This paper examines whether human resources within an organization should be treated as critical investments. It defines and distinguishes three related concepts — human capital, human assets, and intellectual capital — tracing their theoretical origins and exploring how they overlap. Drawing on HRM literature, the paper argues that an organization's workforce can legitimately be understood through all three frameworks, and that all levels of an organization, not HR managers alone, bear responsibility for developing these resources. The paper concludes with a culturally qualified recommendation: in Western-based organizational contexts, human resources must be treated as critical investments to preserve and grow organizational value.
This paper explores whether the human resources (HR) within an organization should be used as critical investments. To support this exploration, the terms human capital, human assets, and intellectual capital will be discussed on the merits of each specific term as well as in relation to one another. A conclusion will then be drawn as to whether human resources should be viewed as any or all of the above terms, and whether HR managers should utilize them as critical investments in an organization's future.
To begin, the overarching term human resources management (HRM) must be understood. HRM is an all-encompassing term referring to how an organization's human resources are used to achieve the organization's overall objectives and strategic directions. HRM includes a continuum of activities that can be grouped into seven categories:
Human Resource Planning — anticipates organizational needs, then prepares to have the right employees in the right place at the right time.
Human Resource Staffing — involves establishing job needs, then recruiting and hiring the best candidate for the position.
Human Resource Development — ensures that the workforce is prepared for change, achieved primarily through training.
Compensation and Benefits — includes both financial and non-financial rewards given to employees in exchange for the time and effort put forth by the workforce.
Safety and Health — identifies and mitigates potential workplace hazards.
Employee and Labor Relations / Industrial Relations — in unionized environments, this involves organized labor relationships; in non-unionized environments, it addresses general workforce relationships.
Human Resource Information Management — the means by which information supporting the above steps is obtained, handled, and archived.
All of the above aspects of HRM are interrelated, with decisions in one area affecting all others. The means by which a firm approaches any of these areas will therefore have an impact on the organization's overall human resources practices. Generally, an organization's HR manager coordinates the key components of HRM. However, others — such as line managers, employees, unions, and even shareholders — can make important contributions to the overall HRM practices of the organization. Irrespective of who is involved, "HRM must be engaged in creating institutional change capacity, identifying social trends impacting future business opportunities, and building organizational cultures that can accomplish radical innovation."
All organizations must determine how they will view, and consequently treat, their human resources. Will the human resources be seen as human capital, human assets, intellectual capital, or some other human-resource-related construct? Before determining which point of reference will be used within an organization, these various terms must be understood.
Human capital has the longest grounding in intellectual theory. The origins of human capital theory can be traced to the seventeenth century, when William Petty, an economist, "emphasized labor quality differences and who identified what much later was labeled human capital when he argued for an inclusion of the 'value of works' in accounting for wealth for actuarial purposes." Adam Smith (1776) wrote in Wealth of Nations that education and learning were to be considered as investments in human beings. Modern human capital theory emerged with Irving Fisher's capital theory in 1906, which "emphasized that all types of stocks would be capital when yielding services, and even explicitly included human beings."
Human capital theory developed quickly through the 1950s and 1960s from both macroeconomic and microeconomic perspectives. "Human capital theory affirms that people invest in themselves, through accumulation of different types of human capital goods like formal education and productive knowledge and information, in order to constitute stocks of generally intangible human capital with the potential for increasing their owner's market and non-market productivity."
Human capital can be expressed as an equation using marginal product (MP), assumed to be equal to wages, which is taken as a function (F) of three sorts of input. These inputs include: the number of supplied person-hours (L); various types and qualities of human capital goods in aggregation (H); and a construct of other positive and negative capacities — such as personal endowments shaped by nature and nurture (mental and physical capacity, motivation, behavior, and learning). Elements of this third construct affect both the productivity and effectiveness of L and H, while allowing that aspects of it can be modified and improved by investing in H. Both the quantity and quality of human capital components (H) and capacity characteristics work in a circular, mutually reinforcing relationship that strongly influences L. This relationship is presented as:
MP = F[L; (H, C)]
Human capital can be summarized as a quantification of the intangible aspects of human beings — their attitudes and attributes that are inherent to each person, as well as any investments made to increase these capacities and capabilities (e.g., training, other personal improvements, and the ability to retain learning), along with any intangibles that detract from these capacities and capabilities (e.g., loss of motivation, effects of aging).
In the context of the knowledge economy, or new economy, human capital "embraces both the broader human resource considerations of the business workforce and the more specific requirements of individual competence in the form of knowledge, skills, and attributes of managers and the people they manage."
New competencies are required by employees to survive and thrive in the new economy. The new economy requires that "personal attributes involve self-confidence, resilience, and the ability to be flexible and adaptable. If job security is no longer tenure-based, new economy workers will need to be psychologically able as well as technologically proficient to scan the environment and recognize opportunities." Although the understanding of human capital is well established, this field of HRM continues to evolve as the world economy changes.
The term human assets tends to frame employees as assets of an organization and generally does not recognize the role that individuals play in investing in and controlling their own personal and professional development. "Since the late 1970s, many organizations have professed to view human resources as valued assets rather than liabilities, and the investment in human resources as strategically imperative to corporate competitiveness." Human assets are generally seen as receiving investment from organizations rather than making investments in themselves. The term treats an organization's workforce as one of many assets that add value to the organization. This general assessment is supported through a methodology that proposes to measure the return on human assets within companies:
"All organizations have assets. Assets are used to produce output. Standard accounting techniques allow monetary values to be put to many of these assets — buildings, machinery, transportation, stock, and so on. Management uses this and other information in order to make the most efficient and productive use of their assets. The employees of an organization represent an additional asset — they too are there to produce output and they too have an inherent value. A human asset value does not appear on the balance sheet — it is intangible and it cannot be sold to raise cash. But for managers to run human assets as efficiently as they can other assets, they need equivalent information."
Human assets are a business construct that aligns human resources with all other assets held by the organization. The term captures the intangible value of human resources in a tangible form, allowing a more thorough valuation of the organization's worth to be determined.
"Defines intellectual capital and its economic role"
"Maps overlaps between capital, assets, and knowledge"
"Argues HR must be treated as strategic investment"
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