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Based on joint work with Stian Westlake, Carol Corrado ......Based on joint work with Stian...

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Page 1: Based on joint work with Stian Westlake, Carol Corrado ......Based on joint work with Stian Westlake, Carol Corrado, Cecilia Jona-Lasinio, Massimiliano Iommi Presentation at Villa

Intangible Investment, the Digital Economy and the Productivity Puzzle

Based on joint work with Stian Westlake, Carol Corrado, Cecilia Jona-Lasinio,

Massimiliano Iommi

Presentation at Villa Mondragone International Economic Seminar, Rome, June 2018

1 / 31

Page 2: Based on joint work with Stian Westlake, Carol Corrado ......Based on joint work with Stian Westlake, Carol Corrado, Cecilia Jona-Lasinio, Massimiliano Iommi Presentation at Villa

The ever-changing digital economy

• Free goods - Skype, Google, Facebook

• The Cloud

• Big Data

• Arti�cial Intelligence

• But a puzzle: if we have all this technicalchange, why is productivity slowing down?

How well do our usual measures pick up these types of changes?

3 / 31

Page 3: Based on joint work with Stian Westlake, Carol Corrado ......Based on joint work with Stian Westlake, Carol Corrado, Cecilia Jona-Lasinio, Massimiliano Iommi Presentation at Villa

The ever-changing digital economy

• Free goods - Skype, Google, Facebook

• The Cloud

• Big Data

• Arti�cial Intelligence

• But a puzzle: if we have all this technicalchange, why is productivity slowing down?

How well do our usual measures pick up these types of changes?

3 / 31

Page 4: Based on joint work with Stian Westlake, Carol Corrado ......Based on joint work with Stian Westlake, Carol Corrado, Cecilia Jona-Lasinio, Massimiliano Iommi Presentation at Villa

The ever-changing digital economy

• Free goods - Skype, Google, Facebook

• The Cloud

• Big Data

• Arti�cial Intelligence

• But a puzzle: if we have all this technicalchange, why is productivity slowing down?

How well do our usual measures pick up these types of changes?3 / 31

Page 5: Based on joint work with Stian Westlake, Carol Corrado ......Based on joint work with Stian Westlake, Carol Corrado, Cecilia Jona-Lasinio, Massimiliano Iommi Presentation at Villa

Britain's most famous innovation

4 / 31

Page 6: Based on joint work with Stian Westlake, Carol Corrado ......Based on joint work with Stian Westlake, Carol Corrado, Cecilia Jona-Lasinio, Massimiliano Iommi Presentation at Villa

Britain's most famous innovation

4 / 31

Page 7: Based on joint work with Stian Westlake, Carol Corrado ......Based on joint work with Stian Westlake, Carol Corrado, Cecilia Jona-Lasinio, Massimiliano Iommi Presentation at Villa

More British innovation

• Many connected with the Digital Economy

• How well are these innovations re�ected in usual measures?

5 / 31

Page 8: Based on joint work with Stian Westlake, Carol Corrado ......Based on joint work with Stian Westlake, Carol Corrado, Cecilia Jona-Lasinio, Massimiliano Iommi Presentation at Villa

More British innovation

• Many connected with the Digital Economy

• How well are these innovations re�ected in usual measures?

5 / 31

Page 9: Based on joint work with Stian Westlake, Carol Corrado ......Based on joint work with Stian Westlake, Carol Corrado, Cecilia Jona-Lasinio, Massimiliano Iommi Presentation at Villa

Case study: the World's Top Companies (by market capitalisation, 2017)

Source: PWC

Some questions

• Do the published balance sheet assets of buildings, equipment, vehicles help understandthese companies? No e.g. Microsoft tangible capital $5bn

• For the new companies we can work out asset value of reported R&D since birth.

• Alphabet: R&D capital = $53bn• Microsoft: R&D capital = $85bn• Facebook: R&D capital = $14bn• Amazon: don't report R&D

6 / 31

Page 10: Based on joint work with Stian Westlake, Carol Corrado ......Based on joint work with Stian Westlake, Carol Corrado, Cecilia Jona-Lasinio, Massimiliano Iommi Presentation at Villa

What do company accounts tell us about these companies?

Source: Baruch Lev, Feng Gu, The End of Accounting, 2016

7 / 31

Page 11: Based on joint work with Stian Westlake, Carol Corrado ......Based on joint work with Stian Westlake, Carol Corrado, Cecilia Jona-Lasinio, Massimiliano Iommi Presentation at Villa

Let's count a broader range of investments

Treated as

Investment in

GDP?

Treated as

Investment in

GDP?

Tangible Investment Intangible Investment

Buildings and Structures Yes Computerised information

IT equipment (hardware, communication) Yes Software Yes (1993 SNA)

Non-computer equipment Yes Databases Uneven

Vehicles Yes Innovative Property

R&D and mineral exploration Yes (2008 SNA)

Artistic originals Yes (1993 SNA)

Design No

Economic Competencies

Training No

Market Research and Branding No

Business process re-engineering No

• Does considering these investments help understand• EasyJet, Grand Theft Auto, Finance, Tesco, Big Data, Monty Python?• The digital economy• Big Data• Arti�cal intelligence?

• What does the world look like when we count this broader range of investments?

8 / 31

Page 12: Based on joint work with Stian Westlake, Carol Corrado ......Based on joint work with Stian Westlake, Carol Corrado, Cecilia Jona-Lasinio, Massimiliano Iommi Presentation at Villa

Let's count a broader range of investments

Treated as

Investment in

GDP?

Treated as

Investment in

GDP?

Tangible Investment Intangible Investment

Buildings and Structures Yes Computerised information

IT equipment (hardware, communication) Yes Software Yes (1993 SNA)

Non-computer equipment Yes Databases Uneven

Vehicles Yes Innovative Property

R&D and mineral exploration Yes (2008 SNA)

Artistic originals Yes (1993 SNA)

Design No

Economic Competencies

Training No

Market Research and Branding No

Business process re-engineering No

• Does considering these investments help understand• EasyJet, Grand Theft Auto, Finance, Tesco, Big Data, Monty Python?• The digital economy• Big Data• Arti�cal intelligence?

• What does the world look like when we count this broader range of investments?

8 / 31

Page 13: Based on joint work with Stian Westlake, Carol Corrado ......Based on joint work with Stian Westlake, Carol Corrado, Cecilia Jona-Lasinio, Massimiliano Iommi Presentation at Villa

Let's count a broader range of investments

Treated as

Investment in

GDP?

Treated as

Investment in

GDP?

Tangible Investment Intangible Investment

Buildings and Structures Yes Computerised information

IT equipment (hardware, communication) Yes Software Yes (1993 SNA)

Non-computer equipment Yes Databases Uneven

Vehicles Yes Innovative Property

R&D and mineral exploration Yes (2008 SNA)

Artistic originals Yes (1993 SNA)

Design No

Economic Competencies

Training No

Market Research and Branding No

Business process re-engineering No

• Does considering these investments help understand• EasyJet, Grand Theft Auto, Finance, Tesco, Big Data, Monty Python?• The digital economy• Big Data• Arti�cal intelligence?

• What does the world look like when we count this broader range of investments?8 / 31

Page 14: Based on joint work with Stian Westlake, Carol Corrado ......Based on joint work with Stian Westlake, Carol Corrado, Cecilia Jona-Lasinio, Massimiliano Iommi Presentation at Villa

Trends over time EU and US

.05

.1.1

5

1995 2000 2005 2010 20151995 2000 2005 2010 2015Note: non-farm business. Industry-specific value added PPPs for EUNote: non-farm business. Industry-specific value added PPPs for EU

EU11 US

Intangible share Tangible share

Shar

e of

inta

ngib

le-a

djus

ted

GD

P

Year

Graphs by group_Country

(Share of intangible-adjusted GDP, US+EU11)Tangible and intangible investment

Note: EU aggregregation uses Eurostat's industry-speci�c production side PPPs.Source: INTAN-Invest c© 2018, available at www.intaninvest.net

9 / 31

Page 15: Based on joint work with Stian Westlake, Carol Corrado ......Based on joint work with Stian Westlake, Carol Corrado, Cecilia Jona-Lasinio, Massimiliano Iommi Presentation at Villa

Di�erences across countries: Intangible investment, 1999 to 2015

0.0

5.1

.15

.2Sh

are

of G

DP

ES IT DE AT NL UK DK FI FR US SE

Note: Ranked by intangible share. GDP adjusted to include intangibles.

(NonFarm Business, averages, 1999-2015)Tangible and intangible shares of GDP

Tangible Intangible

Note: Nonfarm business excludes real estate.Source: Authors' calculations based on INTAN-Invest c© 2018, available at www.intaninvest.net

10 / 31

Page 16: Based on joint work with Stian Westlake, Carol Corrado ......Based on joint work with Stian Westlake, Carol Corrado, Cecilia Jona-Lasinio, Massimiliano Iommi Presentation at Villa

Digression: Cross-country di�erences are correlated with interesting policyvariables: public R&D spend

ATATATATATATATATATATATATATATATATATATATDEDEDEDEDEDEDEDEDEDEDEDEDEDEDEDEDEDEDE

DKDKDKDKDKDKDKDKDKDKDKDKDKDKDKDKDKDKDK

ESESESESESESESESESESESESESESESESESESES

FIFIFIFIFIFIFIFIFIFIFIFIFIFIFIFIFIFIFIFRFRFRFRFRFRFRFRFRFRFRFRFRFRFRFRFRFRFR

ITITITITITITITITITITITITITITITITITITIT

NLNLNLNLNLNLNLNLNLNLNLNLNLNLNLNLNLNLNL

SESESESESESESESESESESESESESESESESESESE

UKUKUKUKUKUKUKUKUKUKUKUKUKUKUKUKUKUKUK

USUSUSUSUSUSUSUSUSUSUSUSUSUSUSUSUSUSUS

.06

.08

.1.1

2.1

4.1

6In

tang

ible

inve

stm

ent s

hare

of m

kt s

ecto

r val

ue a

dded

.005 .006 .007 .008 .009 .01Government and HE spend on R&D as share of GDP

(Averages, 1999-2013)Market sector intangible investment and Goverment R&D

Source: Jonathan Haskel, Stian Westlake, Capitalism Without Capital, 2017

11 / 31

Page 17: Based on joint work with Stian Westlake, Carol Corrado ......Based on joint work with Stian Westlake, Carol Corrado, Cecilia Jona-Lasinio, Massimiliano Iommi Presentation at Villa

Regulation

ATATATATATATATATATATATATATATATATATATAT

DEDEDEDEDEDEDEDEDEDEDEDEDEDEDEDEDEDEDE

DKDKDKDKDKDKDKDKDKDKDKDKDKDKDKDKDKDKDK

ESESESESESESESESESESESESESESESESESESES

FIFIFIFIFIFIFIFIFIFIFIFIFIFIFIFIFIFIFI FRFRFRFRFRFRFRFRFRFRFRFRFRFRFRFRFRFRFR

ITITITITITITITITITITITITITITITITITITIT

NLNLNLNLNLNLNLNLNLNLNLNLNLNLNLNLNLNLNL

SESESESESESESESESESESESESESESESESESESE

UKUKUKUKUKUKUKUKUKUKUKUKUKUKUKUKUKUKUK

USUSUSUSUSUSUSUSUSUSUSUSUSUSUSUSUSUSUS

.1.1

2.1

4.1

6.1

8Sh

are

1 1.5 2 2.5 3OECD employment market strictness index

Tangible investment share

ATATATATATATATATATATATATATATATATATATAT

DEDEDEDEDEDEDEDEDEDEDEDEDEDEDEDEDEDEDE

DKDKDKDKDKDKDKDKDKDKDKDKDKDKDKDKDKDKDK

ESESESESESESESESESESESESESESESESESESES

FIFIFIFIFIFIFIFIFIFIFIFIFIFIFIFIFIFIFI

FRFRFRFRFRFRFRFRFRFRFRFRFRFRFRFRFRFRFR

ITITITITITITITITITITITITITITITITITITIT

NLNLNLNLNLNLNLNLNLNLNLNLNLNLNLNLNLNLNL

SESESESESESESESESESESESESESESESESESESE

UKUKUKUKUKUKUKUKUKUKUKUKUKUKUKUKUKUKUK

USUSUSUSUSUSUSUSUSUSUSUSUSUSUSUSUSUSUS

.06

.08

.1.1

2.1

4

1 1.5 2 2.5 3OECD employment market strictness index

Intangible investment share

Shares of GDP, average 1999-2013Tangible and intangible investment and regulation

Source: Jonathan Haskel, Stian Westlake, Capitalism Without Capital, 2017

12 / 31

Page 18: Based on joint work with Stian Westlake, Carol Corrado ......Based on joint work with Stian Westlake, Carol Corrado, Cecilia Jona-Lasinio, Massimiliano Iommi Presentation at Villa

Openness

AT

DE

DK

ES

FIFR

IT

NL

SE

UK

US.0

6.0

8.1

.12

.14

Inta

ngib

le in

vest

men

t sha

re o

f GD

P

.1 .15 .2 .25 .3OECD index of non-transport service trade restrictiveness

Intangible investment and service trade restrictiveness, 2013

Source: Jonathan Haskel, Stian Westlake, Capitalism Without Capital, 2017

13 / 31

Page 19: Based on joint work with Stian Westlake, Carol Corrado ......Based on joint work with Stian Westlake, Carol Corrado, Cecilia Jona-Lasinio, Massimiliano Iommi Presentation at Villa

GDP and growth when intangibles are capital

Upstream intangibles-producing N-sector using conventional inputs X = L,K :

PNN = PXXN ; dn = σNX dxN + daN (9)

Upstream tangibles-producing I-sector using conventional inputs X = L,K :

P I I = PXX I ; di = σIXdx

i + daN (10)

Downstream tangible and intangibles-using C-sector, also using intangible capital R:

PCV C ≡ PCC ; dc = σCX dx

C + σCR dr

C + daC (11)

Economy-wide value added = sum of industry value-added

PQQ ≡ PCV C + P I I + PNN (12)

=⇒

PQQ︸ ︷︷ ︸GDP

= PCC︸ ︷︷ ︸consump

+ P I I︸︷︷︸tan invest

+ PNN︸ ︷︷ ︸intan invest

; dq ≡ ωQC dc + ωQ

I di + ωQN dn = σQ

X dx + σQR dr + daQ︸ ︷︷ ︸

output =share* input X +share* input R+ TFP

• What are the new data on GDP, factor shares, inputs, TFP?

21 / 31

Page 20: Based on joint work with Stian Westlake, Carol Corrado ......Based on joint work with Stian Westlake, Carol Corrado, Cecilia Jona-Lasinio, Massimiliano Iommi Presentation at Villa

Growth accounting, per hour, with intangibles

0.0

1.0

2.0

30

.01

.02

.03

QH LH KH_tan KH_int TFP QH LH KH_tan KH_int TFP

QH LH KH_tan KH_int TFP QH LH KH_tan KH_int TFP

1999-07, EU 1999-07, US

2012-15, EU 2012-15, US

Graphs by xperiod and group_Country

(EU&US, Non-farm Business, per hour)Growth accounting

Source:Authors' calculations based on INTAN-Invest

• Intangibles are important: around 30% of lab prod growth in US, 20% in EU

• 88% of EU slowdown is TFP: 38% of US.

22 / 31

Page 21: Based on joint work with Stian Westlake, Carol Corrado ......Based on joint work with Stian Westlake, Carol Corrado, Cecilia Jona-Lasinio, Massimiliano Iommi Presentation at Villa

TFP slowdowns

When intangibles are intermediates:

PVV︸ ︷︷ ︸GDP

= PCC︸ ︷︷ ︸consump

+ P I I︸︷︷︸invest

; dv = σVX dx + daV︸ ︷︷ ︸

output =share*input + TFP

When intangibles are capital:

PQQ︸ ︷︷ ︸GDP

= PCC︸ ︷︷ ︸consump

+ P I I︸︷︷︸tan invest

+ PNN︸ ︷︷ ︸intan invest

; dq = σQX dx + σQ

R dr + daQ︸ ︷︷ ︸output =share* input X +share* input R+ TFP

• Assume partial output quality-adjustment

dcm = dc + νdθC

• Assume measured TFP ignores intangibles

dtNoIntanm = dv − σVX dx(V+N)

=⇒dtNoIntanm = daQ︸︷︷︸

tech,spillovers

− ωQV (dn − dv)︸ ︷︷ ︸

missing intan invest

+ σQR drV︸ ︷︷ ︸

intang rental

+ (σQX − σ

VX )dx(V+N)︸ ︷︷ ︸

K, L share mismeas

+ νωQC dθC︸ ︷︷ ︸

quality adj

• Quality adjustment? Spillovers? TFP slowdowns during early period of Big Datainvestment?

24 / 31

Page 22: Based on joint work with Stian Westlake, Carol Corrado ......Based on joint work with Stian Westlake, Carol Corrado, Cecilia Jona-Lasinio, Massimiliano Iommi Presentation at Villa

Quality adjustment is not just in high-technology goods...

Source Johnson (2015)

Observed price rises by 50%. Price index falls by 20%.27 / 31

Page 23: Based on joint work with Stian Westlake, Carol Corrado ......Based on joint work with Stian Westlake, Carol Corrado, Cecilia Jona-Lasinio, Massimiliano Iommi Presentation at Villa

Spillovers?

ATDE

DK

ES

FI

FR

IT

NL

SEUK

US

AT

DE

DK

ES

FIFR

ITNL

SE

UK

US

-.01

0.0

1.0

2.0

3M

ultif

acto

r pro

duct

ivity

gro

wth

0 .01 .02 .03 .04 .05Intangible capital services growth

Note: non-farm business.

(1999-2007 open diamonds; 2012-2015 closed circles)MFP and intangible capital services growth

Notes to �gure: �gure show time averages of MFP and capital services growth for the two time periods and 9 countriesindicated. Data are for NFBiz, MFP growth weighted by sectoral value added and capital services growth by sectoral capitalpayments.

• MFP growth slowdown =1% =( 1.1%-0.1%)

• Intang growth slowdown = 1.7%= (3.4%-1.7%)

• slope of relation = 0.17 =⇒ 0.3% slowdown = 33% of slowdown

28 / 31

Page 24: Based on joint work with Stian Westlake, Carol Corrado ......Based on joint work with Stian Westlake, Carol Corrado, Cecilia Jona-Lasinio, Massimiliano Iommi Presentation at Villa

Bias in TFP growth B due to unmeasured investment is given by

B = − ωQV (dn − dv)︸ ︷︷ ︸

missing intan invest

+ σQV dr

V︸ ︷︷ ︸intangibles

+ (σQX − σV

X )dx︸ ︷︷ ︸K, L share mismeas

.

Assume AI investment a multiple of nonNA intangible investment ...-.0

010

.001

.002

.003

2000 2005 2010 2015 2000 2005 2010 2015

EU US

Bias

to m

easu

red

TFP

grow

th

YearNote: Positive bias indicates measured TFP is too big

(Non-farm business sector, US and EU. Smoothed by 3yr ma.)Total bias

30 / 31

Page 25: Based on joint work with Stian Westlake, Carol Corrado ......Based on joint work with Stian Westlake, Carol Corrado, Cecilia Jona-Lasinio, Massimiliano Iommi Presentation at Villa

Summary

• Growing importance of the digital economy

• Intangibles approach is one way to organise our thoughts on this and guide

statistical agencies• What might we be looking for to better understand productivity in the digitaleconomy?• Unmeasured investment• Price quality-adjustment• Spillovers

31 / 31

Page 26: Based on joint work with Stian Westlake, Carol Corrado ......Based on joint work with Stian Westlake, Carol Corrado, Cecilia Jona-Lasinio, Massimiliano Iommi Presentation at Villa

Summary

• Growing importance of the digital economy

• Intangibles approach is one way to organise our thoughts on this and guide

statistical agencies• What might we be looking for to better understand productivity in the digitaleconomy?• Unmeasured investment• Price quality-adjustment• Spillovers

31 / 31


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