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.