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June 30, 1997

Conserving Human Intellectual Capital

By Howard Hobbs, Economics & Legal Editor

WASHINGTON DESK - The Economics Institute of Washington D.C. released its 1997 study on human intellectual capital, Friday. The Report concludes that the economic value of the nation's productivity depends more upon employee skills and knowledge and business problem solving aptitude than it does upon the market value of the firm's commercial output.

Intellectual capital is not currently being reported by Commerce Department economists. Perhaps it should be. Steven Wallman, commissioner of the Securities and Exchange Commission, said investors aren't getting enough information to make good decisions. Traditional balance sheets, which record a firm's book value-assets less liabilities - just don't mean much anymore.

The gap between the market value of companies and their book values has been growing, especially since the early 1980s. According to IBD data, the price-to-book ratio of the Dow Jones industrial average grew to 5.3 last week, from 2.61 in early 1993.

Wallman contends the gap is best explained by the effects of intellectual capital. The assets that make up a company's market value are human and intangible - not picked up by traditional ways government economists measure growth and productivity.

Private sector firms invest in human intellectual capital by allocating budgets to research and development and in employee training. Human capital variables are used primarily to justify legitimate differences between groups of individuals in pay and wage rates.

Even the government pays homage to the human intellectual capital principle. Educated workers are more productive and valuable than less well educated workers are. A good education is just one human intellectual capital variable. Other examples are work experience, and the knowledge area in which a worker in the labor force is trained. The Economics Institute Report found that the variables are clearly reflected in job pay in the U.S.

When the labor market has been unable to provide U.S. workers with a good education, firms have attempted to locate educated workers elsewhere. Usually, from overseas labor markets. Identifying the expense a firm allocates in obtaining its supply of human intellectual capital is not being reported for statistical purposes. Better economic measures and reporting of intellectual capital will help owners and investors to make the a more appropriate forecast, the Report says.

There's a lot to this. For example, knowledge-intensive firms, like software companies have some of the highest market values around, with market-to-book ratios as high as ten. These firms have the highest educated work force in the world.

As Austrian economist Friedrich von Hayek explained, capitalism does not require everyone to have perfect market information. What capitalism needs desperately to survive, is the freedom to take risks and the time to learn from mistakes.

Taking the risk out of market economics destroys the essence of capitalism. The opportunity for personal learning from making poor choices. When the government interferes in the wealth getting process, the government is suppressing the growth of capitalism and insuring its demise.

Whenever risks are undertaken, there is a good chance of a painful loss. Loss of economic resources builds the character and independence needed to learn practical economics principles. We try again. Eventually, wealth is created through gaining market intelligence and making better market decisions toward self-improvement. A complete education, therefore, serves the purpose of our republic.

When the nation's children fail to develop competitive intellectual capital by the end of 12th Grade, they are not employable in the labor market and they fail to serve the republic.

It is far too late to expect the nation's colleges and universities to make up for a lazy intellect and basic skill deficits. Promises of college grants for every high school senior are empty and meaningless political rhetoric. If you can't read after 12 years of free public school education, a full-ride four-year college scholarship is not the appropriate solution for getting youth ready for the labor market.

The nation's employers cannot be expected to pick up that burden of basic education in science, math, and economics. They look elsewhere.

This is what the Austrian economist called human intellectual capital. Its what Congress, the White House, and the Supreme Court can never achieve. It's what working America has and needs a lot more of as the nation's store of human intellectual capital is being rapidly depleted by welfare statism. A sure and dangerous road to serfdom at the millennium.

That's what the National Debt is all about. Its about the loss of the nation's human intellectual capital in a disgusting display of $5.4 trillion in wasteful government spending, shrinking productivity, and the worsening Chinese trade imbalance.

This year, already, the National Debt has grown to $1.2 trillion and climbing. Today, your family's share of this bill is just over $69,170. If your family didn't have to pay this bill what would you have wanted to do with the $69,170.00?


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