There's one asset we often forget about -- human capital.
Karl Marx wrote about it, Warren Buffett allocates it and economists call it a "factor of production." So what is it? It is capital.
When you invest what you are actually doing is using your capital to produce more capital and/or to produce an income. So what is the equivalent when you perform work for payment? Work means that you are using your "human capital", the sum of all of your skills, knowledge, experience, personality and relationships, to generate an income.
By improving your human capital you can boost your income and later on we shall see that your human capital enables you to generate an income which you might not realise that you already have!
Using Human Capital
By maintaining and improving your human capital, especially if you keep your skills up to date and learning new ones, you can continue to earn and even increase your income. However, should your skills fade, perhaps because of new technological developments or due to age, then it's likely that your income will take a hit. After all you don't see many 40-year old top-class professional footballers (Paolo Maldini being the major exception to this rule) and since the Locomotive Act 1865 was repealed there's not much too been demand for someone to walk in front of a car whilst waving a red flag.
Some people use their human capital to improve their working conditions, to become self-employed, to set up a business as a sideline or to work from home.
Working from home is a good way to boost your effective income because it lets you eliminate some of the costs associated with a conventional workplace, such as the need to commute to work, buy clothes for work and the extra money that is often spent on convenience foods and other items in order to save time. Home workers don't spend £5 every morning on breakfast coffee and sandwiches to eat at their desk!
Human Capital And Employers
Conventional accounting says that the majority of a typical business' capital assets are its land, buildings, materials and machinery (fixed assets), plus goodwill such as brand names and patents (intangible assets). But for some firms, such as advertising agencies, their employees are their key assets, but these assets leave the building every evening (workaholics aside) and their human capital never appears on the balance sheet. For these companies the slogan "our people are our greatest asset" is true, rather than just being yet another example of management by jargon.
Some workers will accumulate "firm specific human capital", such as the ability to operate a specialised piece of machinery or knowledge of a firm's internal processes. This knowledge doesn't generally travel particularly well because other employers have little need for firm specific expertise. But some human capital is very easily transferred to other firms and these employers are often willing to poach staff with these skills.
Human capital theory lies behind much of the brouhaha over investment bankers' bonuses because these people have skills, experience and, in particular, client relationships which can easily be transferred to other employers and/or countries. The effect is "human capital flight" as people and businesses leave the country, taking their expertise and taxes with them.
Making Z-Goods
Human capital is also used to produce "z-goods" which are defined as any good or service which is produced within the home for consumption by the household. Typical z-goods are cooking, cleaning, gardening, teaching your children (and parents!), performing repairs and even brewing your own beer! Z-goods are effectively a secondary source of income because you don't need to buy in these goods and services, which enables you to live well within your means.
People who produce z-goods instead of purchasing substitutes, such as hiring a gardener, are effectively creating an additional income. If their human capital gives them a particular advantage in producing some types of z-goods then can produce more of these z-goods whilst other households may have to buy in alternatives. So if your technical skills and experience mean that you can do your own building and repair work then you have a higher income, even though it never appears as cash, because you don't need to pay others for their skills.
Similarly the household which regularly goes to restaurants and buys lots of takeaway meals needs to earn more than a household which only eats home-prepared and cooked meals (z-goods).
Z-goods create a problem when it comes to calculating the national economic output because z-goods don't appear in the gross domestic product statistics (GDP). Let's say that you agree to repair your neighbour's car for £200 and use this money to buy a wardrobe for £200, so a total of £400 will end up somewhere in the official GDP figures. However, if you build your own wardrobe and your neighbour repairs her own car then nothing is credited to the GDP.
The Income Substitute
Z-goods greatly complicate the picture when comparing incomes. Someone earning £30,000 isn't necessarily better off than someone earning £20,000 if their extra income is consumed in higher taxes, work-related costs and paying for substitutes for z-goods (because they no longer have the time to produce their own z-goods). Needless to say, this idea throws the proverbial spanner in the works for those who only think in monetary terms.
A possible New Year's resolution; "improve my human capital and produce more z-goods!"
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