Capitalism Without Capital

Capitalism Without Capital Plot Summary

Introduction

What drives economic growth in the modern world? For centuries, economists have focused on tangible capital—factories, machines, and physical infrastructure—as the primary engines of prosperity. Yet something profound has changed in recent decades. Today's most valuable companies like Apple, Google, and Microsoft derive their worth not from physical assets, but from intangible ones: software, research, design, organizational systems, and brand value. This shift represents more than just a change in business models; it signals a fundamental transformation in how capitalism functions. This transformation helps explain many puzzling economic phenomena of our time. Why has productivity growth slowed despite technological advances? Why has inequality risen so dramatically? Why do financial markets seem increasingly disconnected from the real economy? The theory of intangible capital offers a coherent framework for understanding these challenges, revealing how the changing nature of investment reshapes markets, firms, and society. By examining the unique economic properties of intangible assets—their scalability, spillover effects, synergies, and sunk costs—we can better grasp the hidden forces restructuring our economy and develop more effective strategies for navigating this new landscape.

Chapter 1: The Shift from Physical to Knowledge Capital

The modern economy has undergone a profound transformation in recent decades, shifting from one dominated by physical capital to one increasingly powered by intangible assets. This transition represents one of the most significant economic developments of our time, yet remains surprisingly underappreciated in mainstream economic discourse. Intangible assets encompass a broad range of non-physical investments: research and development, software, design, branding, organizational development, and training. Unlike factories, vehicles, or equipment, these assets cannot be touched or seen, but they increasingly drive value creation in advanced economies. In the United States and other developed nations, businesses now invest more in intangibles than in traditional physical capital—a historic crossover that occurred around the turn of the millennium. This shift has been enabled by several converging forces. Technological advances, particularly in information technology, have dramatically reduced the cost of creating, storing, and distributing knowledge-based assets. Globalization has expanded market sizes, making investments in scalable intangibles more profitable. Changes in business climate, including deregulation and the rise of service economies, have further accelerated this transition by rewarding flexibility and innovation over physical production capacity. The rise of intangible investment manifests differently across industries and regions. Knowledge-intensive sectors like technology, pharmaceuticals, and financial services lead the way, while traditional manufacturing and resource extraction industries maintain higher proportions of tangible capital. Similarly, advanced economies show higher rates of intangible investment than developing ones, though this gap is narrowing as global economic integration deepens. Perhaps most significantly, official economic statistics systematically undercount intangible investment. National accounting frameworks were designed for an industrial economy and still treat many intangible investments as intermediate consumption rather than capital formation. This statistical blind spot not only distorts our understanding of economic growth but also affects policy decisions, potentially leading to underinvestment in crucial areas like education, research, and digital infrastructure that support the intangible economy.

Chapter 2: The Four S's: Unique Properties of Intangible Assets

Intangible assets operate according to fundamentally different economic principles than their physical counterparts. These differences can be captured in what might be called the "Four S's": scalability, sunkenness, spillovers, and synergies—distinctive properties that together explain why an intangible-rich economy behaves differently than one dominated by physical capital. Scalability refers to the capacity of intangible assets to be used repeatedly without additional cost. Once created, intangible assets like software code, designs, or business processes can be deployed across unlimited users or products simultaneously. While a physical factory can only produce a finite number of goods before reaching capacity, a software program can serve millions of users with minimal incremental cost. This property creates winner-take-all dynamics where the first company to develop a successful intangible asset can rapidly scale it across global markets, explaining the extraordinary growth trajectories of firms like Microsoft, Google, and Facebook. Sunkenness describes how intangible investments typically cannot be recovered if a project fails. Unlike physical assets that can be sold secondhand if a business venture doesn't succeed, the costs of unsuccessful R&D, failed brand campaigns, or abandoned software development are largely unrecoverable. This creates higher risk profiles for intangible investments and explains why financing them through traditional channels proves challenging. The sunk nature of intangible investments also means that historical costs become irrelevant once the investment is made—what matters is the future value the asset can generate. Spillovers occur when the benefits of intangible investments flow beyond the investing company to competitors or adjacent industries. Ideas, techniques, and knowledge inevitably leak through employee movement, reverse engineering, or simple observation. The classic example is the EMI scanner—a revolutionary medical technology developed by a music company that ultimately benefited General Electric and Siemens far more than EMI itself. These spillovers create a gap between private and social returns on investment, potentially leading to underinvestment in intangibles from a societal perspective. Synergies arise when intangible assets combine to create value greater than the sum of their parts. The iPhone exemplifies this phenomenon, integrating multiple technologies (touchscreens, mobile internet, GPS) with design and software to create an entirely new category of product. Similarly, business models like Uber combine mapping technology, payment systems, and organizational innovations to deliver novel services. These combinatorial possibilities multiply as the stock of intangible assets grows, creating accelerating potential for innovation but also requiring new organizational capabilities to identify and exploit these connections.

Chapter 3: Productivity Paradox and Secular Stagnation

Despite unprecedented technological advancement, developed economies have experienced a puzzling slowdown in productivity growth since the early 2000s. This "productivity paradox" has coincided with concerns about secular stagnation—a persistent condition of low growth, low inflation, and low interest rates. The rise of intangible investment offers a compelling framework for understanding these seemingly contradictory economic trends. Intangible investment creates measurement challenges that may understate true economic growth. Since national accounts classify much intangible spending as current expenses rather than investment, GDP calculations systematically undercount the capital formation occurring in knowledge-intensive sectors. This statistical distortion makes the economy appear less productive and investment-oriented than it actually is, potentially explaining part of the measured slowdown in productivity growth. The unique properties of intangibles also generate increasing divergence between leading and lagging firms. The scalability of intangible assets allows frontier companies to grow rapidly and achieve extraordinary productivity levels, while spillovers enable them to capture benefits from others' investments. Meanwhile, laggard firms struggle to keep pace, creating a "best versus the rest" dynamic visible in widening productivity and profitability gaps across virtually all sectors. This bifurcation drags down aggregate productivity statistics even as leading firms thrive. Intangible-intensive economies also exhibit different cyclical patterns, particularly following financial crises. The Great Recession triggered a sharp decline in intangible investment that proved more persistent than typical cyclical downturns. Since intangible investments generate spillovers that benefit the broader economy, this prolonged investment drought likely contributed to the sluggish recovery that followed. Moreover, the sunken nature of intangible investments makes them particularly vulnerable to financing constraints during credit crunches. The contestability of intangible assets further complicates their economic impact. Unlike physical assets with clear ownership rights, the value of intangibles often depends on complementary assets, regulatory environments, and the ability to prevent imitation. This contestedness creates incentives for defensive strategies—from aggressive patent litigation to regulatory capture—that may divert resources from productive investment toward rent-seeking activities, further dampening aggregate productivity growth. These intangible-specific mechanisms help explain why technological progress has coincided with disappointing productivity statistics. They suggest that the productivity paradox reflects not a failure of innovation, but rather the growing pains of an economic system transitioning from tangible to intangible capital accumulation, with institutional frameworks and measurement systems still catching up to this new reality.

Chapter 4: Rising Inequality in the Knowledge Economy

The rise of intangible capital has profoundly reshaped patterns of economic inequality, contributing to several dimensions of the widening gap between winners and losers in modern economies. Understanding how intangibles drive inequality provides crucial insights into the social and political tensions that have emerged alongside the knowledge economy. Income inequality has increased dramatically in most developed countries since the 1980s, with particularly stark growth at the very top of the distribution. The intangible economy fuels this trend through several mechanisms. First, the scalability of intangible assets creates winner-take-all markets where leading firms can serve global customers with minimal marginal costs, generating extraordinary returns for their owners and key employees. Second, the growing gap between frontier firms and laggards translates directly into wage disparities, as productive companies pay higher salaries across all job categories. Third, the synergies between intangibles place a premium on workers who can coordinate complex knowledge assets—what Robert Reich called "symbolic analysts"—driving up compensation for managers and specialized professionals. Wealth inequality has been similarly affected by the intangible transition. The rising value of urban real estate represents a significant portion of increased wealth concentration, and this appreciation is directly linked to the geography of intangible production. Cities with diverse knowledge industries generate powerful spillovers and synergies between different types of intangible assets, making them extraordinarily productive locations for knowledge work. This productivity premium translates into escalating property values, benefiting existing property owners while creating affordability crises that exclude many from these opportunity-rich environments. The geographic dimension of inequality extends beyond housing markets to regional disparities. Places specialized in traditional manufacturing have struggled to transition to intangible production, creating a growing divide between prosperous knowledge hubs and declining industrial regions. This spatial sorting has political consequences, as evidenced by the populist backlash in "left-behind" communities across the developed world. Perhaps most intriguingly, the intangible economy appears to exacerbate what might be called "inequality of esteem"—social divisions based on values, identity, and cultural orientation. Research suggests that personality traits like openness to experience correlate strongly with success in intangible-intensive work environments. These same traits often align with cosmopolitan values and progressive social attitudes, creating a self-reinforcing cycle where economic advantage and cultural orientation become increasingly intertwined. This helps explain why economic divides increasingly map onto cultural and political polarization. The multidimensional nature of intangible-driven inequality presents particular challenges for policy responses. Traditional redistributive approaches may address income disparities but fail to tackle the geographic, wealth, and cultural dimensions of the new inequality. Effective solutions likely require rethinking everything from housing policy and regional development to education systems and financial regulation.

Chapter 5: Financing Challenges for Intangible-Intensive Businesses

The distinctive properties of intangible assets create significant challenges for traditional financing mechanisms, helping explain both microeconomic phenomena like the funding gap for innovative firms and macroeconomic trends like declining business investment. These financing frictions represent one of the most consequential aspects of the transition to an intangible economy. Traditional debt financing proves particularly ill-suited for intangible-intensive businesses. Banks typically require collateral to secure loans, but the sunken nature of intangible investments means they retain little liquidation value if a business fails. Unlike physical assets like vehicles, machinery, or buildings that can be repossessed and resold, investments in research, software development, or organizational capabilities cannot be easily recovered. This fundamental mismatch explains why intangible-intensive industries consistently show lower leverage ratios and why many innovative firms report difficulties accessing bank credit despite strong growth prospects. Public equity markets also struggle to properly value and finance intangible investments. Accounting conventions treat most internally generated intangibles as expenses rather than capitalized assets, creating artificial volatility in reported earnings and obscuring the true capital formation occurring within firms. This information asymmetry makes it difficult for investors to distinguish between companies cutting costs to boost short-term profits and those making valuable long-term investments. Research suggests that stock markets systematically undervalue certain types of intangible investments, particularly those with longer-term payoffs like R&D, training, and organizational development. The financing challenge is further complicated by the spillover effects characteristic of intangible assets. When benefits of investment flow to competitors or adjacent industries, private returns may fall below the cost of capital even when social returns remain substantial. This creates a classic market failure where profit-maximizing firms rationally underinvest from a societal perspective. The contestedness of intangible assets exacerbates this problem, as uncertainty about who will capture future returns further discourages investment. Venture capital has emerged as a specialized financing mechanism adapted to the peculiarities of intangible investment. By taking equity positions rather than requiring collateral, accepting high failure rates in exchange for occasional home runs, and staging investments to manage uncertainty, venture capital addresses many of the challenges that stymie traditional financing channels. However, venture capital remains geographically concentrated, focused on a narrow range of sectors, and unsuited for many types of intangible investments that lack the explosive scalability of successful tech startups. These financing frictions help explain broader economic phenomena, from the growing cash hoards of established corporations to the declining rate of business formation. They suggest that financial architecture designed for an industrial economy may be increasingly misaligned with the capital needs of an intangible-intensive production system. Addressing these misalignments will require innovations in financial instruments, accounting standards, and public policy to ensure that valuable intangible investments receive appropriate funding.

Chapter 6: New Infrastructure for an Intangible World

The transition to an intangible-dominated economy necessitates a fundamental rethinking of what constitutes essential infrastructure. While traditional physical infrastructure remains important, new forms of "invisible infrastructure" become increasingly critical for economic prosperity in a knowledge-based system. Cities take on heightened importance as infrastructure for intangible production. The spillovers and synergies characteristic of knowledge assets flourish in dense, diverse urban environments that facilitate face-to-face interaction and knowledge exchange. This explains why, contrary to early predictions about technology enabling geographic dispersion, knowledge-intensive activities have become more concentrated in major metropolitan areas. Cities function as crucial platforms for innovation by enabling the mixing of ideas, talent, and capital in ways that generate unexpected combinations and breakthroughs. However, this concentration creates challenges around housing affordability, transportation, and inclusion that threaten to undermine the very diversity that makes urban areas productive. Digital infrastructure extends beyond basic connectivity to encompass platforms, standards, and protocols that enable collaboration and knowledge sharing. Cloud computing services, application programming interfaces, and data exchange standards constitute a new layer of infrastructure that reduces transaction costs for intangible-intensive businesses. The governance of these systems—determining who controls them, how they interoperate, and who captures their value—becomes a critical economic question, blurring traditional boundaries between public and private infrastructure. Educational systems represent perhaps the most important infrastructure for an intangible economy. Human capital development takes on increased significance as tacit knowledge embedded in workers becomes a primary productive asset. This extends beyond formal schooling to include lifelong learning systems, knowledge-sharing networks, and communities of practice where specialized expertise is developed and transmitted. The rising premium on creative and social capabilities that complement rather than compete with automation places new demands on educational infrastructure designed for an industrial era. Legal and institutional infrastructure plays a crucial role in determining how intangible assets are created, protected, and exchanged. Intellectual property regimes, contract enforcement mechanisms, technical standards bodies, and regulatory frameworks constitute the "rules of the game" that shape incentives for intangible investment. The design of these systems involves complex tradeoffs between encouraging private investment and enabling beneficial spillovers—a balance that varies across different types of intangible assets and economic contexts. Perhaps most subtly, social capital functions as essential infrastructure for intangible production. Trust, shared norms, and social networks reduce transaction costs and facilitate knowledge exchange in ways particularly valuable for intangible-intensive activities. Societies with high levels of social capital can more easily establish the formal and informal institutions needed for collaborative innovation, while those with eroding social cohesion face additional barriers to succeeding in the intangible economy. This expanded concept of infrastructure challenges conventional policy approaches focused primarily on physical systems. It suggests that public investment strategies must evolve to encompass a broader range of assets—from urban amenities to digital platforms to institutional capacity—that enable intangible value creation while ensuring its benefits are widely shared.

Chapter 7: Policy Implications and Future Directions

The rise of intangible capital demands fundamental reconsideration of policy frameworks across multiple domains. Governance systems designed for industrial capitalism often prove poorly adapted to the distinctive properties of knowledge assets, creating opportunities for policy innovation that transcends traditional ideological divides. Intellectual property regimes require careful recalibration to balance competing objectives. Strong IP protections help firms appropriate returns from intangible investments, potentially encouraging greater innovation. However, overly broad or lengthy protections can inhibit the synergies and recombinations that drive progress in an intangible economy by preventing knowledge diffusion. The optimal approach likely involves clearer rather than simply stronger rights, with well-defined boundaries, efficient dispute resolution mechanisms, and specialized protections tailored to different types of intangible assets. Competition policy faces new challenges in markets dominated by intangible capital. The scalability of intangible assets creates powerful winner-take-all dynamics that can lead to market concentration, while network effects and data advantages may create durable barriers to entry. Traditional antitrust approaches focused on consumer prices prove inadequate when dealing with zero-price digital services or innovation markets. Effective competition policy for the intangible economy requires new analytical tools and enforcement approaches that preserve the benefits of scale while preventing harmful entrenchment of market power. Financial regulation and tax policy require updating to address the financing challenges inherent in intangible investment. The current preferential tax treatment of debt over equity financing disadvantages intangible-intensive businesses that rely more heavily on equity capital. Similarly, accounting standards that expense rather than capitalize most intangible investments create information asymmetries that hamper efficient capital allocation. Reforms in these areas could significantly improve the financing environment for innovative firms while reducing incentives for tax avoidance through intangible asset shifting. Education and labor market policies must evolve to address the changing nature of work and skills in an intangible economy. The rising premium on tacit knowledge and creative capabilities increases the importance of both early childhood development and lifelong learning opportunities. Labor market institutions designed for stable, long-term employment relationships may need adaptation for a world where human capital mobility drives knowledge diffusion. Policies that facilitate workforce transitions while providing adequate security become increasingly important as technological change accelerates. Perhaps most fundamentally, the growing gap between private and social returns on intangible investments strengthens the case for public investment in knowledge creation. When spillovers prevent firms from capturing the full benefits of their investments, government funding for research, development, and other intangible assets can help close the resulting investment gap. This suggests an expanded role for mission-oriented innovation policies that direct resources toward societal challenges while creating knowledge assets that benefit the broader economy. These policy implications suggest neither simple deregulation nor conventional industrial policy, but rather institutional innovations specifically designed to address the unique characteristics of intangible capital. Countries that successfully adapt their governance frameworks to this new economic reality will likely enjoy significant advantages in innovation, productivity, and inclusive growth in the decades ahead.

Summary

The rise of intangible capital represents nothing less than a fundamental restructuring of modern capitalism. By recognizing how the distinctive properties of knowledge assets—their scalability, sunkenness, spillovers, and synergies—reshape economic dynamics, we can better understand the seemingly disparate challenges of our time: slowing productivity growth, rising inequality, financial market dysfunction, and organizational transformation. These phenomena are not unrelated problems but interconnected consequences of an economic system increasingly built on intangible foundations. The intangible turn demands new approaches across multiple domains. Businesses must develop management models that protect intellectual assets while enabling creative recombination. Financial systems need instruments and regulations better suited to knowledge-intensive enterprises. Policymakers must recalibrate everything from intellectual property regimes to urban planning to education systems. The societies that most successfully navigate this transition—developing institutions that mitigate the downsides of intangible capitalism while amplifying its innovative potential—will define the next era of economic prosperity. The stakes could hardly be higher, as this transformation will determine not just economic outcomes but the social cohesion and democratic vitality of advanced economies for generations to come.

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Jonathan Haskel

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