Uwe E. Reinhardt, a noted economics professor, has posted a series of essays at the Economix blog on wealth creation — the latest being Who Creates the Wealth in Society? In this essay, he expands upon the basic theme:
It is now well recognized that the wealth of modern societies is dictated not so much by the natural resources at their disposal, but by their human capital — the knowledge and skill of human beings and their ability to learn and apply new knowledge on their own.
This leads him to the important role of the family – as the original institution for fostering human capital.
I would push this a step further. It is not just human capital — “knowledge and skill of human beings and their ability to learn.” It is the organizations and the other framework conditions that allow for that human capital to be used. As I hinted at in the previous posting, too many organizations focus only on certain parts of their human capital. All parts of facets of an organization’s human capital need to be fully engaged. We used to call this the “high road” strategy of high skills and high wages.
But that is not enough, the organizational structures themselves need to promote knowledge creation, sharing and utilization. At one point, we called these high performance work organizations or learning organizations or innovative organizations.
No matter what we call them, the point is the same. The way in which human capital is organized is just as important as the human capital itself.
Reinhardt ends his essay with the following:
Governments everywhere in modern societies provide the legal and much of the physical infrastructure on which private production and commerce thrive. Imagine a world in which private contracts can be adjudicated and enforced only by private thugs rather than in the civil courts.
Just as sports contests could not be fairly conducted without a strict set of rules and referees with power, so private markets could not thrive without regulations and regulators with power. A truly laissez-faire market economy would be apt to be a mess, as what Wall Street made of its own business in recent years reminds us.
. . .
A nation’s wealth is truly a joint creation in which individuals, families, business and government all play crucial parts. Finding just that mix of efforts and regulations that will maximize society’s well-being is a tricky and never-ending quest.
But governments need to do much more than play the referee. They need to be involved in helping create the intellectual capital that makes the economy work. Part of that is active assistance in fostering the organizational capital needed for the I-Cubed Economy.
In that regard, I have been advocating for changes in public policies to foster greater utilization of intellectual capital (see our Policy Brief Intellectual Capital and Revitalizing Manufacturing). These include:
Expand the Manufacturing Extension Partnership (MEP) to Boost Intellectual Capital. The Administration’s budget appropriately calls for doubling the MEP budget, but the scope of this assistance to manufacturers needs to be expanded to include innovation, new product development, and utilization of intellectual capital. Manufacturing companies have a wealth of intellectual capital that they often do not recognize or manage well. MEP services must include intellectual resource management that covers a broad array of assets, beyond help with intellectual property. The program’s budget increase should be used to expand services and staffing in areas such as marketing, finance, and business model development, in addition to new product development and process adoption.
Help Entrepreneurs Manage Intellectual Capital. The Administration’s A Framework for Revitalizing American Manufacturing specifically cites efforts by the U.S. Small Business Administration (SBA) to provide entrepreneurship training and to foster partnerships with community colleges, universities, and others. It also mentions the U.S. Economic Development Administration (EDA) program of supporting business incubators. But most of these training programs do not explicitly recognize the importance of managing intangible assets and intellectual capital. Programs that support entrepreneurs need to incorporate these topics as part of their activities and impart these essential skills to would-be innovators.
We need to move ahead with programs like this if we are to truly restore wealth creation in this country.