Measuring a Technological Revolution

A Problem With Accounting

Corrado and Hulten point to a major problem in the way accounts (both corporate and national) are created. A basic idea underlying many sets of accounts is to measure things at a given point, “stocks”. When you do this at two periods changes over time show you “flows”. All else equal any positive difference over time between the assets owned is progress in any given period. The challenge the authors point to is that “..companies are moving away from the making of things in the United States and focusing increasingly on services or product development, design, and marketing” (Corrado and Hulten, 2010, page 99). Accounts (be they national or firm accounts) are much better at monitoring things that can be pointed to. In essence they are pretty good at measuring the making of tangible things. Unfortunately the accounts are not as good at measuring challenging things like marketing assets. If the accounts don’t capture what is owned at any given point, i.e. wealth, they can’t be great at measuring changes in wealth.

It is not just marketing

While I often describe issues relating to marketing much of what Corrado and Hulten focus on wouldn’t typically be classified as marketing. Innovation is a major part of the modern economy and the national accounts don’t do a good job of capturing that. Research and Development is very tricky to account for in national (or firm) accounts. We see a clear bias towards accounting for “development” activity close to being translated into a product, rather than the equally crucial “research” that produces the ideas that can be developed.

The authors look at what makes for savings and capital investment. They say that savings occurs “…when resources are used to provide future rather than current consumption, and from the  producer’s standpoint, investment is the commitment of current resources to gain future profits”, (Corrado and Hulten, 2010, page 100). Of course, investment is precisely what firms do when they invest in long-term marketing strategies, or devote resources to innovation etc…  The accounting systems we use just aren’t doing a great job of reporting what they are supposed to report. (To be fair I’m not suggesting that this is easy to do).

Trends in Intangible Investment

Corrado and Hulten look at changes in the types of investment over time. They calculate the percentage of gross business output being used to invest in tangible or intangible assets. Their figures show a modest decline in tangible investment (11.2% to 10.4%) between 1948-1972 and 1995-2007. For the intangibles the story is very different, with the investment rate in intangibles more than doubling, 5.9% to 12.8%. Intangible investment is now the biggest game in town.

How to produce accounts (national or firm) is always going to be challenging but intangibles aren’t some sort of strange exception that can be ignored. Corrado and Hulten point to a technological revolution with a change in the way business is being done. This change, without any change in recording systems, are going to leave the accounts increasingly at risk of being divorced from reality.

Read: Carol A. Corrado and Charles R. Hulten (2010) Measuring Intangible Capital; How Do You Measure a “Technological Revolution”?, American Economic Review: Papers & Proceedings 100 (May) pages 99-104.