Introduction of Human Capital

 In terms of economy that is based on the modern knowledge, a major role is played by human capital as people with their creativity and innovation could purge growth and expansion within their organizations. Therefore, similar to the financial capital, human capital’s performance has to be monitored and watched by the executives. But within organizations, a strong framework for the monitoring, managing, and measuring human capital had yet to be established by human practices. Highlighting the human capital’s concepts and addressing the human capital’s evolution in recent years will be attempted by the writer in this chapter. Additionally, the author will attempt to tackle human capital in the context of both (micro level) organization and (macro level) nation. In this chapter, HCS or human capital strategy and intellectual capital are also going to be tackled along with its implementation in a corporate strategy or business.

Capital and Resource

For understanding and defining ‘Human Capital’, it is important to consider the evolution and meaning of the word ‘capital’ and just how it is not similar to the term ‘resources’. It will facilitate considerably in realizing just why and how ‘Human Resources’ is not similar to ‘Human Capital’. Available supply’s total sum or the assets that are available at the moment and can be used when required refers to Resources. In a simple context, resources can be utilized until they are exhausted.  Meanwhile, Capital can be referred as a form of means or wealth that can be used for producing more wealth or means. In simple words, capital is capable of growing with investment for producing more capital. Therefore it can be seen that while one is decreasing upon utilization, the other actually requires to be manipulated for sustaining growth that is continuous.

The evolution of the term ‘resources’

Considering the resources’ evolution, it has not been complex and there is not sufficient debate or literature on its representation. In France, it was first used in the 17th century and Oxford Dictionary is currently defining it as ‘The supply or stock of staff, materials, money, and other values capable of being utilized by a company or a person for functioning in an effective way’. With the passing time, it can be said that the definition of ‘resources’ that actually constitutes it has become quite broad. We didn’t have nuclear resources or technological resources in the 19th century but considering the tectonic modifications in technology and society, it can be no doubt said that the resources’ definition has been broadened by us. It has become simpler to extract and explore natural resources with the superior technology’s evolution which was impossible in the past. Even though in the 19th century the term ‘Natural Resource’ was referred or defined, the term’s definition has expanded ever since that moment.

The evolution of the term ‘capital’

For understanding capital’s evolution, a lot will be drawn or captured from the research of Geoffrey M. Hodgson in 2014 named as ‘What is capital? Economists and sociologists have changed its meaning: should it be changed back?’ From both economic and financial viewpoints, capital’s evolution has been approached by Hodgson in his study. In 1211, Italy, the term ‘Capital” was first used. Then from 1283, it was used ‘in terms of a trading firm’s capital assets. Gradually, the word started to point at ‘a merchant’s or a firm’s money capital’. It also reached Western Europe in a little time. In the 16th century in Britain, its monetary meaning was retailed and was captured by companies to be used in accounting processes or methods. The English sources or references of 1759, 1750, and 1730 all have been cited by Fisher (1904) that refer capital as ‘the assets or money brought by the merchant in his account or trade’ or the money that the trading company advances. Similarly, to England in the 18th century from Italy in the 13th century, the term was used mostly in the context of money that shareholders or owners advance for establishing a business or company.

With the entrance of Adam Smith and other future economists, the word’s meaning changed. The new fixation of ‘The Causes and Nature of Nations’ Wealth (Smith, 1776)’ is actually the labor’s division and the rising physical things’ productivity. It has been written by Smith that: “Such talents’ acquisition through the acquirer’s maintenance during the process apprenticeship, study, or education no doubt costs real expenses which is the realized and fixed capital, like in the person himself. His fortune is made partially with such talents and similarly, such talents contribute to his society as well. A workman’s efficient dexterity might be recognized in the same context as a trade’s instrument or machine which abridges and facilitates working, even though it is expensive but pays back with gains Smith (1776)”.

Sure, the word ‘human capital’ was not used by Smith but it plays an important role in understanding that the word represents not only humans but things as well. Through the extension of capital’s notion to the labor and people, its meaning was changed by Smith to productive resources rather than money values or money. Ever since then, the capital’s meaning has been expanded by economists for including people as well with instruments. But the financial community didn’t avert from a wealth perspective. The debate has been shaped by this different over the capital’s definition in the past ten decades. Capital has been defined broadly by Fisher (1896) as a ‘material’ body or entity that developed an income’s flow over some specific time. People were regarded as capital by Fisher. In the Wealth of Nations of the Smith, the implicit was made explicit by him. Objections which were capital met, their notion was broadened by it. It has been noted by John A. Hobson (1926) that the capital’s meaning is disrupted by economists all the while ‘not paying attention to the fair and constant meaning which the word possesses in the world of businesses. It has been pointed by Hobson that in the ‘world of businesses’ capital actually refers to ‘money’s control or money and sometimes it is also referred to as credit’. It is referred to as ‘marketable matter’s all forms in which labor is embodied’. During the 19th century and moving on, the monetary meaning was retained by financial circles and business elsewhere despite the economists’ efforts. For instance, it has been noted by Mitchell (1914): ‘Every other commercial man and banker knowledge money is the only capital.’ Deeper into the 20th century, Frank Fetter, the American economist influenced by original institutionalism and Australian economics attempted to restore the term’s earlier meaning. In the expansion of capital concept, danger was seen by him: “Necessarily, capital is a separate investment, financial, and concept of acquisitive ownership. Compared to the physical objects, it isn’t coextensive with assets but with authentic rights and rules as claims to incomes and uses. It must be a concept linking in an unequivocal way to the present pricing system and private property”

Moving on a couple of years, Knight (1934, 1935) and Hayek (1936, 1935, and 1934) debated on the topic of capital in a broad context. Meanwhile, it was insisted by Schumpeter (1954) that capital should focus only upon financial assets. It was stated by him:

Even before economists found the word’s employment, it has been partaking in the business and legal terminology. … Later on, it rose to denote the money’s sums or assets equal to them brought by participants in a company or partnerships, the whole assets of a firm, and the similar. Therefore, the context was monetary referring to either evaluation of goods in money, or claims to assets, or real money. … It would’ve actually saved a lot of futile and invaluable controversies only if economists had stuck to the monetary definition rather than attempting to increase the depth!

Economists however didn’t follow this point of view and continued to ignore the financial status of capital. With this, a new question is brought, ‘Then what is Capital’? Paying attention to the above description, two different points of views can already be seen:  One is aligned with the post-Smith concept in sociology and economics and refer capital actually as a reliable attribute or thing that is capable of leading to requirements’ satisfaction. This definition tells that ever since the humanity’s dawn, capital has been present and is not bound to a certain production’s mode.

The other perspective that aligns with Schumpeter, Fetter, Mitchell Innes, Weber, Sombart, and Hobson returns the capital’s meaning to the one that developed in the 13th century in Europe in terms of investment and trading. Moving own, capital is referred as the money’s fund to be invested in an enterprise by a firm or person. For his whitepaper’s aim, the first perspective will be followed by us that will assist us in the exploration of the concept ‘Can capital refer to humans?’

Can humans be capital?

In economics’ prominent journal, ‘human capital’ first appeared. Irving Fisher (1897) had written the article and proposed that capital must refer to all the elements of labor, land, and machines.  Prior to it, however, African Commerce’s under-developed standard has been addressed by (1807-48) Sir William Cornwallis Harris. He stated: ‘Only a few if present of the materials bartered by her with other nations for limited and rude supplies sought by her are the industry, or labor, and human capital’s production’.  A thorough research of the above perception points towards slaves according to Harris.

This interpretation actually has a reason. For centuries, capital was defined by non-economists as a monetary spending in the context of fixed assets which are not consumed by the production but still are bought and used. The appointed labor and raw materials are excluded by the usage of this commonplace. However, an owner retains the slave similar to an instrument. This way, not an appointed worker but a slave can become capital. William Westgarth, an Australian politician, statistician, historian, and a merchant born in Scotland wrote about the Science of Money and Capital: ‘Work or labor can be capital or wealth … but only with its bonding and thus limited to an exchangeable value’s subject. In this sense, a free man is not capital but a slave. Wealth is produced by labor but in other bonded forms, I have to state that it’s not wealth. … A free agent is not capital as a bound person is a subject that definite marketable. (Westgarth, 1875)’

In 1897, the post definition of Irving Fisher in the context of ‘human capital’ encountered opposition (little). It became a commonplace, specifically after the pieces of Jacob MIncer (1958), Gary Becker (1964), and (1960, 1971) Theodore W. Schultz. Therein, the elements of production along with others are meant by ‘Human capital’. Training and education enhanced its magnitude. For economists, an important objective was the estimation of its values so this labor’s quantities could be placed into a function of production aligned with other inputs for ‘explaining’ the output’s magnitude. Human capital is described by Mincer and Becker as:

‘The useful and acquired skills of all members or inhabitants of a community; Such talents’ acquisition through the acquirer’s maintenance during the process apprenticeship, study, or education no doubt costs real expenses which is the realized and fixed capital, like in the person himself. His fortune is made partially with such talents and similarly, such talents contribute to his society as well. A workman’s efficient dexterity might be recognized in the same context as a trade’s instrument or machine which abridges and facilitates working, even though it is expensive but pays back with gains.’

Human capital has been defined by Schultz (1971) as ‘a productive capacity’s embodiment within individuals. Specifically, it is the overall sum of fortitudes, motivations, attributes, knowledge, and skills of people which permits them to offer value to a product, organization, or a company by performing duties. Although it can be rented or given to others but only for a short period; as far as its ownership is concerned, it cannot be transferred’. Human capital’s above definitions dominated the others present in the 20th century. However, as we moved further into the later century, it became a tangible body by many academicians focusing upon it. Similarly, management of human capital has been described by Hall (2008) as the ‘network or system for the improvement of individuals’ performance with strong authorities-those affecting the core competencies. It has been proclaimed by Hall that the requirement for a new way to expand human capital through (1) describing the efficient human capital clearly and how it is linked with the outcomes of a business, (2) managing and measuring human capital similar to the financial capital’s discipline, and (3) allowing managers to gain efficiency from experience to improve decisions of human capital. There are other human capital’s definitions as well. Such definitions involve 1) the bundle of energy, knowledge, life experience, and attributes that individuals decide to use in their duties, 2) the effect of management practices of people and 3) investments of people in the form of non-financial and financial reward on contribution and value creation to an organization’s performance that is bottom-line (Hall, 2008; Weatherly, 2003; Fitz-enz, 2009). It has been recognized by Bounfour (2009) that ‘in terms of a value of an organization, an unclear picture is provided by balance sheets … specifically in an economy that is service oriented and to the corporate assets’ measurement, the physical paradigm is not adapted’. Lev (2004 and 2001) here represented the context of “intangibles” for explaining a company’s assets which are not illustrated in the current reporting of finance.

It has been concluded by Hall (2008) that on the theory of human capital, Human Capital Management is actually created-‘the theory is about contribution is made by human capital in the success of a business’. It has been described by him that understanding the theory of an organization is very important in realizing just how things will be processed and just what is significant to be managed and measured. The exploration of human capital’s evolution in the recent decade will take place in the next section. In it, the concentration will be upon its measurement of human capital in terms of quantification.

Can human capital be quantified?

Over the recent fifteen years, definitions of Human Capital have focused upon the measurability’s concept. Several scholars or academicians have attempted to offer a quantitative aspect for understanding the term; it has modified to a quantitative entity from a qualitative one. These academicians have attempted to instill an idea that measurement of the Human Capital can be carried out and the alignment of outcomes of Human Capital with objectives at macro level will assist in the achievement of objectives in a holistic and agile manner. In this section, the remaining portion will concentrate upon several scholars who have explained the Human Capital’s quantitative aspects. It has been explained by DiGregorio and Stallworth (2014) that ‘the financial disclosure’s absenteeism is complained by investors concerning assets which are intangible and often, managers find it quite tough to use and measure intangibles for gaining a competitive advantage. It has been traditionally summarized by them: with respect to intellectual properly, intangibles have been prodded by accountants. However, in the business environment at present, intangibles’ concept has extended to involve intellectual or theoretical capital, involving the critical contributions which have been made by people and innovations (human capital).’ It has been cited by Norton and Kaplan (2004) that ‘the measurement of intangible assets’ value like the skills of employees, management systems’ knowledge, and company culture is the accounting’s holy grail’. According to their perception, it is recognized by executives that intangibles are strong resources of competitive advantage that is sustainable and their replication is tough as well. Additionally, they illustrate that from the measurement of tangible assets, managers scoot away because of their subjective nature. For it, solutions are discussed by them for firms in ‘the desirable measurement rather than measuring what they are capable of’ (Norton and Kaplan, 2004). Seven separate ways have been identified by Spehrer-Patrick (2010) with a single aim to develop awareness and transparency for human capital’s impact on the performance of company. These measurement ways are illustrated by below figure.

 Human capital context – Nations

Towards a production’s different focus, economy has turned in the recent sinecures. Phillips (2015) exclaims that economy is now knowledge-based from industrial-based, from agriculture-based. Within the era of agriculture, the production’s focus was in land and the way to raise productivity. Meanwhile during the age of industry, which ruled over the 20th century’s first half, the production’s focus was on how profit and efficiency could be created with machinery usage. Within the economy of knowledge, the production’s focus is upon the human mind and the way through which knowledge is used for building an efficient and productive economy. Therefore, it is quite safe for concluding that human mind is recognized as the most significant asset in the knowledge’s era (Martin 2014).

At a separate nation level, planning and investment of human capital at a long-term is not that critical but it requires at an international level, a political leadership for moving beyond the negligible competition and a workforce for countering challenges at the present day[1]. Problems concerned with worldwide migration and mobility requires an approach that coordinated for unlocking opportunities and minimizing risk for economies and individuals as a complete entity. Additionally, appointing working-age and young populations of the nation with skills and education for surviving in the 4th Revolution of Industry will need collaboration over industrial borders and sectors.

Such a Human Capital’s wide standard understanding has been molded by various worldwide firms such as the OECD, Organization for Economic Co-operation and Development, ILO or International Labor Organization, the World Bank, and the World Economic Forum. Human Capital’s importance and growing influence is signified by it along with the necessity to recognize it from a perspective of macro-economy.

For explaining the context of human capital among countries i.e. how the elevation of human capital has been managed by various regions, data from the report of World Economic Forum 2016, named as ‘The Report on Human Capital’. ‘The Index of Human Capital’ has been defined by the annual Report on Human Capital and 130 volunteering regions have been ranked on the state of deployment and development of potential concerned with the human capital. Outcomes of Employment and Learning are assessed by the Index according to a scale ranging from the worst 0 to the best 100 over 5 separate groups on age (above 65, 55-64, 25-54, 15-24, and 0-14) for capturing the country’s complete demographic profile. Pure potential of human capital and exclusion of labor market’s specific age patterns have been highlighted by the generation lens.

 ‘Human Capital’ is defined by the report as ‘the skills and knowledge possessed by individuals which permit them to develop value In a system of global economy’. Quantification of key concepts and providing a practical instrument to business leaders and policy-makers is the aim of Index. A human-centric perspective is formulated concerning the work that understands individuals’ skills, creativity, talents, and knowledge as a good economy’s drivers.

The Index highlights that regions can further improve the potential. Over it, only nineteen countries reached human capital’s 80 percent or more. At the spectrum’s other side, 5 countries remained under 50 percent while 28 countries scored in between 60 and 50 percent.

North America only passes the threshold of 80% nearly. Central Asia, Eastern and Western Europe scored between 80 to 70% among 3 others, North Africa and the Middle East, Caribbean and the Latin America, and Pacific and the East Asia between 70 to 60 percent. 60% threshold was not passed by Sub-Saharan Africa and South Asia. But there is also a effective utilization of human capital’s wide variety in every other region with underperforming regions and success stories in each place.

It has been stated by the report that concentration upon human capital will be controlled by government’s initiative in their specific regions. If Middle East’s data is analyzed for instance, it can be observed that (87[2]) KSA is capable of improving human capital immensely by only leveraging and learning initiatives of human capital from (46) Bahrain, (69) UAE, and (66) Qatar. All of these reach a higher ranking and the same region’s part. In the region, a smaller economy is boasted Bahrain (46) with $26 billion GDP compared to KSA (87) with a $633 billion GDP. Notwithstanding these issues, human capital is focused upon by them, regulating investments which are sustained in education and training for creating a future workforce. This is the initial marketing element of Bahrain for getting the attention of foreign businesses and they have been successful in attracting western companies and organizations.

It is emphasized by above elements to consider development of human capital at a global or national level along with organization level. A development’s foundation will be offered by it for human capital’s overall caliber which is capable of then being leveraged in private and public firms.

Human capital context

For evaluating ‘how’ human capital mainstream has become, it is important to consider a concept on how it adjusts into a macro-economy and an organization’s plan. Therefore, in understanding the context of human capital, we will consider synergy and adoption of human capital within nations and organizations.

Human capital context – Organizations

Indeed, the consideration of human capital as an organization’s intangible asset can take place that could impact its performance greatly. But the tracking or quantification of this intangible asset is tough through the old practices of accounting. Federal Reserve Board’s former chairman, Evan Elan Greenspan stated that the tracking of intellectual assets’ investments was not being performed by business accounting and the methods of financial reporting that every other organization uses (Financial Accounting Standards Board FASB) were actually offering a wrong image to needs of accounting profession and corporations’ actual comparative value for adjusting to the economy that was new (Phillips 2015). Sure, the categorization of intangible assets is in various ways but the author believes in a broad grouping in which a firm is separated into financial capital, intellectual capital, and tangible assets. Actually, the intellectual capital is divided in structural capital and customer capital as shown in the below image (Phillips 2015).