The Problem With Intangible Investments

A new book called “Capitalism Without Capital” deals with a new form of capital allocation, intangible investments. Recently, the book was broken down by HuffPost Contributor Glenn C. Altschuler. Here’s what he had to say!

While intangible investments were once a primarily positive force in the economy, driving such innovations as the internet and jet airline travel, as the government has stepped back from its role in funding primary research and development, intangible investments have become an economic spoiler to some extent.

Intangible investments in the age of unlimited communications

At their core, intangible investments can be described as any form of produced knowledge or training that has a clear associated cost and that cannot be included in the realm of formal intellectual property. Examples of intangible investments include things like training company employees in a new manufacturing technique or developing a new product that is innovative but too broadly defined to be patentable.

The four major characteristics of intangible investments are scalability, a tendency towards the imposition of sunken costs, spillover effects, and creation of synergies. The problem arises when extremely expensive processes need to be funded to effectively innovate, but there are few or no borders designed to keep those investments from being pillaged by competitors.

This phenomenon, known as spillover effect, can be demonstrated by examining the development of the CT Scan. While some of the core technology required for the first CT scanners to function was patentable, the concept of a machine that used software to greatly enhance radiographic images was entirely too nebulous for the same.

As a result, the original company funding the development of the CT scan ended up being a minor player, receiving only small licensing fees on narrow proprietary technologies, in a multi-billion-dollar industry. Tech giants like General Electric and Siemens already possessed the necessary space and scalability to become the dominant players in the field and, because it’s near impossible to patent an intangible idea, they were able to circumvent any legal repercussions simply by “inventing around” an idea.

The above example also illustrates the problems that scalability and synergies create for any firm that is not a veritable industrial powerhouse. Siemens and General Electric had the capital on hand to immediately scale up to a size where both costs were significantly lowered and the barrier to entry into the business was made virtually insurmountable. At the same time, they were able to use their prior expertise to quickly outstrip the capabilities of the original CT scanners.

Authors Jonathan Haskel and Stian Westlake close by calling for change. They posit that intangible ideas and their investment environment can only be secured if we “encourage trust and strong institutions, expand opportunity, reduce inequality and social conflict, and check powerful corporations.”

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