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Capitalism Without Capital, A Review

I recently finished reading the book Capitalism Without Capital, The Rise of the Intangible Economy by Jonathan Haskel & Stian Westlake ( It was a fascinating book with profound implications. Here are just a few of them:

  • In the 21st century developed economies like the U.S. and the U.K. have shifted from investment in tangible assets like real estate, buildings, plant and equipment and hardware like computers to intangible assets like intellectual property, software, branding, know-how and proprietary operational techniques and processes. The U.S. and the U.K. now invest more in intangibles than tangible assets.

  • These intangible assets have some interesting qualities that have important consequences for the economy and for businesses. These are:

  • Intangible assets are highly scalable, for example, software, gaming apps, proprietary policies and procedures, branding and marketing, are all easily scaled and applied across a wide range of distribution channels and platforms. Thus the rewards for firms that create and best exploit these assets are greater than the potential returns on investment in tangible assets.

  • Investment in intangibles represents largely a sunk cost for a business, meaning a business typically cannot get back or recoup these expenditures by selling the asset such as they would with tangibles like real estate, equipment, computers or other hardware. This is because it is more difficult to value intangibles and there is not a well-developed marketplace to buy and sell such assets. Moreover, oftentimes these investments are highly valuable to the firm making them, but they are unique and proprietary to that firm, e.g., Starbucks’ operations manual and training, so their value is not easily transferable to a third party.

  • Intangible assets have many more positive externalities, which is economic jargon for valuable spill-overs, than tangible assets do, plus they exhibit valuable synergies with other intangible assets. This leads to firms and entrepreneurs jockeying to appropriate these spill-overs and synergies in the most optimal and productive combinations as the rewards for doing so are huge. Moreover, and as an intellectual property lawyer I find this very interesting, because of the high value of these spill-overs the rights to them tend to be contested more than tangible assets. There is a tug of war between firms asserting proprietary rights to these assets and the interest of the public and the economy at large to be able benefit from them by allowing them to be available to everyone. If a society grants IP rights that are too strong and restrictive, the economy will not be as productive as it could be by allowing enterprising individuals and businesses to exploit these spill-overs on a more widespread basis, but on the other hand, if you do not provide adequate protections to the firms that create these assets then you weaken the economic incentives for these firms to make the investments in the first place. This tension is evident in the ever-developing area of intellectual property law and the decisions handed down by courts every week. The most important thing is to have clear-cut, consistent and stable rules, laws and norms that firms can rely on in making economic decisions involving intangible investment.

  • Some of the consequences of the ever-increasing share of intangible investment in the economy are:

  • Secular Stagnation – This is a term coined by economist Lawrence Summers which is used to describe a long-term condition of low economic growth and a fall-off in productivity indicators. The rise of intangibles may contribute to this phenomenon because overall investment has fallen. The scalability of intangible investment allows super-large and profitable firms to emerge and creates a larger profit and productivity gap between the leaders and the laggards. This reduced overall investment has created fewer spillovers and thus less scaling, resulting in slowing productivity and economic growth. The Great Recession has obviously also contributed to this.

  • Inequality – Income inequality occurs when the spillovers and synergies from intangible assets widen the profitability gap between competing companies, with some doing incredibly well, and others stagnating or losing, raising the demand for managers, leaders and other so-called “symbolic analysts” (a term coined by Robert Reich) with the skills to coordinate exploitation and protection of these assets as well as execution of business operations built around these assets, with the managers and leaders of the leading firms seeing the biggest rise in their income. Wealth inequality increases as cities such as Los Angeles, San Francisco and New York, where intangible spillovers and synergies are very high, become increasingly in demand because of the premium on living where one can interact with others and exchange ideas in a diverse and vibrant community of fellow entrepreneurs, techies, artists and other innovators, which drives up property prices, both commercial and residential. People lucky enough to be long-time property owners in these areas have benefited and seen a tremendous windfall in the value of their properties. Since many of these long-term property owners are older, this has fueled an intergenerational inequality of wealth with millennials finding it hard to own or even rent property and even harder to build wealth since housing costs eat up so much of their income. Many of them remain financially dependent on their parents.

  • An Ill-Equipped Financial System – When it comes to financing business investment in intangibles, the financial system is poorly equipped to do so. Debt finance from traditional banks is difficult for these kinds of businesses since banks want collateral to lend money and typically that collateral is tangible with a liquid market to sell off the collateral if the loan goes bad. As discussed above, no such market exists for intangibles. The equity markets tend to undervalue intangible assets due in part to the uncertainty surrounding these assets and their potential value or payoff. Venture capital is best equipped to deal with the uncertainty and sunkeness of intangible asset investment, but it is hard to expand this type of finance to many industries apart from tech, pharmaceuticals and the traditional areas of venture capital.

  • The authors point out some things businesses and societies should be looking at to address these issues, including more government investment in “soft” infrastructure for intangibles as opposed to more often-discussed tangible infrastructure, such as clear IP rules, laws, and norms with enforcement mechanisms in the courts and the USPTO that strike an economically optimal balance between IP owners and IP users of spillovers; creating more affordable space in large cities; facilitating knowledge sharing and dissemination through education and IT technology, urban planning, and public R&D; and businesses learning how to exploit and manage their intangibles by employing managers and leaders with the skill and foresight to do so efficiently and profitably.

In any event, I highly recommend this book for anyone who wants to understand the recent history of the economy and where things appear to be headed.

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