Challenges of a disembodied economy

What is new about today's economy? It is not the role of ideas themselves. The technologies we take for granted - the wheel, fired pottery, the plough or the steam engine - were once brilliant new ideas. What is new about today's economy is that many of our best ideas remain disembodied. The idea is indeed valuable, but it does not take physical form. This changes almost everything.

That is the theme of an intriguing new book, by Jonathan Haskel of Imperial College and Stian Westlake of Nesta. Their main point is compelling: Apple, the world's most valuable company, owns virtually no physical assets. It is its intangible assets - integration of design and software into a brand - that create value.

Perhaps the most surprising fact in a book full of surprises is how large investments in intangible assets - in research and development, software, databases, artistic creations, designs, branding and business processes - now are.

Measuring this has become an important intellectual activity. In the United States and United Kingdom, investment in intangible assets now exceeds that in tangible assets. This is also true in Sweden, but not in Germany, Italy or Spain.


The authors explain the features of intangible assets by referring to the "four Ss": scalability; sunkenness; spillovers; and synergies. Taken together, these subvert the familiar functioning of a competitive market economy.

"Scalability" means that an intangible good can be enjoyed by one person without depriving another of its benefits. Economists call such a good "non-rival". You cannot eat the same sandwich as I can. But an intangible asset can be used over and over again.

In an economy where scalability - frequently turbo-charged by network effects - is important, some businesses will quickly become huge. These winners may also enjoy huge incumbency advantages.

"Sunkenness" refers to the fact that intangible assets tend to have little or no market value, unlike, say, land or a factory. They have value as part of their owner's business, but not to anybody else. This means that investment in intangible assets is risky. The fact that expectations are insecurely anchored might, argue the authors, also generate asset price bubbles.



Finally, intangibles exhibit synergies. This goes against the spillovers. Synergies encourage inter-firm cooperation (or outright mergers), while spillovers are likely to discourage it. Who really wants to give a free lunch to competitors? Taken together, these features explain two other core features of the intangible economy: uncertainty and contestedness. The market economy ceases to function in the familiar ways.

Does the rise of intangibles explain what has come to be called "secular stagnation"? Partly.



One way it can do so is that workers in the most successful businesses tend to share in their employers' success. Furthermore, people with relevant skills do outstandingly well.



This transformation of the economy demands a rethink of public policy.


Intellectual property monopolies may indeed be necessary but, like all monopolies, they can be costly.







A version of this article appeared in the print edition of The Straits Times on December 02, 2017, with the headline 'Challenges of a disembodied economy'. Print Edition | Subscribe