The rise of the intangible economy requires us to re-evaluate, refine and reorient how we think about economic policy and aim to position Canada to compete in a new market dynamic, write Sean Speer and Robert Asselin.
By Sean Speer and Robert Asselin, April 2, 2019
Nearly 250 years after Adam Smith’s The Wealth of Nations, we may be undergoing one of the biggest shifts ever in what drives economic competitiveness. It’s critical that we take notice and begin to understand what it means for public policy and Canada’s economy.
The debate in Canada prefers to dwell on the familiar territory of corporate tax rates here versus those of the United States, government deficits and fleeting metrics such as average weekly earnings or the monthly unemployment rate.
This isn't wrong. These old classics still matter. But it isn't right either to fixate on short-term indicators that matter less and less in this age of technological change. Technology is creating a whole new set of determinants of national wealth. These economic developments require urgent attention.
Consider a new and different economic metric about Canada’s near- and long-term prospects. Roughly 70 per cent of the value of the Toronto Stock Exchange today consists of intangible assets such as brands, intellectual property and data. The same share for the S&P 500 in the United States is 91 per cent. For Europe, it’s 77 per cent.
This tells us three things. Markets are placing far greater value on patents over physical plants and intellectual property over real estate. Canada is falling behind our competitors on this measure of where growth increasingly comes from. And even here, in a land replete in natural resources, the trend toward a new, data-driven and knowledge-based economy is significant and accelerating. We need to better factor in how we think of the wealth of our particular country.
The rise of the intangible economy requires us to re-evaluate, refine and reorient how we think about economic policy and aim to position Canada to compete in a new market dynamic. The stakes are high. We need to make the right choices today if we want to thrive in an era of intangibles. And some of these decisions challenge decades of conventional wisdom.
What do we mean when we talk about the intangible economy?
The intangible economy is one that’s no longer just fuelled by capital assets such as equipment, machinery and assembly plants, and instead is driven by intangible assets such as brands, domain names, service contracts, computer software, data and patented technologies.
The intangible economy is principally about accumulating assets that produce continuous streams of rents with low or no capital requirements after initial investments, and therefore have practically zero marginal costs. Think of data, for instance. A single piece of data can fuel multiple algorithms, analytics and applications, and so the data owner operates with minimal costs and with greater chance of dominating a market monopoly.
There’s a growing view among entrepreneurs and policy-observers that the intangible economy represents a new economic paradigm. It’s something fundamentally different. Conventional economic and policy thinking fails to account for its peculiarities.
As Jonathan Haskel and Stian Westlake have written in a path-breaking book entitled Capitalism without Capital: The Rise of the Intangible Economy: “There is something fundamentally different about intangible investment, and that understanding the steady move to intangible investment helps us understand some of the key issues facing us today: innovation and growth, inequality, the role of management, and financial and policy reform.”
These debates and discussions about the intangible economy’s scalability and winner-take-all dynamics are increasingly present in technology hubs such as Waterloo, Ont., but are only starting to spill into the world of politics and policy. It’s critical that policy-makers start to get their collective heads around these issues and their implications for Canada’s economic policy framework.
What does it mean for public policy? And how will it affect Canadian competitiveness?
There are certainly some who argue audaciously and somewhat persuasively that the intangible economy requires a whole new model of economic thinking. And then there are others who contend that the differences are overstated and that conventional economic thinking and attendant policies remain by and large sufficient. We fall somewhere in the middle of these two poles.
The rise of the intangible economy doesn’t mean that we should discard the insights of economists and scholars who have studied the drivers of economic growth since Smith’s seminal work. Time-proven ideas such as the role of incentives, the laws of competition and the limits of state planning will continue to apply.
But there’s certainly a need to refine conventional pro-competitiveness policies and adopt new ones in light of emerging issues flowing from the intangibles paradigm. Policy-makers must apply this new lens to traditional policies such as education, taxation, regulation, foreign direct investment and intellectual property as well as the development of policies in emergent issues such as data governance and ownership.
This process will involve trial and error, intergovernmental co-operation and a disciplined focus on the long term. We won’t solve these issues overnight, but we also cannot afford to be merely reactive. The next government will invariably make policy choices that have long-term implications for Canadian competitiveness in the intangible economy.
As we grapple with these tensions, policy-makers will need to balance the opportunities and challenges associated with the intangible economy without neglecting or harming those sectors such as natural resources that sustain investment and employment across the country.
The good news is that it’s not a binary choice. There’s considerable overlap between old and new, traditional and modern, tangible and intangible. Canada’s natural resource sector, for instance, is increasingly drawing on cutting-edge technologies and processes to drive efficiencies and reduce its carbon emissions. Data, nanotechnology and other innovations are reshaping traditional sectors as much as they’re creating new ones.
It’s the modern manifestations of these traditional sectors in fact where Canada may be best poised to become a global innovation leader. It’s no accident, for instance, that Finance Minister Bill Morneau’s Advisory Council on Economic Growth identified agriculture and agri-food, as well as energy and renewables as two of the four domestic sectors with the highest potential for Canada to compete and win.
This economic dualism requires policy-makers enact an agenda that recognizes the continuing importance of traditional sectors and their technology-driven transformations, and the emergence of the new intangible economy and its unique characteristics and policy peculiarities.
The role of human capital is the one major commonality between the two. Smart, dynamic people have been a key input into innovation and growth in the past and will continue to be in the future. Attracting, training and retaining human capital will thus remain a key bridge between these two economic paradigms.
There are various policy ideas and recommendations that policy-makers will need to consider in order to better invest in human capital in particular and support Canadian competitiveness in general. Such policy reforms will necessarily cover the traditional drivers of competitiveness as well as the new drivers for the intangible economy. But as important as these prescriptions may be, the main takeaway is for policy-makers and the Canadian public to start to better understand the rise of the intangible economy and what it may mean for our old assumptions and the need for new thinking.
We should neither chase new ideas merely because of their novelty nor stick to old ones because of nostalgia. Competitiveness is a dynamic matter. Policy making in the intangible era will require continuing evaluation, adjustment and, most importantly, a multipartisan set of long-term, competitiveness objectives – what we have come to describe as Canada’s economic “north star.”
Canada has been generally well served by a north star that was broadly shared across the political spectrum, beginning first with the policies and institutions – domestic and international – of the postwar era and then, from the mid-1980s to the present. We believe it’s time to reflect upon a new north star. Canada’s future prosperity depends on it.
Sean Speer and Robert Asselin are senior fellows at the University of Toronto’s Munk School of Global Affairs & Public Policy, and Speer is a Munk Senior Fellow at the Macdonald-Laurier Institute. They are both co-authors of the new Public Policy Forum paper entitled, A New North Star: Canadian Competitiveness in an Intangible Economy, which will be released on Thursday.