The search for asset valuation in the age of intangibles.

Gary Gorton an Economist who specializes in banking and asset prices said, “The history of safe assets is the history of money.” The ambiguity surrounding what a safe asset is and isn’t has rarely grown scarce in the last couple of decades. The importance of safe assets though can’t be understated. A safe asset is defined as, “Safe assets are those which are deemed to be relatively low risk while at the same time offering high liquidity, in that there is a ready market to buy and sell them.” Treasury bills and cash have historically been considered the safest assets.

First up, what is an intangible asset from a business perspective?

It’s an asset that is not physical in nature. Corporate intellectual property, including items such as patents, trademarks, copyrights and business methodologies, are intangible assets, as are goodwill and brand recognition.

The increase in intangible investment in recent decades has distorted the market not only from a supply side perspective, but also affected how we value assets in general.

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The recent trend has also affected banks and called into question what their exact role should be. Banks historically have been viewed under two different branches within economics. One branch looks at banks as totally intermediary vehicles that play no role when it comes underwriting asset purchases. The other branch tends to view banks as monetary institutions that act as issuer of funds through short term lending. (Ricks 2017)

Intangibles have played a big role in affecting the market for safe assets by distorting the lending credentials of banks. A bank would typically lend in the estimation that if the debtor defaulted the bank could just seize his/her assets. But intangible assets come with such high sunk costs that make the asset nearly irrecoverable if removed from the environment they were designed for. For example, Company A’s supply chain is highly efficient, but so well tailored that it can’t be of any worth to anyone outside Company A. Its supply chain is an asset for Company A, but is it still an asset when removed from Company A and transferred to Company B? That’s an extremely tough question to answer, but one that we face none the less. Traditional assets were extremely easy to recycle from one company to another without depreciating as much. But we can’t say the same about algorithms and personalized softwares, because their utility to another consumer is extremely hard to measure.

The utility function is something everyone’s favorite superhero/billionaire, Elon Musk has touched upon before. When asked about what the biggest asset for Tesla would be moving forward he mentioned -“production lines”, and its not hard to see why. Electric car manufacturers biggest asset won’t be their cars, but their supply chains. Its how you piece together, efficiently, all the different jigsaw puzzles that need to go into making an electric car. And the company the first to mass produce electric cars, has the ability to squeeze the margins of other manufacturers and solidify its position at the top.

Intangibles also play a big role in innovation. Not only are intangibles easier to scale than tangible goods, they also come with higher spillover effects (Haskel and Westlake). Spillover effects is the tendency of one person’s innovation to benefit another owing to proximity. As I explained in my last post, the importance of distance as a variable can be reduced with an increase in parity in around the country when it comes to internet availability. Sadly the parity is extremely hard to find and hence with each passing day it becomes harder for those places near the bottom of the innovation index to rise up. With the rise in intangible investing and workforce automation, the importance of tangible investment cannot be neglected. But we need to make sure that there’s a smooth transition to an era where intangible goods hold prominence. The transition should start with making sure there’s parity in tangible assets first.

This bring us back to why the source of funding for these investments needs to evolve at a quicker rate. Stock markets initially were the source of funds for companies that invented and had high capital requirements. Take for example, railroad & construction companies. Companies that go public these days aren’t there to raise funding for R&D or to meet capital requirements, and even if they did the short termism with which the market treats certain sectors/participants while being lax towards others wouldn’t let them. Venture capital in this regard has duly filled in the massive gap left by the retreat from what was historically under the domain of banks. As the percentage of intangibles assets as a part of private sector GDP rises, we need to make sure that adequate ways of valuation can be found. The discounting process and weighted average cost of capital methods aren’t as effective when it comes to intangible valuation. America’s been home to greatest feats of financial innovation, and it needs to come up with many more. The signalling power of the market might just depend on it.


Capitalism without Capital The Rise of the Intangible Economy. Jonathan Haskel & Stian Westlake. 2017.

Ricks, Morgan, Money as Infrastructure (March 11, 2018). Vanderbilt Law Research Paper No. 17-63. Available at SSRN: or

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