Tangible and Intangible Capital

Major changes in national accounting were introduced between 1999 and 2012 by recategorizing spending on intellectual property (IP or IPP) as ‘final' rather than ‘intermediate' output. The changes, which sought to give more weight to the impact of technology on the economy, were accepted for their aprioristic plausibility. Their validity can, however, be tested by measuring the returns on equity when IP is treated either as a form of final output or of intermediate output. When IP is treated as intermediate the returns on equity are consistent with those derived independently from stock market data, but when IP is categorized as final output they are not. The change has therefore been a mistake and should be rescinded. This error is one of many examples of a widespread, unrealistic, indeed romantic attitude to technology, which has been encouraged by the stock market success of high technology companies and the tendency of journalists and investors to confuse the economy with the stock market. Growth depends on improvements in technology and the incentives or restraints on corporate management to exploit them. We do not appear to be able to accelerate the rate at which technology improves. But we can change incentives. The romantic attitude to technology is hindering changes to incentives and thus holding back growth. One of the adverse consequences of the error made in recategorizing IP has been to divert attention from the need to stimulate tangible investment, which is the only policy likely to significantly accelerate trend growth. The key incentives are taxes and subsidies. Corporation tax falls on investment, not on shareholders, and its net revenue should be reduced by cutting the rate or increasing the subsidies on tangible investment.