The Ingenesist Project

The Next Economic Paradigm

Tag: capital

Tangible Knowledge; Options and Contingencies

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On November 19, 2008

In General Information

In order for knowledge to become a tangible asset, we need to come to grips with the fact that human knowledge is fluid and mobile, whereas a condo or a piece of machinery is static.  A machine can’t walk away if it does not like their management.

With knowledge assets, the typical “Return on Investment” (ROI) model breaks down.  When assets have a mind of their own, there is no reliable way to calculate ROI without somehow corralling the asset inside some form of closed contract, a corporation, political system, social class, or by introducing barriers to exit, etc.  In the modern financial system, human assets are held tangible by debt obligations – today many people go to work in servitude of debt, not in creation of new ideas.

An option* is the right, without the liability of obligation, to exercise a decision in the future.  Human interaction accommodates this valuation model quite readily; it’s called free-will.  Therefore the option valuation model is an adequate method to assess knowledge assets as a means of making them tangible.

The value of a financial option can be calculated if one knows the following 5 variables: The asset price, the strike price, the date of maturity, the risk free interest rate, and the volatility – or, the odds on the bet.  By contrast, the ROI model requires us to know basically the same things; the cost today, the strike price (future sale price), the date of maturity, the risk free interest rate, and the probability of success – or variance of the expectation.  The equation is just a little different.

Individually, human behavior often appears chaotic and irrational, but in aggregate, we know that human behavior is really quite predictable.  If you put similar people together, you get similar ideas.  If you put extremely different people together, you get extremely unpredictable ideas.  If you put strategic combinations of people together, you should be able to predict the variance of the ideas.  This is all the information we need to place a value on our bet.   If human behavior is predictable, it is tangible.

Suppose we enter into a ROI venture and it fails miserably; the market was wrong or the product was wrong, or the people were wrong, etc.  Even though the investment failed, the knowledge accumulated from the attempt can be exercised in many other projects in the future. While the Patent may turn out to be worthless, the knowledge gained by the team can be used over and over again.  Each person gains a statistical data point in their experience set with which to assess comparable situations in the future.  This is an option and this option has value.  If the team were disbanded without somehow capturing the inventory of new knowledge assets, a very valuable set of options becomes squandered.

Some companies such as Google, try not to kill an idea, they morph the idea into something else.  Free-range knowledge tangibility must achieve those same objectives.  Today we see people building networks on Linkedin – this activity resembles the collection of options on future opportunities.  People post on social media to see and be seen by other knowledge assets as a means of collecting more options for their careers or actions. People would not be doing it if there was no intrinsic value.  The next big leap will happen when knowledge tangibility is married to the financial system through the direct valuation and capitalization of options.  Did I mention there is an equation for that?

The Ingenesist Project specifies a method and system for knowledge inventory that would produce a variance for knowledge assets.  The Percentile Search Engine would pull knowledge assets in combination that diversify variance into a highly predictable surplus assets and deficit assets.   The Innovation Bank would match most worthy surplus to most worthy deficit.  As such, the Innovation Economy itself is now a most worthy option for supporting a feeble financial system.

The ROI model is the mother of all squandered knowledge assets – the very same assets that are really purchased on a project, successful or not, are often willfully abandoned.  All of the parameters of an option valuation model can now be met with social media and The Ingenesist Project integration methods. Free-range knowledge assets can then be directly financed toward business objectives.  The idea of an innovation economy based on knowledge tangibility is well within our grasp technologically, culturally, and systematically.

Social media has an astonishing opportunity to integrate social, creative, and intellectual knowledge assets to trade that single most important part of the puzzle, tangible knowledge assets.  I suspect that this outcome will depend on whether these new tools are treated to an ROI valuation model or on an options valuation model.

* Italic used for clarity

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The Tangibility of Knowledge

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On November 9, 2008

In General Information

Knowledge Tangibility should be the most important conversation in Social Media circles given the current financial situation in America.

I lived through financial devaluation in another country and the effects were crushing: after the run on the banks, there will be a run on Walmart.  People will buy TVs, small appliances, shoes, and useful stuff that will hold more value tomorrow that they cost today.  These items may become a de facto currency of trade.  Americans will be astonished by how fast a devaluation event plays out; hours and days, not months or years.  When things settle down, the government will retire the old dollar and introduce a new currency at an exchange of, say, 1 megabuck equals 1000 old dollars.  Then the chips are cleared, assets are transferred, and the same game can start all over again.

The difference is that for the first time in history, there is a window of opportunity for social media technology to break this cycle. Please let me explain:

Suppose that a BMW costs $50,000 dollars and a KIA costs $10,000 dollars.  These prices reflect the quantity and quality of the car in terms of availability and popular amenities such as, handling, road noise, comfort, status, etc. Suppose the government introduces a new currency called the “megabuck”.  Suppose the government pegs the megabuck to cars saying that all cars will have a value of 30,000 megabucks. Since these cars are not equal, people will begin trading; the BMW will be bid up to 50,000 megabucks and the Kia will be bid down to 10,000 megabucks based on supply and demand – right back where they started.

Admittedly an oversimplification, but the point is does not matter what you call the currency – the most important thing is the quantity and quality of the asset.  This brings us back to the idea of knowledge tangibility.

Suppose that, on average, 1 hour of human labor is worth 20 megabucks.  As above, hard labor will be bid up while soft labor would be bid down.  The same is not really true with knowledge because knowledge is invisible and it can’t be counted with bricks or bushels.  There is no knowledge inventory in America’s communities.  Therefore, there is no way to establish supply and demand for knowledge assets.  People in a community do not know what other people in the community know. This is where social networks will make a huge difference.

Human knowledge, if formatted correctly, would make an excellent asset upon which to peg a currency. Today, accountants say that human knowledge is “intangible” but social media demonstrates otherwise; human knowledge is simply invisible – hidden inside corporations under the thumb of Wall Street. Social media demonstrates that knowledge assets are itching to be release to the public domain in a highly tangible manner.  Believe it or not, we are now 95% of the way toward real knowledge tangibility today.   We should be very excited about this because everything changes.

Like the example with the cars, we need to have a comprehensive inventory of the knowledge assets in our communities so that they can be strategically combined into productive organizations.  This inventory must be formatted in terms of quantity and quality and include all knowledge living including social, creative, and intellectual capital.  If done correctly, it will not matter what happens to the dollar or what currency is used as a scorecard, the value of human knowledge assets will remain intact.

Again, the value is in the asset, not the currency – it is in you, me, and our diverse communities who will favor community priorities rather than Wall Street priorities. This is how where we will find equity, sustainability, and fairness in a capitalist system.

The Ingenesist Project has specified exactly how to create knowledge tangibility in a capitalist model using 3 simple web applications for Social Networks; a Knowledge Inventory, a Percentile Search Engine, and an Innovation Bank. Please read the intro and the articles on page IEc101.  If you agree, please pass it on.  If you do not agree, please help us make it better.  If you don’t understand, email me. This needs to happen fast and unfortunately nobody will do it for us – we must do it ourselves.

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Social Enterprise; The Vetting Mechanism; #1

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On October 26, 2008

In General Information

I read many articles with rants like “all this social network stuff is cool – but show us the money”.  Innovation Economics offers a way to see new markets and new businesses that are currently hidden by “the old way” of doing things.   This article is part of a series called ‘Business Plans of the Innovation Economy” which will identify ways that Social Networks can command huge markets and drive vast revenues – if, and only if, they align themselves in a specific way….

Managers manage through experience. They observe a situation and compare it to prior situations they have encountered. Through a process of intuitive (statistical) analysis, they calculate the probability of success based on the success or failure of prior experience. This is the reason why managers are often older and also why youth correlates with inability to manage.  The depth and breadth of one’s experience is often called wisdom.

Today’s problems, business opportunities, technological change, and competitive strategies are so complex and so integrated across the globe that no single person can accumulate in a lifetime the experience needed to manage at what is called a Pareto Efficiency. A Pareto Efficiency, named after Italian economist Vilfredo Pareto, is an economic condition where a one’s actions benefits at least one person while leaving no other person less better off.

The problem with the “top-down” management structure is that the “top” no longer has a statistically relevant sample of prior experiences from which to fully understand the probable future outcome of their actions – the consequence is that someone always gets screwed (Pareto Inefficient).

The concept of Pareto Efficiency may be what people are today inadvertently calling “sustainability”.  I recently saw the movie Syriana with George Clooney about the petroleum industry in the Middle East.  It was a convoluted mix of 5 different stories.  Each story had its hero doing what they thought was in the best interest of those they represent – “the common people”.   Yet the combination of actions carried out by these heroes was absolutely disastrous for all of them.  So no matter how benevolent one’s intentions are – and I believe that most corporate managers are acting in the highest integrity that they know – this systemic failure of knowledge will always hurt someone, continually adding to those already at the fringes.

The world of imperfect information is therefore the enemy of sustainability.   Perfect information is when everyone associated with a business transaction has the exact same information as everyone else.  Perfect information is what makes markets efficient and decisions rational.  Agreement is perfectly mutual, supply and demand are perfectly aligned, all risks are perfectly predictable and cause and effect are perfectly transparent.

It follows that any business plan that simply improves information in a market can command revenues proportional to the degree at which market efficient is improved.  For example; Ebay owes its 50 Billion dollar market capitalization to the feedback system which supplies improved information in a market.  Carfax, The FAA, Craigslist, Democratic Government – all have vetting mechanisms that make their prospective markets more efficient.

Likewise, when the vetting mechanisms fail, the market fails.  I attended a lecture once with Charlie Munger, CFO of Berkshire Hathaway.  Regarding Enron, he said (paraphrase) “It’s tragic enough when the accounting profession goes bad, but God help us if we lose the engineers”.

This brings us back to management.  The business plan of the millennium will be the art and science of perfect information.  We know that no single human can accumulate enough experience, however, we also know that perfect information can reside in many people – it is simply a matter of finding the perfect group of people who collectively possess perfect information.

This relatively simple task is entirely and irrevocably the domain of Social Networks. Social Networks are sufficiently enabled by current technology to perform this essential and highly lucrative task – if and only if they align themselves accordingly.  Social Networks need to hold a complete and detailed inventory of resident knowledge.  Social Networks must cooperate to codify social capital, creative capital, and intellectual capital so that computational methods can be used to assemble unique collection of persons holding unique collections of experiences. That unique set of knowledge assets must then be deployed precisely in the market, ideally targeting specific transactions.

If Real Estate Agents can command 6% of a gazillion dollar housing market and bankers can take another huge chunk – and not even do a very good job at providing perfect information – only to get bailed those at the fringes.  Social Networking have a moral, ethical, and entrepreneurial obligation to compete in the sustainability game.

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A Few Predictions for the Innovation Economy

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On September 18, 2008

In General Information

Here are a A Few Predictions for the Innovation Economy

Social Network will become the corporate structure of the future. They will spit out start-ups at an astonishing rate.

The “resume system” will be banished forever possibly earning the title of the cruelest human invention since the lobotomy.

The University System will be challenged – the relevance of the college degree will be questioned in an economy that favors unique combination of knowledge assets rather than everyone having the same “degree”.

Everyone will have visibility of supply and demand for knowledge assets meaning that employers and employees will have equal information about cost, availability, and demand.

Creative knowledge workers will earn micro-royalties for their participation in thousands of brainstorming sessions and product development discussions. Earnings will be shared openly and the percentile Search Engine.

The new Patent will be the “Secret Sauces” – the algorithm that entrepreneurs will develop to select their knowledge assets when producing specific innovation.

Teachers will forego salary in favor of an equity position in their students. The best teachers will make the most money. Universities will forego tuition in favor of an equity position in students; the best students attract the best mentors and universities. Apprenticeship will become commonplace.

The knowledge inventory and Percentile Search Engine system rewards people for doing what they are most passionate about. The dominant strategy for all players in an Innovation Economy (that which produces the most revenue) is for participants to pursue what they are naturally good at and passionate for – as long as there is a market for it.

Innovation bonds will return 80% interest or more with near-zero risk. Institutional investors, insurance reserves, and foreign investors will flood the market with venture capital.

Knowledge workers will outsource management.

The Fed will peg the dollar to productivity, not gold or silver – interest on deposits will track productivity increases due to innovation.

Social priorities will impact what gets invented or what stays on the shelf; Global Warming, Alternative Energy, Sustainable environments will have net positive business cases.

The flaw in market economics will be reversed. Technological change will precede economic growth eliminating the economics of debt (ref video). The financial system will be restored to a sustainable condition.

We know that innovation is the engine of all wealth creation and it will live in an integrated system. Knowledge will be reformatted to emulate a financial instrument.

A good article from business week

A great Blog: Jay Deragon and the relationship economy

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The Capitalization of Knowledge – Innovation Bonds

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On September 18, 2008

In General Information

With a computer readable knowledge inventory, local communities of practice, a percentile search engine algorithm, and the virtuous circle of finance, then future innovation cash flows can be predicted much more accurately and with far lower risk than with, say, the venture capitalists acting alone.

Were risk is predictable, cash flows are predictable and the portfolio of innovations can be diversified so if one business fails there is an equal chance that another will succeed and the risks cancel each other out. The cash flow of all the innovation enterprises can be combined into a single large steady cash flow. Just like companies do to raise money for expansion, the innovation bank can issue innovation bonds on the open market. The revenue from selling Innovation Bonds can return to the community to finance innovation and fund wealth creation at very low interest rates compared with venture capital today.

With a lower cost of venture capital and a system that supports open source innovation an astonishing amount of innovation will be unleashed in society.

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The Capitalization of Knowledge – The Virtuous Circle

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On September 18, 2008

In General Information

We have set up a new game for entrepreneurs to play called Innovation Economics. We have defined a currency and an inventory where knowledge is visible outside the construct of the corporation – and resident in social networks. We have also described a way for entrepreneurs to visualize the knowledge asset and the supply and the demand for knowledge assets. We have given them a tool for matching assets for profit. We have described how social networks will keep the game fair. We have outlined the structure of new business plans; the brain storming session, product development cycle, the neural network, and the multiplier effect. Future businesses will be built upon combination of these four structures and whatever else entrepreneurs can dream up.

We have described all of the pieces needed to form a new economy. Now we need to connect with the financial markets so that knowledge is readily convertible to other currencies.

For review;

With the financial bank, the entrepreneur assumes that they have the knowledge to execute a business plan and then they look for the money. The risk is that the entrepreneur does not in fact have enough knowledge.

With the Innovation Bank, we assume that we have the money, and we go to the bank to search for the knowledge. The risk is not having enough money to purchase sufficient expertise.

With both banks acting together – the risks cancel each other out and the innovation economy tends toward a ‘risk free’ cycle; the more knowledge you can assemble, the more money you can borrow. The more money you can assemble, the more knowledge you can assemble.

Now we have a virtuous circle. The more knowledge you have, the more money you can borrow; and the more money you have, the more knowledge you can borrow.

There is no shortage of money circling the globe – only a shortage of risk free places to put the money. The innovation economy is an environment of very high return for a very low risk and will attract a great deal of money to fund innovation enterprise.

Earlier we demonstrated that money represents human productivity. It follows that the places that have the greatest potential for increasing human productivity can create the greatest amount of wealth. Therefore, poor areas and marginalized economies with under utilized knowledge inventories or the injection of specific knowledge inventories, become the highest ROI centers in a risk-free system; a condition the explicitly favors the wealth equalization rather than wealth disparity.

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Social Networks and the Multiplier Effect on Innovation

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On September 18, 2008

In General Information

If we combine the parallel transaction with the series transaction we have what now looks like a neural network. In practice, we know that strong networks of people freely exchanging ideas make organizations better, smarter, and more efficient. Networks are where knowledge and wisdom is literally stored. A network is fault tolerant, if one person leaves, the network survives. For a relatively small input into a network, we can produce a large output of new knowledge – we have a learning organization.

However, in society, these interactions are largely accidental; people meet at Church, Starbucks, and Social Events or by word of Mouth. Other times, these interactions are concentrated inside a single community of very similar people such as a technical conference, group meeting, or lunch buddies and are often not well diversified.

Suppose the interactions among people were not random, instead, they could be designed by the entrepreneur to produce a unique outcome. The Innovation Bank will combine people of complementary knowledge assets in a calculated manner in order to arrive at specific business approaches and applications.

A special case of the above business method and resulting social network is called the Multiplier Effect. A financial bank enjoys a multiplier effect with the ability to lend the 10 times more money than they hold in reserve. Money changing hands has a multiplier effect on an economy. Again, financial analogies hold.

Suppose that a company owns composite material technology for use on aircraft. Since they specialize in airplanes, they have no intention of pursuing other applications such as recreational equipment, energy production, or health care products.

Suppose that the company could deposit this asset in a bank and collect interest. The Search Engine can scan the business landscape to find companies with a knowledge deficit in the area of your technology and make loans of your technology. As the originator, you have the option to see what those other companies invent and you hold the right to use their new ideas in your aircraft application.

With an innovation Bank, you can reduce your Research and Development costs and create additional revenue in a tangential innovation market. With reduced cost and risk of innovation, you are likely to specialize more and more in innovation as your enterprise. In the event of a cyclic downturn in the business of an originator, instead of “laying off” knowledge assets, people can work in tangential industries where they will continue developing – literally putting “Knowledge in the Bank” – to be called back when market conditions improve. A mobile knowledge asset increases in value becoming smarter and more productive over time.

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