The case for Capital
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noahI follow Noahpinion because 1) he provides a helpful window into the abysmal state of modern macroeconomic theory, and 2) he pisses me off. In the latter regard, his latest crime against humanity is a little ditty about Capital (the concept, not the book). His point of departure is a column by my friend Branko Milanovic urging the discard of the term “human capital.” Noah manages to ignore the points raised by Branko. Some elaboration here provides an inkling of the reductionism inherent in mainstream economics, even when practiced skillfully by kinda-sorta liberals.

Of course there are no a priori incorrect definitions. We can apply whatever names we like to whatever we want. The question here is whether it is useful to imply an analogy between an attribute of the worker — a marketable skill, ability, or educational attainment — and durable productive physical assets, or the ownership thereof.

There is no issue here about abstraction for the sake of analysis, or modeling. Capital-c Capital is as abstract as anything. Is what makes it different from Labor sufficiently fundamental to maintain the distinction that prevailed before the economists’ invention of “human capital”? You know I’m going to say yes.

NS noodles around the difference and similarity between Capital and “human capital” by analogies to prosthetic arms and financial options, or he puts it in the context of a narrow modeling problem — decisions about investment in education. Or Jesuitical digressions on is it wealth or isn’t it. More definitional trivia.

Branko approaches the heart of the matter by noting capital is something that most people have little of, while a small minority have a lot. Not only do most have little, but exploitation of their so-called “human capital” takes an important toll on their well-being — to rent your human capital you must give up your own time. Exploitation of your financial capital incurs brokerage fees and service charges. Not really the same thing.

But Branko pulls his punches. Capital assumes a life of its own and informs the organization of society, in the large. Those who seek to accumulate live on as part of the Capital borg; those that don’t become irrelevant rentiers. Capital exercises overweening influence in otherwise democratic systems, for that reason only nominally democratic systems. Capital, not Labor, determines the conditions of work, where most of our lives are spent.

In the conventional wisdom, augmenting human capital cures all ills. Inequality? We will help people raise themselves up, though while you do, others slip back down. Low wages? We will increase productivity, though wages have not kept up with  productivity. And we’re not really doing much for human capital in its own terms either. College becomes increasingly out-of-reach, public schools are under assault by corporate raiders.

Of course, you could model the decision to attend college as some kind of investment, taking account of costs, foregone earnings, one’s preference for making less money sooner vs. more later. If you’re lucky you come up with “statistically significant” elasticity estimates that some other nerd can contradict with a follow-up paper. Meanwhile we face long-term trends in wage stagnation and the so-called ‘college premium,’ support for public education, and student indebtedness, to name a few things that are goin’ on. What a sterile exercise such models are. Think of what college students actually do. Are they rationally maximizing utility with the benefit of long-run foresight and accurate information? If you believe that, delete your account.

nobsWhen I was a graduate student, we had a room in the attic of Tydings Hall reserved for us to study and hang out. On the blackboard, somebody drew a picture that looked a lot like this:

It was labeled “consumer theory.” In the barren world of mainstream economics, people are reduced to atomized pleasure-seekers who solve impossible optimization problems with the benefit of limited information on a featureless social plain with no past and no future. And they call it social science!

Capital likes it that way. Its greatest feat — getting you to forget it exists as an overwhelming, malignant, motive force in history. It’s not only a moral issue; it’s an analytical one.

MrNatural-kicks

 

 


Comments

The case for Capital — 14 Comments

  1. exploitation of their so-called “human capital” takes an important toll on their well-being — to rent your human capital you must give up your own time. Exploitation of your financial capital incurs brokerage fees and service charges. Not really the same thing.

    Sure, but operation of physical capital requires labor. Same with human capital, except that labor has to be the labor of the owner. Either way, someone’s puttin’ in some labor! Maybe a world of human capital is more fair, because it makes the capitalists work. 🙂

    Capital exercises overweening influence in otherwise democratic systems, for that reason only nominally democratic systems.

    O RLY? Then explain increasing worker protections, weekends, labor safety laws, OSHA, overtime pay, workers’ comp, unemployment insurance. Frigging Social Security.

    Obviously, human capital is getting in some punches, Mr. “only nominally democratic systems blah blah blah”…

  2. Thanks for the visit, Nocutis I’ll just let that lay there and decompose for a bit and let others chime in, respond myself tomorrow nite.

  3. “Noah manages to ignore the points raised by Branko.”

    We are seeing more and more of that these days. Appears to be a successful rhetorical strategy. Learning to ignore the points raised by one’s opponent must be a form of human capital.

  4. O RLY? Then explain increasing worker protections, weekends, labor safety laws, OSHA, overtime pay, workers’ comp, unemployment insurance. Frigging Social Security.

    This is in egalitarian Australia:

    A Productivity Commission report into workplace relations appears to have been accidentally made public online.
    22 January 2015
    (…)
    The document discusses penalty rates, bargaining and labour flexibility and is expected to be a starting point for the Coalition’s workplace relations policy.
    (…)
    The issues paper invites discussion about the rationale for minimum wage, how effective it is, how many people should receive it, how long people should receive it for and how it is calculated.

    On awards and penalty rates, it raises questions of whether they should be further simplified, calculated differently, swapped for time-off-in-lieu or scrapped altogether.

    The section on bargaining raises questions about the process employers must undertake before they can ask employees to approve a workplace agreement, suggesting it is an “open question” as to whether some should be changed.
    (…)
    The final report is due in November.

    http://www.abc.net.au/news/2015-01-22/productivity-commission-workplace-relations-report-released/6035272

  5. Suppose the “college premium” disappeared entirely. How many potential students do you think would decide against going to college? All those students would be looking at college as an investment decision. (The rest, presumably, would go because they think it’s fun, or an investment in status, or just an investment in learning for its own sake.)

    Suppose I lend money to finance student loans. Am I a capitalist? What sort of capital do I have a claim on?

    You can have a nice neat model where labourers own labour, capitalists own capital, and landlords own land. Just like early 19th century economists. And then along comes the concept of “human capital”, which totally messes up your nice neat model. Pity. (And what we call “land” is partly capital too, because you usually can’t grow corn on it unless you invest in clearing it and draining it and getting the rocks out. Just like labour, it needs investment to be productive.)

  6. It came from “financial capital”. People are attempting to make a modern definition, coming down to three different parts: 1. productive of goods or services; 2. accumulable (and if we stop here, “human capital” falls under the rubric, insofar as skills are accumulable); but last and not least, 3. fungible: Fungible, but without requiring additional personal effort to gain more income from it (cf. Milanovic’s observation that Capital guarantees income without work).

    So it’s a negative definition? Capital is that which is not labor?

    But even this is not so clear because, as Nick Rowe points out, agricultural land is called capital, but you have to work the land to gain income from it. Physical machines are called capital, but they must be put into operation (to perform “work” in the physics definition) to derive income.

    Of course, you can SELL the farmland for another form of capital (go buy bonds, for example) and, from that new form, may gain income without work.

    This could be a clue to a better definition: Capital is everything that is FUNGIBLE for (i.e. can be traded for) that which gains income without continued work. You may labor to accumulate capital, and some forms of capital require continued labor, but after that, you can trade it; you are not required to labor. It allows a level of material being-in-the-world that that does not depend upon one’s own labor.

    But this remains a negative definition.

    Note that negative definitions are often a signal that an emergent conceptual superstructure has impinged upon distinctions at lower levels, redefining them and enforcing a new cast upon them, a new purpose. Or here we could say, a social superstructure has redefined transactions at lower levels.

    Such is the case with Capital, which started as “financial capital”. NIck Rowe, in his own post on this go-around, wrote that he would abolish the term “financial capital”. But I suspect that this is the wrong way around. As follows:

    “The word Capital has been a part of legal and business terminology long before economists had found employment for it. With the [ancient] Roman jurists and their successors, it denoted the “principle” of the loan as distinguished from interest and other accessory claims of the lender. In obvious relation to this, it later came to denote the sums of money or their equivalents brought by partners into a partnership or company, the sum total of a firm’s assets, and the like. Thus the concept was essentially monetary, meaning either actual money, or claims to money, or some goods evaluated in money. Also, though not quite definite, its meaning was perfectly unequivocal, and there was no doubt about what was meant in every particular case. What a mass of confused, futile, and downright silly controversies it would have saved us, if economists had had the sense to stick to those monetary and accounting meanings of the term instead of trying to ‘deepen’ them!”

    –from Joseph A. Schumpeter, History of Economic Analysis, pp. 322-3.

    Lending money to finance student loans is the historical essence of capital.

    My own simple picture of several different levels of a modern definition of capital, an even more modern definition, stretched so far as to include “individual labor” and “institution”, and all in one minute, is here:
    https://www.youtube.com/watch?v=sMnuvxyexHY

  7. Nick Rowe,

    For the non-economists among us, would you mind elaborating?

    I’m trying to follow this fascintaing discussion, and I understand the critique of the “left” (for lack of a better term) to be that the neo-classical model is flawed, not merely that it prevents us from identifying the morally salient feasures of life in our discussions of political economy (though this is an assertion too, I tend not to find this as interesting because I figure we can walk and chew gum at the same time).

    What exactly does “human capital” allow us to predict (or maybe describe) that the model of the early 19th century economists didn’t? Why can’t people like the writer of this blog post just use the early 19th century model you mention? What would they miss, in terms of broad reaching economic phenomena? Can the models both usefully inform our views?

  8. In other words, Nick, they say your ilk invented “human capital” and shouldn’t have, and you say human capital came along and messed up their simply model. You might be right, but apparently they don’t realize their model is messed up or surely they wouldn’t be arguing, and those who don’t alraedy know the alternatives (like non-specialists) have no way of judging, just from reading the conversation.

    Thanks in advance,

  9. If you run a PC, download Gimp. Free program. Pull your head shots, resize so the heads are the same size, paste the mask pic on top of face pic as a second layer, then erase the face in the mask to reveal the face (yours) underneath.

    I’ll invoice you.

  10. The more I think about it, isn’t human capital just the labor failure of value and completely at odds with neoclassical economics and is really more in lines with Marx / Sraffa.

    Following Sraffa, Since human capital is the ability of a human to be productive, this means that everything that was ever produced was produced by human capital if you go back in time.

    It is hard to see how human capital can be compatable with a neo-classical production function. But it is not like mainstream economists care about the coherence of production functions anyway.

  11. Who except a neoclassical economist would fail to see the distinction between who you are and what you own? But why would they care about such a meaningless distinction? What it all comes down to in the end is your ability to acquire stuff, right? Surely, only a hippie would care about other things than that?

  12. “But even this is not so clear because, as Nick Rowe points out, agricultural land is called capital, but you have to work the land to gain income from it. ”

    No you do not. Someone has to work it but it does not have to be you. Try that with “human capital”.

  13. Certainly you are correct, though for me, that just gets back to a definition that “capital” is that which is fungible for a form where certainly don’t have to do the work, yourself, and so your income is derived instead through a chain of ownership.

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