What is an “intangible asset,” and why are we investing so
much in them? How should intangibles be reshaping our approach to the economy?
Joining me today to answer these questions is Stian Westlake, the co-author
of Capitalism without Capital: The Rise of the Intangible
Economy. Stian is also the co-author of an important economic plan for
the UK, entitled Reviving
Economic Thinking on the Right, which we discuss as well.

Stian is a senior fellow at the UK’s national foundation for
innovation, Nesta. He was also a policy adviser to the UK Minister of Science,
Research, and Innovation. An Oxford and Harvard graduate, he is also the
founder of Healthy Incentives, an enterprise focusing on healthcare
initiatives.

Below is an abbreviated transcript of our conversation. You
can read our full discussion here. You can also subscribe to my podcast on iTunes or Stitcher, or download the podcast on Ricochet.

In Capitalism without Capital, you and
Jonathan make the case that there’s been a fundamental shift in the way that
the economy works, particularly in the turn to “intangibles.” Could you explain
what they are?

Once upon a time, businesses mostly invested in physical
things: machines, factory buildings, vehicles, computer hardware. That’s been
gradually changing for 40 years. Each year, businesses gradually invest less in
that physical stuff and more in what we would call “intangible assets.”

These are things that, like physical capital, have a long
term value. But they’re immaterial. Things like research and development,
designs, organizational capability, and even brands, marketing, and artistic
originals.

Why is this
difference significant?

From an economic point of view, intangible assets behave
differently from tangible capital. For example, if you’ve got a really
invaluable intangible asset like the algorithms that make the Uber application
work, a little bit of valuable intangibles go a long way. This is because we
use the same Uber application in London, in Washington DC, and in Budapest and
Hungary. It’s the same algorithm.

Now, contrast that with a tangible investment like a factory. You’ve got a factory, you have a limit to how much you can produce in that factory before you need to invest in a new production line or even a new building. So intangible assets are more scalable than tangible assets.

Are there downsides
that come with this shift?

There are. For example, those of you with long memories may
remember Nokia, the mobile phone giant. Nokia had a bunch of intangible assets
— operating systems and so forth. They also had a vast research and development
campus in Helsinki, Finland.

That campus, a tangible asset, as soon as Nokia got into trouble, was immediately sold. But while its operating system was bought by Microsoft for $5 billion, within 18 months Microsoft realized it was worthless and took the entire cost of that charge as a write–off. That’s why intangibles are often sunk costs.

Many of your policy
recommendations in Reviving Economic
Thinking on the Right are informed by the fact that intangibles have
created an economy with high-tech “clusters,” where lots of innovative businesses
huddle into a single city. What are your suggestions for maximizing the
economic opportunity that these hubs provide?

In all of these clusters we’ve seen skyrocketing property
prices. This is bad for the development of the knowledge economy, and it’s also
bad for ordinary working peoples’ wages.

When the housing market works well, you can move from a poor
place to a better-off place and earn a high salary even if you’re not in a
glamorous high-tech job. You’ll still earn more by making coffee, or cutting
hair, or being a builder there. But if all of that is being eaten up by your
rent, or your housing cost, or your mortgage, then there’s no benefit and the
economy doesn’t thrive from that.

So we recommend planning deregulation, making it easier to
build houses so that more people can take advantage of benefits to the
intangible economy, and the economy itself can improve.

As nice as that
sounds, this may force us to make big, innovative pushes in areas like
infrastructure and public transit. So is this even politically viable?

This is where the detail really matters. What we proposed in
the report is a way of getting around the political objection to deregulating
and planning. This is what we call “street votes,” or as it’s sometimes called,
street-by-street zoning.

The idea is this: at the moment, zoning decisions are
decided on a city level, neighborhood level, or even, in the UK, at a national
level. And in most cases, if ask people, “Do you want to make it easier to
build housing?” generally people say “No.” They don’t trust the government on
these issues, they value green space, they value low-density.

But the way around this is to say, “Let’s push this decision
down as much as we can. Let’s make it not to be done at a national or city
level — let’s give people the right to make these decisions at a street or
neighborhood level.” What that means is that if you get a majority of people on
a street who want to make it easier to densify their street, within limits, it
can happen.

Now, in some cases, you may be able to create big
agglomerated areas where people can both live and work through high-speed rail
systems, but more important is quality local transportation that allows people
to get from their home to their jobs.

That could mean better buses. I think the question with buses is: How do you make a bus something reliable, that people want to commute on? It’s partly about making sure you have more dedicated bus routes. And it’s partly about having reliable buses so you’re not sitting there thinking, “Ah, no! I missed my bus, I’ve got to wait 17 minutes and I’m going to be late for my job.” It is about making buses more like trains, or for that matter, more like Hyperloops.

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