Carlos Joly
The extent to which the world has become Orwellian is reflected in the widespread use of the term `human capital`, as if it were a humanizing concept, whereas it´s really a contradiction in terms. What is human about capital in the 21st century? Any attentive reader of Picketty, Sadler or Stiglitz gets my point.
In our capitalist society capital is seen as the ultimate value. More capital, more value. Ergo, if we are to value people, dignify them, why not imbue them with capital value? It would seem like this is an ennobling strategy to substantiate the business claim that “people are our greatest asset”, as if attributing the quality of capital to people were a moral enhancement. But this is misleading and fails, even on its own terms.
Consider what capital really is. Equity capital is made up of tangible assets like plant and equipment and intangible assets like brands, copyrights, patents and goodwill. Buildings, plant and equipment are amortized. Each year we write down their value. This fits with how we treat employees: once we use them up, and amortize them, we can consider them expendable, redundant, like so many 50+ year olds to be replaced by new improved models in their 30s, requiring lighter pension outlays. Not quite the glorious substantiation aimed for.
Intangible assets make up a large part of equity capital in the big high tech players like Google or Microsoft, and also in traditional package goods companies like Unilever. But this kind of capital is high maintenance, notoriously demanding of continuous upgrade, ad expenditure, R&D, and legal outlays. When corporate earnings risk falling behind Wall Street´s expectations, what gets sacrificed? What´s the preferred variable to show future productivity gains to keep stock prices from falling? Employees. `Human resource` expenditures get slashed, firings multiply. Share price capital trumps human capital.
What´s going on is that this naming strategy is really an objectification of the subject, revealing the extent to which people are commodified by an economic model so pervasive that it has become a dominant cultural reality, perverting our language and how we think about ourselves. We have to remember: we are not capital, we are people.
The Pensions Trap
Capital is failing us, not helping us. Think of what goes on in asset management and pensions. The mainstream investment industry fails most of those affected by the consequences of its actions, particularly savers and pensioners. It fails on both ethical terms and on its own terms. Pension funds are generally not providing the financial returns people need for their retirement.
The replacement of defined benefit pension schemes by defined contribution in most Western developed countries in the past 10 years is a technical solution aligned with the primacy of individualism over collective solidarity. It means collective pensions negotiated for retirees by labor unions are replaced by individual private pensions. In the earlier schemes, retirement income is guaranteed as a percentage of salary. In the later ones, income depends solely on whatever the individual´s savings yield minus intermediary fees. And this is accompanied in many cases by a reduction in state pensions. This means the transfer of investment risk onto individual savers who are rarely able to make the right decisions – a captive market for the fee-gouging chain of investment intermediaries.
The resulting retirement income shortfall in some countries is staggering. In the US, 34% of the workforce has no savings set aside for retirement, and for those working households about to retire and with defined contribution retirement savings, the median balance is little more than $100,000 and that means an income of less than $5,000 a year. The amount added by social security payments is on average about $16,000 per annum per retired worker. In sum, not the level of income most people think they´ll be getting.
Furthermore, how fund managers invest keeps on destroying nature, on which human existence and survival depend. This is self-destructive financially, a moral failure, and negligent as regards sustainability. Managers for the most part mindlessly invest in passive or index investment funds that mirror the market as it is, thus helping to perpetuate the polluting industries, companies and products that should be a thing of the past. The lame justification for this is the dogma of efficient markets that assumes market pricing represents the right price, the right value as determined by rational actors. In fact, it has little to do with the empirical reality of how prices are formed in the world of passive investment, algorithmic trading or round-robin guessing whether and how much the other guy is buying or selling. Stock market prices are notoriously disconnected from the real world, from consideration of long term economic, societal and environmental matters and are generally more responsive to short term news, sentiment, irrational exuberance or fear, easily resulting in bubbles and crashes. Hardly something you´d want to ascribe to “human capital”.
Those of us who are concerned with fairness in income and wealth generation and distribution, in work-life conditions, and with treating people with the dignity that is their right should drop the term human capital from our vocabulary and expose it for what it is: Orwellian speak meant to obscure reality. An oxymoron. Whether we want to fix capitalism or invent something better, we should start calling a spade a spade. The appropriate term is Inhuman Capital because that is the role capital has come to have in the current phase of financial capitalism.
Carlos Joly is a fellow at the Cambridge Institute for Sustainability Leadership, Cambridge University, where he founded the Investment Leaders Group. He was chair of the United Nations Environment Programme Finance Initiative.