McKinsey Global Institute

Forward Thinking on the transformative role of intangible assets in companies and economies with Jonathan Haskel and Stian Westlake

“William Blake talked about the dark Satanic mills, these inhuman pieces of tangible capital. Intangible capital is in some ways about what makes us human. It’s about ideas, and it’s about relationships. It’s about expressiveness. Some people may ask whether we should we be making that the basis of the economy. But we would argue that this is actually making those things that matter to us as humans more central to our thriving.”
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Forward Thinking on the transformative role of intangible assets in companies and economies with Jonathan Haskel and Stian Westlake

In this episode of the McKinsey Global Institute’s Forward Thinking podcast, co-host Janet Bush talks with Jonathan Haskel and Stian Westlake. Jonathan Haskel is professor of economics at Imperial College Business School at Imperial College London and an external member of the Monetary Policy Committee of the Bank of England. Stian Westlake is chief executive of the Royal Statistical Society in the United Kingdom.

Haskel and Westlake talk about their pioneering work on intangible assets: how to define them to reflect their growing role in companies and economies, the benefits and risks, and how to enable a smoother transition to a dematerialized economy with such assets at its core. They answer questions including the following:

  • So we really are now in the knowledge and know-how economy. Is this a new era for capitalism?
  • Are intangibles good for us?
  • How do you tell whether investment in intangibles is smart or dumb?
  • Are intangibles a recipe for inequality?
  • What needs to be fixed to ease the transition to the intangibles economy?

An edited transcript of this episode follows. Subscribe to the series on Apple Podcasts, Google Podcasts, Spotify, Stitcher, or wherever you get your podcasts.

Podcast transcript

Janet Bush (co-host): So, Michael, today’s podcast focuses on a single topic: intangibles. It is a topic that MGI highlighted twice in 2021: first in a paper about how intangibles are driving economic and corporate performance, and second in a report on global balance sheets. And it was surprising given the increasing prominence of intangibles that they are actually a very small item on that global balance sheet. But when you hear that word, what does it mean to you?

Michael Chui (co-host): Well, I’m at MGI, so of course I’d first think of our published reports, which by the way you can download for free from the web—this isn’t a commercial! But I am also a sports fan. And in sports, people talk about intangibles as being the things about an athlete that are harder to measure. It’s easy to measure how fast someone can run or how high they can jump. It’s a lot harder to measure characteristics like leadership, resilience, and the ability to come through in the clutch, and those are all really important, too.

Janet Bush: Today’s guests definitely see intangibles as a reflection of what it means to be human, and not actually what initially sounds like a tedious accountancy term. It’s about relationships and talent and imagination. And, by the by, it really made my heart sing to hear the inspirational English poet William Blake name-checked in our podcast.

Michael Chui: Well, I can’t wait to hear what they have to say. Over to you, Janet.

Janet Bush: With me today are British economists Jonathan Haskel and Stian Westlake. Jonathan Haskel is professor of economics at Imperial College London and an external member of the Monetary Policy Committee of the Bank of England. Stian Westlake is chief executive of the Royal Statistical Society in the United Kingdom.

Jonathan and Stian, thank you so much for joining us today. You’ve written two fascinating books together, Capitalism without capital: the rise of the intangible economy and Restarting the future: how to fix the intangible economy. The second book is out in March 2022, and may I say, the authors invite you to preorder at Amazon [laughs].

I would like to start by asking each of you—why are you focused on intangibles? To many people, it sounds like a rather esoteric accounting term. But there’s clearly more to it than that. Jonathan, do you want to kick off?

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Jonathan Haskel and Stian Westlake

Jonathan Haskel: Thanks so much, Janet. You’re right, and when we first started this project, I guess we were somewhat nervous that nobody at all would find it of any interest whatsoever to get into this arcane feature of accounting. But I think the reason why we wanted to do it is that we are of the view that the economy has gone through a profound change over the past 20-odd years. A change which has just been missed by quite a lot of accounting—because of the various conventions, which we can get into, of the accounting profession—[and] by some of the economics profession as well. But also a change that spoke to a lot of what the management profession looks at.

What it is, essentially, in a nutshell is that the nature of firms’ investment and the assets upon which they base their competitive advantage is just very different now to what they were before. In the old days, companies like steel companies were full of tangible assets. They were full of blast furnaces and vehicles for getting stuff from A to B, and that’s what they produced.

Nowadays, companies are full much more of intangible assets. They are built on their reputation. They’re built on lines of software code. They’re built on wonderful design. They’re built on innovative scripts and movies and things like that. It’s that move from the tangible economy to the intangible economy, which is what we wrote about, and which, as I say, I think is hopefully of more interest than some of these rather arcane accounting issues.

Janet Bush: And Stian, how did the two of you end up working together on this?

Stian Westlake: I used to run an innovation think tank looking at technology and innovation and particularly the policy around that. And we were asking ourselves the question, “How do you measure at a national level, at a company level, how much innovation is going on?”

This question a lot of people are very interested in, but it’s very hard to get a handle on. And I was talking to a whole range of economists and other academics about different approaches and came across Jonathan’s work. Jonathan had been working, along with others, on this question of maybe there’s another type of capital other than machines and buildings and vehicles and all that kind of stuff that you can stub your toe on, as it were.

And Jonathan had been developing his thinking on intangible capital, and it seemed to really capture what we were looking for. Because we didn’t just want to measure R&D. We didn’t just want to measure tech. And I think that’s what’s so interesting about the intangible economy.

It speaks to a lot of the trends in the tech economy, but it’s also deeply human. It’s also about the expressive connection, the emotional connection people have with brands, the human relationship that underpins a really high-functioning organization and the software assets and tech and R&D as well. And that combination of us looking for that solution and Jonathan, who had been plowing this furrow looking at the economics of this—it was a great partnership.

Janet Bush: So we really are now in the knowledge and know-how economy. Other people say “dematerialized” economy. Is this a new era for capitalism? What you said implies that it is. Jonathan?

Jonathan Haskel: I think it is. And just to follow up a little bit on what Stian was saying—but I think, Janet, it relates to your question—it’s not just tech. Lots of people have said, “Oh, aren’t you just documenting there’s a new tech economy out there, and the world is full of computers and all that kind of thing?”

One of the examples that we try to use in the book, which hopefully uses many examples to be accessible, one of the examples we tried to use is Les Mills gyms. Now, this is not a tech company, but turns out to be a deeply intangible economy.

For those of the listeners who may not be familiar with this, they are the people who are in charge of the exercise class and the exercise routine on Body Pump, which is one of the most popular routines. If you go to Google and look at what people search for when they move to a new area, or when their local gym is closing—this is somewhat pre-COVID—Body Pump was one of the things that they looked for.

What’s so interesting about it is it’s not a giant firm, housed somewhere-or-other in Silicon Valley in California. It’s actually the outgrowth of a New Zealand company. Les Mills was a famous New Zealand athlete. And rather than owning a gym itself, which would be a very tangible thing, a building, and owning all of the exercise machines and so forth in that building, which would also be very tangible, that would be, as it were, plant and equipment, if I were an accountant looking at all that kind of stuff, what Les Mills owns is literally none of that. Instead, it owns lots of intangibles. It owns the reputation and the brand of Body Pump. It owns the software and the ability to put out these exercises to any exercise class you happen to be in the world.

For those of you who aren’t familiar, you go into the exercise class, so that’s the tangible bit, but then the software downloads the stuff on the screen, and there’s music. And it’s absolutely brilliant. And it owns also the kind of know-how and the relationships that Stian was talking about earlier on, about negotiating with the music companies and so forth to get the rights and so forth to play all the music.

So as I said, it’s not a tech company. And in a sense, it’s not a new company, because we’ve had gyms for a very long period of time. But it is a deeply intangible economy. And we thought that therefore we wanted to capture why that was a new feature of our economic makeup.

Janet Bush: Stian, just following up on the definition of intangibles, where your work was groundbreaking—and I know at McKinsey we’ve been building on this—you define intangibles much more broadly than the traditional accounting norms. Can you just tell us a little bit about that, because it does embrace lots more, including what you do with intangibles.

Stian Westlake: I suppose the way we and other economists would define intangibles, first of all, the thing’s got to be an asset. It’s got to be something that lasts for a period of time, typically more than a year. It’s got to deliver a lasting benefit to the business that makes it. And it’s got to have some up-front cost to acquire or develop it.

All of that is what you’d expect accounting bots to define. But as you implied, that includes a lot of really interesting things. It includes things like R&D or custom software, tech elements. Because you do some R&D, you hopefully develop some ideas out of it, and those ideas will bring a benefit to your business over, potentially, many, many years. Similarly with a big software installation.

But as you said, there are some of these things which are much less tech-related and much more related to human elements. So organizational development, if we look at, say, the investment that organizations make to become high-performing companies or the investments they make to develop their supply chains where those supply chains are durable and develop the benefit. Those are intangible assets, because they fit all those criteria of assets. And they’re not physical things.

Those things are—although sometimes people talk about the knowledge economy and imply that it’s a synonym—those aren’t really knowledge assets. They are more emotional. They are more human. And those things are, if we look at really high-performing companies at the moment, they typically will have a bunch of really valuable intangibles.

Janet Bush: Jonathan, just to follow up on that, are you continuing to refine and change how you define intangibles?

Jonathan Haskel: We are, Janet. And that’s something that we look at a little bit more in the current book. As Stian was saying, it’s not just knowledge of how to do things, a blueprint, a design, a line of computer code. What we think that these companies are founded upon is a lot more than that.

Part of it is reputation, which isn’t quite knowledge as well. Companies like Nespresso, for example—I can’t tell the difference between good and bad coffee, but Nespresso can charge an enormous premium, and puts a lot of effort into doing so.

That’s one thing, and then the other thing is the relationships within a company. Part of the miracle of Apple versus Nokia was not only the design and so forth that Apple had but Apple’s ability to get literally millions of phones to market on the day that they launched. Nokia would launch some, in the days when they made phones, would launch some fantastic phones. But the people who queued overnight to get their phones could never, ever get hold of them, because the relationships that they had in the supply chain were just not as good as Apple’s.

Whereas could you imagine what would happen if people queued overnight to get the latest Apple machine, and it turned out that Apple hadn’t managed those supply chain relationships and managed to supply them? People would be astonished that Apple was so poor at that. So that I think gets at some of these broader features of intangibles that we were after and trying to document.

Janet Bush: I now want to turn to the big question, which is, “Are intangibles good for us?” We worked on this issue in a report earlier this year, and we found that intangibles investment appears to be good for corporate performance. And that companies in the top quartile for growth invest 2.6 times more in intangible assets than the bottom 50 percent of firms. So do you agree with this finding that intangible assets [and] investments are good for firms?

Jonathan Haskel: Broadly speaking, the answer’s yes. And particularly, one of the things that we see, across sectors, across countries over the last 20 years or so, a lot of economists have observed a growing gap between the performance of the best companies and the rest—between the leaders and the laggards, as it were.

One of the things that’s particularly interesting, whether you look in a case study level or you look at a population level, is that one of the things that is driving that outperformance by the leading companies is more investment in intangibles. And to some extent, that’s sort of intuitive. You expect good companies to be investing in R&D and new product design in their organizations. But there’s also something about it which relates to the specific economic properties of intangibles. And one of the things we explore in the book is the fact that intangibles are different from tangible capital in a quite fundamental economic way.

For example, one of the reasons is that they are highly scalable. An intangible asset, like a new software system or a brand, can be scaled across an arbitrarily large business in a way that a tangible asset like a factory can’t. A factory will have a certain limit of utilization, and once you’ve hit that, if you want to produce more goods, you need to invest in another factory.

And you can imagine that that is a real advantage to leading companies. Leading companies can get bigger, they can take more advantage of these intangibles. So you get this sort of virtual circle arising from companies that invest in intangibles.

Investing in the intangibles gives you a competitive advantage. That competitive advantage allows growth, and then the growth makes the intangible stock that you own even more valuable than it was before. So smart investment in intangibles is a real competitive advantage.

Janet Bush: How do you tell whether investment in intangibles is smart or dumb, if you like?

Stian Westlake: This relates to another of these kind of fundamental characteristics of intangibles that we talk about. Because another way that intangibles tend to differ from tangibles is they seem to exhibit very great synergies. By that we mean that combining, if you can bring together the right set of intangibles, they’re often worth much more than the sum of their parts.

Jonathan talked earlier about Apple. If you look at an incredibly successful commercial product like the Apple iPhone, it combines a bunch of really valuable intangibles that would be much less valuable on their own. There’s the underlying design of the phone. There’s the R&D that went into the phone. There is the investment to develop the network of developers in the App Store, which is kind of an organizational investment as much as a technological investment.

And then there’s obviously the software and the operating system. Any one of those would probably not be that valuable on its own. You know, is iOS really distinctive compared to Android, if iOS was somehow a stand-alone company? Probably not.

But the combination of iOS, the App Store, the unique design of Apple, the reputation for design—that people trust that an Apple product, even before they’ve taken it out of the box, will be superb and easy to use. All of those things are highly synergistic.

To come back to your question, what does a good intangible look like? Well, a good intangible is often good based on what else you combine it with. And one way of thinking about the secret of combining intangibles is, that’s what strategy and good management means nowadays.

Jonathan Haskel: But I think that takes you then to the question about, if it’s all good, why isn’t everybody doing it? And the answer to that is, there are some bits of this which actually aren’t quite so good. The example that we use a lot is an example I ask my students all the time. I ask them, especially foreign students, to name Britain’s most famous innovation.

And after lots of thinking, radar, hovercrafts, you know, all that kind of thing, I tell them what the answer is, which is completely obvious once you think about it. It’s the one British innovation that even people on remote planets have heard of, and that is, of course, Harry Potter. And the point about Harry Potter is that it exhibits the scale and the synergies that Stian was just talking about.

Once you’ve written the script, you can print millions of books. Once you’ve written the script, you can make the movie, you can bring in the software that makes all the fantastic animation. You can make the theatrical production and all those synergies.

But it’s got at least two downsides to it. One of the downsides is what we call spillovers. And the spillovers are that the thing about these intangibles is that the Harry Potter theater can’t show other plays. People can copy these intangible notions because of their ideas. There’s a famous case in India [in] which the Harry Potter rights owners went after an Indian film which was called also Harry Potter—Hari Puttar. And guess what? It was about a young wizard at home. Actually, weirdly, the young wizard at home, his parents go away over Christmas, leaving him mysteriously behind. And a pair of incompetent burglars then come and attack the house. So it’s a mashup of spillovers from lots of different movies.

The difficulty is that if you invest therefore in these intangibles, and all the benefits spill over to everybody else, then that’s no good. So part of the management of these intangibles is going to have to be, as Stian was mentioning, not only bringing all these synergies together but also stopping these spillovers from occurring.

I’ll mention one last disadvantage, Janet, if I may, which follows from the last of the four economic properties of intangibles, which is the trouble is, when you get started with intangibles, it’s quite difficult, often, to raise money.

If you go to a bank and say to them, “I’ve got a tangible asset”—like a vehicle or a building or a blast furnace, to go back to our earlier example—a bank will lend you money against that security. If you go to the bank and say, “I’ve got a really good idea for a fantastic movie about wizards,” it might well be that the bank’s a little more hesitant to lend you the startup money. So defending against those spillovers and getting over the initial hurdle about raising the finance, which comes from the sunk-cost nature of intangibles, those are the two downsides.

Janet Bush: I guess one of the barriers to the inexorable rise of intangibles is that they just cost a lot at the beginning.

Jonathan Haskel: That’s right, Janet. And one of the themes of our new book is to ask the question, “Is conventional bank and conventional bank lending well suited to this type of economy?” And we say it probably isn’t. What banks love to do is they love to lend against security, against tangible assets, buildings, houses most notably in the UK and in other countries.

What they find much more difficult is lending against these intangible assets. And so there’s been an evolution of financial institutions outside of banks to deal with all of this, of which venture capital is an obvious candidate. And the issue with venture capital is whether one can scale up that type of financing model across the whole gamut of intangibles that Stian was talking about earlier on.

We know that venture capital, especially in Silicon Valley, is astonishingly successful at financing ICT [information and communications technology] and digitalized and software type of industries. That’s what they’re amazingly good at. But what we’re going to need in the future is to finance different types of industries, most notably around green, for example. Some of those industries might be software type of industries, but many of them might be around the knowledge and the innovation that’s required to get us to a carbon-neutral future.

It’s not clear that that venture capital industry is yet well enough equipped to finance that rather different type of investment. When I say different, it’s another dimension of intangible investment. But it’s a different dimension to the intangible investment beyond the software that venture capital has mostly been funding up until now.

Janet Bush: Just to follow up on that, is this a question of knowledge about what intangibles are? Or is it just that it’s a new beast, that there needs to be a transition to a different way of thinking?

Stian Westlake: The problem is probably more than that. It’s quite a fundamental problem in how intangibles work. So again, it comes down to this fact that compared to a tangible asset, an intangible asset is not worth much to a creditor if the business that has created it, that owns it, goes bust.

And we see again, that explains a big part of the reluctance of debt finance providers, especially banks, to back intangible-related businesses. This is not really an awareness problem. It’s sort of a fundamental aspect about these knowledge assets.

I think we are seeing some sort of minor changes to that. So, for example, there are some secondary markets emerging for certain types of intellectual property. But for the most part, this is—one economist called this “the curse of collateral,” the fact that businesses nowadays have less easily fungible collateral for banks to look at.

And it plays out in very strange ways. One thing that some research that Jonathan’s been involved in, and research that other people have done, has shown is that this manifests itself through banks effectively turning business loans into de facto mortgage loans in countries like the UK.

The way one can observe that is [through] some clever research looking at the value of company directors’ houses and how that affects business credit. In the old days, if your modal business basically owned a factory or a property or something that the bank could take a charge on and seize if the loan went into default, there wasn’t a significant relationship between the value of directors’ houses and credit availability for businesses.

In a world where businesses have fewer assets like this, banks suddenly become very interested in whether the directors of these small firms are willing to—whether they’ve got nice expensive houses that the banks can take a charge on. And what’s fascinating is you actually see that in the business microdata, in the analysis, that in this new economy this suddenly starts to be relevant to the question of available credit.

Now obviously that’s interesting if you care about the overall health of your economy, because we want new businesses to have access to finance. And if this is proving a barrier, then that’s problematic. It’s potentially very interesting from an equality and opportunity angle, because the ownership of expensive houses is obviously not fairly distributed throughout society. So if you care about the ability of people from all backgrounds to start a business, that could be a real problem.

Janet Bush: It’s fascinating, because it seems to be a recipe for inequality just from the bank lending or the financing side. Obviously the large digital tech companies are intangible companies substantially. And they have obviously got a lot of money. So they started somewhere and they got the money somewhere, but how can other people pull off the same trick?

Jonathan Haskel: That’s what’s so interesting. It goes back a little bit before, to what’s good and what’s bad about intangibles. You might say exactly that intuition, Janet. You’ve got these enormous companies now. They’re more cash rich, the Microsofts and the Apples and so forth are more cash rich than many banks, frankly.

How would anybody else stand an earthly chance? And the answer of course is, as we were mentioning, there are these spillovers, which is that other companies could potentially do what they do. So the question is, how is it that in this tug-of-war between what seems to be the entrenched dominance of these companies, who have the resources and have the current intangible assets—how is it that in that tug-of-war, they’re winning out to all of these entrants who seem unable to succeed?

Maybe we’re just at the early stages of the intangible revolution, actually, and maybe it’s going to be perfectly possible for companies to get past all of this in the future to succeed.

If we were even talking five years ago, and we were doing, as another tech example, we were doing dating websites, no one had ever heard of Tinder. So you might say, “Well, how on earth can Tinder have ever started,” right? They never had any information. They didn’t have any financing and all of that, yet they managed to be astonishingly successful essentially by having a different business model than everybody else. There’s a rich set of predictions and possibilities that I think come out of this intangibles world, which are playing out even as we speak.

Janet Bush: Going back to the point about inequality, it does seem to play into the narrative that MGI has written a lot about on superstars, that there is this increasing gap between the leaders and the laggards, and that intangibles is fueling that gap. It’s the leaders who have the intangibles and the laggards who can’t afford them. Is this a recipe for inequality in a very broad economic sense?

Stian Westlake: You’re absolutely right. This is something we do see in lots of sectors. The thing that exacerbates it, if anything, is, as we were saying, the spillover properties of intangibles in some ways make it worse.

One of the things that leading firms are often very good at doing is not just getting the benefit of their own intangibles but also getting the benefit of any intangible investment that their competitors might make. Sometimes [that’s] called open innovation in the management literature, which sounds very benign. But obviously what it implies is getting the benefits of investments that others make. I think you do see this is a hard world for laggard firms.

The flip side is—and this comes back to the fact that intangibles are scalable—if you have a lucky break, you can grow very rapidly in a way that I think is much harder to do in a tangible economy. As Jonathan was saying, you move from a world where being a laggard is maybe, I don’t want to say easy, but you have a strong hope of catching up if you’re a laggard. You can just copy. It’s relatively easy to follow the leader to a world where it’s harder to be the challenger, the upstart, because the leaders have such advantage. But if you can make it work, you can hit it big.

It takes you from a more static, fairer world to a more dynamic world that’s unfair, unfair, and then suddenly the tables are turned. And the question to making that a sustainable model is to make sure that you have enough competition in the economy, enough dynamism, that the tables get turned enough.

Janet Bush: Jonathan, going to you for the macro view—in the MGI report, we thought that there was evidence that intangibles investment correlates or at least is associated with higher growth and productivity in sectors and even in whole economies. Are you seeing that in your analysis?

Jonathan Haskel: Yes, we are. One of the causes of the productivity slowdown since 2008, which McKinsey and others have studied, is that although the economy is becoming more intangible-intensive, there’s been a slowdown in the rate of growth of intangible intensity after the financial crisis. And that slowdown is correlated with a productivity slowdown as well. We think part of this story is trying to understand what the causes of that slowdown were. Because if we can find a way of investing more in intangibles, then we can raise overall productivity.

Now, of course, whether the fruits of that increase are then spread equally amongst everybody goes back to the discussion we were just having. But at least we would be in a position, if we could get more intangible investment and overcome those barriers, at least we’d be in the position of having a bigger cake, potentially, to share out. We can then worry about how evenly it’s going to be shared.

Janet Bush: Stepping back a bit, do you think that the rise of the intangible economy is now unstoppable? Is this just part of a new era that is about tech, it’s about more than that, it’s about knowledge?

Stian Westlake: It’s certainly a long-term trend, in the sense that we’ve been seeing the growth of intangible investment in the figures for at least 40 years. And those kind of trends, to the extent you can extrapolate from any trend, it seems like something that one can have some confidence in.

I think there was an interesting question when COVID-19 hit about what would this do to the intangible economy? It took a while for data to emerge on this, but actually intangible investment has been pretty robust in the COVID-19 period. And that may well be because people have been investing in new business processes and software to take account of the new world.

One could argue if this trend’s been going on and a pandemic hasn’t derailed it, that’s further evidence that this will continue to come.

Janet Bush: Jonathan, we talk an awful lot about skills and ensuring that people have the wherewithal to thrive in what is already a very different economy. How much does this rise of intangibles make the skills or reskilling imperative even more urgent?

Jonathan Haskel: It does, because of course a lot of skilled workers are deeply complementary with intangible assets in firms. Skilled software programmers are going to be able to do the fantastic programming to make the special effects, to make the Harry Potter movies, and so on.

There’s no question that it’s going to increase the demand for those types of workers. But where that takes you, Janet, I think is that people then turn your question a little bit more sharply and say, “Well, give us some careers advice in that case. If this intangible economy is going on, does that mean that everybody should become a software programmer, an algorithm writer, an expert calculus performer, so that they can program massive computers to do even more?”

And we say, “No, no, actually,” because we say that that once again is an undue focus on the tech dimension of intangibles. As Stian was saying earlier on, the intangibles have got a much broader dimension to that around design, around artistic expression, around creativity.

And the other aspect that Stian mentioned also is around management and relationships and so forth as well. Now, it might be that highly qualified tech designers and algorithm writers are really good at management and really good at maintaining those personal relationships.

On the other hand, it might be that historians and poets and scholars of ancient Greek and so forth are very good at all that stuff as well. We are saying that skills are going to be important. But we’re not trying to push people into narrow tech skills, which is what some people think would be the consequences of this intangible growth.

Janet Bush: I just want to go back to your book coming out in early 2022. You talked about fixing the financing side of the intangibles economy, but are there other things that need to be fixed that you talk about in your book?

Stian Westlake: One thing that is particularly problematic in country after country is the system for land use, how we lay out our cities and how we do planning and zoning. As we said a little earlier, even with digital technology being what it is, people still seem to like exchanging ideas or building relationships in person.

One of the lessons of COVID has been that even after COVID, even after 18 months of being on Zoom and Teams, that has still stuck. There is still something about working in person that really helps. One of the challenges—and we see this in the US, we see this in many parts of Europe, we see it in other economies as well—is that our rules make it very hard to grow and develop thriving cities.

There are a lot of rules on what you can do. Places like San Francisco are classic examples where it’s incredibly hard to build, incredibly hard to develop. And we see this being a problem for businesses. You hear the complaints from tech businesses trying to expand. But what you don’t necessarily see is the cost that that imposes on the wider population.

It makes it harder for people who are on lower incomes to move to places where there’s more opportunity, which is bad for the economy. But it’s also particularly bad for people who could be increasing their incomes through moving. There’s no point in doing it if all your additional income is going to be eaten up in rents.

That’s an example of an institution that appears to be to do with tangibles. You know, buildings are very tangible things. But it’s become important in an intangible economy in a way that 50 years ago was much less of a big deal.

Janet Bush: Jonathan, any other thoughts?

Jonathan Haskel: We talk about the public funding of science, and the need for that to be fixed and maintained, and the commitment value that’s required there as well. What that raises is this tricky issue about quantity versus quality.

Do you think as a society that if we just fund a lot, then things will kind of fall out of that in some way or other, in a way that we hope? Or do we think that funding needs to be much more directed, maybe a bit more competitive, to allow some more experimentation, to allow synergies to develop and so forth? We talk about some of those trade-offs there as well.

Stian Westlake: This is something that we see in the public debate around science and technology at the moment, some of the conversations people are having about how to advance technology and the progress studies debate that people like Tyler Cowen have been advancing in the US.

Or here in the UK, the conversations about how do we increase science funding? Should we create an institution like DARPA, the US defense funding agency, in the UK? There’s a real question about how do we do more of that kind of funding, but also how do you do it well? And it seems important in a way that it wasn’t even ten years ago.

Janet Bush: I wanted you to zoom into the stratosphere with a question which is very, very broad. This is a different era of capitalism. It’s not the Industrial Revolution. We don’t have children working in factories. It’s a lot less dangerous and a lot less dirty. But is it good for us? I mean, when you look at this world that we’re building, does it feel right to you? It may be inevitable, but does it feel right for us as human beings?

Stian Westlake: I would start from an optimistic standpoint on that question. William Blake talked about the dark Satanic mills, these inhuman pieces of tangible capital. Intangible capital is in some ways about what makes us human. It’s about ideas, and it’s about relationships. It’s about expressiveness. Some people may think, should we be making that the basis of the economy? But we would argue this is actually making those things that matter to us as humans more central to our thriving.

The other grounds for optimism, I’d say, relate to the climate and the climate challenge. We all broadly agree that there is a big challenge in terms of the resources we use, the carbon we emit. And we know that this is a big existential challenge one way or another for humanity to address. One way to solve that is by shrinking the economy, becoming poorer and becoming less prosperous, which I think would be a very depressing way to have to address the challenge. But if we want to do more things, we need to do more things in a way that uses less resources and emits less carbon.

And an economy based on intangibles, which are by definition less physical—it’s not that they don’t emit carbon, but on the whole, compared to big things made of concrete and steel, they are less carbon-intensive. That offers a path to this idea of, as some people call it, decoupling economic growth from the impact we have on the planet. This is a fundamentally humane vision of the economy, and it’s one that possibly offers us a path to an environmentally sustainable economy, too.

Jonathan Haskel: And the climate point, I think, demonstrates the multidimensional nature of intangibles as well. So part of the solution to our climate difficulties—our very profound climate difficulties—is going to be the R&D and the skills and the technology and so forth that will lower our emissions.

But the other part of it is that the climate problem is a massive collective action problem. And so the other part of the solution is going be a relationship solution that somehow or other, countries of the world are going to have to get together and form those kinds of relationships and develop that kind of trust to solve that collective action problem. So both of those areas are I think what we’re talking about when we talk about intangibles.

Janet Bush: Well, on that note—a big challenge of our collective future—may I just say, thank you very much for a fascinating chat.

Jonathan Haskel: Thank you.

Stian Westlake: Thank you, Janet.

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