Innovation economics has a way of forcing us to look at the mirror image of conventional wisdom.  This article will look at knowledge assets as they might appear on an accounting balance sheet.  You may be surprised at what happens at the bottom line.

Wall Street will often reward a company that has a large backlog of orders. This can appear in the eyes of most observers as an asset. After all, who would not want a backlog of orders?  However, in the world of social media, a huge backlog causes a serious problem – it represents commitments made that have not yet been delivered. An unfulfilled promise in a social network is a liability and not an asset.  By extension, a backlog in an innovation economy is a liability and not an asset (note: climate change).

Applying conventional wisdom to an innovation economy, we find that most companies have an excellent inventory of the “liability” but a poor inventory of the “asset” that will execute those promises. All of their plans, specifications, blueprints, job descriptions, policies and procedures, etc., are liabilities in an innovation economy because these define the promise that is unfulfilled, not the asset that will fulfill them.

Until recently, companies assumed that the right knowledge assets will always be available – an assumption that for a long time has limited the level of productivity that humans can achieve, specifically, the sustainability of natural resources. The absence of a knowledge inventory limits the complexity of problems that humans can solve much like industry was limited to custom machinery before Eli Whitney demonstrated the concept of interchangeable parts less than 200 years ago.

Further, if the product line is expected to have a life cycle of more than a few years, the knowledge inventory must extend beyond the doors of the company and into the surrounding community.  Therefore, the knowledge inventory must take on the taxonomy of the community, not the taxonomy of the corporation such as skill codes, levels, titles, etc. The requirement is now clearly in the domain of social networks.  Yet, I still hear grumblings in the blog sphere that social networks cannot be monetized – nothing should be further from the truth.

So, let’s talk about the bottom line.  For example, Boeing announced today that their greatest future challenge would be the availability of engineers. Boeing has a market capitalization of $34B and a $300B backlog.  Money has a 10:1 multiplier as it travels through and economy.  For a balanced accounting statement, what would be the real value of a social network that can capture the correct knowledge inventory to support Boeing; 34B, 300B, or 3T?

In general, valid estimates of the bottom line can vary by 2 orders of magnitude depending on the point of view of Wall Street, corporate management, or the social network community.  Who would be the better steward?


There is an ongoing discussion about the rating system for articles posted to a business oriented social network site that I belong to.  While am not part of the discussion, my one and only post to that site had been rated very low despite the fact that I am recognized internationally in the subject matter of that particular article.  I stopped posting articles to rated sites because the rating systems are flawed at the core of logic – Frankly, it’s too risky.  As the creativity, originality, or controversy of the post increases, the disincentives to sharing it also increases.  I don’t want my customers googling me to see this rating without also being able to google my reviewer.  No sour grapes – I’d wear a D+ from Stephen Hawking as a badge of honor.

The objective of any business/social network in today’s world should be to make human knowledge more tangible outside the construct of the corporation, such that it emulates a financial instrument – at the end of the day, it’s about the money.  Otherwise Social Networking amounts to active recreation – like guitar hero, or tubing; fun but somewhat trivial.

ALL financial instruments, without exception, are described in terms of a quantity and a quality.  ALL quantity and quality measures for financial instruments are statistical in nature – that is, they fall on some kind of “bell curve”.  This is true for EVERYTHING from a stock valuation to credit score to marketing demographics to health/home/life/car/business insurance, baseball players, GPA,  etc. – the bell curve is ubiquitous.  Whoever is not minimally familiar with the simplest basic concepts of a Normal  Distribution, et al, is at a severe and unfortunate disadvantage in the innovation economy. This is how the world of money is organized, this is what money is, this is what Wall Street does – for better or worse, like it or not….it is what is.

One obvious failure of most Social network rating systems is the linear 1-5 “stars”.  If there were 6 stars then at least we could have a leg up on applying the most valuable mathematical tools available from the world of wealth and value creation (hence, Six Sigma).  Second – the bell curve is not linear and the reviewer needs to be aware of this. 6 stars would mean that a post falls (in some measure) between 97%-100% of all similar level posts ever read by the reviewer. 5 stars falls in the 85%-97% range; 4 stars, 50%-85%; 3 stars, 35%-50%; 2 stars, 3%-15%; 1 star 0-3%.

If Calculus isn’t your thing, consider this – the bell curve rating system makes the reviewer really think about who they are in the process, the responsibility they hold in the rating of others, and the implications of their ratings – too high, or too low.  It would be good to know how many articles the reviewer has read and rated, the average of their ratings, as well as their own rating on articles published (is this staring to sound like EBay? – it should, at 25B market cap, they’re not silly people).  Social accountability does wonders for market efficiency and wealth creation.

Social Networks are ideally suited for correctly rating their own knowledge inventories so that when their members go out in the new world trying to make a living, it is known to all that they have been vetted by a respected community.  This increases the value of the member and it increases the value of the community in the market. Communities that empower and release great talent to a market actually empower themselves; Harvard, GE, Frank Zappa.  This has happened at the local level since the stone ages.

What about our competitive instincts? There can only be one winner and the rest are losers, aren’t all good Capitalists supposed to decimate thy neighbor? Always remember, it is all about the perfect combination of average assets, not necessarily the single excessive asset that makes product most valuable in a market.  The market for Toyotas is far greater than the market for Ferraris, yet each are competitive in their respective market.  The studies of ‘beauty’ discovered a collection of perfectly average features – in the eye of the beholder, consistent with balance and harmony.  So we’ll need to drop the win-lose culture on this one and worry about competing with the real threats that lie before us.

Sure, most people will complain about such a system because it is too complicated, too math-ish, not the easy tweet (OMG CUL8R!). But this is the reality of how money is organized – and disorganized (did I mention Wall Street yet?). There is no exception, there is no rational alternative – the world does not care if people agree with the way things are or if they understand the math.

Fortunately, once people learn to roll over this metaphysical speed bump, the rest is real easy as a vast world of possibility for generating extreme wealth in social networks will unfold before our eyes!!  Knowledge tangibility is the Holy Grail of modern finance but Social Networks are at risk of squandering this unique and historical opportunity to paint this empty canvas in their own image.  Act now, please – this chance may never happen again.


If we combine the parallel transaction with the series transaction we have what now looks like a neural 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 wisdom is literally 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.

Suppose the interactions among people were not random, instead, they could be designed by the entrepreneur to produce 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.

A special case of the above business method and resulting social network is called the Multiplier Effect. A financial bank enjoys a multiplier effect with the ability to lend the 10 times more money than they hold in reserve. Money changing hands has a multiplier effect on an economy. Again, financial analogies hold.

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

Suppose that the company could deposit this asset in a bank and collect interest. The Search Engine can scan the business landscape to find companies with a knowledge deficit in the area of your technology and make loans of your technology. As the originator, you have the option to see what those other companies invent and you hold the right to use their new ideas in your aircraft application.

With an innovation Bank, you can reduce your Research and Development costs and create additional revenue in a tangential innovation market. With reduced cost and risk of innovation, you are likely to specialize more and more in innovation as your enterprise. In the event of a cyclic downturn in the business of an originator, 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 when market conditions improve. A mobile knowledge asset increases in value becoming smarter and more productive over time.


So now, what are the entrepreneurs going to do with this percentile search engine?

Entrepreneurs wander the earth looking for valuable things that are being used at a low level of productivity and they move those assets to a higher level of productivity and then pocket the difference, called profit.

Think pet rock, condo conversions, sand, corn, etc.,…it goes on forever.

The entrepreneur needs to have a clear view of what the asset is, the lower level of productivity, and the higher level of productivity of the asset. These three elements are the focus of all business plans. Then they set things in motion and give life to the market system.

When we look at financial banks we see the classic entrepreneurial activity. In the simplest form, banks do little more than find people who have a surplus of money and they match them with people who have a deficit of money.  Bankers have a clear view of the asset, the lower level of productivity and the higher level of productivity for the asset.

They pay a lower interest to the depositor than they do to the borrower and pocket the difference. In addition, they enjoy a multiplier effect that allows them to lend the same money many times effectively creating money from a promise to pay, or debt.

It is in the best interest of the bank to find rich people who will not need their money for a while, and poor people that have the best likelihood of paying the money back in time. This is to minimize the risk that the depositor will pull out their deposits and the risk that the borrower will not pay back the loan. The problem is that some assumptions need to be made, some of which may no longer be valid:

The bank assumes that the borrower has the knowledge required to execute the business plan that they are financing. Unfortunately, the credit score does not predict knowledge on future ventures.  For this reason, new ventures are not easy to finance.

The financial bank makes the assumption that the entrepreneur has the knowledge to execute a business plan that they seek money to fund.

On the other hand, the Innovation Bank makes the assumption that the entrepreneur has the money available to execute the business and is searching for the knowledge to do so.  This service will be required in the innovation economy since no single person can live long enough to possess as much knowledge as is required to manage the complexity of problems that face the World. We will need to mind meld.

The Innovation Bank simply matches most worthy knowledge surplus with most worthy knowledge deficit and a market is born.

The challenge for the innovation Bank is to match the most correct knowledge surplus to the most correct knowledge deficit. This is accomplished with the computer enabled knowledge inventory. A search can be conducted of the supply and demand for knowledge assets. The Percentile Search Engine will calculate the probability that the specific business objective will be successful.

The business plan for the entrepreneur is very simple but the implications are vast.


The Percentile Search Engine is a way of using a computer to make predictions about all types of combinations of knowledge Assets.

Conceptually, the percentile search engine is where all of the equations that we use to analyze financial assets are now applied to knowledge assets. The main characteristic is that the Percentile Search Engine returns probabilities – that is, what’s the probability of success for any number of scenarios.

For example; an entrepreneur may want to know if her team has enough knowledge to execute a business plan. Maybe the team has too much knowledge and they should try something more valuable. Maybe the team does not have enough knowledge and they should find someone else, take training, or try something simpler. The Percentile Search Engine can look into the community and identify the supply and demand of a knowledge asset. If it is unavailable or too expensive, the Percentile Search Engine will even tell them what training they need to increase their probability of success.

The entrepreneur may also want to determine what competitors have a dangerously high probability of competing with her new business. The Search Engine will allow competitors to scan each other’s knowledge inventory to determine how long it would take for their secret sauce copied. They can take then choose to take evasive action, compete, or cooperate. If a key person retires, the entrepreneur would simulate the knowledge that is lost and reassign people strategically. All of these scenarios can be examines prior to spending money. They can be made during the project cycle, or after the project is completed. Lessons learned can be used to adjust the algorithm perfecting it over time.

While companies such as Disney and Boeing both use Engineers, each would have proprietary combinations of knowledge that represents their “secret sauce” of success. These recipes can be adjusted and improved to reflect the wisdom of an organization.

Over time, these algorithms will far more valuable then the Patents and Trade Secrets created by them – this will allow technologies to be open sourced much more profitably and shared across more industries.

Literally thousands of new business plans will emerge from this important new paradigm. Knowledge will become tangible outside of the organizational construct of the corporation. Knowledge combinations will become the new corporate structure. The rate of change of knowledge with respect to time is the key metric and fundamental building block of the innovation economy.


Suppose we used the Dewey Decimal System to write a resume. A person could be described as a series of numbers instead of words and computers can search the numbers as they do key words today.

For example: 302, 307, 330, 607, 17, 500, 519

This person has experience in social interactions, communities, economics, educational research, ethics, natural sciences, statistical analysis

While memories of high school librarians may make us cringe, the computer loves numbers and classifications in this format. This will be important especially where knowledge is very specific. However, this simple list of numbers does not capture the knowledge of a person any better than the flawed “key word” search system that we are trying to replace. So we need to do something more.

If your mind were a library and you attempted to map it all out, one would see that everything is related in some way – intuitively, this is what defines you. If we looked at your brain, we would discover a huge network of experiences, relationships, books read, lessons learned, and people encountered. We would find a system of knowledge rather than random facts. Your likes and dislikes would be reflected in what you do and do not want to do. Everyone is different – nobody is the same. Everyone innovates, everyone has knowledge, and everyone shares information.

Somehow we need to reflect this on our computer readable resume.

The Universal Decimal Classification (UDC) System was built on top of Dewey for precisely this reason, to catalog complex and dynamic knowledge. The UDC system uses symbols to connect and relate the categories.

• Addition (+) allows for a string of subjects to be listed together.

• Forward slash (/) defines a range – or a “system” of subjects matter.

• Colon (:) identifies categories that are related like; sports and medicine, ethics and law; innovation and economics.

• We can even employ Boolean Operations such as IF, AND, OR, NOT statements. For example; we can say Polo IF Horses NOT water OR trade marks

• In a Global Economy, we can employ language and culture assets as well.

Now, we have a system of numbers and symbols represent the knowledge of the person.

For example: {20,12};[302+307], (330):[607+17]+[500/519]

Now we see that a computer language is emerging for human knowledge. This “resume” is for a specialist in Social systems and communities of practice. Knowledgeable in economics related to educational research, ethics, and natural sciences. They also employ statistical analysis in their work and can do it all in either English and Spanish

This is starting to demonstrate several key advantages:

1. It is Infinite and expandable to any field of knowledge
2. Paints a picture of knowledge not simply a list of information about a person.
3. Machine programmable and machine readable.
4. knowledge of several people can be combined to represent the knowledge inventory of a team, group, or company

We are getting closer to the elusive true “Knowledge Asset”. Part 3 will demonstrate how knowledge can be made to look like a buck, walk like a buck, and quack like a buck.


We identified the 5 essential elements of a market economy. Then, we discussed the currency of the Innovation Economy; people trade information and turn it into knowledge and new ideas using factors of production; Intellectual Capital Creative Capital and Social Capital. Now we’ll discuss the inventory strategy for knowledge assets.

Most companies have an inventory of every nut, rivet, or panel that they need to build something of value. Innovation Economics will be no different – we need an inventory of knowledge in our community so that we can build things with it.

Google and Wikipedia offer us a huge inventory of information – we read that information and turn it into knowledge through a mental process. Since knowledge can only exist inside people, we need a catalog of what people know. Our Knowledge inventory must be able to catalog and classify all human knowledge from the past, present, and future. It must account for Intellectual Capital, Social Capital, and Creative Capital. If done correctly, our knowledge inventory will begin to take on the characteristics of assets – knowledge will look like money.

Suppose that we say your resume is like a book about you. This isn’t too strange since every book that you have read has become part of your knowledge inventory. Every conversation with another person has become part of your inventory. Every new idea that you have tried, successful of failed, is part of your inventory. The things that you like to do, things that you do not like to do, and things that you do not know are part of this inventory as well.

The Dewey Decimal System is a way to catalog information. Even though Dewey is somewhat archaic, it provides a good example of how a knowledge inventory should be structured. Entrepreneurs will improve it if needed – so let’s just understand the concept for now.

For a quick review, the body of written information is divided into 10 main categories. Each main category is divided into 10 more categories and each of those are divided into 10 categories – and this can go on forever. For example, the term 519 identifies a piece of information. The main category is 5 = natural sciences, sub category is 1 = mathematics, and the next sub category is 9 = probabilities. So to have the number 519 on your resume says that you have knowledge and can solve problems related to probability and statistics.

You will also notice that some Dewey categories favor Social Capital, some favor Creative Capital, and some favor intellectual capital. While a knowledge inventory may sound daunting, computers and modern Internet applications can now do much of the work for us – in fact, they already are doing this work.