Human Capital Theory: Still Relevant or Woefully Outdated for Our Knowledge Economy?

Human Capital Theory Still Relevant or Woefully Outdated for Our Knowledge Economy

“Our human capital stock is ready to go back to work.” – Kevin Hassett

In May 2020, White House advisor Kevin Hassett drew public ire by referring to the American workforce as “human capital stock.” US Representative Alexandria Ocasio-Cortez asserted the term was not only outdated but inherently racist.

This raised a very important question for employers: How do you measure the output of your employees without treating them like cattle?

In addition to questions about the potential for dehumanizing employees, contemporary theorists question whether or not human capital theory – a product of the mid-20th century manufacturing economy – still has a place in our 21st-century knowledge economy.

In a knowledge economy, an employee’s output is intellectual rather than physical. Human capital theory originated during what is considered a manufacturing economy. As a result, it’s optimized for measuring physical output.

At a clothespin factory, a worker’s productivity is judged by how many pins they produce a day. There’s an established length of time it should take to make a faultless pin. That pin is an example of physical output. At the end of the day, you can count that worker’s pins and have a fairly good idea of their productivity.

A knowledge worker, however, doesn’t produce physical output; a knowledge worker produces intellectual output. I’ll go into this in more detail further on, but – in terms of human capital theory – the question is: how do you know how many “pins” a knowledge worker makes per day?

Obviously, knowledge workers are still given a wage, generally factored according to their value to the company (experience, education, etc.); in other words, using the principles of human capital theory.

But is this an accurate reflection of that employee’s worth? Are knowledge workers being undervalued because their productivity isn’t linked to the number of hours they work? Should intellectual and physical output still be measured on the same scale? Can they be weighed by the same scale?

More to the point, if human capital theory has outlived its usefulness, what language should we be using to describe an employee’s value? Is it fair to consider employees part of a company’s assets?

In this Process Street post, I aim to investigate these questions and explore ways in which the 21st-century employer can assess employees in terms of company value without objectifying the individual contributions.

Let’s delve deeper.
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