The term “Human Capital” was first used by Adam Smith in his seminal work “The Wealth of Nations” published in 1776, yet it has taken nearly 200 years to move into the lexicon of business management. Now that it has, however, we need to be careful how we go about implementing the concept.
Smith defined Human Capital as “The acquired and useful abilities of all the inhabitants or members of the society,” adding, “The acquisition of such talents, by the maintenance of the acquirer during his education, study, or apprenticeship, always costs a real expense, which is a capital fixed and realized, as it were, in his person. Those talents, as they make a part of his fortune, so do they likewise that of the society to which he belongs. The improved dexterity of a workman may be considered in the same light as a machine or instrument of trade which facilitates and abridges labour, and which, though it costs a certain expense, repays that expense with a profit.”
This is logical and consistent with the approach taken to other capital, and it is therefore rather puzzling that it didn’t receive the same degree of acceptance. Indeed the term does not appear to have been used again until 1954, and only appears to have become more popular with the publication of the book “Human Capital” by Gary Becker in 1964. Why it has taken so long and not been subject to the same accounting treatment could well be the subject of a thesis all on its own, and is certainly not something I wish to go into great detail about here. It clearly has been a complex subject, with enormous socio-political implications.
This can be deduced from the simple definition of the London School of Economics as, “The stock of expertise accumulated by a worker. It is valued for its income-earning potential in the future.” Also the 1998 OECD definition as, “the knowledge, skills and competences and other attributes, embodied in individuals, that are relevant to economic activity.” Both hint at the complexities of the subject, while the latter is evidence of both its political ramifications and increasing relevance.
Nevertheless, there is a danger of over-complicating things, and I believe that has perhaps been the biggest factor in the 200 year delay. The question of value is always a difficult one because it is always subjective. If you don’t believe me: which is worth more – a glass of water or a 27 carat, flawless diamond? Of course in normal circumstances the diamond is the obvious answer, but to a man stranded in the middle of the desert the glass of water could just save his life while the diamond would be worthless! When dealing with people, the question becomes even more thorny, because every individual is different and each will have their own idea of their value, so it becomes even more subjective. Furthermore, it has the same sensitivity to situation: an unemployed electrician would be worth his weight in gold on a space shuttle stranded in space with an electrical malfunction.
While it is impossible to anticipate every possible situation, at the end of the day, however, it has to be possible to have a standard that can be used as a starting basis for determining the value of an individual. After all, going back to the diamond, a carat is just a unit of measure for weighing it and comparing it with other diamonds. Its “value” still depends on a number of other factors such as the shape, the flaws and ultimately on the price a prospective buyer is willing to pay. No two diamonds are the same, but that doesn’t preclude us from putting a value on them. Why should people be any different?
The fact is that human capital does have a value: a principle that, as we have seen, has been recognised and accepted for nearly two hundred years. All that has been missing is:
• The standard of valuation;
• The sense of urgency to develop one.
The latter situation, evidenced by the growing usage of the term Human Capital, is changing rapidly, enforced by global competition, the pace of change, the ‘war for talent’ and the recognition of the importance of people to an organisation.
And now Zealise has created the former. It offers a basis for valuing people that can become a standard for the future. It offers all the ingredients essential to any valuation system in that it is:
• Logical
• Consistent
• Easily understandable and taught
• Measurable.
And, as with any measurement system, it isn’t the measure itself that is important, but the fact that it provides ready and relatively easy comparison. After all, “keeping up with the Jones” has always been relative perception rather than an absolute measure.
But, perhaps best of all, it doesn’t pose a threat to the people being valued, but, to the contrary, offers a basis for better fulfilling their own individual potential.
Clearly it is an idea whose time has finally come.