Restraining the Metamorphosis of Intangible Capital

A Review of The Code of Capital and Capitalism without Capital

I have just finished two enlightening books, the first from a legal scholar at Colombia and the second from an economist at the Imperial Business College here in London. In spite of their different academic backgrounds, their books, The Code of Captal and Capitalism without Capital, are worth reading together.

Drawing from the late legal scholar Bernard Rudden’s insight on the inadequacy of applying a legal system intended for land to increasingly sophisticated and mobile financial instruments, Pistor writes that the feudal remnants of special exemptions conferring capital with comparative advantage in wealth accumulation are resurrected in every new form of capital that is conjured up by bright legal minds and on Wall Street. Indeed, the law’s incompleteness, especially on global disputes, leaves fertile ground for clever minds to expand capital’s reach into new asset classes. The logical conclusion of this overreach is into the intangible sphere. Pistor emphasizes that it is no coincidence that the two countries with nearly all top 100 global law firms, the U.S. and U.K, are also the only countries where intangible investment has exceeded that of tangibles.

Intangible investment is therefore the greatest strength of Anglo-American capitalism, and what imbues America in particular with its soft power, but is also the site the parasitic element of that capitalism chooses to occupy and multiply. A sign that intangible investment has some inherent virtues is that our economies are in good company. The two countries that are most like the U.K. and U.S. with respect to intangible investment are Finland and Sweden. Intangible investment also clearly must be nurtured and only sophisticated state administrations capable of funding public sector research and development can nurture it. Those that lack the political structures for sustainable R+D provision, such as Spain and Italy, will inevitably fall by wayside in the race for competitiveness in the new economy. The interesting point about Sweden and Finland is that it suggests that there is an alternative future for Anglo-American capitalism. The parasite can be contained.

This possibility belies the conventional wisdom suggested by the properties of intangible investment laid out by Haskel. An essential fact is that intangible investment is high risk and extremely uncertain. Due to sunkedness and spillovers, there is no way to cover your losses in the event the manager is not able to anticipate a setback and there is no way to ensure that the benefits of the investment will not be absorbed the company making the investment. On the other hand, the risk taking and uncertainty is well worth it to the dominant firms in the position to capitalize on the synergistic advantages.

The uncertainty inherent to intangible investment has likely contributed to the phenomenon of secular stagnation, defined by lower aggregate investment but higher return on the investments that are made, Haskel writes. To the extent that intangible investment has facilitated the collection of rents and separated the men from the boys at the firm level, it has also contributed to economic inequality.

But the real inequality that is far more nefarious is of a political kind. A landmark historical study on emerging sectors within the late 19th century industrial economy found that those emerging sectors are not only defined by risk but it pays to have well-connected political operatives to mitigate that risk. Similarly, it pays to have “symbolic analysts” who speak the language of risk, and is reflected in the salary premium they garner in the labor market.

So Haskel’s narrative goes something like this: (1) intangible investment has properties that make decisions under risk and uncertainty unescable. (2) This decision environment and the contestability of intellectual property create the conditions for Schumpeterian capitalism to work its magic and separate the cream from the shaft. (3) But what is often neglected is that Schumpterian capitalism does not occur on a neutral playing field. There will be strong incentives for firms that believe they can secure a dominant position with respect to intangibles to tilt the playing field. (4) Thus, we have gone full circle to Pistor’s world of corporate attorneys who seek to imbue the assets firms conjure up with an enduring quality through the modules she identifies—priority, durability, universality, and controvertibility. Priority is fundamental, then the task is to extend those priority claims to the income derived from the asset in both time and space, and finally to ensure that the problem on sunkedness is remedied through controveribility. If the module chain is followed through, a metamorphosis of intangible capital is achieved, eliminating its only essential defect—the risk arising from its contestable value.

The problem with Anglo-American capitalism as Pistor sees it is that we have conflated this process of how firms secure their assets in perpetuity to the vitality of our economic system. Due to this misattribution, we have elevated subjective property rights to foundational principles. It doesn’t have to be this way, Pistor emphasizes. Drawing from a radical German legal scholar’s seminal work, The Critique of Rights, Pistor imagines an alternative legal order where no rights are regarded as sacrosanct and the awesome coercive power of the state is applied to empower the future and achieve the transformations mandated by both Schumpterian capitalism and social protection rather than protect the status quo’s insistence on legal privileges that all but guarantee perpetual stagnation.

I find this idea, even in its rudiments, to be immensely alluring for reasons stated by my grandfather (who himself dabbled in Schumpterian philosophy), “Power in repose is power in decline.” The way forward is a little bit less clarifying, however, as revealed by the apocryphal Irish sheep herder’s advice on the best way to get to Dublin, “Don’t start from here.” Perhaps the recommendations offered in Haskel’s book reflect this insight that political incrementalism is a necessary strategy for countries burdened by their past and a cultural view that reifies capital and invention.

But I found them to be lacking in correcting fundamental tendency Pistor identifies—to rewrite the code of capital to ensure claims to income derived from an asset are delivered in perpetuity. Clearer property rights, maximizing the benefits of agglomeration, and equalizing debt and equity finance are all good solutions to targeted problems, but not the problem of political, legal, and regulatory capture. As readily admitted by Haskel, they also do not solve the problem of underinvestment when even massive monetary stimulus cannot satiate the appetite of the hoarder under radical uncertainty that concerns these assets. As the cases of Sweden and Finland reveal and Keynes would have foresaw, the government’s role as the investor of last resort is indispensable.

I am left wondering if it is sufficient to stave off the most rapacious elements of capitalism. I think that the features of Swedish and Finnish capitalism that both allow for a high share of intangible investment without the legal tendency for private firms to extend those lucrative claims ad infinitum to the point that it erodes the law’s legitimacy and engenders populist backlash are promising avenues for further inquiry.