Intangibles and National Income
Measurement:
Measuring a scientific revolution
Leonard Nakamura
Federal Reserve Bank of Philadelphia*
*reflects solely my opinions and not those of the
Federal Reserve System
In social sciences, the ruling paradigm
may depend on institutions
• Invisible Hand or Creative Destruction
• Humans have always been creative
• But creativity was only a small proportion of
investment and wealth
– Private investments in new product development
have risen substantially since the late 1970s
• Does it now change the paradigm of
economics?
– Does economics need or have a paradigm?
Talk outline
• A scientific revolution?
– Economists are uncomfortable with this notion
• Measuring the U.S. rise in investment in
intangibles (new product creation)
• Are US economic choices sustainable?
A scientific revolution in
economics?
• John Hicks on “revolutions” in economics, 1976:
– “Our special concern [in economics] is with the fact of
the present world; but before we can study the
present, it is already past.
– In order that we should be able to say useful things
about what is happening, before it is too late, we must
select, even select quite violently.
– We must concentrate our attention, and hope that we
have concentrated it in the right place.”
Issues in a scientific revolution
• According to Thomas Kuhn, a scientific
revolution is a change in paradigm:
– What is to be studied?
– How do we define the objects of interest?
– How are they to be measured?
– What theory is relevant?
• Along some dimensions the new theories
and measurement may be worse than
those replaced
The old theory and practice: the
invisible hand
• Solid welfare theory:
– Perfect competition good, monopoly bad
• Price and quantity well-defined (Hicks)
• Progress is exogenous rather than
endogenous (Solow)
• Inputs equal outputs (Perfect competition)
• Investments are rival and tangible: private
value equals social value (Fisher)
New theory: creative destruction
• Theory and practice unsatisfactory along several
dimensions
– Welfare theory unclear (intellectual property rights theory and
practice remain controversial)
– Price impact of new products depends on measurement of
consumer surplus (controversial)
– Endogenous productivity growth (predicts accelerating growth)
– Monopolistic competition, quality ladders, etc.: markups (inputs
may not equal outputs)
– R&D investments are risky: many fail (complicates accounting)
– Intellectual property is nonrival: private and social valuations
typically diverge (require two national accounts?)
Intangibles make income and
product hard to measure
• Measuring inflation and output growth more
difficult
• How to deflate intangible investment
– Probably can’t deflate it from the output side, need to
deflate it from the input side
• How to depreciate intangible investment?
– Depreciation rate very hard to measure
– Many investments fail (should these be written off?)
• Measuring nominal investment
– Expensing of intangibles in corporate accounts makes
measuring the size of this investment difficult
Interaction between theory and
practice
• If intangible investment and intellectual property
are relatively unimportant, it is easier to ignore
the knotty theoretical and empirical difficulties
associated with the theory and empirics of
creative destruction.
• Collecting data, even crude data, that shows
these investments are rising as a proportion of
expenditures forces us to confront the possibility
of an economics without the invisible hand.
On the timing of the “revolution”
• Intangibles became much more important
as a consequence of the rise of the
personal computer (1977 to 1984)
• Software investment became much more
important
• R&D: small firms became much more R&D
intensive
Computer hardware investment (relative to GDP) took off around 1976 when the
microprocessor came of age, stabilizing in 1984
1.2%
1.0%
Computer hardware as nominal percent of US
gross domestic product
0.6%
0.4%
0.2%
computer investment to GDP
05
03
01
99
97
95
93
91
89
87
85
83
81
79
77
75
73
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69
67
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61
0.0%
59
Percent of GDP
0.8%
Since 1978, US nonfinancial corporations
have doubled research and development
spending
How important are intangibles as
part of private business fixed
investment?
• Four views
– Old (pre-1998): Only tangible investments are
counted, intangibles are 0 % of business fixed
investment
– Current: Only software is counted, intangibles are 15
% of business fixed investment
– R&D satellite account: as of 2002, software and R&D
were 27 % of business fixed investment (including
R&D)
– Total (my est): 48 % including marketing and other
expenses associated with new product development
• Similar estimate by Corrado et al
Four views of US Private Business Investment: View 1
Old Definition -- Excludes Software
Investment near post-war low
19.0%
17.0%
13.0%
11.0%
9.0%
7.0%
5.0%
19
53
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65
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01
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05
20
07
percent of GDP
15.0%
Nominal Investment relative to Nominal GDP
Tangible ex software
Four views of US Private Business Investment:
View 2 Current Official Definition
Investment Near Postwar Average
19.0%
17.0%
13.0%
11.0%
9.0%
7.0%
5.0%
19
53
19
55
19
57
19
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19
61
19
63
19
65
19
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87
19
89
19
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19
93
19
95
19
97
19
99
20
01
20
03
20
05
20
07
percent of GDP
15.0%
Nominal Investment relative to Nominal GDP
Tangible ex software
Private Nonres
Four views of US Private Business Investment:
View 3 With Private R&D from Satellite Account
Investment above Pre-1977
19.0%
17.0%
13.0%
11.0%
9.0%
7.0%
5.0%
19
53
19
55
19
57
19
59
19
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19
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19
65
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87
19
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19
93
19
95
19
97
19
99
20
01
20
03
20
05
20
07
percent of GDP
15.0%
Nominal Investment relative to Nominal GDP
Tangible ex software
Private Nonres
Priv NR Plus R&D
Four views of US Private Business Investment
View 4: All Intangibles Included
Investment Near Postwar High (Excluding Internet Bubble)
19.0%
17.0%
13.0%
11.0%
9.0%
7.0%
5.0%
19
53
19
55
19
57
19
59
19
61
19
63
19
65
19
67
19
69
19
71
19
73
19
75
19
77
19
79
19
81
19
83
19
85
19
87
19
89
19
91
19
93
19
95
19
97
19
99
20
01
20
03
20
05
20
07
percent of GDP
15.0%
Nominal Investment relative to Nominal GDP
Total
Tangible ex software
Private Nonres
Priv NR Plus R&D
Has US Business investment been
falling or rising over time?
• Answer depends on how important
intangibles are
– Including software and business R&D implies
rising investment
• Rising investment would suggest rising US
wealth
• And wealth has been rising!
Beginning in 1979, wealth rose relative to income
4.800
4.600
4.400
4.200
4.000
3.800
3.600
3.400
3.200
3.000
59
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02
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07
2.800
networth/gdp
Household wealth has increased
• And it hasn’t been high levels of measured
personal saving
• Indeed, measured consumption has risen
relative to gross domestic product
Beginning around 1980, savings fell and consumption rose relative to
income
72%
12.0
70%
10.0
68%
8.0
66%
64%
6.0
62%
4.0
60%
2.0
58%
0.0
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01
02
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04
05
06
07
56%
consumption to GDP
personal saving rate
Summary
• In NIA, we are measuring about ¼ of intangibles
• With R&D satellite, we are measuring close to
half of intangibles (but only through 2002)
• This substantially improves our understanding of
business fixed investment
• Ignoring intangible investment produces a
different view of US investment, one that helps
explain rising US wealth
• Also makes creative destruction more central to
US economy