Democrats & Liberals Archives

Human Capital Formation

We are bombarded with talk about cutting taxes on investment, not only by tax reform organizations, but also by so-called capital formation organizations. You cannot build up capital if you don’t make it easier to invest, they say. Capital formation is the primary source of economic growth and prosperity, they say. They do not say that investing in human capital is just as important or perhaps more important than investing in so-called capital equipment.

Republicans love tax cuts, especially tax cuts for investors. They have arranged the tax code so that even Warren Buffett thinks it is unfair that his tax rate is half the tax rate of his secretary. Why is it half? He earns money from making investments and she makes money by working.

Furthermore, when money is invested in machinery, the company receives all kinds of reductions. What does the company get when it invests in people? Nada. Why no human capital formation?

VeraSage Institute talks about human capital:

The term human capital was first used by Nobel Prize—winning economist Theodore W. Schultz in a 1961 article in American Economic Review. His basic thesis was that investments in human capital should be accounted for in the same manner as investments in plant and machinery.

Peter Drucker, the business sage everybody quoted when he was alive, said:

In the knowledge society, the most probable assumption for organizations—and certainly the assumption on which they have to conduct their affairs—is that they need knowledge workers far more than knowledge workers need them.

In other words, to be competitive we must concentrate more upon human capital formation. How do we do this? In his book, "Return of the L Word," Douglas S. Massey refers to the "capabilities approach," first advocated by Amartya Sen and Martha Nussbaum - a list of 10 human capabilities or capacities:

  1. Capacity to live out a normal human lifespan
  2. Capacity to be healthy during this lifespan
  3. Capacity to control one's own body
  4. Capacity to use one's senses to imagine, think and reason
  5. Capacity to form emotional attachments with other things and people
  6. Capacity to form an individual conception of what is good and moral
  7. Capacity to engage in social interactions with other human beings
  8. Capacity to love sustainably within the natural world
  9. Capacity to laugh, play and enjoy recreation
  10. Capacity to control one's social environment, politically through participatory government and materially by enjoying rights of property and full access to markets
In plain language, employees are not commodities to be bought and sold like paper clips. They are flesh and blood human beings. Human capital is built by enhancing these capacities in employees. This is why Drucker called them knowledge workers.

VeraSage also quotes Steve Jobs, whose achievements depend on excellent use of human capital:

It doesn’t make sense to hire smart people and then tell them what to do; we hire smart people so they can tell us what to do.

We need to advance human capital formation. We need education, health care, recreation, safety nets, excellent environments and of course, good pay, to build our human capital. We must depend on the minds of employees, working singly or together with others, to achieve innovations that may lead to future success.

Enough of this blindly reducing taxes for the use of more machines, more automation. We must enact tax cuts for corporations that know how to use human capital. Human capital formation is the answer to the problems of globalization.

Posted by Paul Siegel at January 15, 2007 5:47 PM
Comments
Comment #203438

So Paul,

To a great extent, I agree with your premise. It does make sense to invest in human capital. One question: What kind of tax cuts would have in place for companies and corporations to make the investment? You have proposed a strategy, now how about some tactics.

Posted by: John Back at January 15, 2007 9:24 PM
Comment #203448

I agree to, to invest in human capital. Education is a beginning. With all the high tech equipment we have now companies are going to have to educate their employies to operate the equipment. Some companies already do this. But what about the people that don’t want to learn? What about all those that are satisified working their minimum wage jobs? What about those that just want a free ride?

Posted by: KAP at January 15, 2007 9:54 PM
Comment #203454


Today, it is much cheaper for corporations to invest in human capital in China. May be some day in America.

Posted by: jlw at January 15, 2007 10:16 PM
Comment #203458

In whatever way you build a worker, it is still a commodity in the sense that it is in a market with other labor units that have comparable abilities.

More to the point, many of these labor units have tasks that can be fulfilled more efficiently and effectively by machines. So why the opposition? Efficiency is a good thing, right?

Steve Jobs was not talking about labor units when he said, “smart people.” He was talking about individuals whose competence and abilities are significantly greater than your typical grunt’s and are therefore more coveted in the business world.

But to address the larger picture, the only “needs” you listed that I think would be good to have are increased education and an “excellent environment.”

Posted by: Zeek at January 15, 2007 10:31 PM
Comment #203460

Most good firms do invest in the human capital of their employees. Most of the things on your list, however, are not the kinds of capital a firm can or should create. Tell me how a firm can create a “Capacity to laugh, play and enjoy recreation.”

As an employee, that is my business. I do not need or want my employer to interfere with my life in that way, with the possible exception of giving me some deserved time off. If the government or an employer has to teach you how to laugh, you probably are beyond help anyway.

The other thing individuals should do is change their attitudes. People should think of themselves as a firm. You invest in your human capital. You learn new skills and keep up with trends. Your employer can help, but it is not fundamentally an employer responsibility. I do not want to empower my employer to control my life to such a great extent.

One more thing, there is teaching and learning. An outsider can provide teaching, but only the individual can learn. Individuals come with a variety of talents. It is not always a good investment to invest in some sorts of human capital, especially if the human in question is not cooperative.

I sometimes give lectures to employee groups. There are always a few people who do not listen. They sit in the back and goof off. No good comes from them until they decide to do something. I try to make it uncomfortable for them so that they leave the others alone. That is the best you can do sometimes.

Posted by: Jack at January 15, 2007 10:36 PM
Comment #203498

Jack,

Google does a pretty good job, but I acknowledge that it’s a pretty odd company with a unique position.

google

google

google

Posted by: gergle at January 16, 2007 8:37 AM
Comment #203501

Gergle

It also depends on how much you want to invest in the human capital. You might want to attract and develop some people and not others, depending on how long you thought they would be with you and the sort of talent they had.

The U.S. military is very good about that. They send some of their top officers to years of university. But they expect it will help the organization.

I advocated that the firms I worked at sponsor day care and gym memberships. In fact, I advise any firm with high quality employees to do what it takes to keep them happy.

The big difference between my view and the one I see liberals advocating is coercion. I want firms to offer it. I figure it is a good thing for them to do. But if it becomes a legal responsibility, it will decline in value. We need flexiblity in the system.

Some people might prefer higher salaries to perks and not everybody can use the perks. My employer paid for a full academic year for me a couple years back. I was delighted. My co-worker thought it was the worst fate in the world to have to go back to school. Not everybody wants the same things.

I guess the trick is that if you are smart and like training, join the military, get a job at Google or become a foreign service office. People do have choices among employers. And those who find themselves w/o choices might consider improving their own human capital.

Posted by: Jack at January 16, 2007 9:07 AM
Comment #203503

Unfortunately, Jack, people aren’t fungible-to use a word I learned here.

I guess it depends on whether you think people deserve respect or not. Even the guy that sweeps the floor has dignity and deserves to be treated with such.

Capitalism promotes greed and self interest as benefitting society, which it does. The issue is one which Adam Smith did talk about, in another era, responsibility comes with gain.

I’m not so naive as to believe that a corporation should be so burdened as to not be able to thrive, but that line gets real fuzzy as to how funds are allocated. People talk about Detroit/ Steel industry/Airlines being burdened with beneits packages, Is that reality or did some individuals gain at the expense of the sustainability of these packages, in effect making them a come-on to gain employees while the structure of the funds was such as to allow using the money to benefit execs who squandered their position in the market, and then cried that they could no longer sustain these funds?

Greed has a funny way of benefitting those at the control of fiduciary reins.

I mentioned this in this thread:

whatchblog comment #203402

Posted by: gergle at January 16, 2007 9:37 AM
Comment #203504

Unfortunately, Jack, people aren’t fungible-to use a word I learned here.

I guess it depends on whether you think people deserve respect or not. Even the guy that sweeps the floor has dignity and deserves to be treated with such.

Capitalism promotes greed and self interest as benefitting society, which it does. The issue is one which Adam Smith did talk about, in another era, responsibility comes with gain.

I’m not so naive as to believe that a corporation should be so burdened as to not be able to thrive, but that line gets real fuzzy as to how funds are allocated. People talk about Detroit/ Steel industry/Airlines being burdened with beneits packages, Is that reality or did some individuals gain at the expense of the sustainability of these packages, in effect making them a come-on to gain employees while the structure of the funds was such as to allow using the money to benefit execs who squandered their position in the market, and then cried that they could no longer sustain these funds?

Greed has a funny way of benefitting those at the control of fiduciary reins.

I mentioned this in this thread:

whatchblog comment #203402

Posted by: gergle at January 16, 2007 9:37 AM
Comment #203506

Although Jack (god forbid) is fuindamentally correct (i.e. we need to be primarily responsible in improving our own worth) I would propose that the reason business interest groups are not expending efforts in “increasing human capital” is two fold:

a - Low cost geographies. Why spend effort on what is becoming a commodity? There are fewer and fewer positions that require specialized skills better served by a local full time employee.

b - Slavery is still illegal. A machine that makes IC’s can’t switch companies although the IC designer can. Business wants to make automation operate cheaper so they can eliminate human costs.

Posted by: Dave1-20-2009 at January 16, 2007 9:56 AM
Comment #203514

This whole thread suffers a fundemental delusion brought on by the rareified air of higher altitude. Last year California ,under a Rep governor,put rules in place requiring employers to provide water ,shade and breaks to workers after people died from heat exhaustion. They worked themselves to death. Slave prison labor is manufacturing garments,shoes and doing data entry with no benefits like UI insurance or SS for private companies that will not hire them after release. Why should they when they can get the labor nearly free. There is a constitutional exemption from “involuntary servitude’ for prison labor. Thousands of American workers die horribly every year from the effects of asbestos exposure. Many of companies that exposed them knew full well the results. Some even issued memos to alert supervisors of what to look for in an employee so they could fire them before they could file a workers comp case.This is delayed mass murder. There was even a push in the Rep congress to let these companies off the hook. “Human capital”? How about some human decency?

Posted by: BillS at January 16, 2007 11:26 AM
Comment #203537

John Back:

I propose that corporations be given tax credits for hiring people, just as they get tax credits for buying machinery. I propose that corporations that outsource labor, lose their tax exemptions for machinery.

Posted by: Paul Siegel at January 16, 2007 2:18 PM
Comment #203558

Paul,

Good suggestion; now what lobby group will bribe, I mean contribute to, the congress for that bill?

Posted by: Dave1-20-2009 at January 16, 2007 3:33 PM
Comment #203574

Gergle

People all deserve respect, but not all investments in human capital make sense. YOu can buy me all the basketballs you want, and I will never be an NBA star. The same goes for less tangible talents.

The worker also may not be willing to invest in the firm. Many workers are content to work 9-5 and then just go home and not think about work again until the next day. While everybody talks about his desire to learn more, many people will not take the time.

Some jobs require little human capital. Among those that do, employers are often very willing to develop human capital IF the humans involved are willing to cooperate.

Posted by: Jack at January 16, 2007 5:35 PM
Comment #203585

Paul,

Excellent suggestion. This when government works best, providing incentives for companies to do the “right” thing. It’s when government mandates behavior, either corporate or individual, that I have a problem. By giving the corps a choice, the ones who are truly motivated by a desire to improve the bottom line by improving their workforce will latch on for all they are worth.

I might add to your idea a tax credit for educational reimbursements or paid tuition for those employees who want to further enhance their value to the company, or themselves.

But, again I emphasize, it must be by choice, not fiat.

Posted by: John Back at January 16, 2007 6:45 PM
Comment #203730

My point Jack,

is that a company takes at least 40 hours a week of a persons life. It seems to me that is a significant investment on the part of an individual. My question is what is reasonable return on that investment? A life of poverty, while other investors become wealthy, doesn’t seem quite fair to me.

Posted by: gergle at January 17, 2007 2:57 PM
Comment #203780

Gergle

The employee trades his time for money. He deserves whatever wage and benefit package he negotiates. The firm might want to invest in the employee, if the employee is worth the investment.

I am currently managing a large professional staff. Some of them I would send to training across the world; others I would not give a subway token to go to the library. Still others I would gladly send around across the world IF they promised not to come back. Some have the talent and work ethic that others do not. Having someone else “invest” in you is no more a right than making someone invest in a stock. You have to be a good investment. If you are not, change. If your talents do not fit your job, move. If your employee does not recognize your talents, find one that does.

Posted by: Jack at January 17, 2007 9:41 PM
Comment #203810

Jack,

I agree generally, if the negotiation was on an even plane. It isn’t.

We have a history of slavery that continues to influence our attitudes. You did not answer the question why someone deserves to benefit with riches while getting a significant investment from an employee who barely gets sustanence. Both contribute to the success of the business.

Reducing the argument to the price the market will bear, ignores the moral implications.

True, poverty is better than dying in the street, but is that just, moral and what we expect from our society. Is that negotiation or coercion? Where are your values, Jack?

It is by this logic, that we subvert our economy by subsidizing slavery and despots across the world, for the profits of a few.

Posted by: gergle at January 18, 2007 7:04 AM
Comment #203865

Gergle

It is not a sound investment in some people’s human capital. If you got a guy with an IQ of 80, you cannot teach him higher level math. You can pay him well and extend him rights, but it is a waste of the employer’s money and his time to try to make him more than he is and much more than he can become.

Posted by: Jack at January 18, 2007 3:47 PM
Comment #203866

Careful gergle,

I was chastised by the Editor for questioning individual “priorities”. Which is where, IMHO, the crux of this matter lies. A person either says that the rights and interests of the business is paramount, or the rights and interests of the individual. It’s either pure free market where the haves get more and the middle class only succeeds in an employees market or it’s level the playing field and make sure the middle class is solid in all environments. The right wing would have us believe that the left as a whole believes that everyone should enjoy the same rewards. (total BS or a lack of understanding on their part) I would propose that your position statements are very well described, just not understood or possibly just ignored for purposes of soliloquy.

Posted by: Dave1-20-2009 at January 18, 2007 3:53 PM
Comment #204114

Perhaps we are cross talking here, Jack.

I am not talking about investing in teaching higher math to the sweep up guy. I am simply stating that the guy who sweeps the floor keeping others from tripping and injuring themselves and creating a more productive enviroment deserves more than mere subsistence. I never said make him the director of the company or chief engineer, to prove some abstract point. Reducing the investment to the cheapest wage you can possibly get away with, isn’t always the best policy for society or business. The point is that humans are of value beyond a simple income and outgo account.

Seeing the diginity with which a floor sweeper is treated may lure a great number of high knowledge workers evaluating the “value” of a company. The Brain Drain Europe experienced with the rise of facism or the “good will” created by a company that values all it’s employees, is an intangible in standard economics, but a very real effect.

Dave1,
Given that this whole discusion is about values, I’m not sure what you mean, or the context to which you are refering, but I know Jack doesn’t take what I said as a personal attack, and I would find it odd for anyone to construe it thus.

Posted by: gergle at January 20, 2007 2:23 AM
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