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Capitalism without Capital Capitalism without Capital The Rise of The inTangible economy Jonathan Haskel and Stian Westlake Princeton University Press Princeton & Oxford Copyright © 2018 by Princeton University Press Published by Princeton University Press, 41 William Street, Princeton, New Jersey 08540 In the United Kingdom: Princeton University Press, 6 Oxford Street, Woodstock, Oxfordshire OX20 1TR press.princeton.edu Jacket images courtesy of iStock All Rights Reserved ISBN 978- 0- 691- 17503- 4 British Library Cataloging- in- Publication Data is available This book has been composed in Berling LT Std and Gotham Printed on acid- free paper. ∞ Printed in the United States of America 1 3 5 7 9 10 8 6 4 2 Contents List of Illustrations vii Acknowledgments ix 1 Introduction 1 Part i The Rise of the intangible economy 2 Capital’s Vanishing Act 15 3 How to Measure Intangible Investment 36 4 What’s Different about Intangible Investment? The Four S’s of Intangibles 58 Part ii The consequences of the Rise of the intangible economy 5 Intangibles, Investment, Productivity, and Secular Stagnation 91 6 Intangibles and the Rise of Inequality 118 7 Infrastructure for Intangibles, and Intangible Infrastructure 144 8 The Challenge of Financing an Intangible Economy 158 9 Competing, Managing, and Investing in the Intangible Economy 182 10 Public Policy in an Intangible Economy: Five Hard Questions 208 11 Summary, Conclusion, and the Way Ahead 239 Notes 243 References 253 Index 267 illustrations figures Figure 1.1. “Intangibles” references in scientific journals 6 Figure 2.1. Intangible and tangible investment over time, United States 24 Figure 2.2. Intangible and tangible investment over time, UK 25 Figure 2.3. Intangible and tangible investment in Europe 26 Figure 2.4. Intangible and tangible investment in Europe and the United States 26 Figure 2.5. Intangible and tangible investment as shares of country GDP 27 Figure 2.6. Intangible and IT investment 29 Figure 2.7. Intangible intensity in manufacturing and services 31 Figure 2.8. Tangible and intangible investment and regulation 32 Figure 2.9. Intangible investment and government R&D spending 33 Figure 2.10. Intangible investment and trade restrictiveness, 2013 34 Figure 5.1. Real investment as a percentage of real GDP 92 Figure 5.2. Long- run real interest rates for the United States and UK 93 Figure 5.3. Measures of profits and profit spreads 95 Figure 5.4. Labor productivity spreads 95 Figure 5.5. Growth of labor and multi- factor productivity 96 Figure 5.6. Investment/GDP ratios with and without new intangibles 103 Figure 5.7. Intangible intensity and change in productivity spread 106 Figure 5.8. Intangibles and R&D capital services growth: all countries 107 viii List of Illustrations Figure 5.9. Multi- factor productivity and intangible capital services growth 108 Figure 5.10. Multi- factor productivity and R&D capital services growth 109 Figure 5.11. Output growth with and without intangibles 117 Figure 6.1. Inequality in median annual earnings between high school and college graduates 121 Figure 6.2. Inequality between the generations, UK 122 Figure 6.3. Income shares of the top 1 percent in English- speaking countries 128 Figure 6.4. Rises in house prices for selected US cities 137 Figure 6.5. Rises in real house prices for UK regions, 1973– 2016 138 Figure 6.6. “Openness to Experience” and voting to leave the EU 142 Figure 9.1. “Management” and “Leadership” mentions in the Harvard Business Review 184 Figure 9.2. The declining informativeness of earnings and book value reporting 203 Tables Table 2.1. Examples of Tangible and Intangible Business Investments 22 Table 3.1. Categories of Intangible Investment 44 boxes Box 4.1. Knowledge, Data, Information, and Ideas: Some Definitions 63 Box 5.1. Productivity and Profitability Explained 97 Box 6.1. Measures of Inequality 119 Box 6.2. An Outline of Piketty’s r > g Condition 125 Box 10.1. An Opportunity for Small Nations: or, What Should Ruritania Do? 234 aCknowledgments This book would be impossible without the years of determined and insightful work by economists and others who glimpsed the beginnings of the intangible economy and sought to understand and to measure it. From the very start, Carol Corrado, Chuck Hulten, and Dan Sichel have been extraordinarily open and gen- erous with their time and advice and have become delightful coauthors and friends. In particular, Carol Corrado has made detailed and invaluable comments on this text. It is a pleasure as well to thank our various close coauthors over the years, as much of the data and thinking in this book is drawn from our joint work. Particular thanks are due to Tony Clayton of the Office for National Statistics and UK Intellectual Property Office, Peter Goodridge (Imperial College), Massimiliano Iommi (ISTAT), Cecilia Jona- Lasinio (LUISS), Gavin Wallis (Bank of England), Albert Bravo Biosca (Nesta), Mariela Dal Borgo (War- wick), Peter Gratzke (Nesta), Brian MacAulay (Nesta), Martin Brassell (Inngot), Ben Reid (Nesta), and Mauro Giorgio Marrano (Queen Mary). We are also grateful to the organizations that have funded this work, including the Engineering and Physical Sciences Research Council (EPSRC, EP/K039504/1), the European Commission Seventh Framework Programme (COINVEST, 217512; SPIN- TAN 612774), HM Treasury, and the Agensi Inovasi Malaysia. In particular, much of the cross-c ountry data in this book comes from the COINVEST- and SPINTAN- funded projects with long- standing coauthors Carol Corrado, Massimiliano Iommi, and Ce- cilia Jona- Lasinio. Our authorial partnership began with our collaboration on Nes- ta’s Innovation Index, a project that would not have happened without the support of Richard Halkett and Jonathan Kesten- baum of Nesta, John Kingman of HM Treasury, and David Cur- rie, who chaired the advisory board. A commission from Ryan