Moving Beyond Tangibles

Capitalism Without Capital is an impressive work that fills the mainstream gap on the intangible economies.

Very few books in economics open up a whole new world for the readers. Jonathan Haskel and Stian Westlake’s Capitalism Without Capital is one such book. It opens the eyes of the world to the rise of the intangible economy, over the last few decades, something the mainstream economic analysis seems to have clearly missed out on. It makes sense to clarify right here that Haskle and Westlake are not just talking about the rise of the digital economy, which needs very few physical assets to operate.

The book is not just about Google, Facebook, Twitter, WhatsApp and Instagram, as its title seems to suggest. As the authors write, “The type of investment that has risen inexorably is intangible investment in ideas, in knowledge, in aesthetic content, in software, in brands, in networks and relationships.”

Take the case of Apple. One of the most important things that makes the company so valuable is the supply chain that the company developed over the years. In case of sharing economy firms like Uber and AirBnb, it is a network of committed suppliers — drivers and hosts, which makes them valuable. One of the most important characteristics of a firm high on intangible assets is its scalability. In fact, a large part of the book details this. The authors explain,

Once a business has created or acquired an intangible asset, it can usually make use of it again and again at relatively little cost, compared to most physical assets.

Let’s continue with the examples of Uber and AirBnb. These companies could have worked in an earlier era as well. Cities used to have taxi companies, where you could call on a particular phone number and book a taxi. Even before AirBnb, homestays were available, though they were not as popular as they are now, simply because it wasn’t easy to find them. What changed was the apps that these companies built using information technology and which could be downloaded on to a smartphone connected to the internet. This basically gave the companies the scale and the ability to operate at the global level, and not just one city at a time. At the same time, it made things easier for consumers as well.

Also, intangible assets, don’t just mean the use of information technology and the internet, if that is the impression you have been getting, dear reader.

Take a company like Starbucks. The most important part of Starbucks is the way the global coffee chain makes and serves coffee, across its stores. The coffee needs to taste the same across its stores. Once the firm has nailed this process for a given country, it can keep using it across stores. This is its main asset and it’s intangible. According to Haskle and Westlake,

Once you have written the Starbucks operating manual in Chinese — an investment in organizational development — you can use it in each of the country’s 1,200-plus stores.

And given this scalability, in several developed countries, intangible assets now dominate the tangible ones. At the same time firms high on intangible assets can use these assets, and become big very quickly. Haskle and Westlake use the example of corporations like Uber, Google and Microsoft, “They can achieve this giant scale with relatively little employment.  So, their productivity (revenue per employee) rises, perhaps massively.” In the case of Microsoft, it makes MS Office. Every year subscription to the software needs to be renewed. In this way, the company keeps making money on the same product over and over again.

Uber is another excellent example. Nobody had heard of the company half a decade back. Since then, it has tried to disrupt existing taxi businesses across large parts of the world. Of course, it has not succeeded everywhere. While, the company does create jobs for drivers, it is well worth remembering that many of these individuals were driving earlier as well. So, net-net these companies don’t create many jobs, on the whole, even in the gig-economy. They clearly don’t create as many jobs at the individual firm level, as firms high on tangible assets used to.

There are a few other things that companies high on intangible assets can do. One is they can make the best of tax competition, which prevails between countries, and which companies high on tangible assets cannot. This is primarily because intangible assets are geographically more mobile. As the authors write,

For an oil company to move its physical refining operations from the UK to the Netherlands would be a massive undertaking, a decade-long project of the kind most firms would undertake only if absolutely necessary. But if Starbucks wants to move the ownership of their brand or the IP behind their UK store operations to Netherlands or Ireland or Luxembourg, it can be done with some modest legal work.

This is something that makes things difficult for the government. The United States has been feeling the heat of this, with its top corporations paying very little taxes in the country. This is also because of the rise of the intangible economy.

The funny thing is that most mainstream economists have missed the rise of the intangible economy over the years, and barely ever talked or written about it. To that extent this book fulfills that gap.

On the whole, the authors do a commendable job of explaining the intangible economy to the lay audience. In fact, they offer enough data to show the rise of the intangible economy in developed countries, going way beyond just anecdotal evidence.
Having said that, I have two quibbles with the book. One, the book tends to get slightly technical at places, which will make things slightly difficult for the lay reader. Two, the book doesn’t have enough examples explaining the rise of the intangible economy. And this is my main quibble with the book.