Is The Human Capital Theory Effective?
The Human Capital Theory Is Effective If…
Human capital can be debated by economists as to whether the human capital theory is effective or not in terms of increasing a company’s revenue for example. I can see both sides in this discussion but I also look at it from a different lens, which is leadership. It is always good to look at a theory such as the human capital theory from many different angles and not just a single angle. In this post I am going to dive into what the human capital theory is, why I think investing in human capital is vitally important, and how no company can really thrive with out it. So lets dive into the human capital theory and unpack my thoughts surrounding it shall we…
What Exactly Is The Human Capital Theory?
The economist Gary Becker is tagged as being the person who essentially made the the human capital theory stick in the U.S through his book Human Capital which was released in 1964. The human capital theory focuses on if management invested in education, training, etc for their employees that ultimately they would have a higher rate of return or larger ROI by doing so. Some will argue that there is no economical model to capture the true rate of return or investment of human capital because you are dealing with people who have different character traits and a wide range of other variables. To sum it up here, the human capital theory is an economical look at the benefits of investing in people.
My Take on The Human Capital Theory
I look at the human capital theory from a leadership standpoint first. A leader can invest in all of the new technologies, systems, machines, or any other form of automation to increase productivity, shrink overhead costs, and ultimately make more profit. However, each of those new investments require people to ensure that they are running optimally. Businesses are not successful due to stellar systems and technology only, although that is a part of it. Businesses are successful mainly due to the people that work for them. I have yet to see a company that only employs robots and no humans that out competes a company full of people. The more you invest and equip not only yourself but others to learn new skills, get more education and training the more you are investing in them and the future of the company.
Many large successful businesses offer to help or fully pay their employees tuition. Some leaders may feel that investing in human capital is expenses and should not be a top priority. They are only looking at human capital with a monetary lens. The more you invest in people the more they feel appreciated, taken care of, and cared for. This builds a climate of trust, lets them know that they mean more to the company than a position. Companies that do this usually see low turnover and attract top talent. Companies that do not invest in human capital will have the opposite experience. The more you invest in human capital it lowers the chance of the Peter Principle from coming true. So simply looking at the human capital theory through only a lens that only looks at the cost will come back to bite you.
Final Thoughts On The Human Capital Theory
I know that there is far more to discuss on the human capital theory. You can look at it at many angles from different cultures, to athletes and so on. You can unpack it further and drill down to the economics of it and how truly measurable it is. You can focus on the opportunity cost of to invest or not to invest in human capital. But the reality is that the human capital theory serves a purpose in business as well as your personal life.
If you actively seek to fill your knowledge gaps, grow as a leader, and develop yourself you are investing in your own human capital. You could measure the cost of your development in monetary means like tuition or you could measure it in terms of hours invested, or both. But the end result is what is needed to be looked at. Would you not be better if you invest in yourself? The answer is yes, so would the people that you or a company leads be better off, more productive, and efficient by having the opportunity to be invested in? The answer is yes also. The human capital theory is extremely important for leaders to understand and utilize. The more you invest in others, the more they will invest in you. What are your thoughts on the human capital theory?
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I believe leadership is about build up human capacity. I have seen the benefits of adding value and building up your people. I have also seen what happens when managers do not do this. The leaders and managers who focus on their people will see better long term results. Great post man.
Thanks for the comment Dan. Without investing in human capital a company’s culture cannot fully thrive.
James