Why human capital will become the most scarce economic resource

News categories: the New Economy economics, human capital management and recruiting

Just only 5 to 10 years ago (depending on the type of business), wise capital allocation decisions have been still perceived as the major task of management. This has totally changed in the New Economy, which forces also traditional businesses to adapt to its new economic conditions. In many businesses today, like in high tech, biotechnology etc., human capital has already replaced financial capital as the most scarce resource. But this effect will not be limited only to those typical New Economy businesses.

Why have human resources – human capital – developed into the main economic factor ?

Because innovation has become the most important economic activity, which creates most of the economic value for companies and nations today. And innovation is dependent heavily on human brains. Let me explain this in more detail:

In 1975, production of goods and services ceased being the occupation of the majority of U.S. workers. In 1900 , production workers in goods and services accounted for 82 percent of the U.S. workforce. Over the course of the century, that number declined by large steps, to 64 percent in 1950, and to 41 percent in 1999. Managers, professionals, and technical workers such as software developers and engineers, who are increasingly involved in creative activities, have risen from 10 percent of the workforce in 1900 to 17 percent in 1950, to 33 percent in 1999 (for this figures and some more detailed consideration on the new economics resulting from this trends see: Leonard Nakamura, “Economics and the New Economy: The Invisible Hand Meets Creative Destruction” – article published in the “Business Review” of the Federal Reserve Bank of Philadelphia, July/August 2000)

This, that a very competitive and open economy, like the American economy, devotes a lot of its resources to creative efforts, is a clear indication that innovation and creativity – that is “the creation of new recipes” – have become economically more productive and are creating more value than just producing goods and services – that is “following existing recipes”. A lot of recent research is proving, that companies with large investments in R&D (a sign for a high degree of product innovation), are in general able to create significantly more economic value than pure production companies.

Because brain power can not be simply copied and multiplied, businesses are relying therefore on individual talented employees, who are engaged in creative tasks like engineering, marketing and customer interaction, and management. Their objective is to develop the next breakthrough innovation, that give their companies a competitive advantage. And creativity work is no standardized work, where workers are easily and fast replaceable like in industrial manufacturing, because it requires - beside also some technical skills – especially talent. And talent is a capability of the individual, converting such talented people, of which you can never get enough, into a scarce resource.

Considering, that also the still remaining manual tasks in manufacturing and repetitive work in general will be automated by robots and computers in the future and also traditional manufacturing companies will focus much more on innovation and creative work, it is probable that the problem to hire enough talented creative workers will become more dramatic for businesses in the future. There are clear indications, that a constantly increasing number of people will work on creative tasks in all type of businesses. It is estimated that in 2005, only 20% of the U.S. workforce will be still involved in manufacturing jobs. Companies like Cisco, often highlighted as a model of a New Economy company, owns less than 10% of the manufacturing facilities that make its products, has an automated ordering system, relies on others to handle distribution and focuses most of its workforce on product innovation and creative customer interaction. Many companies will look like Cisco in the next 3 to 8 years.

The employee, the one engaged in creative tasks, has therefore moved in the New Economy to centre stage within business organizations. The contribution and quality of the employee base is becoming a major differentiator and source of competitive advantage for companies. Overall, we are in a period that may be better defined by a revolution of the employee than by the e-commerce revolution. And companies are struggling to hire and especially retain talented people. But new compensation schemes, like stock options, phantom shares etc., or the most recent trend to reward top performers with points, prizes and gadgets instead of cash bonuses (see for this the article of Rachel Konrad, “Perk alert: Companies try prizes instead of cash bonues” at CNET.com) are only the beginning of how companies try to master this new challenge.

More about this topic, about New Economy Economics and Management Best Practice in general, and about other related topics will be continued here in my newsletters. To register for a free-of-charge e-mail push newsletter click here.

I will also report about these issues and other related success factors in a more intangible New Economy in much more detail in my new upcoming book.

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