>Doug wrote:
>
>>[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 negative "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.