Capitalism without Capital

1. The rise of intangible assets is reshaping the global economy

Investment used to be mostly physical or tangible, that is, in machinery, vehicles, and buildings and, in the case of government, in infrastructure. Now, much investment is intangible, that is, in knowledge-related products like software, R&D, design, artistic originals, market research, training, and new business processes.

Shift in investment patterns. Over the past four decades, developed economies have witnessed a profound shift from tangible to intangible investments. This transformation is not merely a change in accounting practices, but a fundamental alteration in the nature of economic value creation.

Underreported transformation. Much of this intangible investment remains hidden from traditional economic measures:

• Company balance sheets often fail to reflect intangible assets
• National accounts struggle to capture the full extent of intangible investments
• Economists and policymakers are only beginning to grasp the implications of this shift

Examples of intangible dominance:

• Tech giants like Google and Microsoft derive most of their value from intangible assets
• Even traditional industries like manufacturing increasingly rely on intangibles (e.g., software, design, branding)
• Services sector, now the largest part of most developed economies, is heavily intangible-intensive

2. Intangible investments have unique economic properties: the four S's

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

The four S's of intangibles:

1. Scalability: Intangible assets can often be used simultaneously by multiple parties without diminishing their value. For example, software can be replicated infinitely at near-zero marginal cost.

2. Sunkenness: Many intangible investments are difficult or impossible to recover or resell if they fail. Unlike a factory or machine, a failed R&D project often leaves no salvageable assets.

3. Spillovers: The benefits of intangible investments frequently "spill over" to other firms or the broader economy. Competitors may reverse-engineer innovations or employees may take knowledge to new jobs.

4. Synergies: Intangible assets often become more valuable when combined with other intangibles. For instance, a company's brand value may increase when combined with innovative product designs.

Economic implications. These unique properties fundamentally alter how businesses compete, invest, and create value. They also challenge traditional economic models and policy approaches that were designed for a tangible-dominant economy.

3. Secular stagnation and productivity puzzles explained by intangibles

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

Underreported investment. The shift to intangibles helps explain several economic puzzles:

• Low measured investment rates despite low interest rates
• Weak productivity growth in many developed economies
• Increasing disparity between leading firms and laggards in productivity and profitability

Productivity paradox. The intangible economy creates a paradox:

• Highly scalable intangible assets allow some firms to become extremely productive and profitable
• But spillovers and synergies may be concentrated among a small number of leading firms
• This concentration can lead to overall slower productivity growth if laggard firms struggle to catch up

Post-recession dynamics. The Great Recession's impact on intangible investment may have prolonged the recovery:

• Firms cut back on intangible investments, reducing potential spillovers
• Fewer new intangible assets were created, limiting opportunities for synergies
• This cycle may have contributed to the slow productivity growth observed in many economies

4. Intangible economy exacerbates inequality in multiple dimensions

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

Income inequality. The intangible economy drives income inequality through several mechanisms:

• Superstar firms capture disproportionate returns from scalable intangible assets
• High-skilled workers who can manage and exploit intangibles command premium wages
• Workers unable to adapt to the intangible economy may see stagnant or declining wages

Wealth inequality. Intangibles contribute to wealth concentration:

• Urban property values soar as knowledge-intensive industries cluster in cities
• Owners of successful intangible-rich businesses accumulate vast wealth
• Traditional forms of wealth (e.g., savings, pensions) struggle to keep pace

Social and cultural divides. The intangible economy may deepen social rifts:

• Skills and personality traits suited to the intangible economy (e.g., openness to experience, abstract thinking) become more valued
• Geographic divides between thriving, intangible-rich urban centers and struggling regions widen
• Cultural tensions may arise between those who benefit from and those left behind by the intangible economy

5. Traditional financial systems struggle with intangible-rich businesses

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

Challenges for debt financing. Traditional lending models face difficulties with intangible-rich businesses:

• Banks struggle to value or use intangible assets as collateral
• The "sunkenness" of many intangible investments increases risk for lenders
• Intangible-intensive firms may have lower tangible asset bases to secure loans against

Equity market limitations. Public markets may not efficiently value intangible-rich companies:

• Accounting standards often fail to capture the full value of intangible assets
• The uncertain and synergistic nature of intangibles makes valuation challenging
• Short-term focus of many investors may undervalue long-term intangible investments

Rise of alternative financing. New financial models are emerging to address these challenges:

• Venture capital has become crucial for funding intangible-rich startups
• Private equity firms develop expertise in valuing and nurturing intangible assets
• New financial instruments (e.g., IP-backed securities) attempt to monetize intangible assets

However, these alternatives have limitations and may not be suitable for all industries or company stages.

6. Management and leadership gain importance in the intangible era

Firms using intangibles become more authoritarian; those generating intangibles will need more leadership; financial investors will have to find information well beyond the current financial statements that purport to describe current businesses.

Evolving management practices. The intangible economy demands new approaches to management:

• Coordinating and exploiting synergies between intangible assets becomes crucial
• Protecting and nurturing knowledge workers requires different leadership styles
• Balancing openness for spillovers with appropriability of returns challenges managers

Leadership's growing role. Effective leadership becomes more critical in intangible-rich firms:

• Inspiring and aligning knowledge workers around a shared vision
• Fostering cultures of innovation and continuous learning
• Navigating the increased uncertainty and rapid change inherent in intangible-intensive industries

Challenges for investors. Evaluating intangible-rich businesses requires new skills:

• Traditional financial statements provide incomplete pictures of value
• Understanding a company's intangible assets and their potential becomes crucial
• Investors may need to develop industry-specific expertise to properly value intangibles

7. Public policy must adapt to foster growth in an intangible economy

Policymakers will need to focus on facilitating knowledge infrastructure—such as education, Internet and communications technology, urban planning, and public science spending—and on clarifying IP regulation but not necessarily strengthening it.

Rethinking infrastructure. Governments must broaden their concept of infrastructure:

• Traditional physical infrastructure remains important but insufficient
• Investments in education, research, and digital networks become critical
• Urban planning must facilitate the knowledge spillovers that drive intangible economies

Balancing intellectual property rights. IP policy faces new challenges:

• Overly strong IP protection may hinder spillovers and synergies
• Weak protection may discourage intangible investments
• Finding the right balance requires nuanced, possibly industry-specific approaches

New roles for government. The intangible economy may demand more active government involvement:

• Funding basic research and other high-spillover intangible investments
• Facilitating knowledge transfer and collaboration between firms and institutions
• Addressing the inequality and regional disparities exacerbated by the intangible economy

Policy challenges:

• Measuring and tracking intangible investments accurately
• Developing new frameworks for antitrust and competition policy in intangible-dominated markets
• Adapting tax systems to capture value from highly mobile intangible assets
• Balancing the benefits of agglomeration in cities with the need for inclusive growth

Last updated: January 24, 2025