Haskel + Westlake // Capitalism without Capital
Haskel and Westlake’s Capitalism without Capital boils down to an analysis of the causes and implications of a shift from tangible to intangible assets in the modern economy.
I found the chapter on Management and Monitoring the most interesting — I have said in the past I think the next job threatened by mass automation is not the driver but the middle manager, which I think is an implication shared by this chapter. (Also, I never made the connection between Coase and Hayek before.) …
So who decides in a noncentrally planned economy? Friedrich von Hayek was awarded the Nobel Prize for Economics in 1974 for coming up with a brilliant answer: nobody. To buy a pencil in a market economy, one simply goes into a shop to get it. Purchasers of pencils don’t know those who made the pencil — who mined the graphite, cut down the trees, or transported the pencil to the shop — so can hardly issue them with instructions. Those engaged in its production, the miners, the tree-fellers, and the truckers, take instructions not from the individual pencil buyers but via the price system. If pencil prices rise, more graphite is mined, more trees are felled, and more wood is transported. No personal authority is required, since the price system issues the instructions.
In light of this, in 1937 Ronald Coase (another Nobel laureate) asked a deceptively simple, but very profound, question: Why then do firms exist? If markets do a pretty good job coordinating the economy, what’s the need for firms? Coase’s answer was that firms did a cheaper job of coordination than markets. Inside a firm, Coase said, coordination by internal markets would be very costly since you would have to (a) discover what the market prices are and (b) negotiate a contract for each and every transaction.
This is where managers come in. If the market cannot coordinate activity but authority can, then someone has to exercise the authority. That person is the manager, where managers are defined as people in a firm who have authority. That’s quite a neat definition and is, indeed, used by statistical authorities when they run occupational questionnaires and ask people to self-report if they are managers.6
So, costs are avoided inside the firm via authority. Rather than haggling all the time, an employer tells an employee what to do and the employee does it. Hence, the role for managers. They perform the coordination activity within a firm that a market cannot, and they do so via authority.
Another interesting citation on why capital gains are taxed at a lower rate than income:
In countries like the United States and the UK, capital gains have since the 1990s been taxed at a lower rate than income. This is a political sticking point, not least because it is mainly rich people who have capital gains because they are much more likely to own capital. The reason for this lower rate of taxation is that capital is mobile, and so taxing it will, according to a large body of economic research, encourage its owners to shift their capital to a lower tax jurisdiction. The same can’t be said, or at least not to the same extent, for income from employment, since most people’s jobs take place in a particular location and are much harder to move. So, although it might seem fairer, from the point of view of redistribution, to tax capital income more than employment income (as governments in the 1950s and 1960s did, with their separate tax rates for “unearned income” and the like), most governments have concluded it is not possible: capital is just too flighty.
Here is the tldr; from the last chapter of the book:
- There has been, and continues to be, a long-term shift from tangible to intangible investment.
- Much of that shift does not appear in company balance sheets and national accounts because accountants and statisticians tend not to count intangible spending as an investment, but rather as day-to-day expenses.
- The intangible, knowledge-based assets that intangible investment builds have different properties relative to tangible assets: they are more likely to be scalable and have sunk costs; and their benefits are more likely to spill over and exhibit synergies with other intangibles.
- These characteristics have consequences for the economy. In particular, we argue that they contribute to:
a. Secular stagnation. Investment appears too low since some is unrecorded; scalability of intangibles allows large and profitable firms to emerge, raising the productivity and profits gap between the leaders and laggards; the slowed pace of intangible capital building after the Great Recession has thrown off fewer spillovers and enables less scaling, thus slowing total factor productivity.
b. Inequality. Income inequality rises as synergies and spillovers increase the gap in profitability between competing companies, raising the demand for managers and leaders with coordinating skills; wealth inequality rises as cities, where spillovers and synergies abound, become increasingly attractive, driving up the property prices; esteem inequality rises as psychological traits like openness to experience become more important.
c. Challenges to the financial system, specifically relating to the financing of business investment. Debt finance is less appropriate for businesses with more sunk assets; public equity markets appear to undervalue at least some intangible assets in part due to underreporting of such assets but also due to the uncertainty around intangibles; venture capital, a response to the sunkenness and uncertainty around intangibles, is currently hard to scale to many industries.
d. New requirements for infrastructure. In particular, the shift from tangible to intangible assets has increased the need for IT infrastructure and affordable space in large cities, while making greater demands on our “soft infrastructure”: the norms, standards, and rules that govern collaboration and interaction among people, government, and firms.
- This shift has implications for management and financial investing. Firms using intangibles become more authoritarian; those generating intangibles will need more leadership; financial investors will have to find information well beyond the current financial statements that purport to describe current businesses.
- The shift also changes the public policy agenda. Policymakers will need to focus on facilitating knowledge infrastructure — such as education, Internet and communications technology, urban planning, and public science spending — and on clarifying IP regulation but not necessarily strengthening it.
It was interesting to read this book directly after finishing The Revolt of the Public and The Crisis of Authority, as the two books touched upon many of the same themes. I far preferred Gurri’s book.