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Overview
For a long time, the economy was based on producing and consuming physical things. But that is changing, and we need to be aware of this shift. The most important investments in our economy are nonphysical – or intangible assets.
Today, the true value of many companies lies in their intangible assets. For example, Apple and Google have valuable software programs that they sell to other people. Starbucks has a strong brand name that allows them to charge more money for coffee than anyone else would be able to get away with. And Microsoft used its research capabilities and organizational development skills to make itself into one of the most successful technology companies in the world. Because these kinds of companies rely on intangible assets instead of physical goods like cars or furniture, they can grow much faster than traditional businesses do because there are fewer limits on how big an intangible company can become. However, this also makes it easier for competitors to copy ideas from those intangible-based businesses and start competing against them without having as much risk involved as if they were trying to compete with a company that was selling physical products.
In this article, you will learn about intangible investments and why Starbucks’s assets are intangible. You’ll also read about why an economy based on intangibles could lead to a decline in investment unless the government steps in.
Big Idea #1: The focus of our economy is shifting from physical assets to intangible assets.
When William the Conqueror wanted an estimate of his kingdom’s wealth, he sent out surveyors. They talked to people and inspected buildings in towns and villages across the land. In one village, they found a mill that was worth £11 per year.
For a long time, we’ve assessed the value of things by measuring and counting tangible objects. We measured buildings, machinery, computers and so on.
Economists have begun to realize that intangible assets are becoming more important. To illustrate this, imagine you’re in a supermarket from the 1970s. You’d probably feel right at home, because there’s nothing physically different about supermarkets today than those decades ago. The shelves and coolers look the same as they did 50 years ago.
Supermarkets have changed in many ways over the past few decades. They’ve invested in intangible assets like barcodes that help them manage inventory and prices more efficiently, for example. Barcodes make it easier to track sales, which also helps supermarkets better plan promotions and change prices without having to manually reprice every item on their shelves.
Supermarkets have been able to increase their productivity with the help of new technology. They can now offer more complex and profitable pricing systems, which is made possible by loyalty card systems that they use to collect data about customers.
Nowadays, the most valuable assets for businesses are intangible. They’re not physical things that we can touch or see. For instance, when Microsoft became the world’s most valuable company in 2006 with a market capitalization of $250 billion, its tangible assets were valued at only $3 billion – just 1 percent of its overall value. It was because it had great software and brand recognition and because it could get products to market quickly.
There is a growing disconnect between capitalism and the use of physical capital. Let’s explore how this has changed in recent times, starting with China.
