Human capital merits a higher rate of interest;Commentary;FE Focus

8th March 1996 at 00:00
A workforce's skills and knowledge should be recorded as assets on the company balance sheet, as its property and equipment is. This was one striking message from Euro Commissioner Edith Cresson as she launched the European Year of Lifelong Learning for us in Edinburgh last month.

The idea of human capital accounting is not completely new, but it opens up some interesting avenues. Human capital is of course a metaphor, and to some a distasteful one. There's no denying that it suggests some intriguing parallels.

Even before the astonishing success of Will Hutton's book The State We're In, the British financial system had often been criticised for focusing on the short-term, preventing companies from getting access to the capital they need to invest and grow in the longer term. Hence merger mania, footloose investment and general insecurity.

It is a thesis I still subscribe to, but in qualified form. As so often, the issue is more complex than it appears. For alongside the inability of financiers to make capital available on the right terms, there is the inability of businesses to make effective use of the capital that is available. There seems to be strong evidence that firms are simply not taking advantage of potential investment offers, so capital goes begging. A vicious circle emerges, investors fail to find ready takers and investment shrivels away before it takes root.

So what is the parallel with Mme Cresson's point? There is a danger, I believe, that the current passion for education and training focuses excessively on the supply side. All the attention is on ways of raising levels of qualifications and skills in the workforce. The message is that we need more provision and enthusiasm from individuals for improving their own levels of education and training.

But is the demand there? I don't mean demand from individuals, but from employers, from within the organisations which are supposedly hungry for all this human capital. There is some disturbing evidence which suggests that the utilisation of human capital may be at low levels, just as not all the physical capital is effectively used.

One study, for example, compared the steel and finance industries' use of graduates. In steel, it really was the case that increased numbers of highly-qualified staff were put to good use. But in banking and insurance it seems that they were used to do work very similar to that done previously by staff with much lower qualifications. Not the best expression of demand, and not encouraging to future investment.

The relationship between supply and demand is a complex one in both cases. It requires institutions - capital-holding institutions such as pension funds, and educational institutions as generators of human capital - to take stock of the terms on which they make their offers, and the basis of their relationships with potential clients. It means looking hard at how effectively skills and knowledge are used, and whether those who make use of them communicate this back to the suppliers.

My partial apologies to those who reject this vocabulary, but it is important to delve into these complexities so we are not seduced by the quick-fix solutions - and fall into the exactly the short-termism which we need to avoid. Mme Cresson's proposal is a particularly welcome one if it prompts us to carry out that kind of exercise, and I do believe that the time is coming for the idea of human capital accounting. The question is how broadly it will be conceived.

Tom Schuller is director for the centre for continuing education at the University of Edinburgh

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