The Debate Over the Depreciation of Intangible Capital

Andrew Smithers

Published: March 2020

Spending on intellectual property (IP) is classed in national income accounts (NIA) as investment and represents a proportion of total investment as measured. It is, however, rapidly depreciated so that it has only a minor impact on gross domestic product (GDP). Some economists argue that the amount of such spending is being understated and the depreciation rate overstated. If these claims were correct, they would result in large increases in the measured levels of gross and net output and reduce the share taken by labour incomes. If correct the resulting changes would also be important for economic theories. Current data show that the labour share of output is mean-reverting, thus supporting the Cobb-Douglas production function, and that q’s mean reversion results from changes in share prices. The suggested revisions to the data would undermine both. These claims require an increase in profits after depreciation in the NIA. However, they cannot be correct because independently generated data on equity returns to shareholders show that profits are already overstated. Profits need to be reduced rather than increased. The change made to NIA in 2013, by the inclusion of IP expenditure as investment, has led to widespread misunderstanding about the economy and should be reconsidered.

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