Thursday, December 15, 2011

The Faulty Thinking Behind "Human Capital"

I take a generally negative view of the term "human capital." The expression came into vogue as a way to emphasize and to attempt to capture the value of people. It seems that if something doesn't have a monetary value attached to it, then we cannot conceptualize its importance in business. I fully understand the value of people; after all, that is what this blog is all about, but I do have concerns about the term and its implications in how we think about people in our organizations.

The term "capital," according to is defined as:
  • Cash or goods used to generate income either by investing in a business or a different income property
  • The net worth of a business; that is, the amount by which its assets exceed its liabilities
  • The money, property and other valuables which collectively represent the wealth of the individual or business
Following this definition, human capital would be one of the "other valuables."

There is not complete agreement on the definition of the term 'human capital." Sometimes the term "human capital" is used almost interchangeably with the word "people." It may also refer to the productive output of the person or to the set of skills a person has that increases the economic value of that person.

But the important point is that the "capital" if you choose to call it that is inseparable from the person. Therefore, you can invest to increase the value of the person, but since slavery is no longer legal, you can't own the person that controls that value. Even if you rent, borrow, lease or purchase the capital for a period of time, you have only so much control over the value of of the output you receive. The person can control the amount and quality of what they produce for the organization. They control how long you have access to their knowledge, skills and abilities. When the employee leaves, so does your investment.

For us as business people, the key is to find a way to get the employee to choose to put forth their full effort to invest their capital in our organization. That is the bottom line for business and what we'll discuss going forward.

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