When Enron melted down, many attributed it to dishonesty, but I and many others saw it as the inevitable consequence of a financial and accounting system that was still rooted in the tangibles of an industrial economy.Â
In the industrial economy, value is added by taking raw materials and turning them into finished goods, which are then brokered to their destination in some supply chain, and consumed or used to produce further value.
The entire philosophy of our accounting and systems for valuation are based on this system which was developed for assessing risks in the renaissance for trading and raiding (European war financing) ventures.Â
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.Â 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.Â 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.Â
Since soÂ 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.
When I was a young woman, big investment firms had analysts who could understand and keep up with a technical sector — say, aerospace.Â But today, no single analyst can follow a sector like social networking, for example.Â There’s too much going on.Â Too much relies on rumor mill, PR, marketing, and glitz — because the substance can’t easily be evaluated.
In finance, it can be even worse, because Darwinian forces come to bear.Â When one player adopts complex instruments, there is pressure on the peers to adopt the same.Â
But the root of this evil — that the transactions and services that are the basis of so much of the modern economy can’t be adequately valued or analyzed by conventional accounting or traditional market analysis — seems to be missed in the financial press.
Is that because they think we are too ignorant to understand the system?Â Or because the financial press has an investment — nearly a holy trust — in not spooking a market that is increasingly influence by mobs of small investors, rather than large (and more patient) institutions?Â
The companies themselves can’t even call foul.Â They can’t substantiate with numbers the feeling that their rival emperors have no clothes.Â If a company could say “This instrument is close to fraud!” and sound credible, they wouldn’t feel pressured into a market without foundation.Â And the companies that “innovated” beyond acceptable risks would not be supported by the market if sufficient analysis could be made.
People like Professor Robert Bloomfield at Cornell have been working to revolutionize our thinking about accounting for value, but I suspect the inherent conservatism resisting changes in accounting are against him and his colleagues.Â Too many have too much invested in the current system, and are afraid any adjustment in valuation rules would produce an “adjustment” too close to home.
Also, to change the rules requires admission that the current system is flawed, which could produce a systemic, global, drastic market “adjustment.”Â Of course, not changing the rules made that inevitable, but deferred.
I would think it would be a bold move if the WSJ would take the opportunity to analyze the roots, rather than the symptoms, of this current crisis.Â Avoiding spooking the markets seems like locking the barn door, at this point.Â We might as well call for transformational change.
Shava Nerad, News and Opinion Correspondent:
Shava’s column, Iconoclasm, published irregularly and frequently to Gather Essentials: News, is an examination of the provocative ideas emerging in media and world culture behind the news.Â Her Iconoclasm columns are now listed as a mainstream news source in Google News.
Shava Nerad is a polymath who has been working on the Internet for over twenty-five years, at the boundaries of Internet and social issues. She is CEO of Oddfellow Studios [website to come], a company working on medical, marketing, and entertainment applications of a patent involving virtual world technology.Â
She’ll be performing with her fiance at Jack the Pelican Presents in Brooklyn on 10/11/08.
She lives in Somerville, MA with her teenage son, her fiance (a professional magician and online entertainment engineer), and a corgi/dachshund mutt named George.Â Her wedding in Second Life was recently featured in Business Week, and even she finds this surreal.
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