Enterprise Issues: Invest in machinery made of flesh and blood

WE HUMANS - described by one tetchy writer as "the wet side of the carbon-silicon divide" - have a natural tendency to regard machines as human too. If your computer plays up, you talk to it, shout at it and finally hit it, in a caricature of a dysfunctional human relationship.

But the key to understanding many trends in the modern, weightless or knowledge-based economy is rather to think about humans as machines. Human capital has finally become as important as physical capital in economic growth.

This is why so many people in professional jobs work all hours, facing a dilemma about how to balance work and home life - how to combine being a piece of expensive capital equipment with being a person too. Such workers represent a long and expensive investment in knowledge and expertise, and one for which employers pay with high salaries. Research published just over a year ago by the Institute for Fiscal Studies confirmed that the returns to higher education are in double digits.

As with any type of costly equipment, the employers leasing them at expensive rates want to sweat their human machines as much as possible. The more hours of work they can extract, the better. The limits are physical - humans are less productive when they suffer stress and get too little relaxation and sleep. They burn out or drink too much or fall ill.

Still, with the technology available to tie staff to their work even when out of the office, the temptation for employers to demand more and more effort is immense. Few resist it.

Few even manage to recognise that there might be a trade-off between short and long-term returns to human assets. If the unit of human capital, or employee, is permitted an easier time, allowing him or her to go home early sometimes, take longer holidays, go to the art gallery or concert at lunchtime, take time out to go to the gym during the day - how pleasant it is to fantasise about the possibilities - this might replenish their capacities and make them more productive for longer. But in a ferociously competitive world, it is all too easy for companies to focus on getting more output now.

Of course, one of the results of this pressure is that many highly qualified people prefer to set up on their own. They will have to work just as hard, but they will get all the return to their investment in themselves. The same force is behind the need for high-technology companies to give employees generous equity options. In other words, the economic forces driving companies to make key staff work as hard and as long as possible paradoxically reflect a change in the balance of power in the workplace that favours employees at the expense of employers.

For human capital, as opposed to basic labour, is scarce. It is only custom that leaves the power to exploit it in the hands of companies. That, and the reluctance of many people to take on the risk of competing in an uncertain world themselves. But most companies have removed the cushion of protection from the ups and downs of business they once offered employees as part of the compensation package. Those that are all too willing to shed people during downturns have thrown away the financial advantage of mutual loyalty.

There is another consequence of the scarcity of human capital, and its high price. That is the tendency towards greater inequality of incomes. It is a well-known fact that the earnings distribution in the UK is more unequal than at any time since the Industrial Revolution.

The explanation is pretty much the same - and so is the eventual solution. There are relatively few people around with the skills needed in industries that account for a growing part of economic output. A shortage of any sort of capital means the returns are bid up. This is one of the reasons the top end of the income distribution has been stretched upwards. In the long run, of course, excess returns ought to stimulate more investment. A century ago in the western economies this happened with the spread of universal primary education and the creation of a national system of elementary schools. Over a period of 30 years or more - a full generation - this steadily made the income distribution less unequal by raising the incomes and living standards of the poorest.

This is exactly what needs to happen again now. Governments all over the world must extend and improve access to education. In the West, this means getting more and more young people into tertiary education and significantly raising standards. Although the Labour Government certainly stresses the importance of education, the UK, as with other countries, will have to start spending a lot more money on education.

According to OECD figures, the average member country spends 6 per cent of GDP on education - it is about 4 per cent of GDP in the UK. The rate of investment in physical capital is about 20 per cent on average - 16 per cent in the UK. We ought to be thinking about bringing those two ratios in to line.

In the developing world, it means education is an economic and not just a social priority. As an Oxfam campaign launched this week emphasises, there is a serious danger of the poorest countries in sub-Saharan Africa getting left even further behind because their governments cannot afford to put all the children through school, and perhaps do not even value it. Inequality between countries, as well as between citizens within countries, is driven by unequal access to the possibility of improvements in human capital.

Human well-being ultimately depends on economic growth. Economic development depends on investment. And investment means investment in the machines made of flesh and blood as well as those made of metal and plastic.

n d.coyle@independent.co.uk