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Capitalism without Capital: The Rise of the Intangible Economy is a fantastic read by Jonathan Haskel and Stian Westlake.

Jonathan Haskel is Professor of Economics at Imperial College Business School and Director of the School’s doctoral programme, and Stian Westlake is a senior fellow at Nesta, the UK’s national foundation for innovation. In the book he discusses how the “new intangible economic age” is reshaping businesses and how scalability many times is the key for a successful business and what effects this have on society.

As we entered the twenty-first century, a quiet revolution started to occur. For the first-time businesses began putting more money into the sort of stuff you can’t see than they did into concrete assets, like design, branding, R&D, and software, than in tangible assets, like machinery, buildings, and computers. For all sorts of businesses, from tech firms and pharma companies to coffee shops and gyms, the ability to install assets that one can neither see nor touch is increasingly the main source of long-term success.

But this is not just a familiar story of the so-called new economy. Capitalism without Capital shows that the growing importance of intangible assets has also played a role in some of the big economic changes of the last decade. The rise of intangible investment as, Jonathan Haskel and Stian Westlake argue, an underappreciated cause of phenomena from economic inequality to stagnating productivity. A company such as Uber don’t own cars, they “just” own the software and the data. Coffee bars and gyms rely on branding to help them stand out from their competitors. While the pharmaceutical industry has large budgets for marketing as well as R&D.
“This is capitalism without capital. But why does this matter? Alarmingly, it seems to be fostering inequality and social division.”

Haskel and Westlake bring together a way to measure intangible investment and its impact on national accounts, showing the amount different countries invest in intangibles, how this has changed over time, and the latest thinking on how to evaluate this. They explore the economic characteristics of intangible investment, and discuss how these features make an intangible-rich economy different from one based on tangibles assets. They present three possible scenarios for what the future of an intangible world might look like, and by outlining how managers, investors, and policymakers can exploit the characteristics how; businesses, portfolios, and economies can grow their intangible age.

If a company with intangible assets fails those assets can’t be sold off easily Effectively their value has sunk with the company. At first glance, you’d think the prominence of intangibles might spill over and help smaller companies keep up with the bigger players, as it’s relatively easy to copycat prominent business models. For example, every smartphone today looks like an iPhone, so doesn’t the whole industry benefit from scaling up design and technology? But the opposite seems to be happening.
While the largest companies in the intangible economy – the likes of Google and Amazon – are getting bigger, at the same time as smaller businesses are struggling to get investment. Frontier companies are breaking away from the laggards and the data suggests these divisions will only widen. This is because bigger companies are more likely to have resources to allow them to benefit from synergies between intangible assets. As example, in creating the iPod, Apple combined MP3 technology with licensing agreements, record labels and design expertise to produce a new improved MP3-player. This ability to combine different technologies and then scale up helps these companies to dominate markets. Which widens the gap between the small businesses and the “giants”.
Smaller companies also suffer as banks are struggling to understand how to value and monitor intangible assets. When a company went bust in the “tangible economy”, if a company went bust the bank could recover much of its losses by selling physical assets. But when a company with intangible assets folds, those assets can’t be sold off as easily, their value many times sinks with the company. Effectively, smaller businesses don’t have that same access to bank loans, which makes them more reliant on venture capital and angel investors. This have worked well in a few areas such as in Silicon Valley. But for many technology-start-up they tend to do business for three or four years before being bought by some giant. This means larger firms will grow ever more dominant.

Speculative finance works if only if there’s a bedrock of savvy investors with experience whom everyone looks to before following suit. This bedrock we often see in larger cities such as; San Francisco, Tel Aviv or London. Technology-start-up need to be in cities, but the cities many times are too expensive for many people to live in. So, the rise in the “intangible economy” calls for policy makers to create the infrastructure that is needed (slick communication technology, education, wise urban planning and public science spending), which can help promote this clusters. But this kind of economy, can create a social gap between the cities and the country-side. People more open to innovative ideas and experiences might earn more from the intangible economy, with the flip side that this could leave more isolated populations feeling ever more left behind.

“This new economy also gives a new perspective on education. We’re used to hearing about the urgent need for more science and engineering skills – received wisdom suggests it’s no longer worth studying ‘fluffy’ subjects such as history or other humanities – but, increasingly, the intangible economy will rely on those who can pull all the disparate strands together. Success in this new economy will not only come to people with the right creative and technological talent: it will come to people with the soft skills and leadership required to organise them.”
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