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Bill Gates: not enough people are paying attention to the trend of intangible assets making up more and more of the economy
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- Title
- Not enough people are paying attention to this economic trend
- Authors
- Bill Gates
I mean... Gates is right about his point that the economics are different for a company producing an intangible asset than for one producing a tangible asset... but he's wrong about so much of the detail he mentions along the way! I just want to go through that essay and red-mark everything he got wrong. Instead, I'll do it here. :)
No. Supply does not increase as demand goes up. Demand and supply move independently of each other - they're both being driven by price. Consumers might demand thousands of paintings by a particular artist, but that doesn't mean the artist is suddenly going to supply them! What the graph shows us is how demand is influenced by price: a higher price leads to a lower demand, and a lower price leads to a higher demand. Supply is also driven by price: a higher price leads to a higher supply (of course you'll sell more if you get more money for each unit), and a lower price leads to a lower demand (why sell stuff if you get less money for it?). And, somewhere in the middle, there's a happy spot where the price produces a demand and a supply that match each other.
Not necessarily. It's ironic that Gates chose cars for this example, because Henry Ford was a pioneer in mass-producing cars. If you hand-make 10 cars, each car is expensive. If you produce 1,000 cars on a production line, each car is cheap. Of course, if you hand-make 1,000 cars then, yes, the 1,000th car will cost as much as the 10th car.
Yes and no. There are some costs involved in copying and distributing the 10th and 1,000th units of that program. But, they are minimal compared to the original investment. However, this why amortisation exists: to distribute the original investment across all the copies of the program, rather than front-loading only the 1st copy.
Insurance isn't an asset. It's a financial service. You don't own anything when you pay for insurance - not even an intangible collection of bytes or pixels.
No. No. No. Market research is not an asset: you don't own anything as a result of spending on market research. It's an expense of doing business.
As for training... FUCK NO. You don't own your employees, nor their skills. You can not buy or sell employees (it's illegal!). This is a common mis-perception that arises when employers talk about "human resources" or "people capital" - they start blurring the line between actual resources and assets, and their employees. Employees are an expense, not an asset. Investing in their skills is an expense. You don't own anything at the end of it. Training might increase people's ability to produce assets, but the training itself is not an asset.
Responding to your last point: I can understand your argument. I agree that employees aren't assets, but i do believe that their time is. A company pays an employee, and then the employee provides their time to the company.
Framing it this way gives us the ability to see what training is more than just an expense. Training will increase the value of an employee's time, thus increase the production capacity of the company as a whole.
This is further supported by the notion of outsourcing companies. One company hires another company to provide employees for a job. The outsourcing company then provides the time of its employees to do the job. In this way, the time of an employee is an asset.
Let's use your analogy that an employee's time is an asset; we can therefore say that an employee sells their time to their employer. So, an employee has 168 hours per week available to them, and they choose to sell 40 of those hours to a company in exchange for money.
The employee's time is worth money because of the employee's labour (the work they can perform in one hour), and their experience and knowledge. If an employee has more experience and/or knowledge, they can do more or better work in an hour, so that hour is worth more when they sell it to their employer.
If the employer spends money on training the employee, that increases the employee's experience, which makes their time more valuable. However, it is still the employee's time to sell: they could choose to sell their time to someone else. The employer does not control or own the employee's time - the employee does. Even if the employer spends money on training the employee, the resulting knowledge is owned by the employee, not the employer.
Imagine that I rent your back yard for my children to play in (we live in an apartment). Now imagine that I improve your back yard so my children enjoy it more: I install a sandpit, I lay down a lawn, I plant some flowers around the fence. Your back yard is worth more to me and my children, so I pay you more to rent it - but who owns those improvements? When my kids grow up and don't like playing in your yard any more... you will own the improvements I installed, and you can continue to rent out your yard to other families long after my kids have moved on.
There's also the issue than an employer might have a contract which entitles them to buy the employee's time, but they still don't own each hour until the employee actually sells it. It's important to note that the employee can provide exactly one hour of work per hour. The company can't "save up" these hours: each hour gets used exactly as fast as it's produced.
So, before each hour, the company does not own the time because it doesn't exist yet and, after each hour, the company does not own the time because it no longer exists.
Every year on 30th June (or whenever the financial year ends in your country), the employer/company prepares a balance sheet which shows, among other things, the value of all assets the company owns at that date (strictly speaking, it's as at midnight between 30th June and 1st July). As I've just described, the company can not possibly own any time at that date: all the hours that were produced by the employer before that point have been used up and all the hours that will be produced by the employer after that point do not exist yet. The company does not own anything as at midnight on 30th June when it produces its balance sheet.
At most, it owns the right to be the exclusive buyer of the employee's time, by virtue of its employment contract with the employee. It can sell that right to another company, but the right to buy time is not the same as the time itself.
This seems like an oversimplification. Commercial software does not build, test, update, bug fix, and go through whatever other processes occur within its product life cycle without a team of engineers supporting it. The value of an unmaintained piece of software is basically zero. The value of a piece of software supported by professionals is usually non-zero (unless it's a pet project, but I don’t think that’s what Gates was talking about). The tangible assets of value, then, are software engineers capable of maintaining existing software, and also, software engineers capable of creating new software worth maintaining. But you can’t have one without the other. This is the fundamental distinction between soft (i.e., intangible) and hard goods. The soft goods are completely dependent on the companies that provide/service/support them because there are people with valuable skills working for those companies. Appliances, cars, etc. that can be repaired by specialists are somewhere in between. But, the value is not intangible—it’s just not in the product itself, it’s in the people.
The value of unmaintained code is certainly less than maintained code, but it's not zero. If it still solves the problem it was written to solve, it has value.
I think you're just stating Gates' argument in a different way here. Previously the tangible assets would be produced in a factory and actually sold to customers, which they would then own. If the assets of value are now engineers and their time, we've shifted to a model where customers only buy the intangible asset of "engineer time", or perhaps for an even more intangible quantity like a support contract for "engineer time, but only if I encounter a serious bug".
Looked at another way - a car manufacturer in the 20th century had the same problem of engineering and sustained maintenance. It needed to keep its cars up-to-date. New model years would require styling changes, engine changes, regulatory changes for things like airbags, emissions and fuel economy standards, and so on. The key difference is that the cost of those activities was relatively small, as a percentage of the overall cost of a new car.
We've now flipped that on its head, where the marginal cost of say a Windows 10 installation is very low - the bandwidth needed for the download, or the cost of the DVD media. A much larger share of the purchase price goes to those activities like engineering that aren't directly tied to any one install.
I think I may not have made my point clearly. It is different from what Gates is saying.
I get the sense that economists don’t like to model the world wholistically. Parsing out the marginal cost of the installation media for a single copy of Windows doesn’t really make any more sense than parsing out the marginal cost of a single brick produced by a brick maker. The brick itself has very little value. In context, wholistically, it can be part of something larger of value that is tangible. But the brick is still considered a tangible thing.
In a vacuum, an instance of some computer program is virtually worthless. Without a computer to run it and probably at least one human or some other system to give it input and consume the output, there isn’t any value. The value of the program is relative to what it is used for. Same with the brick. I don’t think the tangible vs. intangible distinction is important.
Someone might use their copy of
Windows to create things of value. Shouldn’t some fraction of the value of all the work that is done by Windows users (or any other software) be partially attributed to the software provider?
Think about it this way: If someone uses an unpaid/unlicensed copy of Windows to create a work of art that is of value, the fact that they didn’t obtain the copy of Windows legitimately doesn’t diminish the value that Windows provided to the creator. This is opposed to a boxed copy of Windows sitting in a sealed box in a warehouse that is providing no realized value. Sure, Microsoft made a sale. But, that instance of the product is worthless. I think this analogizes to a brick sitting in a warehouse as compared to a brick in the wall of a home that provides valuable shelter. The same applies to a car that breaks down and is scrapped for parts unecesssrily when it could have been repaired by a skilled repair person. An economic model that treats the unrealized value of goods (hard or soft) as true value I think is the problem. And the ultimate value is really not inherent to the tangible things. The value is in what people do with it.
In economic terms, an asset is something you own, and which you can sell for money. Last time I checked, it's illegal to own software engineers. ;)
This is a common mis-perception that arises when employers talk about "human resources" or "people capital" - they start blurring the line between actual resources and assets, and their employees. Employees are an expense, not an asset.
Microsoft does not own its software engineers or their skills, they merely rent them.
I think it’s not useful to measure value in terms of only things that can be owned. Under such an economic model, things like people, education, and software have no value. Seems like a fundamental problem with the field of economics if it can’t account for the value of things that aren’t owned.
Exactly: economics can not measure everything. It's great for talking about money and trade and how capitalism might work, but it's not a universal tool. Just like you can't use a thermometer to measure the size of an object, you can't use economics to measure the value of people.
Or, in blunter terms, the world is not all about money. You can't measure experience or knowledge or happiness in dollars/euro/pounds.
Asset:
Emphasis added.
That definition has to be interpreted. For example, the very next line says "assets are reported on a company's balance sheet". I've worked in or around accounting departments for about 20 years out of my 30-year working life (including right now), and no respectable accountant would dare to put an employee on the balance sheet - because it is impossible to assign an economic value to a person. Not only must the entity own or control the putative asset, but the supposed asset must have an economic value.
Also, control is taken to mean that the controlling entity can dispose of the asset - such as by selling it to someone else. You can sell an item of stock, you can sell a building, you can sell a trademark, you can even sell goodwill - but you can't sell an employee. At most, you can sell the employee's contract, but that's like selling a lease on your premises: you're selling the right to hire the building or employee, but you're not selling the building or employee themselves.
Are Employees Intangible Assets?:
See also: Goodwill:
If your only contribution to this discussion is to toss quotes at me... I can't be bothered engaging. See ya.
I find this an interesting response from someone who feels uninhibited in posting unsubstantiated commentary and ignoring contradictory auhoritative references.
Have a fabulous day.
There's a missing piece in this discussion, that even Gates' review neglected to mention: intellectual property is the "intangible asset" under discussion.
What's become clear over time is that intellectual property is a fragile, transient, contentious asset subject to a bewildering thicket of laws and norms, nearly impossible either to protect or value accurately.
It's not a substantial basis for determining the market price of companies that produce it.
To the extent that the factors of "intangible asset" production largely exist in the heads of the employees, we're nicely positioned for an actual Socialist revolution... except that the tangible products of capital that people need to survive are most definitely owned and controlled by the ruling class.