Putting a Price on Brainpower

By Paul A. Strassmann Print this article Print

The information in employees' heads can be worth millions. Here's a way to put a price tag on all of that brainpower.

Download the worksheet

For the past 100 years, economists have waged an ongoing debate about the causes of economic growth. Classical economic theory has rested on the assumption that if one invests in factories, tools and improved transportation, economic growth is sure to follow.

Under that theory, labor productivity gains will be realized from mechanization and new production processes or innovative technologies.

As a result, elaborate procedures for reviewing capital asset budgets consumed most of the attention of corporate boards of directors. These were based on the assumption that a company was bound to prosper if it could show a high return from capital investments.

Problem is, this assumption increasingly did not explain economic worth. The 2004 net value of financial assets (book value) for 7,241 listed U.S. corporations totaled $9.2 trillion while investors were willing to pay $22.7 trillion for these firms, putting the value of "knowledge"—the difference between a company's market and book values—at $13.5 trillion.

No doubt, any discussion about "knowledge capital" or "knowledge assets" will quickly regress into debates about definitions and interpretations of these terms.

The purpose of the worksheet on this page is to define knowledge capital as a calculable financial metric, in dollar terms.

To measure knowledge in this sense requires metrics that are repeatable and quantitatively definable. Such metrics must be also independently verifiable.

Admittedly, this approach overlooks matters related to aesthetics, motivation or psychology. What you will find here concentrates entirely on analysis of assets that are becoming the essential capabilities for any organization that wishes to compete in the 21st century.

Unfortunately, the $13.5 trillion valuation must be seen as a simplification. The sum of knowledge values includes a number of firms that delivered negative results. Also, high-value management tends to be concentrated in a few firms.

Consider the following insights on how one should view the importance of knowledge:

  • The top 100 firms by book value, out of the total corporate population of 7,241 firms (1.4%), accumulated $6.5 trillion of knowledge value, or 71% of the total for the U. S. economy. This contradicts a popular theory that it is the small firms that account for the creation of new knowledge in the "new economy."

That is just not so. Bigness still rules wherever one looks.

  • There were 662 firms whose knowledge was negative, meaning that 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.

This condition offers an argument against the proposition that the U.S. economy—during a year of prosperity —may be approaching its full capacity for generating wealth. A number of corporations appear to be searching for the bonanza within the new economy without a lot of success in finding it.

This article was originally published on 2005-11-08
Paul Strassman created and trademarked the Information Value-Added and Information Productivity formulas behind the Baseline 500 rankings. His career in technology, which began in 1956, includes stints as a top information-technology executive at Xerox, General Foods, Kraft, the Department of Defense and NASA.

Strassman is president of The Information Economics Press and senior advisor to Science Applications International Corp., he is also Distinguished Professor of Information Sciences at George Mason University's School of Information Technology and Engineering.

He has written numerous articles and books on information management, including Information Payoff: The Transformation of Work in the Electronic Age (1985) and The Squandered Computer (1998).
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