Wednesday, March 22, 2017

Raising the Economic Value of Human Capital

Understanding how human capital is utilized in society and how that human capital is measured is important for understanding economic underpinnings.  A study by Olimpia Negu delves into comparing human capital attainment throughout 28 OECD countries and the market benefits of that capital (2012). This measurement helps to show which countries have the highest human capital development. It may also start to highlight where economic growth is most receptive.

Before analysis it is important to understand what human capital actually is. Human capital is complex and hosts concepts such as biological capital, educational capital, social skills, and health capital (Neagu, 2010). The total human being and their ability to be productive in the environment entail their ability to be productive.  Laroche et. al. (1999) indicates that human capital has some generalizations:

-Non-tradable good embodied in humans.
-Individuals are subject to human capital decisions made by parents, society, and government. Individuals who make their own choices internalize those choices.
-Human capital is qualitative and quantitative.
-Human capital can be used for multiple purposes and is transferable among businesses.
Because human capital can be complex and difficult to measure across nations most researchers use time in education. There is a basic assumption that education raises the ability of people to compete and be productive on the market. The more productive people in a nation the greater the national output.
Collective productivity turns into the Gross Domestic Product (GDP) of the nation and can be broken down into the GDP of the individual. The cost of education is important in determining the effective value of that human capital. Judson (2002) expanded on previous calculations to create measurements of human capital per worker (h) based upon cost of education:
 Human capital can be studied and used as an imperfect measurement across nations. These measurements are important because they can impact whether or not a society even has the potential to grow.  The authors found that the human capital value of 28 OECD countries between 1999-2008 were led by the U.S., Australia, and Austria and trailed by Mexico, Czech Republic and Hungary. The market leading nations had economic value of their population's skills and abilities. 

Laroche, M., et. al. (1999). On the concept and dimensions of human capital in a knowledge-based economy context. Canadian Public Policy - Analyse de Politiques, 25(1)

Judson, R. (2002) Measuring human capital like physical capital. Bulletin of Economic Research 54 (3).

Neagu, O. (2010). Capitalul uman _i dezvoltarea economic_, Cluj Napoca: Editura Risoprint.

Neagu, O. (2012). The market value of human capital: an empirical analysis. Economic Science Series, 21 (2).

Monday, March 20, 2017

Adams Smith's Role of Limited Government in Business Formation

Adam Smith, the father of economics taught us in his book The Wealth of Nations, that laissez-faire approaches to the market encourage the highest levels of growth. Government is limited in its role and provide the greatest freedom to business without unnecessary restriction. As we experienced during the advent of globalization, companies regularly choose nations with lower input costs and fewer restrictions. Newly formed clusters will need to offer something more than simply "cheap" costs and instead push for maximum growth opportunities through cultivating environments that supersede advantages of low cost manufacturing localities.

The market system will determine where companies will invest in operations, where they will hire employees, and how they will contribute to the global economy. Low cost copycats will be drawn to cheaper locations, while innovators will be attracted to places that spark the greatest opportunities for the development of new services and products.

One seeks to to focus on a low cost strategy that uses available technology. The other seeks to dominate the market by leading it through transitions with new products and services. Companies that seek innovative strategies will inherently look for locations that have the right elements that foster knowledge accumulation and intellectual capital.

A cluster exists within a local economy with inherent benefits that allowed these clusters to form in a one location over another. Governments create market conditions by attracting or deterring business investments through government policy making. Business-minded global companies do not invest locally out of patronage or loyalty but because they believe they can achieve the greatest advantages by doing so.

Adam Smith states, "Its not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from the regard to their own self-interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages (Smith, 1776)."

As a profit oriented enterprises, governments should move beyond traditional approaches to economics by thinking from the perspective of would be corporate interlopers. What are they looking for, what type of environment are we providing and how do we provide it are essential questions to strong cluster management.

Of course we have choices, and one of them is to not change or adjust our governance to a global marketplace. We can use the same methods, continue to lose corporations, and watch our national debt rise and incomes decline. The role of government is to create polices that are in the best interest of their citizen stakeholders and thus have a responsibility to adjust their thinking when necessary.

Proper cluster management offers opportunities for government to be an environment creator but not seek to fight against the forces that allow are swirling through the global economy. Fighting these forces leads to greater decline. However, they can create local advantages by rethinking some policies that are hurting the ability of business to flourish while at the same time still protecting the needs of citizens.

Nationalism and loyalty are powerful motivators for local businesses but international companies have options where countries are often seen more as tax and cost incentives than believing in a particular national causes. While it is difficult to calculate the amount gained or lost due to corporations moving operations overseas, the amount is likely in the trillions of dollars in tax revenue. Creating strong market driven clusters helps to draw these businesses back to the U.S. because it is their best interest to do so to maintain their profit margins.

Smith, A. (1776). An inquiry into the nature and causes of the wealth of nations. London: W. Strahan. Book 1, Chapter 2.