Inequality and intangible capital

These thoughts on the relationship between inequality and intangible capital were written in response to James Plunkett’s Unequality: when inequality changes, our strategies must too. Thanks to the Joseph Rowntree Foundation for their support for the project.

The prevalent story about inequality has a few common elements:

• It’s getting steadily worse over time.
• It’s part of a multifarious and catastrophic societal decline (which some have recently started calling a ‘polycrisis’).
• It’s mainly the result of market-friendly public policy: lax competition policy that allows monopolists to prosper, low taxes on the rich, and neoliberalism.

This is a helpful story for policy entrepreneurs calling for more redistributive policies. Some have criticised it on factual or normative grounds: is inequality really getting worse? Is the polycrisis a meaningful phenomenon? Is inequality even a problem? It is not the aim of this piece to address those questions, but to ask a different one: what if something more complex and interesting is going on?

In particular, I’d like to look at the relationship between inequality and a subject close to my heart: the shift in the nature of productive capital from tangible assets (things you can touch and feel, like machines, vehicles and buildings) to intangibles (things like research and development, software, organisational development, brands and skills).

First of all, a quick primer on why the shift to intangibles matters, and why it matters in general economic terms. (People who have read Capitalism Without Capital or Restarting the Future will be familiar with this).

Over the past few decades, investment in rich countries has shifted decisively from tangible to intangible. In most rich countries, businesses now invest more in intangibles each year than in tangibles.

Intangibles are interesting because the tend to behave differently from tangible assets from an economic perspective. Jonathan Haskel and I call these the ‘four Ss’:

• Scalability: the value of an intangible investment can often be scaled across an arbitrarily large business.
• Spillovers: the benefits of an intangible investment often accrue partly or even wholly to firms other than the one that makes the investment.
• Sunkenness: intangible investments are often worth little if a business fails; they represent sunk costs and are of little value to a creditor.
• Synergies: intangible assets are often disproportionately valuable when you combine them with other intangibles.

These properties have several interesting implications for inequality, particularly in the UK.

The first relates to income inequality. It is tempting to think of income inequality as manifesting itself between types of jobs: CEOs earn a lot, and cleaners and carers earn little. But a range of studies from Scandinavia and the United States suggests that a more important distinction is between employees of the most successful firms and everyone else. (For example, according to Jae Song, Nicholas Bloom and co-authors, over two thirds of the increase in income inequality between 1981 and 2013 could be accounted for by the rising variance of earnings between firms, rather than within firms).

This in turn reflects the well-documented fact that in most sectors and countries, the gap in productivity between the most productive firms and the rest has been steadily increasing for at least two decades.

There is a lively debate as to the causes of this growing leader-laggard gap. ‘Neo-Brandeisian’ competition scholars argue that it is down to increased corporate lobbying and more incumbent-friendly competition policy. It may well be that this is to some extent true, but intangibles have a role to play as well. The scalability and synergies of intangible capital mean that big incumbents with valuable intangibles will often enjoy a dominant market position — large tech-platform businesses being a live example. And indeed, when we look at the relative size of the leader-laggard gap in different sectors, we find it is larger in those sectors with a higher share of intangible capital.

The importance of intangibles to inter-firm inequality might at first glance look like cause for despair — if this is the consequence of a technological change rather than a weakening of policymakers’ resolve, isn’t it harder to reverse? But there is some cause for optimism. Although the synergies and scalability of intangibles often privilege incumbents, they also allow for occasional upsets. Scalability can also be the weapon of the insurgent firm, allowing challengers to occasionally unseat their rivals quickly and dramatically. The role of competition policy should be in helping create the conditions where this can happen.

Intangibles also have an important role to play in inequality of wealth, albeit by a circuitous route. One of the most interesting follow-ups to Thomas Piketty’s iconic survey of wealth inequality, Capital in the Twenty-First Century, was analysis by Matthew Rognlie suggesting that a significant part of the increase in wealth inequality was the result of housing wealth.

Housing is on the face of it as far from intangible as you can get. But the housing that has increased most dramatically in value in the past few decades is real estate in economically dynamic cities in which property supply is constrained by planning rules. These cities owe their economic dynamism to the importance of the spillovers and synergies of intangible assets, and from the incentives that businesses and workers have to cluster in the same place to exploit them.

In the UK, this is a phenomenon we see mainly in London and the South East. In London, the inequality is accentuated at a local level by the relatively high levels of social housing in the city’s richest local authorities, with the result that boroughs like Islington, Camden and Kensington & Chelsea contain a mixture of astronomically expensive private homes and flats, social housing inhabited by tenants who are often very poor, and little in between.

The UK’s tax system perpetuates this problem. Council Tax is based on three-decade-old property values (described by the Institute for Fiscal Studies as “out of date, arbitrary and highly regressive”, while primary residences receive extensive exemptions from capital gains and inheritance tax.

The divergence in housing costs between thriving places and the rest of the country likely has second-order effects on inequality too. If it is expensive to live in places with fast-growing economies, the only workers who can afford to move to them will be those with the skills to command the highest wages, while those with less marketable skills will stay put. (This raises the question of to what extent the distinction between what David Goodhart called ‘Somewheres’ and ‘Anywheres’ — people rooted in a particular place and people willing to move — is driven not by immutable cultural preferences, but by the economic difficulty that many people face in moving for work.)

Intangible capital also contributes to the growth of inequality of status between individuals. A feature of an intangible-intensive economy is the growing importance of the rules, norms and people with the power to negotiate the spillovers and synergies that intangible capital creates. This in turn grants power and prestige to a whole cast of recognisable modern types: lawyers, agents, managers, brokers and bureaucrats; what Robert Reich called ‘symbolic analysts’: people who process information and symbols for a living. These people tend to enjoy high levels of formal education and broadly liberal social norms — and their growing power and prosperity attracts resentment (not always unjustified) from those who cannot aspire to their status. It is interesting in this respect how the ‘Freemen on the Land’ and ‘Sovereign Citizen’ movements, which tend to find their most promising audience among those left out by the modern elite, look a lot like a cargo cult of symbolic analysis. There is something about the superficially plausible system of rules, the invocations of admiralty law and true names, that feels like a fitting reaction to a world in which even the excluded know that symbols are powerful.

It may also be that the growing economic power of intangible capital affects not just inequality itself, but our perception of it — and in particular its salience in the media. Journalism has always been to some extent an intangible business: stories and news are intangible, and were to some extent scalable from the dawn of commercial printing. But for most of the history of media, physical reality put sharp limits on the scalability of journalism. Newspapers were printed and distributed, which set limits to the size of the market they could serve; classified print advertising created a robust business model for local news. This in turn limited the scalability of the best journalistic content, and preserved a steady stock of reasonably well-paid journalism jobs in rich countries. The shift to online publishing and online advertising, and more recently to subscription platforms like Substack, has made journalism a more intangible-intensive industry.

This in turn has made it more winner-takes-all: in-demand journalists can enjoy seven-figure salaries, often without needing to be employed by a newspaper; at the same time, there are fewer steady journalism jobs (especially outside of London), and more precarious ones, what Vanessa Gregoriades called the creative underclass: in short, it has seen a big rise in inequality, probably more so than the economy as a whole. Journalism is a rounding error from the point of view of the UK’s economy — but of course it is far more significant in its impact on public discourse. In this respect, the shift to an intangible-intensive economy may not only have changed the nature of inequality, but made it more salient.