Selected Moments of the 20th Century

A work in progress edited by Daniel Schugurensky
Department of Adult Education, Community Development and Counselling Psychology,
The Ontario Institute for Studies in Education of the University of Toronto (OISE/UT)

1997

Thomas Stewart publishes Intellectual Capital: The New Wealth of Organizations

What is this book, and why review it?

Intellectual Capital by Thomas Stewart is not an academic work, but is instead a popular business book. Stewart is a member of the board of editors of Fortune magazine, a popular columnist with a broad audience, and a Fellow of the World Economic Forum. The book Intellectual Capital is cited in academic literature and is widely cited in popular business literature. Though originally published in 1997, the book is still in print, which is somewhat rare for a business book - a genre which is populated with more than its share of books on passing fads (a phenomenon that Stewart himself addresses).

The topic of intellectual capital, and related topics such as knowledge management, is currently of great interest within the business community. Hundreds, if not thousands, of items have been written on the topic, including books, articles in scholarly journals and articles in the business and popular press. Searching on the Internet turns up tens of thousands, even hundreds of thousands of pages referring to the topic. The book may not mark a major addition to the field of adult education, but is of relevance when trying to apply the principles of adult education to business.

Intellectual capital

Early in the book, Stewart defines intellectual capital as "intellectual material - knowledge, information, intellectual property, experience - that can be put to use to create wealth." (p.xx). Intellectual capital can be found in three places: in people, in structures, and in customers or customer relationships. Stewart does not claim credit for this breakdown, but attributes it to Leif Edvinsson (of Skandia Insurance Company Limited of Sweden) and Hubert Saint-Onge (of CIBC - the Canadian Imperial Bank of Commerce). Thus we have three forms of intellectual capital: human capital, which is focused on the employee; structural capital, which concerns how the corporation embodies the knowledge of its employees; and customer capital which consists of the sum value of "an organization's relationships with the people with whom it does business." (p.77)

Human capital

Of the three forms of intellectual capital that Stewart identifies, the implications for adult education are most obvious in the area of human capital. Stewart doesn't actually provide a simple or clean definition of human capital (as he does for structural and customer capital) and on more than one occasion makes not only the assumption that the reader understands what human capital is, but also that we agree that it is a good and positive thing. Reading between the lines only slightly, we can infer that human capital is, to Stewart, the knowledge, skills and abilities that are intimately associated with and tied up in a person. It is fundamentally associated with the individual and not with the corporation. He says, "A company's human capital is embodied in the people whose talent and experience create the products and services that are the reason customers come to it and not to a competitor." (p.91)

Embodied in the whole notion of intellectual capital is the application of accounting principles - the dispassionate logic and hard rules of business - to more ephemeral notions such as knowledge and skill. In the area of human capital particularly we can see how Stewart extends that thinking. He argues that not all employees and not all skill sets are created equal. Some are indeed assets - they are part of the human capital of the corporation - but others are merely costs or expenses. The implications are rather obvious: assets are things with which one invests, with which one equates the value of one's business. Expenses, on the other hand, are to be controlled; costs are to be reduced. The notion of the expendable employee is just below the surface here, and not always even below the surface: "Smart organizations, then, will spend and invest as little as possible in work that customers do not value and whose workers' skills are easy to replace, automating what they can." (p.91)

There are several times when Stewart appeals to and applies directly the concepts of learning and education, and it is in these areas that his material is likely of most interest to us as adult educators. For example, despite discussing several different forms of human capital, Stewart is clearly most interested in skills, and in so doing fulfills at least one of the criticisms of his work. He analyses different kinds of skills within the workplace (he calls these commodity skills, leveraged skills and proprietary skills) and discusses their relative importance and how to work with them. He also quite usefully outlines different ways in which knowledge is available in the corporation, distinguishing between private and public knowledge, and between tacit and explicit knowledge.

Stewart also explores quite fully the notion of community - particularly the learning community - within the corporation. He acknowledges that learning is a social activity and that most learning happens in groups, and discusses how that can work in a corporate context. He introduces the concept of a "community of practice" as a social grouping which may be wholly within one company or may extend beyond its borders, and within which significant learning can take place. He says that "to create human capital it can use, a company needs to foster teamwork, communities of practice, and other social forms of learning." (p.163)

There are also, in this part of the book, some assumptions with which I am somewhat uncomfortable. For example, we have the following: "The primary purpose of human capital is innovation" (p.86). This comes a bit out of left field, and while perhaps true, it is certainly not obviously so, and could have been substantiated further before being used as the basis for further argument.

Structural capital and customer capital

Both structural capital and customer capital are of less immediate interest to adult educators. They are both less concerned with learning and more with business strategy. Structural capital is concerned with some of the same issues as human capital, but embodied within the corporation, instead of within the individual. Some structural capital is fairly tangible: patents, copyrights, rights of ownership etc. "But also among the elements of structural capital are strategy and culture, structures and systems, organizational routines and procedures - assets that are often far more extensive and valuable than the codified ones." (p.109) Customer capital, on the other hand, refers to the value of the company's ongoing relationships with its customers.

In discussing structural capital, Stewart also includes strategies and mechanisms to avoid information overload. He goes further with this line of reasoning to say, somewhat counter-intuitively, that successful companies are "actually working to increase areas of deliberate ignorance." (p.134). Stewart draws on the work of David Ulrich at the University of Michigan to summarize structural capital by saying that "The learning capability of a company is G times G: the ability to Generate new ideas, multiplied by the ability to Generalize them throughout the company." (p.140)

"Classical" Human Capital Theory

Stewart proposes human capital as one aspect of intellectual capital. There is a pre-existing school of human capital theory that is therefore worth investigating. This "classical" human capital theory is widely viewed as having been popularized by, if not created by, Theodore Schultz of The Chicago School, circa 1960 when he was president of the American Economic Association. It was brought further to light through Schultz's writings, particularly "Investment in Human Capital", published in the American Economic Review in March of 1961. Schultz was very highly regarded in his time (he passed away in 1998) and was awarded the Nobel Prize for economics (along with Arthur Lewis) in 1979.

In his later writings, Schultz described human capital as encompassing "those abilities and information that have economic value." There are therefore significant parallels between Stewart's "intellectual capital" and Schultz's "human capital". (Stewart's "human capital", on the other hand, is more concerned with the individual - the person as asset or resource.) In addition to parallels, there are also clear differences between Schultz's human capital and Stewart's intellectual capital. For example, Schultz's perspective was that of an economist, whereas Stewart's focus is the corporation.

It seems clear that Stewart's notion of intellectual capital owes much to the pioneering work done by Schultz. It is interesting that Stewart doesn't reference Schultz once in his entire book, though many of his references do, in turn, reference Schultz. Nonetheless, it is my opinion that to gain a fuller understanding of intellectual capital, and of this book by Stewart, one would be well advised to acquire further foundation in "classical" human capital theory.

Conclusion

I think this book, and the work of Thomas Stewart in general, will be a lasting contribution to the emerging field of intellectual capital. The concepts in the book are of importance in the workplace, and to our understanding of the learning organization. It provides us with a fairly clear view written from the perspective of the business person, instead of the academic. It is not a book about adult education, or about learning per se, but nonetheless should be of interest to adult educators working in corporate settings.

Source:  

Stewart, Thomas (1997). Intellectual Capital. New York: Currency/Doubleday.

Prepared by  Scott Williams (OISE/UT)

March 2001

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