For Noah and Nick

righttoolOK Noah. Here we go. This is in reference to comments on the previous post. A little long for a reply comment.

1. Quoth Noah: “Human capital is more fair, because it makes the capitalists work.” This is pretty baffling. Yes the use of physical capital usually requires labor. It does not require the labor of its owner and typically does not entail the labor of its owner. What this has to do with ‘fair’ I have no idea. At issue is whether Capital’s fundamental differences with Labor obviate the terminology of human capital. Fair has nothing to do with it. It’s an analytical issue. In fact the whole idea of Capital is that its basic nature subordinates the identities and peculiarities of its individual owners. It becomes a social and economic force in its own right.

2. The reforms Noah alludes to are arguably the consequence of labor mobilization in the 30s, and enduring union power through the 60s. Politics, not human capital. Sometimes the economic lingo is really unequal to the tasks of analysis. As for whether that debunks my ‘nominally democratic’ crack, the reference is to recent decades, as pressure builds to undo those reforms.

As we speak, the next presidential contest bids fair to feature a Clinton versus a Bush. Are you excited? I know I am. For a more academic treatment, I’d refer readers to the recent Larry Bartels piece, reported on here:

Of course there is some democracy. It’s hard to measure, but I suggest easier to detect its direction, namely going south. This kind of argument is never easily settled.

Nick Rowe visits (thanks!) and says can’t we model college as an investment decision. Sure we can. Or you can. Wake me when you’re done. I’d say economists are sufficiently ingenious to account for labor of different skill levels without confusing labor with capital. Nick suggests the human capital complicates the simpler division of labor from capital. I’d suggest that it muddies the fundamental distinctions and simplifies in an unconstructive way. In the quote provided by Lee Arnold, I think Schumpeter does this too.


For Noah and Nick — 25 Comments

  1. Max: “I’d say economists are sufficiently ingenious to account for labor of different skill levels without confusing labor with capital.”

    True. If we were born with different skill levels, and if there was nothing we could do to change our skill levels, that would be right. Those different skill levels wouldn’t be capital. Just different types of labour, and calling it “human capital” would be unhelpful at best, and a misleading name at worst. But if we can do costly investments today to improve our skill levels so we benefit in the future by being more productive, then it makes sense to compare the returns from investing in our own skills to the returns from (say) investing in building tools that also make our labour more productive.

    And sometimes the two sorts of investment are complements, because we have to invest in our skills otherwise we won’t be able to operate the tools. And at other times the two sorts of investments are substitutes, like when a tool let’s an untrained worker do the same job a trained worker could do.

    Now, you *could* talk about these things without using the words “human capital”, but it’s very hard to avoid the word “investment”. We invest in increasing our skills, our strength, our knowledge, etc. It just easier to use the words “human capital” to describe the things we have invested in in the past. And we can talk about how our human capital depreciates too, as we forget stuff, or technology changes so our skills become obsolete.

    Now the word “capital” is deeply problematic, because time has many future periods, and so trying to convert a vector into a single scalar number is….tricky. That is true for both human and non-human capital. I prefer to say that “capital” isn’t really a thing; it’s just a name we give to a production process where time matters, because inputs and outputs come at different times. And once you start to think of “capital” as just the time-structure of production, then brain surgeons are just as much capital as blast furnaces. Costs come first, and benefits come later.

    Sorry, I’m rambling.

    But this has been a good debate.

  2. Max, arguing like you is like arguing with my dad. And not just because you look like my dad and are also an R. Crumb fan. 🙂

  3. Pardon my Marx, but this throws some light on the ideological function of human capital, as well as the antiquity of the gambit:

    “In reality I possess private property only insofar as I have something vendible, whereas what is peculiar to me may not be vendible at all. My frock-coat is private property for me only so long as I can barter, pawn or sell it, so long as it is marketable. If it loses that feature, if it becomes tattered, it can still have a number of features which make it valuable for me, it may even become a feature of me and turn me into a tatterdemalion. But no economist would think of classing it as my private property, since it does not enable me to command any, even the smallest, amount of other people’s labour. A lawyer, an ideologist of private property, could perhaps still indulge in such twaddle.”

      • Your human capital qualifies you to teach Economics at Carlton and mine qualifies me to teach Labour Studies at SFU. Suppose you wanted to come out west to enjoy the cherry blossoms in February and I wanted to do more skating. We could just swap capitals, right? Isn’t that how it works?

        • My brother built a seed drill that only he knows how to operate. Is it capital?

          It’s really hard to move my apple trees off my land. Are they capital?

          And it’s Carleton with an E. Or I will start saying you teach at Human Capital Studies at SFU!

          • It wouldn’t be impossible to device an instrument for conveying the trees on the model of strata title…

            Here’s a hypothesis inspired by the last remark: labor economics in the 1940s and 1950s was dominated by institutionalists, in the tradition of John R. Commons and J. M. Clark. So too, presumably, would have been the labor economics journals. The Chicago boys needed a way to make an end run around having to situate their analysis in relation to nasty old institutionalist analysis. Human Capital was the solution to that academic politics problem.

          • “My brother built a seed drill that only he knows how to operate. Is it capital?”

            The short answer: probably not. If only he can use it, then he couldn’t sell it. If he couldn’t sell it, it has no market value. An asset with no market value is not a capital good.

            Besides, depends on what use your brother gives to the seed drill: does he use it for commercial purposes? After all, a car can be either a durable good or a capital good, depending on whether it’s the family car or a taxi. Why should the seed drill be excluded from that principle?

            “It’s really hard to move my apple trees off my land. Are they capital?”

            That’s a strange question.

            It’s much harder to move your house from the land it’s built on, so when you sell the house you also sell the land. Are you implying your house is not an asset?

            Again, the question: are you also in the business of growing apples?

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  5. So first, it may be that this conversation is not meant for normal people. If so, that’s understandle as maybe it’s too far into the weeds for non-specialists.

    But generally curious people might want to know too!

    So, for Nick/Noah’s side:

    What does the addition of “human capital” allows us to understand/predict/describe (any of these) that we couldn’t otherwise? Not just the particular words human and capital, but the concept, no matter what we call it. Speaking here of not just one hypothetiacl example you could come up with, but, what generalizations are we better at now that we have this concept “human capital?” Seems like there’s just got to be an answer an educated layperson can appreciate, unless the other side is right.

    For the MaxSpeak/Branko side:

    You are saying “human capital” hasn’t enabled any new insights, correct? And what harm has it done, again? Not speaking of touchy feely stuff here. What do we misunderstand about the economy since this concept was introduced? And what would even a nice liberal saltwater type who might be sensitive to the world outside still fail to notice or get wrong about the world on account of “human capital?” You aren’t just saying we should keep a broad and pluralistic perspective on the world regardless of what our disipline says, right? You’re saying the concept “human capital” should be junked.


    • Jay: let me give one example. The government is trying to decide whether to: make additional education compulsory; subsidise education and training; offer student loans; do nothing. For policy questions like this, we need to think about how subsidies and loans would affect students’ investment decisions, and whether the additional education would result in their earning higher incomes, and whether the extra tax revenues would pay for some of the subsidies. For example, does the fact that it is harder to borrow against investment in human capital (because yes it *is* different in some ways from non-human capital) mean that the market creates too little investment in human capital and too much investment in non-human capital?

      Or is the human capital theory of university education totally wrong, and students learn nothing at university, and getting a degree is just a way to show you are smarter than other kids and better at jumping through stupid hoops, which is why employers pay you more (“signalling theory”)?

      It is hard to even think clearly about questions like this without using the words Human Capital.

      • Thank you, Nick,

        Good answer. I’m getting the feeling that we can lump for these purposes and split whenever the differences become too great, which I think is what you and Noah have said already.

        For the MaxSpeak/Branko side, Branko’s opening savlo (in Junk the Phrase ‘Human Capital’) said that human capital is just the combination of education, skill, and experience that economists have always known about (adding that people with higher skill get paid more and so using “human capital” adds nothing but confusion. But what Nick Rowe has just said seems to go beyond that, because the students’ decision to invest or not seems to map so well onto the concept of capital, whereas the analogy is less cleanly accounted for in a model that kept labor and capital separate.

        Of course we can keep in mind that there are differences as well. So long as we do that, what’s the problem?

        • I think (not sure) this current debate all started when Elizabeth Breunig said we were evil to use the words Human capital. And she objected in particular to people who spoke of babies as human capital.

          My initial thought was that new-born babies are not human capital, and that this was an abuse of the concept, because they haven’t invested in learning yet.

          Then I remembered reading “Larks Rise to Candleford”, a memoir of a tiny poor village in 19th century England. There was only one couple in the village that had any savings. Why? They were the only childless couple. They needed a pension for their old age. Everyone else had children to support them when they were too old and sick to work. Children are costly to feed and clothe. But children are their pension plan.

          Now we might nowadays not look on our own children the same way. But for the country as a whole, it’s going to be our children who are working to produce the goods we will be consuming when we are retired. It’s not so different.

          • Yeah, boy oh boy was Elizabeth Breunig’s article overwrought, even as you’re right that children will one day be the ones working to proudce the goods.

            MaxSpeak wrote that his side’s objection is not only due to a moral issue, but an analytical one. Not sure I can see the latter yet.

            Hopefully when (if) they chime in to answer my queries for their side, they’ll enlighten me.

    • What harm has human capital theory done?

      I would have to give the same example as Nick except to point out that government education policy HAS been increasingly guided by so-called “human capital” considerations over the last 30 to 40 years rather than by universalistic “liberal” educational objectives. What we have achieved is increasing elitism, massive increases in tuition and student debt and a great deal of cynicism and disengagement among students.

      I’m not blaming human capital theory for those outcomes; only saying that human capital theory has NOT led to a rationalized improvement in quality and access to education. That is to say, it hasn’t delivered on the promises that Nick is still making for it.

      So what harm has human capital theory done? It has become a domineering discourse — “there is no alternative” — by making promises that it has repeatedly reneged on.

      • From a methodological perspective, “human capital” embeds the dubious standard assumptions of abstract-deductive static neoclassical analysis in the terminology. Methodological individualism, rational economic actors, perfectly competitive markets, complete knowledge about prices including future prices, absence of externalities. Economists are already inclined to confuse their models with reality and to prefer their models to reality. Human capital makes the illusion seem even more natural and comfortable.

  6. My name links to an abstract depiction of a capitalist economy. That model can be elaborated in various ways, including showing the workforce broken up into categories of various levels of skilled workers. And those developing traditions associated with the model (e.g., Ian Steedman) have formally modeled conflicts among such strata of workers, as well as between workers and capitalists, and between different sorts of capitalists.

    Pace Nick Rowe, a major developer of a 19th century tradition for which this model is an update rejected the so-called trintarian formula (capital-profits, land-rent, labor-wages).

    These traditions do not seem to be compatible with those in which the phrase “human capital” is common and used unironically.

    By the way, I suggest that there is a large amount of history and convention built into relative pay scales and the division of which jobs pay well and which do not.

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  8. One way of pinning down the concept of human capital is to think about in terms discussed at times by some of those who developed the theory, namely when labor was capital in the sense of being able to bought and sold as an asset, in short, slavery. Without doubt, slave prices roughly reflected prsent value calculations of the future net productiviey, minus mainenance and reproduction costs (Marxian subsistence). Exactly how that fits into this disupte over how much it matters whether one has to work or not in order to benefit from the “capital” of labor, I am not going to answer.

  9. Well I think one problem (which has been alluded to by others) with the term “human capital” would be in making too much of the concept of calculable ROI for investors and policymakers. The future also depends upon growth of ideas and connections. But we all know there’s no way to predict future creativity and the emergence of new ideas. Education has to be quite broad and overgenerous, except in the case of direct skills learning for pre-specified career paths. And even there, it isn’t too smart for policymakers to lock it down to an ROI, because we really can’t tell what sort of work may be needed next, and retraining will have its costs, too.

    The more I think about these things, including healthcare and so on, the more I am coming to believe that for certain sectors of the economy, the best solution is for government to print the money, and monetize them directly. It should only be on things which have certain supply-and-demand characteristics which keep them free of free-riding and inflationary tendency. But I see little reason why this stuff should be entirely funded through taxes, and absolutely no reason why new money has to enter the main economy only through private bank lending. Or rather, the only reason I see is widespread intellectual and emotional incompetence.

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