How to Fix the Intangible Economy

"Restarting the Future

By Jonathan Haskel and Stian Westlake

(Princeton, 303 pages, $27.95)

I was primed to be excited about "Restarting the Future: How to Fix the Intangible Economy" by Jonathan Haskel and Stian Westlake. The book's core claim is that "the economy is partway through a fundamental change from one that is largely material to one that is based on ideas, knowledge, and relationships" -- intangibles that, according to the authors, include software, data, R&D, design, branding, training, and business processes. Such domains, they argue, are now key to economic growth. To which I say, with caveats, amen.

Mr. Haskel is a professor of economics at Imperial College London; Mr. Westlake is the chief executive of the Royal Statistical Society. The two observe that while business investment in intangibles has risen for more than four decades, "the institutions on which the economy depends have . . . failed to keep pace." We now require "better institutions for a new type of economy" that would invest "in the ability to exercise good judgment" by "rebuilding state capacity." They admit that's "a tall order."

Messrs. Haskel and Westlake note that they're not talking about the rise of services over manufacturing -- which is old news -- but about all sectors, including manufacturing, having become "heavy investors in intangible assets."

It's a bridge too far, though, when they propose that the value of Amazon, Apple, Google and Meta comes mostly from intangible assets. These companies are masters of intangibles, but they're also titans of the tangibles. To give one example: Amazon's dominance is firmly anchored in hardware -- from warehouses, trucks and aircraft, to fiber networks, hyperscale datacenters and, increasingly, robots and Amazon's own game-changing microprocessor. The company certainly uses its intangible skills to its advantage in all that. But it's their fusion of the tangible and intangible -- of "bits and atoms," to use the phrase popularized by Peter Thiel -- that's the real revolution.

To be fair, the authors aren't focused on how intangibles are animated or why they're growing. They do note, late on, that intangibles go hand in hand with the digital economy. In fact, for two decades annual business spending on things digital -- software and the silicon hardware that makes the former possible -- has exceeded the other categories of capital expenditure (structures, transportation and industrial equipment). And the power of intangibles has been fueled by the new cloud-centric software-as-a-service industries, which over the past 15 years have vaulted in value to $400 billion a year from a few billion dollars annually. The digitalization of everything is the defining feature of our era.

Nonetheless, one can agree with the authors' premise that, after a "flurry of optimism" about technology bringing "great advances in prosperity," there have been some "great economic disappointments." The authors place much of the blame on the consequences of "dysfunctional competition," a declining dynamism that has led to fewer new businesses. They argue that intangibles such as operating systems and economies of scale have given big incumbents the advantage, and propose that governments exert more agency to give challengers "the best possible chance of dislodging incumbents," though not, they add, by "a new wave of trust-busting." They give short shrift to the well-documented intangible impact of regulatory burdens on business formation and exhibit a lot of confidence in bureaucratic management.

That confidence is on display again when the authors explore the economy's vulnerability -- to pandemics, climate change and other threats -- which they claim has arisen mainly from a "failure to invest in intangibles." Spending more on solar panels, wind farms and electric vehicles, they say, won't be enough; we need better systems, standards and agreements. As an example, they believe America needs a single electric grid -- a feature of most other countries -- to facilitate implementing those intangible policies. But America's seven grids and hundreds of utilities are a feature, not a bug, rooted in the Constitution's pesky federalism.

Similarly, we're told the tangible part of decarbonizing energy systems, whether it's batteries or new kinds of power plants, has "proved the easiest part to get right." What's missing, the authors believe, are intangibles such as "business models that allow people to charge their cars as easily as they fill up" with gas, and also "battery R&D to produce electric cars with sufficient range." But these aren't problems with a business model, they're challenges anchored in physics.

The book's concluding pages offer ideas for policy reforms, such as "targeted payments to the most vulnerable groups, as well as a more progressive tax system," that are supposed to help get money to the right people and places to address issues such as inequality. The pandemic, they suggest, "raised the political acceptability of these types of proposals, and now is a good time to adopt them," despite surveys showing that any such acceptability is highly correlated with political affiliation. They also call for more collective action and a "genuinely charismatic mission." Their examples: the Apollo program (everyone's go-to) and the Green New Deal, which the authors call "perhaps the most charismatic mission in recent years."

The book is infused with faith in smart bureaucratic governance, and reaches its denouement with a proposal to overcome those standing in the way of growth. The authors recommend creating "an apolitical, arm's-length" body of expert bureaucrats to "stop vested interests" from impeding or taking advantage of a "new, more capable state." They believe government needs more agency to combat the misdirection that began "since at least the Reagan and Thatcher eras," which they say led to those on the right to seek a reduction in "the state's size but also its agency and even its knowledge." This is, of course, the very nub of the debate about our future: the intangible philosophy of governance itself.

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Mr. Mills is a senior fellow at the Manhattan Institute and the author of "The Cloud Revolution: How the Convergence of New Technologies Will Unleash the Next Economic Boom and a Roaring 2020s."" [1]

1. You Can't Touch This
Mills, Mark P. 
Wall Street Journal, Eastern edition; New York, N.Y. [New York, N.Y]. 27 July 2022: A.15.