Microsoft’s market value in 2006 was around $250 billion… The traditional assets of plant and equipment were only $3 billion, a trifling 4 percent of Microsoft’s assets and 1 percent of its market value. By conventional accounting of assets then, Microsoft was a modern-day miracle. This was capitalism without capital.

—Jonathan Haskel and Stian Westlake, Capitalism without Capital: The Rise of the Intangible Economy, pages 4-5.1

In Capitalism without Capital, Jonathan Haskel and Stian Westlake (HW) provide a comprehensive survey of the economic issues raised by the increasing importance of intangible factors in business performance and overall economic growth. They provide a useful framework for understanding the differences between intangible investment and tangible investment.

In this essay, I will try to summarize HW’s analysis. I will then proceed to explain what I see as its negative implications for neoclassical economics. In my view, trying to stuff the square peg of intangible investment into the round hole of neoclassical capital theory turns out to be an effort with a low benefit-cost ratio.

The HW analytical framework focuses on four ways that intangible capital differs from tangible capital, each starting with the letter S. These are: sunk costs; scalability; synergies; and spillovers.

“Sunk costs” refers to the fact that intangible investment often has little or no salvage value. Plants and equipment are marketable goods, and in the event that a business fails it can sell those goods in order to provide investors with some compensation. In contrast, if a business invests in an effort to develop and market a new product, and that product fails, there is little or nothing that can be sold in the market to recover any of the cost of the bad investment.

Scalability refers to the fact that the intangible value of a brand or idea can be extended at very low marginal cost. Once a pharmaceutical firm has discovered and proven the therapeutic value of a molecule, the costs associated with manufacturing and distribution are relatively trivial.

With physical capital, on the other hand, there is a limit to the productive capacity of a given piece of equipment or physical structure. Thus, there are lower economies of scale in physical investment compared with intangible investment.

“Synergies” refers to the fact that the value of a combination of intangible assets cannot be decomposed into individual components. A successful smart phone incorporates many innovations. Evaluated separately, none of these innovations represents a marketable product.

“Spillovers” refers to the fact that the value of intangible investment can easily be captured by other firms. Ideas can be copied. On page nine, using product designs as an example of intangible asset, HW write,

If someone asks to use your factory for free, you politely refuse… The designs, however, are a different business altogether… your competitors may be able to… “reverse-engineer” them. You might be able to obtain a patent… but your competitors may be able to “invent around” it, changing just enough aspects of the product that your patent offers no protection.

HW use this framework to draw out a number of implications: difficulty with measuring the value of intangible capital; difficulty with forecasting the value of intangible investment; different methods of financing intangible investment; the incentive to capture spillovers; and increased inequality across firms and cities.

For more on James Tobin and the q-ratio see his bio in the Concise Encyclopedia of Economics.

With tangible plant and equipment, the market value of capital is closely tied to the cost of its acquisition. This is the basis for the famous theory of stock market valuation and investment known as Tobin’s q (ratio).

However, with intangible investment, the value of capital can diverge from its cost. Because of sunk costs, the value of intangible investment can fall close to zero, in spite of a large expenditure. Think of some of the dotcom companies that were created in the late 1990s and subsequently collapsed.

On the other hand, because of scalability and synergies, the value of intangible investment can very much exceed its cost. Think of successful software-based companies, such as Microsoft, Google, or Facebook.

Recognizing these issues, on page 53 HW write,

… some very successful products yield firms a stream of returns massively out of proportion to the cost of creating them. So how can a cost-based method be accurate? … in practice firms and economies do many, many projects. Each is uncertain… On average, however, if the successes and failures balance out, the value of investment at the level of a large economy ought to equal the value of the spending.

That approach to defending the use of a cost-based method to value intangible capital strikes me as based on hope rather than theory or evidence. The overall economic value of intangible investment does not necessarily equal the resource cost spent. Indeed, strong economic performance may come from particularly good investment choices being made on average, while weak economic performance may be due to misallocation of intangible investments.

The same issues that make the value of intangible investment difficult to measure also make it difficult to forecast. This leads HW to point out that debt financing is less appropriate than equity financing for intangible investment.

Spillovers create another issue with financing intangible investment. On page 180, HW point out that,

There may also be a different strategy available to the largest institutional investors: to invest broadly across an ecosystem, to such an extent that it is worth approving management plans for intangible investments even if they have large spillovers

I would add that some venture capital firms execute a strategy focused on trying to develop firms within a given ecosystem. Perhaps even more important are the strategic acquisitions made by large pharmaceutical corporations or by companies such as Google, Amazon, Apple, and Facebook, which are able to capture spillover effects by combining the inventions of the firms they acquire with their existing portfolios of intangible assets.

The fact that intangible investment leads to very divergent outcomes can help to explain rising economic inequality. The contest to exploit scalability and synergies and to appropriate spillovers generates winners and losers. Founders and investors in the winning firms, and the cities in which they are located, amass great wealth. Other firms, including failed start-ups and older firms whose business models give way to creative destruction, see wealth disappear.

I recommend Capitalism without Capital. The four S’s framework is insightful. Also, the book is very well organized, with concluding sections for each chapter that are particularly pithy.

“For me, it calls into question the core neoclassical model that relates output to the aggregate amount of capital and labor in the economy.”

However, I think that intangible investment has much more drastic implications for economic analysis than HW are willing to contemplate. For me, it calls into question the core neoclassical model that relates output to the aggregate amount of capital and labor in the economy.

By deploying the terms “intangible investment” and “intangible capital,” economists are attempting to view immaterial phenomena through a materialistic lens. In the process, I believe that we lose more than we gain. I have the following concerns:

  • Firms invest in different types of non-physical capital, and these have different characteristics. As HW point out, a creative high-tech company needs to allow its employees to be freewheeling, while a company that depends on finely-tuned logistics and reliable worker performance needs to be very controlling. These various forms of intangible investment also have risk-reward profiles that differ from one another.
  • The existence of spillovers causes complications that far exceed those that involve tangible capital. Business strategies for capturing spillovers tend to fall outside of conventional economic analysis of industrial organization. When Google acquires other companies, does that speed up innovation or does it retard innovation by stifling other approaches for capturing spillovers? As HW point out, the right strength for intellectual property law also is difficult to specify. If intellectual property protection is too weak, then projects with high spillovers relative to cost will not be undertaken. If it is too strong, then projects with low spillovers relative to cost will be overly subsidized.
  • Accounting for intangible investment will have difficulties that do not exist with tangible capital. When a bank buys desks, it can simply designate the cost of the desks as investment. But suppose that a bank assigns some of its loan officers to work part-time on a project to develop more effective training program for new staff. How much of the salary and benefits of the loan officers should be treated as investment? When the project team, which includes employees from diverse locations, meets to discuss the project, should the travel expenses be treated as an investment?
  • As long as it does not become suddenly obsolete, tangible capital tends to depreciate along a relatively predictable path. But the intangible assets of a firm might retain their value for a long time, or even appreciate rapidly. Conversely, they may suddenly plummet in value.

For purposes of evaluating overall economic performance, these issues limit the value of trying to add together intangible capital and intangible capital and undertake analysis based on this sum. In particular, it is highly problematic to attempt to calculate “total factor productivity,” the “capital-labor ratio,” or the “capital share of income.” All of these elements of neoclassical analysis are becoming increasingly artificial and inappropriate as the relative importance of material goods in production and consumption continues to decline.


Jonathan Haskel and Stian Westlake, Capitalism without Capital: The Rise of the Intangible Economy. Princeton University Press, 2017.


*Arnold Kling has a Ph.D. in economics from the Massachusetts Institute of Technology. He is the author of several books, including Crisis of Abundance: Rethinking How We Pay for Health Care; Invisible Wealth: The Hidden Story of How Markets Work; Unchecked and Unbalanced: How the Discrepancy Between Knowledge and Power Caused the Financial Crisis and Threatens Democracy; and Specialization and Trade: A Re-introduction to Economics. He contributed to EconLog from January 2003 through August 2012.

For more articles by Arnold Kling, see the Archive.