Accounting and the Human Economy
24 Feb 2017
Why is it that the world of accounting recognizes capital items such as laptops, printers, photocopiers, desks, chairs and shredders as assets yet the people that work in an organisation are listed as a cost, an expense.
This comes from the industrial age thinking which has driven and underpins the accounting principles and assumptions we use today. People are looked at as just a number, spending on employees is recognised as an expense which takes away from rather than add to profits. Businesses and the management models we use are far away from embracing the human factor as a key asset to the success of organisations.
Sometimes people are assumed to be motivated using the carrot and stick model. When you hit the target you get the carrot, when you miss the target you get the stick. This is archaic and ineffective.
How an organization values its people determines how it fares in this economy that is driven by the need for speed, flexibility and creativity. As Peter Drucker has said “We live in the era of accelerated Change, overwhelming Complexity, tremendous Competition and lightning Communication”
People want to be led, not managed. A human being is more than just the task or role they are performing. There’s a broader, more complete element to this person that when appreciated and appeased, it can lead to peak performance, creativity, and value addition.
It’s high time business leaders address the entire life or the complete human being of their employees. This will help unlock potential into performance resulting fulfilment and balance which effectively benefits the organization.
We are now moving from the knowledge economy to the human economy.
I was reading recently a publication by Dov Seidman in the Harvard Business Review which outlined the transition from the knowledge economy to the human economy. According to Seidman, over the course of the 20th century the mature economies of the world have moved from being industrial economies to knowledge economies. And now in the 21st century we are transitioning from knowledge economies to human economies.
Prior to the 20th century the economies of the world were driven by agriculture, it was predominantly an agrarian economic system where merchants were farmers who owned large pieces of land on which they produced commodities which they then sold on the open market. This changed in the 20th century with advent of the industrial revolution where emphasis shifted from agriculture to manufacturing, from hand made products to machine made products. The industrial revolution saw an increase in productivity as heavy machines and the factory system overtook the basic model of the agrarian economies. Better still the industrial economies were overtaken by the knowledge economy which pulled us from factories to office buildings. This ushered in a significant change where the value of employees was driven extensively by the knowledge that they had about a subject. As Seidman accurately put it, they were no longer hired hands but hired heads, companies capitalized on employees’ brains more than their hard labor. The initial foundation for the knowledge economy was introduced in 1966 in the book, The Effective Executive by Peter Drucker. In this book, Drucker described the difference between the manual worker and the knowledge worker. The manual worker, according to him, works with his or her hands and produces goods or services. In contrast, a knowledge worker works with his or her head, not hands, and produces ideas, knowledge, and information. This inevitably led to an accelerated pace of technical and scientific advancement.
Fast forward to the 21st century, knowledge is still relevant but we are witnessing a change which is ushering in a whole new paradigm where human interests are more fully represented in economic activity. The global financial crisis has renewed concern about whether capitalist markets are the best way of organizing economic life. Would it not be better if we were to treat the economy as something made and remade by people themselves, rather than as an impersonal machine?
This basically means that we are now in need of an economy that hires more than just the knowledge and skills of employees. After all, intelligent machines and computer systems are making some of the knowledge obsolete. What organisations can leverage on are the traits of human beings that cannot be programmed into a machine, like creativity, passion, character i.e their humanity. At a very deep level a forward thinking and engaged management will appreciate that humanity is still a key element to the success of organisations. In reality the human being is an asset and when a company spends money to develop a person, they are not really spending but investing. How I wish this could be reflected on the balance sheet.
Former CEO of General Electric, Jack Welch, is famous for his candid, talent-centric management style and has long preached that companies are only as strong as the people who keep them running. “This whole game of business revolves around one thing,” he said at New York’s World Business Forum in 2012. “You build the best team, you win.”
I find myself wondering how much of management in modern organizations is leading using outdated leadership and organizational models. Some may be operating using industrial age methods, some have made a bit more progress and are using methods from the knowledge age but few are embracing the human economy. It is only in the human economy that Robin Sharma’s message in The Leader without a Title becomes even more relevant, where employees operate as if they were leaders even if they do not have the title to go with it.
As for accounting principle, I long for the day when money spent on developing human beings becomes recognizable as an investment more than just an expense and moves from the P&L to the assets side of the balance sheet. Surely even accounting assumptions can progress and embrace the human economy.
My name is Wellington and I seek to share strategies for successful living particularly strategies for mitigating the various risks that we face in life, strategies that would smoothen our journey through life and increase our chances of success. I hope you enjoy this article. Feel free to share with as many of your friends as possible.