Date posted: 17/07/2018 12 min read

The dark side of intangible investment

A provocative new book suggests surging investment in intangibles could cause economic stagnation and rising inequality.

In Brief

  • Investment in intangible assets is hard to measure, but has surged to high levels across the world.
  • Intangible assets differ from tangibles in key respects, affecting how firms and people behave.
  • Investment in intangibles could cause economic problems including stagnation and rising inequality.

By Garry Shilson-Josling.

When most people think of business capital, they first imagine solid, tangible capital like machinery, equipment and buildings. Intangibles are different: software, market research or business processes – durable, productive assets without physical form. We value, own and account for intangibles differently. Their benefits filter through firms and economies differently. And companies that own intangibles grow differently and compete differently. 

Jonathan Haskel

Stian Westlake

But the economic policies, investment cultures and accounting standards of modern economies developed in a world of tangible capital. In a new book – Capitalism Without Capital: The Rise of the Intangible Economy – economists Jonathan Haskel and Stian Westlake take on this economic dark matter and its effects. They argue that the rise of intangible capital in a tangibles-oriented world is creating potentially serious economic and social problems.

What are intangibles?

Most statistics agencies estimate the value of four types of activity: research and development; computer software and database development; mineral exploration; and the creation of entertainment, literary or artistic works. (The Australian Bureau of Statistics counts all four, while Statistics NZ counts only the first three.)

But the international standard includes a fifth category, blandly labelled “other intellectual property products”. It hides a wealth of uncounted assets, such as training, market research and branding and business process re-engineering.

That creates problems both for economists looking to check the state of the economy and for investors looking to a company’s accounts to gauge its health. For Haskel and Westlake, though, the main concerns are how the special qualities of intangibles and their increasing importance in business investment affect our economic behaviour.

The rise of intangibles

Haskel and Westlake do not claim intangibles are anything new and they use the example of EMI to show intangibles have been around for a long while. In 1967, one-third of the music company’s profits came from one collection of intangible assets – songs recorded by the Beatles. Indeed, long before that, James Watt owned a valuable intangible asset: the knowledge embodied in his steam engine technology, patented in 1769, which eventually made him a rich man despite his admitted lack of business skill. What’s changed in 250 years is the scale of the investment in intangibles.

Spending on intangible assets in the market sector of the economy grew 1.3 times as fast as investment in tangible capital goods over more than three decades, according to an Australian Productivity Commission (PC) paper in 2008. By 2005-06, intangibles made up nearly one-third of total investment.

Related: Integrated reporting – the future of accounting

A new wave of globally non-financial reporting is changing the way accountants tell the story of their companies.

That story of surging investment in intangibles is being repeated around the world. Data dug up by Haskel and Westlake suggest investment in intangibles overtook tangibles across much of the developed world around the time of the global financial crisis. But the authors had to look hard to find the numbers, which are usually missing from official data.

The PC’s estimate of intangible investment is in stark contrast to national accounts compiled by the Australian Bureau of Statistics. By the PC’s reckoning, one-quarter of business investment was in intangibles not counted in the official ABS figures. So the investment is out there – but, like the dark matter sought by physicists, we just can’t see it. 

Accounting for intangibles

How would you value the knowledge or skill of your workforce? Could you put a price on an idea or on corporate culture?
Ceri-Ann Ross reporting leader at CAANZ, on the challenge of greater intangible asset recognition

This missing intangible capital has its counterpart in business accounts. It’s for much the same reasons too, as CA ANZ reporting leader Ceri-Ann Ross points out. Ross notes that accounting standards take a “somewhat prudent approach” when it comes to recognising assets, particularly intangibles. An intangible asset has to clear three hurdles before it can be included on a balance sheet under the current accounting standards. It must be separately identifiable, it must have some future economic benefit at the time it is produced or purchased, and its value must be reliably measurable. 

“If you buy an intangible asset, it’s pretty much a slam-dunk for all three. If it’s an internally generated intangible asset, however, you’ve got work to do,” Ross says.

Items like software produced in-house are often capitalised, but most internally produced intangible assets are not. They either fall at one of the hurdles or businesses take a conservative approach and write off the expenditure to the profit and loss account straight away. “Even if accounting standards were to allow more intangible asset recognition, there are practical considerations. For example, how would you value the knowledge or skill of your workforce? Could you put a price on an idea or on corporate culture?” Ross asks.

Related: Available from Your Library

Capitalism without Capital is available as an eBook from Your Library. Download your copy from or contact the Library Team at [email protected] to learn more

The four S words

Whether or not they can be valued, intangible assets differ from tangibles in four important ways, according to Haskel and Westlake.

• They are more scalable. Software does not have to be rewritten every time a licence is sold, and a model of business organisation can be applied numerous times for little extra cost.

• The cost is more likely to be sunk. It’s hard to sell a corporate culture despite all the money that’s been invested in it. Staff training cannot be bundled up and sold at auction.

• They are more likely to have spillovers. Despite trademarks and patents, competitors will always be able to learn from your ideas, the same way that smart phone makers learned from Apple’s success with the iPhone.

• And they are more likely to have synergies. Apple’s software, business model, and distribution channels create opportunities for app developers and IT firms.

Haskel and Westlake say these “four Ss” have real economic effects. Two in particular stand out: secular stagnation and inequality.

Secular stagnation

“Secular stagnation” is the idea that we have run out of ways to grow the economy at its historical rate – that the economy is stuck in a rut. Many economies have struggled in recent years, especially since the global financial crisis in 2008. 

Haskel and Westlake suggest intangibles could be helping to perpetuate this stagnation. Because intangibles scale up so well, they create large and super-profitable firms, whether through successful movie franchises or smartphone apps. But they also expand the gap between super-profitable firms and the rest – the “laggards”. The big firms are better at appropriating spillovers from weaker firms and better at using their market clout to prevent the smaller fish in the pond from reaping big profits from their ideas. The result: most firms won’t invest enough or spend to boost their productivity.

Their argument has its critics. Perhaps the world economy has undergone just what the International Monetary Fund (IMF) warned of in April 2009 without any reference to intangibles – a slow and unusually weak recovery.

And in the US, business investment as a proportion of total production is currently running at almost exactly the average for the preceding 50 years. The equivalent measures for both Australia and NZ are not far below multi-decade averages. If intangibles really are being under-reported, it seems likely that the true level of investment is actually above average in all three nations.

Even so, Haskel and Westlake have clearly set out a plausible path for rising intangibles investment to stifle growth, a potential that should not be ignored by investors or policymakers. Forewarned is forearmed!


The same inequality between firms that Haskel and Westlake say can stifle investment by “laggard” businesses has a parallel in inequality between people. Intangibles-rich firms tend to pay more, they argue, and people with the required skills benefit from “myths that can be used to justify excessive pay, especially for top managers”. They cluster together to harvest the synergies, creating Silicon Valleys where housing prices surge, further enriching the insiders. And because intangible assets are easier to shift across borders, there are fewer opportunities for governments to impose or collect wealth-levelling taxes. This financial inequality creates what Haskel and Westlake dub “inequality of esteem”, with resulting tensions and resentments that foster support for recent populist movements like Brexit and Make America Great Again.


Politics aside, Haskel and Westlake flag some thorny problems intangibles pose for financing. Banks are more reluctant to lend using intangible assets as security and equity markets can push managers into an unhealthy short-term focus. Even venture capital, often seen as a panacea to the problem of valuing intangibles, draws a warning from Haskel and Westlake. The focus on big, quick gains gives managers of VC-backed firms a strong disincentive to invest in intangibles if there is a risk that their benefits will spill over to their rivals.

The challenges

Haskel and Westlake conclude their book with a list of five challenges posed by the rising tide of intangible investment:

• constructing a robust intellectual property framework

• fostering synergies from innovation

• building an intangibles-friendly financial architecture

• funding basic research that firms may avoid because private firms cannot hold onto the benefits created by their work

• reducing inequality and maintaining trust.

Haskel and Westlake argue that as the importance of intangibles grows, these problems will only grow more pressing. It’s hard to imagine them becoming less pressing. Refreshingly, the pair resist the temptation to claim they have the answers. They offer no quick fixes, just “a collection of dilemmas and hard problems, the answers to which are not known”. Capitalism Without Capital offers a welcome counterpoint to the idea that the knowledge economy is nothing but upside. We may all one day look back in gratitude that it laid bare the potential of the intangible economy to go horribly wrong.

Garry Shilson-Josling has been chief economist at both the Australian Associated Press and MMS Standard and Poor’s Australia/NZ, and an economist at the Commonwealth Bank of Australia.