How the Rise of the Intangible Economy Impacts You

tl;dr: the changing nature of the economy from an industrial-driven to an information-driven has a number of downstream implications that are impacting the foundations of modern societies.

The premise of Capitalism Without Capital: The Rise of the Intangible Economy might be described as “what happens to the foundations of the current economy as ‘software eats the world?‘”

The answer is: a whole heck of a lot.

For one, the tools that we currently use to measure economies (e.g. GDP) are no longer appropriate as they are based on an industrial mindset.

Another is that financial system and banks, in particular, are structured in such a way that they can only extend credit when a loan is based on a tangible or hard asset. The authors point out that the term “real estate” got its name because land is “real.”

A third is that the unique growth drivers of intangible economy companies (i.e. knowledge, talent, software, data, AI) mean that, while companies like Facebook, Apple, Amazon, Netflix, and Google (FAANG) can grow to incredible sizes the hundreds of thousands of other companies that wish to emulate them are extremely high-risk for banks.

For example, if a bus company or restaurant fails, the bank (and other creditors) have some hope of recouping part of their capital. After all, they can sell the buses, the ovens, the chairs, etc.

Intangible Economy Primer

“Intangible Economy” companies work differently. The authors point to four unique characteristics of this new economy

• Scale— given the low capital requirements for growth, these companies can grow rapidly and with increasing returns. We’ve seen that.
• Synergies— the interoperability of many of these companies yields the possibility for “combinatorial innovation.” An example they use is how Zynga (creator of ‘Farmville’) was built on the back of Facebook. Some would argue that it was actually the reverse, which proves the point.
• Spillovers– knowledge from one area can be applied easily to another. GitHub is a great example of this, with its repository of open source software available to anyone.
• Sunk Costs– unlike “hard” assets, the IP that is created in the start-up phase of an “intangible economy” company is not always salvageable, reusable, or of value to someone else. Biotech is a good example. A company may spend millions of dollars trying to find a vaccine or a cure and when it fails, the money is gone.

Bottom line is that these “intangible economy” companies which are yet another wave of impact of the arrival of the commercial Internet (and computers, processors, and semi-conductors before it) operate VERY differently than every company before that…ever.

Impacts of the Intangible Economy

The impacts are far-reaching and wide and the authors point to the intangible economy as a key driver of the widening income and wealth gap in many societies. With fewer capital requirements and greater opportunities for scale, the value captured does get concentrated in fewer hands.

What’s more, it creates a challenge for governments that has led to “tax competition” between countries seeking to attract intangible economy companies to their locales. An oil refinery can’t just pick up and move from one place to another if it doesn’t like the change it the tax law. Facebook could, and in a matter of weeks or months.

All of this doesn’t bode so well for the short-term for governments in need of revenue.

Populists on both the left and the right of the spectrum (I consider Warren and Sanders to be as much of populists as Trump) are fighting losing battles. Trump looks at the loss of the tangible economy and wants it back. After all, he’s a real estate guy. Warren and Sanders want to tax wealth, but those assets are just going to fly the coop.

Meanwhile, entrepreneurs will have to increasingly become equity funded instead of debt funded. Debt is good for capital intensive company. Equity is good for intangible companies, given the high-risk, high-reward nature of them.  Small business lending from banks is, apparently, already drying up and the Small Business Administration will end up making more bad loans.

Crypto to the Rescue?

I’ve been desperately trying to avoid confirmation bias that blockchain is the answer to everything, but as I listened to this book, it occurred to me that there may be a few ways where crypto-economic systems may be of value.

First, the authors talk about many types of intangibles such as proximity to other smart people, access to cultural stimuli (art/music), transportation, and healthcare. But, the one they call the “biggest intangible of them all” is TRUST. This is the bullseye for blockchains.

Second, the ICO boom of 2017 may have been irrational, but it did show the possibility of global crowd-funding at scale.

If venture capital is better suited for equity plays and intangible economy companies are better suited for equity, then it stands to reason that there will be need for more venture capital. However, existing VC firms can only scale so much and their rounds are getting bigger and bigger (a separate blog topic on its own).

What Kickstarter shows is that there’s a market for crowds to support innovation. Put kickstarter campaigns on the blockchain and assign security tokens based on the investment and you may have a new model on your hand. Of course, this will require some changes in the regulatory environment and the accredited investor laws, which discriminate against people who aren’t rich.

A third way is that blockchains can protect IP at micro-levels and reward creators for intangible assets that they create. This is what SingularityNet is doing for AI algorithms, for example. This can mitigate some of the “sunk cost” nature of intangibles.

More important than the solution (be it blockchains or not) is the recognition that many of the challenges we are facing as a global community are driven, perhaps invisibly, by the rise and ongoing importance of the Intangible Economy.

For that alone, I am grateful to have discovered the book.