>[I'd rather not say where this comes from, other than to say a market
>newsletter, but it's a perfect example of New Economy reasoning,
>coming from someone who used to be very skeptical in temperament. Lev
>said these things in an interview with the ridiculous biz mag Fast
>Company. What's amazing to me is that "value" is defined entirely by
>the stock market - the actual production of profits, the
>long-standing raison d'etre for capitalist enterprise, isn't merely
>secondary, it's a hindrance to "value production." Who needs
>something as mundane as sales? That's a relic of transaction
>thinking!]
>From a Marxist standpoint, there is nothing at all wrong with Lev's
argument. Capital is the mass of socially necessary labor time
accumulated to serve as the basis for production of surplus value.
The capital of each firm is subject to what Marx called "moral wear
and tear," which we nowadays call "obsolescence." But the obsolescence
of one firm's capital is produced by a technological advance that
provides a profitable [temporary] monopoly advantage to the firm
introducing the new technology. The laggard's capital is "destroyed,"
but that "destruction" is compensated by the market which capitalizes
the expected profit of the innovator at a much higher rate. This is how
capitalist fortunes are made when they are made
"honestly." From a
Marxist view, this is a transfer of capital from loser to winner. It is
also the very essence of capitalism as a continual revolution of the forces
of production (and the main thing that Schumpeter learned from Marx!)
The essential point is that technological knowledge--not merely its embodiment in machines--is an objective part of the productive forces of society (and historically the most important part). Under capitalism, according to the law of value, its producers contribute socially necessary labor time at an enormous multiple of the "standard" labor hour. The capitalists who employ it extract a correspondingly enormous amount of surplus value, which they realize directly, without need for any further transactions, by incorporating it into their capital base. But the transactions-based accounting system, which Lev rightly decries, not only refuses to recognize this, it as actually quite perverse. Research and development expenditures not only are not recognized as additions to capital, they are actually accounted for as *losses*!
Once you realize this, you can grasp that "profitability" of a technologically dynamic firm, as measured by conventional, legally required, standards, is not merely irrelevant to the rational capitalist but even tends to be correlated with positive investment value. Rational investors, their eyes focused on the *future* returns of a firm over a long run measured in decades, evaluate current expenditures, not for their effect on this years "bottom line," but for whether or not they really are likely to build up, for that firm, a durable "competitive (ie., monopoly) advantage." Some make right judgments, some wrong. Those who are right will be richly rewarded, those who are wrong will be harshly punished, financially. But in the World According to Marx (ie., the real world) the technologically dynamic sectors of capital will always outstrip the laggards.
Shane Mage
"When we read on a printed page the doctrine of Pythagoras that all things are made of numbers, it seems mystical, mystifying, even downright silly.
When we read on a computer screen the doctrine of Pythagoras that all things are made of numbers, it seems self-evidently true." (N. Weiner)
>
> From where we sit, the new era economy should continue to defy the
>outmoded actuarial tables that attempt to quantify it. On this score,
>recent work by Baruch Lev has been truly eye-opening. Lev is, among
>other things, the Philip Bardes Professor of Accounting and Finance
>at NYU's Leonard N. Stern's School of Business, as well as the
>director of the Vincent C. Ross Institute of Accounting Research and
>the Project for Research on Intangibles. He has pioneered the
>development of a Knowledge Capital Scoreboard, which attempts to put
>hard numbers to intangible assets. Fed Chairman Alan Greenspan
>recently noted that during the second half of the twentieth century,
>the US tripled the real value of its output with no increase in the
>weight of the materials produced.
>
>Lev contends that the half-a-millennium-old accounting standards
>developed by an Italian monk in the 15th Century form a hopelessly
>antiquated approach to determining value in the marketplace. Luca
>Pacioli's system is entirely based on transactions. But transactions
>and tangible assets describe a constantly shrinking portion of
>today's economy. Economist John Kendrick has studied the main drivers
>of economic growth and reports that there has been a general increase
>in the contribution that intangible assets have made to US growth
>since the early 1900's. In 1929, for example, the ratio of intangible
>business capital to tangible business capital was 30% to 70%. In 1990
>that ratio was 63% to 37%. So generally accepted accounting no longer
>delivers accountability.
>
>Think about it. Lev points out that when a drug passes its clinical
>test, huge value is created but there's no transaction. Nothing
>changes hands. Nobody buys anything and nobody sells anything. When
>software passes a beta-test it suddenly becomes valuable but, again,
>there's no transaction. Or think about how value is destroyed. When a
>big, old company is late in figuring out how to enter the world of
>e-commerce, huge value is destroyed but there is no transaction. This
>helps explain why - in the midst of a torrid 85% bull market gain in
>NASDAQ stocks last year - half of the stocks in the S&P 500 were down
>in 1999, and why more stocks made new lows than new highs by a wide
>margin.
>
>Even more illustrative of the market's harsh treatment of companies
>that refuse to embrace change is one recent study that showed that
>stocks with no earnings had gained on average 52% while stocks with
>earnings had lost 2%. Grasping the significance of knowledge-based,
>or intangible, assets is what separates the sentient from the
>stillborn in today's financial arena. The analytical ground is just
>being broken on this front and promises to deliver an endless bounty
>of insight and opportunity to investors.