Janet Bush of the McKinsey Global Institute interviews Jonathan Haskel and Stian Westlake in “Forward Thinking on the transformative role of intangible assets in companies and economies” (January 12, 2022). As they point out, there can be a tendency to view “intangible capital” as synonymous with databases and software. The interviewees are at some pains to argue that they view the term as being much broader, including aspects of organizational competence, reputation, reliability of supply chains, brand names, and more.

Haskel says:

One of the examples that we try to use in the book … 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. …

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.”

Here’s another example from Haskel:

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.

Westlake describes the human side of intangible capital this way:

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. … It includes things like R&D or custom software, tech elements. …

[T]here 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. …

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.

There are also interesting discussions of how intangibles can often be expanded to greater scale or to synergies, why it may be hard for a conventional finance system to put money behind intangible capital, why intangible capital may widen the gap between industry leaders and laggards, and why firms that succeed because of intangible capital may be harder for new entrants to dislodge, and much else.