74 Finance & economics The Economist May 21st 2022
Immaterialneeds
W
hen russiainvaded Ukraine, tangible things at first seemed
all too important. Bombs and bullets were what mattered;
commodity markets were roiled; supply chains were upturned. As
the war has gone on, however, intangible factors have asserted
their importance, too. The managerial and logistical knowhow of
the armed forces on either side, as well as technological advantag
es, like Ukraine’s deployment of Bayraktar drones, have altered the
course of the war. So too has the goodwill that Ukraine has attract
ed from people around the world, which has in turn led foreign
governments to lend the country more support.
The idea that intangible assets, though hard to see and mea
sure, are critically important to foster, is the main message of a
new book by Jonathan Haskel, a Bank of England policymaker, and
Stian Westlake of Britain’s Royal Statistical Society. “Restarting the
Future” is their second book. The first, “Capitalism Without Capi
tal”, published in 2017, argued that the economics of intangible as
sets helped explain stagnating economic growth and rising in
equality. The new book goes a step further, asking how the bottle
necks holding investment in intangibles back might be loos
ened—thereby fostering a more efficient and fastergrowing
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 investment includes the research and development
conducted by firms, as well as things like marketing, design and
branding. In the late 1990s, by some measures, spending on intan
gibles in America overtook investment in tangible plant and
equipment. But the pace of spending has slowed since the finan
cial crisis. The authors note that annual growth in intangible cap
ital in rich countries tended to be around 37% between 1995 and- Over the subsequent decade, however, it barely surpassed
3% in any single year. That did not just reflect slower economic
growth. Intangible investment also stopped rising as a share of
gdp, which poses something of a conundrum, considering that
corporate profits were strong. Although the burst of overall invest
ment in the past year or so has been impressive, crosscountry da
ta on intangibles are not yet available. Nor is it clear that the in
vestment surge has done enough to alter the sluggish trend.
The nub of the problem, say Messrs Haskel and Westlake, is
that the economic and financial arrangements that exist to sup
port investment are geared towards spending on capital goods,
not intangibles. They point out that bursts of economic growth,
such as those in medieval Italian city states and in China between
the 10th and 13th centuries, have often faded precisely because in
stitutions failed to generate the right incentives and activity.
Part of the solution this time, say the authors, is to encourage
the financing of investment in intangibles. A study by the oecd,
which looks at 29 developed economies from 1995 to 2015, suggests
that intangibleheavy sectors are more productive in places with
more developed financial systems, where they can access finance
more easily. Differences in financial development, as measured by
a combination of equitymarket capitalisation and total credit to
gdp, can explain why annual labourproductivity growth in a sec
tor like computer equipment (where twothirds of assets are in
tangible) has been a percentage point higher in more financially
developed countries like Japan than in places like Portugal.
Venture capital (vc) has been a preferred source of equity fund
ing for firms conducting the most intangible activity, such as bio
technology and consumertech. But that has been disproportion
ately available to American companies with a plan for extremely
rapid growth. In many parts of the world, a lot of business invest
ment is still debtfinanced, and more dependent on the use of
physical assets as collateral.
America’s vcindustry took off after pension funds were al
lowed to invest in less liquid investments in 1979. That may help
explain why business investment in America has held up better
than in many other places. The authors therefore advocate for
larger investment vehicles that pool risk for individual lenders
elsewhere in the world, like the LongTerm Asset Fund launched
in Britain last year, which helps pension funds gain exposure to
longterm illiquid assets. Ending the tax advantages of debt fi
nancing by removing the tax deductibility of interest payments,
say, would help level the playingfield between tangible and in
tangible investment.
Other prescriptions relate to how and where investment oc
curs. Patent law, for instance, 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
make it easier to form the relationships that make intangibles
happen, encourage new ideas and create a larger pool of beneficia
ries when investments spill over. Making cities work, therefore,
with better landuse and zoning policies, is vital.Can’t touch this
“Restarting the Future” may be emblematic of a shift in econo
mists’ thinking on growth. In the 2010s debates raged over how
best to address persistent shortfalls in demand. In the inflation
arylooking 2020s, the emphasis is on unleashing the economy’s
supply potential. But where researchers such as Mr Gordon and Mr
Vollrath regarded the bursts of rapid growth in the 20th century as
the exception, not the rule, Messrs Haskel and Westlake are more
hopeful of a return to headier rates of growth.
Mr Gordon argued that the digital economy was a busted flush
when it came to growth; Mr Vollrath saw slower growth as a symp
tom of economic success, a larger services sector and reduced geo
graphic mobility.Bypresenting solutions, “Restarting the Future”
offers a more optimistic vision—as long, that is, as governments
follow its advice.nFree exchange
How to unleash more investment in intangible assets