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D15:   The Economics of Knowledge Capital
    By Paul A. Strassmann
    53 Pages
    Date Published: 02/2004

    Online Price: $8.95

Summary

For the past fifty years economists have waged a debate about the causes of economic growth. Classical economic theory has rested on the assumption that it was capital that made growth possible. If one invested in factories, tools and improved means of transportation, economic growth was sure to happen as labor productivity gained from mechanization and from new production processes. The purpose of this book is to propose a methodology for filling the gap in the ways how corporate inputs and outputs are accounted for. Instead of leave the term “technology progress” as an undefined term I will explain how the insertion of the concept of "Knowledge Capital" can be applied to solve many analytic problems, such as how to measure payoffs from investments in “technology progress.” Much of what is said about the advanced state of the U.S. economy does not stand up when one shines an uncompromising beam of analysis on actual financial results. The premature claims that the U.S. has reached unprecedented levels of widespread prosperity are also not correct. Wealth based on Knowledge Capital remains highly concentrated. It is limited in scope and can be observed only for a small number of firms.

The data presented here should be seen as the perhaps the most favorable perspective on economic conditions. The Knowledge Capital for large segments of the workforce remains unaccounted for, such as for the government, in defense, in the case of not-for-profit firms, for notoriously under-resourced consumer services and among a rising population of part-time workers.

Ultimately all power derives from the control over resources that are identified either by legal rights or, in practice, as a capacity to extract economic surplus value - profit. “Knowledge”, as an instrument of power is different from all other prior forms of resources, such as control over hunting grounds, agricultural land or industrial capital. Knowledge cannot be measured by conventional means because it is not tangible and remains elusive. It is not reflected in the published accounting statements – the generally accepted current means by which corporations report about their assets. The valuation of a firm’s “knowledge” is also frequently mentioned in shareholder reports but no value ever assigned to it. In this work we present a practical analytic method for calculating the valuation of Knowledge Capital.

Table of Contents

Economic Growth & Knowledge Capital8
Measuring Technological Progress8
The Importance of Knowledge Capital10
Observations13
Knowledge Capital Issues14
How is knowledge a form of economic power?14
Why has knowledge management become important now?15
Can knowledge be measured?15
What are the methods of measurement?16
How does knowledge management affect markets?16
What is the significance of the value of knowledge?17
What is a knowledge capital ranking survey?17
Who should be responsible for knowledge capital?18
How do you expect these ideas to be applied?18
A Theory of Knowledge Capital19
The individual's point of view19
The employee's point of view20
The corporate point of view22
Calculating Knowledge Capital24
Valuation Attempts25
Market pricing of Knowledge Capital26
A Case of Knowledge Capital Valuation: Abbott Laboratories27
How to grow Knowledge Capital27
Knowledge Capital and Information31
Individual Knowledge vs. Organizational Knowledge31
Knowledge Capital as Manifestation of Organized Complexity32
Examples in Valuation32
Knowledge Capital and Spending for Information34
Why Employees’ Worth Differs35
Investing in people36
Software as Knowledge Capital38
Insights40
Market Valuation of Knowledge Capital42
R&D and Knowledge Capital45
The Right Ratio46
KM, IT and Organizational Capital47
Appendix: Knowledge Capital Valuation Methods50
Market Value Minus Book Value50
Tobin’s Q50
Calculated Intangible Value51
Baruch Lev's Knowledge Capital Valuation51
Paul Strassmann's Knowledge Capital Valuation52
Karl Sveiby's Intangible Assets Monitor52
Leif Edvinsson's Skandia Navigator53

List of Illustrations

Table 1 - Calculation of Knowledge Capital for Abbott26
Figure 1 - Cumulative Spending and Knowledge Capital Gains28
Figure 2 - Trend in the Overhead-to-Asset Conversion Efficiencies29
Table 3 - High Variability in the Knowledge Capital per Employee33
Table 4 - Information Management Spending for Comparable Firms34
Table 5 - Stock Market “Bubble” Valuations43


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