The FT’s Martin Wolf: getting it wrong about intangibles
The Financial Times’ distinguished economics commentator Martin Wolf lauded in a piece published on 29 November a new book about intangible assets by Jonathan Haskel of Imperial College and Stian Westlake of Nesta.
Capitalism without Capital: The Rise of the Intangible Economy deals with the growing importance of intangible assets in advanced economies.
“Messrs Haskel and Westlake have mapped the economics of a challenging new economy,” Wolf wrote. “It is a world in which many of the old rules do badly. We need to reimagine policy, carefully.”
Wolf’s comments are sound, but there’s nothing new in the rise of intangibles.
More than 80 per cent of employment and output in the UK has been due to services for more than two decades. Intangibles have accounted for around 90 per cent of the assets of the 25 most valuable companies listed on the London Stock Exchange for at least 10 years.
The only surprise is that Wolf finds this surprising.
Capitalism without Capital calls for government and business to do more to identify and quantify intangible assets.
This makes apparent sense but is precisely the wrong prescription.
By definition, intangible assets have no physical characteristics and are inherently unquantifiable. Any attempt to measure them will lead to an underestimate or overestimate that will have lamentable consequences for private and public investors. Even when the estimate is “right” it will be by luck not judgement.
The desire among managers of corporations to capture the intangible worth of their businesses has already resulted in a total distortion of the valuation of companies, particularly those that have few tangible assets like Google and Facebook.
It is the absence of quantifiable assets in these company’s balance sheets which is facilitating misleading valuations by investors driven by speculative greed rather than sound analysis.
As Wolf noted, the growing attention being directed towards intangible assets is feeding the speculative activities of private equity firms and other investors working outside established institutional and regulatory structures.
The unhealthy relationship between unconventional investors and intangible asset companies is the most consequential of the issues thrown up by the rise of what the Financial Times calls the disembodied economy. It must eventually end in tears.
What Wolf fails to appreciate is that the economics of intangibility invalidates all conventional economic theory. In services, the market not only doesn’t work. As Economics 2030 demonstrates, it doesn’t exist.
Intangibles are beyond scientific inquiry, particularly by economists and business analysts. They are figments of human imagination that only exist in the minds of those involved in an intangible transaction. Attempts to quantify them will lead to damaging consequences.
This is already evident in the work being done by academics and others seeking to define policies for companies wishing to capitalise on intangibles. Most involve an extension of intellectual property rights, a concept with no place in economic theory, and in the power of companies to control the action and thinking of their employees. Seeking to embed the ideas and imagination of a company’s workers in its balance sheet involves restricting the right of employees to express themselves freely either within that firm or elsewhere.
The sign of the times is the growing pressure flowing from corporations to increase state coercion in the enforcement of intellectual property.
For policymakers, expanding the role for intangible assets will compound the single largest challenge they face: the ability to tax corporations and secure their involvement in national economic development.
The more intangible assets, the less governments can do to manage economies.
The right prescription flowing from recognition that physical goods and assets are declining as a proportion of output is to focus more attention, not less, on both.
Companies seeking to build long-term value should be investing a far higher proportion of their balance sheet in physical assets. The alternative is to continue to book assets that don’t exist and face collapse when this reality is eventually exposed.
For governments to continue to facilitate the expansion of intangible assets is a formula for failure for the same reason. They should be encouraging corporations to invest more not less in physical assets like offices and equipment and incentivising them to buy debt floated to finance infrastructure construction.
It’s good that Wolf and others are waking up to the true facts about advanced economies.
The bad news is that they are drawing the wrong conclusions.