By
Mike Russiello

Knowledge is the new precious resource -- the new source of surplus economic value. The winning companies and nations of the next century will be those that develop the means to convert knowledge assets into human capital. Those that do not will be hopelessly left behind.

Corporations of the 21st Century will aggregate and deploy human capital via a large- scale marketplace, much as they did with physical capital in the previous century. As with physical assets, the more liquid the market for trading knowledge, the more wealth will be generated.

What causes the surplus wealth? The source is capital generation, a process that occurs when the perceived economic potential of an asset increases. A common cause of this generation process is new technology. For example, the development of affordable mobile phone technology greatly increased the value of FCC licenses in the mobile phone spectrum. Another common cause of capital generation can happen due to structural changes in the marketplace. For example, consider the introduction of secondary financial markets in the United States, which increased the liquidity of mortgage assets and hence the economic potential of making mortgages. This increased liquidity for mortgages provided more options and flexibility to banks and hence it increased their economic potential, which generated significant market capitalization for various financial institutions.

Recent technology introductions and structural changes that increase liquidity in human capital markets also generate capital, which we call "Human Capital." New talent exchanges, electronic recruiting, and supply chain approaches to staffing processes all help to establish this liquidity.

Knowledge as a source of wealth has been recognized among corporate executives. For example, Bill Gates, Chairman of Microsoft, has said "Take our twenty best people away, and I can tell you that Microsoft would become an unimportant company." People have always been the driving force behind successful organizations. To date, however, few have been able to directly convert the knowledge of their employees into additional shareholder value, or capital.

Governments also have reason to get excited, since they can potentially increase their nation's overall wealth. For third world and developing nations, human capital represents a chance to close the wealth gap with the industrialized world. For developed countries, human capital represents both a threat and an opportunity. Like corporations, however, few governments have been able to transform the knowledge of their citizens directly into national wealth.

However, the wealth producing effects of human capital have not yet been realized because there are no accepted global skills standards. These standards are required to facilitate transactions in a large-scale marketplace. Without them, human capital cannot be adequately quantified to permit trading at any appreciable volume.

Skills standards for the knowledge-intensive disciplines are inevitable. However, don't expect them to emerge via some kind of national or international decree. The demand for these standards is here today, driven by the needs of the knowledge worker. These workers are craving a method to quantify their knowledge, both to satisfy their egos and to stand out with employers for the jobs they want to obtain. As a result, the market has little patience and the standards will develop via the grass roots. This bottom-up movement will be fueled by the incredible communication power of the Internet. Ultimately, the new, de facto, standard will be embraced by corporations and governments.

What is Capital?

Both Adam Smith and Karl Marx wrote about how physical assets can unleash surplus value that exceeds the characteristic worth of the assets themselves. For Adam Smith, it was the application of an asset to activities of increased specialization that drove this transformation¹. For Marx, it was the conversion of an asset into a commodity that could be managed and traded virtually that caused it to spawn new value. In both cases, the value came from establishing a marketplace in which the asset could be applied in the way in which it was most productive and most highly valued.²

Capital, in the language of capitalists, is a conceptual representation of the potential of an asset to generate economic production. In this context, surplus value comes from the ability to use the asset in a more productive manner than previously imagined.

When an asset is deemed to hold greater potential than it had before, capital is created. For physical assets, this can occur when the asset is placed in a more specialized use, or when it can be aggregated with similar assets to produce economies of scale. For people, it can occur through learning.

So how does a country or corporation create human capital? By ensuring its workers develop their knowledge effectively and by creating an efficient human capital marketplace.

Transforming an Asset into Capital

In "The Mystery of Capital," highly regarded economist Hernando De Soto explains that a physical asset can be transformed into capital only after certain conditions are met.³ These are:

1. Legality—the asset must have a legal owner
2. Standardization—the asset must be describable using a standard set of characteristics that allow transactions to take place without the physical asset itself being present.
3. Fungibility—it must be possible to combine and divide the asset to suit the needs of any particular transaction.

In other words, for an asset to become capital, it must be possible to trade it in a marketplace that is physically removed from the asset itself. Without support for the marketplace, capital cannot be created.

De Soto shows that the vast majority of physical assets held in third world and developing nations fail to meet this criteria because they are owned outside the country's legal system. No legality due to arcane and dysfunctional "official" property systems means that assets cannot be reliably bought and sold on a large-scale marketplace. The result for many countries is that a tremendous quantity of assets cannot be transformed into capital.

Introducing legality is not a swift process. The industrialized nations, including the United States, each took over a hundred years and endured much political upheaval to complete this process⁴. Therefore, the short-term prospects of the third world and developing countries look grim. However, there may be a new opportunity for the developing and third world countries to generate large quantities of human capital.

Human Capital

Like its physical counterpart, human capital is valued based on potential. Just as a physical asset can be applied in different ways to produce goods and services, so can an employee. When marketplaces emerge that facilitate transactions where knowledge can be directed to where it has the greatest potential, and hence the greatest value, human capital is created.

However, there are some important differences between markets for physical assets and knowledge. First, a knowledge worker cannot be bought and sold, only rented through some form of employment agreement. Second, rather than be expended, human capital is constantly in danger of becoming outdated and requires constant refreshment (learning). Third, human capital is sensitive to the way in which it is treated and used, since employees can walk away forever if they are not happy. Finally, the productivity of a specific employee is often dependent on many interrelationships with other employees, often defined by a specific culture.

These differences mean that future marketplaces for human capital will not resemble the traditional physical asset exchanges. However, regardless of what this marketplace looks like, it will undoubtedly require an accepted set of standards for quantifying and representing knowledge. While there are many experiments in progress for new human capital markets, doing so without having an established set of standards is placing the "cart before the horse." It would be akin to trading goods without a currency.

How Much Capital Can Be Unleashed?

While difficult to estimate, there may be more human capital value created in the 21st century than the total amount of physical capital created during the previous century. This equates to trillions of US dollars. The basis for this estimate is thate the potential of a human being is greater than an inanimate object, and if technology and structural changes can have the same impact on knowledge workers this century that they did on physical assets in the last century, proportionally greater value should be created.

Gary S. Becker, Nobel Laureate and professor of economics and sociology at The University of Chicago, has estimated that around 70% of a country's wealth today is in human capital, as opposed to physical capital.

Skill Standards

Skills standards are the currency of the human capital market. In this capacity, a standard describes the knowledge, competencies, abilities and related attributes needed to perform a specific skill well.

There are many ongoing attempts at creating skill standards by both private industry and government. For example, in 1994, President Clinton created the National Skills Standards Board (NSSB). The mission of NSSB is to encourage the creation and adoption of a national system of skill standards that will enhance the ability of the United States to compete effectively in a global economy. Additionally, many associations and corporations have created skills standards for specific skill domains. Many of these standards have some overlap with others.

The large number of partially competing standards at various stages of development has bred just as many different deployment strategies. At one end of the spectrum, organizations like the NSSB are relying on government adoption to make it the "winning" standard, while at the other end, organizations such as Brainbench are relying on a "grass roots" wave of adoption to make it the de facto standard. Still other organizations are pushing their standards through corporations.

While it's difficult to predict which standards will emerge as the winners, we know that they will have the following characteristics:

• Easy to use and understand
• Meaningful for both individuals and corporations
• Acceptable quality
• Must be adopted by a large percentage of knowledge workers in the domain
• Will provide both relative and criterion-related information

While multiple standards will emerge for the same skills, it's likely that cross-mappings and translations will be created, much as exchange rates are created between currencies.

The Emerging Human Capital Marketplace Needs Skill Standards

The employment marketplace is evolving into a human capital market. Though it's impossible to predict how this market will ultimately be shaped, it will likely have the following characteristics:

• Facilitates a increasing velocity of employment transactions
• Presents a growing number of options to the knowledge worker
• Is driven by the need for continuous learning

Increasing Velocity

As the market becomes more efficient, knowledge will be able to move to where it is needed (and valued) most. Organizations will not want to pay for knowledge they don't need, and workers will not want to remain idle in positions that do not allow them to increase and hone their knowledge-based skills. As a result, knowledge workers will change jobs or projects much more quickly, and the velocity of the employment market will increase.

Growing Options

The variety of employment arrangements is constantly increasing. Robert Laubacher and Thomas Malone of MIT's Sloan School define a spectrum of options ranging from employment agreements to freelance work to expert spot marketplaces. Today, nearly 30% of American workers work outside of traditional employment arrangements. In certain regions, the ration is even worse. For example, only one out of every three working Californians holds a permanent, full-time, day shift job working on-site.

Learning as the Driver

Knowledge workers are no longer loyal to specific companies. Instead, they are loyal to their own career development. Since the knowledge worker's career is dependent on continued accumulation of knowledge, continuous learning is of prime importance.

A key part of future compensation will be the opportunity for learning. Models have already appeared where individuals have their training financed by corporations in return for commitments to work for a period of time. Training companies have stepped in, offering to finance education in return for allowing the training company to place the person in another company for a period of time and collect the placement fee. A good example is iGeneration, which allows a person to offset his or her training costs by allowing the trainer to place the person into a job.

The future human capital marketplace will surely have these features, and skill standards are as necessary for them to operate as money is to financial markets. For example, velocity means transactions. However, unless transactions can be made on the basis of virtual representations of a knowledge worker's skills, adequate velocity cannot be attained. Similarly, for learning to be represented in the virtual environment of a human capital marketplace, there must be skills standards. It's the equivalent of trading for commodities like gasoline and pork bellies without standard weights and measures.

Summary

In the coming age of the knowledge worker, human capital is the next great frontier for large-scale wealth, or capital creation. This new trend will provide great opportunities to industrialized and developing countries alike, with more than a trillion dollars of capital created. Among the key catalysts is skill standards, which will become the currency of the human capital marketplace and enable it to reach proportions similar to the physical capital marketplace of the previous century.

About the Author

Mike Russiello is President and CEO of Brainbench, the world's leading independent skills certification authority. Prior to co-founding the company in 1998, Mike was a manager at EDS, where he successfully led a large-scale software implementation for the U.S. Department of Education. Prior to his operational role, Mike was a salesperson for EDS and is credited with sales totaling over $500 million. Mike is a graduate of the U.S. Naval Academy and holds advanced degrees in Electrical Engineering and Business Administration from the University of California and University of Maryland, respectively.

1 Adam Smith, The Wealth of Nations, 1880

2 Karl Marx, ~1864

3 Hernando De Soto, The Mystery of Capital, 2000

4 Hernando De Soto, The Mystery of Capital, 2000