How do we make America great when we don’t make anything?

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

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Will blockchain be a net loss for jobs?

Will blockchain be a net loss for jobs?

By Scott Dennis March 4, 2017

It is early days in the world of block chain technology, so why worry about its effect on jobs? If you buy into the hype that is being dealt from bit coin fueled startups all the way to IBM’s New York headquarters then you would believe that the impact of blockchain will be no less as important as the internet. The internet is the world’s greatest printing press, disseminating information globally with limits however in its ability to trade items of value in a secure way. A new way of trading is essentially the promise of blockchain, employing the same technology that makes crypto currency detached from the usual gate keepers of money, developers imagined an open ledger where business transactions are ultra-transparent with an incorruptible digital trail. With blockchain the only element missing is the kind of trust that traditional banks currently enjoy, which advocates hope will come over time.

Will jobs be lost?

If champions of blockchain compare it so closely to the internet then in may be helpful to analyze its future impact on the job market by asking “has the internet been a job creator or destroyer?” As of this writing Snap Inc. a company that lives online is having its IPO rolled out and it will be put up on the bookshelf of e-businesses throwing off billions of dollars on paper. Despite the high profile earnings of similar companies and their millions of users the jury is still out on how the internet has affected workers.  The Economic World Forum has this to say in regards to internet effect on employment:

“According to calculations, current trends could lead to a net employment impact of more than 5.1 million jobs lost to disruptive labour market changes over the period 2015–2020, with a total loss of 7.1 million jobs—two thirds of which are concentrated in the Office and Administrative job family—and a total gain of 2 million jobs, in several smaller job families.”

On the other hand McKinsey & Company has leveraged its resources to come up with an alternative perspective:

“The Internet’s impact on global growth is rising rapidly. The Internet accounted for 21 percent of GDP growth over the last five years among the developed countries MGI studied, a sharp acceleration from the 10 percent contribution over 15 years. Most of the economic value created by the Internet falls outside of the technology sector, with 75 percent of the benefits captured by companies in more traditional industries. The Internet is also a catalyst for job creation. Among 4,800 small and medium-size enterprises surveyed, the Internet created 2.6 jobs for each lost to technology-related efficiencies.”

Why the confusion?

Analysts can come up with very different perspectives when asking questions about new technology because jobs need to be seen as different labor families, grouped into clerical, industrial, managerial for example. Technologies like blockchain will mean different things to different people or labor families. What we can say for sure is that blockchain has some important goals to improve market transactions, if you are working as an intermediary along a logistics, trade or other commercial chain the target is squarely on your back.  This is how blockchain offers added value fiscally, by blowing away an assortment of gate keepers that are seen as expensive and potentially unreliable. The near term question will be if the assurances of security and transparency are enough of a tradeoff to cast off many traditional jobs, only time will tell.

Scott Dennis writes for Blue Collar Think Tank