Saturday, February 11, 2006

the price of brainpower

Classical economic theory has assumed that if one invests in factories, tools and improved transportation, economic growth is sure to follow. If you subscribe to that theory, labor productivity gains wil be realized from mechanization and new production processes. The assumption that a company was bound to prosper from a high rate of return from capital investments. That assumption did not however explain economic worth.

The 2004 net value of financial assets (book value) fro 7,241 listed U.S. corporations totaled $9.2 trillion while investors were willing to pay $22.7 trillion for these companies. That puts the value of knowledge at $13.5 trillion (the difference between market and book value).

To define knowledge capital as a financial metric is to measure knowledge that requires metrics that are repeatable and quantitatively definable. Analysis of assets is the key for essential capabilities in any organization that wishes to compete in the 21st century. The $13.5 trillion stated earlier is a simplification. The sum of knowledge values includes a number of firms that had negative results and high-value management tends to concentrated in a few firms.

Consider the following:

  • The top 100 firms by book value, out of the total corporate population of 7,241 firms (1.4%), had $6.5 trillion of knowledge value, or 71% of the total for the U.S. economy.
  • There were 662 firms whose knowledge was negative. They were worth less on the market than their financial valuations. They were worth $300 billion more than if they were sold off at book value.
Bigger firms still have the most knowledge in the "new economy" and is the U.S. economy approaching its full capacity for generating wealth?

Costs of Planning
Market Value (market capitalization, year-end)
Financial Value (shareholder equity) B
Knowledge Value (A-B)
Importance of Knowledge (C/B) D
Number of Employees E
Knowledge Value/Employee (C/E) F

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