Amazingly, for a country with a well-developed capitalist economy, few Americans today can accurately explain the concept of "capital" and how it relates to value creation. Applications of the term proliferate today as we try to describe varying characteristics of our potential wealth. We speak of human capital, intellectual capital, social capital, and so on.

The emerging recognition of new forms of "capital" has largely been an effort to account for the huge growth of intangible value recognized in many businesses. Karl-Erik Sveiby, a leader in the new field of knowledge management, describes the phenomenon by reference to computer-chip maker Intel. In 1999, Intel had an actual tangible market value of around $17 billion. Its market value, however, was nearer $93 billion. Accountants can only capture this discrepancy in value as "goodwill," but what exactly is this goodwill and how can it be managed?

We believe that use of the term capital to try to describe the intangible value uncaptured by traditional accounting practices leads us further from understanding how value is actually created.

In The Mystery of Capital, Hernando de Soto points out the importance of distinguishing between capital and the assets that underlie the value creation process. De Soto traces the concept of capital and reminds us that it connotes the creation of surplus value from an asset: that is, value that exceeds the face value of the base asset. For example, your home represents a fixed asset of a certain value. This value only becomes capitalized when you use the value of your home to finance additional production, such as by increasing the value of your home by an addition or using the value of your home as collateral to finance the launch of a new business.

This means that on their own, accumulated assets are not the same thing as capital. De Soto tells us that "capital is not the accumulated stock of assets but the potential it holds to deploy new production." Capital, in other words, is an abstract concept for value-creating potential, and according to de Soto this concept must be given fixed, tangible form to be useful. Today, we consume money for capital, but money is only one of many vehicles for the transfer of value.

What we need to recover is an understanding of how the value-creating potential of assets (the proper definition of capital) can be applied so as to enable surplus value creation. De Soto reminds us that value creation is a human process. He likens it to the process an engineer uses to capture potential energy from a lake by building a dam to harness the kinetic energy of falling water, then translating it to electrical energy that can be widely distributed far from the geographic location of the lake. The addition of value did not exist in the dormant waters of the lake, but was created only when a man-made process extrinsic to the lake activated the potential energy of the water.

Capital, like energy, is also a dormant value. Bringing it to life requires us to go beyond looking at our assets as they are to actively thinking about them as they could be. It requires a process for fixing an asset's economic potential into a form that can be used to initiate additional production (Hernando de Soto in The Mystery of Capital).

We believe that what holds for corporate capitalism will also apply to free agent capitalism. The opportunity is to help highly motivated and skilled entrepreneurs go beyond looking at their personal assets to thinking about them as they could be.

Sveiby suggests that there are essentially three kinds of intangible assets that help comprise the "goodwill" found in so many companies today: individual competence, external structure, and internal structure.

We believe that individuals possess these same types of intangible assets and that by identifying these assets (the Life Value Code^TM), the entrepreneur can begin to think more strategically and more creatively about how they are used.