My father had died, and I was flying back to my home town for his memorial service. I was thinking of all the good that my dad, an MD and chief of medicine in the town where I was born, had done in his lifetime. He had saved soldiers in the Battle of the Bulge and raised five children and helped more people in long years of medical practice than I can ever know. My life as a manager, editor, and analyst suffered by comparison. Maybe that’s why I started jotting down ideas on one of those flimsy, paper napkins that the airlines provide when they serve up the soft drinks.
They were all improve-the-world ideas, and I only remember one of them: the most outlandish. It was something like “fix capitalism.”
I know that sounds idiotic, but I had recently read Thomas Stewart’s wonderful book Intellectual Capital and loved, for example, his idea that companies could substitute intellectual capital in order to reduce resource costs and generate greater wealth. Here’s an example: Columbia University professor Frank Lichtenberg looked at the return on investment for spending on new plants and equipment (i.e., physical capital) versus spending on research and development (i.e., investments in intellectual capital). His findings suggested that a dollar spent on R&D returned eight times more than a dollar spent on new machinery.
Stewart’s book made me wonder how many “capitals” we are missing in our standard systems of economic and management thought. If we really understood them and how they interact with one another, would we be able substitute one for another in order to create greater value for businesses – even while improving the world? Some years later, while working for the Human Resource Institute, I started to pursue these ideas with a short white paper called Virtuous Cycles: Toward an Expanded Model of Capital.
Marginal Rate of Technical Substitution
The basis for the paper is that we can identify at least six types of capital: conventional capital, of course, along with digital, intellectual, social, human and natural. In all cases, I was burrowing notions about what constitutes capital from other thinkers, from Don Tapscott to Paul Hawken to Jac Fitz-enz to Robert Putnam. I reasoned that we might be able to determine sophisticated ways of substituting one type of capital for another in order to, well, improve the world.
I’m afraid that paper was not much more than a quick, rough sketch of ideas. I’ve never found time to go back to see if there’s some way, perhaps in partnership with a real economist, to flesh them out, making them measurable and more practical. I thought we could start with ideas such as the old marginal rate of technical substitution notion, which basically shows how a producer can substitute one input (such as traditional capital) for another (such as labor) without affecting the quality of the output (graph from Wikipedia). If we could, for example, systematically substitute intellectual capital (which is expanding daily and could be expanded more quickly) for what others call natural capital (which tends to be contracting), then we’d able to positively affect the world in measurable ways.
I’ve noticed that there are now organizations working on some of these ideas, such as the Natural Capital Project at Stanford. I like to believe there’s something emergent and inevitable about the organized substitution of multiple capitals (let’s just call it the Multicapital Substitution Model for now). Of course, I’ve long since learned that hope is not a strategy. Perhaps, however, it can be a launching point.
