Wednesday, October 26, 2011

Time, Value, and the Answer - Part 1

Bob Fiske
May, 2009


Modern civilization has advanced the methods of accounting practically to a science.  The most developed accounting system we have concerns itself with money.  The simple view of financial accounting is based on the basic accounting formula

Assets = Equity + Liability

Each of these broad categories are typically broken down into finer and finer types.  (I call these "flavors of money".  Here is a little lecture I gave about financial accounting: accounting basics.)

Businesses are modeled on monetary accounting simply because this is a value that CAN be measured easily and accurately.  In this regard financial accounting is quite successful.

Financial accounting is formulated as a double-entry system in which monetary value is transferred between accounts.  When this happens, one account is debited while the second account is credited.  This system maintains balance and accuracy.  The monetary value of the debit equals that of the credit.  The sum total of the plus values equals that of the minus values.

An example from financial accounting is when I use an account representing one type of asset—“cash” ( in other words, liquid capital)—to buy items of another type of asset—goods to be re-sold.  The value of the asset account (e.g., a shoelace multi-pack crate) increases, while that of the first (cash) decreases a like amount.  Adding across the two sets of accounts produce a net change of zero, since the credit and debit values cancel each other out.

Given this, one might wonder how any company could produce a profit and stay in business?  Changes to the overall value of a business happen in primarily three ways.  First is the action called "markup".  In other words, I "buy cheap and sell dear"—what my customers buy must cost them more than it cost me to procure it.  Second, businesses pay out to cover their expenses.  When this loss is less than revenue from selling, the business posts a profit.  Third, there are payouts a business makes that are not balanced by receiving a reciprocal value in exchange.  Two examples are taxes and interest paid on loans.  Again, these losses must not dominate revenue if the business is to become profitable over the long term.

A broad rethinking of accounting systems would question the premises and ask, What's missing?  When we focus upon values for which there exist no common currency, then we must admit that we lack a method of accounting precisely because many value systems don't lend themselves to systematic numerical measurement.

What is the value of a hug?  How about a pet dog?  What is the value of the security of knowing you won't lose your job?  What is the value of dying without any regrets?  Can you measure the love between two people?  Can you put a number on the concern that all life on this planet might be threatened?

This opens the possibility that there are many types of value that color and flavor the "quality of life".  Imagine, then, how it would look to have an accounting system for these hard-to-quantify values that is of similar sophistication as the financial accounting system that is the mainstay of the capitalistic system.

So, imagine an accounting system (however crude) in which we could include and track the value of something as intangible as a hug?  We start by assuming that something is received as well as given.  For instance, what I give is a gesture of support and caring.  The value I receive is the pleasure that it gives me to hug and feel hugged back or the value of knowing that I helped somebody feel good.

Without, at this time, being able to specify how it is done, we will imagine that an intangible accounting system is possible.  In this system, it will be possible to evaluate items of value, assign a number to them, and balance the giving against the receiving.

In the case of money, the measurement system is “mathematically strong”.  It is what is called a ratio scale.  For example, it is always true that ten $1 items are worth ten times the value one $1 item.

The assigning of numeric value to intangible things such as hugs or security might require a weaker measurement scale than the ratio-capable scale that monetary value allows.

This is in the province of measurement theory.  In non-ratio scales it is not always true that ten 1-unit things have ten times the value of a single 1-unit thing.  After all, how many hugs can a person receive?  It becomes tiresome to receive hug after hug after hug.  The value of the tenth hug could be substantially less than the value of the first hug.

Nevertheless, this new currency would need to establish “value equivalencies” between one kind of intangible thing and another.  This could make it possible to conduct trades, even if the measurement scale is only approximate.  More on this, later.

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