Book Review of Capitalism Without Capital by Jonathan Haskel and Stian Westlake

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Book Review of Capitalism Without Capital by Jonathan Haskel and Stian Westlake
This Book Review of Capitalism Without Capital by Jonathan Haskel and Stian Westlake is brought to you by Cal Holland from the Titans of Investing.

Genre: Non-fiction, Business
Author: Jonathan Haskel and Stian Westlake
Book: Capitalism Without Capital (Buy the Book)

Summary:

The economies of the world are undergoing a marked transformation. From the tangible industries of yesterday, we are moving toward markets and economies driven by assets that, in many instances, we cannot see, touch or feel. The shift toward these intangible assets is important, both because intangibles themselves are unique and different, and because these unique characteristics will have a distinct impact on our longstanding institutions and social norms.

Intangible assets differ from tangible assets in that they lack material substance. For many, software and new technological ideas are the first things that come to mind when intangible assets are mentioned. Other intangible assets include new models, designs, business processes and brand recognition.

While markets have previously undergone shocks and transitions, such as the Industrial Revolution and the Great Depression, in all these instances, tangible assets formed the bedrock of our economies. However, this is no longer the case. We are instead moving toward a market consisting of mainly intangible assets, which will behave differently, because intangible assets themselves are different, possessing four unique characteristics.

First, intangibles are uniquely scalable, with the ability for companies to scale up intangible assets to great sizes at extremely low costs. Second, intangibles represent sunk costs. With few secondary markets for intangible assets to be sold in, should they fail, investing in intangibles carries higher risk and is more difficult to finance. Third, intangibles produce spillovers.

As it is extremely challenging to stop the spread of ideas and knowledge, the benefits reaped from one company’s investments in intangibles are likely to be absorbed and capitalized on by other companies, as they incorporate these advances in intangibles made by other firms into their own companies. Finally, intangibles produce synergies. By combining ideas, research and design, companies are able to reap massive returns, encouraging openness and cooperation between firms.

Compounding the effects of these unique characteristics is the fact that we currently lack the ability to accurately measure the true value of intangible assets. Due to the difficulty of establishing agreed upon values for assets, such as brand recognition, business processes and R&D, accountants, statisticians and economists have long ignored the true value of intangibles.

This is not a problem when intangibles represent a minority of the asset value in a market, but as markets move toward majority-intangibles, it will become increasingly important to accurately measure the value of intangibles in order to provide clear data on the state of market health and to encourage investing through representative financial data.

Due to these two factors – fundamentally unique assets and a lack of information as to their true value – a shift toward a majority-intangible economy is likely to profoundly alter the form and function of many of our long standing institutions. From how companies are financed to rapidly altering infrastructure needs, intangibles will reshape the institutional landscape of our society.

Amongst the changes wrought by a majority-intangible economy, three issues are likely to be at the forefront of our collective conscious. These three are the rise in inequality, the need to adapt management and leadership styles and the necessity of governments to enact laws and policies that facilitate the ever-growing wealth of public knowledge.

Inequality is a broad term, but there are three types that will be affected in particular. First, income inequality will rise. In an intangible-driven economy, star performers will increase in value and will be justly compensated for this rise. Secondly, wealth inequality will also rise. Intangibles have driven an increase in value for assets already held by the wealthy, and the effervescent nature of intangibles has made it easier for the wealthy to avoid taxation.

Finally, inequality of esteem will become more common. The intangible economy is uniquely suited for those with the ability to accept and create new ideas. This slanting of the market toward those with a specific psychological and value set will likely cause economic pressures to exacerbate existing political and social tensions.

Intangibles will also alter management styles and what it means to be a leader. A company’s relationship to intangibles, whether they are users or creators, will promote two distinct management styles. The management of users will be more authoritarian, while the management of creators will be more egalitarian.

However, in an intangible economy, what will really differentiate companies is whether executives are simply managers or evolve into leaders. Managers are merely authority figures, while leaders possess both the hard and soft skills necessary to inspire employees to greatness.

Finally, governments will be required to take a bigger role in ensuring that their country’s economy is at the forefront of the intangible revolution. Due to the unique characteristics of intangibles, such as sunk costs, private investment in intangible assets could likely see a downturn. Therefore, it will be up to the public sector to pick up the slack, either through public funding or procurement.

Additionally, governments will have to create and enforce new IP laws. What is important here is the clarity and stability of interpretation of those laws, rather than their strictness. A stable industry-wide understanding of IP laws will go a long way toward ensuring investment in intangibles.

My Views

I found myself agreeing with most of the points and ideas that the authors laid out in the book. I sincerely believe that there are fundamental differences between tangible and intangible assets. I do differ from the authors in my estimate of just how big an impact the measurement, or current lack thereof, of intangibles will have on the markets.

I am of the belief that accountants and economists will be able to come up with accurate guidelines for measurement before we see any truly negative impacts. As a soon-to-be college graduate, it is both exciting and slightly nerve-wracking to be entering the job market at a time when economies are undergoing such a fundamental change. Exciting because there will be great opportunities for growth and creation, and nerve-wracking because of the uncertainty regarding where that growth will be.

I found it particularly interesting how the authors seemed to predict that a rise in intangibles would promote a blurring of the lines between the public and private sector. First, with the government taking an increased role in investing in private firms. For me, it seems like some serious conflicts of interests could arise in that situation. Secondly, with the fact that the market will come to favor people with certain belief or value systems.

Historically, the market has favored skill sets, regardless of political or social beliefs. I found it very prescient of the authors to point out that, unfortunately, an economic system driven by intangibles could even more greatly divide our already fractured and tribal political system. Overall, I found the book to be very enlightening and would highly recommend it to all who have had their interest piqued by this brief.

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The Rise of Intangibles

In the mid-1990s, an interesting development began to take place within the economy of the United States. For the first time in human history, there was a greater amount of investment in intangible assets, which are those assets that cannot be felt or touched, such as software, branding and R&D, than there was being invested in tangible assets, like the factories and machinery that are so often associated with great industries.

And while this increased investment in intangibles was first recorded in the United States, it was by no means simply a domestic phenomenon. Across the world, from the EU to the burgeoning economic powers in Asia, businesses began allocating more investment dollars toward intangibles than ever before.

This shift away from tangible assets toward an economy dominated by intangible assets will affect our businesses, economies and societies as a whole as we move deeper into the 21st century.

What Are Intangibles

An intangible asset is a broad category including all business assets that are not physical in nature. For many, software and new technological ideas are the first thing that come to mind when intangible assets are mentioned. Some intangible assets are new models, design or business processes. Others, such as brand recognition and brand loyalty, are developed over the course of a business’s life.

While these all differ to some degree, what they all have in common is that they are not physical. They cannot be touched or felt, but they are undoubtedly real and, for many companies, they are the most valuable assets on the balance sheet. Below is a table of intangible vs. tangible assets, and, while not exhaustive by any means, serves as a starting point for a working understanding of what intangible assets really are.

Why Intangibles Matter

Before embarking on this journey to seek to understand just how intangibles will impact our economy, an important question to ask is,

“Why would they have any different impact at all?”

After all, our industries and economies have previously undergone significant transformations, such as the Industrial Revolution and the Great Depression, and though there were indeed social and political changes in response to these alterations, the markets kept running in a recognizable way. Why would a switch to intangibles be so different than those previous experiences? The authors have identified two main reasons as to why this shift toward intangibles will have such a profound impact on our markets.

First, the authors posit that intangible assets are fundamentally different from tangible assets. As intangible assets come to make up a larger portion of our economies, our economies as a whole will behave differently. Second, intangibles are extremely hard to measure accurately and, up until very recently, most conventional measurements have completely ignored them.

Historically, this ignorance of the exact value of our intangibles has had a minimal impact, but as intangibles grow to make up a larger portion of our economy, it will leave a gaping hole in our understanding of the markets. When combined, these two factors make it clear that a shift to majority-intangible market will have a strong impact on the dynamics of both national and global economies.

Unique Characteristics of Intangibles

Authors Haskel and Westlake identified four main characteristics that make intangible assets unique. Relative to tangible assets, intangible assets are more likely to be scalable, their costs are more likely to be sunk, they are more heavily inclined to create spillovers and they are more likely to produce synergies.

Scalability

One way in which intangible assets are unique from tangible assets is that intangibles are, for the most part, non-rival, knowledge goods. Tangible assets, of which the clear majority are rival goods, meaning they have finite lives and can only be used until they are gone, decrease in value once they start being used. A sandwich, for example, is a rival good because once a person eats the sandwich it is gone forever.

Intangible assets, in contrast, are non-rival, knowledge goods that can be used over and over again by a limitless number of people. The coding for an app, an intangible asset, can be downloaded onto an infinite number of phones. This ability to be used repeatedly over a very large scale and at very low costs is the scalability to which the authors refer.

This scalability will manifest itself in three unique ways in a majority-intangible economy. First, the scalable nature of an intangible-heavy business will allow some companies to grow to be very large, both in terms of size and geographic reach. We are already seeing this play out with software-reliant companies, such as Alphabet Inc. or Facebook, reaching astronomical sizes in terms of revenue and market cap.

Second, in markets where scalable investments are common, there are high levels of industry concentration. Because of scalability, the prospects, should a company succeed, are extremely high. This possibility of high returns, however, is likely to draw many competitors, contributing to fierce competition and eventually creating a sector in which only a few dominant firms can compete.

Third, scalability promotes a winner-take-all paradigm within industries. Because companies can so cheaply and easily deploy scalable assets, there is simply no room for second place. When the best product can be made ubiquitous with very little marginal effort or cost, why would anyone use anything else?

Sunkeness

The second unique aspect of intangibles is the sunk costs associated with developing, implementing and creating an intangible asset. For virtually all tangible assets, there is a secondary market in which the assets can be sold should the project not succeed. This minimizes the downside risk associated with a project, thereby making investment in the project more likely. This is not the case, however, with intangible assets.

It is extremely uncertain whether intangible assets, such as a firm’s brand, operating procedures or intellectual property, will be worth anything should the firm have to liquidate their assets. Because there is a low likelihood that any value will be recovered should the project fail, the development of intangible assets is viewed as a sunk cost.

This sunkeness impacts the overall market in a number of ways, many of them being negative. First, it is difficult to finance intangible-heavy investments, especially with debt. Because there is very rarely a secondary market for intangible assets, firms in search of debt financing have very little to offer as collateral to the lenders.

This increased risk causes lenders to either raise their cost of debt, or remove themselves from the process entirely. The lack of a secondary market also contributes to the high level of uncertainty surrounding the value of intangible assets. With no markets offering concrete values for intangible assets, there remains a glaring lack of consensus as to the true value of a certain asset.

Additionally, an increase in the overall amount of sunk costs could be logically extended to predict an increase in the amount of managers and business people who fall victim to the sunk-cost fallacy. People have a tendency to become emotionally attached to sunk costs and refuse to write them off, even when it becomes clear that the project is a failure.

As managers hold on to bad investments longer, combined with the aforementioned lack of information as to the asset’s true value, the possibility for overly optimistic bubbles, and increased volatility when they pop, rises greatly.

While sunkenness manifests itself in numerous negative ways, there are also positive aspects. Investment in intangibles provides an “option value” to the firm. For example, imagine a firm invests in Project A and Project B. Even should Project A fail, it is very likely that the firm gained some form of knowledge that they can then apply to Project B to ensure that B turns out a success. This “option value” created by investing in intangibles then results in higher expected payoffs.

Spillovers

The idea of spillovers speaks to the fact that when a company develops a new intangible asset, it is relatively easy for other companies to take advantage of it, even though they themselves did not create it. This stems in large part from the fact that many intangible assets at their core are ideas, which are non-rival and non-excludable. It is easy to understand this spillover when thinking in terms of R&D.

One company develops a new product or design, begins selling it and then competitors reverse engineer and tweak it just enough to get around patent laws. The years of effort put into developing a revolutionary product are now moot points as competitors roll out almost identical products. While spillover is obvious in terms of R&D, it can extend to other intangible assets that might seem harder to imitate, such as business processes.

For example, McKinsey & Company revolutionized the management consulting field by being the first company to move away from hiring industry veterans to hiring elite college graduates and putting them on high performing work-teams. Though McKinsey was first to do this, eventually word spread and this structure and practice is now the norm across the industry. While the idea of spillovers can seem, at first glance, to be cutthroat, there is immense value in taking the best ideas or products and rolling them up into one’s own company.

The increased possibility of spillover will likely first exhibit itself in decreased investment by companies. Because companies are fearful of other firms reaping the benefits of their own investment, companies will be less likely to pursue high levels of investment. In response to this increased likelihood of spillovers there will be heightened responsibility, and compensation, for managers who are able to both ensure that valuable assets are kept private within a company and constantly look to capitalize when other companies experience spillover from their own investments.

Of course, the best way to protect company information and secrets is through the effective use of patents and copyrights, but effective hiring and retention of employees is another key practice on which managers in the majority-intangible market will have to focus.

Interestingly, the benefits of spillover could possibly go as far as to shape our physical environment. Because the benefits of being surrounded by new and dynamic ideas is so high, successful businesses will locate themselves in cities with a vibrant business community. This explains why we see people and businesses willing to pay such high rent to live in places like Silicon Valley, New York City or London.

Though we are living in a world where you can video conference or Skype anywhere in the world, people and firms are still willing to pay exorbitant prices to live in small, exclusive communities. This speaks to just how important spillovers can be to the success of a business, and one would expect, with an increase in intangible heavy companies, to see more and more of these so-called “clusters” of innovation and business develop around the world.

Synergies

Synergy is the idea that when you combine two ideas, products or firms, the whole is greater than the sum of the parts. Synergies are not unique to intangible assets, but in the instances of technology or ideas,  the synergies  are magnified. This  stems  from  the scalability of many intangible assets, as well as the fact that many intangibles are not expended when they are used.

An interesting thing to note about synergies, especially those involved with intangibles, is that they can be quite difficult to predict. Take, for example, the invention of the microwave. The microwave was the brainchild of a partnership between a defense contractor and a large appliance manufacturer. This unpredictability of collaboration will make it even more important for companies to be connected and engaged within the business community.

Synergies will play a meaningful role in the market because they provide a counterbalancing force to the threat of spillovers. While the threat of spillovers will cause many companies to be cautious and protective of their intangible assets, the possible benefits of synergies will push companies to be collaborative and open to sharing. This will serve as a deterrent to the appropriation common with spillovers.

Companies, rather than playing a zero-sum game of attempting to protect all information or having it stolen, will instead attempt to collaborate in order to maximize the benefits of synergies and minimize the risk of spillovers. This collaboration can either be centrally planned, such as the case of government-sponsored prizes and awards given to those who develop breakthroughs in underserved fields, or completely random, such as the invention of the microwave.

The Measurement, or Lack Thereof, of Intangibles

In addition to their unique characteristics, intangibles are likely to cause a profound change to the operations of our markets because of the difficulties associated with accurately measuring them. Historically, accountants and statisticians have ignored measuring intangibles in concert with the accounting principle of conservatism.

In the past, intangibles made up a small portion of overall investment spending and it was almost impossible to obtain consistent, accurate data as to the true value of these investments. Therefore, accountants decided it would be safer to leave them out of the picture completely. Because of this, investment in intangibles is not captured in company balance sheets or national accounts such as GDP. As we transition toward more intangible assets, this lack of accurate measurement will negatively impact investment in firms.

Both debt and equity investors will be more hesitant about investing as the balance sheets of firms look weaker due to the material undercounting of intangible assets. This could also contribute to the secular stagnation and weak growth seen in some developed economies. Investment growth and intangible capital building will be perceived as weak, as it is going unrecorded. This will cause fewer spillovers and less scaling of companies, which will contribute to lethargic total factor productivity.

In response to these concerns, accountants, statisticians and economists are taking steps to improve the measurement of intangible assets. More and more studies are being done to give us a better understanding of the actual value associated with particular intangibles.

For example, an Israeli study shows that the average life of an idea developed in R&D is around 10 years and that higher levels of depreciation (~33% per year) should be applied to software, design and marketing projects, while a lower (~15% per year) rate should be applied to R&D projects. While this is a valuable start, the accurate measurement and subsequent representation of the value of intangible assets will be vital in ensuring the optimal efficiency of our markets.

Effects of a Majority-Intangible Economy

Due to the unique characteristics of intangibles, and the fact that we currently lack the ability to accurately measure their true value, the authors predict that a switch to a majority-intangible economy will have a marked impact on our current institutional systems and the make-up of our social fabric.

Due to these shifts, three areas in particular could see the most upheaval; problems of inequality will be exasperated, management and leadership styles will have to adapt, and governments will have to enact laws and policies that facilitate the ever growing wealth of public knowledge.

Inequality of Intangibles

While inequality is a broad term, there are three forms that will be most impacted by the intangible revolution: income inequality, wealth inequality and esteem inequality.

Income Inequality

The authors posit that intangibles will drive an increase in income inequality. This stems from the fact that the best firms will be the ones who are best able to scale up, reduce spillovers and drive the competition out of business. Due to this heightened competition, there will be a premium on hiring high performing “superstars.”

These “superstars” are the employees who are able to combine the hard skills of technical knowledge with the soft skills of fostering relationships, both inside and outside of the company. Naturally, due to the value these “superstars” bring to firms, they will be compensated quite handsomely, thereby promoting an economy in which a select few are earning multiples above everyone else. This will lead to an increase in income inequality.

However, these “superstars” are not moving up the ranks from low-paying jobs to high-paying ones, which would help alleviate some income inequality. Rather, through a process called “sorting,” they are already employed in high-paying jobs and simply move on to even better paying opportunities. This “sorting” refers to the fact that high-paying firms put a premium on vetting and hiring the best possible candidates.

These people who are already doing well have proven that they are capable of leveraging spillovers and maximizing synergies. As the world becomes more inundated with intangibles, which will put an even steeper premium on such skills, “superstars” are poised to be compensated even better than they are now. This idea that those already in the upper echelon will remain there and that those who are not will face fierce competition to join the higher paying tiers again fosters the possibility of worsening income inequality.

Wealth Inequality

Wealth inequality is also getting worse. Wealth inequality measures the stock of all wealth that has been accumulated up to this point in time.  Intangibles have exasperated the wealth divide in two ways.

First, intangibles have helped to drive the increase in property prices, which accounts for a large portion of the increase in wealth for the world’s richest people. Second, intangible assets are much more geographically mobile making it more difficult for governments to redistribute wealth through taxation.

Due to spillovers and synergies, there is an immense value in the intangible world to be located in vibrant cities with free-flowing ideas. Consequently, as the demand to live in cities has gone up, so have real estate prices in those cities. Additionally, in many cities, as demand has grown, supply has not matched it. In many of the vibrant “clusters,” such as Silicon Valley, there are rules in place that prevent the building of new housing.

Because demand has increased exponentially and supply has remained static, real estate prices in these areas have skyrocketed. Historically, wealthy individuals have invested heavily in real estate and have, thus, reaped the benefit of the rise in real estate prices contributing to the rise in wealth inequality.

Another aspect of intangibles that has promoted a rise in wealth inequality is the ease with which intangible assets can be “moved.” Historically, the assets that made people wealthy were tangible and fixed, literally, to a certain geographic region. Because of this, they could be taxed easily by the states in which they were located, which has historically served as the government’s most effective method of wealth reallocation.

Now, because of the effervescent nature of intangibles, it merely takes a little legal work and a firm is suddenly headquartered in a state or country with very low tax rates. This makes it extremely hard for governments to effectively tax the extremely wealthy in order to cut down on overall inequality.

Esteem Inequality

Inequality of esteem is perhaps one of the least recognized forms of inequality and speaks to those who feel as if the current system is stacked against their personal strengths and values. This inequality manifests itself in populist political movements, such as the ones seen within the U.S. and Europe. There are some studies that show that supporters of populist movements are more likely to be less open to new experiences and to hold traditional views.

While there is nothing inherently wrong with these values, the intangible economy will be constructed to reward those individuals who can take new ideas and thoughts and merge them in scalable and synergistic ways. This economic slanting toward those who have a psychological mindset geared toward new experiences and ideas could seriously hamper the economic mobility of those who maintain more traditional viewpoints. It then follows that the economic pressures of an intangible-driven economy could contribute to the increasingly divided political and social landscape that we see playing out across both Europe and North America today.

Adapting Leadership and Management

The rise of intangibles will force managers to rethink how their businesses are both structured and led. The authors make it clear that what makes managers important is their authority. Managers act as the coordinating force of their firms and they do this via authority.

With the rise of intangibles, the authors foresee the growth of two distinct managerial styles, with the styles being determined by a firm’s relationship to intangibles. The first approach will require the manager to give more autonomy to employees, while the second requires the manager to take on a more authoritarian role.

The first style will be used by managers of firms that are creating intangibles, such as ones writing software or producing research. These, for example, are the types of firms that you have in mind when you think of the stereotypical Silicon Valley tech startup. In these instances, a flatter hierarchy, in which the manager gives employees the leeway to make their own decisions, will be necessary to maximize output.

These firms depend on the creative output of their employees, so it is vital to have a free-flowing exchange of information, both top-down and bottom-up, as well as an atmosphere that allows for creativity and the ability to take risks. In this structure, the role of the manager will be less of a captain who steers the ship and more of a coordinator making sure all of the pieces of the puzzle fit together in order to see the bigger picture.

If the firm is a user of intangible assets, managers will take on a more authoritarian style of management. Users of intangible assets, like an Amazon warehouse relying on a routing algorithm or a Starbucks store teaching their employee handbook, are not as concerned with creativity or exchange of ideas as they are with productivity and meeting established goals.

Because of this, the manager/employee relationship should be differentiated, with the manager having the clout and organizational standing to ensure that quotas are met, even when it requires being demanding of employees.

While the authors speak of the importance of tailoring management styles to the unique needs of intangible-intensive firms, they also make it clear that businesses will need more than just managers to succeed. They will need leaders. Managers rely on authority to further their strategic initiatives. Leaders, in contrast, can persuade employees to voluntarily follow the plans that they set forth. This will be invaluable as intangibles gain prominence and the threat of spillovers increases.

In a majority-intangible business, the most valuable asset will be the tacit knowledge possessed by employees. Therefore, it is key that leaders can inspire and motivate loyal employees, ensuring that company knowledge and skill is retained within the firm, as opposed to simply giving them numerous tasks to complete and goals to meet likely promoting high employee turnover and an atmosphere in which company knowledge leaks like a sieve.

Leaders will not only have to inspire and affect change within their own firms, they will also have to be able to look outside of their own business and exploit synergies available at an industry or market-wide level. Because much benefit in an intangible-heavy market will be derived from synergies, spillovers and their associated scalability, leaders must be able to develop relationships with other top-level executives and lay the groundwork for possible partnerships in the future.

The majority-intangible market will place new demands on business executives. Those that succeed will be those who identify the unique nature of their firm’s business process and tailor their management style and structure to maximize those processes. Additionally, the executives who are able to make the transition from authority figure to leader will be the ones who most effectively capture the new opportunities that come with a majority-intangible market.

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Governing the Rise of Intangibles

Intangible-heavy economies will put new burdens and responsibilities on the governments of our world. First, governments must have an increased role in investing in intangible assets. Additionally, governments will need to update and clarify existing IP laws to ensure that creators of intangibles are able to reap their rewards, thereby spurring more intangible investment.

The first way in which governments can ensure that intangibles have adequate investment is through public R&D funding. By funding university research, public research institutes or research done by businesses, governments can ensure that their economies are on the leading edge of the intangible revolution. Because intangibles have a high threat of spillover, firms are worried that they will not recuperate the full value of their investment as other firms profit off of their ideas and developments.

This could cause a sharp decrease in private intangible investment. Because of this, the public sector will have a much larger role to play in ensuring that investment continues, either through funding public research or enticing private research through grants and tax breaks. Whatever the method, in an intangibles-centered world, the economies that succeed will be those receiving funding and support from both the private and public sectors.

While public funding is a great way to prompt research and minimize the negative effects of spillover, it is important to realize that it is merely a complement, rather than a total substitute, to private investment in research and business infrastructure. Research has shown that when funding is provided to universities in an economically disadvantaged town, the actual economic benefit is quite muted, compared to those universities where a vibrant economic community already exists.

Therefore, to fully capture the benefits of the research being done by universities or public research institutes, communities need to have the pre-existing capacity for private firms to leverage the benefits of increased public funding for research.

The second major way in which governments can ensure that intangibles receive a proper amount of investment is by procurement. By acting as a primary customer, and not just an investor, governments can ensure that companies receive spending and in some cases can direct spending to certain industries.

For example, when the U.S. military funded the development of semiconductors in the 1950s, it led to the explosion of the U.S. IT sector and countless success stories of private companies that have stemmed from DARPA. Even though procurement has spawned many success stories, it is by no means a panacea for intangible investment ills.

The authors identify four main criteria that must be met to give procurement the best chance of success possible. First, procurement budgets must be quite large in scale. When working with nascent industries or technologies, there must be adequate funding available to provide the environment for these industries to grow. Second, there must be a high level of sustained political commitment.

Technological innovation takes time, and it is key for groups to know that they have the support of the government, from administration to administration. This was easy to find during the Cold War, when the United States government was focused on advancing technology in order to combat the USSR, but could be more difficult to ensure in today’s increasingly divided political climate. Third, due to the contrasting nature between the incentives of procurement and intangible investment, there must be leaders in place who can handle the increased risk. Procurement seeks to achieve good value for the money invested, while intangible investment is increasingly risky.

Those leaders who are suited to garnering stable returns are probably not those who would create an environment geared toward wild innovation and breakthrough, but in an intangible-driven economy, technological innovation is the best way to build and sustain value. Because of this, leaders must believe that they have made the right investments and follow them through with dedication. The final criterion is a high tolerance for uncertainty. Innovation, for the most part, cannot be predicted.

Therefore, leaders must be comfortable knowing that, at times, procurement can seem like a roll of the dice. While there are difficulties associated with procurement, should the criteria be met, there is a high likelihood for great technological breakthroughs.

Perhaps an underappreciated way in which government can spur intangible investment is through the creation and enforcing of IP laws. Governments will need to balance between ensuring firms are able to reap the rewards of their research, while also promoting the diffusion of technology and interbusiness competition.

On one hand, governments will have to enact laws that seek to diminish the negative consequences of spillovers. IP laws that protect private company knowledge and businesses process will be paramount to spurring private investment. On the other hand, one of the most exciting aspects of the majority-intangible economy is the value that can be garnered through synergies. IP laws that are too strict will limit the ability for firms to realize the synergies between intangibles. So, while overly strict IP laws could spur investment, they would also stifle productivity gains.

While determining the most beneficial level of IP law stringency is difficult, the authors stress that the strength or stringency of IP laws is secondary in importance to how clear they are and how consistently they are enforced. A stable interpretation of IP laws will promote, if not a drive for intangible investment, at least a tolerance and willingness to sink money into investing in intangible assets.

Conclusion

The economies of the world are undergoing a marked transformation. From the tangible industries of yesterday, we are moving toward markets and economies driven by assets that, in many instances, we cannot see, touch or feel. The shift toward these intangible assets is important both because intangibles themselves are unique and different, and because they will have a distinct impact on our longstanding institutions and social norms.

As opposed to tangible assets, intangibles possess a specific set of qualities that will change how businesses run. Intangibles are scalable to great sizes, create spillovers, exhibit sunken costs and produce vast synergies. While we do know what makes intangibles unique, we still do not have accurate ways to measure their true value. As intangibles become more important to our economies, it becomes increasingly important that we develop new and sophisticated ways to measure their worth in order to promote investment in these assets and to have a full view on the state of global markets.

The rise of intangibles will change the form and function of many of our most important institutions. From effects mentioned in this brief, such as growing inequality, changing demands on leaders and evolving role of government in business, to those not covered, like changing roles for the financing industry and the development of vastly different infrastructure needs, the shift toward intangibles will require fast adaptation and the ability to absorb new information and transform that information into new ideas.

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Britt always taught us Titans that Wisdom is Cheap, and principal can find treasure troves of the good stuff in books. We hope only will also express their thanks to the Titans if the book review brought wisdom into their lives.

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