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Three Key Characteristics of the Intangible Economy

· 3 min read

For centuries, our economy has revolved around physical assets. With technological advancements, the modern economic landscape has changed, and the most significant investments and assets are increasingly occurring and existing in non-physical forms.

The highest-valued companies, including Facebook, have their core assets in intangible assets such as software, branding, and development capabilities, rather than real estate or factories. Companies built on intangible assets operate differently from those relying on physical assets due to certain characteristics. From the book "Capitalism without Capital," we summarize the three key characteristics of intangible assets.

1. Rapid Scalability

Businesses that rely on physical assets share a common drawback — they are easily constrained. When we need more production capacity, we must invest in acquiring more physical assets. In contrast, intangible assets are not subject to such limitations, allowing for rapid expansion in a short period. The scalability of intangible assets is particularly evident in the tech industry. For instance, the development of a software application can often lead to millions of downloads. This means that an increasing number of intangible asset-intensive companies can grow to astonishingly large scales.

However, this rapid scalability also brings the possibility of monopolies, posing significant challenges for new companies entering the market.

2. High Risk and Irrecoverability

Physical assets tend to outperform intangible assets in terms of value stability. Even if physical assets depreciate, they are unlikely to be completely unwanted at the time of sale, whereas intangible assets are different. Intangible assets are difficult to quantify and cannot be recovered once issues arise, becoming sunk costs that investors have already incurred and cannot reclaim.

Brands do not have mature markets: on one hand, because brand value is hard to assess; on the other hand, a company's failure often leads to the complete disappearance of its brand value. Therefore, if a company relying on intangible assets fails, all previous investments will be lost. In reality, intangible investments carry extremely high risks and can vanish overnight.

3. Ease of Replication

Intangible assets are generally easier to replicate than physical assets, making them susceptible to theft by competitors; they can be an idea or a concept. Thus, when a tech company creatively solves a problem, a surge of imitators and competitors typically follows. The iPhone is a prime example. To capture a larger market share, competitors often continuously engage in technological improvements and further innovations.

The ease of replication also brings issues of abuse and plagiarism. Policymakers in the intangible economy need to strengthen robust protection of intellectual property to ensure that innovators are not discouraged.

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