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The Economic Power of an Idea: Capital

  • Date: 05/12/2002
  • Author: Dr. Luis M. Proenza (President, The University of Akron)
  • Location: UA Commencement, E. J. Thomas Performing Arts Hall
  • So first, let us distinguish between two words that sound alike and are often confused: "capital" and "capitol." The latter, capitol - the word that ends with "o-l" refers to the seat of government. Thus, we refer to the capitol, a building that houses legislators, such as the State House in Columbus or the Capitol in Washington, DC, where Congress meets.

    However, in other matters of government, we refer to the principal city of a state or a nation and designate it as the capital ("a-l") city - this time referring to the city that serves as the seat of government, such as Washington, DC, or Columbus, Ohio.

    Thus, capitol and capital are frequently confused, and you now know how to distinguish between the two. And that concludes the spelling part of our lesson.

    This afternoon, I want to focus on the word "capital" - the "a-l" "capital" word, which has at least 17 different meanings.

    For our discussion, I want to home in on the concept of "capital" used when we want to convey the idea of capital as an asset, namely capital as "any form of wealth employed or capable of being employed in the production of more wealth."
    (Random House Dictionary of the English Language, Second Edition Unabridged)

    In that sense, "capital" has a broad impact because it is the basis of our global economic system.

    In addition to being pervasive and useful in its most common forms such as currency, for example, capital not only affects all of humanity, it reflects all of our human endeavors.

    But capital is far more than money. It is an abstract concept made very real and very useful because of human ingenuity and the role of government policies that support our use of capital.

    Consider the concept of currency, say the dollar, . . .

    And listen to the words of Paul Podolsky, writing in a recent edition of the Wall Street Journal.

    "It is a curious fact that the world's most trusted currency, the dollar, represents a claim on an asset no more tangible than faith in the U.S. government."
    (Podolsky P. "If You Haven't Got a Penny..." a review of the book "The Big Problem of Small Change" by Thomas J. Sargent and Francois R. Velde, The Wall Street Journal, 02/02/02)

    In fact, the same is true of any other currency in the world . . . currency is accepted as a matter of "faith" because it has become "legal tender."

    But that has not always been so.

    Consider the case made by a recent book entitled, The Big Problem of Small Change, which tells the fascinating story about currency, commodity, difficulty, and policy.

    For example, at one time, coins were made of precious metals and, thus, were worth something in and of themselves, quite independent of the currency denominations they were supposed to "represent."

    Because the metals in the coins were inherently valuable, people began shaving the edges of the coins, and that became the problem with small change - because then coins were not worth what the face value of their denominations said they should be.

    The progressive shaving of metal caused devaluation and instability in the economy. Coins of a given denomination, when they had been shaved, were no longer accepted at "face" value, and it became difficult to determine how much each coin was worth. And that was the Big Problem of Small Change.
    (Podolsky, P. Ibid)

    It took centuries for humanity to learn what Adam Smith came to understand "that using commodities (such as precious metals) for physical currency represented a poor allocation of resources."
    (Podolsky, P. Ibid)

    When the technology became available to create serrations along the edges of coins, making it much easier to detect attempted shaving of value, the problem of small change vanished. By sometime in the 19th Century, standard coins were created that could always be accepted at their stated denominational values, regardless of what metals they were made of.
    (Podolsky, P. Ibid)

    But capital can also arise from many other ideas of people, not just ideas about currency.

    In its early stages, "intellectual capital" often took the form of an idea about how to use a natural resource - shaping a new product from a raw material, for example.

    In today's knowledge economy, ideas - and those who produce them - are readily recognized as capital.

    Some take offense at the notion of "human capital," as though the term means that having value in the marketplace lessens someone's humanity.

    But "human capital" simply acknowledges the role played by ideas in creating new wealth in the marketplace.

    Today, ideas are the driving force for creating new wealth.

    Indeed, economists agree that creation of technological knowledge through basic research is our most direct economic avenue for acquiring added value.

    When that new knowledge is quantified in a market environment - it creates fuller employment, capital formation, growing profits, and surpluses for reinvestment.

    In other words, it is from research and innovation that new companies are born, that new jobs are created . . . .

    It is from research and innovation that the economy expands and new wealth is created.

    That is the power and meaning of human capital! . . .

    . . . but not all of the power. There is more.

    Because, when people put ideas to work, there are consequences beyond profit and loss in a single business. There are consequences that affect society as a whole, including many positive economic consequences for our society. In short, human capital - the ideas and creativity of individuals - creates value in a company and that new value also has economic consequences in the broader society.

    In other words, human capital creates social capital.

    Social capital may seem an elusive concept, as it is generally based on "...the quality of relationships among and between people."
    (Anne Turnbaugh Lockwood, Community Collaboration and Social Capital: An Interview With Gary G. Wehlage, New Leaders, North Central Regional Educational Laboratory, p. 2)

    But social capital can be made real because it produces a measurable return-on-investment out of the combinatorial effect of a critical mass of human talent.

    To illustrate social return-on-investment, let us consider higher education.

    Higher education creates knowledgeable individuals who can apply their analytical and problem-solving skills to shape our industries and our society.

    And that is precisely what we celebrate today in your commencement.

    Higher education gives each of you the basis for generating the ideas and technologies that enable both personal and economic progress.

    And because of your college education, you will earn twice as much as someone with only a high school education.

    Social capital is created, for example, because with your higher incomes, you will pay back to the state $1.84 in inflation-adjusted dollars - just in additional taxes - for every dollar the state invested in your higher education!

    But there is more, because there are additional social returns of as much as 60 percent per year that result from a better educated population that will be more productive in the workplace and will generate more ideas to shape the future.

    And there are yet other social and economic benefits to be counted, including savings from the many costs often associated with the lack of education - such as unemployment, welfare, and crime.

    That is social capital at work, and its estimated rates of return are very large indeed.

    This example of higher education illustrates the breadth and impact of social capital when it is expressed as a return-on-investment.

    How can our society better capitalize its human capital?

    It can do so by recognizing the concept of "clusters of innovation." Bringing together a critical mass of people with synergistic talents creates a cluster of potential human capital that can have far greater returns on investment than when such talent is scattered widely.

    People's combined talents express and create value that is far greater than the sum of its contributing parts - creating opportunity, excitement, and community.

    Think Silicon Valley in microelectronics, think Route 128 in biotechnology, or think Akron and Northeast Ohio in polymers, and you will know how it is that clusters of human capital create a social capital and returns on the investments that created them.

    Yes, there is value in relationships.

    So, we come full circle.

    Capital as currency illustrates the real value of an idea . . .

    . . . for capital is really just a concept, an idea of value.

    And human capital - people as the source of capital - and social capital - relationships among people as the basis for enhancing the flow of capital - extend and stretch our thinking to the realm of our free society.

    Together, these are the ideas that provide the opportunity for new wealth creation. Today, these ideas support a global economy and reflect some of the best that humanity has to offer - shared values, a sense of human worth, community, and trust . . . in an idea.

    Your final lesson is now concluded.

    Go forth, . . . capitalize!

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