How do we make America great when we don’t make anything? The Role of intangible capital in our economy.
by Scott Dennis
Recently Microsoft founder Bill Gates reviewed a new book looking at the expanding role of intangible assets in a global economy driven by the technology sector. He takes time to mention that the authors
“..don’t act like there’s something evil about the trend or prescribe hard policy solutions.”
Although his review was meant to bring attention to this economic trend the Freudian slip by Mr. Gates should cause people to ask if an economy built on intangibles is good for people or not?
Capital that cannot be touched is not new, for instance value in branding has been part of the modern economy since the start (think Colgate or Cadburys) and patents which are essentially just ideas spelled out on paper were widely used in 19th century France. The question that leads to concern is when value of a company becomes almost entirely intangible how can its true value be measured? Let’s use Toyota as an example an auto manufacturer that still lives in the standard economy because it follows the following economic logic:
The total cost production increases as supply increases because it takes a certain fixed amount of labor and materials to make the cars. The labor and materials are a type of capital inherently required to make Toyota cars.
Now imagine that Toyota was originally conceived as a brand of computer software, perhaps a large amount of resources are put into the initial launch of their product but the cost of production does not increase as supply increases because unlike cars each additional unit of software costs virtually nothing to produce. In today’s economy it is likely that the Toyota brand as a software company could very well be more valuable and in a shorter time frame than the company that has produced high quality tangible automobiles.
At this point let’s stop to consider that with the cost of capital requirements for production diminishing and only one (Exxon Mobil) of the top highest valued companies in the world actually working with a normal cost to production ratio in 2018, is this a good trend for our economy and if so who benefits the most?
The first thing that may come to your mind as you compare the tops ten list from 1998 to 2018 is how much human capital (labor) would be needed to run the 1998 group versus the top ten of today. With the exception of Amazon the top companies in 2018 employ roughly half the amount of people than in 1998, although the majority of the Amazon employees work in minimum wage warehouse positions with no union representation. Even from an investors point of view this new configuration seems like it creates a lack of equilibrium because the most successful investors has always had a mix of profitable operating companies with predictable valuations due to ownership of capital (warehouses, machinery etc.) in order to buy up shares when the market slumps; this is a simplification of Warren Buffets “two buckets theory”. With the new economy – investment dollars are “sunken”, that is to say if things go bad there is no capital to sell in order to offset your losses. Certainly there are synergies, faster scaling and overflow opportunities with intangible companies
but the concern for workers is that the underlying business plan for these companies is to create and support a network of more and more gig economy platforms, eliminating jobs that provide security and real wage growth.
Certainly Uber and Lyft are good for a sector of workers but our whole system cannot be supported with this model.
If the role intangibles assets companies are going to change the equilibrium of our market economy what role does labor have in the valuation of intangibles?
Labor organizations need to find their footing in the form of political power and legal reform when it comes to dealing with the new economy. There needs to be a firewall between the speculative stock of companies over leveraged in intangibles and public funds that support communities or even private ones that sustain colleges. The overwhelming wealth gap needs to be addressed in terms of tax reform. If these companies are holding billions in cash it’s a clear indication that the system is warped, cash is simply a vehicle to purchase goods, services or build more capital not to horde. It is clear that intangible companies are not contributing enough to the community that makes their business possible.
Scott Dennis writes for the Blue Collar Think Tank