Theodore Schultz, who won the Nobel Prize for economics in 1979, developed the concept of investment in intellectual capital, upon which his award was granted. His core argument was that although it is obvious that people acquire useful skills and knowledge, it is not obvious that these skills and knowledge are a fundamental form of capital; that this capital is part of a deliberate investment that has grown in Western societies at a faster rate than conventional non-human capital; and that its growth will be the most distinctive feature of the economic system of the future.
Conventional wisdom in management as well as in economics has viewed the employee as one of the three factors of production: land, labor and capital. In such an interpretation, labor is an expense item, and its contribution to value-added lies in its cost being minimized. This old paradigm has produced the effect of employees being treated as an expense item on the profit and loss statement.
To the contrary, the intellectual capital framework, see the employees as assets that should be value in much the same way that other assets, such as factories, computers, or key inventories are valued. This perspective has enormous implication for developing a strategy of competitiveness and most of all for the adequate management of intellectual capital. It also has major implication for the filed of human resources management, because the treatment of intellectual capital and its valuation, acquisition and retirement call for new policies and strategies.
But, what is the definition of intellectual capital? Intellectual capital economics and management is a system of inputs, processes, outputs, and adjustments which individuals, companies, government agencies, institutions and societies make toward the increase of potential and performance which the individual human or humans as groups and teams may contribute to society, the economy, specific employers, or themselves… The inputs are the system’s raw material of people who are born, immigrate, die, or emigrate. The study is the examination of demographics or population. Processes include education and training at all levels, and the ability to adapt to change and to obstacles. Outputs are measured in employment at various levels in all sorts of fields and might also be expressed as return to investors in socials effects in groups such as government, society, community or business.
The estimation of value-added the relationship of human input to output is an important element in the intellectual capital theory.
The final element of the system of intellectual capital is the adjustment controls that should operate to make the system responsive to charge and to maintain its equilibrium. The adjustment is necessary because people are sometimes rejected by schools, organizations or society due to conditions that limit their capacity to work at productive tasks. They may be retrained or assisted in different ways. Some people find themselves outside the mainstream of the working world because of labor market changes or technological changes. And a low of work motivation may produce a need for adjustment in the system of intellectual capital by changing managerial practice, policies, strategies and cultures in the portfolio management of humans as strategic assets.
Shultz demonstrated that the proper investment in intellectual capital produced a steady increased in productivity.
Because investment in education is based on performance and intelligence, it could create a meritocracy of talent rather than a more egalitarian system. Nevertheless, the robust empirical proposition suggests, that the higher the level of education, the greater that return on investment. But the theory of intellectual capital does not suggest that such an investment is permanent and unmoving. Rather, it depreciates like other capital assets and educational needs, technological factors, human resource development, also have a component of obsolescence that must be taken into account for true balance sheet changes in intellectual capital, and for advancing competitiveness.
More recently, Odiorne, has graciously shown how to enhance investment in intellectual capital by grouping employees according to productivity and growth potential, and managing each group according to its particular attributes, motivations and needs. He makes a strong case for identifying, managing and developing stars (high performance with high potential for growth); workhorses (high performance with limited potential for growth); problematic (those not performing to their potential); deadwood (poor performers with little potential for improvement). Any strategy of effective intellectual management should ponder market forces, service and production capabilities, point of entry, performance indicators, scope of investment, ethical system, work systems, incentives and compensation, career passages, technology availability, community, government and university relations, and other productive sectors.
The key point is that intellectual capital investment relates to the quality of life of all citizens, and this includes the quality work life, which is a function of the quality of the entire society.
The purpose of a great society is to make great human beings!
Copyright 2001 QBS, Inc.