Advice From A Nobel Prize Winner On Human Capital Management

Posted by Robert Norton on

Advice From A Nobel Prize Winner On Human Capital Management

An Interview From The Line Zine e-Newsletter

Gary S. Becker, the winner of the Nobel Memorial Prize for Economic Science in 1992, is a Professor of Economics and Sociology at the University of Chicago and a Senior Fellow at the Hoover Institution and University. He is recognized for his expertise in human capital, the economics of the family, and economic analysis of crime, discrimination, and population.

Becker: I would start out with some obvious things that are still sometimes forgotten: the basic resource in any company is the people. Remember Bill Gates’ famous comment that if you took away the top thirty employees at Microsoft, it would be a pretty ordinary company. And what’s true for companies is true for nations as well. In the New Economy, the reliance on people hasn’t fallen, but has increased. We are much more a human capital-based economy than the economy was even thirty years ago.

The most successful companies and the most successful countries will be those that manage human capital in the most effective and efficient fashion—investing in their workers, encouraging workers to invest in themselves, provide a good learning environment, and yes, including social capital as well as skills and training.

I also think the best companies will set up human capital accounting systems. Companies don’t have to do that under present tax law because you can expense all your expenditures on human capital, but in order for a company to know more about just what human capital is costing and what the payoff is, they want to track and assess the return on investment. I can also foresee them publicly reporting what they spend and invest in this area. In this age when human capital is such an important form of capital, how could they not want to do that?

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LiNE Zine: Gary, what do you see as the role of technology and its place in either facilitating or extending the ability of human capital to be a critical source of value? Is technology really becoming more important, or is that overblown?

Becker: I think technology—computers, the Internet, other technologies—are important in many ways. First, of course, modern economies depend upon modern technology; you couldn’t have a modern economy with the technologies of the 19th century. Secondly, these technologies themselves are produced by people with lots of human capital; you need human capital to build and then make effective use of these technologies. One reason that less-developed countries haven’t adapted more advanced technologies is that they do not have the human capital that allows them to effectively utilize the technology. Finally, the new technologies are going to significantly impact the acquiring of this capital. Education and training and knowledge will experience revolutionary change through distance learning. Today, most learning in schools still takes place in the same way that it did in the time of Socrates: a group of people gathers together with a teacher who conveys knowledge.

The problem here is that it is costly to gather people together in the same room in the same university. So people are now asking, “why not try to utilize the technology so I can learn at work or at home and pursue courses and degrees in this more remote fashion?” And by the way, good distance learning is not a video where you just see a professor lecturing. It’s got to be more interactive: graphics, back and forth questions, chats with other people involved in the learning experience, and the like. We’re just at the beginning of understanding the possibilities.

LiNE Zine: Given your interest in market economics, what do you make of the evolving phenomenon of so-called human capital markets on the Internet? Or the idea of making skills more portable, as in current discussions about knowledge workers each having their own “skills passports”?

Becker: Well, I see this beginning to happen, and I’d mention two dimensions of the evolution. First, we can expect to see more employment exchanges in which jobs and people are being matched on the Internet, matching the right skill to the right demander. That will increase in scale. The second dimension is about the sourcing of skills from lower-cost economies; that is only going to grow. Since India is producing some very good software engineers, why not farm out the work there, and have them communicate through the Internet with other people working for the same company? Some may be in South America, others may be in the United States or China. The division of labor will become more and more worldwide and virtual.

LiNE Zine: Given the kind of trends you see, and we’ve been discussing, what are the new management imperatives? What should senior executives be thinking about in managing and developing human capital?

Becker: Well, a few thoughts—but understand, I’ve never had to meet a payroll! First, they need to keep updating skills. Given the rate of change in technological progress, there’s an ongoing need for investment. Skills don’t last a lifetime. They depreciate. Any company has to recognize that not only is the human capital of their employees a major asset, it is also a depreciating asset that needs continuing investment. A finance officer with an MBA in finance from say twenty years ago will not know much about options markets, derivatives, options pricing, and the like. These people need refresher courses, to learn new techniques about the risk management of their company’s resources. It’s the same in every area: marketing skills, IT skills, how the Internet operates—everyone needs to keep updating skills.

LiNE Zine: You made a now-famous distinction between so-called generalized knowledge and company-specific knowledge in your work on human capital. Do you still stand behind the different kinds of knowledge, and how does that difference affect planning today?

Becker: That distinction is now either explicit or implicit in most literature in the human capital area, and still has a lot of common sense behind it. There are some skills that people acquire that they can use in many companies, while other skills or knowledge is really highly specific to a particular company or maybe to only a small set of companies. For example, for me, the culture at the University of Chicago is very different from the culture of competitors like Stanford or Harvard; if I were to leave Chicago, I would lose that knowledge and I would have to acquire something comparable at another university. These differences can be found in pretty much all companies now, and the distinction also applies to particular technologies and the knowledge required to apply them. Some technologies are transferable as one moves from company to company; others are specific to how a particular company is organized and run. If you leave that company, that knowledge becomes obsolete. We can observe that when workers leave a particular company, their earnings will often be less; their company-specific skills are not as valuable, and thus they have to start over with new skills in a new company.

LiNE Zine: Does that distinction imply that companies should make a much greater investment in the company-specific kinds of knowledge?

Becker: Yes, I would argue that most investments in learning for employees should be in company-specific knowledge. If workers acquire a general knowledge while employed, they’ll benefit more than the company if and when they leave; accordingly, workers themselves should pay for that knowledge through lower wages initially. Companies should be willing to pay for company-specific knowledge because it helps lock the worker into the organization. He or she will earn less from that knowledge in another company.

LiNE Zine: Do you believe that in the future workers will be paying for their own general knowledge or taking a lower wage because they are essentially becoming more mobile with those skills?

Becker: Absolutely. Ever since my original work, study after study has shown that workers are willing to invest in acquiring general knowledge by accepting lower earnings. And as we said before, we also see workers taking a hit when they move from one company to another when they have acquired company-specific skills.

LiNE Zine: A lot of the work that began with yours has equated human capital with knowledge and skills. Two professors, Chris Bartlett of Harvard Business School, and Sumantra Ghoshal of London Business School have been working on a new management theory of human capital—and they define it as also including so-called social capital (value from relationships) and emotional capital (value from engagement and commitment). What do you make of this fuller definition of human capital?

Becker: I certainly think social capital is important; I’ve worked on that myself and just came out with a book called Social Economics. Yes, social capital is a form of human capital. When I spoke about the corporate culture before I was really talking about social or corporate capital—how people are connected with a company. Social capital as a concept has become very popular in recent years, but it is very difficult to quantify, and emotional capital would be even more so. But they do seem important because they do affect the productivity of individual workers and certainly of companies overall.

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