Noah and Nick, Too
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Hi Jay. (Note to readers, his blog is here.

We could just as easily call human capital “skilled labor” and acknowledge that spending now can finance the acqusitions of skills that endure. And we could try to exploit a capital investment model to analyze individual spending to acquire skills. None of that would be objectionable in principle.

Some of us oddballs reject the term human capital (so-called “saltwater economists” are perfectly comfortable with it, by the way) because humans spending money to acquire skills are labor, and we think labor including skilled labor is fundamentally different from Capital in the traditional sense: the concentrated ownership of capital assets that afford its owners overweening control over investment, production, and the democratic process itself. By contrast, labor lacks any such control and must submit itself to capital for survival. We think the right foundational framework is to distinguish labor from capital. This would not necessarily change how one did a model of spending for higher education. What it goes to is the context for any such model. An excessively narrow model ignores that context, which in some cases makes for a bad model yielding junk results.

I think Nick’s reply at 1:02 pm illustrates the problem. He describes an exercise that tries to shed light on whether the market (sic) results in too much or too little human capital. But with some additional context, individuals’ demand for college education obviously depends on their income, as well as outside support. And their ability (or anybody’s) to estimated expected earnings is clearly limited. And signalling, though Nick condemns it to quotes, is relevant too. It is well understood by all semi-conscious economists that ‘endowments’ (wealth) influence demand, so efficiency results are contingent on an arbitrary footing.

The other huge gap is that the narrowness of skill and knowledge acquisition as an investment  glosses over what economists recognize as externalities. Would you rather live in a nation of educated persons, or one where science and the arts are alien to the culture? Even if we set aside income distribution and uncertainty, a human capital context is anti-social. Everyone’s human capital is his or hers alone. It augments individual income but does nothing for society. In effect, there is no society.

In the final analysis, the human capital concept is prey to the weaknesses of the market, and by extension to models of the market, and by further extension to the micro-economic theory constructed to analyze that market. The problem comes if you think what human capital stands for is not well served by a context of individual outlays and discounted earnings — if you agree that it is fundamentally a non-market, social thing. In other words, the problem with human capital is the problem with mainstream micro-economics.

Nick’s comment at 8:19 provides further ammunition for my argument, wherein capital is reduced to inputs, outputs, and time. I think Capital is also about power, who has it and who doesn’t, and what this means for historical development. Marx called it a “social relation.” How could it not be?

Again, this is not a question of sentimentality. I don’t care if you want to call infants an investment, or a tax deduction. It’s about what you allow into your frame of analysis, and what you exclude.

Related, for a non-Marxist view, see “Power and the Useful Economist” herein.

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Comments

Noah and Nick, Too — 17 Comments

  1. Hi Max: I didn’t mean to condemn the signalling model by putting it in quotes. Just saying “that’s what it’s called”. My guess is there is some truth in it, I just don’t know how much. (Of course, it definitely goes against my ideological self-interest to say that, since if the signalling model were 100% true the government should probably be taxing universities, not subsidising them, and I work at a subsidised university.)

  2. We could just as easily call human capital “skilled labor” and acknowledge that spending now can finance the acqusitions of skills that endure. And we could try to exploit a capital investment model to analyze individual spending to acquire skills. None of that would be objectionable in principle.

    In that case, it would seem that the argument over terminology is complete. We can relabel human capital “skills”, and treat skills like capital in some situation if we think that isn’t a vast oversimplification.

    Differentiating between “skills” and “skilled labor” allows us to make a distinction between A) some sort of durable thing with property rights attached to it, and B) the flow cost associated with extracting value from that thing.

    So I’m good. Whatever you want to label stuff is fine with me.

    Capital in the traditional sense: the concentrated ownership of capital assets that afford its owners overweening control over investment, production, and the democratic process itself. By contrast, labor lacks any such control and must submit itself to capital for survival.

    This, I disagree with. In most rich societies, you see skilled professionals – doctors’ associations, lawyers’ associations, etc. – exercising a non-trivial amount of political control. If you want to use the word “capital” for “stuff that gives you political power when you own it”, it seems to me that you can’t ignore the political power of the skilled classes – or if you do, you’re being intellectually dishonest.

    The political power of physical capital owners may be a lot greater, per person, than the power of human capital owners, but that doesn’t mean it’s OK to just dismiss the political power that having skills confers.

  3. Hi!! Thanks for linking to Partially Examined Life!

    So, where that leaves me, personally, is that I’m wondering if you’re satisfied with Noah’s concession? If I had to guess, I would say you would consider it progress, but, based on your post (and I do appreciate you breaking it down for me) I think your objection to mainstream economics is pretty global (in other words, doesn’t begin or end with “human capital”). Am I right?

    I took micro and macro as an undergrad, and have frequented econ blogs for the past several years. So, I guess that my implicit instincts are pretty mainstream, at least when it comes to discussing matters that touch on formal economic theory; it’s just the mindset I have now. But, I’m also a lifelong, pious Democrat, and had a grandfather who started his career of tenant farming in 2nd grade (and am very sensitive to all the things in my family that go along with that, including political insights, not to sound too “my father was a mill-worker” ish).

    Why have I never felt that economics was telling me to be more right-wing about capitalism? (I guess you could say that I might have made it through micro and macro somewhat unscathed, but I would be EVEN MORE enlightened had I had a proper heterodox Introduction to Economics, and would be a good leftist rather than the milquetoast liberal that I am, I don’t know).

    So anyway, other than wondering whether you think Noah’s terminological concession solves the problem, I have a more general curiosity, and that’s, what could a nice mainstream econ professor do on behalf of your cause, without abandoning the mainstream mindset?

    Could Dr. Mainstream Econ Prof respectfully introduce your “radical” (defined here as outside the mainstream rather than out-to-lunch or something) critiques, to give the students more of a lay of the land, but of course stick to the more conventional instruction for the majority of the class? What if the journals starting loosening up and including heterodox contributions?

    I could easily imagine myself being willing to try to contribute to environment and comity enhancing gestures like this if I were a person in a position of authority in econ academia, meaning, I can’t see that requires an abandonment of my mainstream instincts. But again based on your critique, I think your scientific revolution might be a little bloodier than that. In other words, it might be more of a zero sum game, given how different mainstream economics would have to be to include the kinds of considerations you would like.

    Thoughts?

  4. Hume & Kapp, et al.

    http://econospeak.blogspot.com/2015/02/hume-kapp-et-al.html

    I didn’t get any response to my earlier provocation that “human capital” was cooked up by the Chicago boys as a way of side-stepping the fundamental methodological critique posed by the institutional analysis in the tradition of John R. Commons and J. M. Clark, which dominated American labor economics — and presumably labor economics journals — in the 1940s and 50s.

    I particularly wanted to mention cost-shifting as an issue that “human capital” evades. Over at Econospeak, I’ve posted a passage from “The Foundations of Institutional Economics” by K. William Kapp that highlights some of the central motifs of institutionalism’s critique of conventional theory. It also has the merit of mentioning the contribution of David Hume, among others and thus enabling the pun in the title.

  5. In other words, Max, I really wonder if your concerns could plausibly be accounted for in the current culture, be it in the classroom, in the right journals or what have you. Particularly when it comes to power (when is undoubtedly a real and potent force).

    My thing is not that I can say you’re view is obviously wrong, I’m just not as familiar with it. In my limited exposure to heterodox views (mostly via blogs like the Slack Wire – http://slackwire.blogspot.com/) usually when asked about the models that would replace prevailing ones, the answer is “we’re working on it.”

    In the meantime, I think most people (insofar as they think about it at all) view the insights of mainstream economics as useful, but not necessarily overriding, and rely on personal experience, gut feeling, all sorts of other things. In that spirit, maybe we should also listen to sociologists, political scientists, historians, etc. Of course I know you don’t disagree with that, but, maybe some of what people do now is to gain some insights about the world through supplements, insights you might want to be represented inside the discipline. And if that’s possible, hoo-boy.

    But, one way forward that usually makes me squirm is one that smacks of a wholesale replacement, and so hope for some sort of reconciliation.

    Finally, not sure if “heterodox” is the right term; it’s kind of a catch-all. Not sure if I should call it classical, Marxian, or what, but I think you get the form of what I’m saying.

    Now, are you and Noah reconciled on this matter?

    Thanks again,

  6. This, I disagree with. In most rich societies, you see skilled professionals – doctors’ associations, lawyers’ associations, etc. – exercising a non-trivial amount of political control.

    Why, if I did not know better, I’d think they were acting just like….unions.

  7. The nature of Capital minus ‘human capital’ is the question.

    The power of high-income professionals is a secondary poli sci consideration. It moves the discussion out of the realm of political economy into more mundane, empiricist political sociology. So for the same reasons as above, I would separate that from Capital. It isn’t that Capital is all-powerful. Not at all. I maintain it’s an essential abstraction for understanding economy and society.

  8. See my comment above responding to Noah. I wouldn’t say we’re reconciled, no.

    The teaching problem is that whatever one’s theoretical proclivities, students sign up for Econ 101 and other straight theory courses with a certain set of expectations. It wouldn’t do for a radical to pile on contradictory material. It would just get too confusing. That would be more fitting in courses on economic issues, or history of economic thought. Or a course clearly labeled as radical econ.

    There’s a lot of more diverse economics being done in other departments — urban planning, sociology, area studies, and within economics, in the fields of development economics and what used to be called ‘comparative systems’ (currently labeled analysis of ex-socialist economies and such). The monopoly on dubious theory is held by the elite departments and journals, that brook no diversity. The only recourse is to destroy their credibility, something they are helping with themselves.

  9. Thanks for the explanation.

    One more thing, if I may? (at least for now)

    Beyond this conversation, I’m not sure what the models actually are. I suspect they would appear meaningless to me, at least at first. It’s not that I need some in depth explanation, but, is it that “human capital” is now always included in definitions of capital in prevailing economic models?

    I’m trying to get a feel for how totalizing your critique is. Meaning, if neoclassical (fresh or salt water) economists often do play around with models (that include capital and what you would call labor) that would avoid your concern here, then it seems like your side is being extremely ambitious by trying to stamp out all traces of “human capital.”

    On the other hand, if there’s just no room in the mainstream at all for a model that included capital AND excluded human capital (perhaps because such a move would be considered heretical) then, considering that your concern doesn’t seem so insane, then my sympathy for your concern would increase (again, however I should say this, if labor is included, so, if the issue is even relevant to the hypothetical model in question.

    And of course there could be some room in between those poles.

  10. I mean, Noah wrote,

    “In that case, it would seem that the argument over terminology is complete. We can relabel human capital ‘skills’, and treat skills like capital in some situation if we think that isn’t a vast oversimplification.”

    The “… in some situations…” seems to indicate some wiggle room. You would only be satisfied if Noah et al *never* did what he suggested above? You see what I’m getting at, I think.

  11. Seems you are pretty judgemental, Jay, for someone who claims not to know very much. Just an observation.

  12. Oh, no problem. I just get the impression in reading your questions that they are loaded with tacit preconceptions that constrain what will constitute a persuasive answer.

    Labor and capital were already metaphors that have led scores of political economists down very dark and dreary passages. Human capital is a mixed metaphor that incorporates and compounds all of the flaws of the earlier metaphorical duo and obfuscates the rich tradition of critique that developed in response to the their limitations.

    It’s self-evident what is meant by capital, right? Wrong.

    Nick thinks apple trees and seed drills are capital (or at least he uses them as examples as if they were capital). I don’t. I would describe them as “representatives” of the capitalization of an expected future revenue stream.

    But it IS self-evident what is meant by labor, right? Wrong.

    Marx distinguished between labor and labor power — workers don’t sell labor, they sell their capacity to labor. Jevons evaluated labor in terms of “pain cost” — the worker would continue to work until the point at which the marginal disutility of working an extra hour would equal the marginal utility of an extra hour’s wage payment. Subsequent marginalists replaced pain cost with opportunity cost, the definition of which resembles the definition of sugar as “the stuff that makes tea taste nasty when you don’t put any of it in.”

    I suspect that most economists today couldn’t really say whether their conception of labor is derived from the pain cost, opportunity cost or labor-power perspective. It’s probably a mongrel.

    So what do you get when you mix a misplaced concrete capital metaphor with a mongrel labor metaphor?

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  14. Having a professional skill does not preclude the accumulation of wealth, obviously. It likely enhances the ability to accumulate wealth. There is a difference between having the skills that result in accumulation and the wealth thereby accumulated. Political power results from the willingness and ability to share some portion of one’s wealth. Professionals do have some degree of political power, but only as a result of their having substantial accumulated wealth that they are then willing to share as a part of their political participation. Also obvious is the fact that professionals as a class have to band together in order for their wealth to be capable of competing with those whose wealth comes from the earnings of previously accumulated wealth. No, political power does not flow from the skills acquired by the professional class. It comes from their ability to share the wealth that their skills have allowed them to accumulate.

  15. To: Sandwichman on February 28, 2015 at 2:00

    So, are my questions loaded and/or do they contain tacit preconceptions that will constrain a persuasive answer? I don’t think so, but, I don’t know, maybe. If that’s the case, it’s subconscious. And like Leonard Lowe (played by Robert DeNiro) said in Awakenings, when asked if he was aware of the subconscious hostility he was showing toward his overseers, “How can I be aware of it if it’s subconscious?”

    Sticking to what’s objectively “on the page” as it were, I understood this conversation to be about “human capital,” and the particular critiques Max has to offer, rather than global critiques of mainstream economics in general. True I prodded about how these critiques could possibly fit in mainstream econ academia today, and whether this conversation is local to “human capital” or globally about economics in general. But even here, I feel that Max, even while being open about his feelings on the global issue, has been willing to be clear about his reservations on this particular topic in a way that makes sense in an “ecumenical” setting as well.

    Had I known at first that the argument was something like, “Look, mainstream economics as it looks today is just totally out-to-lunch, in various ways. One example is the employment of the concept ‘human capital,’ which serves as just one example and itself has the form of more fatal flaws in mainstream economic theory more generally,” then I probably wouldn’t be participating in the discussion, with all due respect.

    You might be right about everything you just said, but, I think neutral observers just reading the blog posts on this topic would say that we might be able to have the argument without already agreeing on a deep background.

    And your replies, and especially your most recent, have the feeling of you sliding the issue’s clarity away right as I have it almost nailed down (though you may be doing that subconsciously).

    It’s just that I thought, with the way the conversation was introduced, that it might have tighter boundaries. With that I can only say that I’ll consider what you wrote and I find it interesting, but, if we wanted to have a big huge honkin talk about the fundamental flaws of mainstream economics, we could have billed the discussion that way, but then not only would I likely not be commenting, but I seriously doubt that Nick and Noah would have chimed in. With that, I would be open to someone answering my relatively narrow questions, as constraining as they might be.

    For example, if someone said, “Look, Noah’s concession that we might not include human capital as capital (in cases when it might be a vast oversimplification) is an empty gesture, because the concept of human capital is too dominant within mainstream economic theory for there to be interesting alternative models, and that’s what we’re fighting,” then I would find that very compelling. Doesn’t seem too constraining to me.

  16. Jay,

    I don’t think that the concept of human capital is “dominant within mainstream economic theory.” What dominates is the Cobb-Douglas production function, which has its own problems. Where human capital theory comes into play is mainly at the intersection between the formal monetized economy and households. What it does there is to insert a replica of utility-maximizing, perfect foresight, system-of-natural-liberty competitive market utopia.

    How this maneuver relates to that “tighter boundary” that you favour is rather straight forward. One of the central critiques of the market fundamentalist model is that it assumes the absence of externalities. Human capital theory takes a huge honking step beyond merely assuming the absence of externalities. It magically converts them into “preferences.” Everything is a preference. Under this kind of hocus bocus occupational health and safety hazards present themselves to workers as investment opportunities for higher incomes. No thanks.

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