To continue the conversation from the last post, what is value and how is it interpreted? Through out the quarter we have learned about several models to help determine value of enterprises - five types of capital, discounted free cash flow, various valuation ratios. They all seem to be tied one way or another to a common denominator, which is often money.
We have read a number of theorists this year that explore value and its relationship to money. In David Korten’s article, “Defining a New Development Paradigm”, he says that the current way of measuring value is through money and that making more money is the sole purpose of firms and economies. Korten suggests that we instead use life as the definition of value and that the purpose of the economy and markets is to secure happiness and well-being for all.
Charles Eisenstein’s book Sacred Economics: Money, Gift and Society in the Age of Transition sees money as both a store of value and as a medium of exchange. Because money is both a store of value and a medium of exchange it can be hoarded (store of value), which makes it less available and then it loses it’s ability to be a medium of exchange (because the money is in a bank and not circulating).
Both these theorists (and many more) suggest that that money, in its current form, is not the best measure of value. Instead they suggest tying value to natural capital, or happiness. They want value to measure something that is intrinsically valuable to humans without the need to exchange it for something else. So when we decide to build up reserves of something we are actually building up reserves of something with intrinsic value, rather than simply a medium of exchange. The question is, what is a good universal indicator of value?
Should we look to various types of capital and use them to measure value - social capital, natural capital, or human capital? If we do that then we come up against further questions. What are universal elements of nature or society that we intrinsically value? Let’s take trees. Do trees have the same value in the Pacific Northwest, where they grew plentifully as they do in Iceland, where the growth is slow? What would happen if people bought and sold living trees? Who would manage the forests? What would happen during a forest fire?
When I apply these questions to an enterprise I find that things get very complicated when trying to determine the value of an enterprise in a global economy. Within a local economy where production, jobs, consumption and disposal occur within close proximity alternative forms of valuation could work. For example, a local Portland grocery store isn’t just creating a financial return for its investors, it is providing a marketplace for local organic farmers to sell their produce. Employees of the store are given excellent benefits and treated as co-creators rather than robots. These and many more elements of the business create value.
Yet, when we talk about assigning value to an enterprise that inherently means reducing it to a common denominator. And that means making assumptions and creating commonalities between businesses and wealth (social, environmental, financial) that they create or destroy. As Bert said during week 4 collaborate, the hard part about modeling the value of the company isn’t the modeling part it’s the assumption part. The assumptions that we select have a huge impact on how an enterprise is valued.
At this point in time, we assume that money is the best form of value because it is the most widely used. Until there is another widely accepted form of capital that people all people value, or can convert use to translate between values (much like currency exchanges) I think that the capacity for financial return will continue to be the major element in enterprise valuation.
