The Erosion of Intangible Capital: Why Current Economic Models Fail and Growth Slows

This podcast episode, featuring Peter Temin, Professor Emeritus of Economics at MIT, critically examines the limitations of traditional economic growth models, particularly the Solow model, in accounting for intangible capital. Temin argues that the finance sector, despite its size, lacks a clear measure of output, leading to inaccuracies in national income and product accounts. He posits that the economy is underinvesting in crucial forms of intangible capital—financial, human, and social—which are essential for long-term growth and competitiveness. The current system, he contends, overemphasizes private fixed investments while neglecting these vital, yet hard-to-measure, assets.

The discussion highlights several key distinctions and nuances. Temin differentiates between various forms of capital: physical, financial, human, and social. He explains how the finance sector, while recorded in national income, has its product imputed, leading to misrepresentation. He also contrasts the paternalistic employer model (like old Sears) with tougher modern employers (like Amazon), and the impact of private equity's debt-loading strategies on workers. A significant nuance is the observation that while charter schools were intended to improve education, on balance, they are no better than public schools but exhibit much higher variance, suggesting a lack of consistent quality.

Practical insights and recommendations include the urgent need to support public education and increase teacher salaries to attract better talent, thereby bolstering human capital. The episode also calls for significant investment in urban infrastructure, including roads, subways, public transportation, and the electric power grid, which are currently being neglected or targeted for problematic privatization. Furthermore, it implicitly suggests a re-evaluation of tax codes that favor debt financing and policies like mass incarceration that undermine human and social capital.

The broader implications are stark: without adequate investment in human and social capital, and a re-evaluation of how economic growth is measured and fostered, the U.S. risks becoming a mid-level developing country, akin to Argentina's historical decline. The erosion of social capital, evidenced by declining trust and community engagement, further hinders business and societal functioning. The podcast underscores that current policies, such as attacks on public education and mass incarceration, are moving in the wrong direction, exacerbating inequality and undermining the foundational elements necessary for sustained economic prosperity and social well-being.

"on balance this shift from public to private destroys the quality of the education"

"the problem with Finance is that there's no approved measure of the output"

"finance is nowhere in that system and so it is in the common parl of uh today it's an intangible"

"our national income and product accounts are not accurate they too much imputation"

"we are not investing adequately in any of these kinds of Capital Finance has gotten too large to contribute to growth but it rather increases the inequality of income"

"human capital is absolutely necessary if we are to keep up with Asian countries and if we uh destroy our schools we won't have adequate human capital to compete with these countries"

"we will uh become Argentina which was once one of the richest countries in the world and now is a midlevel developing country"

"social capital in the US uh has really been eroding for quite a while"

"students when they're afraid of guns don't concentrate on what they're supposed to be learning"

"private Equity uh is uh specializing in buying up businesses loading it up with a lot of debt because that is favored in in our tax code"

"we are in desperate need of improvement for our cities that is to say Improvement of uh infrastructure of Urban Roads Subways public transportation Bridges"

"the biggest problem I think at the moment is human capital and so we have to relent on the public schools because uh what we've discovered is charter schools are all over the map on balance uh they're no better than public schools but they have a much higher variance"