How to unlock more investment in intangibles

Ohen russia invaded Ukraine, tangible things at first seemed too important. Bombs and bullets were what mattered; commodity markets have been disrupted; supply chains have been disrupted. As the war progressed, however, intangible factors also asserted their importance. The managerial and logistical know-how of the armed forces on both sides, as well as technological advantages, such as Ukraine’s deployment of Bayraktar drones, have changed the course of the war. So is the goodwill that Ukraine has attracted from people around the world, which in turn has led foreign governments to lend more support to the country.

The idea that intangible assets, while difficult to see and measure, are critically important to promote, is the main message of a new book by Jonathan Haskel, a Bank of England policymaker, and by Stian Westlake of the Royal Statistical Society of Great Britain. “Restarting the Future” is their second book. The first, “Capitalism Without Capital,” published in 2017, argued that the economics of intangibles helped explain stagnating economic growth and rising inequality. The new book goes further by asking how the bottlenecks that are holding back investment in intangible assets could be loosened, thereby promoting a more efficient and faster growing economy. Their work is part of a wave of writing on the future pace of growth, which includes Dietrich Vollrath’s “Fully Grown” and Robert Gordon’s “The Rise and Fall of American Growth.”

Intangible investments include business-led research and development, as well as things like marketing, design, and branding. In the late 1990s, by some measures, spending on intangibles in America exceeded investment in tangible plant and equipment. But the pace of spending has slowed since the financial crisis. The authors note that the annual growth of intangible capital in rich countries tended to hover around 3-7% between 1995 and 2008. Over the following decade, however, it barely exceeded 3% in a single year. This did not just reflect slower economic growth. Intangible investments have also ceased to increase as a proportion of gdp, which poses something of a puzzle, given that corporate earnings were strong. Although the explosion in global investment over the past year has been impressive, international data on intangible assets is not yet available. It’s also not clear that the surge in investment was enough to change the gloomy trend.

The crux of the problem, according to MM. Haskel and Westlake, is that the economic and financial arrangements that exist to support investment focus on spending on capital goods, not intangibles. They point out that spurts of economic growth, such as those of medieval Italian city-states and China between the 10th and 13th centuries, often faded precisely because institutions failed to generate the right incentives and activities. .

Part of the solution this time, say the authors, is to encourage financing of investments in intangibles. A study of oecd, which examines 29 developed economies from 1995 to 2015, suggests that intangible-intensive sectors are more productive in places with more developed financial systems, where they can access finance more easily. Differences in financial development, measured by a combination of market capitalization and total credit to gdpmay explain why annual labor productivity growth in a sector like computer equipment (where two-thirds of assets are intangible) has been one percentage point higher in financially more developed countries like Japan than in places like Portugal.

Capital risk (cv) has been a preferred source of equity financing for companies conducting the most intangible activity, such as biotechnology and consumer technology. But that has been disproportionately available to American companies with an extremely rapid growth plan. In many parts of the world, many business investments are still debt-financed and more dependent on the use of physical assets as collateral.

america cv the industry took off after pension funds were allowed to invest in less liquid investments in 1979. This may help explain why business investment in America has held up better than in many other places. The authors therefore advocate larger investment vehicles that pool risk for individual lenders elsewhere in the world, such as the Long-Term Asset Fund launched in Britain last year, which helps pension funds exposure to long-term illiquid assets. Ending the tax advantages of debt financing by removing the tax deductibility of interest payments, for example, would help level the playing field between tangible and intangible investments.

Other requirements relate to how and where investment occurs. Patent law, for example, should not prevent the combination of existing ideas. More important still is the role of cities, which, the authors note, are cauldrons of intangible investment: they facilitate the formation of the relationships that bring about the intangible, encourage new ideas, and create a larger pool of beneficiaries when investments are overflowing. It is therefore vital to make cities work, with better land-use planning and zoning policies.

I can’t touch this

“Rebooting the Future” may be emblematic of a shift in economists’ thinking about growth. In the 2010s, debates raged over how best to address persistent demand deficits. In the inflationary-looking 2020s, the focus is on unlocking the supply potential of the economy. But where researchers such as Mr. Gordon and Mr. Vollrath considered the rapid growth spurts of the 20th century to be the exception and not the rule, MM. Haskel and Westlake are more hopeful of a return to higher growth rates.

Mr. Gordon argued that the digital economy was booming in terms of growth; Mr. Vollrath saw slower growth as a symptom of economic success, a larger service sector and reduced geographic mobility. By presenting solutions, “Restarting the Future” offers a more optimistic view, that is, as long as governments follow its advice.

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