Tag: Enron

The Facebook Basket of Goods

On May 14, 2012

Facebook does not produce anything. Facebook sells personal information to advertisers. This is not to say that Facebook is not worth a lot of money, but it certainly deserves a little perspective. In order for Facebook to be worth anything, people must be doing things, making things, and organizing things – otherwise, there would be no need for the utility that Facebook provides.

Consumer Value Index

In order for people to do things and make things, there needs to be basic infrastructure like energy, clean water, telecommunications, food, roads, bridges, and airports. There needs to be housing, education, and health care. There needs to be an effective and fair legal system, equitable political representation, and civil decency.

Debt or Human Potential

Facebook adds value to the human productivity potential that already exists. It is precisely that invisible human potential that seems to be worth most of the money that Facebook commands. When we estimate a value of 100 Billion dollars for Facebook – an astonishing 99 times their advertising revenue – we estimate that the market believes that intangible value exceeds tangible value by a factor of 100:1; versus, say, Apple at 16:1 or Google at 20:1

Nothing economic happens until people get together to make something

Charles Munger, CFO of Berkshire Hathaway uttered these deeply foreboding words at a conference at Seattle University in reference to the Enron debacle;

“it’s bad enough when we lose the accounting profession, but dear God help us if we lose the Engineers”.

Suppose a team of 10 engineers designs a bridge that spans a body of water cutting 1 hour off the alternate route for 14,000 people per day (connecting 2 small towns). Over the 75-year life of that bridge, those 10 engineers are responsible for 380 Million hours of increased productivity. At 25 dollars per hour per person whose time is saved, 10 engineers create nearly 10 billion dollars of NEW VALUE. As such, only 100 engineers could create the same amount of New Value as Facebook is worth in an IPO.

You are worth what is measured

We need to ask ourselves what is more efficient; making things that act as a proxy for the things that we are trying to sell, or measuring the real value of things that we make. Perhaps Facebook would be worth 10 Trillion dollars on such a balance sheet. Maybe Facebook would be worth nothing if true value were in fact measurable. Who knows?

Well, that’s exactly the problem – nobody knows.

Facebook acts as a proxy for human productivity, just like money is a proxy for productivity, but with no intrinsic value itself. Perhaps this explains their Wall Street convertibility. However, if we backed Facebook with New Value of human potential, rather than a basket of debt-able goods, perhaps we would not have a financial crisis to deal with, just a value crisis.

I wonder what Charlie Munger would say

Do We Really Need To Fail?

By Admin

On November 30, 2011

In General Information

Yesterday, I heard a report on NPR about the resource management department in North West Washington, in response to diminished funding – is certifying private boats for emergency duty in clean up, security, and rescue. This is logical because nobody knows and understands the waters of Northern Puget Sound and The Strait of Juan De Fuca than the local tribes and others who ply those waters daily.

Today, I heard another report on NPR about how the City of Houston has gained far more from the demise of Enron than their existence. Enron would recruit the top intellect in the country, move them to Houston and reward them for creativity and hard work. The collapse of Enron released 4000 hugely talented people to the Houston Economy where many have started new businesses with remarkable success.

Vicious Circle or Virtuous circle:

I will not pass judgment beyond what these reports stated, except that there is something very valid about the “Knowledge Inventory” that exists in a community and their specific location. The Jane Jacobs externality proposes that endowment of creative and educated people drives economic growth in a community by attracting investment and development, which attracts more smart people, etc.

Vicious Galaxies or Virtuous Galaxies

As the NPR reports suggest, the type of investment and development is dependent on the quality and quantity of knowledge assets that exist in a particular location. Now, let’s extrapolate that to include all disciplines and talents of knowledge that exist in all communities and we encounter a stark reality that there is no knowledge inventory from which to build – except in the response to a failure such as the corrosion of government spending or in the wake of corruption and associated corporate collapse.

Yes, it is often said that adversity brings out the best in people, but is that really necessary? Do we really need for the whole rig to collapse before we emerge from the ashes?

We need to build the knowledge inventory today. People need to know what people know – that is where the truth lives. We need to know what can be built from the parts that we have in the bin. We don’t want to try to build something from the wrong parts any more than we want to misallocate the right parts to build the wrong things. In any industry in the world, none of these situations would pass the stink test, yet this is the state of our communities today. We don’t even know that we don’t know what we know. Seriously, is anyone else wondering about these things?

Intellectual Property in the Innovation Economy

By Admin

On September 18, 2008

In General Information

Today there is a big scare that bad people will run off with your intellectual property and make a ton of money with it. Another problem is that the Patent system is so slow and so expensive that the vast majority of innovators simply do not have access to patent protection – many people just keep their ideas secret. This happens in corporations where your ideas are used to advance the careers other people. Often the dominant strategy is to not innovate or keep your ideas secret.

The trend toward open sourcing and crowd sourcing is a real option in the Innovation Economy where Social Network are self regulating. In fact, these articles reference Wikipedia – a community source of definitions.

In practice, If I do dirty deals of Craig’s List, for example; people know where I live….or I get flagged. EBay, for example, produces relatively little to earn their 30B market cap except protect their social accountability system – the EBay feedback mechanism rewards high integrity and punished low integrity. The hallmark of the Web 2.0 is the user generated content as well as the user generated vetting of the content.

This is significant. The efficiency of any market is directly related to the efficiency of the vetting mechanism by rewarding high integrity and punishing low integrity; the FAA vets the airline industry, checks and balances vets democratic government, and the FICO score vets the consumer credit markets. Likewise, things go horribly wrong when the vetting mechanism fails; the accounting profession after Enron, and the sub prime mortgage crisis after loose lending practices, etc. The battlefields of business are littered with similar examples.

In an Innovation Economy, the secret sauce for the production of innovation is far more valuable than any single innovation itself. The secret sauce provides a monopoly on dynamic repeatability rather than some static device. As such, patents can be open-sourced and innovation crowd sourced across a much wider domain of user applications. Such conditions will change the type of innovations that are favored to reflect the broad and sweeping social priorities rather than innovations that are easy to patent, protect, and monopolize – and fear for one’s IP being stolen. Bad people cannot steal your intellectual capital, your social capital, or your creative capital – it is yours, you own it and you have the social network to prove it.

Ownership is the key ingredient of entrepreneurship – everyone owns the innovation economy.

In fact, the objective of innovation economics is for people to take your ideas and make money with them – then give you some of it. Your income arises from collecting royalty payments on your ideas and participation of many ventures. If someone does not play fair, their access to intellectual property and the Percentile Search Engine can be curtailed just like access to credit can be curtailed in modern finance. Therefore, it is in everyone’s best interest to play fair; you may cheat, but only once.

Social Networks are largely self-regulating; no government, Industry, or management is needed. This is efficiency, scaleability, and multiplicity all in one!

The Next Economic Paradigm