Capitalism Without Capital

Building a new museum is part of GDP: it’s production. Buying a Titian masterpiece to put into the museum is not included in GDP. The Titian painting was once “produced,” but not in that year. Even if the purchase yielded a vast capital gain to the owner, that does not count as part of GDP. Capital gains do not arise from productive activity and so are not production. It is simply a redistribution of GDP from the seller to the buyer. (The same logic explains why the capital gains that homeowners make on their houses are also not included in GDP.

The second point to remember is that GDP excludes production activities by households. So washing your own car, clothes, or dishes is not production; paying a cleaner to do so is production. This can, of course, create anomalies—for example, Samuelson’s famous observation that when a man marries his cook, GDP falls.

management gurus have studied the art of appropriating the spillovers of other firms’ investments and have even given it a name: open innovation. Like any art, some are better at open innovation than others. A glance at the business news reveals that some companies have a reputation for being especially good at absorbing and exploiting good ideas from elsewhere.

leading firms, which are confident of their ability to create scalable assets and to appropriate most of their benefits, will continue to invest (and enjoy a high rate of return on those investments); but laggard firms, expecting low private returns from their investments, will not. In a world where there are a few leaders and many laggards, the net effect of this could be lower aggregate rates of investment, combined with high returns on those investments that do get made.

Incomes are earned by labor and by capital (an asset) and are a “flow.” The incomes of labor consist mostly of earnings. Incomes of capital are rental payments and dividends, both being flows of payments received over a time period. Wealth is the value of assets/capital owned, which is a “stock.”

By way of analogy, the steam locomotive was described as an “iron horse” from the early nineteenth century, but did not replace horses or even reduce demand for them. Indeed, the railway era saw an increase in the demand for horses—“peak horse” in the United States occurred in 1910, eighty years after the opening of the first steam railway.

Innovation scholar Carlota Perez made the provocative claim that major epochal changes in how the economy uses technology happen periodically and involve first of all an interval of hype and speculation (both intellectual and financial), followed by a crisis, and then a long period of deployment and bedding-in (Perez 2002).

These insights are implicit in Peter Thiel’s book Zero to One. His view is that commercial success is built on four characteristics: building a proprietary technology; exploiting network effects; benefiting from economies of scale; and branding.

Are you creating intangible assets (writing software, doing design, producing research)? If so, you probably want a flat organization with more autonomy, fewer targets, and more access to the boss. That will cost you time on influence activities, but will build an organization that allows information to flow, helps serendipitous interactions, and keeps the key talent.

Because companies can claim tax relief on interest payments but not on the cost of equity, debt is cheaper than equity for any given level of risk.

There were substantial swings in government support for universities over the 1990s and 2000s, and those ups and downs are well correlated with productivity ups and downs, with around a three-year lag.)

The intangible, knowledge-based assets that intangible investment builds have different properties relative to tangible assets: they are more likely to be scalable and have sunk costs; and their benefits are more likely to spill over and exhibit synergies with other intangibles.