Gresham’s Law Applied to Human Capital- Career Stagnation

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The premise behind Gresham’s Law is that money of a higher intrinsic value will be hoarded while the money of a lower substantive value but legally recognized as having the same nominal value will be circulated throughout the economy. Succinctly put, “..bad money drives out good money…” pithily sums up this economic phenomenon. However, is this occurrence solely confined to the commodity of money? Doesn’t the observations convey in Gresham’s Law applicable to other goods? For example, unless a baseball card collect is presented with an astronomically large monetary offer, odds are they will be unwilling to part with a limited-run rookie card of a legendary major league player. This scenario reflects many of the assumptions regarding commodity value implicit in Gresham’s Law. Generally, rare collectibles are held on to, while mass-produced memorabilia is readily available at the local garage sale or swap meet. Most collectors will hang on to the items that are considered valuable unless another interested party can provide a commodity in exchange that exceeds the perceived value of the collectible held by the hobbyist in possession of the coveted item.

However, how does Gresham’s Law interact with the intangible commodity of human capital? A firm or a business unit within a firm would want to retain top-level talent and let go of the mediocre/poor performers. Before we can delve into this analysis we must distinguish what human capital is. Human capital is the economic value that the employee brings to the firm. Typically through their experience, education, certifications, knowledge of company procedures and policies, position-specific “tribal knowledge”, critical thinking skills, and other pertinent soft skills. For readers who have never worked in a corporate environment before tribal knowledge is the informal and unwritten knowledge of best practices of how to perform within a specific job role. It stands to reason that a potential employee possessing all of these attributes would be a hot commodity on the job market. If currently employed by a company would be an employee of a high value.

If human capital is valued in a similar sense to other commodities such as money, how do businesses act in a manner to retain this high-quality talent? The answer most human resources representatives would give is that their organization creates an environment that fosters career advancement. Stressing the perks such as tuition reimbursement, possession of company stock options, and opportunities for placement in vertical job positions. While these factors may play a role in some employees choosing to work long-term for the same company, there is another variable that HR will not be forthright about. That is oftentimes exceptional employees with a high degree of human capital end up getting pigeonholed to the same role. Oftentimes these individuals are blocked from transferring to other business units or positions within the company by the request of middle and executive management. The reason behind limiting this MVP’s potential is quite pragmatic, the business unit cannot afford to lose this individual. Their skills and knowledge are essential to the day-to-day operations of the business. It would be nearly impossible to fill the void if they were to get promoted or transition to a lateral position within the firm. In the corporate world, this individual may be referred to as a subject matter expert or colloquially known as a SME.

It should be noted that the desperate attempts of management to relegate this individual to the same job role has the propensity to backfire. Why? Because this individual gets fed up with their limited job prospects and ends seeking career advancement at another firm. In a free market for employment, a high-quality employee has many prospective options when it comes to their career. If a firm stubbornly, confines them to a shallow career path they will simply look for employment at another company.

The Law of Diminishing Returns Applied to The Division of Labor

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Most economists from Adam Smith onward have sung the praises of the division of labor. It has even been said that the more specificity a labor pool is the more advanced the economy. A more productive economy has more task specialization. However, doesn’t the law of diminishing turns apply even to the division of labor? At some point,  does specialization shift beyond the equilibrium point of the utility function / production frontier and result in inefficiency?  I am not the biggest fan of neoclassical methodology, but in certain areas of economic life, Pareto-efficiency makes sense. It should not be rigidly applied without any qualitative context. That only provides us with a one dimensional account of economic activity.

At work, I am being assigned to help out with some of the workload in our parent division of the company. I can’t help but be awed by how inefficient their process is. This is where my observation of applying the law of diminishing returns to the division to labor becomes pertinent. The way the process was devised for processing orders for the headquarters of our company, requires actions to be passed off to multiple teams. The total process can take up to forty-eight hours. The process that was originally trained on, takes only four hours and a transfer between only two departments to complete.  Does having a hyper-diversified and stringently delineated process help the customer? I would argue that it does not. Giving tasks that could easily be done by one person to three people means there could be a time gap in between task serving only to make the process more lethargic. Making the premise of utilizing a  proverbial “assembly line” method counterproductive and detrimental to the customer.