Human Capital and the Firm

One of the important aspects of the so-called "Knowledge Economy" is that changes in information technology has meant that the knowledge and information controlled by workers has become increasing important to the production process. That is, human capital has become increasingly important to the firm. This should affect the organisation of the firm. How?

Firms can be thought of as being made up of human and non-human capital. Changes in the importance of human capital can affect the organisational choices of the firm. Consider, for example, the case where you have, say, three workers each of whom have some (tacit) knowledge necessary to the production process and three bundles of non-human capital. The workers own their own human capital, and thus the question relevant for the organisation of firm is, who owns the non-human capital. In the case where the non-human assets are highly complementary then for any given worker to be productive he will need access to all three bundles of non-human assets. This suggests that keeping the assets together would maximise productive capacity. We would therefore expect to see these non-human assets owned together in one firm. On the other hand if a given worker's human capital needs access to only, say, one of the three bundles of non-human assets, and each worker needs a different bundle, then separate ownership of the non-human assets seems optimal. Such an argument tells us that where information is decentralised it opens up the possibility that non-human asset ownership should also be decentralised and thus we would expect to see an increased use of markets to coordinate economic activity.

The preceding also highlights the importance that asset specificity of the non-human asset can play in the integration/non-integration decision. If information technology makes assets more flexible so that they are less likely to be locked into other particular assets then this would facilitate a decentralised patten of non-human asset ownership. The alternative is that information technology may increase lock-in, via things like network externalities, proprietary standards or idiosyncratic hardware and software protocols. In this case centralised ownership becomes less costly and thus more likely.

An interesting question that this gives rise to, is to what extent is this just Hayek writ small? For Hayek the market is a mechanism for dealing with decentralised (tacit) knowledge. What we see above is, again, when information is decentralised markets become more likely to be used as a coordinating mechanism.