The Relentless Rise of Intangible Assets

This podcast is brought to you by Wells Fargo Advisors. Looking for a firm your clients can't outgrow? Wells Fargo Advisors offers financial advisors full balance sheet solutions with wealth planning, investment products, banking, and lending that meet the needs of affluent to ultra-high net worth clients. Build your practice your way and on your schedule with independent and employee model options designed to meet your needs today and tomorrow. Learn more at joinwfadvisors.com. In 2012, Facebook bought Instagram for $1 billion. At the time, Instagram had just 13 employees. That's a great example of the power and value of intangible assets. Hi everyone, I'm business coach Steve Sandusky for Barron's Advisor, and welcome to Actionable Intelligence. My guest today is Stian Westlake. Stian is the co-author of Capitalism Without Capital and he's the CEO of the Royal Statistical Society in London, England. In today's conversation, we discuss how in recent years, companies began to invest more in intangible assets like design, branding, R&D, and software than they did in tangible assets like machinery, buildings, and computers. This shift from the physical to the untouchable has massive implications for how we invest, how the economy works, and how we determine the meaning of value. So let's get started with Stig Westlake. You wrote a book a few years back called "Capitalism Without Capital." And the idea I think that you're talking about in there is that we've really seen in recent years, in recent decades, the growth in intangible assets as opposed to tangible assets. Now, that also has implications in terms of how we invest, It has implications in terms of the economy, in terms of policies that government leaders need to be thinking about. So I'd love for you to just set the stage here for a minute about the big idea in the book and where we are today. We're going to get into how the pandemic has affected intangible assets. So just set the stage, if you would, about the book and the big idea there.

So for pretty much all of recorded history, the assets that businesses owned were physical things. They were things you could stub your toe on. They were machines, buildings, vehicles. They were physical items. They were tangible assets. But that's been something that for the last few decades has been gradually but inexorably changing. And intangible assets, assets that you can't touch or feel, have been becoming more and more important. And by that, I mean things like research and development, brands, supply chain relationships, the organizational capabilities that advanced organizations have. And economists have been really working hard over the last few decades to measure these things in the same way that we try and accurately measure the value of buildings and machines. And what that's shown, that the intangible investment as a percentage of the economy has been growing and growing very steadily. And crucially, about 10 years, 10, 15 years ago, for a country like the US or other developed countries, intangible investment overtook tangible investment. So now there are more dollars of intangible investment being made by businesses around the world each year than tangible investment. So that's a kind of big fact that sets the scene for the book. And where we take that then, it turns out that these intangible assets have a host of interesting different economic properties to tangible assets. And from there, a whole host of changes in the economy relating to securities, relating relating to business performance. A lot changes when capital becomes intangible. That's the big idea of the book.

[Speaker:BRAD_STONE] I remember back, it was probably the 1980s when Warren Buffett started to have his lightbulb moment in terms of his shift in investing to more companies that had more brand names. When he started first buying Coca-Cola, I think one of the reasons why he was buying Coke was because of their intangible brand value. He felt like, there was no one that was going to be able to recreate the brand value of Coca-Cola. And we've seen how well Coke has performed over the decades. Is that sort of what you're thinking here? Is that an example? I think you mentioned brand as an example. Would Coke, for example, be a company that has this intangible value and asset? Maybe it's in the formula of Coke. Is that one example?

That's a great example. And Coke is kind of arguably one of the original intangible-rich companies. And of course, you'll know that the way Coke is structured, You have a separation between the company that owns the intellectual property, the brand, the syrup, and a bunch of bottling companies, which significantly own the tangible assets. So it's a really nice example of a separation within the kind of supply chain, and they're the industry structure of an intangible-rich company, and then a bunch of much more tangible-rich ones. But as Warren Buffett realized, the value is in the intangibles here.

[Speaker:GUY_SPIER] Now, you've also identified several different characteristics of an intangible. I think you call them the 4 S's. So I'd love for you to just describe what are these 4 S's? The 4 S's, and why are they so important?

That's right. If all we were saying was that kind of capital had changed, that would just be a kind of interesting trivia fact. What's significant is that intangible assets behave economically in a different way. As you say, we call these the 4 S's: scalability, sunkenness, in the kind of economist sense of the word sunk costs, spillovers, and synergies. I'll just give a couple of examples to show what each of those are. Scalability is something that anyone in business will be familiar with. And the point about scalability is a valuable intangible asset can go a long way. It can be scaled often across an arbitrarily large-sized business. So if you think of a classic intangible-rich company, Uber's traditional competitors, taxi firms, had tangible assets. They owned leased taxicabs. If you want to put 4 passengers in a taxicab, you're fine. If you want 5 passengers, you need another taxicab. That asset does not scale. You need to keep on adding more assets if you want to grow the size of the business. If you think about some of Uber's most valuable assets, for example, its software, its data, its algorithms, those, they require maintenance, but basically they can be scaled across an arbitrarily large business. If Uber opens in a new city, a new country, the algorithms go that much further. And we can talk about this a little bit more later, but one of the things about scalability is— it leads to the rise of massive intangible-rich corporations. Because it's really worth being big if you can scale your assets across a large business.

When we're talking about scalability, how important is the concept of network effects within that aspect?

So network effects is kind of one of the drivers of scalability. Some intangibles get even more valuable if more people use them. So classic social media— the more users are on your social network, the more exciting it is. That's true with some. Of these assets. But scalability works aside from network effects as well. So if you think of the pharma and biotech sector, their extremely valuable assets are also intangible. They are patents and research going into drugs and pharmaceutical products. And those things are also scalable to the extent that drug manufacture is relatively cheap compared to drug development. But once you developed a drug, your marginal cost of producing it kind of goes close to zero.

And so what are the other S's here?

So the second S is sunkenness, in the sense of sunk costs. As all economists listening will know, a sunk cost is a cost that you've spent and you can't recover it. Now, if we think about tangible assets, your traditional tangible assets, they're often not sunk costs. If, for example, a business owns a fleet of airplanes and the business goes bust, there is a thriving secondary market for selling on your airplanes. Consider an intangible asset, like airplane landing slots at airports. And this happened— a UK airline went bankrupt the year we were writing the book. And it turned out that you could track on these websites where you track airlines, you could track their planes. They were flying for a new airline within the week that the company ceased operating. Their landing slots, there was a months-long legal dispute about whether they could be sold on, whether they were an asset of the company that could be recovered by creditors, what would happen to them. And we find this is quite typical. Intangible assets, often when the company fails, the assets are worthless, either because they're highly specific to the company or because there simply aren't secondary markets to transfer them. If you look at, for example, secondary markets for patents, for intellectual property, they exist, but they're incredibly thin compared to the secondary markets for mining equipment, plant and machinery in factories, or things like real estate and office buildings. Kind of real classic example that I think lives in the minds of the tech sector is Nokia, the once world-famous cell phone business. When they ceased operations, Microsoft came in and bought a bunch of their mobile patents. They bought a huge portfolio of their mobile patents for several billion dollars, which rapidly, I think within 18 months, Microsoft had to write off the entire value of that patent portfolio. So they realized that this asset, which they thought was a kind of not a sunk cost, actually was pretty sunk. This has huge significance for the financial system, particularly if we're talking about the traditional mode of financing almost every business apart from the largest is debt finance. And if you make a loan to someone, you will very often want security, want physical assets, or you want assets, that business that you can take a claim on. If a business has buildings, if it has machinery that can be sold, those are all kind of useful things for a creditor if the worst comes to the worst. If a business's assets are sunk because they're intangible and because they're very hard to recover, that makes things harder for lenders. And if we think about this from a kind of economy perspective, this is kind of worrying. You know, our main mode of capital development is bank lending, to a certain extent bonds. If that is becoming less appropriate for the kind of businesses that are now growing, then we have a problem. We can maybe talk more later about some of the implications of that. The third S is spillovers. Again, another economic bit of jargon where a spillover is when a business makes an investment, but it can't be sure that it will gain majority or even any of the benefits of that investment. So R&D is the classic domain of spillovers. Countless examples of businesses that invent some fantastic product. An example that sticks in my mind as a British person is the CT scanners used in hospitals were invented by EMI, a British company that became known as a record company. They were the Sex Pistols record label.

And the Beatles, right?

Yeah, exactly. So back in the day, they were a very cash-rich conglomerate. They were very cash-rich in part because of the Beatles royalties. They invested that money paying some kind of ex-World War II computer scientist to invent this fantastic medical device. The guy who invented it, Godfrey Hounsfield, won a Nobel Prize. He was made a Sir by the British Queen. Fantastic kind of contribution to world healthcare. EMI shareholders didn't make a penny out of it. The market was almost immediately kind of gobbled up by General Electric in the US and Siemens Siemens in Germany. And it's kind of a story of the spillovers of intangibles. By contrast, if you invest in a factory full of machines, you can't guarantee you're going to make money, obviously. But you can at least guarantee that your competitors won't walk in and use your own factory to produce their products. There are laws against that. So spillovers is really significant. And again, spillovers has real implications for business investment. And it's got some kind of interesting investment implications, I think, for fund managers too, which we can talk about. The final S is synergies. And what's one of the really interesting things about intangibles is they get especially valuable when you combine them with other intangibles. So a classic example that we talk about a lot is the EpiPen, the epinephrine injector used to prevent anaphylactic shock. Kind of huge, again, a huge boon to civilization that this device was invented. Also hugely profitable for its manufacturers, to the point where it's controversial and people sort of say, well, how can they possibly make so much money, why is this market not more competitive? And this comes back to kind of Warren Buffett's idea of moats, defensive moats around an asset. And I think what we see is these moats are often made of a combination of intangibles that together are very hard to compete with. So if we think of the EpiPen, epinephrine is not patented. It's a totally off-patent drug, very, very cheap to produce. But the design of the EpiPen, the injector, is protected by various design rights. So it's not trivial to kind of come up with a new design. Their supply chains are extremely well developed, to the extent that in many countries, including the U.S. and the U.K., there are laws allowing EpiPens, which, you know, are dangerous devices if used wrongly, to be kept in certain public locations. You can keep an EpiPen, but if you or I were to invent a competitive EpiPen, that would in many cases not be covered by that law. The name itself, which is trademarked, is very powerful. If I were having a severe allergic reaction, I kind of want to know the name of a device that I can ask for quickly. So even even that has economic value to it. Even training— there's even a human capital element here, because lots of workers who work with children or vulnerable people are trained in how to use EpiPens. And, you know, people often sort of say, well, you could clearly design an improvement on the EpiPen, but then there's that kind of installed base of training that you wouldn't appeal to. And you have this situation where you have a device that in theory should be very easy to invent around, but turns out not to be, and consequently is very profitable. We see this, if you look at any of the big tech companies, you can see a whole ton of synergies between the very valuable intangible assets they have. This is another thing that drives the growth of super companies in this economy. So those are the 4 S's.

[Speaker:GREG_MILLER] Yeah. So as you think about these 4 S's, can you also view them to some extent as a framework for investing? So I'm thinking of someone like a Cathie Wood at ARK Invest, where she's investing in a lot of companies that seem to take advantage of one or more of these 4 S's. Do you think about it in that way? Are there other factors that we should be thinking about when it comes to intangible assets from an investment standpoint?

Yeah. I mean, I think I'm seeing a lot of investment theses that are grounded on the idea that these 4 S's in particular give significant lasting competitive advantage to companies that are good at them. Similarly, Baillie Gifford, historically the largest investor in Tesla, this is very much their investment thesis as well. I think I guess, what would you believe if this were true? You would, on the whole, believe that very high valuations for companies that had large and valuable combinations of intangibles were justified, potentially even undervaluation. So you'd be kind of a bull on, broadly speaking, on tech, but also on companies that could show that they were combining different intangibles. I think the other angle to this is that this is a good story for stock pickers. Because one thing that we know is that tangible assets are pretty well recorded in accounting statements. The accounting profession has had 200 years to develop a good way of writing financial statements that record tangible assets well. Intangible assets are much less satisfactorily recorded in financial statements. So the New York University accounting professor Baruch Lev has written really eloquently about how inadequate financial statements are recording things like research and development. What we see is that, you know, if you're an analyst in a sector that's historically depended on intellectual property a lot, so pharma sector analysts, for example, they've always known this, and they've always basically had to go and do their own discounted cash flow analysis of separate business lines, which is basically a kind of fundamentals-intensive research. And I think if you're looking at a world where this becomes more and more important you're going to need to be doing more and more of this. So the returns to really understanding what's going on in a business, to being able to understand the difference between, are these intangible investments, are these R&D investments, or these new product developments, are they good or not? There is more of an edge. There is more potential to generate absolute return that way.

Do you think that it is easier to start a company that is based on intangible assets? So I'm thinking of someone like an Instagram, that had, I'm going to say, I don't know, 14, 15, 19 employees when they ended up selling to Facebook for a valuation of about $1 billion. Now, back when I was growing up, if you had a company that was worth $1 billion, you had to have thousands of employees probably, because it was very tangible, very physical. Is it much easier in today's world and with today's technology to start businesses based on intangible assets, on patents, on algorithms, that again, take advantage of these 4 S's and have the ability to have tremendous value. Then that I think would lead into another part that I want to talk to you about, which is with the rise of all these intangible assets and the growth of these big tech companies in particular, how come we haven't seen faster overall economic growth? I want to take the pandemic out of it. Let's talk pre-pandemic, and then we can talk what's happened because of the pandemic?

The question of whether it's easier to set up businesses in the intangible economy, there's almost two answers to it. So on the one hand, because these intangible assets are really scalable, if you can set up a great startup, it's easy to grow it very quickly. As you said, Instagram's the classic example of this. But this is, broadly speaking, the story of Silicon Valley generally. Silicon Valley is obsessed with scaling, and with growth hacking, and with these kind of things. And the reason for that is that there asset class of choice, their intangible assets, is particularly conducive to that kind of scaling. So the good news is, yeah, you can grow billion-dollar companies in a way that was probably never possible with tangible assets. The bad news, though, comes back to what we talked about earlier, the synergies and the spillovers. Because if you're looking at an industry where there's already an incumbent of one sort or another— so your incumbent in a sector might be Facebook, it might be Google, those companies, not only are they there already, but because the synergies of the assets they have, their assets are particularly valuable in combination. So although it's easy to start a company and potentially easy to grow, the position of the leading firms in these areas is also stronger. So you kind of get this paradox where the way we think about the economy traditionally was, you know, you'd always have a number of companies in every sector, and they would compete with each other on a a little bit on price, a little bit on innovation. And you can kind of measure the health of the sector by the concentration ratio, or by how many companies there were. That's the kind of traditional mindset. Whereas in an intangible economy, your equilibrium is going to look quite different. You may often have very dominant companies, or companies that bridge a number of sectors. The sectors may themselves even be new, like Google in search. But very often, it looks like a kind of what biologists would call a punctuated equilibrium, where for a while, one company kind of rules the roost. And then all of a sudden their unassailable lead suddenly becomes assailable, and someone else takes over or carves out a bit of their market. So the nature of competition in this sector feels like it's changing. The $64,000 question for people who care about the economy as a whole is which of those two factors is going to dominate? Are we getting to a stage where the great extinctions, the kind of the rise of the upstarts, is going to slow down? Or actually, are things as robust as they ever were?

[Speaker:TREY_LOCKERBIE] Then as we look at economic growth since 2008, I think a lot of people would say, and looking at the data, that it's been subpar. That period of time has corresponded with the rise of intangible investing. What has your research shown is a connection or not a connection between slower economic growth and the rise of intangible investing?

So it's hard to prove any of this. But one thing that we've noticed is that when we think about intangible companies, we're basically thinking about that small bit of the economy where the institutions or intangibles, broadly speaking, work. So if we think about— let's go back to tech, because that is the intangible sector par excellence. We talked about how debt finance doesn't work particularly well. Tech is the sector that has basically spawned over the last few decades its own ecosystem of risk capital and equity finance in the form of VC. That was a really hard fight. That took decades of a combination of kind of farsighted investors willing to lose money, entrepreneurs coming up with new modes of financing businesses, and to a certain extent, government action. All of those things led very, very slowly to the creation of this kind of new subset of financial institutions, which is willing to take a risk on these kind of growth companies. But that is still venture capital. As your listeners will know, venture capital is still just a tiny, tiny fraction of the overall financial system, for all the glamour that it attracts. And when we talk about what's going on in this kind of intangible economy, the question might almost be, well, why are intangibles not spreading more, spreading faster in the rest of the economy? And I think my diagnosis would be the dominant form of capital has become intangible. But for the most part, there are lots of reasons why businesses will be reluctant to invest in intangibles. They might be reluctant because the leaders who enjoy these synergies will will just outcompete them or gobble up the gains. That's a significant problem in a world of spillovers. They might be reluctant because they have access to finance problems. If they're reliant on debt finance, it's harder to raise money to make these investments if you need to raise external finance. Then there is also kind of significant industry culture issue, which is that we know there is a big difference between sectors that deal with intangibles and people who deal with intangibles, where you're busy negotiating networks, you're kind of borrowing an idea from here, licensing an idea from there, bringing things together. That's often a very different mindset. And it's— anyone who's compared the culture of big tech companies to other large companies will know that.

Let's stay with the pre-pandemic here for just another minute. Was it your belief, or were you seeing in the data that prior to the pandemic, that cities like San Francisco, or the Silicon Valley area, or these other— London, as an example, where I think you're located— located, those were like these attractive places where a lot of people were moving to, and there was a lot of synergies that were taking place. And so if you wanted to be in tech, you needed to be in the Bay Area, or you needed to be in, you know, 2 or 3 other places around the world. Is that fair to say prior to the pandemic that because of the intangible assets in these 4 S's, you really needed to be in one of these concentrated areas for certain types of industries? Is that accurate?

RAOUL PAL: That's totally accurate. We economists like to call these things agglomeration effects. When you glom together lots of skilled people who are interested in a particular thing, their productivity goes up, they create valuable businesses, they create value. That comes down to these spillovers and synergies we talked about before. Because for the time being, most of these synergies and spillovers traditionally have been created face-to-face, that we've not got We're not good yet at doing them remotely. And if you look at the historical trajectory of a country like the US or a lot of countries in Europe, we've gone from a world where prosperity was to some extent quite widely spread across medium-sized towns and cities to a world where certain cities have become real hotbeds and others have been left behind. And that is exactly what you'd expect in a world where you've got to be in the place you've got to be in if you want to get the spillovers and make the most of the synergies.

Right, so then the pandemic happens, and all of a sudden everybody is on Zoom, everyone is digitizing everything, people are working remotely, and a lot of companies are realizing that, at least in the industries that aren't like physical things where I have to physically be present in a restaurant, for example, that we can do a lot of this work without necessarily going into the office. And I know the jury is still out in terms of what the long-term effects of this may be because we're still in the middle of this thing. What are you thinking in terms of, as a result of the pandemic, is that going to allow people to move out of these big cities? Because how many people can afford to live in San Francisco? How many people can afford to live in London? But if I can still do my work from a remote area in Wisconsin, like I am, is that a net benefit? Like this remote working, is that a potential net benefit to the economy relative to having everyone having to live in these major metropolitan areas? What are your thoughts on that?

So I guess the first thing, if we can make remote working, if we can make the kind of the magic of in-person working happen at a distance, that will be an incredible economic benefit. It will be hugely valuable to businesses. It will be a huge driver of economic growth. I'd be very happy about the state of the world if that comes to pass. And I guess if we sort of say why, as you say, one of the problems with the intangible economy as of beginning of 2020 was that these fantastic benefits of intangibles happened in places. But for a whole set of reasons, we had a bunch of rules about what you were allowed to build in places that kind of operated in exactly the same way. It's proverbial that you can't build any housing or any office space in San Francisco. It's incredibly difficult. London is very similar. The UK is kind of curious because a lot of our kind of scientific and tech expertise is in the cities of Oxford and Cambridge, where we have, you know, great old universities. And it's almost impossible to build anything in either of those two cities because they're full of beautiful buildings and surrounded by people who like to live in green fields. Now, that was a real contradiction. It was a— you had a world where you needed cities to grow if you wanted intangible investment to prosper. But cities, for a whole set of reasons, would not grow. Real problem. Now, if, as you say, remote working holds the key to this, if we can collaborate effectively, if we can get the same benefits over Zoom, then that will neatly sidestep that problem to the huge benefit of businesses and the economy. So that's the kind of positive story. But let me also tell you a kind of scary story that could also happen. And the jury is out on this. The scary story is, you know, We're all working over Zoom. Everything seems like it's going well. Certainly, at the organization I run, all our metrics look like they're going well on a day-to-day basis. But what if, as some people have speculated, that there is some longer-term stuff that's not happening? Next year's products or next decade's products are not being delivered because they come out of water cooler chat that's somehow not happening remotely. Or you're not bouncing ideas off people that you meet at conferences or sales calls, and therefore things are— which is, you know, And that's a plausible thing. It's something that a lot of people have reported anecdotally that's happening. Now, the reason why that's so scary in an intangible economy is, in a tangible world, if you weren't building new capital, if you'd stopped ordering or repairing your machines in your factory, that would be in your accounts. Your CFO would tell you. It would be totally obvious that was happening. You might not want it to happen. You might have no choice. But you kind of know pretty quickly. Now, the intangible assets that we're talking about, the new ideas, the new products, the relationships for next year, you'll never find out if you're not investing in those in your balance sheet. You may never know until it turns out that your profitability has declined because your products are no longer appealing. So the happy story here, that's the happy story about lockdown, is that we find out a way of remote working that allows us to sidestep these problems about not being able to grow our thriving cities. The scary story is that maybe this isn't working, and we're just not going to know until it's too late. And there's actually going to be a huge downturn in productivity because these kind of important intangibles aren't being formed, and we don't know.

Let me reverse that. And what I mean is, I think so many people are talking about with this remote work, they're figuring out or they're saying, this is what we're missing by working remote. We're not able to have these water cooler chats. We're not able to have this bumping in of ideas and because we're not meeting in person. But I don't hear a lot of people talking about what could be the positive things that are newly created as a result of people being able to have concentrated periods of deep work, as Cal Newport talks about. What could be created as a result of not having all of these distractions of being in the office all the time? Maybe that that could outweigh anything that we might miss by being in the office 5 days a week, being frustrated because we've got an hour-long commute each way, and the stress of that. So I think there could be a lot of potential benefits that people really aren't talking about here.

RAOUL PAL: I think that's really true. And I think it's really interesting if we look at some sectors that have kind of always been intangible-intensive and how they've dealt with this. So if we think about what's a classic sector that has been doing a lot of remote work for quite a while, or an activity, I would say software development. Development, remote software development. Certainly, if I look at many software startups in London, we'll have a development team in Estonia, or in Ukraine, or in Romania. We know that in the US, there are people— firms will be using software developers across the US, in India, and other countries. And this has kind of always been a thing, partly because software developers are scarce, and they command a high salary. So they can dictate the terms of their employment. Be a surfer and kind of surf on the beach and code in the afternoon, they're in a stronger position to demand to do that to their employer than other people. But for whatever reason, that kind of remote work has been a norm in that kind of intangible activity for quite a while. And it's interesting if we look at, well, OK, how have they dealt with that? Well, they've come up with tools like Slack, which is a way of developing relationships. They've come up with tools like Asana or Basecamp to manage projects so that you can get some of the things that you would typically do from face-to-face interaction. And I guess what's interesting about that is the coders have codified what it means to work on projects so that they can make remote work work. And I guess the interesting question is, well, how do we do that in other areas? How do we do it, say, in the creative industries more, where these kind of things work? So I'm very optimistic. But I think we probably need to work out how to make remote work work.

Yeah, and I think it's really fascinating to see in the business world, you've got some companies who are saying, We're going back 5 days in the office, period, as soon as we possibly can. And then you've got other companies' leaders who have said, this is a real opportunity for us to broaden who we can hire. We don't have to hire people that have to physically be located here in our city. We can look all over the country. We can look all over the world and find the best people for the job and not require that they have to relocate. So it's, it's interesting to see how different leaders are approaching this. From different ways. Maybe along those lines, I know one of the things that you talk about in your book, and I think is very important to you and many people obviously, is this idea of inequality. Up to this point, capital has been borderless, meaning a dollar is a dollar, a pound is a pound, regardless of where it comes from in the world. Labor was fixed from the standpoint that I had to physically be in this location in order to perform this job. But with the rise of the intangibles, what the pandemic has also showed us that a lot of these jobs can be done remotely. Do you think that we're going to start seeing a shift in the balance of power between capital and labor? And now that labor is much more borderless, much more flexible, do you think that we might see labor being able to have more of a say in terms of wages?

I think it's a really good question. I think it depends on whose labor, which workers you're talking about. Because I think one of the challenges of the intangible economy is for a small number of workers, the intangible economy is astronomically good news. If you are someone who can create incredibly valuable intangible property, if you're J.K. Rowling, who's written the Harry Potter novels, a hugely valuable intangible asset. But equally, if you're a sports star whose output, because of the intangible economy, now can be broadcast across every continent and licensed very heavily. That's hugely significant. But this isn't just about kind of global megastars and billionaires. It kind of applies further down. So there was some fascinating research done on lawyers about 5 years ago by the British academic Luis Garricano. He looked at how law firms used intangibles, used management technologies to basically rank and yank and rate their lawyers. And he basically showed that over time, as law firms became more intangible intensive, as they develop more processes, the inequality of pay among lawyers at the same level increased because back in the day, no one kind of really knew whether lawyer A or lawyer B was actually more productive. Now we really know. So if you're lawyer A who bills massive hours and is kind of a huge fee earner, that kind of encyclopedic knowledge of what's going on in the firm that you can get from intangibles, from software, from data, is great for you because you can claim the rewards of your labor. If you're the guy who was coasting, it's less good. And I guess where you see this kind of the extreme version is, you know, the accounts you hear of workers in Amazon warehouses, for example, where a job that was once often unionized, potentially relatively lightly supervised, and was kind of a good working-class job has been changed into a job that's much more surveilled, where people are expected— not just expected to work harder, but tracked to make sure they work harder. So I think if we sort of say, well, what does this mean for labor? It's great for some people who live from their labor and not so great for other people.

For decades, if not one or two centuries, we've been hearing economists say that because of technology, eventually we're going to have this leisure class. We're going to work 10, 15, 20 hours a week, and everything's going to be wonderful. Well, here we are in 2021, and we have a labor shortage despite all the technology, despite all the growth in intangible assets that we've seen in recent years. We have a massive labor shortage, at least here in the US. I can't speak for what's happening in the UK, but it seems ironic. So why do we have a labor shortage? And let's maybe take the pandemic pieces out of it because certainly there's some pandemic effects. Some people don't want to go back to work yet. There's probably some political things in terms of people are getting paid to not work right now. But even taking those pieces out, Do you think there's still going to be a labor shortage coming out of this pandemic?

I mean, one thing is that humans are very good at devising new wants, new things to want when our existing wants are satisfied. So when John Maynard Keynes was talking about how we would all work kind of one day a week or whatever back in the 1930s, he didn't foresee the fact that we would want personal trainers and yoga teachers and health billing accountants and things like this. So part of it is just that that kind of human desires seem to be insatiable, and we create new things to want and to do. But I guess there is kind of an interesting intangible element here, because we know that it's pretty hard, especially for a lot of established businesses, to deploy intangibles in the right way. So it may very well be that artificial intelligence technology can use data to allow an insurance company to process its claims in a much more efficient way. But first of all, it's not easy to do that straight away. There's a lot of inertia. There's often legal barriers to doing this because, you know, there will be things that the laws and our rules and our institutions will be based around the world used to be like before these things existed. So it's potentially just legally difficult to implement them. And any of these changes takes time. Often they'll be ushered in by a disruptive business that enters the market. All of that takes time. So I think this partly might be kind of another teething problem for the shift to a different type of economy.

Let's shift gears just a bit here and talk about a couple other things here as we get ready to wrap up. So one is Bitcoin and other digital assets, crypto assets. Have you done any research in that area? What are your thoughts in terms of what's happening in that space and what potential implications that may or may not have for our economy?

To some extent, cryptocurrencies, Bitcoin are kind of a different category of thing to the intangible assets that we talk about. So From an accounting point of view, our intangible assets are intangible fixed assets, whereas Bitcoin is, in a sense, an intangible financial asset in the same way that if a company owns some US government securities or some money market funds, those are financial assets rather than a productive one. So there's one sense in which these are just different things, even though you can't touch either one, so they're technically intangible. But there is, I think, an interesting dimension to between blockchain and crypto generally, which is that if you look at some of the interesting uses that blockchain technology is being used for, one of them is as a way of raising finance for ventures and for new companies. And I think that comes back to this point we talked about earlier about the problem of intangibles being sunk. So if you're in a world where if you can raise VC from Sequoia, you're kind of golden. You're fine. You're in the kind of blessed 0.001% who will start a great business and probably do very well. Well, but if you don't have— if you can't get a bank loan, if you have an intangible-intensive business, and you're not in the kind of world of VC, you're kind of stuck. You're thinking, well, OK, how do I raise the finance I need to back this business when I'm not generating any assets and don't have a track record? And I think you can see some of these applications of blockchain to fund risky business as this sort of evolutionary burst of new ways of trying to solve that problem. The problem is that intangible assets need equity-based finance. There is kind of an existing shortage of equity finance in most sectors. And you can see the use of blockchain technology, or to take a different example, the growth of crowdfunding, as a kind of way of using new technologies to try and meet that gap. And I spent quite a lot of time a few years ago studying the growth of crowdfunding. There is some good practice in crowdfunding. There is some pretty flaky practice. But you could see what was driving the demand. And the demand was the difficulty of raising equity finance for so many businesses. And the desire to draw on whatever resources people could have to get that kind of finance. So I do think this all kind of links in, in a way.

Well, Steve, as we get ready to wrap up here, I think you may be working on a new book, but any final comments that you want to share here, or any insights on some of the new research that you're working on?

Yeah. So Jonathan Haskell, my co-author, and I have a new book coming out in spring of 2022 called Restarting Tomorrow. And it says is, given where we are, given the points that you made about economic stagnation, these big issues we face in an intangible economy, what can we do as citizens, as investors, as governments to try and improve things? And it's really a book about what the institutions need to be for the new economy to work, ranging from monetary policy through financial services through to government. So if you're interested in these ideas, I hope you'll like the new book as well.

Great. And the best way for folks to stay in touch with you, obviously, we've got your book, Capitalism Without Capital, that you can get at your favorite bookseller. But where can people find you online or social media?

I'm always on Twitter.com. My username is @StianWestlake, just my first name and my last name.

So check it out.

Excellent. All right.

Well, Stian, appreciate your time here today.

Thank you so much for having me. It was great to speak.

My key takeaway from my conversation with Stian Westlake is how we can use his 4S framework as a way to better understand the economic characteristics of intangibles. Companies and economies that rely heavily on intangible assets behave differently than ones that depend more so on physical assets. And by better understanding this difference in behavior, we can become better investors and gain a deeper understanding of how our economy works. All right, that's all for today. Make sure you like and share this podcast through your favorite social platforms. And for more great podcasts, visit us at barons.com/podcasts. Take care and be safe. This podcast was brought to you by Wells Fargo Advisors. Looking for a firm your clients can't outgrow? Wells Fargo Advisors offers financial advisors full balance sheet solutions with wealth planning, investment products, banking, and lending that meet the needs of affluent to ultra-high net worth clients. Build your practice your way and on your schedule with independent and employee model options designed to meet your needs today and tomorrow. Learn more at joinwfadvisors.com.