Ultimate Performance: Measuring Human Resources at Work

Human Capital and Production

For the past several decades, macroeconomists and financial analysts have sought to build usable models that describe the many complex relationships between the inputs and outputs of production. In the 1940s, two brilliant economists, Paul Douglas and Richard Cobb, developed what has become known as the Cobb-Douglas Production Function. In its simplest form this model can be described by the formula; Q = F (C, L, T, R) where Q, the quantity of output from the system, is a function (F) of the principal input components, Capital (C), Labor (L), Technology (T), and Raw Materials (R).

This function is generally used to describe the trade-offs of the various inputs that can be made while still maintaining the same level of output Q. For those familiar with this approach, these equal output quantities are referred to as Isoquants.

Dr. Jac Fitz-enz, founder of the Saratoga Institute, would point out that of the components described, Labor, the human component is the only one with the inherent ability to generate value. All the other components have, at best, inert potential, and it is the people who leverage that potential. Labor is also the component with the most variability and least predictability, and it is enormously complex to evaluate. As a result, much of what has happened over the past several decades is a drive towards substitution of other factors for Labor, or Human Capital. Much of what is described as the increase in productivity of the U.S. ...