This new book by Jonathan Haskel and Stian Westlake called Capitalism without Capital: The Rise of the Intangible Economy is a great contribution to the literature on intangibles.
This book was greeted with reviews that I found initially discouraging as they described the novelty of the information. Amazon’s blurb calls it “The first comprehensive account of the growing dominance of the intangible economy” which is far from the truth.
But it’s important to note that the authors open their acknowledgements by thanking (as they and we all should) Carol Corrado, Chuck Hulten and Dan Sichel who built the foundation of economic research on intangibles and what’s often called the CHS methodology of calculating intangibles investment using national accounts data and the great research by The Conference Board. The basic data and arguments of the book are based in this economics perspective and use the definition of intangibles as:
- Computerized information (investments in software and data)
- Innovative property (investments in R&D, creative, art, design)
- Economic competencies (investments in training, branding, business processes)
There are a couple concrete contributions of this book that I’d like to highlight.
First is their reinforcement of the fact that intangibles have been built through investment. Many business people continue to see intangibles as something so abstract that magically appear when in fact, they spend millions of dollars (most of it expensed on the balance sheet) to build these often long-lived assets. It’s an obvious truth but one still not internalized by many people (hence the surprise by many reviewers).
Second is their “4 S’s” of intangibles, that they are not always but generally more likely to have:
- Sunk Costs – The money spent on intangibles can be a sunk cost, that is, it is an investment without a guaranteed value. Today, tangible assets tend to be more generic and interchangeable so it is easier to sell them if you no longer need them. Investments in intangibles tend to be custom-designed and unique so can be harder to liquidate them. There are many exceptions to this rule but the fact remains that there is risk in intangibles investment. Why do companies do it anyway? The other 3 S’s hold the key.
- Scalability – If you get it right, intangibles can be re-used and can grow in quality with use. This quality breaks the basic concepts of finite supply and demand in economics. Software is a great example of this phenomenon—I don’t have less software if I license you mine. The authors use the example of a Starbucks operating manual that can be used over and over again with little marginal cost.
- Spill Over Benefits – While some intangibles can be protected as intellectual property, most cannot. So they get adapted and re-used by others in the market. The authors use the iPhone as an example. While Apple benefited greatly from its product, it also influenced other manufacturers and contributed to the growth of the smart phone market.
- Synergies with Other Intangibles – Intangibles can be combined with other seemingly unrelated intangibles to create new value. The authors cite the example of microwave technology that was developed by Raytheon for radar systems in World War II. While some tried, the microwave oven didn’t become a successful product until Raytheon bought Amana in 1960 and added their knowledge on appliances to the problem.
Third, their examination of the S’s lead them to make a set of really interesting arguments about the huge differences are emerging in our economies between producers and users of intangible capital, with the producers and the managers of those companies getting a higher return. They analyze these ideas in relation to secular stagnation, inequality, challenging to financial system and requirements for infrastructure. Yes, that’s an ambitious undertaking. Some of these chapters felt a little superficial but I was happy to see an analysis like this connecting the dots between intangibles and related economic trends. The arguments here are worth reading and developing.
The intangible capitals are important components of the integrated thinking and reporting movement. So it's important to get exposure to the good work being done with IC theory and practice to support truly integrated thinking. I’ve created a to-do item to create a list of the best books on IC for those who are interested. If you want to understand more about IC in business, check out this definition of intangible capital and the two papers below.
READ INTEGRATED VALUE CREATION 1 - ACCOUNTING, ESG AND THE INTANGIBLE INFORMATION GAP
READ INTEGRATED VALUE CREATION 2 - A PRACTICAL APPROACH TO CLOSING THE INTANGIBLE INFORMATION GAP
Comments
Bill - yes, capitals are a stock. There are also flows that are more dynamic. The challenge is to understand, map and measure crucial flows--both positive and negative!
Mary- thanks.
Here are more thoughts on your three topics for clarification.
First - technology which is dynamic is more than tangible and intangible capitals it's a dynamic component integrated into the capability of innovation management where capability is people with knowledge, tools (products, funding ...), technology (science, engineering ...), and processes.
Second - organizational capabilities which are dynamic. The key part frequently overlooked is the process of development including radical innovation. For example, financial accounting needs to extended with intangible capital accounting. But the extension needs an innovation process for capability development.
Third - public capitals. Recognition of ownership of public intangible investments as property is frequently missing and recognition leads to a significant change in economics and public policy for things like foreign trade including offshoring. Offshoring is "theft" of public investments in intangible capital as an negative externality and new tax regulations are needed to recover the loss of public investments impacts such as the loss of jobs.
Hi Bill - Great comments as always! You are basically making the case for moving to fully integrated models. A few thoughts on each of your points:
First - technology as a capital: It's in the model but divided by hardware (tangible) and software/data/designs/ideas (intangible--called by some structural capital-IIRC calls in intellectual capital)
Second - organizationlal capabilities: There are specific disciplines and competencies required for the management of each of the capital. When preparing capital inventories, I always use a form (available for free download here) that spells out the main disciplines. That way, they are factored into value creation and measurement discussions. These include everything from HR to innovation to strategy, finance, sustainability and more.
Third - public capitals: This is definitely part of the approach of the integrated movement. Wrestling with this public versus corporate perspective led me to write a paper on value creation where I use the ideas of the integrated model being the marriage of finance, internalities and externalities. I'd welcome your thoughts!
I look forward to reading this book. However, there are several large gaps in the current thinking on intangible capital including the CHS thinking. First - Regarding the seven capitals, the capital of technology appears to be missing. Second - the result of the integration of tangible capital (TC) and intangible capital (IC) is missing in that organizational capabilities are the result of the integration. The process of capability development is also missing. For example, professional disciplines such as strategic planning, R&D, marketing and financial accounting are aggregations of TC & IC. And the process of development in these capabilities is missing. Training is a small subset mainly related to individuals whereas organizational capability development is a group activity that is totally ignored in modern human resource (HR) management. The military does a better job of capability development than does business. Entrepreneurship is a subset of capability development and contains a portfolio of multiple capabilities. One of the most important aggregations that Integrated Reporting attempts to describe in their model of business is the capability in innovation management (IM). Best practice in IM is the fourth generation (4G) of IM to emerge since 1900. 4G is the only generation of IM to include financial accounting of TC AND IC. Third - public TC and IC are missing in these discussions about capital. And the relevant of public IC is huge because government policy needs to invest in public IC such as federal funding R&D, infrastructure, education and security, measure these investments as public IC, and then protect the use of these investments. For example in trade policy, offshoring is theft of public IC and new business taxes should recover the loss of public IC in offshoring. In economics, offshoring is a negative externalty.