Blog: William McKnight

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Measuring Knowledge

Paul A. Strassman, in "Putting a Price on Brainpower", puts forward a methodology to measure knowledge capital. He updates the dated economic model (mechanization and new production processes or innovative technologies) to reflect brainpower, or knowledge capital.

The importance of knowledge is defined as Shareholder Equity - Market Capitalization. Divide that by Shareholder Equity and you have knowledge value. Divide that by number of employees and you have knowledge value per employee.

Drawing a correlation between this measure and making the most of your hard assets, Paul states the top 100 firms by book value, (i.e., the largest US firms) accounted for 71% of the total knowledge value for the US economy. So, large firms are achieving the largest increases from book value to market capitalization - something all compaies aspire to - making the most of their assets.

Since investors are willing to value firms at much more than their book value (essentially what the hard assets will generate), now more than ever, this makes some sense. Attributing the gap to "knowledge" is fair. Since there are no hard assets to attribute them to, it must be something else. If you're thinking it's "euphoria", Paul's already thought of that and exempts this calculation from those companies whose stock price is affected by "irrational exuberance."

I don't think this is going to help justify any DW/BI investments. I'm sticking with good old ROI, but it is a clever observation.

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