John Gulick
On Mon, 21 Feb 2000, Shane Mage wrote:
> My correction is to my third paragraph. *Negative* profitability, of course.
>
> >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.
>
>