Why are intangible investments different to tangible investments?

Intangible Investments Are Different

Haskel and Westlake’s main point in Capitalism without Capital is that the world is changing and that the predominant form of investment nowadays (investments in intangibles) is different from investment in tangibles.

The Four Ss of Intangibles

The authors, in making the case for intangible investments changing business, suggest there are four reasons for this. Helpfully (and somewhat coincidentally?) all the reasons start with S.

“Scalability
Sunkenness
Spillovers
Synergies” (Haskel and Westlake, 2017, page 88).

The Ss are typically associated with intangibles and this makes investments in them a different proposition (for firms and the economy as a whole).

Scalability means that the asset can be used many times over. If your firm owns a machine maybe only one person can use it at a time. If you own the rights to a song any number of people can use it at the same time.

Sunkenness tends to occur with intangibles because they are often hard to trade. If I invest in a car I can resell it for most of its purchase price, if I invest in cultivating a customer relationship it can be hard to get the money back out, at least through sale. The money is sunk.

Spillovers occur when it is relatively easy for others to take advantage of what I invest in. If I invest in a building I control the building, if I invest in developing an idea it is harder to control. This can be great — more diffuse benefits for society as a whole — but it can be a problem justifying investment as the investor doesn’t necessary gain most of the benefits of the investment. Collectively we want to do it — individually firms may not want to bother.

Finally, Synergies are a common feature of intangibles. Individually they are less valuable than combined. One machine might do a good job at making a widget but a brand on its own is pretty useless without a distribution system to get products to the consumers who like the brand. Sometimes this leads to pressure for open innovation — working together brings massive benefits to all.

Haskel and Westlake argue convincingly that being intangible heavy, as modern economies seem to be, makes a major difference to the economy.

Read: Jonathan Haskel & Stian Westlake (2017) Capitalism without Capital: The Rise of the Intangible Economy, Princeton University Press