Canada’s hidden economic strength

Western economies have almost no inflation and higher growth rates than economists are measuring because of the rise of intangible assets

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intangible assetsEDMONTON, Alta. Feb. 13, 2017 /Troy Media/ – One of the great mysteries in modern economics is the absence of inflation.

After the 2009 financial crisis, governments around the world, including Canada’s, lowered already nominal interest rates to essentially zero, while adding to the money supply. These radical measures were deemed necessary to avoid catastrophe and return developed economies to growth.

The risks, however, were significant. If western economies didn’t return to growth, then the unprecedented increase in the money supply would trigger inflation on a massive scale.

Yet according to the latest government statistics, our economies haven’t returned to growth, and in spite of significant monetary expansion there is virtually no inflation.

Why? In great part because of an essentially invisible economy that’s driving monetary demand right under our noses.

The global economy’s growth engine is in the midst of historic change. We’re transforming from an industrial economy, underpinned by tangible assets, to a creative knowledge economy, underpinned by intangibles. Since the late 1950s, intangibles (services and intellectual forms of property, and the knowledge embedded in patents, copyright materials, digital apps, software and network applications) have gradually displaced the more familiar tangible assets as the primary engine of growth in all developed economies.

The World Bank estimates that more than 75 per cent of today’s economy is composed of intangible capital. According to estimates compiled by Brand Finance, there are about $41.9 trillion worth of undocumented intangible assets globally. Regrettably, intangible assets don’t (as a rule) get capitalized on company balance sheets, measured or factored into national economic statistics.

Western economies have almost no inflation because of intangibles. Our economies are in better shape, with higher growth rates and productivity than economists are measuring.

Since intangibles are largely invisible to corporate managers, accountants, financiers and tax authorities, this under-reporting represents a significant loss to businesses and society.

Visibility through measurement is a critical tool in the management of these intangible assets. Although there remains considerably resistance to formal accounting of intangibles, many of the more mature intangibles such as software, patented technologies, trademarks and brand assets meet official accounting standards and, as such, should be recorded on corporate balance sheets.

But how would better accounting treatment of intangibles clarify the measurement problems at the national level?

According to Prof. Sir Charles Bean, in his Independent Review of UK Economic Statistics, 2016, “Measuring the economy has become even more challenging in recent times, in part as a consequence of the digital revolution. Quality improvements and product innovation have been especially rapid in the field of information technology. Not only are such quality improvements themselves difficult to measure, but they have also made possible completely new ways of exchanging and providing services.”

This measurement problem also plagues Canada; not documenting intangibles accurately distorts our government’s economic statistics, misleading politicians and the public. The fault lies in the definition and measurement of capital, which is a primary focus of economic attention.

Measurement of capital is largely done based on the assumption that economic growth happens in factories with output in the form of physical capital. As for intangibles, Bean is clear: “good empirical information on service capital is sparse and often dated.”

Measurements of fixed capital assets are reliable, as they appear on balance sheets and can be aggregated regionally and factored into national statistics.

Measurement of intangible assets and services are difficult because, as a rule, they don’t appear on balance sheets and are therefore only estimated (and under estimated) in aggregation.

Alternative consumption-based measurements of intangibles are often unreliable as these assets are often digital and increasingly exchanged in global networks that exist beyond the view and jurisdiction of governments.

More formal treatment of intangibles at the accounting level would give visibility to this new economy and increase the reliability of national economic statistics.

Canadians can take some comfort from the good news that there is more to our economy than meets the eye. However, if we’re to enjoy the full benefits of our new economy, we need institutions to wake up and take action. A more robust management accounting of intangibles will modernize statistics and portray the true revival in our economic growth.

Robert McGarvey is chief strategist for Troy Media Digital Solutions Ltd., an economic historian and former managing director of Merlin Consulting, a London, U.K.-based consulting firm. Robert’s most recent book is Futuromics: A Guide to Thriving in Capitalism’s Third Wave. Robert is included in Troy Media’s Unlimited Access subscription plan.

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