…they counted and measured physical stuff. In particular, they measured things with lasting value. These things became the fixed assets on accountants’ balance sheets and the investments that economists and national statisticians counted up in their attempts to understand economic growth. p2
Microsoft’s market value in 2006 was around $250bn. If you looked at Microsoft’s balance sheet, which records its assets, you would find a valuation of around $70bn, $60bn of which was cash an various financial instruments. The traditional assets of plant and equipment were only $3bn, a trifiling 4 percent of Microsoft’s assets and 1 percent of its market value. By the conventional accounting of assets then, Microsoft was a modern-day miracle. This was capitalism without capital. p5
He identified a set of intangible assets, assets that “typically involve the development of specific products or processes, or are investments in organizational capabilities, creating or strengthening product platforms that position a firm to compete in certain markets.” p5
…they all share the same characteristics of investments: the company had to spend time and money on them up-front, and they delivered value over time that Microsoft wa able to benefit from. But they were typically hidden from company balance sheets… p5
Our central argument in this book is that there is something fundamentally different about intangible investment, and that understanding the steady move to intangible investment helps us understand some of the key issues facing us todau: innovation and growth, inequality, the role of management, and financial and policy reform. p7
We shall argue there are two big differences with intangible assets. First, most measurement conventions ignore them. There are some good reasons for this, but as intangibles have become mroe important, it means we are now trying to measure capitalism without capital. Second, the basic economic properties of intangibles make an intangible-rich economy behave differently from a tangible-rich one. p7
…conventional accounting practice is to not measure intangible investment as creating a long-lived capital asset. p7
But as such investment starts to exceed tangible investment, it leaves larger and larger areas of the economy uncharted. p8
…intangible assets have, on the whole, quite different economic characteristics from tangible investment has has traditionally predominated. p8
…intangible investment tends to represent a sunk cost. p8
The second characteristic of intangible investments is that they generate spillovers. p9
The tendency for others to benefit from what were meant to be private investments–what economists call spillovers–is a characteristic of many intangible investments. p9
Intangible assets are also more likely to be scalable. p9
Finally, intangible investments tend to have synergies. p10
Part 1 The Rise of the Intangible Economy
2. Capital’s Vanishing Act
Investment is one of the most important activities in the economy. But over the past thirty years, the nature of investment has changed. This chapter describes the nature of that change and considers its causes. p15
The type of investment that has risen inexorably is intangible: investment in ideas, in knowledge, in aesthetic content, in software, in brands, in networks, and relationships. p15
There is the software behind the computer on the front desk, recording memberships, booking classes, and scheduling the staff roster, linked to a central database. The gym has a brand, which has been built up through advertising campaigns whose sophistication and expense dwarf those of the gyms in the 1970s. There’s an operaions handbook, telling the staff how to do various tasks from inducting new members to dealing with delinquent customers… All these things–software, brands, processes, and training–are all a bit like the weight machines…in that they cost money in the short run, but over time help the gym function and make money. p17
The part the looks superficially similar to how it did in the 1970s–the gym itself–has become shot through with systems, processes, relationships, and software. This is not so much innovation, but innervation–the process of a body part being suuplied with nerves, making it sensate, orderly, and controllable. p 18
Capital in the Twenty-First Century, [[Thomas Picketty]] definded capital as “all forms of wealth that individuals… can own.” p 19
Baumol’s Cost Disease p28
There are a number of reasons for the growth of intangible investment, including the changing balance of services and manufacturing in the economy, globalization, the increased liberalization of markets, developments in IT and management technologies, and the changing input costs of services. p35
3. How to Measure Intangible Investment
The problem was that output of the steel markets was an input to the car producers, so it would be double counting to add up both their outputs. This is why calculating GDP is muc hharder than you would think. p37
In practice, counting up production turns out to be hard, so the first estimates of GDP are calculated using spending, which is a bit easier to measure. p37
…quality adjustments were crucial in understanding US productivity. p40
In 1999 the US BEA introduced software as an investment into the calculation of GDP. p40
…the broader idea of investment in ideas, knowledge, and networks, whether enabled by new information technologies or not, endured. p42
And these changes added up. In the US, for example, the capitalization of software added about 1.1 percent to 1999 US GDP and R&D added 2.5 person ti 2012 GDP. p40
Let’s now look at the framework that has been used to measure intanglible investment. The first challenge of measuring anything in economics is one of definition: until you can describe what you’re measuring, you can’t begin to gather data. p40
They divided intangible investment into three broad types: computerized information, innovative property and economic competencies. p40
To measure in-house spending, statisicicians imagine there is a software or R&D or training “factory” inside the firm and try to measure how much spending it takes to run that “factory.” p47
This is only the first step, since this returns a figure for nominal spending. But that is not enough, for to measure investment, we need to know how much of that spending will last for more than a year. So that step is step two and is done by consultation with industry. p47
These two steps, then, give us nominal investment: spending times the fraction that is long lasting. Step three is to convert that nomial investment into “real” investment–that is, adjust that nominal investment for inflation and quality change, so we can compare 500 spend on software today with 500 spent 5 years ago. p48
All in all, quality adjustments is one of the most difficult areas confronting national accounts quotes [[Adam Smith]], who said “quality…is so very disputable a matter, that I look upon all information of this kind as somewhat uncertain.” p 48
To go back to our definition of investment in the pervious chapter, these are things that a) cost money, b) are expected to generate a longer-term return, and what’s more, c) the company making the investment has a reasonable chance of enjoying a worthwhile portion of the return itself. p49
Are marketing, organizational capital, and training really investments? p49
In fact, advertising did change, falling where it got more expensive and rising where cheaper. Overall, there was more advertising and product prices were lower, suggesting that consumers reacted to more advertising by buying more at a lower price. This is consistent with the idea that they had more information and the market was working better. p50
Capital gains do notarise from productive activity ans so are not production. It is simply a redistribution of GDP from the seller to the buyer. p54
GDP excludes production activites of households. So washing your own car, clothes, or dishes is not production; paying a cleaner to do so is production. This can, of course, create anolalies–for example, [[Paul Samuelson]]’s famous observation that when a man marries his cook, GDP falls. p54
4. What’s Different about Intangible Investment? The Four S’s of Intangibles
Those characteristics are summed up in four S’s, namely that intangible assets, relative to tangible assets, are more likely to be scalable, their costs are more likely to be sunk, and they are inclined to have spillovers and to exhibit synergies with each other. p58
This means that a business that is reliant on intangibles will behave differently from a business with mainly tangible assets. p58
…under four S’s: scalability, sunkennes, spillovers, and synergies. p58
Physical assets are often much easier to sell, even if they are quite specialized. Let’s call this characteristic of intangibles sunkeness. p60
In the language of economics, you could say that it is sometimes hard for the original investor to appropriate the benefits of intangible investment, or, to put it another way, that intangibles often have spillovers beyond the company making the investment. p61
Scalability
If I drink a glass of water, you cannot drink the same glass: it is a “rival” good. But if I use an idea, you too can use the same idea: the idea is non-rival. p66
Scalability becomes supercharged with “network effects.” A network effect when assets become more valuable the more of them exist. p66
The net result of this was described by the economist [[John Sutton]] in. the early 1990s: in markets where scalable investments (like R&D or branding) are important, you’d expect to see “industry concentration”–a relatively small number of dominant large companies. p67
Sunkenness
If a business makes an intangible investment and later on decides it wants to back out, it’s often hard to reverse the decision and try to get bacl the investment’s cost by selling the created asset–and, in general, it’s harder than in the case of a tangible asset. Economists describe these kinds of irrecoverable costs as “sunk.” p68
But its intangible assets are harder to sell. p68
First, some of these returns might be very high, high enough to reward all these risks. p71
Thus intangible investment might give a very high payoff via giving very valuable information to the firm about the opportunities that it faces, what is called an “option value.” p72
Spillovers
Some intangible investments have unusually high spillovers: that is to say, it is relatively easy for other businesses to take advantage of intangible investments they don’t themselves make. p74
So the tendency of intangible investments to spill over to other firms works on two levels. On the one hand, it is an inherent characteristic of assets thatconsist of knowledge, because knowledge is non-rival. At the same time, the differences between the spillovers of tangible and intangible investment are exacerbated by history. p77
Spillovers matter for three reasons: first of all, in a world where companies can’t be sure they will obtain the beenfits of their investments, we would expect them to invest less. Second, there is a premium on the ability to manage spillovers: companies that can make the most of their own investments in intangibles, or that are especially good at exploiting the spillover from others’ investments, will do particularly well. Third, spillovers affect the geography of modern economies. p77
Zero to One makes it clear that the way to create valuable start-ups is to create businesses that, as far a possible, have monopoly positions in big markets. p78
In [[Peter Thiel]]’s management philosophy, you create these defensible opportunities by investing in the right sorts of software, marketing, and networks of customers and suppliers (three classic intangibles) and bringing them together in ways that competitors find hard to copy. p78
Synergies
What made this possible was the gradual accumulation of ideas and innovations. The magnetron on its own wasn’t very useful to a customer, but combined with other incremental bits of R&D and the design and marketing ideas of Litton and Amana, it bacame a definining innovation of the late twentieth century. p80
“Exchange is to cultural revolution as sex is to biological evolution”; [[Matt Ridley]] described innovation as what happens “when ideas have sex.” p81
The microwave oven story also reflects another aspect of the synergies between different ideas–that they are often unpredictable and jump across domains. In this case, military information technology gave rise to a kitchen appliance. p81
If your ideas are worth more when combined with other ideas, there’s a strong incentive to get access to as many ideas as possible. p83