The most important statistic in the world is surely growth in output per hour worked (or productivity).
Growth in output per hour worked is what underwrites everything. It pays for the modern world.
So it’s a tad worrying that productivity growth has slowed down a lot. In the US, between 1948 and 2010, productivity growth averaged 2.3 per cent. Since 2010, it has averaged 1.2 per cent.
It's the same over in the UK. The UK shows what 15 years of low productivity growth does to a country. They're on their fifth prime minister in six years, and Rishi Sunak is facing into winter of strikes, tax rises and spending cuts.
In the high productivity growth New Labour years, by comparison, there was enough money to pay for everything. Low taxes and a big investment in public services.
It's the same in the rest of the rich world. Productivity growth slowed a lot after the global financial crisis. What's going on?
It might be something to do with the superstar company phenomenon I wrote about two weeks ago: a new species of super-companies are leaving the competition in the dirt.
Across all industries, from retail to finance to technology and logistics, the biggest firms are getting bigger and more efficient and more productive and leaving the rest behind.
It's probably something to do with software. A 2020 paper by Brynjolfsson et al found what it called "digital capital" had disproportionately accumulated at a small number of firms, and that digital capital in turn predicted productivity.
The implication for investors is big: you really don't want to invest in the median company in a given industry. The superstars suck up all the growth and returns.
Old and new models
What's the connection between slow-growing economies and superstar companies?
Well, the thing that has propelled superstar companies to the top is their investment in intangible assets.
Intangibles are things that are useful and valuable that can't be touched. Software is an intangible asset. Brands, research and development, management practices, content, skills, and patents are all intangible assets.
Tangible assets, by contrast, are ones you can stub your toe on. Like buildings, machinery and inventories. The 19th and 20th centuries were all about tangible assets like factories and machinery. The name of the game was combining labour with tangible capital.
But over time, the knowledge economy has kicked in. Software, brands, formulas, data, and algorithms are what make modern superstar companies valuable. When you open an iPhone for the first time, the box says "Designed by Apple in California". There is no mention of the factory in China, owned by a subcontractor, that manufactures the thing.
Stian Westlake and Jonathan Haskell are the intangible asset people. They've written two books together on the subject: 2017's Capitalism Without Capital and Restarting the Future, which came out this year.
Their contention in Restarting the Future is that our economy and society are organised around tangible assets, but that those systems don't work very well with intangible ones.
They point out that investment in intangibles grew steadily through the latter decades of the 20th century. And that feels intuitively right. Bill Clinton was talking about the knowledge economy in the 1990s. Intangible assets made up about 30 per cent of the S&P500 index of the biggest American companies in the 1970s, whereas now it's up to 84 per cent.
But Haskell and Westlake point out that the growth of intangibles slowed right down after the global financial crisis — around the same time that overall productivity growth in the economy slowed. They find that our level of intangible capital is now about 25 per cent lower than the pre-2008 trend line in Europe, and 15 per cent lower in the US.
Why would our systems work well in the 1990s, but not now? They use the metaphor of yeast turning sugar into alcohol — yeast works up until the alcohol content of the liquid passes 15 per cent, after which it stops working. Our system, in other words, may have maxed out the amount of intangible capital it can produce.
The same force that propelled superstar companies to the top — the ability to gather and benefit from intangible capital — might be the force that's holding back the rest of the economy.
What we're talking about
Before I get to the authors' recommendations, some definitions. The authors say intangible capital has four essential characteristics: the four S's.
The first characteristic of intangible capital is it's a sunk cost. Developing intangible assets is often very expensive. But if things go wrong, a company can't just sell its intangible assets on the open market. Like an unsuccessful apartment development. Intangibles are often worthless outside the context in which they're created.
The second is that it's scalable. This means there's no limit on how much it can be used. Think of Stripe's original APIs that allowed websites to accept payments. Once Stripe had developed that intangible asset, it could be used and reused indefinitely.
The third is that it has spillover effects. This means it's hard to stop others from benefiting from it. In the machine learning world, for example, amazing breakthroughs are happening at the moment. And the breakthroughs are leaping from one company to the next. Developers tell each other what they're doing. They imitate each other. It's not that anyone can benefit — you could spend a year teaching me exactly how to build a machine learning model, and I still wouldn't be able to do anything with it — but companies that are adjacent to each other, with the right complementary skills, can borrow from their competitors.
The fourth characteristic is synergies. Intangibles are essentially ideas, or information, and that quality means they can be very usefully combined with other intangibles. Disney can buy Marvel Studios and use its Disney+ app to push Marvel movies out to customers.
Those last three — synergies, scalability and spillovers — go some way to explaining why superstar companies got to be so successful. They were the companies big enough and sophisticated enough to take advantage of intangible spillovers and synergies. Maybe they were based in the Bay Area and they borrowed an algorithm from a competitor up the road. Or maybe they, like Goldman Sachs, were big enough to use new intangible assets to complement the ones they already had.
How to make the world more hospitable to intangibles, so the world can get back to growing at 2.3 per cent per year and the good times can roll? Westlake and Haskell have some ideas.
The first is about maximising spillovers. Spillovers are a nice feature of intangibles in theory because they're equalisers. The best firms shouldn't be able to hoard intangible capital, because of this spillover quality.
But in practice, to take advantage of spillovers, firms have to be in the right place. It helps to be physically close by. A firm in rural Cavan has little hope of copying a useful intangible asset from one in London.
It's yet another reason why cities are important to economic growth and living standards. All over the world, the most dynamic cities make it hard to build. That stops the exchange of ideas and intangible assets. To maximise the benefit of spillovers, Haskell and Westlake argue we need to liberalise planning.
A second suggestion is around the intellectual property system. We want people to come up with useful ideas so we reward them with patents and copyright. It's good to incentivise new ideas. But it's bad that everyone else doesn't get to re-use and remix these ideas while the copyright or patents are in force. They suggest the current system gets the balance wrong, by giving too much protection to copyright holders.
A third point is about finance. Intangible capital is a sunk cost. That makes it hard for investors to finance because there's nothing against which to secure it. The existing system is biased in favour of debt finance because interest is deductible against tax. They suggest getting rid of the debt bias and extending VC-style funding through the rest of the economy.
I can see why Westlake and Haskell kept going with the second book on this. Once you start thinking about the world in terms of intangibles, it's hard to stop.