Capitalisn’t: The Intangible Economy
- May 19, 2022
- CBR - Capitalisnt
What do lighthouses, the wheelie suitcase, Harry Potter, and Wikipedia have in common? They showcase the progressive evolution toward investment in the “intangible economy”: one prioritizing knowledge, relationships, design, reputation, and other internal organization over physical assets. On this episode of the Capitalisn’t podcast, hosts Bethany McLean and Luigi Zingales sit down with Imperial College London’s Jonathan Haskel, author of the new book Restarting the Future: How to Fix the Intangible Economy, to discuss the characteristics and consequences of this economy, its value to society, the system of rewards and incentives behind it, and the role for government in regulating it.
Jonathan Haskel: It’s not that we’re removing all the frictions. It’s just that there’s going to be a different set of frictions in this new economy.
Bethany: I’m Bethany McLean.
Phil Donahue: Did you ever have a moment of doubt about capitalism and whether greed’s a good idea?
Luigi: And I’m Luigi Zingales.
Bernie Sanders: We have socialism for the very rich, rugged individualism for the poor.
Bethany: And this is Capitalisn’t, a podcast about what is working in capitalism.
Milton Friedman: First of all, tell me, is there some society you know that doesn’t run on greed?
Luigi: And, most importantly, what isn’t.
Warren Buffett: We ought to do better by the people that get left behind. I don’t think we should kill the capitalist system in the process.
Bethany: Here at Capitalisn’t, we’re always trying to figure out what works about capitalism and what doesn’t. It’s hard to look at modern-day capitalism, the great inequality that is resulting, and say everything is going perfectly. So, we’re always in search of guests who can help us elucidate and come up with new theories about what it is that’s driving inequality, because fixing this is core to making capitalism work.
Our guest this week is Jonathan Haskel, who’s written a great new book with Stian Westlake called Restarting the Future: How to Fix the Intangible Economy. In it, he essentially argues that there’s a lot of disappointment around the performance of many economies since the start of the century. One big switch we’ve seen is that previous growth has been driven by increasing investments in the intangible economy, and this was the subject of a previous book by him called Capitalism Without Capital.
In this new book, Haskel and Westlake try to diagnose why it is that growth has stagnated in many economies and what the role intangible investment plays, and what’s the right balance between the private market and the government in terms of stimulating investment in intangible assets. We think it’s an incredibly provocative and timely issue, because we’re all trying to figure out the underlying causes of inequality and the underlying causes of stagnating growth, and what we might be able to do differently.
Luigi: Why don’t you start by telling us what is your view on what is not working in capitalism today?
Jonathan Haskel: The nature of capitalism is changing very substantially. What do I mean by that? In the old days, what economies and firms would do is invest in very tangible assets: buildings, plant equipment, vehicles. Those are the things which accountants love to count and which traditional businesses—large oil companies, steel companies, businesses like that—are built upon. Those are the core assets for those businesses. But what we think has been changing gradually, almost unseen over the last 20, 30 years in most developed economies, is the movement towards companies investing in many more intangible assets.
By intangible assets, we mean assets that you can’t touch and feel: knowledge-based assets, relationship-based assets. We mean by that things like R&D, things like software, things like design, reputation, supply-chain management, the kind of the internal organization of firms that makes Walmart somehow very different from Kmart.
What we talk about in the book is two particular properties of intangibles. One is the spillover property. Once Apple had designed the iPhone, basically, within 18 months, every single smartphone looked like the iPhone. There’s a spillover effect, and that’s a force for equality. If everybody copies everybody else, then all boats should rise on that basis.
The other force, and the interesting feature of the intangible economy that works against that, is another tendency beginning with “s,” which we call synergies, which is the combination of these intangible assets, which is extraordinarily valuable.
Apple is an obvious example. It’s the combination of the software and the branding and the operating system and so forth. But if you’ll forgive me, coming from Britain, my favorite example is, of course, Harry Potter. The synergies in Harry Potter are the amazing script plus the software which goes into the movies, plus the theatrical design that goes into theater and all those kinds of things. That’s a second force, and that force means that the rewards are concentrated very strongly in the firms that are successful with those synergies. One of the things we think is interesting about this is, what seems to have happened is that the synergies seem to be having more effect than the spillovers.
That explains why it is that the successful intangible-intensive firms—the Apples, the people who do Harry Potter, Warner Brothers—are breaking away from those other firms. You might say, well, what’s going wrong with that? If firms are going to be able to reap all of these synergies, what’s going wrong? Well, there, we think that there’s something going wrong with the financial system, which is that for startup firms who want to try to reap these synergies and want to try to enter the market and knock the incumbent firms off their perch, it’s pretty difficult for those firms to go and raise money in the conventional banking relationships of raising debt and all of that. It’s very hard to borrow against intangible assets.
Luigi: In a sense, the underlying tone here is to say that there are some frictions in the way capitalism works that otherwise, if we fix this friction, whether it’s financing or it’s zoning, then everything will work fine. There is another hypothesis—and I’m not saying I necessarily believe this hypothesis, but I think we should entertain this hypothesis—that the way capitalism used to work in the past was helped by the fact that the physical element is important. Where raw material is located is important. Naturally, there are some fragmentations, there is geographic diversification, and this impedes, to some extent, a winner-take-all phenomenon. Once you remove all the frictions . . . Maybe we did reach this ideal, frictionless capitalism that we use in our textbooks. We finally reached it, and we found out that it ain’t so good.
Jonathan Haskel: I have a lot of sympathy with that. I mean, one of the features of the intangible economy is, to the extent that once you’ve invented a really good algorithm, you can scale it all up. There is that winner-take-all aspect to it. I think the frictions, though, Luigi, if I may say, in an intangible economy will turn out to be just different from the frictions in a tangible economy. I think that they won’t disappear. It’s just that they’ll be rather different. I wonder if that comes back to the synergies point that I was making. What are the frictions that arise when we try to combine those synergies?
The answer is, I think, at least a couple. One is, it’s quite difficult to manage these bundles of intellectual ideas. The ownership boundaries between ideas are much more fuzzy than the ownership boundaries between tangible assets. That’s one thing. The second thing, which follows from that, is that the role of management and leadership is going to be very important, because there are going to be big rewards for people who can combine those things. It’s not that we’re removing all the frictions. It’s just that there’s going to be a different set of frictions in this new economy.
Bethany: I wanted to come at the question of synergies in a different way, because one of the things you do so compellingly is articulate that there really are no easy solutions to this. I would have thought one of the solutions would be more competition. Just don’t allow mergers; allow a free-for-all where we get away from this winner-take-all mentality by having more startups, more competition. Yet that’s not the answer, as you point out, because it doesn’t allow these synergies to take place. How do you navigate between those two poles?
Jonathan Haskel: Yeah, I think this is really difficult. Maybe part of the reason why our kids like being on Facebook is because it is big and everybody else is on Facebook. What you don’t want is lots of little Facebooks running around, because then they’re not going to be able to talk to each other. Part of our view is when people say on the antitrust side that we want more rivalry and we want more competition, they’re absolutely correct. But when they go and look at these large firms and say, “Oh gosh, it’s all going wrong. The antitrust people have taken their feet off the gas.” We say, “No, be careful with that, because the large firms might be just a consequence of the different form of assets.” That pushes us towards being a little more cautious about some of those kinds of hair-trigger responses to having large firms, number one. Number two, it’s trying to use the good things about the digital economy that are procompetitive, trying to encourage those in helping competition policy.
One obvious one—again, forgive me if this is a very UK example—is price-comparison websites. When the digital economy and the internet were first invented, what I think all the economics textbooks were saying is: “Gosh, consumers are going to be able to sit at home and search between lots of different options just at the click of a mouse. This is going to inject massive amounts of competition.” Indeed, again, forgive me for using a UK example, insurance, broadband, all those kinds of things, vast numbers of consumers do indeed use that to search. We think harnessing the power of the digital economy in that regard is going to help on the competition side.
Luigi: If I may say, you are a little bit too cautious, because, number one, one of the big cases in front of the European antitrust is precisely a case in which Google allegedly damaged a comparison website that was a UK comparison website. It’s not only that these firms have become big, they’ve become big and they have made what creates competition less viable.
But there is a point that is often forgotten in this debate, that synergies and network externalities are a bit dependent on the technological choices and the technological regulation. When the phone was invented, there were enormous network externalities, so much so that we decided to make the phones interoperable. Today, the fact that I don’t worry whether you have AT&T or Verizon when I call your number is not because there are no network externalities. It is because we regulated them out of existence.
I don’t see enough discussion about actions to try to do the same, for example, in social media. My favorite line is, it’s true that when I post something on Facebook, I would like to post in the place where the highest number of people see it. That’s a big network externality, but on the posting, there is a big network externality. On the editing and the promotion and the selection and all the stuff, there are no network externalities. If we were to just separate the posting from the editing, you could have, if you want, a regulated monopoly in posting, but then you would have competition in editing, which is actually the part we care about from a democratic point of view and from all the stuff. If we were a little bit more creative, we could reproduce the right conditions without just stopping and saying, “Oh, there are these externalities, hence we need to live in a monopoly world.”
Jonathan Haskel: Well, Luigi, if I can come back to that for a second, if you’ll forgive me, I think we are actually rather agreeing with you. On the issue about Google and damaging price-comparison websites, we say in the book that the one thing we must do, if we are going to rely upon harnessing the good side, the procompetitive side of digital economy, is make absolutely sure that price comparison is working. That is just a plea, essentially, for precisely the regulators to concentrate their time and effort on exactly the kind of case, Luigi, that you were describing, rather than more complicated attempts to see whether buying up a company which might currently employ three people and a dog is a good or a bad thing. There’s a limited amount of bandwidth that the authorities have got. We’re very much with you on all of that. Likewise, on interconnection, those interconnection regulations have been very helpful in a lot of these network industries. As I say, we’re in a lot of agreement in that regard.
Bethany: What is the role of the government in the intangible economy, not only in these types of regulation, but you also talk about, which I found fascinating, the idea that, per the space example, governments should be the ones to steer more investment into the intangible economy, into areas that we all agree are valuable? That’s not traditionally the way hardcore capitalists think of the government operating. Where did you come out? What is the role of the government in the intangible economy, and should it be different than it was in the tangible economy? Does it need to be different?
Jonathan Haskel: We come out cautiously advocating a higher role for government around basic research. The space race, things like that, are examples where no individual company would undertake those types of investment unless they were backed by an eccentric billionaire. No individual company would undertake a space-race investment. It’s just too big. There are too many spillovers. Once one has devised microprocessors, materials, all those kinds of things, all those kinds of ideas are going to spill over elsewhere. That’s probably something which governments are going to have to do. And indeed, most economics textbooks would agree with all of that. We talk about lighthouses as being a kind of canonical example as well, of where there are these collective-action problems from these sorts of public goods. There, we’re cautiously saying, let’s have a little bit more government involvement to provide that basic research.
But going back to the synergies, the other example we talk about besides the space race is that remarkable innovation, namely, the wheelie suitcase. Because the wheelie suitcase always strikes us as being a remarkable counterexample. After all, the wheelie suitcase consists of a suitcase and the wheel just combined together. Now, these aren’t the product of a multi-bazillion-dollar administered, centralized space program with the world’s finest physicists working on all this stuff. This is the product of synergy.
Bethany: Can you only imagine what we would have gotten if the government had put multibillion dollars into developing the wheelie suitcase?
Luigi: By the way, we went to the moon before we invented the wheelie suitcase. This is an interesting factoid.
Jonathan Haskel: It is. As you say, Bethany, maybe if we hadn’t gone to the moon, we would have had the wheelie suitcase earlier, actually. But it’s getting that balance between the centralized, directed research, which solves these spillover problems, and the decentralized marketplace, which will experiment a lot. Getting that balance between the two is difficult. As I say, we are slightly on the side, at least when it comes to basic research, of a little bit more government involvement to help with those spillovers.
Luigi: But can I go back to your lighthouse example? Because, for the listeners, the lighthouse is the ultimate example of the public good. There is a huge debate with the best economic minds applied to it, because while it is an ultimate public good, there are plenty of examples of lighthouses that are privately supported. You, in your book, make a fascinating case about how differences in technology really change the institutions that are needed. Why don’t you tell your example? Then I would like to discuss that a bit, because I think it’s a very, very important point.
Jonathan Haskel: People talk a lot about good institutions and bad institutions, and we say, “Hold on a moment, we’ve got to fit the appropriate institution appropriate to the technology.” The story with the lighthouse goes like this. Every single society seems always to be worried about whether it’s a technological laggard or not. In 1851, there was a commission in Britain, it was a royal commission, actually—we do things properly in the UK. The royal commission was set up to investigate the provision of lighthouses. Of course, since Britain is a maritime nation, having lighthouses is a first-order issue. This would be like having roads without traffic lights. This is a really big issue. The issue was that in Britain, despite our maritime heritage, we had rather few lighthouses using old technology. Whereas the French—this was particularly irksome for British people— and indeed, the Americans, actually, had modern lighthouses using modern French technology.
The commission was set up to find out why. Well, it turned out that the British lighthouses, the institutional feature of British lighthouses, was exactly the opposite of what’s in the textbook. They were all privately owned, which comes as a surprise to many students of economics. The French lighthouses were all publicly owned. When you delve into that, you find that when lighthouses were first invented, really back to ancient Greek times, their production of light was pretty poor. They burned candles or coal or whale oil. It just didn’t project the light very far, which meant that lighthouses were suitable for going on the end of ports to signal the entrance to a port. That’s about all they were good for. They were no good for seagoing or oceangoing navigation because nobody could see the light.
From the economics point of view, if you put a lighthouse on the end of a port, you can fund it through the private sector. The reason you can fund it by the private sector is that every boat who goes into the port passes the lighthouse and pays a port fee, and so you can fund the lighthouse by wrapping it into the port fee. That is an entirely private-sector operation. You don’t need the public sector. You don’t need a big government, et cetera, cetera, cetera.
Well, in the early 19th century, Fresnel invented a new form of light illumination, which essentially revolved around prisons and concentrated the light and made the light cast by the lighthouse cast over a much longer distance. This change in technology meant that there was now a very different economic problem because the oceangoing boats could now use the lighthouse. They didn’t dock at the port; they sailed straight past the port. It was impossible to charge those ships. It became, from a sort of private problem, a kind of contracting problem, essentially, between two willing parties to a collective-action problem. This is exactly the public-goods problem that you read about in economics textbooks. And indeed, the French, where the Fresnel light prism was invented, they went for a very different institution, which is they went for government funding. And indeed, that’s essentially what the 1851 royal commission found out, which was that the French had the correct institution for the change in technology that there had been.
Luigi: Can you make the step of what is the analogy today? In what way has the appropriability changed and what are the institutions that used to be good in the past and now need to be changed, and what institutions?
Jonathan Haskel: The way the appropriability has changed now is, in general, with a more intangible style economy, there are going to be more of these sorts of spillovers around. There’s more pressure now, I think, on getting the institutions of appropriability right. For example, patenting and intellectual-property law, which essentially seeks to allow private firms to appropriate the gains that they get from intellectual property, there’s going to be a lot more pressure on getting the balance right between allowing the firms to appropriate those benefits and solve these spillover, collective action, public-goods-type problems, and the synergy problems that I was talking about earlier on where we want firms to combine all of those together.
Where that takes you is to one of the difficulties around the patenting and the IP, which is in the area of rent-seeking, what economists call rent-seeking. Rather than people attempting to invent great new things and then patenting them, people instead take out large numbers of patents and then start suing each other. Nothing gets done except arguments between individuals, essentially, about how to split up the cake. The cake doesn’t get any bigger. It’s just that people spend time and effort trying to divide up the cake.
Luigi: I was surprised that you were not more aggressive on this issue because, given this conversation, given that you go into details about the Wright example, how the Wright brothers stopped the development of planes in the United States by having some very powerful patents, why don’t you go more aggressively in the direction of abolishing the patent system or weakening it substantially?
Jonathan Haskel: I don’t think we want to weaken it substantially. I think the European and British patent system is somewhat weaker than the American system, actually. We’re already, as I say, somewhat weaker. For example, we don’t have software patents here, and patents are perhaps a little bit more narrowly drawn. I think we have to do some more work to nail all of this down, but I think we’re moving in that direction. We want, surely, I think, to reward some intellectual property. Listen, we’ve just written a book. We don’t want everybody to be able to copy that book without any kind of reward coming to us, because my coauthor and I, we’ve got to pay the school fees, so we want some IP protection, but we want to make sure that it isn’t undermined by all this wasteful litigation and wasteful rent-seeking.
Bethany: Another notion that you introduce that was new, at least to me, that I found interesting in its framing was that of dysfunctional competition. I’d love for you to pause on that and just explain what you mean by dysfunctional competition and whether you think that’s on the rise today in a more intangible economy as well.
Jonathan Haskel: Dysfunctional competition takes us outside of the economist’s comfort zone a little bit. That is around the labor market. A particular example might be the choice of schooling, the extraordinary pressure on parents to get their children into a particular school, upon the children themselves to then succeed in the school. In part, I think that is somewhat due to the intangible economy and it goes back to . . . Luigi made the comment earlier on about the winner-take-all sort of style of the intangible economy. Part of the reason why parents want their kids to get an internship in the top company and then their kids to go to the best college and then go to the best firm and all that is, if those best firms are pulling away from the other firms, those look like really choice jobs. I think there’s a sort of nexus there between that form of competition and the winner-take-all style, which comes about, in part, there’s a common feature around a more intangible economy.
Luigi: What you call dysfunctional competition is, as you said, the result of a winner-take-all system that is not necessarily the effect of synergies . . . It could be the effect of synergies, but in part it is the effect of rent-seeking. If I am a large organization, I can better control the political system, I can better make sure that my patents get approved, and get to extract rents, and so on and so forth. The best way to deal with that is, to some extent, to go after bigness. I know this is very unpopular among the economists, but there is a problem that big leads to big power, and big power leads to big corruption and an uncomfortable life for everybody. Because in the old days, you could have a decent living in Bristol or Liverpool by being a local guy there. Today, you have to be in London, or you are basically a second-class citizen. Isn’t the right way, from a democratic point of view but also from a welfare point of view, to go after big firms and find ways to break them up so that this winner-take-all effect is reduced?
Jonathan Haskel: Well, again, Luigi, let me try to meet you halfway there. What we say is, you want to go after the restrictive planning regulations that entrench those agglomeration externalities, so that only the richest people can move to London and take advantage of those kind of externalities and have themselves be adjacent to the large firms and so forth as well. We want to get rid of that system as well. The other thing is, we’ve got a lot of public funding of higher education in the UK. To the extent that that might be dysfunctional, and there might be lots of rent-seeking and so forth going on with higher-education institutions attempting to influence the way that money is spent and so forth, we’d like to see rather less of that as well.
Luigi: There is one point that I love about his book. Institutions need to change as technology and the economy change. What I am a little bit disappointed by is that he definitely has some very interesting ideas, but a lot of that is more on the margin than a major change. First of all, one of the interesting things that he says is, there is this problem, on the one hand, that intangible capital creates a lot of spillovers, and so that demands government intervention to produce more. On the other hand, there are synergies, so this stuff needs to be combined, and generally, the market has more of a flexibility in doing so. Now, there is a very rich area in, for example, open-source software that tries to do exactly that. It seems to me that this is a very radical change, because it’s certainly not government control or government-subsidized.
It has the benefits of the flexibility of the private sector, but without the veto power and the disproportionate return you can grab by doing an epsilon improvement. It does require a lot of coordination, but this is where there’s also a positive in the intangible economy. The coordination costs are much lower, thanks to all the communication media that we have.
There is also a development of some norms that are crucial. A book that makes this point very well is by Joel Mokyr—I think it is called The Gifts of Athena, if I’m not mistaken. It talks about how important the development of the academic norms of publication and citation, et cetera, cetera, have been for the West. You say, why is that? Because, think about it, how brilliant it is that people waste their life trying to find a discovery, and then they give it away free. In the world of, if you want, a capitalist economy, when you develop a new gadget, you lock it up in a patent and you become a billionaire. In the world of academia, you publish it. If you’re really, really lucky, you get a Nobel prize that, by today’s standards, is pocket change. What you really get is prestige. The system of prestige has fostered collaboration and innovation in a very complex economy.
It’s not because I’m in academia that I defend that, but I think that it is a brilliant system to promote innovation without giving disproportionate returns. Because I think that the tension is between what I would call the billionaire and the dead. I discovered that one professor at MIT is now a billionaire. Why? Because he was a cofounder of Moderna. He forgot to sell his shares at some point, like every finance person would say, you have to diversify. As a result of this, he has become a billionaire. Now, I’m all in favor of rewarding people, but did he need to become a billionaire to incentivize him or not?
The flip side of him being a billionaire is the fact that a billion people in Africa can get a vaccine. I think that tension is quite important, and contrast this to, I think it was Sabin, when he invented the polio vaccine, he gave it away for free. We were able to eradicate polio sooner, thanks to the free vaccine. We need to provide incentives for people to innovate. Not all incentives are monetary, and we need to think more creatively about how to create new incentives, so that we don’t also create these disproportionate outcomes.
Bethany: Hmm. That’s interesting. I don’t know that there’s a way to do that in any structured sort of way, because we are all wired differently, and we’re wired differently based on our genetics, we’re wired differently based on how we grow up, and we’re wired differently based on how our professions shape us. I don’t know that you can take a person of 30, 40, 50, and make them motivated by prestige, if they’ve been motivated by financial rewards their entire life.
By the same token, I don’t know that any sort of system can take someone who was always motivated by prestige and make them motivated by finance. Human nature may defeat the idea of systemizing this in any way. Maybe there’s something really healthy about a world where everybody is motivated by different things and we’re all competing based on different rewards. But I think your idea may break down in the same way Haskel’s thinking does, which is really, really interesting. What an interesting way to think about the world, but how you operationalize it or systematize it, I’m not sure.
Luigi: But sorry, Bethany, maybe I wasn’t clear. I’m not proposing to completely substitute incentives with this system. I’m just saying I would have expected, as a natural consequence of what he was saying, that he would go more down that path, because that path does exist. Think about the Wikipedia community. The Wikipedia community works very well through a system of prestige and incentives. Not through a system of money. People are not paid to do that, and it works quite well. I’m not proposing to substitute everything with Wikipedia. Certainly, in some sectors, you do need very powerful incentives.
But if you talk about intangible capital and you see the inequality that this intangible capital is bringing—which is not, in my view, a bug, it is almost a feature of the system—then you need to think about radically alternative strategies, because if you are in a world with a winner-takes-all economy and where the awards are disproportionate . . . First of all, he talks about trust, but it’s very difficult to develop trust when, if I can cheat you a little bit, I can become a billionaire and you are left behind. The incentive to deviate and not cooperate as a society becomes very big. We cannot just invoke that trust will come from heaven. We need to create a society that can support it.
Bethany: I understand your point, but the sort of people who are willing to go work for Wikipedia and do things to be part of a community are inherently different than the kind of people who need big financial rewards. The things that make those people different are formed throughout a lifetime, and it’s not that easy to switch people’s motivation.
Your point about trust is an interesting one. It does seem to me that modern social media exactly sits at this cusp of trust. The more we learn about how social media actually works, the less we can possibly trust it. It’s in their interest to keep secret from us how they’re actually making money and how they’re actually using our private information. Because the more we know about that, the more we would demand for things to be different. It seems to me that a lot of the modern economy operates on exactly the opposite of trust. It operates on a certain sort of deception.
Luigi: I think you are too pessimistic on this front. First of all, the millennials and even more so Generation Z, they are interested in something other than money. I think that if you were to give them the right incentives on other dimensions, they might pick it up more than, let’s speak for myself, me, old fart. But the second, there is a societal element, and we are in a time, unfortunately, of war. Why do people commit the ultimate sacrifice? Because of the recognition that is seen in society. The system that the military designed, the system of medals, is a brilliant reward system, because they pay nothing for the lives of people, but it is supported by a very strong belief system throughout society. I think that if we have a system that the only thing that matters is how rich you are, no matter how you made your money, then it’s very difficult to support anything else. I agree with you.
Bethany: Yeah. Maybe you’re right. Maybe I am too pessimistic. You’re right that there’s a sea change taking place in the world right now, post-COVID and with the situation in Ukraine, and that millennials, for all their faults and all the things that we complain about, are totally wired differently on this front. Maybe you’re right, maybe I am being too pessimistic. I guess my pessimism stems from looking more broadly at the world. Maybe it’s one way in which you are less pessimistic being inside academia and seeing a system in which people’s prestige and their rewards come not from a purely monetary sense.
What I see and worry about is that, more and more, prestige doesn’t matter that much. Staying a prosecutor for your whole life and bringing criminals to justice where you earn, I don’t know what the max is now, somewhere less than $200,000 a year, means that in most urban areas, you can’t send your children to the right schools, and you can’t buy a house in the neighborhoods in which you want to live. That kind of prestige of public service has come at a bigger and bigger financial cost and doesn’t make up for some of the financial losses in the way it once did, but maybe that’s changing. Maybe, like everything, that runs on a pendulum. Maybe we hit the pendulum before COVID hit, and maybe the pendulum was swinging in the other direction.
Luigi: No, but actually, I agree with what you just said, and it is true that the differential between the private sector and the public sector, especially in some areas, has skyrocketed. I have a working paper with two colleagues where we look at the difference between what the chair of the FTC or the position that the attorney general at the DOJ pays you, versus what being an equity partner in a law firm gives you. You always made more as an equity partner in the top, let’s say, 100 firms, but this differential has skyrocketed in the last 20 or 30 years. People are willing to give up some for the good of the country. They’re not willing to sacrifice everything. I’m not saying that you run only on prestige, because either you are a fanatic, or you don’t work. I’m just saying that you should mix the two.
And to your point, there is an element that’s hard to quantify. This is where we economists are very bad, because we don’t really have a cost of inequality per se. Extreme inequality does undermine some institutions in society, because you are so rich that you can look down on the prosecutors in your area. Part of the prestige and power of the prosecutor has disappeared. The power of the law goes with it. When I was a little kid, everybody was saying, why do you see so much gold in the church when there are so many poor in the world? The answer that I was always given is because you want to maintain some prestige in the place where God is, et cetera, vis-à-vis the rest. If you don’t have some reward, then you don’t have the prestige, and without the prestige, you don’t have the credibility and enforcement, all the things that go with it.
I’m all in favor of giving rewards. I’m just saying, especially when it comes to innovation, whether rewards can be in the billions, maybe if we could fine-tune them, it would be better.
Bethany: But I think I’d come back to my original criticism of both Haskel’s point and your point by asking you this: how would you operationalize this? How would you take your argument about the importance of prestige from the realm of the theoretical to the realm of the practical? Just as our question for Haskel was, how do you actually take this balancing of spillover effects to the realm of the practical? What do you have governments do? What would you have governments do? What would you have society do in order to make prestige, once again, be a more important part of the value equation?
Luigi: One idea that is also present in the book by Haskel is the use of prizes. Now, prizes cannot be used for everything, because you need to have a very defined objective. Sometimes you don’t even know the objective. It’s difficult to say, I want to create a prize for creating the iPhone, when nobody had an idea what the iPhone was, but for the vaccine, it was relatively easy to say, I want a vaccine with this level of effectiveness and this level of cost of production. Prizes motivate people from a monetary point of view but also from a prestige point of view. The evidence is that people overinvest in trying to get the prize. For example, there was the famous competition to go across the Atlantic, the first person to fly across the Atlantic, the Lindbergh one. I saw some accounts that people had invested five or six times the prize, collectively, in order to reach that prize.
There was a lot of investment. Part of it is, again, the prestige that we know who Lindbergh was because he crossed the Atlantic. Maybe if there wasn’t a prize, we would not know his name. It’s not only the government. The government can do this through prizes, but also, we as a society in general can organize. I think that having maybe some weakened patent system in exchange for more collaboration could be a useful thing. I’m not an expert in patents, but I see some benefits in going in that direction. And to be fair, in the book, he mentioned that as well, but there’s not too clear of a connection with how you set up, for example, an open-source software system.
Bethany: Yuri Milner along with a bunch of Silicon Valley people, including Art Levinson and Sergey Brin, and Anne Wojcicki and Mark Zuckerberg and Priscilla Chan, created the Breakthrough Prize. I think six $3 million prizes are given to scientists and mathematicians. It’s an attempt to create the very thing of which you speak, and what I don’t know and what would be interesting to look into, is what has that done? Has that led to big breakthroughs? Has that created more collaboration? Has the work done in the quest of those prizes ended up changing the world in any fundamental way? And, per your point, has it led to more collaboration, or has it created a grabby culture within the very fields that we are celebrating for not being grabby? By grabby, I mean a very ineloquent way of saying financially motivated, but has it created a me, me, me attitude in what might have once been more collaborative?
Although I say that with emphasis on the word “might.” I’ve read a couple of books about the race to create the vaccines, including a great book by a guy named Greg Zuckerman, who’s a Wall Street Journal reporter, and he points out how much the fields of science can also be very competitive and focused on stomping out your rivals, because what’s at stake is the credit. That’s the most important thing you can get. So, I’m wary of saying that fields in which we’re focused on credit rather than focused on money are innately more collaborative. I don’t think that’s true. But nonetheless, back to my point, it would be fascinating to look at the real impact of the Breakthrough Prize, if it’s been in existence for long enough to be able to see it.
Luigi: I think that’s an excellent idea, but let me clarify one thing, because you are right that academia can be extremely competitive. There was a very famous joke, I think it is from Kissinger, that when he moved from academia to politics, he said, “Oh, what’s the difference between academia and politics? They say in politics that it is dog eats dog. And I said, what’s the difference in academia? It’s the other way around.” There is a lot of intense competition. However, the difference is, and how the collaboration comes, once you’re proven the result and the prize, then everybody can access that freely without any patent trolling or anything like that. In that sense, you can more easily get the synergies.
What I got from the book is that you really want to be able to pick and choose various ideas in new ways. The beauty of the iPhone . . . The iPhone is not a breakthrough innovation. It is a phenomenal ability of putting together a lot of different innovations in a very cool combination. But that ability is somewhat impeded by the patents that become a veto right rather than an enabling characteristic. The beauty of academia is that once I give you proper credit, I can do whatever I want with that and combine it the way I want. Credit is free.
Bethany: There’s something innately interesting in that. One of my favorite classes in college was a class on Samuel Johnson, and he had a great quote, which I’m not remembering the exact words of right now, but it basically asks whether brilliance is the ability to think of something that nobody has ever thought of before, or the ability to pull together ideas and then say the thing that everybody sort of knew but had not figured out how to say yet. I was thinking of that when you were talking about the iPhone, that there’s an interesting analogy between that and innovation. Is innovation coming up with the brand-new product that nobody else has ever seen, or is it the ability to pull together things that already exist and create something new and shiny and sparkly out of that?
I’m hung up on this idea of practical application, though. I’m going back to Haskel’s point even about synergies. He offers a really interesting way to think about things. It makes me realize that I have been reflexively antimerger. I would have said, just get rid of them all. Let’s have an FTC that is much, much tougher, and reading his work made me think that’s not right. There’s no easy answer to this. We need more nuance in how we approach mergers, but I’m not sure on a practical level that we’re set up to do anything other than black and white, that we can do this kind of nuance in a thoughtful way. Government rules and regulations don’t do nuance. I don’t know, once again, when you look, even at that specific example of synergies, how you create a system of approving mergers that fosters synergies and gets rid of the negatives associated with mergers.
Luigi: I actually think that you were oversold on that point. I’m not so keen. I thought that was one of the weak points of the book, because he sounds like very laissez-faire on that front. I actually think that a lot of the synergy can be captured in ways other than through merging. After all, you can have joint ventures, you can have other activities. Why do you necessarily need to own the entire other firm in order to collaborate? We know that owning is very useful to exert market power, but everything else can be done through contracts. I’m exaggerating a bit. But if the contracts are legal, there’s no problem. The only contract you cannot write is a contract to fix prices. That’s the reason why you merge, because imagine a world in which you can do everything through contracts. Then, the only reason why you merge is because you want to do the one contract you cannot do without merging, which is fixing prices.
Bethany: That’s a fair criticism. I’m too drawn to points that when I have dug in on something, I’m always very drawn to points that force me to reconsider how dug in I am. I’m so dug in on this question of big being bad that being forced to reconsider felt like a bright light going off in my head. That always makes me happy.
To me, the most depressing part of his book is this idea that investment in intangible assets has slowed so dramatically, because you might like to believe that even if the innovation that is happening is bestowing the rewards in a really unequal way that isn’t good for a society, you’d like to believe that the whole thing isn’t fundamentally broken. But if the level of investment is falling, then it does seem to me that the whole thing is broken. He noted in his original book that the pace of intangible investment seemed to have slowed since the 2007, 2008 financial crisis. But in this book, he says, yes, it actually has slowed.
Luigi: Sorry, this is the UK or the US or the world?
Bethany: This is the world. If that is what has been driving any growth we’ve seen, even at the cost of growing inequality, if that’s slowing, I do think that adds urgency to his work and urgency to finding an answer to the problems that he lays out.
Luigi: Yeah. I’m a little bit concerned. I need to look more carefully, because the measurement of intangible investments is particularly bad, and something incredibly important happened during this period, which is Amazon Web Services. Think about it. If I want to start a bank, how much did I need to invest in software and intangible stuff, but also hardware—hardware is more tangible, but I think the organization around it—versus I can get a lot of stuff as a service from Amazon? Has the real investment gone down, or has the price of the investment gone down? And I think that remains to be seen.
Bethany: That’s a good question. I don’t know the answer to it. I think pulling out one example of growth and intangible investment growing and leading to economic benefits doesn’t necessarily obviate his point, because you could have a piece of growth, a bright spot within it, and still have the overall number declining, but you’re absolutely right that it is all in how he’s measuring it, and that I don’t understand either. There may be a way, just like in our piece about private-equity returns, where two people can look at the same set of data, ostensibly, and come up with two very different answers. That analogy may hold here, that if you tried to come up with your own measure of whether the investment in intangible assets was really falling, you may say, “No, he’s looking at this the wrong way.” But assuming he is right about that point, that, to me, does add urgency to his work, because that’s something I do think we want to understand and fix and change. That’s an all-is-not-OK signal.
Luigi: If that’s the case, then it must be that there is a huge increase in market power, because we see that the difference between the market value and the book value of companies has skyrocketed. If it’s not market power, it is the result of past intangible investments. But if intangible investments have gone down and the realized value of intangible equity, let’s call it, has gone up, something is amiss. Maybe that’s a sign that something is fundamentally wrong. I was trying to push him on this point to say, how can you say that there are not enough incentives when people become billionaires along the way?
Bethany: Well, it’s entirely possible that he’s right about the slowdown in intangible investment and that it does prove the point that we have a winner-take-all world. I think we got at that a little bit in the podcast that these business models that are so powerful and richly rewarded today are winner-take-all models. They’re not sharing models. Has the world fundamentally flipped? If the sort of businesses being rewarded and that are easier to create today are winner-take-all businesses, that adds another wrinkle in how we think about this.
Luigi: Yeah. But if that’s the case, that’s where I’m worried about incrementalism, because if that’s the case, we need more than just incremental reform to fix the system. If we think that the world is going in the direction of a few large, winner-take-all firms, what do we do to keep society together, because it ain’t pretty?
Bethany: Precisely, that’s my point about urgency. That is the piece of his argument that adds the weight of the moment to it, that this is something we need to look at and consider and fix. It’s not just a theoretical argument. It wouldn’t be a theoretical argument anyway. If this were leading to increased inequality, that’s still something we need to answer. But if the thing itself is also breaking, then it’s an urgent question for us.
Luigi: I agree.
Bethany: Today, for our capital-is, capitalisn’t, Luigi and I wanted to talk about the extent to which corporations should take stances that are political in nature rather than simply focusing on their bottom-line profits.
Luigi: There’s been a major brouhaha on the internet because a memo from a company called Zeno, which is a PR firm affiliated with Edelman Holdings, was leaked. And this memo was suggesting its advisees to stay quiet on the issue of abortion, at least yet.
Bethany: Then, the New York Times weighed in on May 4th with a piece that was headlined, “Corporate America Doesn’t Want to Talk About Abortion, but It May Have To.” The piece noted that antiabortion activists are thrilled with corporate America’s silence. Prochoice advocates are less thrilled, which I thought was interesting, because I think that’s more reflective of the Supreme Court’s leanings than it is of any underlying philosophy on the part of either group. In other words, I think that if the decision had somehow gone the other way, the antiabortion activists would be saying, “Corporate America needs to speak up!”
Luigi: Yeah, and let’s be very clear with our listeners. We are no experts on the abortion issue, nor do we want to take a stand in favor of one side or the other. We actually want to discuss the principle, should corporate America be involved in all of these political issues, from the law in Florida limiting sexual education to children below a certain age to the abortion issue to many of the issues that have come up and that will come up.
Bethany: I fear, Luigi, that we’re going to end up agreeing. Horror of horrors. But I think both of our answers on this are, no, corporate America should not be involved. And I come at it, actually, from both ways, in the sense that I fear corporate America’s power if they do start to take a stand, and it’s very easy to applaud it as long as they’re taking a stand that you agree with. But if they start to take stands that you disagree with, I fear that these days, corporations are more powerful than our elected leaders, and I don’t want the two in competition. I fear which one might be the victor, although maybe I shouldn’t fear that, given that sounds like I have great faith in our elected leaders, which I’m not sure that I do.
But then, coming at it from the other direction, I also don’t think that corporate America actually . . . well, the power that they have to move the needle on these issues is power that is directed in subterranean ways. And I’m not sure that I like that, either. I think that these big questions should be decided by law, not necessarily by subterranean ways in which a corporation might be able to move the needle.
Luigi: I agree, but to be fair, take, for example, Disney Corporation. I don’t think that they are saying that they want to change the law in a subterranean way, but they took a very strong position saying that our goal as a company is for this law to be repealed by the legislature or struck down in the courts. The fundamental question, which, by the way, is very much linked to the Supreme Court’s decision in Citizens United, is what role corporations have and should have. On the one hand, you can think of a corporation as simply an aggregation of individuals. Like individuals have freedom of speech and freedom to advocate for their political position, so should corporations.
However, I am very worried about both the power they represent and the lack of accountability for their decisions. We don’t know who they represent. Is the CEO, for example, of Disney representing Disney’s workers? First of all, he’s not elected by Disney’s workers, and second, which workers? The workers in Florida? The ones in the United States? The ones in the rest of the world? Imagine a company whose majority of workers are Chinese. Should we have a company in the United States lobby to change a US law based on the pressure of the Chinese workforce? I would find this very, very disturbing, and not because they are Chinese, but because they have a different set of values, and I do believe in democracy. I fear that corporations playing an excessive role in the democratic process might end up undermining it in a very serious way.
Bethany: On the surface, yes, the Disney example repudiates my point, because Disney is being absolutely transparent about what their goal is as a corporation. There is nothing shadowy there. But the, when you look underneath it, it’s absolutely shadowy. How did Disney come to the decision that this was their statement as a company? Did they poll their workforce? Did all the employees get to vote that this was the answer they wanted, or did the CEO decide? Did the board of directors decide? Did shareholders decide? So, I think my point holds, which is that even in this supposedly transparent move, which is Disney stating, this is our goal, there’s actually a real lack of transparency and a real lack of accountability as to whose decision this is.
Luigi: And remember that, at least for the time being, CEOs and board members are appointed for their business acumen, not for their representation of the will of the people. If we were to change that, we would transform corporations into little political bodies, which is not exactly what we want to do, given that political bodies don’t seem to work so efficiently. I think that this would be the end of corporate America as we know it.
Bethany: Well, Richard Edelman might applaud this. The results of his survey say that corporations are more trusted than anyone else in the world, right? More so than journalists. Probably more so than economics professors.
Luigi: That’s a low bar.
Bethany: Definitely more so than our elected officials. So, maybe we should just scrap our whole system of democracy and replace it with a corporatocracy in which big companies get to rule the world. I’m obviously joking. I agree with everything you just said.
Luigi: On the other hand, I would think that it’s perfectly legitimate and, in fact, might even be wise for companies to offer employees who work in areas where abortion will become illegal the ability to travel or even pay for traveling to have an abortion in another state. That would be, in my view, a very legitimate way to use corporate resources, because they might not be able to recruit a good workforce in certain areas as a result of that.
Bethany: I think we both agree that Disney’s recent statement is a capitalisn’t.
Luigi: Yes. Companies should stay away from political statements, but they should put their money where their mouths would have been to help workers in need.
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