You should buy and read Restarting the Future by Haskel and Westlake. BUT ….

I have on my real and virtual shelf a score or two of books – the Keepers – that help to anchor what I understand about the world, economics-wise. They range from histories and memoirs (Steering the Economy by Sam Brittan, The Time of my Life by Denis Healey), through classics and polemics (Keynes, Friedman, Smith, Popper).

And then onto the “colon” books: those with that punctuation in the title, usually written since the millennium. You know the form: “Blappity: why the blah of blah is going to bliff the bloo” or whatever.  Most of the genre ages like a fine pork chop.  Re-reading the “how the world is” screeds of, say, the early 2000s is an excruciating and horribly dull experience*. It is quite rare for many of them to be proper Keepers, to strike upon a topic that is timeless, principled, worked through with some solid theory, and worth picking up again. Like The Secret of our Success by Joseph Henrich, The Truth about Markets by John Kay, or Blunders of our Governments by Anthony King and Ivor Crewe.  

Stian Westlake and Jonathan Haskel’s book on intangible capital (Restarting the Future) belong in that category. Insofar as I have pondered intangible capital, it is because of them. Being a Keeper is not the same as a book being “right”, but reflects a tough rigour in the work that forces your mind to engage, chew over a topic, and ends up making it stick. Reading RTF, I gained a persistent sense of the authors not just promoting a theory but kicking its tyres – anticipating the caveats, exceptions and counter-examples, exposing them, toughening the argument rather than just rushing past. Often I started arguing with it in the margins, then found that three pages later they had anticipated my argument and taken it on. This happened continuously..

 A shamelessly simplifying summary would go like this:

Economies proceed from needing more labour and more physical stuff (land, machines, buildings) to the kind you can’t touch: ideas, improvements in organisational design, better designs and processes and knowledge. Nowadays, the successful companies are not defined by the solid things they own, but what they know, instantiated in their products, brand and superior efficiency. Slowdowns in the production of intangible capital have accompanied the slowing of productivity growth and probably helped cause it. In large part this is because the institutions vital to economic growth have not, yet, fully adapted to the features of intangible capital – its sunken-ness, synergies, spillovers and scale-ability.  And so here are some ideas for reform to put in place some of the right institutions and turn things around.

RTF ticks all the boxes. Its theme is enduring; you are going to need to know about this topic. It educates – not just about intangible capital, either: I would say its section on institutions in economics is the best introduction to that topic I have read. It has an argument, in fact many arguments, linking intangible capital to multiple features of the economy.  There is a sheaf of policy recommendations, stretching but not implausibly far from mainstream thought, such as improved incentives for equity investment, looser mandates for pension investment, and so on.

So what’s my beef? Why am I not simply wandering around with a placard saying “Do the Restarting the Future things”? Praying forgiveness for putting it so crudely, it is this: what if the rise of intangible capital is essentially, well, bad?

An odd thought: intangible capital is usually portrayed as an unambiguous benefit. If we ever crack nuclear fusion, cure cancer, design our cities more intelligently, or work out how to end gang violence, the ‘asset’ created is intangible. How can that be bad? More trivially, the investment in a new hit TV series or better smartphone design is intangible capital. None of the economic formulae linking it to growth has a negative sign.

But, as the authors themselves observe (see the point about rigour), there are non-benign features of intangible capital. As Schumpeter observed, companies invest and innovate to acquire a better monopoly position. Buy up the best spot and your shop can sell more. Invest in R&D and you will gain more market power. It applies as much or more to intangible investment than tangible. Authorities have established methods for dealing with this when it is physical. You don’t get to own all the bridges across the river or buy up all the oil wells or the best retail sites.  It is harder when it is something as elusive as a brand or an idea. Maybe it is impossible. You can’t crack down on, say, George Clooney monopolising the brand rights of being George Clooney.

Of course, most attempts to gain a monopoly position fail. The attempt may leave behind some useful innovation. But not all innovation is like curing cancer or cracking nuclear fusion.  In the authors’ words, “intangible investment is more likely to be zero sum or positional”.  This is a very important point! If his investment in his brand just means I must invest in mine to stay level, what has been created in net terms? Consider, say, restaurants, where competitors are ceaselessly investing and innovating to preserve some small advantage. Meanwhile, restaurant spending just rises with GDP. What do we make of all the zero sum investment to scrap over that barely-growing pie?

This market-power-seeking, zero-sum feature of intangible capital undermines, for me, the sense that its social returns necessarily exceed the private returns. This in turn undermines the great advantages elucidated by the authors – intangible capital being scalable, having synergies and spillovers – which render it automatically the kind of activity that economists say demands more investment. Maybe these three “S”s are not always present. My improvement in my company’s management doesn’t spill over to yours. Perhaps it undermines you, so that you need to match my investment just to stand still. “It is valuable to the owner only to the extent that it destroys value for someone else”, as the authors put it.  

Which leads me to my second concern: why does our modern economy need to invest so heavily in intangibles? A naïvely optimistic narrative portrays a world shifting upwards from having solved the essential physical challenges – feeding, clothing, shelter, health – into a pursuit of higher things – in the resonant words of the authors, “economic activity [that] is more freighted with meaning, with association and with emotional significance”.  Something redolent of Maslow’s hierarchy of needs.  Consider instead a bleaker interpretation: continuous investment in intangible capital is the price we pay for the ever-increasing complexity of the economy, its dominance by intermediate activities removed from the direct production of value.

Again – again!- the authors are there already.  Time and again they point out the complexity of modern economic systems – the one needed to produce net zero energy and its attendant new modes of mobility, for example. But I think they nail it even better when writing of the inauthenticity that seemingly taints so much of modern life, the sense that “our output is derivative and self-referential” or that our work does not produce “useful, tangible results” – the “bullshit jobs” thesis of the late David Graeber – and the abundance of fraud or near-fraud, get-rich-quick schemes and bubbles and so forth.

I devoured Daniel Davies Lying for Money on the beach this summer (another absolute Keeper) and its portrayal and analysis of how fraud-risk and intermediate, intangible activities have risen in tandem.. Very simple economies where everything is paid for on sight allow much less fraud. In contrast, increasingly complex societies with numberless parts connected by webs of trust generate inescapable trade-offs, between delegation, fraud risk, tiresome checking and economic growth (I really cannot summarise well – read his book).  What I concluded is that ever more investment in intangible activities is needed to keep the show on the road.  It is one facet of complexity. Tell any simple story of economic development, which starts with only farmers, then the creators of tools, then the traders and owners of rudimentary capital … and as the story develops you end up with more and more people divorced from primary production.  You start with a field of workers pulling up crops and end up with people advising other people on how to market the new company that helps to design new rules on the creation of financial instruments for capitalising the market in tools used to make other tools that help the guy pull up the crops. And when one of them does it so well that they can make a business out of it, it is capitalised. Intangibly.

For the starkest modern day example, we have all noticed how the financial sector takes a steady share of rising economic production. The annual amount spent on financial software runs into the high hundreds of billions. Maybe we get small shifts in efficiency, slightly lower transaction costs. Constant transfers of economic rent from one part to another. But mostly it feels like keeping-the-show-on-the-road money. Some people are richer. Are we all, though?

So. The optimistic account of burgeoning intangible capital is that it is a weightless, positive externality driving our ability to do things better. We need to find ways to generate loads of it.  The bleaker view is of it often being the gory tribute demanded by the ravening beast of our ever-more-complex and intermediated, inauthentic economy. It is the coin paid to the accountant needed to audit the value of the NFT assets underlying a crypto scam, the rent paid for the fancy office of the tax-break-lobbyist, and so on.

I get carried away.  Trying to return this to rigorous thinking: I think these acknowledged features of intangible capital mean its value may need to be questioned more than the tangible kind.  The authors observe repeatedly how hard it is to finance, lacking the solid collateral of its physical rival. When I reflect upon its nature, I am less surprised, and wonder if it is financed just as much as it should be, by venture capital.  Sure, it slowed down when the economy slowed in 2008-10, but the direction of causality is ambiguous. Crater spending on everything, and some of it will be the intangible capital part.

At risk of making this post too ambitious, I therefore see the rise of intangible capital as related to another important recent finding – Thomas Philippon’s argument that the growth of TFP is additive not geometric. Dieter Vollrath discusses this and links it to complexity – “You could think of the severe decreasing returns as embodying an idea like complexity. As we accumulate more and more ideas, they make us more productive, but each new idea has to interact with so many other ideas that the gain in productivity gets smaller and smaller.” New things must interact with an ever-growing body of old things, and to make it work you need giant intangible investments – not to add anything extra, but just to make them work.

The authors once again summarise it best is a short bit on page 68: “there may also be an effect on TFP growth not from the slowdown of intangible investment growth but rather from its historically high levels”.  We are in an intangible-rich economy.  Intangible-rich economies are harder to grow than simpler, physical economies. Producing lots more intangibles doesn’t feel like growth because often it isn’t, not in the sense of addressing lots of serious needs that need addressing.  

Does this quibble undermine the book? Not really. For a start, it is encyclopaedic in its reach – this overlong post has barely touched on it.  And while I differ from the authors in how I see the immediate problems facing the world – this year of all years, they feel extremely physical – the topic of reforming our institutions to address the current nature of the economy is basically the right one. It is how to think about the modern world. Even if we haven’t actually ascended to an ethereal, intangible plane, the task is about how to innovate, organise and cooperate to meet the 21st century’s unique and daunting problems. I don’t think there is a better place to start than here. 

Published by freethinkingeconomist

I'm former special adviser (Downing Street 2017-19, BIS from 2010-14), former FT leader writer and Lex Columnist, former financial dealer (?) at IG, student of economic history, PPE like the rest of them, etc, and formerly in my mid-40s. This blog has large gaps for obvious reasons. The name is dumb - the CentreForum think tank blog was called Freethink, I adapted that, we are stuck now.

2 thoughts on “You should buy and read Restarting the Future by Haskel and Westlake. BUT ….

  1. It is helpful to think of intangible capital using the categories of patents, copyright, and trade secrets. Patents offer a short-term monopoly (typically 20 years) to produce a product in return for making the process public knowledge; copyright gives a much longer protection, but only against copying the work – if some other economists had written an identical book to Restarting the Future, entirely independently, copyright would not protect Westlake and Haskell’s intellectual property. Trade secrets are potentially the longest-lasting intangible capital, think of the recipe for Coca-Cola, but come without any legal protection beyond NDAs.
    Of these, perhaps copyright is in the greatest need of reform. For example, the late Conrad Russell’s “An intelligent person’s guide to Liberalism” is now out of print and the publishers have no interest in reprinting it. Yet without the copyright-holder’s permission, a new edition (or a paperback or digital version of the original hardback) cannot be published.

  2. Isn’t the problem here that “intangibles” make about as much sense as a category as “tangibles”, which would include potatoes, petroleum, pharmaceuticals, processors, publishing, policemen, and a whole lot of other stuff that doesn’t even begin with P?

    Quite a lot of the “intangibles” have in common that they depend on copyright to have measured GVA, but that’s already a substantial shrink and raises all kinds of questions about the fact copyright is a privilege granted by the state. But plenty do not.

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