Noli Me Tangere: Fixing the Intangible Economy

REVIEW ESSAY
Restarting the Future:
How to Fix the Intangible Economy
by Jonathan Haskel and Stian Westlake
Princeton University Press, 2022, 330 pages

What’s wrong with the new economy, variously called the knowledge economy or the information economy? Jonathan Haskel and Stian Westlake’s Restarting the Future, published this spring by Princeton University Press, diagnoses post-2008 Western economic stagnation as the consequence of a massive but incomplete shift away from an economy characterized by investment in “tangibles” to one characterized by investment in “intangibles.” Intangibles, pedantically, are things you can’t touch, but here encompass intellectual property (patents, copyrights, brands, and trademarks), corporate cultures, con­sumers’ emotional attachments to firms or products, and tacit production knowledge. Tacit knowledge is uncodified—often uncodifiable—information about how things get done on the factory or office floor that is stored in workers’ heads.

Haskel and Westlake accurately identify five forms of contemporary dysfunctionality: (1) Stagnant per capita income growth relative to pre-2010 growth rates. (2) Rising inequality, not just of wealth and income but also of esteem as cultural and social change accelerates and magnifies the divide between high-status elites and everyone else. (3) Dysfunctional, winner-take-all competition that inhibits start-ups and promotes excessive interpersonal competition over positional goods and employment outcomes. (4) The fragility of very complex, interconnected inter­national supply chains, which are vulnerable to shocks like Covid or war, or, given very low interest rates, increasingly ineffective monetary policy in the face of a significant recession. (5) And finally, echoing Fight Club, where everything is a copy of a copy of a copy, inauthenticity: the sense that too many jobs and activities are simply fake and detached from any underlying reality.

Haskel and Westlake channel Italian Marxist Antonio Gramsci, declaring that “[t]he problems we see are the morbid symptoms of an economy caught between an irrecoverable past and the future that we cannot attain.” The institutions we have don’t match the institutions that an economy built on intangibles needs. Economies, they say, require institutional structures that are specifically compatible with what we can call, following Joseph Schumpeter, the “current leading sectors.” Those “sound institutions have to solve four problems in exchange: ensuring sufficient commitment, solving collective action problems, providing information, and restricting wasteful influence activities.” In particular, Haskel and Westlake foreground—without much credit to Schumpeter—Schumpeter’s argument that established interests and practices hinder efforts by new leading sectors to mobilize massive volumes of capital for investment.¹

But the authors fail to account for how major interests within the intangibles sector currently impede investment and growth under exist­ing legal and economic arrangements. Indeed, this is perhaps the most significant dynamic affecting the performance of the sector and the economy more generally.

Intangibles and Institutions

Haskel and Westlake begin by dismissing four competing explanations for current institutional dysfunction. We are not in an era of technological stagnation, as Robert Gordon has argued. We are not mismeasuring GDP growth on account of the rise of freemium software or internet-based services, even though GDP accounting was built for an era largely characterized by physical output. We might well be in a transitional era as firms seek to understand and implement the production of intangibles, and with higher proportions of intangible inputs—just as an earlier generation struggled to implement electrification of production—but if we are, we are more than halfway through that transition. And finally, though much less convincingly, rising monopoly power has not led to rising markups once intangibles are “properly” accounted for—a point I will return to in detail later.

Haskel and Westlake’s argument about institutional incompatibility with an intangibles economy builds on their 2016 book Capitalism without Capital.² Capitalism without Capital argued that intangible capital generates four novel “S”s: (1) spillovers: the fact that intangibles or knowledge tend to spread to other firms; (2) scalability: the ability to expand production without a corresponding increase in physical capital; (3) sunken-ness: the inability to extract capital invested in an intangible because of the difficulties involved in selling “information”; and (4) synergies: the ability to combine knowledge to attain greater output.

Restarting the Future argues that institutional failure to deal with spillover effects and sunk costs inhibits growth-generating investment in intangibles. On the demand side for investment capital, if firms cannot capture the majority of the social value their products create for the rest of the economy, why would they invest in those products? On the supply side for investment capital, the world of debt finance is largely closed to firms which deal in intangibles, as those firms typically have no collateral to back a loan or bond. Failed start-ups have only vaporware ex ante, while the already sunk investments of more established intangi­bles firms, claim Haskel and Westlake, cannot be liquidated in case of default. By contrast, normal banking and securities market channels could finance investment in the older, factory-based tangible economy of the post-1945 era. Tangibility provided collateral—buildings and machines—and loan covenants largely prevented asset stripping in anticipation of default.

Restarting the Future also argues, correctly, that incumbent homeowners, risk-averse local government, and—especially in the United States—racially motivated zoning laws have led to extremely expensive housing costs in the cities which typically host dynamic intangibles firms. Relative to household formation, and sometimes in an absolute sense, most rich countries have built fewer new housing units in the past twenty years than they did in the 1950s through 1970s. This institutional bias toward the housing status quo has slowed expansion, again inhibit­ing growth.

Finally, Haskel and Westlake note that some institutional supports for an intangibles economy already exist, which is why the weight of intangibles has been rising. Venture capital funds some intangibles pro­duction precisely because of scalability. Scalability enables a successful intangibles firm to rapidly expand its output with little extra investment—the “production” cost of the nth copy of software is essentially zero, while app firms can accommodate extra customers with incremental increases in rented server space. Likewise, the proliferation of smartphones makes those apps synergistic: mapping apps locate a restaurant, ratings apps tell you if it is any good, delivery or rideshare apps connect you and the food. In many cases, winner-take-all dynamics enable a successful firm to have a global-scale addressable market. But, Haskel and Westlake argue, the volume of intangibles production in the economy has exhausted the available institutional capacity, hobbling further expansion.

Monopoly Matters

The authors are surely correct that the current institutional structure inhibits rapid growth, slows the diffusion of productivity gains, and creates unhealthy winner-take-all dynamics. Legacy institutional struc­tures, however, do not cause these problems. On the contrary, firms built on intangibles massively contribute to the four problems the authors identify.

The intangibles firms which capture most of U.S. and global profit volume are rich in intellectual property rights (IPRs).³ IPRs convey monopoly rights, albeit theoretically temporary ones. These monopoly rights generate the dysfunctional and predatory behavior that Haskel and Westlake decry in Restarting the Future precisely because of the characteristics which they elaborated in Capitalism without Capital. But the authors largely deny that monopoly matters, despite advocating for marginal reforms to IPRs. Haskel and Westlake thus miss the degree to which “The calls are coming from inside the house.”⁴

Easy scalability combined with IPR protections implies strong tendencies towards monopoly, especially for first movers. These mono­polies have proven hard to dislodge. Haskel and Westlake deny that monopoly is harmful and denigrate what they call “hipster” antitrust policy. From a Schumpeterian perspective, the former argument has some theoretical merit. Schumpeter thought nascent leading sectors needed the promise of monopoly profit both to attract funding and to overcome the barriers that existing businesses posed—Haskel and Westlake’s third institutional problem, excessive influence activity by incumbents. As the decidedly Schumpeterian Peter Thiel, who helped found PayPal and Meta (née Facebook), wrote, every firm desiring prosperity should seek monopoly.⁵ But incumbents from the old econ­omy and the robust antitrust regime associated with it are not the problem. Rather, Haskel and Westlake’s intangibles firms are.

Haskel and Westlake dismiss the significance of monopoly by pointing to James Traina’s work suggesting that the rising markups found in other academic studies, particularly by Jan De Loecker and Jan Eeckhout, are illusory.⁶ Traina argues that the apparent rise in markups disappears once sales and general administrative (SGA) expenses are incorporated as part of the cost of production. Haskel and Westlake see these costs as part of firms’ intangibles. But SGA can also be understood as managerial diversion of potential profit away from owners and toward insiders. Private equity similarly siphons off profit through dividend and interest payments, diminishing the apparent scale of monopoly profit and hobbling investment because these firms are not included in the data both Traina and DeLoecker and Eeckhout use.⁷ In other words, the scale of monopoly profit is occluded and hidden by this process.

Monopoly also generates the Weberian kapitalmacht that preempts effective competition, sustaining continued monopoly. How? Equity market shares whose capitalization is puffed up by hype and monopoly cash flows give IPR-rich firms maneuverability in the competition for ownership of real or potentially rival companies. Intangible assets ac­counted for 90 percent of S&P 500 and 75 percent of S&P Europe 350 market capitalization in 2020.⁸ Shares can be traded for ownership of potential rivals, cementing permanent monopoly. Max Weber already observed this phenomenon a century ago:

Capitalist interests are interested in the continuous extension of the free market up and until some of them succeed, either through the purchase of privileges from the political authority [politischen Gewalt] or exclusively through the power exerted by their capital [kraft ihrer Kapitalmacht], in obtaining a monopoly for the sale of their products or the acquisition of their means of production, and in this way close the market for themselves alone.⁹

Haskel and Westlake’s concerns about IPR-based monopolies generating dysfunction focus on patent trolls—nonpracticing entities, or NPEs. While NPE patent trolls were a major nuisance in the late 1990s and early 2000s, an alliance of the big firms has much diminished their power. Instead, preemption and predation by established firms is now the limiting factor on start-ups. Silicon Valley start-ups all fret about the so-called kill zone around the big firms. For example, Microsoft, Amazon, Google, and Meta have acquired over five hundred start-up firms since 1998.¹⁰ Meanwhile, the biggest IP lawsuits have involved large practicing entities, as when Apple sued Samsung over the physical shape of smartphones. Big firms often just copy potential competitors’ products, as Meta did when it cloned Snapchat’s key features after Snap refused a buyout, or as Amazon is often alleged to do. As Scott Galloway says, “Stealing is a core competence of high-growth tech firms.”¹¹ These firms have the resources to wait out or scare away lawsuits by smaller firms.

Building on Capitalism without Capital’s shaky foundations also obscures the monopoly problem around intangibles by overstating sunken-ness. In reality, IPR-rich firms routinely buy up IPRs to build barriers to entry via patent thickets. Google paid a nontrivial $12.5 billion to acquire bankrupt Motorola Mobility’s seventeen thousand patents; a Microsoft-led consortium paid $4.5 billion to buy bankrupt Nortel Network’s six thousand patents. These patent thickets, and IPRs more generally, are weapons in the legal war of firm against firm. They also constitute a form of collateral. Ford famously collateralized its blue oval logo to obtain a loan in 2006.

Finally, monopoly profit does draw investment. Haskel and Westlake suggest reforming pension fund regulation to permit more invest­ment in venture capital. But U.S. pension funds are already the single largest investor in both venture capital funds and private equity firms, supplying roughly one quarter to one half of the capital venture capital funds deploy, and about two-fifths of the capital private equity firms deploy.¹² Moreover, these investment vehicles are interdependent: in 2017, private equity firms accounted for nearly a fifth of venture capital fund exits.¹³

Legally constituted monopolies around intangibles thus drive the four non-cultural problems Haskel and Westlake identify: stagnation, excessive competition in an increasingly unequal world, excessive “influ­ence operations” (i.e., lobbying and litigation), and supply chain fragili­ty.

Patent thickets and their related lawsuits limit spillovers, inhibiting the spread of production innovation to other firms and thus slowing GDP growth. Limited spillovers also contribute to an economy with less redundancy in terms of suppliers, introducing fragility into supply chains. Secure monopoly profits create a winner-take-all economy. While new technologies inevitably involve simultaneous discovery or development, being in the losing firm means devalued stock options and a new job hunt, while workers and owners of the winning firm reap huge rewards. Unsurprisingly, this incentivizes intense interpersonal competition around winning a spot in the few successful firms.

Patent litigation between the Broad Institute¹⁴ and University of California–Berkeley over the core crispr-Cas9 gene-editing technology displays all these pathologies. Crispr-Cas9 and crispr technologies in general promise huge breakthroughs in the customization of pharmaceuticals, medical treatments, and agriculture, as well as less energy-intensive production of chemicals and novel materials. In short, they represent an opportunity for the next Schumpeterian growth wave and have huge social utility.

Building on prior work by Japanese researchers in the 1980s, both the Broad and Berkeley teams more or less simultaneously elucidated the crispr-Cas9 mechanism. The Berkeley team worked out the basic mech­anism using prokaryotic (bacterial) cells. Broad showed that it could be applied to the more complicated eukaryotic cells constituting most of what we think of as living organisms.

Both Berkeley and Broad filed U.S. patent applications in 2012 and European applications in 2013, with Broad lagging Berkeley by six months in each case. While Berkeley’s application was filed first, Broad paid for expedited review in what was then the “first to invent” U.S. patent system and thus received its patent earlier. U.S. patent law changed to “first to file” as of March 2013 to conform with similar European systems. Litigation commenced in 2016. Broad won in late 2021, with the case decided partly on utility—application to plant and animal cells—and partly on Broad’s earlier patent approval. Berkeley’s lead researcher had to console herself with a Nobel prize shared with her European colleague, and rights to bacterial and viral applications.

Why litigation? This was not a purely academic dispute over prestige. Patents have become a major source of revenue for some American universities. As of 2020, the U.S. Patent and Trademark Office had granted over three hundred crispr-related patents and the European Patent Office over one hundred. Estimates of the potential value of the crispr-Cas9 patents range from the hundreds of millions of dollars to as much as a billion. U.S. universities experience the same winner-take-all competition that affects commercial entities, with the top twenty capturing most of the roughly $3 billion that universities earn in annual patent revenue.¹⁵ Spin-off start-ups from university labs, like the eight crispr firms spun out of Berkeley and Broad, similarly concentrate in a handful of schools.

The crispr litigation saga delayed the roll-out of this technology, and the eventual decision in favor of Broad threw the licensees of Berkeley into limbo, as they did not know if their licenses would be re­newed. Meanwhile, Berkeley and Broad created competing patent pools. Nothing here should be understood to disparage Broad or Berkeley; the point is that if these nonprofit entities engage in this kind of fighting, one can scarcely imagine what for-profit firms facing shareholder pressure might do.

Indeed, firms have repeatedly sought to expand the profitable life­time of their IP, and hem in technological change threatening that IP. Disney and other beneficiaries of copyright lobbied Congress to extend copyright on works for hire to as long as 120 years.¹⁶ The 1998 Copyright Extension Act—pejoratively known as the Mickey Mouse Protec­tion Act—not only extended copyright well beyond the life of the human authors whom copyright was intended to protect, but also gave those individual human creators shorter terms than corporate copyright owners. The Recording Industry Association of America similarly lob­bied for the 1998 Digital Millennium Copyright Act (DMCA), which criminalized the production and ownership of technologies intended to defeat copy protection software. DMCA is why you need to buy a special cable to watch high resolution HDCP-protected DVDs that you theoretically own yet cannot watch without the additional cable.

More significantly, many durable goods now run software and the firms producing those goods use the DMCA to obliterate owners’ right to repair using third parties. Thus, firms like John Deere tried to prevent farmers from fixing their own tractors if it involved modifying or decompiling the software. Similarly, BMW plans to use software to sell access to heated seats in some models on a subscription basis and proposed making Apple CarPlay a subscription service. All of this involves reengineering the rules in pursuit of monopoly profit. These efforts, and rulings by the U.S. Copyright Office in 2018 that granted exemptions to the DMCA, show the artificiality of IPRs and the returns to the excessive political influencing that Haskel and Westlake decry.¹⁷

Haskel and Westlake focus on legacy institutions, but the impediments to technology transfer, material and cultural innovation, and a broader distribution of income come as much from new institutions and firms as from nimbys blocking new housing or—unmentioned in the book—fossil fuel incumbents delaying an accelerated rollout of alterna­tive energy sources and uses. This oversight impedes Haskel and Westlake’s efforts to advance positive policy suggestions beyond ano­dyne IP-law reforms or channeling more pension savings into venture capital.

The Unbearable Lightness of Abstract Analysis

Haskel and Westlake have been at the forefront of writing about the intangibles economy. Why do they so miss the mark here? Part of the reason can be found in the acknowledgements: many of those thanked have a decidedly libertarian or propertarian intellectual orientation that downplays the monopoly issue around intangibles and particularly IPRs. Yet the data show that IPR-rich firms are also profit-rich.

Moreover, Haskel and Westlake are invested in the notion that the increasing quantity of intangibles in the economy has created a qualitative change. Perhaps it is a matter of attention—both come from an accounting background and were involved in the early and useful efforts to deal with the novel issue of valuing intangible capital on corporate balance sheets. But accounting spreadsheets are the map and not the institutional terrain. They display the results of corporate strategy and structure while concealing both. These orientations blind the authors to three issues that would have better grounded their analysis and support­ed more substantive policy prescriptions. These are the Madonna prob­lem, a conspicuous lack of Veblenian consumption, and the French Connection.

The American social scientist Madonna famously pointed out that we are living in a material world.¹⁸ Covid-19, supply chain disruption, backlogs at ports, and volatile petroleum prices are obvious episodic manifestations of materiality. But quotidian use of intangibles is also highly material. Apps need smartphones; delivery needs drivers and vehicles; engine control software needs engine control modules and engines; logos need shirts and shoes. What used to be vertically integrat­ed firms combining intangible and tangible production are now discrete firms, with many operating completely in the world of intangibles. Pro­ducers of intangibles outsource commoditized material production to the lowest domestic or foreign bidder, while securing the bulk of the profits.

The material shortages behind supply chain fragility reflect decades of rational underinvestment by tangibles firms trying to maintain profitability in the face of monopoly rent extraction by intangibles-rich firms. It also reflects decades of asset stripping by private equity firms that have reduced socially useful levels of excess productive capacity that once buffered supply chains against various shocks. Winner-take-all competition is not solely about victory by one dominant IPR-based firm, as when Facebook displaced Myspace. It is also a victory of logo designers against shoe and garment subcontractors.

This shift predates the 2008 financial crisis that Haskel and Westlake use as their benchmark. While 2008 caused a clear deceleration of growth rates in rich countries, growth had been decel­erating in each of the global recoveries after the 1970s. Indeed, in both percentage and absolute terms, growth in the 1990s, 2000s, and post-2010 recoveries lagged growth in each prior recovery for the advanced economies.

A monotonic slowdown is not completely consistent with Haskel and Westlake’s argument for a growing institutional mismatch. Their core mismatch involves a shortage of capital for noncollateralized investment, as noted above. But venture capital (VC) is more abundant than ever. VC firms had over $1 trillion in assets under management, three times the level of 2004, and raised over $200 billion in 2021.¹⁹ Indeed, capital has been so abundant during the past decade that firms like Uber and WeWork attracted billions in investment on the strength of implausible promises of future monopoly power. Yet as VC investment and IPR-rich firms’ market capitalization have increased, overall investment in the United States and other rich country economies has fallen as a share of GDP.

Instead, the growth slowdown points to the legal and organizational changes that the United States and other governments made to accommodate greater profitability for intangibles firms and for those firms’ increasingly disintegrated production. Legislation enabled the copyrighting or patenting of software in 1968, 1976, and 1980, strengthened trademark protection in 1988, and as noted, extended copyright protec­tions in 1976 and 1998. The Supreme Court expanded the scope of IP protection in novel ways, such as the 1980 Diamond v. Chakrabarty case permitting patenting of genetically modified organisms and the 1998 affirmation of business process patents in State Street Bank & Trust v. Signature Financial Group. Global trade deals, meanwhile, formed the global legal infrastructure for outsourcing. Legal reinforcement and expansion of the inherent monopoly power of IPRs has shifted profits from other firms toward IPR-rich firms, but those IPR-rich firms do not reinvest those profits in new production at the same rate as do manufacturing firms.²⁰

Second, as Thorstein Veblen pointed out more than a hundred years ago, intangibles production is not novel, but rather characterizes all human history.²¹ Flint is just another rock without socially transmitted knowledge about knapping. But the easy spillover of socially held and transmitted production knowledge removes the sources of profit. If everyone knows how to make something, no one has any competitive advantage in the market, and as Schumpeter pointed out, profits after depreciation fall to zero.²² Intangible production knowledge, digitized information, and the emotional content of cultural creations can only be profitable if other producers are excluded from using that knowledge or tapping into those emotions. Information may want to be free, but property rights hold it captive.

IPRs and other property rights create exclusion, and exclusion slows spillover and thus economy-wide productivity growth. These barriers to spillover create the great dispersion in productivity that the OECD and others have documented.²³ Dispersion suggests—as Veblen would pre­dict—that firms deliberately slow technological diffusion to defend their IPR-based monopoly profits.²⁴

Finally, while Haskel and Westlake are surely correct about the mis­match between contemporary institutions and some “objective” under­standing of how to optimize growth in an intangibles economy, they operate at a level of abstraction so general that they cannot elaborate policy recommendations in any real detail. The uncomfortable antinomy between their condemnation of excessive influence activity—i.e., rent seeking—and the mostly intangibles-based actors doing that rent seek­ing partially reveals this. But it is also revealed in their overlooking the existing body of knowledge—a freely available intangible!—about what kinds of governance structures are conducive to balanced rapid growth. Recall that they cast the core problem as one of exchange—“sound institutions have to solve four problems in exchange”—rather than one of assuring balance between supply and demand, or securing physical rather than financial infrastructure, or mobilizing human and physical resources, or even maximizing human happiness.

These issues are the subject of a rich body of literature stretching from pioneering institutional economists like Thorstein Veblen and John Commons before World War II through Andrew Shonfield’s magisterial 1965 analysis of the “modern economy” (i.e., mass production) and thence to the brilliant collection of “Regulation School” analysts at France’s cepremap (Centre Pour la Recherche Économique et ses Applications).²⁵ While cepremap scholars tended to be post-Keynesians or Marxists, it should be noted that Veblen and Commons were decidedly conservative politically and that Shonfield was a classical English liberal who ended his analysis with two chapters on the tension between regulation and freedom. Modern conservatism still contains a strong strain of institutionally oriented analysis, as with Michael Lind’s critique of “tollbooth capitalism.”²⁶

All of them point out that facilitating exchange by, for example, lowering transaction costs and creating “perfect markets” is the least important part of economic governance. Rather, these analyses highlight the legal and organizational bases for production, and the social distribution of income that determines whether supply and demand are in balance. Thus, Veblen and Commons looked at corporate organization and unions as forms of collective control over individual decisions. Shonfield and his contemporary John Kenneth Galbraith looked at the interaction of corporate and state planning and equally importantly the need for this planning to be seen as legitimate.²⁷ The Regulation School linked these by analyzing how investment and wage formation interacted around supply and demand.

These analyses argued that nothing guaranteed either robust growth or an optimal balance between supply (productive efficiency) and demand (wage formation and the income distribution), because social institutions rather than abstract markets in equilibrium determine both supply and demand. In the tangibles-heavy era preceding our contemporary economy, explicit, often state-backed bargains between mass unions and employer organizations linked productivity growth and wages. This assured firms that reinvested profits would find adequate demand, workers that factory discipline paid off in terms of a rising standard of living, and states that tax revenue would grow in line with increased social welfare expenditure. Furthermore, unions and robust antitrust enforcement tended to equalize incomes not just for workers but also for firms. State planning of and investment in infrastructure added to and stabilized aggregate demand. These institutions managed the conflict and interdependence inherent to any economic order.

Haskel and Westlake are right that the current set of rules generate dysfunctionality. But this dysfunctionality does not stem from a mismatch between the alleged needs of an intangible economy and contemporary institutions.²⁸ Contemporary institutions serve the inter­ests of IPR-rich firms and a small set of financial firms quite well, if we understand those interests as maximizing the volume of profit that those firms capture, and the diversion of those profits variously to management and private equity insiders. As Commons argued, property rights are the fundamental starting point for economic analysis, because ownership creates the right to a stream of income and gives control over resources. Contemporary property rights have created IPR-based monopolies and diminished the effective rights of shareholders in public firms. This isn’t surprising. Institutions are not the product of disinterested design. They are the outcomes of political and economic struggles among various interested parties with unequal degrees of power. Intangibles-rich firms and the U.S. state constructed the institutions which Haskel and Westlake allege are delaying the blossoming of the intangibles economy.

The authors miss the trees for the forest. Their arguments, while cogent, are general and abstract, and this leads to a blindness to the details, to what is really going on in the economy, behind the spreadsheets and scatter plots. Only an analysis which takes into account the tangible realities of institutions and legal structures can answer these pressing questions of stagnation and growth. The call is coming from inside the house.

This article originally appeared in American Affairs Volume VI, Number 2 (Summer 2022): 68–81.

Notes