J. Haskel, S. Westlake: "Capitalism without Capital" | Talks at Google
Good. Morning thank, you all for coming today. Google were delighted to welcome mr. jonathan, haskell and mr., Stian Westlake. Jonathan. Haskell is a professor of economics at, Imperial, College Business, School and Stian, Westlake, is adviser to, the UK's Minister of innovation, and Technology, together. They won the indigo prize in 2017. For, their work on economic measurement. Much, of which went into the book they are here today to discuss titled. Capitalism. Without capital the, rise of the intangible economy, please, join me in welcoming to Google mr., Jonathan Haskell and Steen Wesley. Thank. You very much indeed lady in German thank you all very much for coming. We're. Going to split this presentation into two I'm going to try and talk for about 15, minutes about. Some of the topics for the book and then I'll pass over to Stan and delighted. To have verson QA as, well so here, talk about capitalism, without capital, it's, in three parts the, first asks. The question. What. We know about the rise of the intangible, economy I'll tell you what the intelligible economy is in just a second secondly. So. What why is the intangible, capital a different, type of capital and, thirdly what does this mean for business in the economy so I'll walk you through the first two things and then as I mentioned I'll pass over to Stan so let's, get started, with the kind of core of what this book is about and, it is about the following the, nature, of investment. In capital assets is changing. So here on the left hand side are. The types of capital, assets which. You'd be very familiar with if you're an accountant, or if you work in John GDP, and things like that now this is kind of straightforward for economists here, are the classic, types of investments. That are that are made they're very tangible things buildings computers.
Plant. Machinery and vehicles and. When national, income was accounted a. Saline camaccounting counting. GDP was invented, in the 1930s 1940s, these, were the types of assets which. People measured investment, for on that apartment to GDP and, company, accounts reflect, this kind of thing as well at. The core of our book is, the fact that these assets investment. In these assets is going on but, investment, in these intangible. Assets is zooming. Ahead let me walk you through the kind of things which these intangible. It's are things. Like R&D, training. Design. Things. Like organizational. Development you. Know you can buy shoes from Walmart, and from Kmart that somehow they feel like very different organizations, things, like brands and marketing, artistic. Originals his Britain's most famously in innovation. Over here big. Intangible. Asset and as, I don't need to say in this building here software, and data important. Intangible, assets. As well so these are the types of assets which you can't sort of touch and you can't feel they're, in contrast, to these tangible, assets and, as I say the core of our book is, about the movement to these intangible. Assets now. This. Would be basically, of no interest whatsoever were. It not for the fact that this, change is actually rather hard to discern. GDP. Still. Doesn't include most intangible. Assets let's start with the assets which GDP. Does include, and that includes these tangible, assets so, when you hear on the news about the release of GDP figures and all of that these, are the types of investments that those national accountants, will be telling you about it's going ups going down on, all of that some. Intangibles. Have been added over the years so software is counted, as, an asset there's something that firms are investing, in, likewise. Artistic, originals, and likewise in R&D. But. There are still a whole load of assets, which, aren't counted, so, much in the GDP figures, as. I mentioned before design, business processes, marketing, and so forth and I ought to mention data, as well, the. In GDP, the. National income accountants are supposed to count the kites investments. That firms are making in data and understanding, that data but, that practice, varies a lot across different, countries. Now. If, this thing is rather hidden, in the, national. Income accounts, it's, distinctly. Hidden, in the company, account so this slide on the right is, taken from a book by brokers, and Thane, gue and the title of that book is the, end of accounting, and that's all you need to know and they're the core of their arguments, a wonderful book the core of their argument, is that company, accounts are basically, completely, uninformative. About. Modern-day companies, let me just walk you through very quickly what this is this blue bar here says take. The companies who entered, the US stock market in the 1950s. And. Asked what fraction, of their market, value can, be explained, by the assets, that are on their balance sheet these are traditional tangible companies and the answer is 85%, take. The companies over, here who, invent who entered, the US stock market in the 2000s, ask the same question, and the answer is about 25% this is an r-squared from a regression for those of you who remember, your, sort of stats so in other words these company, accounts, here vary uninformative, about, the set of assets which. Are which, are really powering a company and, and. So therefore underneath. Our heading. There that, this change is, hidden now of. Course if intangibles. Are hidden you, might ask the question about how on earth do we know anything about them and fortunately, some. Scholars have recognized, all of this here's a picture of fritz machlup an, Austrian refugee. Who came as, many did to. The, US you, know found the sanctuary in this country in the 1930s. And he wrote a book I'm sorry this hasn't come out very well in 1962, called production and distribution of knowledge in the United States and it's an early book it's a wonderful read actually, you're, interested in the history of Technology it's, an early book which walks through, really some early Computing's, and very early kind of software that people were doing at that time and maxilla, pass the question suppose, we counted, the money that firms were spending, on that, those types of things as an investment as well now.
In The 1990s. How. Variant is sitting over here and, corpora, shapiro had a book called information, rules in, the early kind of part of the information economy which, made a lot of these points as well and pointed to some of the economic attributes of. Intangibles. Which I'll be talking about in a second, I've mentioned baroque live before professor, of accounting at NYU he, had an important book in 2001. Which was more on the accounting, side and, then some co-authors, of ARS Colorado, trance. Huntin and Dan sickle wrote, about this in 2005. So essentially. What our book does is, it, takes, the. Kind of experimental. Work that, these authors have done and work, that we've been, privileged enough to co-author with them as well it takes, that what that experimental, work and ask the question suppose we did count all of this intangible invest, what would the economy look like and the book essentially documents, all of that now. Once, you've written a book on something, you see them absolutely. Everywhere so, let me give you an example of, what we mean by intangibles. And just. You. Know obviously in the tech sector, there. Are lots of intangibles, like I say software and data and all that kind of thing but it's not just a story about the tech sector now, since you look or as fit and healthy California a lot let's, go to the gym where, you see lots of intangibles, according. To us so in 1977. So this is Arnold Schwarzenegger, breakthrough, movie pumping, iron in 1977. Here's a picture of a gym in 1977. Lots of tangible, things namely buildings, and, machines and, similarly. If you go to the gym in 2007. You see the buildings and the machines but you see some intangible, things as well actually so, when, you go into the door the software, you know registers, you in the door and tells you haven't been don't, you've only been doing an hour that week and you know not, not any of the week before people. Are doing training and teaching all of this and there's branding and marketing going on as well and in fact there's. A sort of pure. Intangible. Company who we talked about in the book which is a New Zealand company called, WA there's Mills well. Their body pump is their particular product, which, is a high-intensity. Good. A gym is a high-intensity kind of training, you know with music going on and you lift weights and all that kind of stuff and. What the Les Mills do they're a small company in New Zealand who have literally managed to sell worldwide. That. Their type of exercise, and the exercise is. Essentially, a collection of intangible, assets they've negotiated with, the music rights owner owners. For the music they've designed the, exercise that goes with it they. Train, people who, stand in the gym and you know help you do the exercises correctly and so forth so those, it's a pure in bundle, of intangible, assets if you sort of see what I mean and, that was an example that, we have so we talked about in. The book now. The rise of intangible, investment we think is a long-term trend and. Again we go back to these experimental, types, of results which ask the question if you augmented. GDP, with these intangible, assets what would you see and, you were saying you essentially. See a rise, over, here in intangible. Assets this, is in, of investment, as a proportion of GDP and a fall in tangible, assets and one, of the things about that which Colorado, has. Looked at is she's looked at that for the u.s. I'm sorry I should have said this is for the US and EU countries, corrado. Has looked at this for the u.s. going back to the 1940s, and shows a steady, rise that's the blue line in intangible. Assets. Overtaking. That tangible assets so. We have a thing here where, we point out that this rise in intangible, assets predates, the IT revolution, I'll come back to that in just a second but, since lots of people are going around writing books with the word capital, in them we thought we'd try and you know push, our book a little bit we think intangible, capital is the 21st. Century as, these types of Grasse illustrate, there's more, of this type of thing coming along let, me say a word about the IT revolution.
Given The building, where we have the honor to stand which, came first the IT or the intangible, economy because a lot of people take the view that. After. The IT revolution. Came along then of course all this intangible stuff came along so once computers, came along then people had to invent, all sorts of ways and reinventing the business and so on, let's. Just try a slightly, different point of view a little bit speculative but nonetheless we'll try this so, here's a picture since. We're a long way from home here's a picture of British people drinking, tea so, there's only you make it just to make us feel like we've, been on planes continuously. For the last few days so just to make us anchored at home this, is in the Lyons tea shop this, was we've. Called here the McDonald's, of mid 20th century Britain, I've hopefully. But. This was a huge chain of tea shops which, existed, on more or less every street corner in. Many British places, and you. Know fed the National great National British diet and. What, that needed, is it had a big payroll, and it had huge numbers of payroll clerks who, you. Know were required to administer the payroll lots of almost, entirely women waitresses, you know working they needed to be paid they were working part-time that weren't working all day and all that kind of thing so, along came the leo Orion's. Electronic, office of world's first business computer, it's, sort of has a I, guess, a linear, for the history, of Technology people are kind of lineage from the types of computers, that were invented, you, know in the Second World War to try to break codes and all of that and this was this, was a computer essentially. Which was meeting, the demand for. You. Know for the administration. Of this payroll so maybe. In some sense the. This type of demand here brought, forth at, the invention of IT and the computers and it was talked about a bit. Okay. Now let, me say a little bit about why intangible, capital is different, before passing over to steam you, might say, well. Surely. The nature, of the economy and investment, in the economy changes, all the time so we used to invest in canals then. We started investing, you know in railways, and then we stopped then we found investing in roads and we started investing in airports, you might say the nature of investment, is changing all the time then. Why, should we bother and, we. Argue. That intangible, investment. Is interesting, because it's got some, different economic, properties, so now we're going to put our economists hat on for a second it's, got some different economic, properties to, tangibles, and this, is where there's an overlap in our book with how varian's book which i mentioned earlier on about. About, information, so the first thing is I just, mentioned in, Howells. Book is that intangible, assets, can often be used over and over again in multiple places they can be scaled up do some examples in a second the, second, is they're all going to begin with s these. These. Things just a help you clear in their mind intangible, assets or what economists called sunk, it's often difficult to get them back or recover their value again, an example coming, up thirdly, spill, overs tangible. Assets spill, over in, ways that, other people can benefit from them and, fourthly, synergies, if you bundle these intangible, assets together then. You can get a particularly valuable product, let me walk you through some of this and then Stan will talk about some of the consequences, so again just make us feel at home let's again start with London. Taxi cabs here. Taxi, cabs if you've ever been to London as you will know you can squeeze five people in there if you want to take a sixth, person you've, got to get a new taxicab so, the. Taxi cabs are not scalable. In the, way they're uber, of course, you. Know you can use it to get to London, Airport to get to San Francisco you can use it in San Francisco you can scale this thing over. And over again so the first interesting consequence, about internship. Is that companies, who have these intangible, assets can potentially scale up very substantially, secondly. I mentioned this economics, term sunken. As' a word, about Nokia, great European, success story, back in the day of course they at one point they had you know seventy-two percent of, the world's smartphone market, but it all went wrong its century after the invention of the Apple iPhone and.
Apple, Took over Nokia, basically, had at least a couple of assets, on its balance sheet the first thing is it had a very nice headquarters. Very razzmatazz, headquarters. It, was able immediately. To sell that asset now, as you remember what I was saying earlier on that's a tangible, asset it's a building a company. Building so that's well known to, accountants international income accountants a tangible, asset it was able to dispose of it and sell it off but. It had a big, intangible. Asset namely, the Symbian operating system. Which after the merger with Microsoft, became, Windows Mobile and that, essentially, was impossible, to get any of that money back so the intangible. Asset it, was much more difficult to get that money back so as I said what economists call junk. That's, obviously gonna have some implications for how a bank might feel if the bank's going to lend a company some money but, which steam I'll come back to in, just a second. Spill. Overs I mentioned spill overs before so if you've got a tangible asset like a factory, you just put a guard outside it nobody, else can get into your factory on. The other hand if you've got an intangible asset, like a design. Well. If you think back to smartphones you, know before Apple came along they were all a bit clunky frankly, they're all just a bit embarrassing, and, the moment that the Apple phone smartphone, came along basically all the other smart phones look like that this, is what economists call spill. Overs namely, if I, have an idea. It can spill over potentially. To other people so other people could adopt that idea whereas if I have a factory, you guys and gals can't come into my factories so again how Varian's book talks, about that, kind of issue as well, so obviously that's going to make it difficult potentially. For, the people investing, in intangible, assets to maybe get some of the returns ok the last s. That. We have of these properties is synergies. So, here's the EpiPen as I was saying on point two billion profits, for my land in 2015, and. You might think. Core of, the EpiPen. Which. Has, inside it as it were the chemical formula to stop anaphylactic shock the, core of it would be is an intangible asset namely an idea namely, the chemical, compound that's in it and you might think well that's just protected, by a patent, the. Patent it is there is indeed a patent but the patent. Ran out almost 100 years ago so the, core of it of the value of it can't necessarily be, in the patent because that's that's, not defended anymore so, what is it it's a according, to us it's, a bundle of these intangible, assets let's go through some of the others first, of all it's the design so it's designed in a particularly convenient way secondly. There's lots of branding, going on as well often when people talk about this type of thing they talked about their EpiPen in the way that people, used to talk about hoover's you know when they're talking about vacuum cleaners, thirdly. There's a lot of marketing and distribution around, all of this and complicated, marketing arms and, so forth which the company. Worked very hard at and. Unfortunately, there's lots of training, going, on as well people get trained to use this and often the training, uses. The very word EpiPen itself in other that uses the branded, word itself so again, the synergies, are that.
We Think that when you put these intangible. Assets together so the intangible assets of the R&D knowledge the, design the, training the, marketing, the branding, if you put these intangible, assets together then, you can get a particularly valuable, product, okay, why don't I pass over to Stan to, say some more about what this means for the economy and society. Thank. You Jonathan and thank you all for coming Jonathan's, talked about the kind of the the rigorous empirical and conceptual, stuff this is more the speculative. So what stuff now but, I'm going to talk about a few things I'm going to talk about what this means for leader companies, and laggard companies in this phenomenon that economists, call secular stagnation then, I talked a bit about what this means for financing. Business is going. To talk about the, human side of this who wins and who loses an, intangible economy, and then, because it's kind of related to my day job I'm going to talk about maybe what how governments, should respond to this um. But. Let's start by talking about winners, and losers in the business world and standing. Here in a kind of in Las illustrious. Intangible. Intensive, business I probably don't need to tell you this but, there's been some great data driven research in the last few years by the OECD and other people that showed that in sector, after sector in country after country the, gap between the, most successful, businesses, and the rest in terms of profitability productivity. In other measures has been growing so, this is manufacturing, firms this is service firms but it kind of works as fractal, it works if you look by sector of my country as well and the productivity, and the profitability of firms seems, to be splitting and economists. And policy makers have really started scratching their heads of this let alone what can be the possible explanation. What are the what are the potential, reasons the. OECD have said well maybe this is technology. Is not diffusing, enough so Google's. Smaller competitors are not learning enough without Google's algorithms, quickly enough, or. Maybe the, governmental, organizations. That are meant to encourage competition in the markets have somehow dropped the ball they're kind of off the pace. Those. Have been some possible, explanations, we think that the rise of intangible, investment, helps, explain, this puzzle for a number of reasons and I'm going to go back to the four SS that jonathan talked about earlier so, the first this kind of idea of scalability, that how, long others have written about we, think is hugely important, from this point of view if you, think of an intangible intensive. Business. Like uber. In the personal, transport, sector or Starbucks. In the cafe, and beverage, sector. Ubers. Got a bunch of valuable entire intangibles. Related to its network of drivers, its data it's it's, it's its software, Starbucks. Got a very valuable. Intangibles. And form of its brand its operating, processes, and its supply chains those. Assets, are much more valuable at scale, where you can deploy them across a big business than they would be further kind of little small local taxi firm near me or a excellent. But small local cafe near me so, if you're in the position of that's both small relatively. Less profitable firms your incentive, to invest in the next intangible, is that much less. Spill. Overs matter as well, some. Of you may be familiar with this book awhile ago from Hank Chesbro a great management studies guy he, talked about open innovation the, idea that businesses, can do a lot of innovation, by learning from other companies and you know you can spend a lot of money on consultants, telling you how to do this sometimes very good at it. Open, innovation is kind of a skill, of capturing, the spill overs of other people's intangible investments, and if we imagine that capability, to be unevenly, distributed which, is the reason why Business School professors, will observe, it in different companies then, you'd imagine that would be another way, that some companies, could pull ahead of others in an economy where there are lots of these spill overs to be had and. Then finally synergies, the idea that these intangibles, are specially good when you combine, them with other ideas as, kind of Brian or the Santa Fe Institute technology.
Theorist Likes to point out. This. Was something that was I think I sort of BuzzFeed originally, but this was someone looking at how. The. App store of the Apple App Store a while ago and they were looking at Facebook's relationship. With them and pointed out that Facebook had either made a lot of the most, downloadable, apps all that acquired them or they were in a position where they could clone them because the synergies between, the. Intangibles, that Facebook had in terms of software data and their relationship, with their user base were. So, synergistic. With other things that people were developing so all of these things potentially mean that even, if competition, regulators, are working. Just as hard as they ever were and even, if technology diffusion. There's no you know no one has slacked off everyone pays attention to technology, it's kind of it's everywhere, you. Could still see this gap between leaders, and laggards white leaders. And laggards wise named at, widening and, we think this is also helpful in terms of understanding secular. Stagnation which concepts, some of you'll be really familiar with a non economist, it's this kind of paradoxical. Mixture, of low. Investment in the economy companies, are on the whole not, investing, a lot even. Though interest, rates are low so money is cheap when money's cheap normally companies will invest more and there. Is kind of high observe return of investment on the companies that are investing, and high corporate profits those things shouldn't coexist, if corporate profits are high and money is cheap economists. Would say well surely everyone wants, to pile in but that's not happening for various reasons and. We think this kind of helps explain it slightly because, our, leader. Firms, have. A strong, incentive to invest in in, intangibles. Because. They can get the benefits of those synergies they potentially get spillover, some other investments, so they will exhibit the high investment, and high ROI, which, is certainly what we see but, at the same time you'd have a kind large crowd of laggard, firms who, have less incentive to invest in intangibles, because they can't benefit, from from, these synergies and if, they do who, knows they'll just be copied or or. Others, will get the benefits and so, they would have low investment low IRI and we think that you know the aggregate, there could be a high, measured. Return investment people who are making the investments are reaping high profits, and the stock price of those companies is is is driving up indices, but, at the same time the aggregate, level of investment and a productivity, would be low so we think that might partly, contribute, to this this this this weird paradox that's going on in the economy today um. Here's. A sorry for the blurry picture here's some Occupy Wall Street guys and obviously one of the very sort of salient, beliefs, in the world at the moment is that the financial, services sector is doing a very poor job of meeting the needs of the real economy, it's something that we feel London where we have a big financial services, sector it's felt around the world we.
Again Think that there is an issue here with an intangible economy, that an intangible economy, the financial service system that we have at the moment is relatively. Less well geared to backing that one. Of the reasons, is one, of the other of our 4s is this idea of sunken, nuts the fact that if your company, goes bust it's intangible assets, are pretty hard to sell on they're pretty hard to salvage and obviously, if you, are a. Debt. Financed here if you're a bank if you're a bond holder that's a disaster, for you you want companies that have lots of really fun jabal assets that, you can take a charge over if the company fails and. Obviously we have a financial system that, is to, a great extent Silicon. Valley accepted, dominated. By debt, provision, whether that's bank finance of small businesses, or bond financed for larger businesses. There. Are some ways of potentially, tackling, that there are some really interesting financial. Services companies trying, to expand the scope of intellectual, property back, lending, there's a great interesting company called M cam in. The UK and in Singapore the governments are trying to work out ways of using, patents. And so forth as as security. So there is kind of there are markets emerging there but, I think after a normative position is this probably suggests that we want to see more equity, finance in the economy, and that, would require very. Big changes, obviously most. Countries, strongly, favor debt financially, their tax system because you can claim debt interest, as a tax deduction which, you can't claim a similar deduction on equity, but, it would also require significant, institution, building because with the exception of the kind of very remarkable, venture capital system in Silicon, Valley Israel. And almost nowhere else, we don't have institutions. That really provide, capital certainly, for private companies or small businesses, other than in the form of debt so, big project that um, the. Second, problem from the financial system relates to these spill overs this idea that company. A can make an investment but company B gets opposed to the most of the benefit and some, of you may be familiar with the history of the, CT scanner, you know remarkable, medical invention that transformed, cancer therapy neurology, and so forth the. Origins of the CT. Scanner this is me and Jonathan's patriotism, again was it was invented by a British company EMI. You may be familiar with. As a record label but EMI, stands for electrical, and mechanical industries. And back in the day they were kind of classic 1960s. Conglomerate, they made everything from Beatles, LPS to kettles and one of the things that they spent all the cash that they made from the Beatles on was, the development, of CT. Scanner which is a project of a engineer. They had called Godfrey Hounsfield he. Pushed. This through he invented it EMI. Shareholders, sadly, made absolutely. Zilch out of the CT scanner because that market was immediately, dominated, by General Electric and by Siemens in Germany so. The shareholders, kind of made nothing now. This, is to, some extent a, problem for publicly, traded companies, for public equity, finance in an, intangible economy, and. There. Is some really interesting empirical, research in the finance field that, looks that seems to suggest that at least some publicly traded firms under. Invest in intangibles, there's a great economist, at, business. School called Alex Edmunds who looked at both R&D, and organizational. Capital, he worked out the companies that were very, highly rated for their organizational, capital, won awards Fred that you could trade off the back of that otherwise totally public information, they systematically, outperformed. Which suggests the equity markets don't, adequately, value, some of those things. Um. Again. There's a bit of a paradox here because if you imagine that there are spillover and you're, thinking how should watch on my portfolio be that, would on the one hand increase, the benefits of diversification, if you're a shareholder in EMI but you're also shareholder, in Siemens and GE you don't care that's EMI, don't make money because if you're sufficiently diversified, in that sector the spill overs you can internalize them even if the company management can't so, on the one hand you think this, is going to mean more, index funds more.
Advantage. To diversification. But. The flipside is that, it turns out that this effect, the, effect that shareholders, are wary of intangibles. Is mitigated. By concentrated. Ownership, because. Investors. Who, can do, who. Can do ambitious, due diligence, on these complicated, in tangible back project, again, there's evidence that they, are more willing to put up with good projects, on the without with ambitious, intangible based projects on management so that would suggest that, you would see more. Long-short. Hedge funds taking, very good doing lots of analysis you'd. Expect to see the returns to kind of detailed equity analysis rate, going, up and you expect to see more active management so it's kind of a bit of a paradox here and indeed that does sort of suggest it does evoke, the way financial, services are going where you are having a bifurcation, between more, kind of quite activist, and. Analytic. Heavy hedge funds but at the same time the kind of big pool of very diversified kind, of mechanical, traders. Um. Better, reporting, may help this the book that Jonathan talked about the end of accounting by 11 gu is really interesting because it kind of says, that we can fix some of this by providing bettering, for information, to investors but. It's not a panacea and again, the venture capital, sector is one way of doing this you take the per capital private to get rid of some of these these these these issues, but although, one. Of the struggles that places, like the UK and, other, developed, economies outside the US so struggle with is how do you grow your venture capital sector in, a fortunate position here of having one but they are quite hard to grow from scratch, um. The. Second thing. Worth talking about this kind of comes to who benefits, from the economy, and I, just want to go back into history a little bit to talk about how these intangible, assets tend to be contested. This. Is. Museum in Istanbul, this is the oldest, human law code the law code of ur-nammu King, in Scenario and. This. Oldest human law code details in very recognizable. Detail how, you can own tangible. Assets field houses, animals the kind of things people owned two thousand years BC. Humans. Have much less experience, in dealing with the ownership of intangible, assets depending, on how you cut it the earliest laws relating, to this are either from 1500s. Or 1700s. So human beings have had over three and a half thousand, years more to, get, our heads around what it means to own physical, stuff than, to own intangible, stuff and what rights we have over it and you know I'm a historian my background so I kind of think that the human, race needs time to digest things, we kind of a slow thinkers, on these important questions and one.
Thing That we know is that when the ownership of assets is unclear, or contested, all. Other things being equal that tends to reduce investment. And at. The risk of indulging. In a little bit more history this. Is the story of barbed, wire and what, it did to agriculture. In the West so this is kind of an analogy, from tangible, capital there's, a great economic history, paper by who and back a decade, ago that, looked at investment. In improving, fields, improving crop lands in the Wild West in. The 19th century and, it turned out that investment, in agricultural, land was quite low in that period because what would tend to happen is if you know you would dig, and drain ditches and do all these kind of great things with your field and then some cattle Baron's herds, will, trample it and they would eat all the alfalfa and you would have wasted your time but. Then there was an exogenous shock, in. The, late 19th century some. Guys invented, a very cheap, way of keeping cows, and crops separate, from one another which was barbed wire was much cheaper than fencing, there was a lot of trees, offense in the Wild West so they're meant to this technology and what. These historians showed is that there was suddenly a spike, in investment. In, agricultural. Land people started digging the ditches they weren't digging before and, it kind of shows that if you can fix these problems of contested. Nurse if you can show who, owns something who has rights to something then all other things being equal you'd expect more investment, it's more worthwhile and. More than happens, um, this. Gets us to a question which I know is very dear. To the hearts of at, least maybe some people here are some of your colleagues intellectual. Property rules so, who should own into intangible, assets and I think here there's a kind of interesting trade-off between the spill overs that Jonathan talked about and the synergies on, the, one hand if we think about spillover, this is a very standard debate, that many, platforms, have with rights holders, in creative industries, how. Do you best manage the spill overs this, is Blind Willie Johnson, one of the celebrated, blues artists, whose record was whose one of his tracks was on the voyage of golden disc sort of representative.
Of Human culture. He. Made, no money from his music he died, stony broke and you. Know kind of a tragic, example of failing. To internalize, the spillover sort of intangibles. The. Flipside obviously this is kind of the the, what sometimes gets called the Mickey Mouse chart this is the extension, of copyright, that coincidentally. Seems to keep, Mickey, Mouse continually, within, copyright, for Disney so, you kind of have a challenge on the one hand we, don't want a world where no creators, get the benefit, of their intangible. Investment, on the, other hand it's, equally problematic to have a world where rights holders, have a massive, incentive to continue to lobby to extend, their rights over things, that they created a long time in the past and, something. We think a lot about a day job and something I know Google spent a lot of time thinking about as well so, that's one issue of that IP but, of course there's another issue about IP which is if you have very tight rules how, do you get these synergies these kind of unpredictable. Benefits, when people bring together different, rights and you. Know where is the next for example Spotify. Who fought, tooth and nail by some, parts of the music industry but actually now kind of. Work. Well in partnership, the one thing that you might look, at here is if we, can improve the clarity of IP rules which means having kind of well-funded patent, offices and means paying, bureaucrats. Frankly, but coming up with effective, rules that, resolve. Some of these in clarity questions that seems to be a good way forward for encouraging investment. It. Also means if we think about who gains from a human level in this economy people. Who can make sense of. Tested nurse of assets who can bring together the synergies and fix the spill overs seem to do well one. Category of people who seem to do their heroic, entrepreneurs, people often talk about systems, innovation, and you know a lot, of mask story if you buy it is very much a story of bringing together synergies. A. Second. Group is people, with political, connections, if you think it's important to influence these things so the you know this is nearly Christ who European, Commissioner who, was. Taken on and role in uber where clearly working, out some of these issues the contestants. Of some of boobers very valuable intangible, assets he's a kind of big salient, point um. There's. Also kind of a thing where just traditional. Desk jobs which kind of people often think we'll get abolished will become more important, Robert, Reich the US economist wrote a book a long time ago when you talk about symbolic, analysts, people who make sense of stuff. Going on in capitalism, in the world they're, probably gonna get more important, as well and then, also there's kind of a question about leadership, I remember, McKinsey. Used to talk about the war for talent back in the 1990s. And obviously the cult of leadership, continues. But, to the extent that leadership is about bringing together these synergies about addressing these issues that, will kind of make sense why it's been kind of growing in importance.
Around The same time that these intangible, assets have been growing um. It. Also means, that cities, will become more important, this. Is one of the many stories I saw one on the front page of the Mercury News today about how San. Francisco, and by extension Silicon, Valley have become tough, places to afford housing I probably need to tell you guys that we have similar things in the UK in parts of the UK um but. One thing this does meet cities. Are places where these, spill overs are realized where synergies, take place people talked about the death of distance thirty years ago but so far the death of distance for the most part hasn't happened so, weirdly, in an economy based on intangibles, where you want to bring these ideas together. Physical. Places. Physical. Places where where, where people interact will, become more important, and it does mean you know if we take the democratic decision that we want to have very strict planning laws but, we don't want to build very much I'm, gonna make it hard to own houses that, choice will become more and more costly choice as time goes by there's. A kind of interesting twist here some, of you will have no doubt read thomas piketty's. Which, talks about the massive, rise of inequality, over the past few decades, one. Of the kind of commentaries, on this by Matt Hong Lee at MIT and by some other French, Economist's, pointed, out that a big chunk of the rise of the wealth of the richest people that pkt documented, was actually the rise in housing prices and there are many drivers for that including, you know interest rates and so forth but, it's notable that where that property tends, to be is in, these places where the intangible happens, there's a kind of very curious, link between intangibles. And this very tangible. Cities. Also becoming more sexually, diverse and there's a kind of Silicon Valley application. Here this is Youngstown Ohio a classic, steel town from the early 20th century and, clusters. In the old days economists and love clusters, but clusters, in the old days we're very often places where people, specialized, in one industry, it. Seems that because of these synergies there, are some evidence that clusters are becoming more diverse this, is some work by Shane Greenstein at Harvard who looked at the, bay area and how innovation, in the bay area was changing, the Bay Area's the blue line the other clusters, are in other lines and not. Only is the Bay Area responsible, for more and more patenting. In the u.s. it's, also responsible for more and more non tech, or non ICT, patenting, which, one, interpretation, of which is that clusters. Are becoming more diverse it's not just that you got to have a cluster that's really good at semiconductors. Or really good at fashion, but actually that. Union, now needs to be a cluster of everything. And. This. Kind of creates some trouble for small towns which are kind of historically, embattled. This. Rise of liberal Citadel's this was the New York the New York Times's graphic of Clinton's America you know this this this shows that some, of these economic divides. Seem, to be very. Intermingled. With the cultural divides that lie behind populist, politics.
This. Kind we think that part, of the rise of populism may be being influenced, by the fact that the economic divisions. Between thriving, cities are kind of very related. To the cultural divisions and we can talk about some of the psychology, behind that in the Q&A if that's helpful. My. Pitch, for what this means from a tech point of view, you. Know the the, mother of all demos was obvious, a huge. Step. Forward in distance. Killing technologies like videoconferencing, 50. Plus years ago I think this kind of the death of distance clearly, has not happened but, there is kind of a question well at, some point perhaps, distance, will. Die would it be VR will it be some kind of collaboration software, an, old colleague of mine has, just written a book on collective, intelligence how, people come together in different ways. You. Know this is if. One, could succeed, at doing, this at really creating, those kind of genuine, economic clusters at, distance, it, would transform, not. Just the, economy but it would transform politics, as well so for, me that's a kind of, non-obvious. Project. What. All of this means is an intangible economy, is one where inequality. Is, potentially, higher so we talked about wealth inequality a, ton of this comes from property prices, and as we've said property, prices are driven by this kind of rise of global cities as places where intangibles, happen, income. Inequality there's. Some really interesting recent, research showing that income inequality is driven as much by the gaps between the performance of different firms as by performance, between different workers, and. If that's the case then this rising. Gap between the leader and laggard, firms that we talked about earlier seems, to be a really important driver and then, we've talked about this kind of status inequality, inequality of, esteem the fact that in many rich countries, there's a kind of group of people who basically feels that the elite disrespect. That's, kind of more of a bit more of a problem than it used to be, this. Kind of to, us the, fact that you've got this cultural, and economic. Causes. Of inequality, intermingling. Seems. To seems to for us give some explanation, for why. This problem, is getting worse I'm. Gonna talk quickly about what. Governments. And what public policy might, want to do and then we're going to throw it open to questions. What. I think big question, is whether, this may very well create a stronger argument for, public investment, this, is a, chart from, some of Jonathan's research showing. The share of government. Public. Government publicly funded R&D, against. Against. Investment, in intangibles. In the wider economy there's, some, evidence that there's some correlation there, so government investment. Olds in private. Investment in intangibles. So. We, think there's a strong case of saying this will be more important, you might expect this share to rise and you know given this line it's probably gonna continue to increase, that's just more public investment as a proportion, of the economy over time which can be pretty significant. However. Speaking. As a public policy person, there's a lot we need to learn about how to do this well governments. Are reasonably, good at investing in academic, R&D, and basic science had a long time to think about how to do that but. Investing, in other intangibles, like training, or design, through procurement is something. Trickier, it's very interesting to see somewhere like Paris.
Where The government has set up a kind of publicly. Owned uber style clothing called my taxi, it's. A kind of an example of an intangible based publicly, owned business is that the way to do it maybe is it to create more open data which is effectively another publicly, provided asset, maybe, it's that but I think we're feeling our way in a way that with publicly, funded research we. Kind of know more about what's going on. The. Other big question we, talked about these big cultural and political divides, in the age of populism if you, want to make the case for more public investment how, do you do that in a world where political legitimacy is, undiminished. I. Think, that kind of leads us on to the question of well do, we need new institutions. For an intangible economy. The. First Industrial, Revolution gave, rise to all sorts, of institutions and social technologies, whether it was the time clock and the kind of labor discipline, whether, it was mutual, aid and insurance, to try and kind of manage what an industrial, worker the needs of an industrial workforce, whether, it's things like mass production, obviously there's a big literature on how the electrification, led. To an entire change in the way factories, and manufacturing was, organized so. Typically. These big technological, changes in how the economy, works have been really fastened, for social innovation and institutions. There were kind of arisen hand-in-hand with them so there is kind of question, well what. Else do we need one. Question, for me is how do we internalize, these, spill overs of intangible, investments, so, I talked about Godfrey, Godfrey Hounsfield the CT scanner guy and although EMI, did really badly. He. Did really well because the Queen gave him a knighthood and he was the fellow of the Royal Society and, he got a Nobel Prize that. Is one way of doing it we have us what so, society, can. Reward people with with, honors. Of one sort or another. But. You know that's a very kind of 1960s. Vision. Or a kind of early 20th century vision so, some. One question we often get asked is are there blockchain, applications, here, I think compulsory, and in, these kind of talks to mention blockchain at some point that's all I will do, but. I'm also fascinated by some of the things some of the experiments, that China are putting in place in terms of Social Credit clearly. There's a lot of political economy, questions, related, to that but, yeah I, see, a lot of very interesting social innovation, experiments, coming out of China and, then, finally how do you build these things in a more fractured society I'm, gonna leave it there there are some copies of the book here we talk about all sorts of other things we talked a bit about brexit, Trump and medieval.
History I got try and get as much medieval history into books as I can and. We. Yeah, that's where. We're kind of a open, opened question so. Thank. You first of all thanks for coming sort, of the interesting and I think very very important. One. Observation and also a question. There. Related. The. Chart. That you showed earlier, about. It, was about the increase, of intangible. Value. In the economy very linear and, my. Own thought, on it is that, we, may actually and should be on the, precipice, of an inflection point with, AI. And. Secondly. There. Was a book recently written, you may be familiar with by Kate. Ray worth, donated. Economics and then she argues that we. Should. Not. Be. Targeting, economic, growth and in. The traditional, sense of GDP I think. Sensible. But, seen, for you. How. Is, the, type of thinking that you guys are talking about being. Integrated into. National. Measures so that people will be satisfied that the economies are growing but it's not in nuts and bolts. Thank. You thank you for the question, just, quickly, on on AI I, mean one. View of AI. Listen. I'm talking, to a room, who is incredibly well informed about this so I slightly, hesitate here is, that it is somewhat, of an example of what we're talking about so if I think about some. Of what I read about machine learning and AI it, consists. Of incredibly, fast computers, so that's the tangible, bit. Interrogating. Gigantic. Databases. I mentioned, databases earlier on that's like an intangible bit as well using, fantastic. Software which does that interrogation amazingly, quickly to recognize faces, and cats and tables and all those various things so in a sense I guess. It's like, if I can put an intangible spin, on it it is precisely the kind of blend of the tangibles, with the intangibles. That. You see that's. One way of thinking. About it um as far as quickly as a donor economics, is concerned um I mean, the donor, economics, book I don't know if Cantrell, weathers come to give a talk here but it's it's it's essentially, a kind of very anti economists, book, so of course there's a card-carrying, economist, I find, it quite an annoying book in that respect but you know challenge is good so you know we ought to be reading all of this um I, think, her, core, message. In that book it's. Very much along the lines that we mustn't neglect the environment, if we have you know economic growth at all costs, we'll have pollution and all these very terrible, things and all that kind of thing along, the side she. Criticizes. GDP. As being an. Absolutely terrible measure of anything and at, that point I would take a little bit of issue with her but I think it relates to your question about you, know how we can sort of build all of this I think, our view, and we talked about this in the Indigo Prize that David, kind can be mentioned is that.
What We want to do is want to bring this stuff into GDP, and so make GDP, more reflective, of these types of intangible. Investments, which it currently is not so, bit of a slight crusade, for GDP in some ways but making, it more relevant to the, type of intangible, economy that's you know being built miss very building. Hi. I wanted. To ask about the. Economic. History of this so you should have chart at the beginning that, showed the intangible, economy sort of starting to rise in the 1940s, 1930s. So. Yeah I just wanted to wanted. You to speculate on like what the causes. Shall. I so, that's, a really good question it's, something we we, sort of mull over a bit in the book and we don't have a we don't have an absolute answer there. Is I don't know if anyone reads cosmical. Easy's various, blog posts, Santa Fe Institute he. Has this wonderful theory. That, the singularity actually. Happened in the late 19th century if, what, we mean is technological. Acceleration causing. An emergent, system, to basically have a life its own so his argument is that modern capitalism, the singularity, has already happened and all these technologies, are actually the kind of the, manifestation. Of that so. Be slightly less kind, of speculative, about, it I think. There is a sense in which, the. Nature of modern. Capitalism and by modern I mean sort of since about 1850, is. Just. Demands, a huge amount of organization. Of not, just ideas but relationships, between people, whether that's customers, and producers or whether it's producers, and supply chain and workers, and. What, the intangible economy, is doing is it's picking that up this, is the kind of accretion, of stuff. That is in some fundamental way very essential to, capitalism. Now, obviously although. We kind of said well maybe this came first rather than i.t i.t is, hugely important, because it's very complementary, to these things you, know you you. Can't have software. Without. Infrastructure. To run the software on. I.t. Various, sorts makes it a lot easier to record and build and accumulate, these relationships. So. It's definitely a complementarity.
There Another. Thing that's kind of interesting, to me is, that if you look at the relationship between. Regulation. Like labor market, regulation, and product regulation, by country, and you look at intangible, investment, in relation, to that less. Regulation. Of those sorts is linked, with more in tangible investment, and the kind of intuition, there that, people are Erik Brynjolfsson and John Berryman have talked about is that if, you, want to invest in new ideas buy a new products new ways of doing things it's potentially easier to do if you have a more flexible labor market if you have product markets, that are more, friendly to disruption, in new markets there's, kind of one other possible, driver that you know since about 1980. Many of the world's economies, have been on a kind of deregulatory, path, and, it's possible, some of those things, may. Have also increased, this investment, there, may be diminishing returns that we're not saying that you should have no regulations, at all but it may be that some combination, of ICT. Just, the general trajectory of. Capitalism. And, the. Regulatory the political economy might have might have been driving that increase. So, I wanted to comment that, there's. That. Traditionally. We sort of think of companies, as containers, of value and, one. Of the things, that we've seen in the last like thirty years or so is the rise, of open. Source where some participants, are actually militantly, opposed, to being called a company and yet, you want to measure somehow. What what, they are contributing. Have. There been any any efforts to measure. Like, for. Example for the free software foundation what. They're what, what the value, of their intellectual capital is. Yeah. It's a great it's a great question and and in. A sense some of these interesting. And difficult, properties, that we were talking about of these intangible, assets call, into question traditional. Measurement methods so the traditional measurement measurement national measurement. Method around software is to. Go out and find out how many software, engineers, are working and figure out their costs, and all of that and from that back out some kind of notion about, how much firms are investing, in new software, but of course if it's open source software, and it's being written, by, some group and then other people are benefiting from it as we were you know just talking about then, you understate. The types of a. Benefit. That come from, that kind of endeavor in a very substantial, kind of way so again it's one of the peculiar features of intangible, assets that make this whole project you know very difficult so statistical. Agencies accountants. Aren't bothering with any of this stuff at all national income accountants, and sadistic agencies are trying but. They come up against these kinds of difficulties, but almost certainly those. Kinds of contributions are understated in that way yeah. The whole question of how you measure the, kind of economy. Outside, firms is something that I think is a really is, a really tough and important problem. A. Little. Bit related, to one of the earlier questions so. We. Talked about how like certain problems like the, income gap or wealth gap or even like happiness kind, of stuff it's, kind of really getting worse and worse with like the evolution. Of the economy so, I'm just curious like do. We see like a trend of like evolving, our economy, as a society, like to kind of make.
These Things better are we kind of evolving, our economy with. Being a little bit vigilant of like the cons of capitalism. Or, even. Like theories, of people like Emily Durkheim, or are we really destined, to failure through our own success I. Think. I mean this I this, if we come back to this question of you know GDP. Grow is. It good for us I guess, there are you know there is quite, a bit of good, news that doesn't get talked about in the critique so if we think about the UN's Human Development Index, which is a kind of very. Earnest. Attempt to measure what really matters, for humans. That's. Extremely. Highly correlated with GDP so, there's so there's definitely some sense in which GDP, growth is associated. With these, these these good things economic. Growth seems to be associated with things, like greater tolerance on, the whole and with. You. Know paradoxically. Environmental, protection, if you see what I mean so as countries get richer often, they stop chopping down trees and start planting them and so forth now that's not to say that things, like climate change aren't, significant, challenges, to the economy, but it does give some it's. It's it's some reason. Not. To despair, I think, some of these questions like the rise of inequality, particularly, if it's driven by these changes, in the capital stock that otherwise are kind of useful. And productive I think that really is important. And my. Take and you know Jonathan's The Economist I'm the non economist, my take is that that's the legitimate, domain of politics that's what we should be thinking about from a political point of view and deciding. Consciously, as a society, what what what what, choices we want to make around distribution. You. Know just because the economy is training and participate, in particular dimension doesn't mean we can't, to being to create the society we want. The. Point to have is like like. Like I do agree like. Or. Like having. Like. How we are growing in terms of whether like technology, or like money that's, important, but, then, like I think, more, often like we actually see things like very differently I think maybe, it's a little bit more philosophical, but like we see when we talk about economy we just talked about like, kind. Of strategies. We should be used to grow like our income levels or like overall, ability, to purchase or things, like that while. We kind of totally, not, correlated. With like. The corresponding, changes, in the behavior or like the social structure, that happens, when, we are kind of targeting, certain things so my, point is like I think we. Need to be a little bit cautious of the other stuff as well so that while. We are really, kind of targeting, for like the overall growth maybe, there are like certain, things that we are not like really considering, which are like a by-product, or. A. Reflection on that and and and and you tell me if I'm not capturing your point I mean I think it's back to the age-old argument about what technology, does so. Speaking as a university, academic you, know the invention, of searching. The internet is fantastic. For me because I can find this paper in this paper and all that kind of thing it's greatly improved, my job massively on, the, other hand if you read for example the Financial Times their, employment correspondent, Sarah O'Connor has written a series of articles about the Amazon warehouse where. The invention of technology the software, for sort of monitoring workers seems, to be dehumanizing. Workers if you putting. Words into innovation. And these, workers in the Amazon warehouse you know we're really having quite a difficult time so maybe, I think it's part. Of what your question is pointing to is I think an age-old question. About whether technology might. Be a liberating, force for some workers stopping. Them from routine, tasks, but then might be you know particularly. Bad and an oppressive other, types as well that's a tough issue right. It. Seems, at least to me that the entertainment sector is becoming a lot more intangible, as well for example if I am you, know cancel, my cable subscription. And web surf instead. It. Seems a lot harder to measure you know we do have you know ads and so forth but I, was, curious you know, do. You think this is happening if so how can we kind of measure this light extremely intangible. Entertainment, value. Our. Web, surfing on social, media and so forth I. Mean. Again I think that's that's, in the box of a hard hard measurement, question, you know which people are sort of struggling with but. When. You're at the entertainment industry I mean I think the way that we think about it but we see intangibles, everywhere is this just bundle of intangible, assets we talk in the book for example about Harry Potter.
Before. Britain's most sort of famous innovation, in many ways it's, not only the script, but, it's also the computer graphics, it's the set design and all those kinds of things so I've got kind of bundle of things together which. You know creates, a particularly you know valuable type of asset but, of course that has to be delivered to people's houses via broadband, and cable and all that kind of thing about which there are many ownership, types of, types. Of arguments so there's a there's a big policy area. And. I think there's kind of there's two interesting questions, there arising, from this intangible. Sort. Of the increasing, intangibility, one, of which is kind of how do you measure the stuff that doesn't get paid for it's a kind of measurement question, there's, at the same time there's a question, which. You. Know rights holders and creators, would ask which is how, how. Do you get some payment. For things, that. Things. That people are consuming and are enjoying which is as much a question going back to this kind of contested. Nurse what are the terms of trade and what are the rules or, the rules these markets, and they kind of I think they're both they're. Both pretty pressing questions. Okay. Great last question. Very. Good question I have a. Purpose. Will be for you guys to help stitch them together point, me out where I'm conflicted, so the, first one is it seems to me like a reasonable. Claim, to make would be that as we as our economy gets more developed it's gotten more specialized. Seems. Like as it gets more specialized. The, distance. Between any two workers. Grows. So. The, job that I do and the job that he does I've no idea who this guy is. Is. Probably, functionally. Different like I don't think I could come in and do his job tomorrow I don't, think he could come and do my job tomorrow because. The context. Required to do our specific, tasks is is actually not that close to each other so it, seems like the more specialized, the, economy gets the kind, of like. I say distance, I don't know what I'm actually measuring yes further apart and that what that means is that communication. And organization. Become, a, more, important, skill in. Order to bind all these things together. That. Was like one random thought I had that if. And. Then the other was, that. You. Guys who clearly put a lot of thinking into funding. At a government. Like, country. Or even institutional. Level but, there's also an individual, level of funding that has to happen where I have to decide to go get a particular degree or not and I've decide even, within that degree you. Know what happens and so this other, point about specialization, is. The. More specialized, things become, some. Of those things some of those choices to become specialized, require. Very, advanced, funding on, the part of the individual, and to, the extent that our economy. Is maximized. By reconfiguring. All these jobs. That can