I’ve been reading the forthcoming Capitalism Without Capital: The Rise of the Intangible Economy, by Jonathan Haskel and Stian Westlake, which is one of this year’s most important and stimulating economic reads (I can’t say it is Freakonomics-style fun, but it is well-written relative to the nature of its subject matter.)
The book offers many valuable theoretical points and also observations about data. And note that intangible capital used to be below 30 percent of the S&P 500 in the 70s, now it is about 84 percent. That’s a big increase, and yet the topic just isn’t discussed that much (I cover it a bit in The Complacent Class, as a possible source of increase in business risk-aversion).
Here is one option Haskel and Westlake lay out, though I am not sure to what extent they are endorsing it, as opposed to merely presenting it:
1. More intangible capital means greater spillovers across firms. Consider Apple inventing the iPhone, and many other companies free-riding upon the original R&D. Of course Apple itself was free-riding upon earlier attempts to build smartphones and tablets.
2. In essence, free-riding companies receive more intangible assets, a kind of free lunch on the side of what otherwise would be expenditures on fixed costs. But receiving these intangible benefits itself requires a kind of scale, so they are not available to each and every potential entrant.
3. Corporate profits go up for some of the winners, but monopoly has not risen in the traditional sense. In fact, more companies are competing for the smart phone market.
4. Eventually those profits will fall, as for instance iPhone imitators will force Apple to lower prices for its devices. But that long-run can be quite far away, and as you probably know after ten years iPhone prices have pretty much held firm.
5. Now how big a productivity gain comes from those cross-firm externalities? It might depend on how many other firms are sufficiently well-scaled to receive the intangible external benefits from the first-mover innovators (this part of the argument in particular I am not sure I find in the book).
6. The so-called “superstar” firms are those that scale up to capture intangible externalities from many other sources, not just one or two. That includes Google and Facebook, but most firms don’t have the talent or cash pile to make that leap. Therefore these gains remain concentrated, income inequality goes up, both in general, and across business firms, as indeed we observe in the data. Since entry into “holding a position to capture a broad swathe of intangible externalities” to tough to accomplish, this state of affairs can persist for some while. Yet, still, in no particular market are mark-ups over marginal cost worse, nor are monopoly problems worse from the point of view of consumers. Profits of the superstar firms are much higher. Arguably that is a pretty decent description of the American economy today.
7. You can think of these conditions, collectively, as arranging a big transfer to some leading businesses, yet without distorting too many other margins.
Now, I’ve put that all into my language and framing, rather than theirs. In any case, I suspect that many of the recent puzzles about mark-ups and monopoly power are in some way tied to the nature of intangible capital, and the rising value of intangible capital.
The one-sentence summary of my takeaway might be: Cross-business technology externalities help explain the mark-up, market power, and profitability puzzles.
You should all pre-order and then read this book, due out in late November. I thank PUP for the review copy.