What do Body Pump classes, Coca Cola and the iPhone have in common?














Their soaring success is in part due to their intangible qualities – parts you can’t feel or touch. 

While they are harder to measure, intangible assets are a critical part of our economy today. Investment share of intangibles has increased by 29% since 1998, while Bill Gates described the intangible economy as “one of the biggest trends in the global economy that isn’t getting enough attention”.

So what are they, how do we measure them, and what do they mean for the future?

Jonathan Haskel is the co-author of the groundbreaking book: ‘Capitalism Without Capital: The Rise of the Intangible Economy’.

He is a member of the Monetary Policy Committee at The Bank of England, and a Professor of Economics at Imperial College Business School.

Q: Where did your interest in economics start?

A: I studied Economics at the University of Bristol, and I had the great fortune of having a series of extremely stimulating teachers. In fact, two of the professors who taught me actually went on to win Nobel prizes! I became fascinated with economics, because I thought it was about some of the most interesting problems in the world.

Q: When did you first think: maybe there is another type of capital beyond the tangible things like machines or buildings?

A: A standard economic seminar is all about manufacturing. And part of the reason for that is because the data is more easily available, and it’s easier to measure. If you want to measure the output of a ball-bearing or steel factory, the physical units are simply the number of ball-bearings or tons of steel.

But at the same time, when I graduated from university, none of my friends went into the ball-bearings industry. Nor did they go into the steel industry. They were doing these more intangible activities – being accountants or consultants, designers or musicians or programmers. Their jobs were creative, imaginative and intensive in knowledge capital.

So to make sense of what they were doing, it struck me that it would be much more interesting to go outside of manufacturing. And that's why I started researching that area of the economy, because I thought it would be helpful in understanding how the economy has changed.

Q: What do you think it is about investing in intangible assets that gives firms that competitive edge?

A: It gives firms something which other firms can't potentially do. Let’s take the example of Apple. You might think: “Surely somebody else can make a phone like an iPhone?” Well, Nokia tried that, and they couldn't do it. Microsoft has tried over and over again in various different programs, but they also found it difficult. So we think it’s the combination of these intangible assets, which makes successful companies’ distinctive features particularly hard to imitate.

When Steve Jobs tragically passed away, what was interesting from a company point of view is that Apple didn't fall to pieces overnight. In other words, the reputation of the company – the talent, the skills and so forth – was not embodied in him personally, rather the company overall. 

That shows that there’s something very interesting about how companies are able to make the skills and talents of individuals add up to more than the sum of their parts (the synergies). And that's going to be the secret to their enduring success.

Q: In ‘Capitalism without Capital’, you wrote that companies rich in intangible assets require leadership, rather than just management. Why is this the case?

A: If people can gather synergies, assemble them in a firm, and get an end product out, the rewards are likely to be very profound. But for someone to manage all the parts, we think that this requires more than just management. It requires leadership, because these individual talents need to have faith in the person who's trying to coordinate all of these activities, otherwise they’ll go elsewhere.

So we make the case that leadership is more important than repetitive management – shuffling pieces of paper around and doing some of the more routine things – which is common in a lot of management today.

Q: Another important word in ‘Capitalism without Capital’ is trust. Why is trust so important to intangible economies?

A: I think it has an increasingly important role. When we were a hunter-gatherer society living in tribes, they hadn’t invented the internet and planes, so people didn't travel very far. This meant that there was very little commercial interaction outside your immediate family, and tribe and trust was incredibly important. But all of that has gone away now, in our globalised business.

If I buy an iPhone, I've never met the person who put it together, or the person who shipped it over. But nonetheless, I trust Apple to deliver me a nice iPhone. Companies need to have that burden of trust in a way that communities had that trust before. 

The early history of retailing, for example, is essentially a trust business. If you were going to buy medicine for your child, and you go to a shop that’s got some large jars, you've got no idea what it's selling. But once companies like Boots came along, they acquired trust. So trust becomes an important part of modern day transactions. 

This relates back to the idea of ‘synergies’. If a manager or leader is going to pull this stuff together, they need to be trusted even further. So we think a return of this sort of trust is going to be part of the future for these intangible style economies.

Q: You wrote ‘Capitalism without Capital’ in 2017 – pre-pandemic and pre-Brexit. How have your thoughts evolved since then?

A: In the book, we noted that since the financial crisis, investment in intangibles (which before the financial crisis has been very fast), had slowed right down. At the time we thought this was a symptom of the very slow recovery from the crash. But as the years have gone by, another five years since we wrote the book, those investment rates have remained very slow. So our next book, ‘Restarting the Future: How to Fix the Intangible Economy’ is really about the consequences of that. The second issue is Covid.

Interestingly,  the only class of investment which has gone up during the pandemic is intangible investment. The airlines aren't buying planes anymore, and companies aren't buying buildings. But firms are investing in software, more digitization, and more R and D. 

That surely is related to the kind of structural shifts that we're going to see in the economy towards more working from home, more remote shopping, all those kinds of things. So we think that the post Covid economy, if anything, is going to be more intangible intensive rather than less.

Q: How can governments invest in intangibles, without exacerbating inequality?

A: At the end of ‘Capitalism Without Capital’, we laid out a puzzle: despite spillovers, which are a force for equalisation, the distance between firms appears to be going up. In other words, the spillover’s force for equality has been insufficient for the inequality forces from synergies and scale. 

The new book takes this up in the following way: suppose you are a young firm, and you see an opportunity – possibly you think of some spillovers, and you think you might be able to knock one of the big firms off their perch. The thing you're going to need is funding. However it’s very difficult for firms to secure funding for intangible assets, like a better piece of software or a better movie script.

So we think that we really need some reforms in the capital market, so that the banking system becomes much more nimble and able to fund these new firms. Because if we can do that, these competitive kinds of effects would erode away, which would allow firms to catch up.

Q: What do you want the legacy of your work to be?

A: If my work helps anybody in the general public to have a think about the world and see the world better; or improve policies and fix things that are broken, that would be a lovely legacy. 

Glossary

Asset - A resource with economic value that an individual, corporation, or country owns, which gives it an enduring flow of services. 

Tangible asset - An asset that you can touch and feel, such as a building or a plane.

Intangible asset - An asset that you can’t touch or feel, such as software or design. 

GDP (Gross Domestic Product) - a monetary measure of the market value of all the goods and services produced in a specific time period in a specific country.

Synergy - when the interaction of two elements produces a greater effect than the sum of the individual parts.

Scalability -  a property of a system that enables it to sustain or better its performance when demand increases.

Sunk cost - money that has been spent and cannot be recovered.

Spillover - an economic event that occurs in one context and leads to an economic event in a seemingly unrelated context.