Presentation
for Rutgers Feburary 5,1999:
A
Systematic Approach to Structuring and Facilitating Value Exchange
...including
a solution to the problem of valuing intangible assets
Matt
Taylor
Co-founder,
MG Taylor Corporation, Hilton Head, SC
Michael
D. Bednarek
Partner,
Crowell & Moring LLP Washington, DC
Abstract
The
solution to the problem of valuing intangible assets lies in recognizing
the real problem: the currently predominant system of value exchange -
the mercantile system - is not well suited for the post-industrial age
economy. There is a need for a new system and method for value exchange
that allows us to place so-called intangibles into a market by using,
for example, a “smart” object-oriented, agent-based method and
system in place of “dumb” money, as a medium of exchange. When
those assets that we commonly refer to as “intangible” are placed
in a market, the issue of valuation dissolves.
The
object oriented system and method for exchanging a value is made up of
objects (or Agents) that serve as a medium of exchange or a measure of
value and/or a means of transacting value. Each object or agent within
the system has certain characteristics including an ownership characteristic.
The system includes means for modeling, sampling, and verifying the current
value, preferably in a real time basis, of the objects within the system.
This
presentation is intended as a "Thought Experiment." Our purpose is to
suggest a new vantage point for considering the valuing of intangible
assets.
Introduction
Our
search for ways to measure the value of intangible assets has led us to
the conclusion that the valuing of intangible assets is a non-issue. We
do not deny that the global economy is becoming increasingly distorted
because of the inability to identify and measure intangible assets. The
distortions are real, but the problem is not the absence of an abstract
model for estimating the value of intangible assets. Instead, the problem
is that intangible assets are viewed in the abstract and have not been
placed in a market.
Companies
do not care what their intangible assets are worth in the abstract
- they want to be able to leverage them in practical business situations.
Markets, on the other hand, are efficient. They are the one standard that
everyone has to accept.
A
new approach using new technologies will allow all intangible assets to
be placed in a market. In principle, the “problem” of intangible
assets is no different than tangible assets - it is just that the present
system and method for facilitating value exchange - todays mercantile
system - is deficient. The deficiencies in todays mercantile system are
readily apparent when considering what we now refer to as “intangibles.”
The
common usage of the term “intangible” in this context is itself
circular. Certain assets are referred to as “intangible” because
they do not fit neatly into the predominant system for value exchange.
Thus, the difficulty we face in valuing “intangible” assets
does not result from something unique about intangible assets - the difficulty
results from the deficiencies in the current economic system.
What
we today refer to as “intangibles” are, in fact, no more or
less tangible than a block of pig iron or an automobile. Pig iron would
have no value except that there exists a method and system - a process
- for its trade and use. This system and method, and the economy that
employs it, has evolved over centuries. It is complex and sophisticated.
It is not requisite, however, with the demands placed on it by the post-industrial,
knowledge-based global economy. The intangible asset issue is just one
of many that reflects this state.
Try
to assess the value of pig iron in the abstract. Do you know its state?
Do you know what uses to which it may be put? Do you understand its nature
sufficiently in order to avoid misuse and unintended consequences in its
production and use? Do you know what market demand may exist for it? Do
you know the scale and scope of this demand including important local
variables? Do you have a model of its future value and what conditions
will effect this? Do you have access to a supply chain that can create,
distribute the pig iron as a product/service and make use of the value
received from this effort? These are but a few of the “questions”
that the market - and the support components that make it up - answer
every day.
To
a primitive society this would be a complexity beyond comprehension and
any dialog about the value of the pig iron regarded as a total abstraction.
This is how we stand in regard to the valuation of so-called intangibles
on the threshold of the networked or knowledge economy.
But,
when those assets that we commonly refer to as “intangible”
are placed in a market, the issue dissolves. It is now possible and will
become increasingly easy to place so-called intangibles into a market
by using a “smart” object-oriented, agent-based method and system
in place of “dumb” money, as a medium of exchange.
Consider,
for example, the “asset” a corporation believes it has because
of its employee base. An Agent-Money-Contract can be custom made to forge
an executable deal that has immediate, short and long term value. It is
then, possible to “sell” these Agents or certain aspect of them
(i.e. as “paper”) on a market that can “vote,” thus,
establishing value for the entire family of assets. The Agent-based system
now opens up new degrees of potential market value(s). This creates a
real asset that can be managed and “booked.”
This
new system of value exchange is no more or less abstract or complex than
the many financial instruments and abstractions that make up today's financial
system - which two hundred years ago would have been considered “intangible”
and impossible to define and manage. It is simply a matter of recognizing
the real problem, acknowledging the deficiencies in the current system,
recognizing the opportunities that are now or soon will become available
and creating a system that can evolve to overcome the deficiencies in
the current system. In essence, we are suggesting a new way of considering
the issue valuation of intangible assets - a thought experiment.
To
begin the process of developing this new approach, we will define the
problem in a new way, identify the deficiencies in the current system
of value exchange and highlight opportunities that will be available in
the networked economy that is now emerging all as a precursor to a thought
experiment. We will then outline our proposal for an object oriented system
and method for exchanging a value and objects that serve as a medium of
exchange or a measure of value and/or a means of transacting value.
Defining
the problem
The
search for ways to measure the value of intangible assets is grounded
in the recognition that the global economy is becoming increasingly distorted
for want of an effective way to identify and measure not only the full
range and scope of traditional assets, but also intangible assets that
now make up the greater value in the economy.
In
considering issues pertaining to the valuation of intangible assets, it
has been widely assumed that the problem lies in the “metrics”
available for estimating value. Thus, most commentators have focused on
ways to identify and quantify “hidden” intellectual capital
assets that occur or are found to exist in “successful” organizations.
There
are at least two fundamental flaws in the current search for “metrics”
to value intangible assets.
To
begin with, intangible assets cannot be taken out of context of the environment
in which they exist. What value is an automobile to a typical buyer without
any possibility of having wheels? What value is a so-called intangible
asset outside of the ability of an individual, team or organization to
deliver to a market a useful good or service or trade the asset as a capital
asset? The value of an asset depends on the market context. Abstract analysis
of “value” is thus suspect.
More significantly, the underlying assumption that the problem lies in
the “metrics” available for estimating value is flawed. The
lack of an effective way to identify and measure intangible assets is
just a symptom of the ills of the economic system currently in place.
The real problem is that the current mechanisms for facilitating value
exchange, which are a remnant of the industrial age, are not well suited
for this task as we move toward a networked economy. The deficiencies
in today’s still largely mercantile system will become more pronounced
in the near future and threaten to inhibit the shift to a networked economy.
Thus,
there is a need for a new approach to value exchange. Moreover, the key
to valuing intangible assets lies in establishing a system and method
for structuring and facilitating value exchange in today’s (and tomorrow’s)
economy that accommodates those assets we now refer to as intangible.
Fortunately,
in the emerging networked economy there will be many tools available to
implement improved systems and methods for structuring and facilitating
value exchange in both real and virtual economies. To craft an appropriate
system, one must begin by understanding the deficiencies in the current
system of value exchange.
Deficiencies
in the Current System of Value Exchange
It
has long been recognized that direct exchange of items of economic value
(e.g., barter) is not always efficient. Thus, there have historically
been objects that serve as a measure of value and a system and method
for exchanging such objects on a macro economic scale.
The
essential ingredients of any economic system or model include the medium
of exchange and measure of value as well as the system and method of exchange
as well as some system for verifying ownership, enforcing ownership rights
and monitoring current value.
All
known systems have drawbacks. For example, current systems tend to value
those objects that are tangible and easily transferable. But, objects
that are tangible and easily transferable are not the only things that
have value, nor are they necessarily the most valuable that “exist.”
Thus, there remains a need for an improved system and method for exchanging
a value and objects that serve as a medium of exchange or a measure of
value.
Current
systems of value exchange, principally currency and other forms of “money,”
are not capable of dealing with the complexity inherent in the emerging
economy. As a result, the system of value exchange limits or attenuates
economic growth instead of facilitating growth. This is increasingly the
case today because of the increasing importance of assets, i.e., “intangible”
assets, that do not fit neatly into the predominant means of value exchange.
In
addition, present forms of money can be easily manipulated causing, among
other things, critical information in the system to be lost, obscured
or false. Thus, when a system of value exchange functions properly, the
change in the cost of a good or service should be the result of an increase
of decrease of its relative value in the market. However, when change
in the cost of a good or service results from a change in value of the
medium of exchange itself by arbitrary means (printing more money for
example) - and this medium is the sole method of exchange - then feedback
to the seller and buyer is compromised and a dynamic is introduced into
the exchange that is not connected to the intrinsic value of the exchange
itself. The system of value exchange has distorted the process that it
is intended to facilitate.
Trading
opportunities are lost for no intrinsic reason other than the “adjustment”
necessary to restore balance and health to the medium of exchange. The
impact on the U.S. economy made by the period of high inflation in the
1970s is just one example.
It
is thus understood that the currently predominant means of value exchange,
i.e., currency, has profound impacts on the system it is supposed to facilitate.
As a result, governments attempt to regulate their currency. These efforts
are rarely successful, however, because of the complexity of the task
and the political temptations involved. What is not operational in the
present economy is a system of exchange that is inherently complex enough,
and self-regulating, to match the true potential variety of the market
place. In cybernetics this is stated as the “Requisite Variety”
problem.
In
other words, the facilitator of exchange is becoming the limit setter
of possible exchanges while more and more potential economy is lost due
to the inadequacy of the medium. This is no different than trying to describe
a complex object without the cognitive and language tools to do it. The
object cannot be seen or manipulated to its full potential. Potential
transactions are lost. Existing forms of currency cannot learn, they are
not smart and they do not adapt. Existing forms of currency do not carry
adequate information with them. In addition, the information that is delivered
does not discriminate - it “says” I am this and that but offers
not ability for the user to know “why.” For example, the history
of every transaction does not go with the medium-of-exchange - this is
done by a partially effective, expensive, corruptible system that imposes
great cost and speed limits on the system.
Existing
forms of currency cannot transact based on context sensitive and case-specific
conditions. This imposes the need for complex, external-to-the-medium,
contracts and the entire court system that goes with it. The simplest
exchange can get tangled in this morass. This gives rise to a plethora
of financial instruments and agents that add complexity in the wrong place
while arbitrarily attenuating the variety of the system (of exchange).
Existing
forms of currency do not know ownership and location - they cannot report
their condition nor be related to specific objects or processes of value
in the system. They cannot function as complex agents but - as noted before
- create unnecessary non-value-added complexity and overhead to the present
system of exchange among agents.
New
Opportunities in the Networked Economy
The
deficiencies in the current system of value exchange detailed above are
no secret. These deficiencies are well recognized, but have become accepted
because of the perception that there is no better alternative. While it
may be true that the current system of value exchange has been the best
available for the industrial age, the emergence of the networked economy
is upon us. In a networked economy there will be opportunities for more
sophisticated systems of value exchange that overcome the deficiencies
in the current system of value exchange.
A
networked economy is composed of agents (humans, machines, groups, organizations
and combinations thereof) that interact and communicate with one another
to such a high degree that the traditional distinctions between agent-types
are blurred. The emergence of the networked economy represents an economic
shift that will dwarf the industrial revolution.
As
the networked economy emerges, it will become increasingly possible to
obtain information concerning how agents interact with one another and
to monitor the location, condition and status of agents operating within
a system and communicate this information to other agents within or outside
the system. Agents can, for example, report or broadcast their location,
condition and status. While the basic technologies have been available
for some time, it is only recently that the cost of hardware and communications
has made widespread use of the technology practical. Reduced cost of hardware,
object oriented programming, the Internet have all contributed.
In
addition, there is an increasing understanding that complex systems do
not operate according to a central controller, but rather emerge from
the interaction of agents operating within the system. It is likely that
this trend will continue and that soon it will be even more necessary
to measure the real attributes of agents in real time. These trends will
continue at an exponential rate of change in the networked economy.
The
Thought Experiment
Within
this contest, we present the following thought experiment.
What
if:
The
wrong question is being asked and intangibles are no different than
all other assets?
The
issue is the system and method by which values are placed on the market
and exchanged?
The current system of value exchange is intrinsically too simple to
deal with the complexities of the knowledge economy?
The
current system of value exchange is inherently unstable, as a cybernetic
system, because, among other things, it relies on Nation-State dominated
currencies that fail to provide adequate feedback to the system and
its components - as well as - being subject to the manipulation of special
interest groups?
The
“message” in the current system of value exchange is increasingly
becoming a reporting of the tool-of-exchange’s state that has little
to do with the state of value of the items the market is trying to trade?
The
cost of all the contracts, agencies, professional services, regulations,
tools of evaluation and intermediaries, market exchanges - all - add
up to an unacceptable overhead imposing damaging limits on what the
system can “see” and trade and the rate that it can
transact?
What
if:
It
were possible to create a intelligent Agent in OOP (Object Oriented
Programming) that has features and behaviors that closely model real
objects in the real world - that this Agent would “know” it’s
owner, the location and condition of the object(s) it represents in
virtual space and what conditions are imposed on the use, transfer and
control of the object(s) as well as itself?
It
was possible for whatever claims, conditions and contractual obligations
imposed and agreed to by any number of stakeholders to be programmed
into this Agent?
It
were possible to build into this Agent strong encryption so that its
integrity cannot be violated, and further, to “shape” the
Agent so that is could only be “seen” and be known to exist
by Agents of a similar class or family?
It
was possible for anyone to define and create these Agents, using ubiquitous
computing, and to send these Agents into virtual space to transact business?
It
was possible to create whole Agent-based (mass-customized) economies
designed to specific conditions and the dictates of particular users?
All
of this could be accomplished at less cost than the printing of paper
money?
What
if:
The
Agent, under specific described and built-in conditions, can “execute”
trades and the transfer of the (represented) real property including
(market accepted) future values?
The
Agent can communicate with many of the real-objects (represented by
the Agent) and exercise some degree of control over the object itself
when prescribed conditions are met?
Most
of what, today, that makes up financial and legal services, trading
markets, much of business and trade law enforcement, many government
functions, many managerial and contractual processes can be replaced
by Agents of this kind?
These
Agents can “travel” through a variety of virtual media, reproduce
themselves as required, sleep and “wake up” under prescribed
conditions, “live” in a variety of media and find-their-way
by built-in protocols through different (known and unknown) networks
(made up of Agents) that are not subject to tampering or the fragile
conditions of one circuit?
This
is possible, today, with today’s technology and can be globally
ubiquitous within ten years?
This
system and method can co-exist with and trade with the in-place financial
system during the period of transition?
The
forgoing thought experiment suggests a need for a new system and method
for value exchange that allows us to place so-called intangibles into
a market by using, for example, a “smart” object-oriented,
agent-based method and system in place of “dumb” money, as
a medium of exchange. The challenge then becomes describing such a system.
A
Systematic Approach to Structuring and Facilitating Value Exchange
One
possibility for a systematic approach to value exchange is to use an object
oriented system and method for exchanging a value made up of objects (or
Agents) that serve as a medium of exchange or a measure of value and/or
a means of transacting value. Computer software and/or firmware objects
(Agents) could, for example, be created to represent the value of various
items within the system. Thus, for example, an object could be created
to represent the value of a tangible object, such as a boat. An object
can be created to represent the value of one persons service and so on.
Objects can also be created to represent the value of ones future earnings.
Each object within the system has certain characteristics. Foremost among
the characteristics of each object is an ownership characteristic, which
is establishes who, within the system, has ownership with control of the
value represented by the object.
It
is, naturally, critically important that the integrity of the ownership
characteristic be maintained. In other words, it is important that one
person within the system cannot misappropriate the ownership characteristic
from others within the system. Thus, it is contemplated that the ownership
characteristic be linked to unique characteristics of the individuals
(or objects) within the system. Examples of appropriate and unique characteristics
can include fingerprint patterns, iris patterns, DNA patters and, encrypted
code values. In terms of manufactured objects, the same can be accomplished
by building in unique “signatures.” This is done today with
batches of chemicals and explosives. Thus, an object knows that it is
linked to the person having a certain, unique, DNA pattern or fingerprint
or manufactured signature. This system for determining the characteristics
of objects makes it possible to achieve increased utilization of all objects
that have value to someone (or something) within the system (or market).
These
can include objects that are physical objects (a boat) or metaphysical
objects (the future value of services that can be rendered). At its most
basic level, the system includes any objects that have value to anyone
or other object in the system. The system is connected with data resources
capable of evaluating or ascertaining the value of an object by standards
derived from the experience of the system, as well as, the actual “voting”
taking place in the market. In addition, the object's location is always
known and its status (health or condition) is always known. Reporting
on location can be done with GPS technology or other similar devices that
can ascertain a location precisely. Circuits and chips that measure conditions
that are believed to be significant factors in the value of the object
can be used to ascertain status or health. In the simple case of a boat,
for example, implanted chips would report whether the boat is afloat or
sunk and the status of its major sub-systems. Initially, any object within
the system can be very simple, but will evolve through recursion and iteration
to refine the predictability of its behavior within the system. Thus,
through experience, for example, it will be learned that certain factors
affect the value of the objects. The system will adjust accordingly. The
key is that feedback is used to refine both objects and system behaviors
as experience is gained. On the level of an economy, this process has
to be autonomous and a built-in capacity as the sum of the Agents within
it.
In
an object oriented system and method for exchanging a value anything that
has value to some people can be a commodity. Any commodity in this sense
can be a tradable instrument. This allows much greater utilization of
assets (for example, future value of services rendered that might otherwise
not be used at all). This system may include a third party agent or enforcement
agent (human, machine, institution), which under current systems of economy
are courts, and other legal process generally used to enforce rules of
exchange and ownership.
An
object oriented system and method for exchanging a value is useful on
an extremely large macroscale and for discrete, definable groups of persons
that have a common interest. Thus, it is possible with this system to
have multiple, distinct economies. It will be necessary to include within
most systems some form of interface with other economies (systems). The
choice is user dependent and dictated by the common goals of the market
or economy that has been established.
Thus,
an object oriented system and method for exchanging a value offers the
opportunity to create tremendous wealth since most assets of the present
economy (and system) are, at any given time, inactive because of the inherent
limitations of the second wave economy and its instruments of execution.
An
object oriented system and method for exchanging a value should include
means for modeling, sampling, and verifying the current value, preferably
in a real time basis, of the objects within the system. This can be accomplished
at the system level and/or the Agent level. Thus, for example, the physical
objects that are represented by the software objects within the system
could, for example, report signals indicative of their current state to
a monitoring system. In the case of a boat, for example, the boat would
continuously report its location and that all systems were in order. As
long as these signals were received the system would recognize the value
of the object representing the boat. However, once the system failed to
receive an indication that the boat reported the boat’s location
and function, it would no longer recognize the value of the object value
associated with the object representing the boat. In this circumstance,
certain predetermined actions can be triggered by the condition.
Known
risks can be used to create real-time, user-controllable service costs
and billings. A driver, for example, can be charged insurance costs based
on a number of conditions: speed, location, time of day, road and weather
conditions and so on. This replaces the crude averaging that takes place
to day. In this case, appropriate care can translate directly into savings
- something only partially (and inaccurately) possible today.
There
are, of course, other ways of verifying the values of the objects represented
within the system. For example, in the case of tangible objects such as
boats and automobiles, there is the conventional techniques for establishing
a blue book value which could be used in conjunction with real-time reporting
of the sales of similar objects.
It
should be appreciated, however, that because of the digital nature of
the system and method it is possible to model real world values and their
fluctuation due to specific variable conditions much more accurately.
The fact of ownership and control of the physical object can be continuously
verified, this is unduly complicated using current technology and too
burdensome to accomplish on the granular level necessary for significant
gain.
Thus,
the system can operate employing continuous real-time or periodic verification
or spot-checking. In addition by a credit report type system whereby participants
within the system can lose the ability to participate within the system
if they (or their Agents) fail to report or report misleading or fraudulent
information.
A
system’s (or economies) members (human, machine, etc.) most valuable
asset is the fidelity of their actions and the reliability of their verification
(identity). All participation flows from this history. The recording of
this record is not (only) centrally controlled and subject to manipulation
and arbitrary disenfranchisement. The memory of the system is also
the sum of all of its parts - like the human brain.
In
addition, it is contemplated that the virtual Agents themselves can be
configured is such a way that they behave as genes. With this method,
certain Agents will naturally hook together while others will fail to
see the existence of those Agents outside of their umbaldt. Economies
built on tools of this kind will behave more like living systems and natural
ecologies than simple, even complex, machines. This is one reason why
as these new tools are introduced into the existing structure of the Industrial
economy that it becomes increasingly unstable. Therefore, these tools
have to be constructed and employed in such a way so as to build, incrementally,
a new Knowledge Economy as they are used. The system and method, as proposed,
can facilitate this whereas existing methods do not.
An
object oriented system and method for exchanging a value dissolves many
issues of facilitating knowledge-economy Transactions and Agent value
accounting while radically reducing the multiplicity of financial instruments
(in a myriad of legal environments) now systemic to the industrial-based
economy. The systematic, networked economy will create true ValueWebs
(not supply-chains), where customers, investors, producers, manufacturers
and users will integrate into highbred organizations/economies to accomplishing
discreet goals.
Organizations
in America and across the globe will be able to create Intellectual Property
and Capital with the facility that, today; they can create physical products.
This capacity will completely alter how wealth is created, evaluated and
traded.
Conclusion:
The Future of Value Exchange
Efforts
to predict the future are always suspect. It is clear, however, that we
are in the midst of an unparalleled economic shift and that the current
system and method for exchanging value is no longer adequate. New systems
for exchanging value must emerge. Regardless of whether the systems that
emerge are object oriented system, there will be profound differences
in the methods for exchanging a value in the future.
To
begin with, individuals and organizations are likely to publish their
own money; i.e. instruments of trade. Individuals and organizations would
participate in multiple economies, as well as, have the facility for making
economies of distinct character.
While
traditional forms of money would most likely still exist (at least for
some time), these monetary systems may function as standards by which
many alternative systems and economies will interact. This will not always
be true, as it will soon be possible to have systems and economies that
will reach sufficient scope and scale to stand alone.
Commerce
will never be limited by the monetary system itself as it clearly is now.
This new “monetary” system will create itself, automatically,
as demand requires and as transactions are made. Thus, the system of measurement
and trade will evolve at the same rate as the market place potential -
it cannot lead or lag the market. It cannot be inflated or depressed by
manipulation. It will measure, account, and trade whatever people can
define and value. Execution will be automated. Many roles now filled by
people and legal instruments will be replaced creating a much more efficient
market.
In
the future, money will become a direct agent of the real (existing) value
it derives from and can contain within itself ownership, terms of exchange,
as well as, constraints imposed (at the time of the moneys “manufacture”)
by other stakeholders like insurers, loan makers, various governance agencies.
In
an object-based system, all of these terms and constraints are built into
the Agents at “birth” - they become intrinsic to the Agent and
define its scope of behavior and degrees of freedom (including rules for
how these can be changed). A market will exist for both standard and custom
Agents - integrated Teams made up of legal, financial, business, as well
as, specialty members will create these. They will be sold and traded.
Highly automated Agents will facilitate users through the creation process
(like making a will, for example - a will that automatically executes
upon the death of the property holder).
These
agents will be protectable intellectual property and carry brand and reputation
even persona. A large part of future professional services will
actually be carried out this way. Different Agents and “economies”
will have different market value and “trade” accordingly - like
stock and stock markets do today.
References
Coates,
Joseph F., Andy Hines, and John Mahaffie. 1997 “2025: Scenarios
of US and Global Society Reshaped by Science and Technology” Oakhill
Press
Kelly,
Kevin 1998 “New Rules for the New Economy: 10 Radical Strategies
for a Connected World” Viking Press
posted
January 16, 1998
revised
March 23, 1999
note:
this document is about 80% finished
Aspects
of the system and method described are Patent Pending.