(Excerpt from Capitalism Without Capital by Jonathan Haskel and Stan Westlake)
The type of investment that has risen inexorably is intangible: investment in ideas, in knowledge, in aesthetic content, in software, in brands, in networks and relationships.
Fast-growing tech companies are some of the most intangible-intensive of firms. This is in part because software and data are intangibles, and the growing power of computers and telecommunications is increasing the scope of things that software can achieve. But the process of “software eating the world,” in venture capitalist Marc Andreessen’s words, is not just about software: it involves other intangibles in abundance. Consider Apple’s designs and its unrivaled supply chain, which has helped it to bring elegant products to market quickly and in sufficient numbers to meet customer demand, or the networks of drivers and hosts that sharing-economy giants like Uber and AirBnB have developed, or Tesla’s manufacturing know-how.
Peter Goodridge and his colleagues back to 1992 (Goodridge et al. 2016). They find that intangible investment overtook tangible investment by around the late 1990s
Intangible investments, on the other hand, depend much more on labor. Design involves paying designers. R&D involves paying scientists. Software involves paying developers.
A final determinant is the size of the market. Many intangibles, such as Starbucks’s brand or Facebook’s software, can be scaled more or less infinitely (a point we shall return to in chapter 4). So, smaller markets (for example, countries surrounded by trade barriers) would be less attractive places to make intangible investment.
… economists concluded, software ought to be treated like an investment. The problem was that there was no place for software on the frequent investment surveys that statistical agencies asked firms to fill out. Those surveys asked for spending on computers, machinery, vehicles, and buildings—but not software. So the position echoed a fear voiced by Alan Greenspan, the then Chair of the US Federal Reserve, that there was a New Economy out there, and statistical agencies were not capturing it.
… tangible assets makes solving the excludability problem much easier: if I run a bus company that owns a fleet of buses, my competitors can’t simply sneak into my depot and use them—the buses have ignition keys and locks, my depot has an alarm, and I have hundreds of years of property law to enforce my rights.
But when it comes to intangible assets, the rules around ownership and control are much more contested, even in developed countries. Patents and copyrights are, on the whole, less secure and more subject to challenge than the title deeds to farmland or the ownership of a shipping container or a computer.