(This essay was published in the South China Morning Post on 31 October 2018.)
Ideas can be embodied in human capital in ways that augment a person’s productivity. They can also be embodied in material capital, such as physical assets to boost productivity. But increasingly the most valuable forms of capital are intangibles ones that are not embodied in man, machine, or structures – they are disembodied. Successful economies and companies are now increasingly rich in intangible capital.
The intangible capital-rich economy is driven by ideas. Paul Romer, this year’s Nobel Laureate in Economics, made ideas the central element of his theory of economic growth. His thesis is that ideas are non-rival goods, which means when one person uses an idea it will not reduce its usefulness to others. Ideas can be used and reused, so their ability to increase productivity is not exhausted by use.
Ideas as non-rival goods can generate “spillovers”, meaning companies can copy the ideas and adapt their use to producing other goods. Ideas that can be used again and again without being exhausted are enormously “scalable” and can service large territories and huge populations. Furthermore, their use can be “synergistic” in the sense that they can be combined with goods and other ideas to produce new goods and new ideas.
Economies and companies that are successful in creating new ideas and adapting old ones can keep on producing new goods. They will thrive. Globalization has also helped intangible capital-intensive companies to expand rapidly through global value chains.
However, on the downside, there is evidence of a clear tendency for intangible capital-intensive industries to be dominated by a small number of giant firms that are proficient at scaling up their own investments and gathering spillovers from others.
This might also be a factor in the growth of various forms of societal inequality. As intangible capital-intensive companies become larger and industries become more concentrated, good jobs pay much better but they also become fewer in number.
Economically, we are seeing a thinning out of the middle class with incomes being redistributed more uniformly between the two ends of the distribution – the big hump in the middle is now less prominent.
The breach is growing between the well-educated who have the skills to flourish in an intangible economy, and those who feel “left behind” by societal and economic change and thus have become skeptical of elites and cosmopolitan urban values. This attitude has fueled populist movements in many parts of the world – localism in our own city.
Another consideration in intangible capital-intensive industries is infrastructure. These industries tend to gather in clusters that depend on affordable housing and workplaces for attracting entrepreneurs and skilled talents, as well as a spontaneous crisscrossing and layering of public spaces, artistic and cultural venues, transportation hubs, and informal meeting spots that make city life hospitable and promote a cross-fertilization of ideas.
Governments have been slow to react to the rise of intangibles. They should now pay attention to five areas:
1. Contestedness – The ownership and spillover issues surrounding intangible assets should be addressed by strengthening patent and copyright laws so they are clearer and discourage vague or expansive claims.
2. Synergies – Policy-makers could create conditions to encourage the cross-pollination of ideas and efforts, through urban planning and land-use policies and regulation that does not create too many obstacles to building housing or workplaces. They could also promote intangible methods for cooperation by investing in infrastructure for online collaboration and “distance working tools”, perhaps starting with the Greater Bay Area.
3. Financing –Tax incentives should be devised to support new forms of finance that make it easier to secure debt with intellectual property. Hong Kong is an international financial center, but it is less an innovative financial center. It urgently needs to enable newer financial infrastructure.
4. Low investment – Heavy investment by large companies in intangibles is unlikely to compensate for a shortfall from smaller firms. Governments may need to take up some of the slack by investing in basic research, supporting emerging industries through procurement programs, and funding education and training programs.
5. Middle class insecurity – This is an especially steep challenge for governments, and no clear solution is in sight. Policies that encourage the growth of an intangible economy may magnify insecurity.
Positive non-interventionism counsels government to let free and open markets solve economic problems, and intervene only when markets are unable to resolve significant problems. But it also counsels government to take actions when necessary to enable markets to function properly. The intangible economy is such a case, particularly given spillovers, synergies, and capital market imperfections.
The most difficult task we are likely to face in future is not how to enable economic growth for an intangible capital-intensive economy, but how to make that growth inclusive. The social and welfare policy tools inherited from the past century may no longer be fit for purpose. There is much that we and our government may need to rethink.