As society completes its transition into the Age of Information, economists are struggling to identify the drivers and develop their predictive models accordingly.
Alas, as businesses continue to grow and evolve more rapidly, and as the corresponding systems continue to increase in complexity, many economists still view individuals and businesses as mostly static and reactionary.
“Mainstream economists treat the firm as if it were an inorganic particle that does nothing but react to forces around it,” writes economist Arnold Kling in National Affairs. “But the increased importance of intangible factors has turned the world of business into a complex ecosystem, one that is capable of changing faster than biological systems, because of the faster pace of human cultural evolution.”
According to Kling, much of the science remains woefully stuck in the past, failing to fully align to our new reality and the uncertainty of what’s to come. “We must look away from accepted models and examine the world itself,” he says.
Whereas the economics of yore was primarily concerned with tangible inputs like labor and capital, the economics of the present and future ought to be concerned with intangible factors such as human creativity, brand recognition, collective intelligence, property rights, “informal” intellectual property, social trust, social norms, and so on.
Without a wider imagination and a clearer focus, economists will increasingly struggle to make sense of the world.
“To properly study the economy of the post-industrial era, economists must change the way they treat the individual, the firm, and the composition of overall economic activity,” Kling explains. “Consumer well-being can no longer be measured by the cost of a particular basket of goods. The strategy of a firm is no longer described as capital accumulation and resource deployment. The economy is no longer straightforwardly quantifiable with inputs and outputs; it is driven by services, skills, coordination, and information — intangible factors — that must be monetized in creative ways.”
Referencing his own book, Invisible Wealth: The Hidden Story of How Markets Work (which I highly recommend), Kling also points to the work of Jonathan Haskel and Stian Westlake, whose book, Capitalism without Capital, focuses on the growing significance of intangible value and investment.
To distill their overall point, Haskel and Westlake emphasize what they call the “four Ss”— “sunk costs, spillovers, scalability, and synergies”— which Kling aptly summarizes as follows:
Sunk costs look very different when discussing investment in intangible goods as opposed to physical products…If a company spends hundreds of millions of dollars on research to develop a new drug, and then the drug does not make it to the market, the entire research effort must be written off. All the costs will be sunk.
The second “S,” spillovers, refers to the ways in which ideas can be copied for free. For the economy as a whole, spillovers provide a benefit. But for an individual firm trying to profit from its ideas, spillovers are a problem…
Scalability refers to the fact that intangible assets are often not subject to diminishing returns. If a car manufacturer wanted to manufacture more cars, it would be necessary to build more manufacturing plants. But someone who developed an app for smartphones could make it available to an unlimited number of customers without expending additional resources.
Finally, synergies reflect the reality that ideas in combination may be much more valuable than ideas considered individually. The value of a smartphone, for instance, is much greater than the value of each of its individual components.
As an economist, Kling is understandably focused on a particular set of intangibles, and the practical tweaks he suggests offer a wide range of healthy challenges to the status quo.
But for Christians, and particularly for Christian economists—from the academic researcher to the everyday observer—the broader developments in the modern economy invite us to think even farther beyond the typical “neoclassical” constraints.
How, for instance, do we investigate the forces that Kling points to—creativity, trust, property rights—and connect them to the other social-moral-spiritual dynamics we see across economic life? Further, how do we not just observe the ever-shifting realities and mysteries of modern business strategy, but in doing so, how do improve our clarity of vision and refine our ability to shape them, accordingly?
Regardless, whether we’re studying shifts in business strategies or assessing the future of the broader economy and marketplace, we have the opportunity to adapt our imaginations to a new reality and see our peculiar abundance with fresh, discerning eyes.