NCPA - National Center for Policy Analysis


September 20, 2006

The revolution in information technology (IT) is apparent in the profusion of new products available in the market place, but its appearance in the macroeconomic statistics on growth has been slow to materialize, according to the authors of a new National Bureau of Economic Research (NBER) Working Paper.

The main reason, say the authors, is that accounting practices have historically treated expenditure on intangible inputs as an intermediate expense and not as an investment that is part of gross domestic product (GDP).  But this has begun to change with the capitalization of software in the United States.  This alone has had an appreciable affect on the measured growth of output per worker in the non-farm business sector and the growing literature on intangibles suggests that this is just the tip of the iceberg:

  • Intangible knowledge capital contributed approximately $1 trillion to U.S. economic growth from the conventionally measured output of the non-farm business sector by the late 1990s, understating the business capital stock by $3.6 trillion.
  • The $1 trillion in omitted intangible investment is roughly equal to the amount of investment spending on tangible capital goods.
  • The inclusion of intangible investment in the real output of the non-farm business sector increases the estimated growth rate of output per hour by 10 to 20 percent relative to the base-line case which completely ignores intangibles.

That intangibles, and more generally, knowledge capital should be such an important driver of modern economic growth is hardly surprising, given the evidence from every day life and an understanding of basic economic theory, say the authors. What is surprising is that intangibles have been ignored for so long, and that they continue to be ignored in financial accounting practice at the firm level.

Source: Les Picker, "Intangible Capital and Economic Growth," NBER Digest, September 2006; based upon: Carol A. Corrado et al., "Intangible Capital and Economic Growth," National Bureau of Economic Research, Working Paper No. 11948, January 2006.

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