COVER STORY • 2Interview with Dr. Jonathan Haskel, Professor of Economics, Imperial College Business School,co-author of the book Capitalism Without CapitalW

hat Does “Capitalism
Without Capital” LookLike?

By Japan SPOTLIGHT

We are increasingly seeing a rise in intangible assets and are curious about what the consequences ofthis will be for capitalism. As the coronavirus pandemic continues and the use of software related to IT
rises significantly, its impact could be enormous. To talk about this issue, Japan SPOTLIGHT held aninterview with Prof. Jonathan Haskel, who recently co-authored the book Capitalism Without Capital on theintangible economy with Dr. Stian Westlake, senior fellow at Nesta, the United Kingdom’s nationalfoundation for innovation.
(Interviewed on Jan. 20, 2021)

The Rise of Intangible
Investment
JS: What has changed the nature ofinvestment from the tangible to theintangible these last three or four
decades? Is the IT revolution the
only reason or are there others?

Measuring Intangible
Investment
JS: Your book tells us thatinvestment in intangible assets issignificantly increasing, and insome developed nations has
become key to economic growth.
How can we quantitatively compare
tangible and intangible
investments?

Haskel: It is a good question to understand
why the economy has become intangible andI think there are at least two reasons. One, theHaskel: Let us start with national accounting.
rise in information technology is deeply
For national accounting, that is compilingcomplementary with intangible capital.
GDP, we have got a lot of experience inComplementary is a term in economics whichmeasuring investment. We survey firms andsays that if you have inputs used in
ask them how much they are investing in
production like fast computers, they are
Dr. Jonathan Haskel
plant, equipment, and vehicles. Firms aregoing to need software and databases andused to answering those kinds of questions. More recently, firms are
may need the restructuring of businesses in order to become morealso investing in intangible items such as R&D and software. One
effective. Two, the nature of business organization, especially in
way is to ask them the same kind of questions, and many companies
developed countries, has changed. A lot of the production process
can answer these questions. Software, for example, is quite often
has been sent offshore, for example from the City of London to Eastbought either off-the-shelf, or firms might be renting software
Asia and to closer countries like Eastern Europe. Those companies
services from the cloud, and so on. That is one approach. Where thathave become different kinds of companies – they are not really doing
gets more difficult is that for many intangible assets, especially R&D
manufacturing at home anymore, rather they are organizing andand market research, these are quite difficult for firms to buy in. They
coordinating and managing. That requires a much more intangible
want to do somewhat the opposite, which is to develop themgroup of assets such as the organizational capital, reputation, and allinternally so that the secret of R&D or knowledge of the market does
the knowledge that goes into coordinating large supply chains. Thatnot leak out. So, if you take a conventional questionnaire and askchange in the nature of businesses has increased the amount of“How much are you spending on buying this in?”, firms don’t know
intangible capital that they need.
what to do with that. So in terms of how we are going to measure
the intangible assets, we have to get a bit cleverer when we ask
firms, and that is what statistical agencies do. They ask how much
8 Japan SPOTLIGHT • May / June 2021

https://www.jef.or.jp/journal/

they are spending on the internal generation of these assets if you
have a unit of your firm writing software, for example. We have to
ask what costs were incurred in that unit. That is one area aroundnational accounting and GDP, and what statistical agencies are doing
is to increasingly move to count these intangible assets.
Regarding company accounting, company accountants are very
reluctant to count intangible assets. They dislike putting it on thebalance sheet essentially because those internally generated assets
are very difficult to measure. It is a situation in which national
accounting is going a little bit faster than company accounting andfor that reason we think a problem with company accounts is thatthey are not very informative about a very intangible intensive
business because they are limited in the extent to which they countthese intangible assets.

Impact on TFP
JS: Turning to total factor productivity (TFP), many

people seem to be irritated about its low growth,
especially governments, but this should not be thecase given the technological advances in software.
How can we take account of these intangible assets
for TFP?

Haskel: You are absolutely right that the performance of productivity
growth and in particular TFP growth has been very disappointing in
more or less all countries since the financial crisis. This is a great
puzzle because it does seem like we have wonderful newtechnologies, for example those that help discover a vaccine forcoronavirus, which should speed up TFP growth. So there are anumber of things going on with the fall in TFP. One possibility is that
we are having to do as a society a lot of investment in technologies
which have not yet brought about the goods we are hoping for. An
obvious example would be driverless cars; lots of companies are
spending money on software but so far, at least in the UK, we don’t
have any driverless cars on the road. The trouble with thishypothesis is the evidence suggests otherwise. There is a lot of
spending on software and these other goods, but even if you were toinclude that spending in various ways into GDP, you still don’t get
much boost to GDP.
Another hypothesis is that productivity growth has just finished.
We were very lucky as a society over the last 200 years; we had anindustrial revolution and an information technology revolution but
now that’s all finished, and we have nothing left. A third hypothesis isaround intangible assets and starts with the observation that since

the financial crisis, the pace of investment in intangible assets has
slowed down. In the countries where it has slowed down the most,those are the countries that have had the biggest falls in TFP – theUK and Finland are two examples. Maybe what is happening is thatwith the slowdown in investment in intangible assets, there is lessproductivity coming, and if that is true it might be quite optimistic for
the future because if we can raise investment in intangible assets wewould therefore be able to reverse this and restore productivity tohigher levels of growth.

Key Characteristics of Intangible Assets
JS: You describe the four key characteristics ofintangible assets as sunk cost, spillover, scalable
and synergy. How might these characteristics
increase uncertainty and conflicts?

Haskel: Intangible assets have got these interesting economic
properties. You can scale them up; they can spill over from one firm
to another; if you combine them, they are very powerful. They areoften sunk costs that are difficult to recover. They also raise a big
puzzle – in an intangible economy with lots of spillovers, companies
can copy intangible ideas from others. For example, when the iPhone
first appeared, within about 18 months every smartphone looked likeit. Before the iPhone, smartphones had little keyboards and aerials
sticking out and so on but in 18 months that was all finished. This isa clear example of a spillover where an idea can be used by others,
the idea being the design in this case, which is an intangible asset.
You might conclude from that that intangibles are a great force for
equality, because firms can converge in the type of products they
offer. On the other hand, what we have seen is a divergence between
the performance of the top firms and the lower firms. What is goingon here is that the other properties of intangibles are forces forinequality. For example, scale means that if you have a very valuable
intangible you can scale up. Apple has a very valuable intangible
asset called reputation, so it can scale up and make not only phones
but watches and other goods too. Synergies mean that if you
combine the intangibles together you are even more productive.
Google, for example, has the intangible asset of an enormous
database that everybody is searching and they can combine that withmaps, to offer programs for navigation, or could offer advertising. So
the force of spillovers is a force for equality, while the force ofsynergies and scale is a force for inequality, and it looks like the force
for inequality is winning out at the moment.
All of that combined together means that you get the kind ofJapan SPOTLIGHT • May / June 20219

conflict referred to in your question. If you have a very unequal
distribution of firm performance, those high performing firms
probably might be more profitable, probably attract more workers,
and probably the types of conditions and economic circumstances
involved in those firms are going to be more if you hold stocks andshares in those firms, or if you have a job in those firms. So theconflict might come from the outcome of those very different
intangible forces.
JS: Intangible investment would be high risk with highreturns, because it has high sunk cost and highscalability. So if you are smart enough, you can earnlots of money, but if you are not smart you would
lose money. This could be a source of conflict anduncertainty.

Haskel: I agree, and it makes these kinds of intangibles deeply
complementary to talent and skill in the workplace. I mean the kindof talent and skill that can combine those intangibles together. Whatis interesting is that you can imagine a very talented chemist might
have the talent and skill to combine chemistry elements together,gain the synergies, scale up and do very well in the intangible
economy. On the other hand, maybe a very talented person who is
not a brilliant scientist or mathematician can bring together thedesigners and scientists and marketing people and succeed greatly
in the intangible economy. So the skill to succeed in the intangible
economy is the skill that combines those intangible assets together.
JS: Synergy, for example, could create monopolies, aswith the GAFA companies.

Haskel: Let us talk about Amazon. One of the great synergies it has
is its own platform. It has an enormous database, so if you are acompany selling shoes and brown shoes happen to be doing better
than black shoes, you know that as a company because you knowwhat your sales are, but so does Amazon because it has that
information too. The synergies that Amazon has are that information,and the network of other information and computer programmers,
so they can then enter the brown shoes market and grow very big
because they have that information combined with the other things
they can do. That would appear to be a situation in which Amazon
would get a permanent monopoly. In order to do that it might be able
to offer them cheaply, or deliver with other items, for example. There
are two forces – one force for monopoly because of the synergies,
but the other force is that if they can scale up and offer these more
10 Japan SPOTLIGHT • May / June 2021

cheaply, that might be beneficial. We don’t quite know how this isgoing to work out. There is some academic research evidence on the
Amazon side that it does indeed enter into the markets where it getsthe information, but it does offer very cheap prices in those markets
where it enters. These different effects would give you more types ofmonopoly, but it might end up with consumers getting a better deal.
JS: Another possibility might be caused by massive

spillover. Would that force firms to strictly protect
their patents?

Haskel: That is correct. In all developed countries we have a wellestablished intellectual property protection system which iscontroversial in some ways. Everybody accepts that if you are acompany and you spend billions developing a vaccine, for example,
you need protection from other companies copying that vaccine,otherwise you would not spend billions in advance. On the other
hand, we have seen companies using patents in a somewhat
strategic fashion, for example taking out lots of patents intechnologies that they might not use, making the ownership ofpatents extremely complicated. That means that other companies
that want to either license or use information from those patents todevelop other medicines or products might find it very difficult to doso and if they are challenged on a legal point of view, that may takeaway from the amount of follow-up information. Many people takethe view that maybe as a society we might have gone too far inallowing companies to patent in a way that would stop this kind offollow-up innovation. In the book we are cautious about having more
patenting, because of that possible bad effect.

Significant Impact on Macroeconomy
JS: The macroeconomic impact of this intangible

economy does seem to be enormous, because low
investment and low interest rates and low growth
rates in the long run could be explained by risingintangible assets. Would you concur with that view?

Haskel: Yes, we think that is part of it. As you observe, one of thegreat puzzles for current day economics is that investment anddemand in economies seem to be extremely low, even thoughinterest rates are very low. Usually when interest rates are low andprofits are high and there is lots of technology, you would expect a
lot of investment by companies to take advantage of these
conditions. The puzzle is that over the last 30 years, interest rates

have been falling and falling with no apparent offsetting rise ininvestment. We think that part of the answer may be that the changethat there has been to a more intangible economy has meant that theinvestment climate for firms has got riskier.
When we say investment interest rates have gone down, we
typically refer to the interest rates on safe assets like government
bonds, but the interest rate that companies face has gone up
somewhat for reasons we don’t quite understand, but it could be
partly to do with the more risky type of economy in the intangible
assets area and might mean the firms require a higher hurdle rate of
return. Therefore, all those safe interest rates have been going down,
and investment has not been going down for that reason.
JS: Do you think this issue is known bymacroeconomic policy practitioners such as central
bankers?

Haskel: Not so much. I think that mostly, central bankers look at thefall in real interest rates over the last 30 years and describe it as
being to do with demographics, namely more people coming into thelabor market and saving for their future. We think that an additional
element is the rise in intangible assets which has raised the risk
hurdle that firms have to cross.
JS: During the pandemic, with working from home andIT utilization, the intangible economy has been risingfurther. Does this mean an economic depression
would negatively affect economic growth?

Haskel: A few thoughts on this question. What we have seen
especially in developed countries is a gigantic switch to working
from home. Before the pandemic in the UK, we had about 12% of theworkforce working from home; now we have 30% or possible 35%
working from home. How did we achieve such a considerable
structural change in the economy? If we go back to industrial times
when people mostly worked in factories, if you were to have a thirdof the factory workforce working at home, they would have had nomachines to work with and the output of the economy would
collapse. We have not had a total collapse of output and so thetransition to working from home has cushioned the economy
slightly, and so it is a source of some resilience because somepeople have been able to leave their factory as it were and carry on
working from home. In terms of the role of intangibles, the capital –the machines they work at home on – is not old-fashioned capital
like blast furnaces or diggers; they are using their MacBook and theirInternet connection, and the software has to power the connectivity
that brings all that capital together. The ability to work from home isdeeply connected with the intangible economy. The intangible
economy has given us some resilience in the economy and protected
us from some of the worst effects of the pandemic.
What does all of this mean in the future? One thing we do know isthat productivity growth and innovation and improvement do notdrop out of the sky – firms have got to spend money on it andexperiment and spend actual resources. The pandemic has helped
more people work at home but has been very difficult for firms
financially and to plan in the future. The fall in investment would be
bad news for productivity and so everything hinges on whether
investment goes up and bounces back, and will that burst ofintangible investment bring some more productivity growth? We
don’t know the answer to that yet but the faster we can roll out thevaccine and get back to normal, the faster that would be a possibility.

Income Inequality
JS: On the question of the possible expansion ofincome inequality due to the expansion of theintangible economy, this inequality will happen not
only between companies but also between
individuals. That would affect democracy. The
intangible economy has a deep impact on theeconomy but also on politics. Would you agree?

Haskel: I think that is a very interesting point that we don’t cover inthe book. You are absolutely right that the growth in inequality in theintangible economy might be very considerable. My favorite example
coming from Britain is the great British invention that everybody inthe world has heard of, namely Harry Potter – and if you ask who
has got rich from Harry Potter, the answer is the woman who wrote
the book, J. K. Rowling. What asset does she own? She owns a very
valuable intangible asset which is the idea behind Harry Potter andthe copyright to the books. That asset has been combined with otherintangible assets like the software that generates the computer
things in the movie, or the design to make a theater performance. It’sa sort of case study where the ownership of that asset and the
combination of the assets have given you something extremely
valuable. That leads you to an unequal world, but it leads you to an
unequal world on the basis of an asset that everybody likes in thecase of Harry Potter.
The political aspect that follows is that, if we have societies where
campaign finance is extremely important, then we have theJapan SPOTLIGHT • May / June 202111

possibility that richer people might be able to influence economic
policy in a way that might be felt to be undesirable, and this is taken
up in Thomas Philippon’s book where he argues that the importanceof campaign political finance in the United States leaves its anti-trustand other systems very vulnerable to spending by very rich people,
and then for putting influence on the law. Part of the difficulty is thatthe increase in inequality possibly from intangibles – if it breaks
down the political consensus around anti-trust and other types ofpublic policy – could be very difficult.

Impact on Other Public Policy Issues
JS: Regarding the intangible economy’s impact on awide range of public policy issues, could education
policy or infrastructure provision policy also beaffected? How about human resources and business
management?

Haskel: There are lots of implications for education and managerial
policy also. As part of the intangible revolution, the whole structureof delivering education itself has surely completely changed – theuse of online resources. Maybe it is time to change the education
business model, if I may call it that, and do something different.
There is a wonderful illustration in the front of a very good book by
British writer David Willets called A University Education, and it is an
illustration of a university lecture in Italy in the 16th century. In otherwords, 500 years ago. It has a lecturer standing at the front andstudents sitting at the front paying attention and other students
sitting at the back fast asleep, having a drink or not paying any
attention. We have had exactly the same method of teaching, thesame business model for 500 years and so maybe it is time to dosomething different with teaching and the Internet. That is one
thought on how intangibles affect education.
Another thought goes back to what I said earlier on. You might saythat from an education policy point of view, what we need to do in an
intangible economy is for everybody to become a scientist or acomputer programmer. You might say that because perhaps
everybody needs to be writing software and discovering new
chemical compounds. That is surely what a knowledge economy isabout – there is no need for historians and poets because they haveno future in this kind of economy. We reject that hypothesis quite
strongly. The reason is this. If you have a lot of synergies in theintangible economy, that is to say combinations of intangible assets– going back to Harry Potter, the terrific script and the software andthe design – then valuable people in the economy are those who can
12 Japan SPOTLIGHT • May / June 2021

combine those synergies together, work with different people and ina team, with human communication and motivation skills. These aregoing to be very valuable people in the intangible economy so let’s
not have a complete shift in education policy only to scientists andonly to chemists and biologists. Let’s have other people as well.
JS: The intangible economy has a wide range of

implications for politics, economy, business
management, and so on, and your book is invaluablefor pointing these out. But maybe the next step would
involve specific solutions for the issues arising fromthe intangible economy. How do you assess yourbook’s contribution to the future of the intangible
economy and how would you elaborate on yourcontribution from now on?

Haskel: Thank you for the question. I would say two things. Firstly,
we hope the book has raised a set of questions and helps people tounderstand an economy that a lot of people find very puzzling. Why
it is that Harry Potter is so successful and more traditional
companies making cars and steel are not so successful? They don’t
understand why it is that Apple is so dominant and more traditional
companies are not. It is helpful to think about those companies andindividuals as having very valuable intangible assets. We hope it
contributes to thinking about these kinds of issues.
The second thing is that in terms of understanding what is goingon in the future, the biggest issue is if we end up with a very divided
society. Then the consensus around the type of economy anddemocracies that we run in developed economies – open, fairly
liberal market economies – may run out. So understanding that kindof conflict is very important. What follows from that is if I had tothink of one thing, I just wonder whether something about thefinancial system is going to be very important in the future. At the
moment is very difficult for an intangible intensive company toborrow money and start up. If you are company that has a building,then you can go to the bank and offer the building as security andthey will give you a loan. If you are a company and you have an idea
for a movie or some software, banks will find it more difficult to lend
to those kinds of companies and so we may be holding back thosecompanies from starting up. That passes the advantage to theexisting companies and so understanding how we can improve that
could turn out to be very important.
Written with the cooperation of Joel Challender who is a translator,
interpreter, researcher and writer specializing in Japanese disaster preparedness.