![]() If your investment doesn’t pan out, you don’t have physical assets like machinery that you can sell off to recoup some of your money. Haskel and Westlake outline four reasons why intangible investment behaves differently: Products you can’t touch have a very different set of dynamics in terms of competition and risk and how you value the companies that make them. They start by defining intangible assets as “something you can’t touch.” It sounds obvious, but it’s an important distinction because intangible industries work differently than tangible industries. If you want to understand why this matters, the brilliant new book Capitalism Without Capital by Jonathan Haskel and Stian Westlake is about as good an explanation as I’ve seen. This is one of the biggest trends in the global economy that isn’t getting enough attention. That has major implications for everything from tax law to economic policy to which cities thrive and which cities fall behind, but in general, the rules that govern the economy haven’t kept up. The portion of the world's economy that doesn't fit the old model just keeps getting larger. And software isn’t the only example: data, insurance, e-books, even movies work in similar ways. Unlike the goods that powered our economy in the past, software is an intangible asset. Microsoft might spend a lot of money to develop the first unit of a new program, but every unit after that is virtually free to produce. The same is true for the other things that dominated the world’s economy for most of the 20 century, including agricultural products and property. The tenth car you build costs the same to make as the 1000 th th car. But each vehicle after that requires a certain amount of materials and labor. The first car costs a bit more to create, because you have to spend money designing and testing it. ![]() Imagine Ford releasing a new model of car. The second assumption this chart makes is that the total cost of production increases as supply increases. Goods are affordable, plentiful, and profitable. Equilibrium is magical, because it maximizes value to society. The sweet spot where the two lines intersect is called equilibrium. If the price gets too high, demand falls. The first is still more or less true today: as demand for a product goes up, supply increases, and price goes down. There are two assumptions you can make based on this chart. At the time I was in college (which was longer ago than I like to admit), this was basically how the global economy worked: One of the first things he taught us was the supply and demand diagram. By the second semester of my freshman year at Harvard, I had started going to classes I wasn’t signed up for, and had pretty much stopped going to any of the classes I was signed up for-except for an introduction to economics class called “Ec 10.” I was fascinated by the subject, and the professor was excellent.
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