A Note on “Human Capital”

BGCTC601Like Peter LewinWalter BlockMario Rizzo, and Peter Boettke, I greatly admire the late Gary Becker, a pioneer in many areas of economics and sociology, a strong proponent of economic and personal freedom, and by all accounts a terrific teacher, mentor, and colleague. But I confess that I have always had qualms about the concept of “human capital,” along with the analogous constructs of social capital, knowledge capital, reputation capital, and so on. These are metaphors for capital in the narrow sense, and I worry that the widespread use of “capital” to denote anything valuable and long-lived obscures important issues about actual, physical capital that can be divided up, measured, priced, and exchanged. Witness the confusion over “capital” as Thomas Piketty uses the term. Here is something I wrote before:

[O]ne of my pet peeves [is] the expansive use of “capital” to describe any ill-defined substance that accumulates and has value. Hence knowledge, experience, and skills become “human capital” or “knowledge capital”; relationships become “social capital”; brand names become “reputation capital”; and so on. I fear this terminology obfuscates more than it clarifies.

I don’t mind using these terms in a loose, colloquial sense: By going to school I’m investing in human capital or diversifying my stock of human capital; if this gets me a high-paying job I’m earning a good return on my human capital; as I get old I forget new things, so my human capital is depreciating rapidly; and so on.

But we shouldn’t take these metaphors too literally. In economic theory capital refers either to financial capital or to a stock of heterogeneous alienable assets, goods that can be exchanged in markets and analyzed using price theory. Their rental prices are determined by marginal revenue products and their purchase prices are given by the present discounted value of these future rents. Knowledge is not, strictly speaking, capital, because it is not traded in markets does not have a rental or purchase price. What markets trade and price is labor services, and it is impossible to decompose the payments to labor (wages) into separate “effort” and “rental return on human capital” components. Some labor services command a higher market price than others because they have a higher marginal revenue product. Some of this wage premium may be due to intelligence or experience, some due to complementarities with other human or nonhuman assets, some due to hard work, and so on. But these are all determinants of the MRP, and hence the wage, not different kinds of factor returns.

Moreover, the entrepreneur needs cardinal numbers to compute the value of his capital stock, to know if it is increasing or decreasing in value, and so on. I can’t measure my stock of human capital, I don’t know for sure if it is increasing or decreasing over time, I can’t calculate the ROI of a specific human-capital investment, etc., because there are no prices and no measurable units. Knowledge may be “like capital,” in the sense that it lasts, that you can add to it, that you benefit from it, etc., but it isn’t literally a capital good like a machine or a refrigerator.

If we think going to school is valuable and increases lifetime earnings, why don’t we just say, “going to school is valuable and increases lifetime earnings,” rather than, “there is a positive return on investments in human capital”? Is there a good reason to prefer the latter, besides scientism?

Comments

  1. Vince, thanks, but you’re missing my point. Of course past deeds and personal relationships are important for business success. But you don’t trade them directly. Where can I buy one unit of past deed? You hire and fire people, you write contracts for delivery of goods and services, you buy and sell stock, and so on. The value of past deeds and relationships are embodied in those prices, but are not directly traded. Donald Sterling can be forced to sell the Clippers, but he cannot be forced to sell a unit of reputation or social capital.

  2. Um, I don’t think you’ve spent enough time in any actual business. Past deeds and personal relationships are in fact very actively traded in markets, and a big reason why many start-ups fail is that the managers lack either sufficient volume of Social Capital or lack Social Capital in a desired market.

    Joe Kennedy, Sr., famously discovered that brains and education and friends from the right schools didn’t matter in the business world because he was a Catholic. On the other hand, Chelsea Clinton’s career, whatever that turns out to be, is assured because she is Hillary Clinton’s daughter. She will never lack job offers when she chooses to work and will never lack backers if she seeks investors. The value of Chelsea’s Social Capital might be counted in the hundreds of millions of USD.

    The skills and personal characteristics and past associations that are in demand in the market change. I think that there are a bunch of folks who had been very interested in being recognized as business associates of Mr. Sterling only a month ago who are now trying very hard to explain that they never met the man.

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