"You've GOT to be kidding!" I told the voice on the phone. She had called me at dinnertime to tell me she would cut off my credit line if I didn't make a payment the next day. "Do you know how rich I am? I may not have any money, but I am…an intellectual capital millionaire! I have a doctorate in economics and a Phi Beta Kappa key. My wife studied psychopharmacology, plays the flute, and speaks French. And on my family balance sheet my five children have already capitalized one Ph.D., two and a half bachelor's degrees, three prep school degrees, and two fancy East Coast private-grade-school honor-roll certificates. We have books all over the house and our own Web site, sophist.com. We recycle everything. We value diversity. My children have studied Latin, for crissake. And with all this intellectual capital, you want to cut off my credit card?"

"With all that intellectual capital, maybe next time you can figure out how to pay your bills," she said, and hung up. Bitch! This argument, or some variant of it, is the mantra of knowledge workers, knowledge consultants, chief knowledge officers, and New Age knowledge accountants who have figured out there are big bucks to be made in intellectual capital--or simply IC to those in the know. Like professors everywhere, they argue it is time for society to recognize the value of people who are smart rather than those who create profits, both at cocktail parties and on a company's financial statements. And they want every company in America to have an IC strategy, which they will help you create and implement.

After reading the academic papers in the field, I have formalized a strategy that I can recommend without reservation: If you meet people who have the word knowledge anywhere on their business card, don't give them any money! Just walk quickly and quietly away. At best, IC will bore you to death. At worst, IC is a potential Trojan horse for those who want stakeholders, not shareholders, to control our companies, and social agendas, not performance, to drive business decisions. Early signs that the IC mavens have captured the attention of officials at both the SEC and FASB (Financial Accounting Standards Board) mean it is time to drive a stake through the heart of this movement now, before any real damage is done.

The most troubling idea of the IC generation is to tinker with financial statements, so companies full of smart people who don't make profits look more attractive to investors. Some want to include the capitalized value of workers' ideas on the balance sheet. Some want to include cultural factors, such as the gender composition of the workforce, as if it is somehow a driver of the profitability of a company. And some want to use measurements of intellectual capital to influence the credit markets or public policy. Anyone who has ever attended a Mensa meeting can see the fallacy of this idea. There is a big difference between smart and effective, and I'll take an effective person over a smart one any day.

The leading advocate of balance sheet diddling is Leif Edvinsson, director of intellectual capital for Skandia, a large Swedish financial services and insurance company. (Yes, the same Sweden that brought us the welfare state, Volvos, and socialized medicine.) He and his colleagues at Skandia built a model that at last count had 164 different variables, not including subcategories, to explain and measure intellectual capital. It must have been a long night when they thought all those things up, because toward the end they had to use "share of employees under age 40 (%)," "number of women managers," and "average age of employees" to pad the list. I can't even imagine what they had in mind with those ideas.

Monkeying with financial statements, for almost any reason, is a terrible idea. Investors have 500 years of practice interpreting financial statements while learning to understand, project, get comfortable with, and value our more than $60 trillion in total assets. In doing so, they have developed methods to adjust for many of the anomalies (for example, amortization of goodwill, which can only be defined by describing what it is not) that emerge from our archaic double-entry bookkeeping practices from time to time. Scrambling the financial data we use to make such judgments would render these methods less useful. It also would throw up a cloud of uncertainty large enough to make owning assets more risky, and therefore less valuable. Giving people more information is fine: they can make their own judgements. Tinkering with the balance sheet is not a good idea.

Although intellectual capital is important (who would doubt that people who know how to do things are more successful than people who don't?), it should be left off the balance sheet. Balance sheets are for stuff, the stuff that George Carlin talks about, not people or ideas. People aren't assets because you can't own them, at least not in this country (I'm neglecting alimony here); you can only rent them. Ideas are not assets because, partly due to the fact that the people who generate them can't be owned, you can't keep them bottled up for very long. (Except for the secret formula for Coke, that is.) If you want to measure the value of people and their ideas, you need to look at cash flows, not assets. Balance sheets measure the value of things you own; cash flows measure the value of things you rent. Unless we return to conditions in the antebellum South, this will remain true no matter how many computers we have on our desktops or how fast they run.

IC evangelists make two fundamental claims. They claim that knowledge is accelerating at such an incredible rate that our brains are going to explode if we are not careful. (Stand back, I'm getting smarter.) And they claim that financial measures have become useless and obsolete because the value of intellectual capital is growing so fast it is swamping everything in determining the value of today's companies. Don't believe them on either count.

Their first point is naïve, as Daniel Boorstin details in his fabulous books The Discoverers and The Creators. There have always been very smart people who have worked hard to learn as much as they could during their lifetimes; knowledge wasn't invented in our lifetimes. Although I have never met my personal Dream Team, I am confident that if Leonardo, Locke, Newton, Laplace, and Jefferson found themselves in Silicon Valley today, they would get along just fine.

Nor is the speed at which information flows a new phenomenon. Sir Arthur Conan Doyle wrote about five daily mail deliveries in greater London in the 19th century, not to mention the telegraph and Holme's real-time messenger boys, who were human precursors to the Internet. Short travel distances between cultural hubs (Florence, Vienna, Paris, London) and competition among royal patrons for the talents of creative people led to a great deal of interaction among artists, writers, scientists, and inventors since the time of the Renaissance. And the idea that intellectual capital has value is not new. In 1839 the French Academy of Sciences arranged for the French government to purchase Louis Daguerre's secret process for fixing an image on a plate of silver, or daguerreotype, in exchange for a lifetime annuity for the inventor, then gave the idea to the public at no cost. The idea quickly spread across Europe.

The second point, that IC is becoming so valuable that it renders balance sheets obsolete as a measure of a company's value, is irrelevant. Balance sheets were never intended to measure the value of a company, and they are not used for that purpose by serious investors. At best, balance sheet measures give an investor a rough idea of the value that can be realized by killing a company, breaking it up, and selling it in pieces, and then only after careful scrutiny. It's like saying the value of a human being is $2.89, because that's all the component chemicals in our body would fetch in the marketplace. The value of a business as a going concern is determined by its cash flows or profits, not by its assets.

That something is afoot in the capital markets, however, is undeniable. The ratio of the market value of companies to the market value of their physical or tangible assets--which can be referred to as Tobin's Q-Ratio--has increased significantly since 1981. Some portion of this certainly reflects the claims of intellectual capital wonks that brainpower is replacing property and equipment as a generator of income and wealth. This is especially true of the high technology industries--known as bugs, drugs, and plugs among venture capital types--that have sprouted over this period.

But it also reflects two parallel trends. The first is falling inflation. Since 1981, lower inflation and lower income tax rates have caused investors to radically rebalance their portfolios, shifting more than $8 trillion of wealth from tangible assets such as real property into securities. This rebalancing pushed stock and bond prices higher--i.e., interest rates lower--than they had been in the preceding decade, relative to the prices of tangible assets. This was responsible for a large portion of the Q-Ratio's improvement.

The second trend is toward more-efficient financial markets, by which I mean markets that allow people to value, buy, and sell income streams in the capital markets. Falling inflation erased the endless income streams--in the form of price increases--the world had learned to enjoy spending, and created a systematic shortage of future-dated incomes for investors. Investors, in turn, bid up the prices of income streams, from bonds to equities, especially growing ones such as high tech firms. It is these scarce, growing income streams that form the basis of the high book value multiples being accorded to high technology companies in the stock market. In principle, the book value of a highly dependable income stream could be infinite if it used no physical capital to operate. (You could create such a company by selling all the operating assets of a company like Coca-Cola and renting them back to run the business.) Perhaps ironically, we owe the ability to value and trade unsecured income streams to Michael Milken and the junk bond market of the 1980s.

The real question posed by intellectual capital is not one of measurement or financial reporting, it is how to manage the companies. To the extent that today's technology companies derive their value in the capital markets from distant income streams that depend on a continual introduction of new products created by a large group of very smart people, managers must deal with a serious sustainability question. How are they going to hold the people together long enough to accomplish their objectives? Since they can't own the "assets"--the people who think up the ideas--the next best thing is to have the people own the income streams created by their own efforts. In technology companies, broad and deep employee stock ownership is extremely important.

With that in mind, we should ask ourselves what an investor should know about a company's IC before investing in the company. At the top of my list would be information about the long-term incentives of the people who run the organization. I'd want to make sure that more than half their total pay was determined (both up and down) by performance, and that managers were at risk in the company's stock. It may take a village to raise a child, but it takes an owner, not a salaryman, to build a company.

Why worry about this stuff at all? Because the advocates of IC voodoo are working hard to capture the ear of the regulators (read "political appointees") who control the country's security markets. And they are having a lot of success doing so, as indicated in recent statements made by SEC officials. As Michael Malone, one of the IC gurus, recently wrote, IC is "not merely a new model for valuation, but a new arbiter of value…..Intellectual capital renders a moral judgment on what is good and proper behavior. In doing so, intellectual capital establishes a whole new set of images through which to order the world, and to determine what behavior will be valued and rewarded and what will be dismissed and punished." Frightening words. When I look back on government attempts at behavior modification in this century, where a small group of people are able to unilaterally impose their values on other people, I see very bad things. Words like Malone's are very frightening.

Sooner or later a consultant is going to knock on your door and offer to sell you a seven-figure (state-of-the-art) project to map your company's intellectual capital. When he does, sit him down, give him a cup of coffee, and offer him a job on the loading dock. It may not be too late for him to learn what intellectual capital is really all about.