Finance over Human Capital

The recent financial crisis triggered by the US real estate market has provided new elements for understanding how markets are inextricably linked on a global scale, and has led many to underline the cyclical damage that is recurrently being inflicted on the real economy by a hyper-securitized economy. In spite of repeated crises and falling credibility of operators, rating agencies included, power of finance and financial markets stays intact. The revision of growth estimates in the wake of the crisis, determined by a meltdown in the subprime mortgage market, is a further indicator of the central role of globalized finance in the workings of the economy today.

This occurs while many talk with verbal conviction about wealth being created by the competitiveness of firms and the “system” in which they are embedded, and about the fact that, in a globalized knowledge economy, the most critical asset is human capital. What do the mythical (or mythicized) financial markets think about it? Do they bet on it?

It’s far from being a rhetorical question. If financial markets believe in human capital, we should expect policies and investments promoting those virtuous firms that are able to generate new knowledge and innovation thanks to an effective management of human capital. Does this actually happen? Unfortunately, many elements point toward a rather different picture. For instance, looking at how intangibles are valuated, you can see that investment in human capital development is usually consigned to the vague category of social responsibility. If this is so, it also means that the connection between human capital and competitive advantage is tenuous at best: human capital is not strategic asset, if investing in it is considered tantamount to benevolent or compassionate capitalism.

Before the financial community, how would a CEO go about defending the fact that last-quarter profitability was eroded by an important project of human capital development? What would happen to the company’s stock price the following day? Who is ready to believe the fact that a massive investment in wages and training can yield additional productivity growth capable of offsetting investment costs within a reasonable time-horizon? How would financial analysts react if faced with a company that is boosting the salaries of its employees, because it expects medium- and long-term returns of productivity?

The conflict between financial logic and human capital as the basis of competitiveness essentially comes from two sources. Firstly, the time-scale of human capital investments is quite different from the speed at which financial markets operate. Secondly, and linked to the first factor, if investors did share similar expectations on the relationship linking wages to productivity, the issue would be more easily addressed. But the impact of human capital on economic performance is hard to measure. It’s as if an amateur astronomer knew that the planets are turning around the sun but didn’t have a telescope to show it and was not really committed to build one, while the ruling priests are asking for a telescope, but it’s not really sure they will be willing to look through one when it’s ready. On both sides of the intellectual spectrum, a lot of work remains to be done.