We need to change the way we look at the economy, says Imperial professor

Professor Jonathan Haskel

'Intangible assets' are of increasing importance to the economy, says Professor Jonathan Haskel, of Imperial College Business School.

This might explain the UK’s productivity puzzle, argued Professor Haskel and co-author Stian Westlake, executive director of research at innovation foundation Nesta, at the launch of their new book, 'Capitalism without Capital: the Rise of the Intangible Economy'. The book refers to the seemingly lower output of valuable work produced per hour in the UK as compared to other developed economies.

“If you throw intangible value in, you get a better image of productivity,” said Haskel in the discussion that followed a presentation of the book’s key findings, presided over by Daniel Finkelstein, columnist and former executive editor of The Times newspaper.  

Haskel and Westlake argue that much of the value of modern businesses lies in things that cannot be measured in traditional ways by accountants.

They gave the examples of intangibles that companies are investing in such as research & development, training, design, organisational development, branding, marketing, software and data, and original artistic material (music, visuals or videos).

Investment in these intangibles has gradually increased over the past half-century, eventually overtaking traditional tangible investments in buildings, equipment and manufacturing, around the time of the Great Recession of 2007-08.

“Even recently things have changed,” Haskel commented, “How do we know this? We’ve been carrying out a research effort over the past 10 years – we’ve gone to national and company accounts to try and measure what the picture looks like if they include things that are left out of the balance sheets.”

This shift towards intangible assets is partially due to the emergence of new innovative sectors, but Haskel and Westlake argue that it is also the case in industries we might assume are more reliant on tangible assets.

“Some industries have been traditionally knowledge intensive such as the high tech sector,” said Haskel. “However, now things like gyms, supermarkets and even traditional manufacturing companies have more intangible assets and we are now seeing manufacturing and services blending together.”

Haskel illustrated this through the example of Les Mills Bodypump – a New Zealand-based exercise business. Les Mills owns barely any physical assets, and is run entirely through software, with 150,000 licensed trainers and six million users around the world – a very different model to a traditional bricks and mortar building filled with weights and treadmills.

Challenges and opportunities

Not being able to ascertain the true value of the businesses and the real strength of the economy - which the two authors suggest is a job for investment analysts - is not the only question posed by this new economic paradigm.

Westlake’s section of the talk focused largely on the challenges posed by the intangible economy, which, for businesses, include the difficulty in protecting intangible assets – exemplified by the imitative smartphone market that emerged in the wake of Apple’s iPhone in 2007 – and the difficulty in selling on intangible assets, in part because of the complications in determining who owns them.

There is also a wider effect on society. This is where wealth inequality is seemingly driven by the intangible economy, as are differences between those in knowledge hubs and those based in “left-behind places”. The authors suggested this could potentially be the cause of societal tensions leading to outcomes such as the Brexit referendum or the election of Donald Trump.

However, the authors stressed that there are also opportunities in creating value through the synergy of intangible assets. This is exemplified by the EpiPen, a market-dominating emergency adrenaline-delivery system. While the product and the adrenaline itself are tangible, its market dominance and value of $1.2 billion is the result of a combination of intangibles, according to authors. These are its easy-to-use design, brand recognition, effective marketing and distribution, training programmes, and integration with policy (UK schools can purchase them without a prescription).