Arnold Kling  

Capitalism Without Capital

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John Kay writes,


The critical resources of today's company are not its buildings and machines but its competitive advantages - its systems of organisation, its reputation with suppliers and customers, its capacity for innovation. These attributes are not, in any relevant sense, capable of being owned by anyone at all.

In 1998, I wrote,

the economic problem has been shifting from one of allocating physical capital to one of allocating human talent. Yet the institutional mechanisms that are being employed to solve the talent-allocating problem are anachronistic, in that they evolved to solve the problem of allocating physical capital.

I pointed out that Tobin's q (the ratio of the market value of the firm to the replacement cost of its capital) is no longer meaningful.

this model breaks down when the valuable assets of a firm are intangible. Surely, the cost of Microsoft's office campus, manufacturing facilities, and equipment is only a fraction of the market value of the company. No one would use "replacement cost" as an approximation of its value. To put this another way, no one would suggest that the high value of "q" for Microsoft is a signal that it should be building factories and buying machinery.

The essay ends with one of my early expressions of scorn for the Internet bubble.


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COMMENTS (5 to date)
JP Koning writes:

On a different note, you have popped up in a Nick Rowe post:

http://worthwhile.typepad.com/worthwhile_canadian_initi/2012/01/the-speed-of-recovery-plucking-and-psst.html#more

Any thoughts?

Ken B writes:

Hmm. I would say Microsoft owns those capabilities. kay seems to be confusing replacement or isolation with ownership.

Troy Camplin writes:

The way we find jobs is part of the problem. We need an eHarmony of job searching.

Ghost of Christmas Past writes:

Incidentally, this is why the multitudinous analyses showing that predatory pricing by a would-be monopolist is impossible are all now invalid.

Every one of them depends upon smokestack-era capital-goods-are-king arguments along these lines: a predator may drive a competitor out of business at some cost to itself, but doing so will only make the competitor's plant available below cost at the bankruptcy sale to a successor competitor. The successor firm will be an even more formidable competitor than the firm the predator drove out of business (because the successor acquires the plant cheaply) and the predator will be weakened (by the costs of predation), so the predator will be worse off than if it had never attempted predation. Predatory pricing is therefore bootless and so will not occur (rare examples of irrational behaviour notwithstanding).

In these arguments the plant's labor force is assumed to be completely fungible, and many people arguing along these lines suggest that the successor will face lower labor costs than the victim of predation because it can hire a complete staff with no seniority.

The modern firm, though, doesn't have any plant of consequence. It might have some fairly fungible real-estate, but otherwise it has no more than a warehouse full of already-obsolescent and nearly worthless computers running either commodity software of little value, or proprietary software of no value absent the specific individual employees who created and maintain it.* Instead, many a modern firm has only "human capital"-- its painstakingly-assembled and trained labor force.

When a predator drives a modern firm into bankruptcy its staff disperses, leaving behind nothing. Or if some successor thinks to acquire the bankrupt firm entact with employees, it will cost the successor no less to operate the business than the predecessor, making the proposition unattractive since no competitive advantage is on offer.

In fact, a modern predator rich enough to carry though a plan of predation can expect to win, driving the victim firm completely out of business without providing valuable capital assets to any other competitors via the bankruptcy process.

*In case the reader is unaware of the fact, trust me, it is extremely difficult for a new staff to take over the maintenance and growth of an old proprietary computer system without prolonged assistance from the old staff. The cost of an attempt would in most cases exceed the cost of building a new system from scratch.

Becky Hargrove writes:

In terms of human capital, much confusion actually lies in the definition of the knowledge product, or the cow we have to buy when we need a quart or two of milk. Perhaps that confusion arises because of what a physical product consists of: many processes, resources and bits of information. Sometimes a knowledge based product needs to be presented in a similar manner, such as certain surgeries.

When a customer requests a knowledge product, he or she desires bits of information along a continuum. How many? The possibiities are infinite, and that's the problem. Presently government conceives of most exchanges being made near the end of the continuum, with the result that every time we buy, we pay for multiple resources all along the way. That is a big part of the government debt we keep wondering how future generations will ever pay.

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