When Anthony Albanese expressed his (widely shared) nostalgia for “an Australia that makes things” he might well have been referring to the decade of his birth, the 1960s. In those years, around one in four Australian workers were employed in manufacturing, an all-time high.
This was the decade in which Heinz Arndt’s classic study of the Australian economy, A Small Rich Industrial Country, was published. Arndt’s title was not as prosaic as it might sound today: it was a dig at nostalgia for a largely imaginary past in which Australia was an agricultural country peopled with miners, small farmers and shearers. That vision of Australia had been evoked by Russel Ward’s highly successful book, The Australian Legend, published in 1958.
In reality, Australia had always been urban. As early as 1900, more than two-thirds of the population lived in cities and large towns. But nostalgia for “an Australia that grows things” was reflected in decades of policies aimed at encouraging economic activity — notably including the often-disastrous soldier-settlement schemes — outside the major cities.
Just as the industrial economy displaced agriculture in the mid twentieth century, it was displaced in turn by the service sector towards the end of the century. By 2000, services represented three-quarters of output and employment. Construction remained strong, but the overall share of employment in “making things” (manufacturing, mining and agriculture) was steadily declining. These transformations changed working life in all sorts of ways, but they didn’t fundamentally challenge the assumptions of capitalism.
A capitalist society’s central driver of growth has always been investment — in buildings, equipment and infrastructure — and investment requires capital. The proceeds from the sale of goods and services, after deducting wages and input costs, must earn a return for the owners of that capital. This is as true for cafes as it is for car factories.
All this changed with the emergence of an information economy. In economic terminology, information is a non-rival good, like Norman Lindsay’s magic pudding. Using information doesn’t reduce the amount that’s available to other people. Information is also cumulative: the more we know, the more we can find out. And information from different sources can be combined to produce new and different information. In economic terminology, the production of information displays economies of scale and scope.
But just as the plot of The Magic Pudding centred on the question of who owned the pudding, control over access to information can be immensely valuable and hard-fought. And there is no necessary relationship between producing information and controlling it.
This changes the nature of investment. Rather than investing in land, building and equipment to produce goods and services, investors focus on securing control of information and profiting from that control. The result is the economic system summed up by Jonathan Haskel and Stian Westlake in the title of their 2017 book, Capitalism without Capital.
Haskel and Westlake described how physical capital has been replaced by “intangible capital,” a concept as hard to grasp as the name implies. Examples of intangible capital include research and development, design, business process re-engineering, market research and branding. Typically, the assets created in this process take the form of intellectual property — patents, copyrights, trademarks and so on — or control over networks and platforms like Facebook and Twitter.
Some items classed as intangible capital are relatively straightforward extensions of familiar concepts. The best-known — the research and development expenditure that goes into developing new products — is as much a part of the cost of producing those products as are the labour and machinery used to produce them.
But other forms of intangible investment, such as branding and marketing, are more problematic. As Haskel and Westlake recognise, it is far from obvious that branding enhances the value of the goods and services it promotes: the efforts of one brand to promote itself through advertising largely cancel out the efforts of its competitors. There is some evidence of a net positive effect overall, but it is fairly thin.
Intangible assets differ from tangible assets in the same way information differs from ordinary goods and service. As Haskel and Westlake put it, “Those characteristics are summed up in four S’s, namely that intangible assets, relative to tangible assets, are more likely to be scalable, their costs are more likely to be sunk, and they are inclined to have spillovers and to exhibit synergies with each other.”
The spillovers and synergies mean the benefits of distributing information will often flow to people other than those who produce it. The most obvious examples are Alphabet (owners of Google) and Meta (Facebook), whose most valuable asset is not their computers and buildings but the information to which they provide access. Facebook’s information is supplied in the first instance by its users, but in many cases consists of links to content elsewhere on the internet. Google’s search engine relies entirely on information produced by other people and organisations.
In other words, the connection between investment and profit has broken down. The scalability and sunk costs of intangible assets exacerbate this effect by creating a winner-takes-all model, enabling those with an established position to capture all or most of the benefits of information.
The results are evident in the market value of companies, and particularly the value of the large tech companies that dominate the information economy. Most of the time, we’d expect the value of a firm to reflect the capital invested in it, as captured by Tobin’s Q, a measure of the ratio of market value to capital stock developed by Nobel prize–winning economist James Tobin.
Q ratios were generally near one during the twentieth century. High ratios were seen as a signal that existing capital was yielding a high return and further investments were likely to be profitable; low values suggested lower demand for investment. But this relationship has broken down in spectacular fashion. Alphabet has a market value five times the book value of its assets. The ratio is ten for Amazon, fifteen for Microsoft and twenty-one for Apple. Even Meta, which is clearly in decline, manages a ratio of three. By contrast, General Motors, the classic twentieth-century corporation, rates just under one.
The difference can’t be explained by R&D spending, which is relatively small. The real intangible here is likely to be monopoly power, generated either by intellectual property laws or control over platforms.
The tone of Capitalism without Capital was cautiously optimistic. Haskel and Westlake thought the rise of intangible investment would offset the decline in traditional forms of private investment over the course of the twenty-first century. While acknowledging the growth of inequality and other problems, the pair concluded that “strategies that go with the grain of the long-run rise of intangible investment… are more likely to secure prosperity than those that go against it.”
But in the wake of the pandemic and the (first?) Trump presidency, the problems are clearly much more severe than they seemed — as the subtitle of Haskel and Westlake’s new book, Restarting the Future: How to Fix the Intangible Economy, makes clear. “When we think about the state of the economy today, it is hard not to think, it wasn’t supposed to be like this,” they write. “The world is richer than it has ever been, remarkable technologies are transforming every facet of our lives — and yet, everyone seems to know that, from an economic point of view, something is wrong.”
Many of the things that are wrong can be traced, they say, to problems with intangible capital. Their examples include:
Stagnation: Despite impressive technological progress, economy-wide productivity growth has slowed. Investment in intangibles has declined; so too has economic dynamism, as measured by such variables as the number of new firms. Most notably, the IT sector is now dominated by five firms: Amazon, Apple, Microsoft, Facebook/Meta and Google/Alphabet. Using a combination of incumbency and acquisition, the same firms have maintained their dominance even as the sector has been transformed by cloud computing and other web services.
Inequality: Having increased throughout the developed world since the 1980s, inequality has become the subject of steadily increasing concern. It is aggravated by the scalability and synergies of intangible investment, which reward a relatively small number of companies and wage earners.
Dysfunctional competition: Ideally, with many firms in the market, competition offers better products at lower prices. But once markets become sufficiently concentrated, competition tends to take the form of zero-sum efforts to weaken the position of competitors or extract unearned rents. At the extreme are the “patent trolls” who make intellectual property claims over well-known ideas and methods, then extract licence fees from anyone seeking to use this idea.
Inauthenticity: In an intangible economy, it is difficult to distinguish between spurious branding efforts and investments that genuinely enhance the usefulness of products. The result is the general feeling of “fakeness” that accompanies much of modern life.
Fragility: The intangibles economy is vulnerable to both internally generated crises like the global financial crisis and external shocks like Covid-19. In part, this fragility arises because intangible investments are “sunk.” Once an enterprise fails, intangible investments in organisational structure, corporate culture and so on are lost. By contrast, buildings and equipment can be sold when a business is liquidated, saving much of its economic value.
Although Haskel and Westlake frankly acknowledge all these problems, they don’t conclude we should slow the shift to an intangible economy. Rather, they want to change our institutions to complete what they see as an unfinished revolution. To do this, they propose improvements in the financing of research and development and the financing of investment, and offer some worthwhile but tangential suggestions about urban design and school reform.
The standard solution to the problem of financing R&D is for governments to fund “pure” research while private enterprises fund “applied” research, or the development of marketable products. But the characteristics of intangible capital, particularly its spillover effects, mean that producing intangibles is more like pure than applied research.
Haskel and Westlake are sceptical of traditional modes of public research funding. They suggest prizes be used more often to stimulate goal-oriented research (an idea that goes back to the competition that led to the discovery of a method for determining longitude at sea) and subsidies be made to open-source software and data collections. They also endorse the general preference of economists for less stringent patent and copyright protections.
Their analysis of financing focuses on the decline in the neutral real interest rate — that is, the interest rate (adjusted for inflation) at which monetary policy is neither expansionary nor contractionary. Correctly linking the rate’s welcome decline to reduced investment in intangibles, they propose ways of encouraging pension funds and venture capitalists to fill the gap. In a world of very low real interest rates, they also recognise the need to shift away from inflation targeting as the basis of monetary policy.
What’s striking, though perhaps not surprising, is that Haskel and Westlake don’t consider the possibility of an end to capitalism, or even a substantial change in the role of government. To the extent that intangibles are public goods, mainstream economic theory suggests they would best be provided by governments. Private firms can rarely capture the spillover benefits of intangibles without imposing access restrictions that reduce their social value.
Haskel and Westlake discuss traditional spheres of government activity — the defence-related R&D that gave us the internet, for example — but they don’t consider whether governments should become active investors in intangible capital.
The possibilities are full of promise, but also potential pitfalls. Governments could expand the informational role of public media services like the ABC, reversing the cuts of recent decades. They could systematically strive to make information of all kinds available in an easily searchable form, bypassing advertising-driven search engines like Google. And they could provide platforms for social media on a common-carrier basis, requiring easy interconnection and discouraging the use of “algorithms” (a misnomer) to keep people inside a “walled garden.”
It’s easy to point to the problems that would arise if these possibilities were pursued in a world where trust in governments is low. But these are the kinds of arguments that need to be made when the existing economic model is failing so clearly.
Despite the limited scope of the reforms they consider, Haskel and Westlake’s work tackles fundamental questions considered by few other writers. Restarting the Future is essential reading for anyone interested in the future of capitalism, or in the possibility of a post-capitalist future. •
Restarting the Future: How to Fix the Intangible Economy
By Jonathan Haskel and Stian Westlake | Princeton University Press | $34.99 | 320 pages
