11 Mar 2019
The problem with intangibles
Is ‘capitalism without capital’ fostering inequality and social division? Jonathan Haskel CBE, professor of economics at Imperial College Business School, discusses how investment in intangibles is widening the division between small businesses and large companies.
Early on during this century, a quiet revolution took place: businesses began putting more money into the sort of stuff you can’t see than they did into concrete assets. From the mid-2000s onwards, companies have been investing more in ‘intangibles’ – such as branding, design and technology – than they have in machinery, hardware or property.
Businesses such as Uber don’t own cars; they own software and data. Pharmaceutical companies have vast budgets for marketing as well as research and development. Coffee bars and gyms rely on branding to help them stand out from the crowd. In short, this is capitalism without capital. And alarmingly, it seems to be fostering inequality and social division.
At first glance, you’d think the prominence of intangibles might spill over and help smaller companies keep up with the bigger players. Every smartphone now looks like an iPhone, for instance. So shouldn’t the whole industry benefit?
Well, unfortunately, the opposite seems to be happening. While bigger companies such as Google and Facebook are getting bigger, smaller businesses are faltering because they struggle to get investment.
Bigger companies are more likely to have resources to allow them to benefit from synergies between intangible assets. In creating the iPod, Apple combined MP3 technology with licensing agreements, record labels and design expertise to produce a winning product. This ability to combine different technologies and then scale up helps these companies to dominate markets – and the gap widens.
A finance system fit for purpose
Smaller companies also suffer because our finance system hasn’t caught up with the new order. Previously, if a company went bust, a bank could recover its money by selling physical assets, such as buildings or machinery. But if a company with intangible assets folds, those assets can’t be sold off easily – their value has sunk with the company. Smaller businesses often don’t have that same access to bank loans. They’re more reliant on venture capital and angel investors – and this is a very different model of financing from traditional bank lending.
Speculative finance works only if there’s a bedrock of savvy investors with experience whom everyone looks to before following suit
The best outlook for a technology start-up is to do business for three or four years before being bought by Google or similar. Bigger companies have enough internal finance not to rely on the banks. And while that might work well for the individuals, it means larger firms will grow ever more dominant. A lot hinges on us having a finance system that’s fit for purpose in the intangible economy.
In the UK, we’re betwixt and between. We have successful clusters of biotechnology as well as creative clusters around gaming and entertainment. More widely, however, companies with intangible assets struggle to raise investment. Speculative finance works only if there’s a bedrock of savvy investors with experience whom everyone looks to before following suit. And this ability to make a judgement seems to be constrained by national boundaries.
This has a knock-on effect in areas you might not expect. People need to be physically close to each other for the right kind of synergies to occur. Someone with a Harry Potter-style script isn’t likely to bump into a computer-generated effects expert or a talented actor in a small, rural village; they need to be in cities. Yet our cities are too expensive for many people to live in. So the rise in the intangible economy calls for policymakers to be aware of the kind of knowledge infrastructure that we need (slick communication technology, education, wise urban planning and public science spending), which can help promote clusters better than roads and runways.
However, this kind of economy can create a social gap between city and country dwellers. People more open to new ideas and experiences might reap more rewards from the intangible economy, but the flipside is that this could leave more isolated populations feeling ever more left behind.
Since the recession of 2007-08, the pace of growth in intangible investment has slowed, partly due to lingering uncertainty and difficulties in our finance system. But this has a far-reaching effect: it has dampened the benefits of spillover technologies and knowledge, which in turn has limited how much companies can scale up and expand. And it’s this that has caused our productivity to stagnate.
This new economy also gives us a new perspective on education. We’re used to hearing about the urgent need for more science and engineering skills – received wisdom suggests it’s no longer worth studying ‘fluffy’ subjects such as history or other humanities. But, increasingly, the intangible economy will rely on those who are capable of pulling all the disparate strands together. Success in this new economy will not only come to people with the right creative and technological talent; it will come to people with the soft skills and leadership required to organise them.
Jonathan Haskel is a professor of economics at Imperial College Business School and a specialist in innovation and productivity. He replaces Ian McCafferty on the Bank of England’s Monetary Policy Committee on 1 September.
The opinions and views expressed in the above article are for general information purposes, they should not be construed as recommendations or advice for any individual nor should any action be taken on account of the information presented.