The origins of human capital management lie in the realisation that investing in people yields greater profit than machines
So keen are the obsessives and pundits of human capital management (HCM) to nobble themselves a slice of a fabulous and infinitely measurable future that few probably have the time to look backwards. HCM, it sometimes seems, arrived on our shores from an unknown destination, without baggage, history, backstory.
We all know about human resources. We can trace the chronology from Taylorist time-and-motion study, through welfarism, human relations, personnel administration, industrial relations, and finally, to human resource management. But what is the background of this hybrid concept HCM, this convergence of the disciplines of HR, accounting, economics and investing, that so many believe will define people management in the years ahead? What are its origins?
The specific term ‘human capital’ is easy to place: it was first used by the Nobel laureate economist, Theodore Shultz, in a 1961 paper called Investment in Human Capital (about which more in a minute). But if the central idea of HCM is to express the critical relationship between human beings and the process of production, then it is much older and more difficult to trace precisely.
Something that seems to come close is the Labour Theory of Value (LTV) – the idea that the value of any good or service is equal to the amount of labour required to produce it.
On the very first page of the Wealth of Nations, published in 1776, Adam Smith gives a blast of proto-HCM thinking: “The annual labour of every nation is the fund which originally supplies it with all the necessities and conveniences of life which it annually consumes, and which consist always either in the immediate produce of that labour, or in what is purchased with that produce from other nations.”
But Smith was by no means the first to believe wealth creation was ‘all about people’. The philosopher John Locke famously asked where the institution of private property originated. His answer, in 1690, was that people own themselves and therefore their labour; the mixture of human labour with material substance gave rise to property. “‘Tis labour that puts the difference of value on everything,” he wrote.
Another anticipation of HCM lies in the Marxist concept of ‘labour power’. Labour power is the capacity to work, which, under capitalism, workers must sell to employers for an income. According to Karl Marx, exploitation occurs when workers are denied the full value of their labour, which employers pocket in the form of profit.
Since then, the LTV has rather fallen into abeyance. It no longer seems plausible that ‘labour’ gives things their value; more likely it is the knowledge embodied in technology, or perhaps simple supply and demand.
However, the 1960s saw economists attempt to re-cast some of the old concerns of the LTV for an age when synapses were replacing brawn as the most important factor of production.
Schultz arrived at the idea of human capital while visiting an elderly farming couple. Noting that they seemed contented despite their apparent poverty, they replied that they were not poor because they had used the income from their farm to send four children to college. Their children were valuable because of their education. In fact, Schultz argued, the yield from investing in humans would greatly outstrip the yield from investing in land or machinery.
Another Nobel-winning economist, Gary Becker, took these arguments on in a 1964 book called Human Capital. Education, training, medical care and so on could all be seen as investments in human capital. “They are called human capital because people cannot be separated from their knowledge, skills, health or values in the way they can be separated from their financial and physical assets,” he wrote.
Human capital is, therefore, the stock of assets that we all have as individuals.
From here, it is easy to see how human capital jumps into management theory.
To the traditional accounting viewpoint, employees, skills and knowledge are all costs. But contemporary HCM recognises that the rate of return from the value of employees to the employer can be enhanced by a management intervention, such as training, reward, or simply by giving someone a new project. Human capital is thus the intangible value contained in human know-how, ingenuity and gumption.
And that more or less delivers us into the present day, where the frantic desire to understand the linkages between human beings and business performance has escalated into the dashboards, scorecards, indices, benchmarks, regression analyses and value chains that confront (and baffle) HR practitioners on a daily basis.
Yet the evolutionary perspective on HCM appears to throw up a question. In the modern managerial version, companies and consultants speak of human capital as something owned by organisations – an asset to be sweated.
This seems to be at odds with the 1960s version, where human capital belongs clearly to the individual. Employees rent out their human capital to employers in exchange for the usual benefits, such as reward, affirmation and development. Of course, individuals need access to organisations for their human capital to appreciate in value. But if it doesn’t, it is the type of capital that is not nailed down and can get up and walk out of the door.
Today’s distinctive twist on HCM seems to be this sense of corporate entitlement to the ownership and possession of human beings. Previously, it was a loan, not a gift.