In an era dominated by digital technology and information, our traditional ways of categorizing economic output are becoming increasingly outdated. Peter Hill’s seminal paper, “Tangibles, intangibles and services: a new taxonomy for the classification of output,” offers a fresh perspective on how we should classify economic products in the 21st century, with particular emphasis on the crucial role of intangibles.

Peter Hill; Tangibles, intangibles and services: a new taxonomy for the classification of output; The Canadian Journal of Economics / Revue canadienne d’Economique Vol. 32, No. 2, Special Issue on Service Sector Productivity and the Productivity Paradox (Apr., 1999), pp. 426-446

The Traditional Dichotomy: Goods vs. Services

For centuries, economists have relied on a simple dichotomy to classify economic output: goods and services. This distinction, rooted in the work of Adam Smith, has long associated goods with tangible, material products, while services were considered intangible and immaterial. However, this traditional classification system has become problematic in our modern, knowledge-based economy.

The Rise of Intangibles

Hill argues that the traditional dichotomy between goods and services should be replaced by a three-part taxonomy:

1 . Tangible goods
Tangible goods are physical, material objects that can be owned, traded, and consumed. They are separate entities from their producers or owners, allowing for production, distribution, and consumption to occur at different times and locations.

2 . Intangible goods
Intangible goods are non-physical entities that share economic characteristics with tangible goods, such as the ability to establish ownership rights and trade them. Examples include original creations by authors, composers, scientists, and software developers, which can be recorded and stored on physical media and have considerable economic value.

3 . Services
Services cannot be produced without the agreement, cooperation, and possibly active participation of the consuming unit(s). They are not separate entities that exist independently of producers or consumers, and their outputs must impinge on the condition or status of the consuming units.

This new classification system recognizes the growing importance of intangible products in our economy. Intangible goods, as defined by Hill, are non-physical products that share more economic characteristics with tangible goods than with services. Examples include:

  • Original creations by authors and composers
  • Software
  • Designs and blueprints
  • Patents and copyrights

The Importance of Intangibles in the Knowledge Economy

In today’s digital age, the traditional dichotomy between goods and services has become increasingly inadequate for capturing the true nature of economic output. Peter Hill’s seminal paper proposes a new taxonomy that recognizes intangibles as a distinct category, highlighting their crucial role in the knowledge economy. This classification is essential for several reasons:

  • Value Creation
    In today’s economy, a significant portion of value is created through knowledge, innovation, and creativity rather than physical production. Intangible assets like patents, trademarks, and proprietary software often represent the most valuable assets of many companies, especially in tech-driven industries.
  • Economic Measurement
    Traditional economic measures, focused on tangible outputs, often fail to capture the true value created by intangibles. Recognizing intangibles as a distinct category allows for more accurate measurement of economic output, productivity, and growth.
  • Investment and Capital Formation
    Intangibles represent a form of capital investment. Companies invest heavily in research and development, brand building, and organizational processes – all intangible assets that can generate future economic benefits.
  • Competitive Advantage
    In the knowledge economy, competitive advantage often stems from unique intangible assets rather than physical resources. A company’s intellectual property, brand value, or proprietary algorithms can be far more valuable than its tangible assets.

The Interrelation of Intangibles and Intellectual Property

Intellectual property (IP) is intrinsically linked to the concept of intangibles. In fact, IP rights are the legal mechanism that allows intangible goods to function economically like tangible goods. This interrelation is crucial for several reasons:

  • Ownership and Tradability
    IP rights allow ownership to be established over intangible creations. This makes intangibles tradable, just like physical goods. Patents, copyrights, and trademarks enable companies to buy, sell, and license their intangible assets.
  • Value Realization
    IP rights enable creators and innovators to realize the economic value of their intangible creations. Without IP protection, it would be difficult to monetize many forms of intangible goods, as they could be easily copied or used without compensation.
  • Incentivizing Innovation
    The ability to protect and profit from intangible creations through IP rights incentivizes further innovation and creative output. This is particularly important in knowledge-intensive industries where R&D investments are high.
  • Global Trade
    In the modern global economy, trade in intangibles and IP rights has become a significant component of international commerce. IP-intensive goods and services now form a substantial portion of many countries’ exports.

Implications for Economic Policy and Business Strategy

Hill’s new taxonomy and the recognition of intangibles as a distinct category have far-reaching implications:

  • For Policymakers
    • IP laws and regulations may need to be revisited to better account for the nature of intangible goods in the digital age.
    • Economic statistics and national accounts should be revised to accurately capture the value of intangibles.
    • Tax policies may need adjustment to fairly treat tangible and intangible goods.
  • For Business Leaders
    • The recognition of intangibles as a distinct category should influence investment decisions and resource allocation.
    • Understanding the value of intangible assets can inform strategies for protecting and leveraging IP.
    • The growing importance of intangibles may shift business models and competitive strategies in many industries.

Challenges in Valuing and Managing Intangibles

In the modern knowledge economy, intangible assets have become increasingly crucial to business success. However, their unique nature presents several challenges for valuation, risk management, measurement, and protection. These challenges require new approaches and methodologies to effectively manage and leverage intangible assets:

Valuation
Intangible assets lack physical substance, making them inherently more difficult to assess than tangible assets. Their value often depends on future economic benefits, which can be uncertain and subject to change. Valuation methods for intangibles must consider factors such as market conditions, technological advancements, and potential obsolescence.

Risk
The value of intangible assets can fluctuate rapidly due to factors like technological disruption, changes in consumer preferences, or legal challenges. This volatility makes risk management for intangibles particularly complex. Companies must constantly monitor and adapt their strategies to protect the value of their intangible assets.

Measurement
Traditional accounting systems were designed primarily for tangible assets and often struggle to accurately represent the value of intangibles. Many intangible assets, such as brand value or organizational knowledge, are not reflected on balance sheets. This gap in measurement can lead to significant discrepancies between a company’s book value and its market value.

Protection
Safeguarding intangible assets in a global, digital economy presents unique challenges. Intellectual property rights can be difficult to enforce across international borders. Digital assets are vulnerable to cyber threats and unauthorized replication. Companies must invest in robust legal and technological protection measures to secure their intangible assets.

Conclusion: Embracing the Intangible Economy

As we move further into the 21st century, Hill’s taxonomy provides a crucial framework for understanding our evolving economic landscape. The recognition of intangibles as a distinct category of economic output is not merely an academic exercise – it has profound implications for how we measure, manage, and create value in the knowledge economy.

By rethinking how we classify economic output and acknowledging the central role of intangibles, we can develop more effective strategies for fostering innovation, protecting intellectual property, and driving economic growth. As the lines between physical and digital continue to blur, embracing this new paradigm will be essential for policymakers, business leaders, and economists alike.

In this new era, the ability to create, protect, and leverage intangible assets will increasingly determine the success of individuals, companies, and entire economies. Understanding the nature of intangibles and their interrelation with intellectual property is no longer optional – it’s a fundamental requirement for navigating the complexities of our modern, knowledge-driven world.

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Further information:

Tangibles, Intangibles and Services: A New Taxonomy for the Classification of Output