Intangible Assets and the Financialized Business Enterprise: A Veblen-Commons Approach

Abstract:

In the Veblen-Commons view of the business enterprise as going concern, the primary goal of the enterprise is to engage in sequential acts of production through time. To that end, intangible assets play a crucial role in providing a differential advantage, granting the owners an income stream separate from normal activity that more easily allows them to achieve this purpose. Therefore, understanding the business enterprise from a Veblen-Commons perspective requires first and foremost an understanding of the way in which such assets confer this differential advantage. In doing so, two things become clear: First, such assets are grounded in law and accounting, and as such, any discussion of them must include a discussion of how they emerge in a legal process and how accountants treat them on the balance sheet. Second, as the enterprise evolves, so too does the form of the differential advantage. This article incorporates both of these points to provide a clear, coherent framework of intangible assets within the business enterprise from a Veblen-Commons perspective that can be used to understand a financialized economy.

Keywords:

• business enterprise
• intangible assets
• financialization
• Thorstein Veblen
• John Commons

JEL Classification Codes:

• B15
• B25
• L22
• O34

Notes

1 In this context, knowledge refers to what Veblen terms “technical knowledge,—knowledge serviceable and requisite to the quest of livelihood, comprising at least such elementary acquirements as language, the use of fire, of a cutting edge, of a pointed stick, of some tool for piercing, of some form of cord, thong, or fibre, together with some skill in the making of knots and lashings” (Veblen 1908a, 518).

2 This includes not only the development of tools, but also the creation of new resources. As stated in DeGregori (1987, 1247), “Resources are not fixed and finite because they are not natural. They are a product of human ingenuity resulting from the creation of technology and science.”

3 It follows that the expansion of the joint stock of knowledge also expands these parameters. This is done in two ways: diffusion, by which a greater portion of the community becomes more adept at utilizing the existing stock; or by invention, where new knowledge is created (Veblen 1908a). These processes are not separate; simply increasing the level of complexity of existing technology is not enough to improve the quality of life. This new technology must also be assimilated (Bush 1987).

4 Two things should be noted here. First, it is impossible to have tools without skills, or skills without tools. An airplane without a pilot is simply a pile of metal, whereas a pilot without an airplane cannot fly anywhere. This leads to the second point, which is that the application of technology depends upon the institutional setting and the value structure of the community. Neither the plane nor the ability to fly dictates whether the plane is filled with bombs or medicine before being sent to a war-torn area; the institutional structure and the values associated with the community do. This article makes use of the instrumental-ceremonial Veblenian Dichotomy as discussed by William Waller (1981), F. Gregory Hayden (1982), and P. Dale Bush (1983) to understand the value structure of the community.

5 Both, however, represent control over the joint stock of knowledge—who may use the mine and for what purpose.

6 More specifically, an identifiable asset “is separable (capable of being separated and sold, transferred, licensed, rented, or exchanged either individually or together with a related contract) or arises from contractual or other legal rights, regardless of whether those rights are transferable or separable from the entity or from other rights and obligations.” (IASB 1998, 3).

7 “Fair value,” as defined by accountants, is “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date” (FASB 2006, 5). It is, more or less, the value of an asset when marked to market.

8 Aristotle, in his discussion on natural and unnatural exchange, emphasizes this point as well. According to him, natural exchange represented the accumulation of goods for the purpose of satisfying one’s natural wants and desires—what we might call use value—which need not depend upon ownership rights beyond what is needed for consumption. On the other hand, any type of monopoly right, by allowing the owner to sell a good above cost, represents a pure exchange value, which promotes acquisitiveness and unnatural exchange (Aristotle [350 BCE] 1984).

9 Though, it should be noted, trade was highly regulated by guilds to ensure a “fair” trade between guilds and the general public (Heilbroner and Milberg 2012).

10 This idea of a patent being a tool for sharing knowledge is one of the main justifications for a patent system—trade secrecy does not promote cumulative innovation because any new knowledge is not made public. Patents, on the other hand, do promote this cumulative innovation by requiring disclosure of the knowledge embedded therein (Mazzoleni and Nelson 1998).

11 This, further, serves as the dawn of the mercantilist era as the state would grant patent monopolies to merchants in exchange for gold to finance colonial expansion (Sherman et al. 2008).

12 Some of this confusion may be related to the confusion as to how to account for assets in general, and whether they reflect property rights that may be exchanged for cash, or whether they reflect some abstract future benefit. For a more detailed description of how accountants have treated assets in general, see Sarah Williams (2003).

13 These four types of goodwill may be seen in conjunction with the three ways John Commons (1924) defines goodwill: Personal goodwill, business goodwill, and location goodwill.

14 Crutwell v. Lye, (1810) 17 Ves. Jr. 335.

15 Crutwell v. Lye dealt with disputed shipping routes, where Lye had sold his business at auction—purchased by Crutwell—to satisfy creditors. He then opened a similar business and operated on the same routes, with Crutwell asking for an injunction, arguing this damaged the goodwill of the company he had just purchased. Lord Eldon rejected the injunction.

16 Austen v. Boys, (1858) 27 L.J. Ch. 714.

17 Churton v. Douglas, (1859) 28 L.J. Ch. 841.

18 Commons identified three types of transactions: bargaining, which occur between agents of a social system absent any hierarchical structure; managerial, which are command-like that occur between a legal superior and a legal inferior; and rationing, which occur between the collective action—be it the state, the law, or any other type of accepted social rules—and members of the collective. To quote Commons: “Bargaining transactions transfer ownership of wealth by voluntary agreement between legal equals. Managerial transactions create wealth by commands of legal superiors. Rationing transactions apportion the burdens and benefits of wealth creation by the dictation of legal superiors” (Commons [1934] 2009, 68).

19 For more on the specific makeup of the going plant, see Dean (2013).

20 Indeed, as Commons pointed out, a hallmark of bargaining transactions is the existence of at least two buyers and at least two sellers (Commons [1924] 2007).

21 As will be noted in the next subsection, the maintenance of goodwill becomes a key activity for the business enterprise.

22 The relationship between the going business and the going plant takes the form of a managerial transaction, with the going business in the position of legal superior commanding the going plant (Commons [1934] 2009).

23 Two points should be noted: First the advantage given by the creation of bargaining transactions is still present; it is just no longer the primary focus. Second, intangible assets do limit the market to an extent in the first degree of separation, but this is, in the author’s view, not necessarily the primary cause of the asset’s differential advantage from a Veblen-Commons perspective.

24 Rationing transactions are defined as “the negotiations of reaching an agreement among several participants who have authority to apportion the benefits and burdens to members of a joint enterprise” (Commons [1934] 2009, 66–67). Key to this transaction is a legal relationship in which the legal superior has the ability to apportion these benefits and burdens while the legal inferior must accept this apportionment. In this legal relationship, patents are clearly a form rationing transaction, as they give the holder control over how production will occur, while non-holders accept these decisions. Market equities in the form of patents, then, also take the form of rationing transactions by defining roles in the market. Those with the right to sell output are given control over production and sales, while those without the right must either obtain it through licenses or follow such decisions.

25 Both Veblen and Commons stressed the importance of maintaining goodwill as the primary concern of the owner (Veblen [1904] 2013; Commons [1924] 2007). While this is done in several ways—customer service, maintaining a good public reputation, etc.—the most important is advertising. Advertising allows the enterprise to both obtain a consumer base and increase the cost of entry; once one enterprise advertises its products, all are required to do so or face the loss of market share (Veblen [1904] 2013; Galbraith 1958; Eichner 1976).

26 This has a number of implications for innovation and creative destruction as discussed by Joseph Schumpeter ([1942] 2003). For more, refer to Acs and Audretsch (1987), Acs and Sanders (2008), and Carlsson and Stankiewicz (1991).

27 To be clear, industrial production and the joint-stock corporation are intertwined as the financing of the large capital investments necessary for industrial production occurred through the sale of stock (Chandler 1977). For the purposes of this article, however, it is worth treating them separately to more accurately understand the role of intangible assets as market equities.

28 While Commons does not explicitly mention common stock, later writers such as Rudolf Hilferding ([1910] 1981) and Alfred Eichner (1976) would include stocks as a form of intangible assets, as shareholders are able to demand returns using the threat of liquidation.

29 It is recognized here that this transition to the shareholder value theory of corporate governance was neither an immediate nor harmonious transition. The reader is referred to Lazonick (2005, 2010) for more on this transition and its impact on the governing structure of the business enterprise.

Additional information

Notes on contributors

Avraham Izhar Baranes

Avraham Izhar Baranes is an assistant professor of economics in the Department of Business and Economics at Elmhurst College (Illinois). The author would like to thank Erik Dean, associate professor of economics at Portland Community College; James Sturgeon, professor of economics at the University of Missouri-Kansas City; Phil Kozel, associate professor of economics at Rollins College; and Ken Taylor, professor emeritus of economics at Rollins College, for their feedback and support during various stages of this project.