Shava Nerad on The Epic Fail: it's the (information) economy, stupid.

Shava Nerad shares a new essay, below, about the current economic crisis:

Accounting methods really haven't been updated to keep up with the changes as service and information economy overlays have changed the game. We have no way to account for our greatest assets in the modern economy -- talent, staff loyalty, team productivity in innovation, effective communication of information through media and business channels, and so on. These are all without accounting value in our current systems.

Today, value is added by shifting assets through complex smoke-and-mirror complexities in the financial markets. Or, value is created by applying talent (our largest intangible) stabilized by loyalty and passion to task (our least quantified intangibles, and the root of real innovation and productivity) in the information economy.

Tangible industries -- heavy industries, retail,... -- have been transformed by supply chain innovations, but even globalized, are well enough understood.

But a huge amount of the wealth creation since the invention of the transistor is intangible, and since we have no way to quantify and account for innovation, creativity, excellent records of technical teams, and so on, the market has tried to find tricks to value them, mostly through the stocks of information economy firms.

Since so few people really understand tech, PR, marketing and flim-flam have become the greatest influence on the value of any technical or informationally complex company.

Iconoclasm: Wall Street -- the chickens come home to roost (gather.com)

• [shava]

  @#1 I don’t claim to know how it *should* all work, but I do know that there are systems that have been proposed, discussed in rarified circles of government and academia, and been squashed by dissent, fear of change, entrenched agendas, and competitive interests.

  There have been groups trying to examine these questions more closely for years, but the cost of change has always been considered a higher risk than the cost of a bad system.

  oops…

  The importance of asking the question, and knowing the history of the problem, are often a good proportion of the solution. On the other hand, *avoiding* the history and the questions is asking for failure — we see this in this issue, in politics, international relations, public policy, and probably in our own family histories somewhere… That part is just human nature.

  Someone has to postulate that the emperor is wearing no clothes before people will develop the courage to comment on his ensemble.

  But blaming the current mess on “greed” (which is about as far as most media analyses have gone this week) isn’t good enough.

  We will always have greed. Our hope is that we can develop rule sets that discourage gaming the system for greed, rather than nearly necessitating the strategy.

• [SeamusAndrewMurphy]

  Shameless, foggy-headed, piling on.

  The current global credit crisis has to do with skirting acceptable regulation and accounting, a complete lack of transparency of the underlying assets that have been securitized, and cronyism within the regulatory structure (2004 SEC ruling allowing for investment banks to leverage their holding from 12-1 to 30-1 asset to leverage ratios). The crisis has everything to do with corruption and nothing to do with this airy-fairy claptrap.

  Essays like this only serve to muddle the extent of the problem (firestorm, really) we face.

  It is a confusion of two different arguments: Her contemplations on a lack of true value given to innovation versus the maelstrom of corruption and bureaucratic capture that has led to global credit deflation. She has no idea what she is talking about. Her first statement regarding Enron is utter nonsense. Complete and total nonsense.

• [zandar]

  “they offer no inherent value”

  you said it, not me.

• [shava]

  @#13 I’ll check out some of those sources — have read some. Thanks for adding to the discourse! :)

  Special props to Malone’s The Future of Work, which I have sitting to the right of me on my desk, and find full of good thoughts!

  @#14 Although I operate in a home office, I find that telecommuting is not something that suits every job or every learning style or style of work. Many people enjoy and thrive in an office culture, and feel the need to have face time with collaborators ad libitum. And that’s before you get into the folks who don’t have the internal clock or drive to get things done in isolation.

  We’ll see where the tipping point comes on that. No one solution suits everyone, but you get some choice of how you wish to work and for whom.

  Shava

• [bkdunbar]

  None of this would have happened had it not been our free ride on cheap oil

  tht nd cngrss stblshng frdd nd fnn s Fdrl nstttn nstd f tr fr mrkt lndng bnk.

  nd wht ds ‘free ride on cheap oil’ vn mn?

• [SeamusAndrewMurphy]

  #10: The vitriol is because she is making statements about the current crisis state and then making statements that innovation is not properly understand and properly accounted for. The latter is most likely correct. The problem is that there is so much mis/disinformation regarding the causes of global credit deflation (deflation being the most horrifying word in financial economics), that the last thing we need is more confusion. I’m sorry, but her well-meaning argument is confused. That doesn’t mean it isn’t well meaning or appropriate in a different context, but her essay is poorly thought out. The statements made in her complete essay regarding Enron are jaw dropping. Enron ended as a criminal enterprise masquerading as a business. It was definitely not a failure to understand innovative thinking. Just the thought that this could be inferred is making me swoon and sweat. It lends arguments to apologists. That is the last thing we need.

• [Clueless Wonder]

  As an accountant, while I understand the thrust of the argument, I think it is the wrong way to go not because I don’t see value in all of the items mentioned, but because Financial Accounting is NOT the tool to do so. Much like a carpenter wouldn’t say “I’m doing more sawing than nailing, so I’m going to add a blade to my hammer” – he’d get a saw.

  In fact, I would also argue that the trend to put everything related to the company into the financial statements is behind a lot of the market manipulation we see nowadays, there is too much room for “estimates”. Need to boost profit? Boost your estimate. Overacheived your bonus this quarter but going to be short next quarter? Lower the estimate. Going to have a few bad years? Take a big bath now by writing things off and then post profits the next few years.

  I do not argue at all with the conjecture that all of these elements have value for a company, but that is why the annual report has grown so much beyond just the financial statements, because financial statements alone are not enough to get a picture of a company. If a company wants to be recognized for the length of service or loyalty of it’s staff.. take a page from Berkshire’s annual report and recognize your key people. Want to tout how your creative people are bringing new products to life? Take a page from 3M’s annual report and spend some time publicizing the new products you’ve developed. But saying “because our staff is really loyal our assets are increased by $10m” doesn’t make sense.

  In the end, it is not a problem that these things are not recognized today for their potential future cash flows, because there is too much uncertainty to be completely accurate, and over time they WILL appear on the financial statements, as higher than average revenues or lower than average costs.

  By all means, show every single possible bit of goodness that you want to show in the annual report, but don’t do it by fudging the core, true, numbers. A talented manager would only be an asset that could be quantified if we had immortality and slavery… under any other circumstances you never know when he could die or leave, resulting in no further value.

• [shava]

  lengthy ruminations on various comments are posted on my original blog here.

  Shava (OP)

• [alowishus]

  @#4: I appreciate you replying to my comment, Shava. Thank you!

  I’m definitely interested in reading about the alternatives. Will you be writing more about them in the coming days/months?

• [shava]

  @#6, I guess now I should, but I’m in the process of preparing for two performances in NYC, creating a company, filing a patent, and delivering a 30 minute documentary script. So I’ll try to!

  I didn’t know until about 9pm eastern today that I’d been boing-boing’d!

  What I might do is try to interview some of the folks in academia and finance I know are thinking about these issues and post that.

• [cookEgawd]

  Wow, lots of vitrol…

  So it’s not at all clear from the one line intro that the excerpt of the essay that Xeni posted is not the complete essay. Or maybe I’m the only one who didn’t get it… Regardless, please go read the whole thing first because Shava does mention some of the current research going on in academia on the topic.

  I agree with #5′s point (but not the tone) that the essay has little impact on the current, short term problems, and it is somewhat off topic. But the current crisis does highlight the fact that our financial system has a myriad of problems and it’s nice to see this topic brought back into the spotlight once in a while, even in the middle of a crisis.

  Thanks

• [zuzu]

  …the reason we have no way to quantify and account for innovation, creativity, excellent records of technical teams, and so on is because they offer no inherent value…

  You are part of the problem.

  Ditto that. The factory model of business is obsolete. The problem is no longer how to make more of the same, but what new different things should we make?

  For, you see, economy of scale has also applied to the fixed-cost investments — the engines of economy of scale — themselves. This is called recursion, or feedback.

  Read the story of lathes in Planning the Software Industrial Revolution (PSIR) by Brad Cox. The result is “prosumers”, that many people can now afford to do what once only a handful of factory owners could do. Capital investment has lost the privileged status it acquired at the beginning of the industrial revolution. We have entered what Alvin Toffler called The Third Wave, or what Peter Drucker called knowledge workers.

  What? Please explain, Shava Nerad. What are the alternatives? How should it all work?

  Read The Future of Work by Thomas W. Malone, and then look at everyone doing crowdsourcing (i.e. Reed’s Law, aka Metcalfe’s Law) and mass customization (i.e. the long tail).

  Oh, and then read Tools for Conviviality by Ivan Illich.

• [Antonio Lopez]

  Intangibles? None of this would have happened had it not been our free ride on cheap oil.

• [zuzu]

  Although I operate in a home office, I find that telecommuting is not something that suits every job or every learning style or style of work. Many people enjoy and thrive in an office culture, and feel the need to have face time with collaborators ad libitum. And that’s before you get into the folks who don’t have the internal clock or drive to get things done in isolation.

  I see the gist of what you’re saying (and I’m all for promoting choice), but I’d also posit the following:

  1.) Even in an office, people are often doing work on a computer that is networked with other office staff. They’re usually “telecommuting” within their own office building / campus. c.f. Doug Engelbart‘s Augmenting Human Intellect and Howard Rheingold‘s Tools For Thought.

  2.) People are presumably good enough at having an “internal clock or drive to get things done” for the rest of their life outside of work. People manage to buy groceries, cook meals, do the laundry, make purchasing decisions, plan vacations, and so on. These are the same decision-making skills used in a workplace environment.

  Furthermore, I wonder if the people who “need” an office to thrive have been institutionalized, in the way that Red spoke of in The Shawshank Redemption:
  

  He’s just institutionalized… The man’s been in here fifty years, Heywood, fifty years. This is all he knows. In here, he’s an important man, he’s an educated man. Outside he’s nothin’ – just a used-up con with arthritis in both hands. Probably couldn’t get a library card if he tried… These walls are funny. First you hate ‘em, then you get used to ‘em. Enough time passes, it gets so you depend on ‘em. That’s “institutionalized”… They send you here for life and that’s exactly what they take, the part that counts anyway.

• [alowishus]

  What? Please explain, Shava Nerad. What are the alternatives? How should it all work?

• [Josh Parris]

  What a crock. There are plenty of ways to account for the things mentioned here, and the reason we have no way to quantify and account for innovation, creativity, excellent records of technical teams, and so on is because they offer no inherent value – either you get a patentable/copyrightable work out of these qualities, or you don’t. Those works are recognised as assets, because legally they can be leveraged into cash.

• [Church]

  “…the reason we have no way to quantify and account for innovation, creativity, excellent records of technical teams, and so on is because they offer no inherent value…”

  You are part of the problem.

• [zuzu]

  Furthermore, I wonder if the people who “need” an office to thrive have been institutionalized, in the way that Red spoke of in The Shawshank Redemption:

  Or, put in more academic terms, Institutionalized Organizations: Formal Structure as Myth and Ceremony by John W. Meyer and Brian Rowan (i.e. myth and ritual in the context of organizational theory).

• [tomic]

  Oh please.

  “Deregulation” and “liberalization” of banking laws from Reagan days onward literally set the stage for the grand theft of all that kited, generated “value” as cash money. It was an engineered theft.

  Read about the mechanisms used to kite up the value of a single property, used as collateral in a loan, in order to buy the savings and loan… that held the loan! Which of course they defaulted on. ANd that was the 80′s S&L “crisis”!

  There’s nothing “high tech” about the S&L theft or the current one. It’s just legal manipulation of circumstances by crooked people. And U.S. citizens have been voting them in for decades.

• [zuzu]

  p.s. Understanding transaction costs (and how telecommunications / personal computing / the Internet severely slashes those costs) helps too. Read up on the works of Ronald Coase and Oliver E. Williamson.

  p.p.s. Another question to ask is why, in an age where Just-In-Time (JIT) inventory management is so well understood, do we still warehouse our human resources (HR) in office buildings?!

  Why aren’t workers themselves dispatched just-in-time to work on projects as needed, like consultants, ala Dan Pink‘s Free Agent Nation and Richard Florida‘s Rise of the Creative Class?