The Problem
Plenty of capital.
Not enough productive investment.
Across advanced and developing economies, large amounts of stimulus and cheap capital have not consistently translated into investment, productivity and wage growth. We think part of the explanation lies in how capital moves through institutions.
In Brief
A well-documented pattern, without a settled explanation
Economists have studied several related problems for decades: rising market power, short-termism in corporate finance, weak wage growth relative to productivity, and slow diffusion of innovation. Each is well documented in the academic literature.
What is less well understood is why conventional policy tools — lower interest rates, quantitative easing, fiscal stimulus and tax incentives — have often had smaller effects on productive investment than expected.
Why it matters: when stimulus does not reach productive use, the costs show up as slower growth, stagnant real wages and strained public finances.
Three Examples
Similar symptoms in very different settings
Japan (1990–present)
What happened
- Asset-price collapse in 1990
- Interest rates near zero for most of the period since
- Extensive quantitative easing and fiscal stimulus
- Growth remained weak for long periods
Consequences
- A large cumulative output gap
- Public debt above 250% of GDP
- Persistent low inflation and weak wage growth
What it suggests: making money cheap and plentiful did not, on its own, restore strong private investment.
Advanced economies after 2008
What happened
- Very low or negative interest rates
- Large-scale QE in the US, UK, euro area and Japan
- High corporate profitability and cash holdings
- Business investment and productivity growth stayed subdued
The puzzle
- Capital was abundant and cheap
- Many firms were profitable
- Yet investment and wage growth were weaker than models predicted
What it suggests: the link between available capital and productive investment may be weaker than standard models assume.
The middle-income trap
What happened
- Rapid early growth slows at middle-income levels
- Innovation and productivity growth plateau
- Economic rents can become more attractive than new investment
Commonly cited factors
- Institutional quality and regulatory capture
- Market concentration
- Access to finance for new entrants
What it suggests: sustained development seems to depend on institutions that channel capital into productive use, not just on the amount of capital available.
Why Policy Can Struggle
Expectations and incentives matter
Research on policy design suggests that firms respond not only to incentives, but to how durable and well targeted they expect those incentives to be.
Firms may doubt that incentives will be well targeted or last beyond the next political cycle.
Holding cash or returning it to shareholders can then look safer than long-term investment.
Stimulus has a smaller impact on productive investment than intended.
Weaker results can reinforce the original caution next time.
This is one reason we are interested in transparent, rules-based measurement: clear, predictable signals may be easier for firms to plan around than one-off interventions.
The Scale
Why the question is worth asking
Estimates of cumulative lost output run into trillions of dollars, depending on the baseline used.
Average annual labour productivity growth in several advanced economies fell between the 1990s and 2010s.
The share of national income going to wages has declined in many advanced economies since the 1980s.
Large corporate cash holdings coincided with investment below pre-crisis trends.
Figures are indicative and vary by country, period and source. See Further Reading for references.
The Question We Are Asking
What if part of the answer is how capital flows, not just how much there is?
Our research explores whether friction in institutions and markets — which we call systemic impedance — can be measured, and whether reducing it could help existing policy tools work better.
Further Reading
Academic background
De Loecker, J., Eeckhout, J. & Unger, G. (2020). The Rise of Market Power and the Macroeconomic Implications. Quarterly Journal of Economics.
Lazonick, W. (2014). Profits Without Prosperity. Harvard Business Review.
Azar, J. et al. (2020). Labor Market Concentration.