IAN McAULEY. Reframing public ideas Part 7: Capital

Former Science Minister Barry Jones complained that we tend to think of “capital” in terms of stuff that hurts when we drop it on our toes. It’s too easy to overlook other forms of capital – human capital, social capital, institutional capital and environmental capital.

One of the technological treasures in Sydney’s Powerhouse Museum is a working Boulton and Watt steam engine, built in 1785. It saw 102 years of service in England’s Whitbread brewery, before it was decommissioned in 1887 and sent to Australia as a museum exhibit.

Standing 9.1 metres high, weighing 33 tonnes, and incorporating a flywheel of 4.3 metres diameter, it’s a massive piece of equipment. In its working life in the brewery it needed a team of workers to keep its exposed bearings lubricated and to supply it with coal and water.

Its power output is about 20 KW – a fifth of a Toyota Corolla’s.

A 20 KW electric motor made today would be the size of a small coffee table, would weigh less than 100 kg, would need hardly any maintenance and would cost $1000 or less.

The industrial revolution was about big, heavy, noisy and expensive machines – the “capital” that gave capitalism its name. Those assets were factories, ships and buildings that wealthy capitalists, and only wealthy capitalists, could afford. We tend to confuse money with wealth, but money itself has the capacity to store and create wealth only if it is invested in productive assets.

We still stand in awe of big pieces of capital – an A380 aircraft, China’s Three Gorges Dam, the International Space Station. These are “stuff that hurts when we drop it on our toes”. But for our future prosperity they are not the most important forms of capital.

Over the years since James Watt brought steam engines into factories, for the most part the cost of machinery has tumbled. Trucks, motors and workshop equipment have become much cheaper, and the most spectacular price falls have been in information and communication technology.

As a young engineer I worked in a factory with a state-of-the-art IBM 360 computer, which would have costed the firm more than $1 million in today’s terms. Its climate-controlled temple occupied about the same space as a Boulton and Watt engine and because it was too valuable to be left unused, 15 or so staff were employed on three shifts to keep it running.

Now we carry in our pockets machines with vastly more computing power. In Whitbread’s brewery and in that factory in the 1960s labour was employed to keep the piece of capital running: labour was an adjunct to physical capital. Now the roles are reversed: in many situations machinery is an adjunct to labour.

In Watt’s time what we would now call “physical capital” was the important factor of production, while “labour” was considered to be a replaceable commodity, hired for its brute force and capacity to submit to authority and tolerance of boredom rather than as a repository of skills. Masons, shoemakers, druggists and others had artisan guilds, but they were seen as relics of a pre-capitalist order. Karl Marx considered them to be anachronisms to be swept aside by capitalism (which in turn would be swept aside) as history took its inevitable path.

If Marx were to turn up in 2018 he would have to re-write chunks of Das Kapital to incorporate human capital. The Marxist scholar Jerry Muller, of the Catholic University of America, has had a go: he sees the knowledge worker as the new capitalist.

Muller’s new capitalist does not fit the stereotype of the bloated plutocrat: he (increasingly she) is more likely to be wearing jeans and a designer T-shirt than a striped three-piece suit, is more likely to be driving a Prius than riding in a chauffeur-driven limousine, and is more likely to vote green than conservative, but he still holds the capital. In fact he holds it more tightly than the traditional plutocrat, because his capital, “human capital”, is embodied. And those with less human capital are still exploited. Because the exploited do not form a distinct class, no communist revolution or a mass trade union movement is going to alter that power.

Yet our traditions and institutions are still guided by classifications of an earlier era. Economists talk about separate factors of production – “labour”, “capital” and “natural resources” – as if they are clearly delineated. Companies record on their balance sheets only financial holdings and physical assets such as machinery, buildings and trading stock. When we assign a market value to a house or commercial building we forget that most of that value is its related human capital. Governments and business lobbies still talk about the “labour market” in the same terms that they talk about the market for iron ore or soy beans, as if “labour” is some homogeneous commodity.

So it is with other forms of capital – environmental capital, institutional capital and social capital.

Much of our economy still functions as if natural resources either have no value or are in inexhaustible supply. Only in recent times has there been growing awareness of our dependence on environmental capital, but getting businesspeople to understand the limited capacity of our atmosphere to absorb greenhouse gas emissions without subjecting us to catastrophic risk has involved decades of struggle. And our national accounts do not account for depletion of natural resources.

Nor do we fully appreciate the value of institutional capital. Many politicians see democracy only in terms of elections for executive government, while ignoring or devaluing parliament, the legal system, the public service, independent media, universities and cultural institutions. Politicians see funding for universities, the ABC or the CSIRO as expensive indulgences rather than as investments in our institutional capital. Similarly clerics of almost all denominations have devalued the reputational capital of their respective churches.

Perhaps the most important capital is social capital, which is about the general respect and trust we show towards one another. We know it by its absence: when people feel they have license to denigrate others because of their political opinions, religion, race, sex, or sexual orientation; when politics becomes a gladiatorial battle rather than a competition of ideas about serving the public purpose; when social behaviour is no longer regulated by norms of decency but by specific laws and regulations; when years of hard work developing the Uluru Statement get dismissed without so much as a “thank you”.

When people stop cooperating with, respecting, and trusting one another not only does life become less pleasant, but also we incur huge financial costs – more resources devoted to audit and policing, more expenditure on personal and business security, the norm of the “fair go” replaced by costly legal disputes over workplace and consumer rights, more legal contracts taking the place of informal agreements, and more activities prohibited or restricted because of the risk of liability claims.

Unfortunately the way we think about “capital” is still influenced by the economics of times past, when national prosperity was clearly associated with investments in physical capital. That thinking seems to dominate in our so-called “business” lobbies who carry so much sway in public policy.

More enlightened businesspeople and policymakers, however, understand the importance of capital in all its dimensions, and that owning lots of big, heavy and noisy stuff is not the path to future prosperity. To them the term “our people are our greatest asset”, once a cliche in annual reports, has meaning.

Some of these businesspeople and policymakers believe that we should try to bring all assets, particularly human capital, to account, while others point out that because our present private and public sector accounting systems cannot even assign meaningful values to physical assets, it makes no sense to extend the distortions of accounting conventions into other asset classes.

But they agree that we need to appreciate the value of everything contributing to our individual and common wealth. That is all forms of capital, and not just stuff that hurts when we drop it on our toes.

 

This is the second-last in a series of eight articles on re-framing public ideas, being published over January 2018. Others so far have been:

  1. Leadership, posted on 3 January.
  2. The role of government, posted on 5 January.
  3. Economy and society, posted on 9 January.
  4. Economy and environment, posted on 11 January.
  5. Competition, posted on 15 January.
  6. Jobs, posted on 18 January.
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