Intangible Capital

Intangible Capital:
Its Contribution to Economic Growth, Well-Being and Rationality
Edward Elgar, 2008

John F. Tomer

From the Introduction

In modern business practice, capital is distinguished into two … categories of assets, tangible and intangible.

In the early days at least, this [intangible assets] is far and away the most important and consequential category of the community’s assets – Thorstein Veblen

Unfortunately, the economics profession has not done very much to develop the early insights of Thorstein Veblen.  True, practically all economists (and other social scientists) accept the view that investment in things like education and training creates a human type of capital which yields returns to the people in whom it is embodied.  But when it comes to the noncognitive or more intangible forms of human capital, economists generally do not accept that these intangible forms of capital are relevant to their research.

The great recent interest of noneconomist social scientists in intangible capital, particularly social capital (SC), has, however, caused more than a few economists to pay attention.  Nevertheless most mainstream economists who have bothered to consider SC remain skeptical of its importance.  For example, while admitting the “plausibility that social networks can affect economic performance,” Kenneth Arrow doubts that the SC concept can be made “operational for the purposes of analysis and policy.”  Similarly, Robert Solow thinks that SC writers “are trying to get at something difficult, complicated, and important,” but he also believes they are trying “to gain conviction from a bad analogy.”  On the other hand, Joseph Stiglitz, while admitting that “SC is a concept with a short and already confused history,” believes that “SC is a very useful concept but an extremely complex one, in which different perspectives have much to contribute”          

As has been widely noted, for SC (just one, albeit important, component of intangible capital (IC)), there are many different definitions and disciplinary perspectives.  This proliferation of different types of capital in social science literatures has been interesting, at times exciting, but often frustrating and confusing.  There is an obvious need for sorting through all these capital categories to determine what is valid, useful, and true to the meaning of capital as productive capacity.  In clarifying the nature of IC and its component types of capital, this book seeks to understand IC as long lasting human capacity that is at once consistent with the core concept of capital in economics, but at variance with the narrow interpretation of capital generally taken by mainstream economists.  On the other hand, some noneconomists may find the concept of IC used here too narrow or too economic for their purposes.  This is understandable.  Nevertheless, a prime purpose of this book is to indicate the importance of IC by demonstrating how utilizing the IC concept can provide new understanding of a range of problems and issues that have at least a partially economic nature.  In its emphasis on the economic or socio-economic aspect of IC, this book arguably ignores some interesting and fruitful noneconomic applications.  This is not to say that these are unimportant or incorrect; they are just not the focus of this book.

As later chapters will spell out in detail, IC refers to the many things that are in humans or in their relationships, things that enable people to perform well in their work situations, and thus be productive and successful.  It also refers to things that enable people to be rational and experience well-being.  IC certainly includes things like standard education and training which provide knowledge and know-how, generally things with a high cognitive component.  This is the well recognized and widely accepted part of IC.  Another part relates to the noncognitive qualities of people.  Some people perform better at work because they are more motivated, more persistent, more empathetic, manage their emotions better, manage their social relationships better, are more patient, more focused on goals, are more tough mindedly competitive, and so on.  Some groups of workers produce more because they have developed relationships with each other that channel their energies and communications in positive, constructive ways.  Workers’ social networks and the organizational structures that control them insure that communications occur easily and are well directed.  The quality of these relationships may contribute to cooperative, coordinated efforts that lower the cost of getting things accomplished.  In sum, when workers are equipped with the requisite knowledge and training, when they have developed the necessary personal qualities, and when they have developed appropriate organizational relationships, assuming they have been inspired and focused by strong leaders, these workers have the capacity for superior performance.  In the absence of these IC qualities, these workers’ productive capacity and performance are likely to be severely limited.  An important purpose of this book is to provide a framework for thinking about the whole range of these long lasting human qualities, and thereby to enable clear economic thinking about these phenomena.