Restarting the Future

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Jonathan Haskel and Stian Westlake. Restarting the Future: How to Fix the Intangible Economy. Princeton University Press, 2022.

British economists Jonathan Haskel and Stian Westlake have an explanation for why the most advanced economies in the world have been underperforming in recent decades. They cite five symptoms of underperformance:

  • Stagnation: Compared to growth in the second half of the twentieth century, twenty-first-century growth has been significantly slower.
  • Inequality: Within economically advanced countries, disparities in wealth, income and social status have been increasing.
  • Dysfunctional competition: While the largest and most profitable businesses prosper, fewer new businesses are starting up and entrepreneurship is in decline.
  • Fragility: Economies are more vulnerable to severe disruptions, such as financial shocks, energy shortages or pandemics.
  • Inauthenticity: Economies generate too much “fakery, too much work that does not produce useful, tangible results.”

The authors associate these symptoms with the transition to what they call the “intangible economy.” The problem is basically that the economy is still struggling to make this transition, and that the social institutions required for the new economy are not yet fully developed. Here is what I found to be the best statement of their thesis:

We believe 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. Unfortunately, the institutions on which the economy depends have for the most part failed to keep pace. The problems we see are the morbid symptoms of an economy caught between an irrecoverable past and a future that we cannot attain.

The intangible economy

The underlying assumption of the entire analysis is that the capital on which capitalism runs is not what it used to be.

Once upon a time, firms invested mostly in physical capital: machines, buildings, vehicles, computers. Today, as society gets richer, most business investment goes to things you can’t touch: research and development, branding, organisational development, and software.

Because the term “intangible” is deliberately broad, the intangible economy is not quite the same as the “knowledge economy” or the “postindustrial (service) economy.” For one thing, investments in human capital like educated and healthy workers are important in both manufacturing and service industries. An intangible economy is one where most people have satisfied their basic material needs, and now “demand a wider variety of goods and services, often with the kind of expressive or emotional value that intangibles can provide.”

The authors identify four main characteristics that distinguish intangible assets from tangible assets:

  • They are highly scalable: A successful software design is easier to reproduce on a grand scale than a physical piece of equipment.
  • They have spillovers: It’s harder for a company to keep an idea to itself than to maintain sole ownership of a machine.
  • They are sunk costs: Machinery may have some value even when a company fails, but an intangible asset like a talented workforce may just scatter.
  • They have synergies: The value of an idea depends on how it is combined with other ideas.

These characteristics of intangible capital pose new challenges for the economy. For example, they make it trickier for companies to decide to invest or banks to decide to lend. The benefits are harder to calculate because they depend more on uncertain synergies, and the risks are greater because of possible losses from spillovers and sunk costs.

Economic crisis

The authors’ analysis of the contemporary economic crisis is mainly a matter of connecting the dots between the distinctive challenges of the intangible economy and the symptoms of underperformance already cited.

Economies may stagnate because investment in intangible capital fails to keep pace with the growing need. Who will invest in tomorrow’s creative workers? Talented children may lack the resources to develop their own talent, but investors may be reluctant to invest in elusive benefits that could be lost to spillovers and sunk costs.

In many industries, healthy competition gives way to dysfunctional competition. Firms with useful intangible assets can scale them up to the point that they dominate an industry—think Amazon or Google. Newer firms with new ideas have trouble getting off the ground.

Inequality worsens partly because of the gap between leading and lagging firms. In addition, the increased importance of synergies encourages leading firms to cluster together geographically, creating large disparities between flourishing cities and economically depressed areas. This is reflected in income and wealth gaps among households, especially because property values are so much higher in thriving cities. Intangible assets also create more disparities in social status, since people with more education and cutting-edge ideas are valued over less educated and more traditional segments of the population.

Economies are more fragile because inadequate investment in intangible capital limits their response to economic threats like pandemics, supply shocks or pandemics. For example:

The path out of the pandemic…required massive intangible investment: software and processes to track, trace, and quarantine people with the disease; research to develop effective drugs, treatment protocols, and vaccines; and networks, systems, and campaigns to ensure that people got vaccinated.

The authors suggest that the inauthenticity they observe in the economy is related to a proliferation of ideas. Because ideas have the potential to be reproduced on a large scale and “the right combination can release big synergies,” the rush is on to promote all kinds of business schemes, from the brilliant to the wacky. Already in the 1990s, fortunes were being made or lost by “” companies that might or might not have a viable product. We have also seen massive frauds by crooks like Bernie Madoff (phony investments) and Elizabeth Holmes (phony blood tests). And of course, the internet “seems to be plagued by charlatans, misleaders, and hucksters.”

All these problems suggest that we do not yet have the institutional constraints to make the intangible economy work for the general good.

Institutional change

The authors rely on Douglass North, a leader in the New Institutional Economics, for his conception of institutions. He defines them as “the humanly devised constraints that shape human interaction.” Economic institutions in particular exist “to create order and reduce uncertainty in exchange.”

Consider the contract that my partner and I signed when we agreed to buy a home that was about to be constructed. The home’s value depended on the institutionalized property rights that came with it. As long as we fulfilled our side of the contract, no one could take it away from us. We also had an institutionalized means of enforcing the contract. (Here I confess to some dissatisfaction, since the builder required us to submit any disputes to arbitration and waive our legal right to a day in court, a troubling trend in sales contracts.) The contract’s value was also backed by “mechanisms for collective decision-making,” such as zoning restrictions to keep my neighbors from opening a gas station on their front lawn, or municipal agencies to insure the cleanliness of the water supply. Beyond the legal institutions, character-building institutions like families, churches and schools are supposed to generate enough “trust, reputation, and reciprocity” to assure us that the developer is not a fraud.

The authors say that the importance of institutions to economic growth is now “uncontroversial” in economics. This has not always been the case, however. Economists have a long history of attributing the workings of the economy to natural laws that require no conscious human intervention. Early institutionalists like Thorstein Veblen were very controversial critics of this mainstream view. Even today, many economists seem to take institutional constraints for granted and devote little attention to them. As a sociologist, I welcome the authors’ more explicit focus on institutional change.

Institutions are essential, but they can also be poorly adapted to the needs of a changing society. In particular, new technologies may not achieve their potential for economic benefits without some new rules.

The specificity of institutions means that the institutions that helped promote equitable and sustained growth in yesterday’s technological landscape may not work as well today. Their inertia means that these outmoded institutions often persist after they have ceased to be useful. Their unpredictability means that well-intentioned efforts to shape institutions to deal with new technologies may miss the mark, especially in the early days of those new technologies. And the politics of institutions are such that small groups with vested interests often prove very effective at defending institutions that are, on balance, socially harmful.

The intangible economy makes new demands on institutions, highlighting the need for institutional change. For example, the benefits of intangible investments are harder to privatize because of spillover effects. A new idea very easily spreads to people who had nothing to do with thinking it up. The existing patent and copyright laws may need revision in order to achieve the best balance of private incentive and public benefit. The economy may need some expansion of public investment as well as revised protection of private investment.

Having described the general problem of the intangible economy in Part I, Haskel and Westlake then devote Part II to specific areas of institutional reform.


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