What government can do about the winner-takes-all economy

“…over the past 20 years there has been a steady rise in the importance of intangible investment relative to tangible investment… by 2013, for every £1 of investment in tangible assets (buildings, machines, vehicles, etc.) the major developed countries spend £1.10 on intangible assets (such as software, R&D, design, branding, training, and business process engineering).”

This matters because intangible assets have special economic properties:

“One is the ability of firms to scale intangibles over their operations more readily than tangibles. Uber can serve more customers with their existing software, but Bob’s Taxis, your local taxi firm, has to buy more cars. Another is spillovers – firms cannot use their rivals’ tangible assets, but can potentially use their rivals’ intangible assets.”

If their business is based on intangibles, it’s therefore easy for big companies to get even bigger – quickly ramping up production to meet demand, and readily developing new capabilities by attracting talented individuals and acquiring the intellectual property of other firms.

In getting bigger, such firms also get better because of synergies between intangible assets:

“…intangibles are often highly valuable when combined with other intangibles. For example, consider how the R&D and design in an iPhone combine with the organisational design of the App Store and Apple’s supply chains, and with Apple’s own brand to create one of the world’s most profitable products.”

OK, that explains why the shift to an intangible economy lends momentum to leading companies, but how does it explain the slowdown of the wider economy?

One theory is that the ‘laggard’ firms just can’t catch-up:

“If more of the capital stock is scalable, and exhibits synergies and spillovers, leading firms can pull away from their competition, scaling up over their intangible assets, assimilating knowledge from rivals, and combining intangibles in a way that laggards cannot.”

The old world of tangible innovation was different. For instance, when coal-powered machinery was superseded by oil-powered and electrical machinery, the factories that first adopted it may have had an initial advantage – but the competition was able to close the gap by slotting the new tech into their existing operations. However, in the new world where innovation is more about the multi-dimensional integration of intensely knowledge-based systems, the gap between the frontier firms and everyone else becomes unbridgeable.

There is, however, an alternative (or additional) theory, which is that the problem lies with not with the laggards, but the leaders. The idea is that many intangible investments, while profitable for the investor, are parasitic on the rest of the economy. Examples that Haskel and Westlake give include tax avoidance schemes, lobbying for special favours and spurious legal action over intellectual property. This is what economists call ‘rent-seeking’ i.e. economic activities that do nothing (or less than nothing) for overall productivity.

Is there anything government can do about the winner-takes-all economy?

In some cases, the answer is no. We have to accept that outdated business models aren’t worth saving. Indeed, when they tie-up talent and capital that would be better deployed elsewhere, we should welcome their dissolution. If the agent of change is a bigger firm that offers better goods and services – yes, even a foreign one – then we should not stand in its way.

Yet, at the same time, we must guard against monopoly. Government must disrupt rent-seeking at every opportunity, especially on the part of the most successful businesses. State bureaucracy is good at getting in the way of private enterprise – but when that enterprise is fundamentally unproductive, government should not hold back.

More positively, government can encourage competition by investing in shared infrastructure – making sure it’s accessible and useful to businesses of all shapes and sizes. Infrastructure includes the intangible infrastructure of knowledge networks, which when under the exclusive control of particular companies can put them in an unassailable position – think Facebook or Amazon. Government, however, collects vast amount of potentially valuable information. Effectively integrated, open access to publicly-gathered data could be a powerful antidote to the monopolistic exploitation of privately-gathered data.

In the winner-takes-all economy, government should allow market-leaders to be the best they can; while preventing them from doing their worst.

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Peter Franklin is Associate Editor of UnHerd. He was previously a policy advisor and speechwriter on environmental and social issues.

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