Erik Brynjolfsson and others write,
Our findings suggest that the higher values the financial markets have assigned to firms with large digital investments in recent years reflect greater digital capital quantities, rather than simply higher prices for existing assets. In other words, they reflect genuine improvements to firms’ productive capacity. In fact, we find that digital capital, if included as a separate factor in firm-level production functions, predicts differences in output and productivity among firms.
. . .One interpretation of our findings is that translating organizational innovations into productive capital requires significant investment in organizational re-engineering and skill development. Therefore, even if firms have the appropriate absorptive capacity, knowledge of how to construct digital assets will not automatically generate productive digital capital any more than access to the blueprints of a competitor’s plant will directly lead to productive capacity.
If I am translating the jargon correctly, this says that the big tech winners got that way by being better at managing software engineers. That is a hypothesis I have raised from time to time here.
We all want to believe that when we get a much greater reward for our work or our grandma’s jewelry is because they finally recognize X (as defined by Harvey Leibenstein), a type of capital that we can see only when others pay for it. In ten years, we will know whether Erik has been right or joined Harvey in the Tomb of the Unknown Ivy League Academic.
“ high market values are associated with AI before they are associated with increased revenues or productivity, suggesting that investors anticipate significant future returns to AI-related intangible assets that are otherwise unmeasured”
So investors can predict future innovation? Sounds more like rationalizing a bubble.
Yep, Erik has had interesting analysis of historic tech and organizational change before, but is completely out of his element in plumbing the depths of the AI scam.
I think that effective management of software development is very rare, and definitely undervalued.
I’d say almost nobody does it well, especially at the largest tech firms, but if they prosper, it’s only because of other strategic advantages.
I suppose management could encompass this but, I’ll add that talent matters and it ain’t cheap, and org structure matters as much or more. The back office culture that is now forced to move at the speed of front office business is not a fun thing to witness or experience.
Keep in mind that a huge fraction of digital assets consists of data used for targeting ads. While there’s certainly some value to that data for the businesses that create it, its overall social value is much more questionable. Also, it tends to depreciate rapidly – the algos often try to sell me things that I have recently purchased and will not need to purchase again for quite some time.
Arnold, when I downloaded Erik&others’ paper from SSRN, I saw another paper on “Intangible Value” by Eisfeldt&others which I also downloaded. In times in which too many people like to talk about K (for capital) and W (for wealth), I think it’s very important to go back to Accounting 101 and explain why after hundreds of years we are still having problems to aggregate assets into K and rights into W and to define correctly the conditions under which the two stocks are equal (and why the identity K=W doesn’t have analytical value). Most of your readers may have some knowledge as to how Accounting 101 applies to individuals, families, and all sorts of organizations, but may know nothing about aggregating accounts over individuals, families, and organizations to construct measures of a society’s capital and wealth. The two papers on intangible capital mentioned above pose accounting problems because they focus on an arbitrary category of assets and assume implicit claims about rights on them. I hope you find time to write about these issues.