Restarting the Future (part 2)

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Jonathan Haskel and Stian Westlake believe that the advanced economies of the world are experiencing something like growing pains. They are becoming economies in which intangible forms of capital are more important than ever, but the institutions such economies require are not yet fully developed.

I found this general framework very helpful for understanding recent economic problems like underinvestment, chronic stagnation and increased inequality. The thesis is very abstract, however, and that poses challenges for both the authors and their readers. We have to try to imagine what fully developed intangible economies will look like, although many of the details are yet to be filled in. I found many of their descriptions and recommendations rather vague, but maybe that is unavoidable in a book of this nature.

With that warning in mind, I turn to the authors’ discussion of public policy, especially their treatment of public investment and intellectual property in Chapter 4.

Public investment

The main issue here is finding the right balance between public and private investment in intangible capital. The private firms of industrial capitalism have a lot of experience investing in tangible capital equipment. They do it in the belief that it can boost productivity and generate sales revenue in excess of capital costs. No investment is a sure thing, but tangible capital at least provides reasonably secure ownership, as well as some residual value even if its particular use is less successful than expected. Investment in something as intangible as a worker’s expertise or a software design entails special risks. Intangible assets are harder to control, since they are more easily copied or shared (the problem of spillovers). And they may disappear into thin air if an investment doesn’t pay off (the problem of sunk costs).

From the perspective of public policy, however, spillovers have a positive side. The fact that knowledge and ideas are so easily shared makes them a public good. Public investment in such intangibles can pay off in any number of ways—many hard to foresee—resulting in a wealth of contributions to the common good. Compared to a private firm, a democratic society often has more to gain—and less to lose—from investment in intangibles.

Governments, along with nongovernmental bodies such as universities, fund or subsidise education and training, R&D, and artistic and creative content for the benefit of firms and citizens. They also invest in intangibles for their own benefit, and some of these intangibles have wide and important spillovers.

Many of the most successful products seemingly created by private enterprise actually depend on previous investments in intangibles by government.

You think of the iPhone as a private-sector triumph, but it is nothing of the sort. In fact, all its component parts, from its touchscreen display to the architecture of its chipsets to the protocols used to encode the web pages and music files you can download, had their origins in significant amounts of government investment.

The importance of public investment does not mean that a centrally planned economy is a good idea. That’s because a high quantity of investment is not enough. The quality of an investment often depends on the particular combination of intangibles that create a useful product. This relates to another feature of intangibles, their synergies. Putting investment decisions in the hands of a central authority is useful for creating intangibles with many possible uses. But encouraging investment decisions by entrepreneurs is useful for harnessing the creativity of decentralized actors with their own information and expertise. Both are important.

A capable state providing generous intangible investment subsidies (such as R&D or student loans) may not on its own be enough to encourage enough productive investment, which also requires an active entrepreneurial ecosystem to generate variety and the valuable synergies that arise when you hit upon the right combination…. A strong state can coexist with strong businesses.

The reference to student loans is a hint that this analysis is relevant to the debate over educational funding. Historically, the U.S. economy got a great boost in productivity from its public investment in primary and secondary education. Public spending accomplished a great quantitative increase in years of education. One might wish to extend the quantitative approach by publicly funding college education as well. However, as a student gets older, the need for a general education coexists with a need for the more specific knowledge and skills required for an occupation. The public may be less enthusiastic about underwriting the traditional four-year degree without regard to the content of a student’s curriculum.

As a retired college professor, I am a strong believer in higher education in both its general and more specialized aspects. As a sociologist, I believe in the potential of the liberal arts and social sciences to help create the informed citizens democracy requires. I disagree with popular critics like Bill Maher who have taken to deriding college education as a waste of time. But I do grant that advocates of human capital investment must consider education for work as well as education for life. Taxpayers may reasonably resist fully funding baccalaureate degrees for children of the wealthy, as long as vocational education for working-class children remains poorly supported. College graduates still make more money than other workers, but the gap is now shrinking. Maybe that is because more employers are willing to consider applicants with fewer years of formal education but more relevant skills.

As my reference to class implies, more careful consideration of both the quantity and kind of human capital investment could also address the problem of economic inequality. Much of the resentment directed at more educated “cultural elites” comes from people whose opportunities to acquire today’s job skills are currently too limited.

Consistent with their emphasis on investment quality, not just quantity, the authors make this recommendation:

[W]e should increase public funding for other types of intangibles alongside basic research and education, including more investment in well-designed vocational training (including training provided directly by state-owned businesses such as national broadcasters or national arts organisations), more investment in big open-data and open-source software projects, and more industrial development (for example, by funding R&D tax credits or public research centres…

Intellectual property

From the standpoint of an individual company, a spillover of intangible capital from one user to another can be a threat. Why invest in new knowledge or product designs if they can easily flow to one’s competitors? The protection of intellectual property by means of patents and copyrights is a very big issue for an increasingly intangible economy. One of the functions of government is to act as the “spillover police.” Government “overcomes the spillover problem by granting inventors a temporary monopoly over the intangible asset they have created, banning others from taking advantage of the spillover.”

Here too, government faces a dilemma. Too little protection of intellectual property reduces the incentive to innovate. But too much protection inhibits further innovation by preventing companies from using existing intellectual property in creative ways. Some companies make money buying up patents they have no intention of using, except to extort money from other companies that are trying to innovate. For example, “war by patent has become an integral part of the smartphone industry.”

While some observers have advocated the elimination of intellectual property rights altogether, the wiser course is probably a more moderate policy. The “Tabarrok curve” (named after economist Alex Tabarrok) represents the relationship between intellectual property rights and innovation as an inverted U. The most innovation is expected where property rights are neither too weak nor too strong. The authors then recommend some moderation of the existing intellectual property regime:

[W]e should cautiously weaken IP rights, rolling back patents in areas where their remit has grown—for example, by ending patents on software and straightforward business processes, reducing patent lengths in selected industries, requiring genuine disclosure of what makes underlying technologies work, and introducing prizes or patent buyouts for certain socially desirable inventions, such as antibiotics.

Patent regulation is an example of the kind of administrative job that requires great expertise. What the intangible economy needs is not so much smaller government or bigger government, but smarter government. This is a recurring theme in the book’s policy discussions.

The politics of public policy

In both Chapter 4 and the Conclusion, Haskel and Westlake address the political challenges of making government more responsive to the needs of the intangible economy. They acknowledge that it won’t be easy to move from the present polarization and gridlock to a set of policies that a majority can understand and support.

The authors distinguish two kinds of challenges. The first is to build state capacity. This is “partly a matter of resourcing: hiring technically skilled staff, building analytical capacity, and using these capabilities to invest in intangibles and administer well-run IP [intellectual property] regimes.” Government agencies need rules to constrain their discretion and limit their susceptibility to political influence, but not so rigid rules that they cannot respond flexibly to technological change.

The second kind of challenge is to achieve political legitimacy by earning and spending political capital. If people feel that government isn’t working for them, they become suspicious of—and resistant to—government initiatives. They become hostile to those who produce and manage intangible assets, especially government experts. Government investments that pay off in actual improvements to the quality of life build trust, which helps generate support for more such investments. Part of the art of politics is trying to “craft narratives to make intangible investment more politically resonant.”

The authors acknowledge that the policy agenda they have in mind is somewhat “unfashionable” across the political spectrum, but they regard its unpopularity with conservatives as especially obvious. “[S]ince at least the Reagan and Thatcher eras, many on the right have sought to cut not just the state’s size but also its agency and even its knowledge.” I would add that in the U.S., the increasing unpopularity of the Republicans’ anti-tax, anti-regulation policies has led the party to rely on culture wars to retain a degree of power. The party offers little by way of policy proposals for strengthening the intangible economy, but devotes its time instead to attacking immigration, reproductive rights, LGBTQ rights, and efforts to address systemic racism.

Liberals are more receptive to building state capacity and investing in human capital, but they may rely too heavily on quantitative, centralized approaches that spend too much money carelessly. It is one thing for government to pick up the bills for existing forms of health care or education, but another thing to steer investment toward the kinds of health care or education that are most cost effective.

Subsidizing intangibles—for example, through tax breaks, public funding, or direct government investment in training or R&D—helps solves the quantity problem of underinvestment… But, at the margin, these policies can reduce the quality of investment by encouraging gaming or low-quality research, or simply because the funding rules have not kept pace with the latest practices and technologies.

This book got me thinking a lot about the state of our two-party system and how it might be reformed. Instead of playing on fears of cultural change and trying to take the country back to the 1950s, the conservative party might more usefully represent the interests of economic innovators willing to work with government rather than against it to strengthen the intangible economy. For its part, the liberal party could represent not just more taxing and spending, but support for those profit-motivated investments most compatible with the common good. Idealistic, perhaps, but certainly more sustainable than the present state of antagonism and standoff.


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