.

  • Investment has fallen since the financial crisis, but not enough to explain all the loss in labor productivity.

  • Much of the productivity slowdown is due to a decline in multi-factor or total factor productivity (TFP). This measures how effectively inputs like labor and capital are being utilized.

  • The sustained decrease in productivity growth in developed countries is not solely driven by lower investment. TFP has fallen significantly since the mid-2000s in OECD countries.

  • Reasons for the TFP slowdown include lower R&D spending, slower technology diffusion, and less competitive markets. This leads to inefficient allocation of resources across firms.

  • Intangible investments like R&D, software, and organizational capital are poorly measured in national accounts. This means measured investment appears lower than it really is.

  • However, including more intangibles in the national accounts does not dramatically affect the downward trend in the investment/GDP ratio over recent decades. So the under-measurement of intangibles does not fully explain the fall in measured investment.

  • Intangibles have properties like scalability and spillovers which may affect firms’ incentives to invest:

  • Scalability - intangibles like brands, software, and IP can be leveraged across large operations, increasing incentives to invest for firms that can achieve large scale. This may explain rising productivity gaps between leading and lagging firms.

  • Spillovers - intangibles often spill over to other firms, reducing incentives to invest for the average firm. But some firms are better at appropriating spillovers (“open innovation”), further increasing productivity and profit gaps between leaders and laggards.

  • Indirect evidence suggests intangibles and their properties like scalability and spillovers may play a role in rising inequality between firms. But direct firm-level data is lacking due to accounting conventions.

  • Overall, mismeasurement of intangibles does not seem to fully explain the investment slowdown. But properties of intangibles like scalability and spillovers likely contribute to rising firm inequality and may dampen investment incentives for some firms.

  • Growth in intangible capital services and R&D capital services has slowed since the Great Recession.

  • This slowdown in intangible growth could help explain the slowdown in total factor productivity (TFP) growth, because intangibles can generate spillovers that raise TFP.

  • There are a couple potential reasons intangibles may be generating fewer spillovers recently:

  • Lagging firms may have become less effective at absorbing spillovers from leading firms’ intangible investments. Leading firms can better take advantage of scalability and synergies of intangibles.

  • Intangibles like software and data may exhibit decreasing returns to scale, so additional intangible investments generate smaller marginal gains.

  • Economic conditions like weak demand and uncertainty may be dampening innovation and intangible investments, reducing spillovers.

  • So the slowdown in intangible investment and capital accumulation, possibly combined with decreasing spillovers, helps explain the TFP slowdown since the Great Recession. This is a potential contributor to secular stagnation.

Smartphones had previously been difficult to use and unappealing to consumers. The introduction of the iPhone changed that by making a smartphone with an intuitive touchscreen interface. This benefited not only Apple but also other smartphone makers like Samsung and HTC, who could now reach a much larger market of smartphone users. So the iPhone’s innovations had positive spillovers for the whole industry.

Here are the key types of inequality that are often discussed:

  • Income inequality - This refers to the distribution of income across individuals or households in a population. It is typically measured by indices like the Gini coefficient or the share of income going to top percentiles (e.g. the top 1%).

  • Wealth inequality - This refers to the distribution of wealth, which includes assets like property, stocks, etc. It is also measured using the Gini coefficient or top wealth shares. Wealth inequality is generally higher than income inequality.

  • Wage inequality - This refers specifically to inequality in earnings from labor. It can be between high- and low-wage earners or between skilled and unskilled workers.

  • Intergenerational inequality - This refers to differences between younger and older generations, for example in income, wealth, job opportunities, etc.

  • Spatial/geographic inequality - This refers to inequality between different geographic areas or regions within a country. For example, income inequality between urban and rural areas.

  • Consumption inequality - This looks at inequality in household consumption spending rather than income. It tends to be lower than income inequality.

  • Elites vs. others - This dimension focuses on the concentration of income/wealth at the very top (the “elites”) versus the rest of the population.

So in summary, inequality has multiple facets, spanning income, wealth, wage, generational, spatial, and consumption differences. Discussion often focuses on the extreme concentration at the very top versus the “left behind”.

Here is a summary of the key points about saving, inheritance, human capital, and inequality:

  • Labor income is typically 65-75% of total national income, with the rest being capital income.

  • The annual return on wealth is around 6-8%, so total wealth is about 400% of GDP/total income. Wealth accumulates over time and is a stock, while GDP/income is an annual flow.

  • Wealth inequality is much higher than income inequality. The wealthiest 10% of households hold 50% of the wealth, while the least wealthy 25% hold almost no wealth.

  • The Gini coefficient for wealth is 0.64 compared to 0.34 for net income, indicating more inequality in wealth distribution.

  • There are several types of inequality: earnings, income between educated and less educated, income of the top 1% or 0.1% compared to others, wealth, between generations, between thriving and declining places, and esteem/regard.

  • Standard explanations for rising inequality include technology replacing workers, globalization and the doubling of the global labor pool with China and India, and the tendency for wealth to accumulate over time.

  • The standard explanations for rising inequality - technology, globalization, and capital accumulation - don’t fully explain some aspects of today’s income and wealth distribution.

  • The relationship between technology and wages is unpredictable. Technology doesn’t always lead to job losses or lower pay, as seen with 19th century textile machines and 20th century ATMs.

  • Inequality has risen most dramatically at the very top - the top 1% - not just between high- and low-skilled workers. Many top earners are CEOs and managers, not tech moguls.

  • Housing wealth has been a major driver of wealth inequality, which doesn’t fit neatly with the standard explanations.

  • Wage inequality between firms has grown substantially, meaning pay gaps within firms can’t fully explain rising inequality.

  • These phenomena suggest other factors beyond technology, trade and capital accumulation are needed to fully understand today’s high levels of inequality. The standard story is incomplete.

  • Income inequality has risen not just between firms but within firms, as the pay gap between managers and other employees has grown.

  • However, recent research shows that the rising gap between high-paying and low-paying firms explains about two-thirds of the increase in earnings inequality since the 1980s.

  • High-paying firms seem to be hiring more highly skilled and educated workers (“symbolic analysts”), likely due to the importance of intangible assets like patents, brands, and organizational know-how. Managing these assets requires specific expertise.

  • Intangible assets are also more “contestable” - it can be unclear who owns them or how to fully benefit from them. Having well-connected managers and directors can help firms assert their rights over intangibles.

  • The outsized pay of “superstars” with ownership of or special access to valuable scalable intangibles also contributes to inequality.

  • In summary, the rising importance of intangible assets appears to be a significant driver of increased income inequality between firms, as well as the growing pay gap between elite managers and other workers.

Here is a summary of the key points about how the rise of intangibles has contributed to increased wealth inequality:

  • Intangibles have helped drive up property prices, especially in thriving cities. This explains a significant part of the increase in wealth of the richest people, as the value of their properties has risen dramatically.

  • The value of properties in thriving cities derives largely from intangible assets like knowledge spillovers, networks, and agglomeration effects. Places where intangible investment has been high have seen large property price increases.

  • Intangible capital is geographically mobile, making it harder for governments to tax and redistribute wealth like they did in the post-war decades. Attempts to tax intangibles are more easily avoided.

  • Inequality of wealth has risen along with income inequality as property price rises have disproportionately benefited the already wealthy. Their tangible real estate has increased in value thanks to surrounding intangible investments.

  • The mobility of intangible capital limits governments’ ability to tax it and spread the gains. This reduces redistribution and allows inequality in both income and wealth to persist.

In summary, the rise of hard-to-tax, geographically fluid intangible capital has contributed significantly to increased inequality in income and especially wealth in advanced economies over recent decades.

Here are the key points about how the rise of intangibles helps explain aspects of rising inequality:

  • Intangibles encourage firms and talented workers to cluster in cities to benefit from spillovers and synergies. This drives up urban property values and increases the wealth of property owners.

  • Intangibles are more mobile across borders than tangible assets. This exacerbates tax competition between countries and makes it harder for governments to tax capital income.

  • An economy based on intangibles tends to reward psychological traits like openness to experience. This contributes to a cultural divide between cosmopolitan groups who possess these traits and more traditionalist groups who feel left behind.

In summary, the rise of intangible investment helps explain growing wealth inequality, difficulties in taxing capital, and a cultural divide between cosmopolitan and traditionalist groups. The economic changes brought by intangibles exacerbate inequality in multiple dimensions.

Here is a summary of the key points about physical infrastructure and intangible investment:

  • Traditional physical infrastructure like roads, railways, and ports is still important in an intangible economy, despite some earlier predictions that “distance would die.” However, the rise of intangibles may change the types of infrastructure that are most valuable.

  • Infrastructure that increases connectivity and brings people together is particularly useful for creating synergies and exploiting spillovers from intangible investments. This includes transportation infrastructure that enables clusters and also digital infrastructure like broadband.

  • Infrastructure to support the creation and sharing of data is important, like sensors, databases, and platforms. This kind of “data infrastructure” helps build a common pool of reusable knowledge.

  • Investments like education and workforce training create an “intangible infrastructure” of human capital that enables people to create and use knowledge. Public R&D spending also builds knowledge stocks.

  • Process infrastructure like standards, intellectual property rights, and shared platforms helps coordinate economic activity and builds intangible assets like brands and reputation.

  • In general, infrastructure policy may need to shift from a narrow focus on big physical projects toward also supporting intangibles like data, human capital, and institutional frameworks.

  • Clusters (concentrations of related industries in a geographic area) are appealing to policymakers because of high-profile successful examples like Silicon Valley. Cluster policies can allow governments to appear supportive of business without major spending.

  • But it is hard to evaluate if cluster policies actually work. There are two types of infrastructure that likely matter more for clusters in an intangible economy:

  1. Affordable housing and workspace, which requires loosening regulations that restrict building in prosperous clusters.

  2. Venues and spaces where people interact and exchange ideas, which are underprovided by the market. Preserving these while allowing more building is a dilemma for policymakers.

  • Investing too much in established clusters at the expense of growing ones is a bias policymakers should avoid.

  • Technological infrastructure like broadband is important but faces challenges of rapid obsolescence and enabling valuable interactions, not just connectivity.

  • Intangible investments often generate synergies when combined with other intangibles. This means that institutions, norms, and rules can play an important role in coordinating investments and managing complexity.

  • Property rights like patents and copyrights encourage intangible investment by reducing spillovers. But overly broad or strong IP rights can also discourage competition and innovation. Getting the balance right is important.

  • Shared norms, standards, and phases (like for drug trials) help simplify complex innovation projects involving many parties over long timeframes. They provide “local predictability” and make projects more manageable.

  • Information protocols and standards help create clear interfaces so firms with synergistic assets can work together more easily.

  • Providing information on what investments others are making also helps firms identify potential synergies. Conferences, publications, and informal networks play this role.

  • Overall, this “invisible infrastructure” of rules, norms, standards, and information sharing takes on heightened importance in an intangible economy, where synergies and collaboration are so vital.

  • There is a longstanding critique that the financial system does a poor job of providing business financing and hampers business investment, due to being short-termist and myopic. This idea was already present before WWII, with Keynes arguing stock markets were like casinos.

  • This critique has taken on renewed urgency since the 2008 financial crisis, which revealed systemic failures in the financial sector. There are common arguments made, such as that banks don’t lend enough to businesses, equity markets overly focus companies on short-term stock performance, and managers cut R&D spending to please short-term investors.

  • However, some of these populist arguments are oversimplified. For example, cutting R&D could be justified if the projects aren’t panning out. Selling shares or share buybacks could also be reasonable decisions in some cases.

  • Rather than rehash these debates, this chapter will focus on whether the shift to an economy based more on intangible assets poses particular challenges for business financing, due to the inherent properties of intangibles like uncertainty, spillovers, and contestability.

  • The chapter will look at how well bank financing, public equity, and venture capital serve the needs of intangible-rich firms. It argues the shift to intangibles helps explain many perceived financing problems, and points to a new course of action for governments and investors to improve financing for intangible investment.

  • The article discusses concerns related to the “financialization” and short-termism of the modern economy, where financial metrics and incentives are increasingly influencing business decisions rather than a focus on serving customers and building strong businesses.

  • Intangible assets like patents, brands, and organizational processes are difficult for banks to lend against, compared to tangible assets like property or equipment. This makes it harder for intangible-intensive firms to access debt financing.

  • As the economy becomes more intangible-intensive, this could gradually cause problems for the stability of the banking system and its ability to lend to businesses.

  • Potential solutions include increased government lending programs, new types of financing products suited to intangible collateral, and greater use of equity financing rather than debt.

  • Venture capital is seen as important for future economies, with many governments attempting to stimulate VC sectors, though the effectiveness of these efforts is debated.

In summary, the intangible nature of modern economies raises challenges for traditional debt financing channels like banks, which may require policy and financial innovation responses.

Here is a summary of the key points about the critique of equity markets and short-termism:

  • Equity markets are accused of encouraging short-termism - rewarding short-term financial results over long-term investment. This is seen as leading companies like ICI to focus excessively on share price performance rather than long-term value creation.

  • Evidence suggests companies are increasingly focused on short-term earnings targets, sacrificing long-term value. Surveys find most executives would prioritize hitting earnings targets over long-term value.

  • Critics argue companies are giving money back to shareholders through buybacks rather than investing it. In 2014, S&P 500 firms spent almost as much on buybacks as they received in profits.

  • Proposed solutions include tax incentives to encourage long-term shareholding, restricting buybacks/options, and calling on shareholders to be more responsible.

  • The critique is about the indirect impact of financial markets on business investment decisions, not the direct provision of financing, as with bank lending.

  • There are two potential failures - shareholders losing out from missed profitable investments, and wider economy missing out on innovation and spillovers that shareholders don’t capture. The relative importance of these failures is debated.

  • Intangibles accentuate underinvestment problems but also create new challenges requiring different solutions. The short-termism debate needs to be reframed in light of the rise of intangibles.

  • Equity markets may discourage companies from investing in intangibles like R&D and training because these investments are long-term and risky. Their benefits are hard to predict and don’t show up immediately on financial statements.

  • Some research provides evidence for this - for example, managers cut R&D spending when their stock options are about to vest, to boost the stock price.

  • But other studies find no effect or even a positive effect of being a public company on measures of innovation like patent quality and quantity.

  • One potential explanation is that the type of shareholders matters. Companies with more expert, institutional investors who hold large blocks of shares may have more patience for long-term intangible investments.

  • So equity markets and short-term pressures can discourage intangible investment, but it depends on shareholders’ time horizons and expertise. More sophisticated investors allow managers more scope for long-term thinking.

  • Venture capital (VC) evolved alongside intangible-rich businesses like Google, Genentech, and Uber, whose value depends on assets like R&D, software, and organizational development.

  • Features of VC like equity stakes, seeking home-run successes, and staged funding match the characteristics of intangible investments, which have high sunk costs, scalability, and uncertainty that reduces over time.

  • VC works well in areas like biotech where there are distinct development stages and intellectual property rights that allow assets to be sold at each stage. It works less well in areas like green energy with massive uncertainty, few stages, and poor property rights.

  • The best VC firms persistently outperform, likely because VC partners’ networks and reputations allow them to exploit synergies between portfolio companies and increase the value of contested assets.

  • However, VC has limits as the model has not spread much globally and has had poor results in some sectors, so it should not be seen as a panacea for financing intangible investment.

Here is a summary of the key points about competing, managing, and investing in the intangible economy:

  • Expectations that the internet and information technology would transform business models and corporate structures have not fully materialized, likely due to the challenges of intangible investments like organizational capital.

  • The fundamental rules of strategy and sources of sustainable competitive advantage have not changed. Control of scarce strategic assets, barriers to imitation, and managerial capability are as important as ever.

  • Management has become more important as intangibles like organizational capital, brands, and software have come to dominate company value. Visionary leaders who can orchestrate complex networks of stakeholders are critical.

  • Conventional accounting measures are poorly suited to identifying and tracking intangible assets. New indicators and valuation methods are needed for investors to properly evaluate intangible-rich companies.

  • Business ecosystems with network effects and platforms are emerging as important new organizational forms that can leverage intangibles across many participants.

  • Policy has a role to play in shaping disclosure rules, setting standards, preventing rent-seeking, and funding spillovers to support business investment in intangibles.

The key message is that while the foundations of competition and strategy remain unchanged, the intangible economy calls for innovative management, new investor sensibilities, and supportive public policy to realize its potential. Companies, managers, investors and policymakers all need to adapt to the new realities.

Here is a summary of the key points about how companies can gain a competitive advantage in an intangible economy:

  • The goal for companies is to create sustainable competitive advantage, not just short-term gains through accounting manipulation.

  • In a world where companies produce identical tangible outputs with identical tangible inputs, like Idaho potato farms, no one can get ahead.

  • Sustainable advantage comes from having distinctive assets that are valuable, rare, and hard to imitate.

  • Intangible assets like reputation, design, and employee skills are more likely to be distinctive than tangible assets like machines.

  • So in an intangible economy, companies are building more distinctive intangible assets as sources of competitive advantage.

  • This explains the rise of intangibles — companies compete by investing in things like brands, R&D, and organizational capital rather than physical assets.

  • For investors, the advice is to look for companies with valuable, rare, and hard-to-imitate intangible assets as sources of sustainability.

In summary, the growth of intangibles reflects companies competing by building distinctive intangible assets, which are more likely than tangible assets to provide sustainable competitive advantage. This competition strategy drives the intangible economy.

Here is a summary of the key points about managing and investing in the intangible economy:

  • The rise of intangible assets like brands, organizational capital, and intellectual property has increased the importance of management. Intangible assets tend to be synergistic, scalable, and prone to spillovers, so managing them well is critical.

  • Managers derive their authority from the need for coordination within firms. Markets coordinate economic activity via prices, but within firms, managers coordinate through authority and direction.

  • However, the tendency to idolize managers as heroic leaders is misguided. Success is often due to general technological progress, economic conditions, and the organization itself, not just the talents of individual managers.

  • Management needs to adapt to the intangible economy, with flatter structures and more employee autonomy. Information technology allows better monitoring and coordination, reducing the need for traditional management hierarchies.

  • Investors also face challenges in valuing intangible assets and gauging management quality. Traditional metrics like book value are less relevant, requiring investors to find new ways to analyze intangible-rich companies.

  • Overall, competing and managing in the intangible economy requires new strategies and new perspectives from managers, employees, and investors alike.

  • Information technology has enabled more efficient monitoring and control in organizations, leading to less autonomy for workers. This helps explain the growth of non-autonomous work despite the lower cost of information.

  • Intangible assets like organizational knowledge raise the stakes in firms, increasing the potential for hold-up problems if key workers leave. This raises the demand for managers who can exert authority and coordinate within the firm.

  • Managing intangible-intensive firms is challenging due to the need to share information for synergies and keep loyal knowledge workers. Managers must balance authority with building a collaborative organization.

  • Personnel departments are often seen as bureaucratic and unresponsive. Studies find mixed results on whether star managers can replicate success when they move to new firms.

  • Some evidence suggests tight monitoring, targets, and incentives are features of well-managed firms. But organizations also need to balance control with collaboration to benefit from workers’ knowledge. The right approach likely depends on the firm’s specific context and strategic needs.

Here is a summary of the key points about managers and leaders in an intangible economy:

  • Organizational design and management practices should fit the firm’s role as a producer or user of intangibles. Firms that produce intangibles benefit from more autonomy, fewer targets, and better information flows. Firms that use intangibles can have more hierarchies and short-term targets.

  • Management of innovation itself is becoming more important as the innovation process changes. It now involves more open idea exchange, experimentation, and rapid implementation.

  • Leadership that inspires voluntary followers is valuable for retaining tacit knowledge and encouraging cooperation and information sharing in an intangible firm.

  • Leaders need to demonstrate superior knowledge and commitment to convince followers. This explains the rise of mission statements, visible sacrifices by leaders, and leading by example.

  • Overall, good organization, management, and leadership complement each other and are increasingly vital for success in an intangible economy. The human relations aspects become more important along with the investments in knowledge and technology.

Here is a summary of the key points about investing in the intangible economy:

  • Accounting rules make it difficult to detect investment in intangibles, as much of this spending is expensed rather than capitalized. This reduces the informativeness of financial statements.

  • Equity investors have a couple options to deal with this:

  1. Avoid investing in intangible-intensive firms and industries. This avoids the problem but misses out on much of the economy.

  2. Spend more on research and analysts to uncover information on intangibles. This is costly but some evidence suggests investors do this for firms with high intangible spending.

  3. Push for changes in accounting rules to capitalize more intangible investments. This would make financial reporting more informative.

  • Investors should look for signals that firms are building valuable intangible assets, such as skilled employees, executive time devoted to intangibles, and organizational practices that enable knowledge flows.

  • Competition for intangible assets means investors should look for sustainable competitive advantages from things like brands, proprietary technology, and customer relationships. Returns will come from scarcity.

In summary, the shift to an intangible economy poses challenges for investors seeking information, but also opportunities to earn returns by identifying firms successfully building intangible assets.

Here are five key policy challenges in an intangible economy:

  1. Intellectual property rules. Intangibles are hard to own exclusively, so good intellectual property frameworks are important. But defining “good” intellectual property rules is difficult.

  2. New markets and institutions. Intangibles benefit from synergies, so markets and institutions that enable connections and collaborations are valuable. But designing these well is tricky.

  3. Financial system reform. Intangibles are risky and difficult to collateralize, so the financial system needs to adapt to provide appropriate funding. But it’s unclear exactly how.

  4. Public investment. Government funding for basic research and education is crucial for intangibles. But choosing what and how much to invest is complex.

  5. Inequality and redistribution. The returns to intangibles tend to be more unequal. New approaches to redistribution may be needed, but these are politically controversial.

In summary, the rise of intangibles creates opportunities for growth but also many dilemmas for policymakers with no easy solutions. Navigating these issues successfully will be a major challenge in coming years.

  • Clear intellectual property laws and effective patent/copyright authorities can encourage intangible investment without overly restricting synergies and competition. The Republic of Foo has a good system for this.

  • Markets and platforms to trade intellectual property rights can help make intangibles more liquid.

  • Shared technical and professional norms allow different intangibles to work together productively.

  • Social consensus and carefully designed regulations enable intangibles to be combined and traded effectively.

  • Overall, well-designed formal and informal rules around intangible ownership and use are important for an intangible economy to function well, as in Foo. Poorly designed rules like in the Kingdom of Bar create problems.

  • Good public policy should facilitate the spread and combination of knowledge and ideas, just as it protects intellectual property rights. This happens most effectively face-to-face in cities currently.

  • Urban planning and land use policies are thus very important. Cities need freedom to grow to maximize intangible synergies, but also need to be livable and connected, balancing organic development and judicious planning.

  • As the economy relies more on intangibles, the cost of bad urban policy restricting development rises. An example is London’s protected view policy that limits building heights.

  • Creating infrastructure for intangible spillovers is not just about physical space but also technology for remote collaboration. If we could replicate face-to-face interaction remotely, it would transform land use needs.

  • Governments could fund experimental technology development to enable more effective remote collaboration and collective intelligence, though the ‘death of distance’ has proven elusive thus far.

Here are the key points from the summarized text:

  • The Republic of Foo implemented financial reforms to equalize the tax treatment of debt and equity financing, making it easier for companies to raise equity finance for intangible investments. This required significant political and administrative effort.

  • Foo now has deep equity markets for smaller firms and innovative IP-backed debt financing. Large domestic institutional investors have also started taking longer-term stakes in public companies, encouraging more intangible investment.

  • In contrast, the Kingdom of Bar continues to struggle with debt-dominated financing for smaller firms, due to ongoing tax incentives for debt. Its efforts to develop venture capital have had limited success due to unstable policies and poor conditions for intangible investment.

  • The summary suggests Foo’s comprehensive reforms to treat debt and equity equally and develop equity markets have been more successful in financing intangible investment, while Bar’s uncoordinated policies have struggled.

  • If intangible investment is becoming more important for productivity growth but harder for private firms to fund, there may need to be more public investment to avoid an investment shortfall.

  • Options for increased public investment in intangibles include:

  1. More public R&D funding for universities, institutes and businesses. Evidence suggests public research boosts productivity, especially if local firms can absorb it.

  2. More public funding for other intangibles like design, organizational capital, training etc, through tax breaks or subsidies.

  3. Using public procurement as a way to fund business intangibles by acting as a lead customer. Historical examples like the US military funding the semiconductor industry suggest this can work.

  • The scale of increase needed in public intangible investment is unclear. But some expansion seems a logical consequence of the growing importance of intangibles in the economy.

  • To avoid waste, any increase needs to be combined with mechanisms to ensure quality control over public investment in intangibles.

  • The US military’s procurement of IT in the 1950s and 1960s helped develop the semiconductor industry, but some attempts like civilian nuclear power were less successful.

  • For procurement to successfully encourage innovation, governments need:

  1. Sufficient scale
  2. Political commitment to tolerate risk of failure
  3. To balance incentives for value for money versus innovation
  4. To feel they can accurately pick winners
  • More education for youth faces diminishing returns on time spent in school. Adult education offers an alternative with more time and the option value of training people later in skills needed.

  • To expand adult education requires investing in new models and technologies to deliver it affordably at scale.

  • Governments can help coordinate training by funding it in areas with spillovers like self-driving cars.

  • Overall, more investment in adult education and training seems worthwhile for the intangible economy.

Here are a few policies a small, nimble country like Ruritania could adopt to take advantage of the shift to an intangible economy:

  • Become a hub for intangible assets and IP. Create favorable laws and tax policies around owning, transferring, and monetizing IP and intangible assets. Attract companies that want to base IP holdings in your country.

  • Invest heavily in education, especially STEM skills and digital literacy. Make workforce skills a key competitive advantage.

  • Create regulatory sandboxes where companies can easily test new technologies and business models involving intangibles like AI, data, and digital platforms. Be an early adopter of regulations friendly to intangibles.

  • Provide generous R&D tax credits and grants to attract investment in intangible-heavy research from multinational companies.

  • Build a financial system tailored to funding intangible investments, like early stage venture capital and IP valuation expertise.

  • Aggressively court relocation of intangible-driven businesses through tax breaks, grants, streamlined regulations, and promotion of your skilled workforce.

  • Partner with other small nations to harmonize policies and create a bloc friendly to intangibles and innovation.

The key is to identify the needs of an intangible economy and orient your policies and investments to meeting those needs quickly and effectively before larger economies adjust. For a small nation, specializing in intangibles can be a growth strategy.

  • There has been a long-term shift from tangible to intangible investment in developed economies over the past 40 years. Much intangible spending is not counted as investment but as expenses.

  • Intangible assets like software, R&D, brands, and business processes have different properties than tangible assets like machinery and buildings. Intangibles are more scalable, have high sunk costs, and their benefits spill over more.

  • These intangible characteristics have major consequences:

  1. Slowing measured growth - intangibles are underestimated in national accounts.

  2. Increasing inequality - intangibles benefit some firms and workers disproportionately.

  3. Changed corporate behavior - short-termism, excess risk-taking, profit diversion.

  4. New challenges in finance - intangibles lack collateral value.

  5. New policy questions - about encouraging intangibles, dealing with inequality, issues of ownership and control.

  • The book illustrates the shift with business examples like Les Mills and EpiPen, and macro data on investment. It aims to apply the logic of intangibles to explain economic trends.

  • The intangible economy represents a deep challenge to policymakers in developed countries. Whichever country can resolve the tensions between intangibles, inequality, and social cohesion is likely to prosper.

  1. There has been a shift from investment in tangible assets like machinery to intangible assets like software, R&D, and branding. Intangible investment exceeded tangible investment in the early 2000s.

  2. Much intangible investment is unrecorded in GDP statistics and national accounts. This is because accounting conventions exclude certain types of spending.

  3. Intangible assets have different economic properties from tangible assets. They are scalable, have synergies with other intangibles, create spillovers, and are sunk - their value cannot readily be recovered.

  4. The shift to intangibles may contribute to economic trends like secular stagnation, inequality, financial instability, and the need for new infrastructure.

  5. The shift has implications for management, investing, and public policy. Firms will need more leadership and collaboration. Financial reporting will have to change. Policy should focus on enabling knowledge flows and infrastructure.

  6. The evidence for the shift to intangibles is quite widely accepted. The consequences are more speculative but the aim is to show the shift may play a role in explaining economic puzzles. Recommendations for management and policy are made in the context of the long-run rise of intangibles.

Here are the key points from the passages:

  • Public sector data shows doctors in German hospitals spend 4.3 hours per day on medical tasks, 2.1 hours on administrative tasks, 1.4 hours talking to patients, and 1.2 hours writing reports. Direct “close-to-patient” tasks like medical work and conversations take 5.7 hours, while “patient-distant” tasks like administration and writing take 3.3 hours - a ratio of about 2:1.

  • The rule of law affects incentives to build assets but is not an asset itself.

  • Net domestic product, adjusted for prices, can be a useful welfare measure if consumers seek to maximize consumption flow. Investment is included because consumers value current investment for future consumption.

  • Intangible investments like R&D can have strategic value even if they don’t directly create an asset, because they create options and reveal information for future investment decisions.

  • Early US patent and copyright laws promoted innovation by granting limited monopolies to inventors and authors.

  • Summers argues secular stagnation results from demand deficiency, not supply constraints, pointing to low interest rates and profits and lack of private investment response.

  • Studies find a correlation between firm market value, intangible investment, and industry lobbying/rent-seeking, but the direction of causality is debated.

  • Productivity may be constrained by barriers to intangible investment like management quality, workforce skills, and regulations.

  • Historically, technology has created as well as destroyed jobs, but its impact on inequality depends on policies around education, taxes, and institutions.

  • Public infrastructure investment historically focused on physical capital like transport, but intangible infrastructure like basic research and education is increasingly important.

Here are the key points from the referenced material:

  • Philippe Aghion, Peter Howitt, and others have developed growth models where innovation and creative destruction drive economic growth, rather than just capital accumulation.

  • There is evidence of collective invention, where groups openly share innovations that then get improved, in some industries like iron production. This challenges the idea that innovation requires patents and secrecy.

  • The share of income accruing to the top 1% has risen substantially in recent decades in many countries. Facundo Alvaredo, Anthony Atkinson, Thomas Piketty and others have documented this trend.

  • Mario Daniele Amore, Cédric Schneider, and Alminas Zaldokas find that credit supply affects corporate innovation, suggesting access to finance matters for intangible investment.

  • Dan Andrews, Chiara Criscuolo and Peter Gal show a growing productivity gap between frontier firms and laggards, related to intangibles.

  • Silvia Appelt, Matej Bajgar, Chiara Criscuolo and Fernando Galindo-Rueda review evidence on the impact and design of R&D tax incentives.

  • Ashish Arora, Sharon Belenzon, and Andrea Patacconi find declining scientific publications by public US firms after 1980, suggesting less openness.

  • Kenneth Arrow established the conceptual rationale for government support of invention and innovation to deal with market failures.

  • W. Brian Arthur describes how technologies evolve through combination and recombination in an interconnected system.

  • David Autor shows how labor markets have polarized between high-skill abstract jobs and low-skill manual jobs as routine middle-skill jobs are automated.

Here is a summary of the main points from the article “Skills, Education, and the Rise of Earnings Inequality among the ‘Other 99 Percent’“:

  • Wage inequality has risen sharply in recent decades, with most of the increase happening in the upper half of the earnings distribution rather than at the very top. This is in contrast to patterns earlier in the 20th century when inequality rose sharply at the top but was stable in the upper middle.

  • This new pattern of inequality is driven by increasing returns to education and skills. Workers with more education and skills are seeing their wages rise relative to less educated workers. This is occurring even among non-superstar earners below the very top.

  • Technologies like computerization have increased the productivity of high-skilled workers, complementing their skills. At the same time, new technologies have substituted for middle-skill routine jobs like clerical work and manufacturing. This polarization of the labor market has bid up the wages for high-skill work while reducing demand for middle-skill jobs.

  • Higher education wage premiums incentivize more people to attain higher education. But the supply of college graduates has not kept pace with the increased demand. This imbalance results in higher wages for those with a college degree.

  • Overall, the rise in inequality over recent decades for non-top earners has been driven by increasing returns to education and skills. Workers with higher skill levels are seeing substantial wage gains compared to less educated workers.

Here are brief summaries of the key points from each of the referenced sources:

Hubbard 2007: This paper argues that managers’ ability to leverage their position is constrained by the extent of the market. In larger, more complex organizations, managers have less individual power and influence. Specialization limits managers’ ability to extract rents.

Gaspar & Glaeser 1998: This paper finds that improvements in information technology facilitate idea flows and knowledge spillovers, enhancing innovation and productivity in cities. IT connects people and enables collaboration.

Marrano et al. 2007/2009: These papers estimate intangible investment in the UK using firm-level data. Intangible assets like R&D, software, design, training, and organizational capital account for a rising share of investment. Intangibles are linked to productivity growth.

Glaeser et al. 1992: This influential paper finds that knowledge spillovers and localized agglomeration effects help explain the productivity advantages of cities. Idea flows promote growth.

Goldin & Katz 2008: This book argues that expanded education in the US drove 20th century economic growth. As technological change accelerated, more advanced skills were needed. Education raced to keep up.

Graham et al. 2005: This paper shows managers make decisions to smooth earnings in response to capital market pressures. Financial reporting shapes corporate investment and R&D.

Overall, these papers highlight the importance of knowledge, ideas, human capital, intangible assets, and managerial decisions for productivity and growth. Knowledge flows, skills, and organizational practices are key.

Here is a summary of the key points from the referenced passages:

  • Robert Parker and Eugene Seskin discuss revisions to the National Income and Product Accounts in 1999, including new definitional and classification changes.

  • Leonard Nakamura argues that intangible investment in the U.S. is at least $1 trillion per year, but not fully captured in national accounts. He advocates for better measurement of intangibles like R&D and organizational development.

  • The OECD publishes the Frascati Manual with guidelines on collecting R&D data. The OECD also compiled a bibliography on measuring intangible assets in 1998.

  • The UK’s Office for National Statistics incorporates intangibles like R&D and software investment in the UK National Accounts.

  • Stephen Oliner and Daniel Sichel present evidence that IT investment drove U.S. economic growth in the late 1990s. Other economists like Paul Romer emphasize the importance of endogenous technological change.

  • Several economists including Carol Corrado argue for capitalizing R&D spending rather than expensing it to better account for intangible investments. Others like Charles Hulten warn capitalizing intangibles may overstate economic growth.

In summary, these passages highlight increased academic interest since the 1990s in measuring and accounting for intangible investments, and debates around the best way to incorporate intangibles into national accounts. There is general agreement intangibles are important for economic growth, but differences on precisely measuring and valuing them.

Here are the key points about intangibles and the intangible economy from the summary:

  • Intangibles like R&D, software, designs, and new organizational processes are an increasingly important form of investment and driver of economic growth.

  • Investment in intangibles has been steadily rising compared to investment in tangible assets like buildings and machinery. This reflects a shift towards more knowledge-intensive industries.

  • Intangibles have unique properties compared to tangible assets. They are scalable, have synergies or “spillovers”, are more sunk or fixed, and are more contested. This affects how we should think about business strategy, management, and policy.

  • The rise of intangibles helps explain certain economic trends like rising inequality, the growing power of firms versus workers, secular stagnation, and short-termism in business.

  • Challenges include properly measuring intangibles, designing effective policies to support them, ensuring access to finance, and adapting management techniques to an intangible economy.

  • Overall, the book argues we are moving towards an “intangible economy” and this has major implications for how economies work that require rethinking aspects of policy, business, and management.

Here is a summary of the key points from the book The Rise of the Intangible Economy by Jonathan Haskel and Stian Westlake:

  • The economy has shifted towards more investment in intangible assets like research and development, software, design, and branding, rather than tangible assets like buildings and machinery. This began in the 1970s.

  • Intangible investments now account for around 13% of GDP in advanced economies, similar to tangible investments. But national accounting methods don’t fully capture intangible spending.

  • Intangibles have four key economic characteristics: scalability, sunkenness, spillovers, and synergies. These make intangibles behave differently from tangible assets.

  • The shift to intangibles helps explain productivity slowdowns, as intangibles are harder to measure. It also drives rising inequality, as intangible-intensive firms tend to have winner-take-all dynamics.

  • Policies need to adapt to support intangible investment, like R&D tax credits. There are challenges in areas like financing, intellectual property, infrastructure investment, ownership rights, and measuring intangibles.

  • Overall, the book argues the intangible economy requires new firm strategies and new policy frameworks to fully realize its benefits for growth and productivity.

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