On Human Capital

An organisation is only as good as the people within it. Seems like a pretty straightforward idea, right? People gripe about bad customer service at the drop of a hat, and TripAdivisor is full of praise for the places where staff go that extra mile to make sure you're happy.

But the notion that a healthy business entity is in some part defined by the quality of its staff is a comparatively new idea, only really coming along in the 1950s. It's called human capital, and it's part of the reason that ethical business practice puts so much stock in a healthy, happy workforce.

Wikipedia says:

"Human capital is the stock of knowledge, habits, social and personality attributes, including creativity, embodied in the ability to perform labor so as to produce economic value."

Although the notion of a workforce being part of the essential resources of a business dates back to the eighteenth-century writings of Adam Smith, the term only really became acknowledged by economist Arthur Lewis in 1954. The phrase moved into common usage ten years later when Theodore Decker published his book Human Capital.

Initially, human capital was viewed in the same way as machinery or premises–a fungible asset, although not one that could be easily bought or sold (in fact, according to Marx, it's impossible for a worker to sell his or her skills–they can only lease them out). You can invest in human capital, through things like training and medical aid, and your output depends to an extent on your people working smoothly. In other words, your workforce is simply another means of production. Why do you think it's called Human Resources these days?

The trouble with that broad definition is pretty simple–you can't treat people like machines. Notice the word that jumps out at you in the Wikipedia definition above. Creativity. That's not something that can be easily quantified, or even modelled. You simply can't build creativity to order. Human creativity and other so-called "intangibles" like leadership and talent make the whole theory increasingly tough to pin down. Many economic and social theorists see huge holes and gaps in the idea of human capital, and the field has become wildly complex as new ideas emerge to fill in the gaps.

The one thing that is not up for argument is that the human component of any business is the most important part, and that it is a foolish manager that does not try to keep it in balance. But of course, none of this is isolated to the workplace. Healthy and well-educated people in society at large make for a better workforce. Look at India, where improvements in health and welfare have seen an explosion in human capital. That expansion has led to exploitation, of course, but also to a workforce less tolerant of poor treatment, with the skillset and technological nous to seek out better employment.

The notion of ethical employment is deeply tied into theories of human capital and is a subject that's constantly in flux. I realise this is a very shallow dive into a very deep subject. One thing's certain. It's vital for the big brands that I so often criticise on this blog to understand that the human component of their organisation is essential for continued growth and profitability. And that applies to everyone from the CEO to the humblest machinist.