Archives

April 2009

The New Economic Paradigm: Part 7; Monetization of Knowledge Assets

by Dan Robles on April 20, 2009

The New Game in Town:

We have specified a structure for a new economic paradigm by simply integrating the the knowledge economy into the same structure as the financial system.  The result is a completely new way for entrepreneurs to create wealth.

Primordial soup:

A. We specified that Information is the currency that is convertible to knowledge assets and innovation assets through a mathematical relationship.

B. The decimal classification and logic system provides a machine-enabled accounting and inventory system for knowledge assets.

C. The factors of production for the new economy are: social capital, creative capital, and intellectual capital.

D. Social Networks provide vetting, perfect information, and self-regulation.

These ingredients allow the spark of entrepreneurship to illuminate the supply and the demand for knowledge assets outside the construct of traditional corporations, government, or academia; instead catalyzing innovation enterprise within and among social networks.

An economy is born:

Entrepreneurs now have all the information that they need for matching surplus knowledge assets to deficit knowledge assets as a means of increasing productivity of these assets in a highly predictable manner.  Advances in Social Media will keep the game organized, localized, transparent, self-regulating, and fair.  The Unit Business transaction can be assembled in infinite combinations to support countless ‘new-to-this-world’ innovation enterprise.

Show me the money.

Monetization is the process transforming a product or service into a universal tangible currency; specifically, a Dollar, a Euro, Yen, etc.  Very few people fully understand how money is created in the first place. The following video series gives an excellent overview of this process. It is highly advised that the reader invest 40 minutes in viewing this documentary:

Money represents future productivity:

In short, money is created from debt.  Banks are given the authority by a government through the fractional reserve system to literally scribe money into existence.  This money is not backed by gold or silver, rather, money is backed by the promise of the borrower to pay it back in the future.

Ultimately, the value of money is a social agreement; a promise based on an estimation of future productivity.  When those promises cannot be kept, the value of economy diminishes. When the promise is exceeded, the value of economy appreciates.

Blood brothers or distant cousins?

Debt and innovation have one very important feature in common; both are a proxy for future productivity. Therefore if debt can be used as a basis for a national currency, so can innovation.  Everyone should be willing to honor the social agreement because the currency would not change, only the basis of the currency.

The only way to sustainably create more money is to increase human productivity.  The only way to increase human productivity is to innovate.

The Risk Factor:

Our financial system has developed over 400 years a variety of systems, methods and analysis tools to manage risk in monetary transactions.  Innovation economics has applied the same system to the  management of risk for transactions of knowledge assets. The correlation is as follows:

The Financial Bank: the entrepreneur assumes that they have the knowledge to execute a business plan and then they go to the financial bank to borrow the money.  The remaining risks are knowledge related.

The Innovation Bank: the entrepreneur assumes that they have the money to execute a business plan and they go to the innovation bank to search for the knowledge. The remaining risk is finance related.

They hedge each other.

The Virtuous Circle:

The more knowledge you can assemble, the more money you can borrow.  The more money you can assemble, the more knowledge you can borrow. With both banks acting together – the risks cancel each other out and an economy of risk free innovation emerges.

Amalgamation of predicted cash flows:

With a computer readable knowledge inventory, diverse communities of practice, a percentile search engine, and the virtuous circle of finance; cash flows associated with innovation enterprise can be predicted much more accurately and with far lower risk than any current innovation system.

Were risk is predictable, a portfolio of innovations can be diversifies so if one innovation fails there is an equal chance that another will succeed and the risks cancel each other out.  The predicted combined cash flow of all the innovation enterprises can be depicted as a single large steady cash flow with low volatility.

Call Street:

Much like today’s companies do to raise money for expansion, the innovation bank can issue bonds on the open market.  A bond is a debt based on future innovation and will act as the transitional instrument to monetize innovation economy. Options can be sold on futures of innovation enterprise.

For example: a bond can issued by a bank or a government with coupon price of 1000 dollars paying a risk adjusted interest rate and redeemable in 8 years.  The proceeds can now be used to fund innovation enterprise which, by definition, are qualified and quantified on the basis of increased human productivity. Investors can buy options on promising algorithms for knowledge assets.

This system is exactly how mortgages are financed through global networks of bonds, options, and hedge funds. The current economic crisis happened because estimations of future human productivity failed to support the estimated value of the assets being represented.

The Innovation Economy is the hedge against financial crisis and consumption capitalism -  now and in the future.

The New Gold Rush:

Innovation Enterprise can easily exceed the 7-12% return that is normally expected on Wall Street.  Venture Capitalists only entertain innovation expected to return 1000%-5000% return.  There is a huge market of innovation enterprise in the regime between 12%-1000% that is currently uncapitalized.  If innovation bonds and associated options return only 25% consistently, the flow of global capital will be intense and our nation will be transformed far beyond any current expectation.  The opportunity is, however, even much greater than that; Innovation will reflect social priorities rather than Wall Street priorities.

The epiphany.

The epiphany of innovation economics is that technological change must always precede economic growth.  Humanity has been going about the process of globalization as if economic growth can precede technological change.  This has been the singular flaw in modern market economics that has created the unsustainable system that we have today.  The financial instrument of the innovation bond reverses this flaw and will open the next economic paradigm to extraordinary human progress.

Future modules in this series will discuss the implication and specific embodiments of an innovation economy.

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The New Economic Paradigm; Part 6: The Business Plan

by Dan Robles on April 10, 2009

The objective of this series is to contain what we know about social networks within the construct of the financial system.  The intention is for knowledge to behave, and thereby trade like a financial instrument.  In prior articles, we discovered the currency, the inventory, the institutions, and the entrepreneurs of the next economic paradigm.  This module will construct the business plan:

A business plan is the blue print for the construction of enterprise.

Like the construction of any tangible asset, an inventory of parts is assembled in strategic proportions.  The ability to accomplish this gives the enterprise a strategic and competitive advantage in a market.

Business failures are knowledge failures

Most enterprises will emphasize design, or service, or performance or price in their proprietary secret sauce of market success.  The question becomes, what quantities and qualities of strategic components allow the new enterprise to create a positive economic outcome.

Most business failure are due to knowledge deficits such as the inexperienced management team, a poor assessment of market conditions, under estimating the amount of money needed, under estimating a competitor, loss of a key employee, or the poor understanding of the technology, etc.  These are knowledge problems not financial problems.

Prediction is the quality of knowledge:

To solve the knowledge problems is to decrease the risk of innovating and increase the predictability of innovations. To decrease the risk will decrease the cost, and increase the availability, of venture capital.  To increase the predictability would increase entrepreneurial activity.

The Unit Business Plan:

The business plan of the innovation economy is very simple; it starts with the single transaction between two people.  The lender provides information and the borrower combines the information with their existing knowledge to create more knowledge.  This single transaction has a value of 1 unit of currency and we call it a unit business transaction:

The Parallel Circuit:

Now we will assemble these single transactions in many combinations.  When we combine two unit transactions in a parallel circuit.  This represents a brain storming session between two people.

The Percentile Search Engine matches the person with the most worthy knowledge supply to a person with the most worthy knowledge demand. The transaction is a simple conversation and the outcome is a prototype process, system, method, or iteration.

The Series Circuit:

The next transaction type is modeled as two unit business transactions occurring in a series circuit.  This represents a product development cycle.

Each cycle of these transactions is an improvement to the business objective. Each time the transaction occurs there is a net increase of new knowledge and therefore an increase in value.  New options are created.  The conversation stops when the product is ready for the market, cancellation, or next physical iteration.

The transaction is recorded as an event between two known persons of known knowledge inventories.  The transaction is stored in the intellect of the participants and becomes their property in the form of a knowledge asset represented by the things they create with their knowledge.

The Social Network:

Now if we combine the parallel transaction with the series transaction we have what now looks like a network.  In practice, we know that strong networks of people freely exchanging ideas make organizations better, smarter, and more efficient.  Networks are where knowledge and community wisdom is stored. A network is fault tolerant, if one person leaves, the network survives. For a relatively small input into a network, we can produce a large output of new knowledge – we have a learning organization.

However, in society, these interactions are largely accidental; people meet at Church, Starbucks, and Social Events or by word of mouth. Other times, these interactions are concentrated inside a single community of very similar people such as a technical conference, group meeting, or lunch buddies and are often not well diversified.  More recently, interaction is self selecting through social media devices such as Twitter, Linkedin, Craigslist, Biznik, and Meetup, etc.

What if the social interactions could be made less random and more intentional?

Suppose interactions be designed with a specific purpose by the entrepreneur as a means toward producing a unique outcome. The Innovation Bank will combine people of complementary knowledge assets in a calculated manner in order to arrive at specific business approaches and applications.

What if Innovation could be made less random and more intentional?

The Multiplier Effect:

A special case business plan is called the Multiplier Effect. In effect, building a network of applications from a network of knowledge assets.

Suppose that a company owns composite material technology for use on aircraft.  Since the company specializes in airplanes, they have no intention of pursuing other applications such as recreational equipment, energy production, or health care products.

The Innovation Bank:

Suppose that the company could deposit this asset in a bank and collect interest.  The Search Engine can scan the business landscape to find persons or organizations with a worthy knowledge deficit in the area of your technology. The originator holds the option to see what those other companies invent and hold the right to use their new ideas in an aircraft application. 

Contracts manage those options.  Those contracts are social contracts and they can be traded.  They are a form of currency – or stored value.

In the event of a cyclic downturn, instead of “laying off” knowledge assets, people can work in tangential industries where they will continue developing – literally putting “Knowledge in the Bank” – to be called back to their original company when market conditions improve.  A mobile knowledge asset increases in value and continually becomes smarter and more productive over time. This is not socialism, this is not capitalism, this is Ingenesism - from the root word: Ingenuity.

Market Efficiencies:

With an innovation Bank, a company can reduce their Research and Development costs and create additional revenue in a tangential innovation market.  Millions of people are being layed off work from corporations – billions upon billions of dollars of innovation potential is being squandered.  With reduced cost and risk of innovation, The new American corporations will specialize in inventing, networking, and applying new ideas as their primary revenue source.

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The New Economic Paradigm; Part 5: The Entrepreneurs

April 9, 2009

There is no shortage of entrepreneurs in this world. 6 Billion of them wander the Earth looking for assets that exists at a low state of productivity waiting to be elevated to a higher state of productivity.

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The Next Economic Paradigm; Part 4: Institutions

April 7, 2009

In this module, we will discuss the institutions in social media that could keep an Innovation Economy, free, fair, and equitable.

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The Next Economic Paradigm; Part 3: Knowledge Inventory

April 6, 2009

Most companies have an inventory of every nut, bolt, rivet, or panel that they need to build something tangible. In innovation economy, we will need to have an inventory to assemble knowledge assets so that we can build something tangible

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The Next Economic Paradigm; Part 2, Currency

April 5, 2009

Everywhere people are trading information and ideas with each other at an incredible rate. All of this information adds up to something because obviously things get built and stuff rolls off the assembly lines. People act on information obtained from each other to produce things.

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The Next Economic Paradigm; Part 1

April 3, 2009

The Innovation Economy will not be delivered by corporations, Government or Academia. There no single person, country, ideology, or philosophy that can meet the challenges of the future alone – everyone will be required to participate because everyone has a stake in the outcome.

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