CHAPTER 10

Lighten Up: Capital Expenditure and Intellectual Property

When did interactive video games morph from a pastime that angered parents to a lucrative profession? Maybe if you were good at Space Invaders or Ms. Pacman, someone might buy you a beer, but today, professional video gaming is a huge global industry. Esports teams from Korea to France, in India and the United States compete around the world in games like League of Legends, CS: GO, Hearthstone, Super Smash Bros., Overwatch, Dota 2, Rocket League, Fortnite, PUBG, StarCraft II, and Call of Duty. When the league around the game Overwatch announced it would add teams, communications giant Cox and a partner paid an estimated $30–$60 million to get Atlanta into the first expansion round. Video gaming is not only a competitive sport but has also become, as a GDP category, a huge investment of human capital.

GDP is getting lighter. So Alan Greenspan often asserted even before he became chairman of the Federal Reserve in 1987. It sometimes struck his audiences as an odd topic, but it was an astute observation with broad implications for the economy. Long ago, the architect and futurist Buckminster Fuller, who designed the Geodesic Dome, predicted that people would one day assess buildings in terms of what they weighed as opposed to what they cost. There was something to be said for efficient design and the economic use of materials, but Greenspan understood that manufacturing, which for years had been the focal point for expanding GDP, particularly in developing economies, was becoming a less critical part of national and global economies. No longer could we measure the advance of our economy by heavy industry. “Building” intellectual property was becoming and is now a dominant source of economic growth.

Big Payoffs: Intellectual Property

We used to think of investment as limited to tangible goods, equipment more than anything, but also real estate. While those still command a significant portion of GDP, today the big payoffs for investors are generated by intellectual property. Innovation has allowed for the monetization of intellectual property and that has accounted for enormous revenue streams across the globe and in all segments of the economy. The development of vaccines for the COVID-19 virus illustrated the level of commitment of both public and private investment to innovation and intellectual property. While the vaccine itself is produced in physical-capital-intensive labs, the process of developing the vaccine required a huge amount of human capital: the training and experience of the medical scientists developing the drugs. We do heavy industry well, but whether it’s medicine or software or the code that moves a vehicle forward autonomously, the value-add to GDP today—and far into the future—is more and more in intellectual property.

That isn’t to say that investment in plant equipment is irrelevant. On the contrary, in almost all cases when intellectual property finds value, it is manifested in some process that requires physical production. But there are an increasing number of cases where that is not true, as in some creative arts, like live concerts, which are performed largely using existing infrastructure and capital. Or in esports that feature competition over an existing Internet infrastructure. Or by TV and movie producers who use existing protocols and hardware to transmit their creations.

Measuring Intellectual Property for GDP

Investment in intellectual property is more difficult to define and categorize than investment in heavy industry where you get to see the new machinery on the factory floor. If you work in research in a factory, you work to make a product better. The Thomas Edison Research Laboratory was all about new products and new uses for physical materials—rubber, for example—where the end product was something tangible. Today an increasing share of research is about investing in and developing human capital, which, in turn, will be better able to develop more intellectual property.

Consider the artist, one who draws or paints on a canvas. She might redirect her talent, along with learning something of engineering, to draw buildings that are realistic and functional. The artist becomes architect. We think of architects as pursuing a different kind of education than a fine arts degree, but the creativity involved in putting something completely new on paper or a digital device does not differ so greatly between the two.

Take it a step further: Instead of architects who build buildings, we have architects that build microchips, a skill we typically think of as part of an electrical engineering education. But it is also about placing little bitty components in the same way an architect thinks about placing bigger components and the same way a painter puts objects into a painting. On some level, the creative processes aren’t that different, even if the specialized field behind each is. Technical and artistic creativity are related, which also makes the idea of investing in creative human capital harder to define and categorize.

Intellectual property is much more fungible than heavy industry. It is without mass, which has profound implications on where it can be produced, how it can be produced, where it can be marketed and applied. A virtual reality work has to accurately render what people look like and how they behave and move, so we have a great melding of what we had in the past. What we thought of as purely creative art now has another outlet of value in the economy. The human capital that is associated with and facilitates certain kinds of creativity is now something pushing economic growth. The line between investment that enhances GDP and a purely artistic effort that might have some economic value but is not initially intended to produce GDP is no longer so clear.

As the economy gets more complex and as technology progresses, it becomes quite clear that the investment in physical and human capital is more integrated, the confusion between creativity and some commercial endeavor is much more blurred. Intellectual property is a powerful force moving the global economy forward. We’re still making a lot of money building buildings, but more and more returns are coming from ideas that can power innovation.

Fungible and Challenging

The ease with which intellectual property can move around, including across borders, presents its own challenges. International trade disputes often center around intellectual property, its protection and use. The concept of “nothing new under the sun” has morphed to be about how innovations are frequently combinations and permutations of existing ideas.

We use patents and copyrights to protect intellectual property. But detecting infringement is often easier when it involves a physical product. How an innovation separates two pieces of intellectual property with little physical manifestation is more complicated. Accounting software does arithmetic, and all arithmetic will lead to the same result. When does one piece of accounting software infringe on another when their basic functions are essentially identical? How do you distinguish between reusing ideas as opposed to stealing ideas?

Such challenges to investing in intellectual property continue to grow in number and complexity. How much of a particular innovation is really new and what is a twist on an existing idea? These are difficult social, legal, and economic issues, as tough as measuring intellectual property investment and output for GDP.

Takeaways

Equilibrium

Technology and the fruits of investment have evolved dramatically over time and as resources get reallocated. Innovations we think of as entertainment also have applications that go well beyond entertaining. The same kind of coding that allows you to control a 3-D virtual character might also be applicable in a medical application. The principle of equilibrium is evidenced in the interconnectedness of investments and the mechanisms by which information investment diffuses itself and gets applied in potentially unexpected ways to produce better outcomes.