Thursday, February 19, 2015

On "human capital" one more time

My recent piece on why the term “human capital” is misleading and confusing  has generated several responses. For example, for Nick Rowe, everything, labor and all, is actually--capital;  then just a couple of days ago, Tim Worstall takes me to task for “introducing Marxian class analysis or something” (I like this “something”). Some critiques are difficult to understand because they do not seem to address at all what I find objectionable in the use of “human capital” as a term. They seem more motivated by the ideological considerations, which, in my initial post, I deplored. 

In order to be clear on what I had in mind, let me summarize my points once again so that there is no misunderstanding.

I do not have any problem with Mincerian approach which seems highly sensible, that people when they decide to consider additional education make a decision based, on the one hand, on the costs of education (tuition) and foregone income during the studies, and on the other hand, the net present value of additional wages realized thanks to a higher level of education. This is a perfectly legitimate way of thinking.  We can call it investment decision regarding one’s optimal skill level, or investment in “human capital.” I would have had no problem with the latter if it was not leading to confusions. Let me list there three key points.

First,  “human capital” differs from all other forms of capital, because for all other forms, one’s ownership of that capital guarantees income as such, that is income without work. This is true for financial capital, ownership of an apartment, patent, land or whatever else. Only, for “human capital”,  one needs to exercise himself/herself, that is to work, in order to get an income. You can be the best pianist in the world, or the best brain surgeon, with, in both cases, huge amount of “human capital”, but that “capital” will bring you zero income if you do not work: perform in concerts, or operate in your hospital. You can be, of course, a very rich worker, as our violinist and brain surgeon are, while a poor widow may depend only on the income from the meagre savings left by her deceased husband. But violinist will still make his income through labor and the widow through ownership. 1/ It is not the amount of income that makes you a worker, but the need for continuous application of your labor. This is the fundamental difference between labor and all forms of capital. This is the cleavage, so obvious to anyone, that has been at the source of the classical distinction between labor and capital. 

Second, this distinction has direct implications regarding individual welfare. $10,000 of income from “human capital” means that I have to work x hours per week, month or year; $10,000 of income from my financial assets, imply no work. Since work, in turn, implies effort and creates disutility (for otherwise, how would we explain upward sloping supply curve of labor?), it is obvious, I think, that in utility terms, the first $10,000 from “human capital” will bring fewer “utils” that the $10,000 collected from owning an asset. Consequently, when we say that both worker and capitalist earn the same, it is true in monetary terms, but not in terms of individual welfare. 

Now, these two issues directly lead to the confusion where “human capital” and other forms of capital are treated as equivalent. For, as we have seen, they are not.

I do not see how points 1 and 2 can be wrong. But if they are not wrong, then the confusion from the use of the term “human capital” directly follows. So, if you cannot show points 1 and 2 to be false, you have to agree that the term is confusing and misleading. And if you agree to that, you have to agree that it should be “junked.”

I have also mentioned  that I think that the term “human capital” was so much liked by Gary Becker and others because of its ideological connotations.  If “human capital” and “real” capital are the same thing, how can there be a conflict between labor and capital?  If profits  and wages are the same thing, why should we fight  about distribution? You have your form of capital (which just happens to look like labor), and I have mine, which just happens to look like T bills and stocks. This is, as I emphasized, what I think was one of the motivating factors. But this is clearly something I cannot prove, and on which I can be also wrong. I do not know what really motivated Gary Becker and others; I did not know them personally, nor do I know their biographies. It could be that they never thought of that. So, this conjuncture is simply that: a conjecture, upon which neither of the points made before depend.

1/ Violinist can record his concerts, retain copyright and keep on selling his CDs (or whatever is the current-day equivalent). The surgeon can discover the  best way not to have blood coagulate, register that patent and make money. But income they would be receiving from their recordings or patents is not longer labor, but capital, income.

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