I have received this message together with a paper
This recently published paper tests the validity of changes made in the calculation of US national accounts, most importantly BEA’s revisions No.s 11 and 14, and concludes that they were a mistake and should be rescinded. (I understand that similar changes were made in UK national accounts).
On the revised data profits are at a record high level as a percentage of US national domestic income (Figure 7)
and returns on capital (Figure 8) at near record highs (Figure 8).
Without a significant fall in corporate profit margins (Figure 6),
the assumption of constant returns to scale will cease to be supported by data. As it’s a fundamental assumption of the Stock Market Model, as set out in The Economics of the Stock Market OUP 2019, it provides a test for that model.
My expectation that profit margins will narrow sharply over the next few years, while firmly held, is thus clearly biased.
The data show that the
(i) corporation tax falls on investment not on returns to shareholders and
(ii) the policy of subsidising corporate R&D has been highly successful in boosting such expenditure and a total failure in stimulating growth.
Insanity has been defined as “Doing the same thing over and over again and expecting different results”. I conclude that switching policy from subsidising IP to subsidising tangible investment, or at least reducing the tax on it, seems sensible both theoretically and pragmatically.
The Paper
Andrew Smithers new paper is available to download and here
smithers.co.uk/wp-content/uploads/2025/07/Tangible-and-Intangible-Capital-final.pdf
The paper is lengthy, but I can include the key points
Summing up
The argument of the paper can be found within it but I can offer the conclusions
There are important lessons in this analysis for the UK government’s approach to industrial strategy.
Occasionally I am offered something of quality. I got a highly erudite piece from Con Keating and Iain Clacher; this week – this. I am very grateful that people allow me to share this kind of opinion . I educate myself in sharing these articles.
The link to Andrew Smithers’ full paper doesn’t seem to work, at least on smartphones.
smithers.co.uk/wp-content/uploads/2025/07/Tangible-and-Intangible-Capital-final.pdf
does work on smartphones.
Not sure whether Professor Sir John Kay, whose participation in the CISI event on 15 July has been promoted on an earlier blog, would agree:
“When governments offer tax advantages to ‘research & development’ expenditures, specialist consultants are needed to enable businesses to frame their claims.
“And while the link between the capital expenditure on a production line at General Motors and the cars that rolled off it in the years that followed was direct and quantifiable, today the connection between development expenditure and future returns is tentative and uncertain.
“What part of the market value of Amazon and Apple is attributable to their past development expenditure? There seems no sensible answer short of ‘all of it’.”
But Professor Sir John has also said the implications of [his] analysis [of the corporation in the 21st century] for business and public policy, both of which should promote the rents that arise from innovative differentiation and eliminate the ones that are the result of the abuse of political institutions, will be the task of a successor volume.
Perhaps those attending on 15 July may be able to tease these implications out from the esteemed speakers, who also include Con Keating of course.
Byron, I will use your link going forward – thank you. I am going to re-read all this stuff in the light of the questions you raise…
“Making things is important” is the byline for a strong, critical letter in the current issue of The Economist.
The Economist had argued earlier in its 14.6.25 issue that the world must escape from “The manufacturing delusion”.
This delusion was said to be drawing countries into protecting domestic industry and competing for jobs that no longer exist. That, it was argued, will only lower wages, worsen productivity and blunt the incentive to innovate, while leaving China unrivalled in its industrial might.
The mania for manufacturing is not just misguided, The Economist concluded. It is self-defeating.
Yet, argue three members of faculty at Cambridge University’s Institute of Manufacturing, manufacturing remains a core driver of economic growth and high-quality jobs.
Yes, they admit, manufacturing is becoming more automated, but this transformation has not diminished its importance.
On the contrary, they say, modern manufacturing drives productivity, innovation, exports and the development of complex supply chains.
Factory jobs also tend to be higher value, supporting surrounding ecosystems through design, engineering and services.
In Britain a lost manufacturing job often means the loss of a high-wage job outside London.
Manufacturing in Britain accounts for the largest share of business R&D investment, boasts the second-fastest productivity growth among industries (3% a year from 2000–23), and remains a leading contributor to capital formation.
It is also argued in their response a logical flaw to suggest that China’s recent growth slowdown comes from an over-reliance on manufacturing.
The real factors behind its slower growth, they say, are a weaker global economy and China’s transition to a more mature development stage.
In fact, China’s economic strategy is increasingly centred on spurring “new quality productive forces” through advanced manufacturing, precisely because manufacturing remains vital to innovation and long-term growth.
Rather than retreating from manufacturing, China is doubling down on it as the cornerstone of its “high-quality development” agenda.
Showcasing India as an example of where economies can thrive while sidestepping manufacturing, as The Economist did, was argued an exercise in cherry-picking that contradicts the lessons of every other industrialised economy.
Indian leaders themselves are said to be more cautious. Manmohan Singh, the late former prime minister, noted that “A substantial manufacturing base is essential to absorb the workforce and ensure sustainable growth.”
Deindustrialisation is not a strategy, the three Cambridge academics argue, it is a surrender.