When the post-pandemic phase comes into view, labor-intensive sectors with lower intangible capital per employee may enjoy a period of outperformance as they bounce back. Yet even in this scenario, the economy’s digital footprint is likely to expand, and the underlying trend favoring intangible capital and its owners will continue.
It is not surprising that intangible-capital-intensive sectors would have an advantage. For the most part, their cost structures are abnormally tilted toward fixed costs and low or negligible marginal costs. This makes some platforms massively scalable, which in turn confers significant power in terms of pricing and market access.
One could draw a few conclusions from these economic realities. For starters, the pandemic economy has accelerated the pre-pandemic trend favoring intangible-asset value creation through firms with relatively fewer employees. We can expect this trend to continue, albeit not at the heightened pandemic-induced pace. Traditional businesses will recover, but the disconnect between value creation across firms depending on intangibles per employee will persist and remain a major economic and social challenge.
The idea that markets and the economy are diverging reflects a narrow focus on particular indices. But no single index can offer a useful summary of overall market, let alone economic, conditions and trends. And in the pandemic economy, equity-market indices obscure even more than they otherwise would, owing to the large divergences in economic outcomes across sectors and for the people who work in them.
Finally, given the outsize contribution of digital intangible assets to value creation, it is hard to see a way to reverse the trend of rising wealth inequality. Because the balance sheets of those lower down the income and wealth ladder are largely devoid of assets with high intangible and digital content, the rewards of current economic and technological dynamics will pass them by.
Michael Spence, a Nobel laureate in economics, is Professor of Economics Emeritus and a former dean of the Graduate School of Business at Stanford University. He is Senior Fellow at the Hoover Institution, serves on the Academic Committee at Luohan Academy, and co-chairs the Advisory Board of the Asia Global Institute. He was chairman of the independent Commission on Growth and Development, an international body that from 2006-10 analyzed opportunities for global economic growth, and is the author of The Next Convergence: The Future of Economic Growth in a Multispeed World.