JACKSON HOLE, Wyo.—The rise of “intangible capital” such as software, patents, intellectual property and innovative business processes explains much of the weakness in private capital investment since 2000, according to new research presented at a conference here.
The conclusion of the paper presented at the Kansas City Fed’s economic symposium Friday carries important ramifications for monetary, fiscal and regulatory policy.
The work by economists
of Northwestern University also explores how the rise of these so-called intangibles, which are often pioneered by industry leaders, can partly explain growing market concentration over the last 20 years in industries that have seen some of the strongest growth, such as health care, technology and retailing.
Intangibles such as online platforms or patents aren’t as sensitive to interest rates and can’t be as easily pledged as collateral for financing as can physical capital, such as property, plants or equipment.
This helps to explain why low interest rates or easier financial conditions after the 2008 financial crisis didn’t boost such investment.
For example, as the technology sector has boomed, its share of private investment has been weak, “as companies with the highest growth and valuations failed to fuel investment demand,” wrote Ms. Eberly and Mr. Crouzet.
Better understanding of why investment has been weak in these sectors—and the potential role played by intangible capital—is important to policy makers because investment is often “a leading target of public policy interventions,” including efforts to reduce taxes or interest rates.
Weak investment in physical capital due to inadequate credit or unfavorable tax incentives would require different policy responses than weaker investment “because the composition of the capital stock used by firms has changed over time,” the authors wrote.
The authors concluded that intangible capital, “when treated as an omitted factor in production, can fill a substantial part of the gap left by weak physical investment.”
Ms. Eberly and Mr. Crouzet argued rising concentration and market share by industry leaders has occurred “hand-in-hand” with their accumulation of intangible capital.
The authors concluded different policy responses may be needed to address rising industry concentration owing to the different properties of intangible capital. Software or online platforms can be more easily replicated than equipment, and ownership is controlled by patents or trademarks.
The upshot for central bankers gathered here is that monetary policy may have less influence over intangible investment than over traditional physical investment, which means policy makers in other policy areas—such as antitrust and intellectual property regulation—will have a greater role to play in spurring investment in intangibles.
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