Home > Uncategorized > Human capital and ‘bad taste in mouth’ models

Human capital and ‘bad taste in mouth’ models

from Lars Syll


I came to think about this dictum when reading Thomas Piketty’s Capital in the Twenty-First Century. 

Piketty refuses to use the term ‘human capital’ in his inequality analysis.

I think there are many good reasons not to include ‘human capital’ in economic analyses. Let me just give one — perhaps analytically the most important one — reason and elaborate a little on that.

In modern endogenous growth theory knowledge (ideas) is presented as the locomotive of growth. But as Allyn Young, Piero Sraffa and others had shown already in the 1920s, knowledge is also something that has to do with increasing returns to scale and therefore not really compatible with neoclassical economics with its emphasis on constant returns to scale.

Increasing returns generated by non-rivalry between ideas is simply not compatible with pure competition and the simplistic invisible hand dogma. That is probably also the reason why neoclassical economists have been so reluctant to embrace the theory wholeheartedly.

Neoclassical economics has tried to save itself by blurring the distinction between ‘human capital’ and knowledge/ideas. But knowledge or ideas should not be confused with ‘human capital.’ Chad Jones gives a succinct and accessible account of the difference:

Of the three statevariables that we endogenize, ideas have been the hardest to bring into the applied general equilibrium structure. The difficulty arises because of the defining characteristic of an idea, that it is a pure nonrival good. A given idea is not scarce in the same way that land or capital or other objects are scarce; instead, an idea can be used by any number of people simultaneously without congestion or depletion.

new-way-oct14Because they are nonrival goods, ideas force two distinct changes in our thinking about growth, changes that are sometimes conflated but are logically distinct. Ideas introduce scale effects. They also change the feasible and optimal economic institutions. The institutional implications have attracted more attention but the scale effects are more important for understanding the big sweep of human history.

The distinction between rival and nonrival goods is easy to blur at the aggregate level but inescapable in any microeconomic setting. Picture, for example, a house that is under construction. The land on which it sits, capital in the form of a measuring tape, and the human capital of the carpenter are all rival goods. They can be used to build this house but not simultaneously any other. Contrast this with the Pythagorean Theorem, which the carpenter uses implicitly by constructing a triangle with sides in the proportions of 3, 4 and 5. This idea is nonrival. Every carpenter in the world can use it at the same time to create a right angle …

Ideas and human capital are fundamentally distinct. At the micro level, human capital in our triangle example literally consists of new connections between neurons in a carpenter’s head, a rival good. The 3-4-5 triangle is the nonrival idea. At the macro level, one cannot state the assertion that skill-biased technical change is increasing the demand for education without distinguishing between ideas and human capital.

In one way one might say that increasing returns is the darkness of the mainstream economics heart. And this is something most mainstream economists don’t really want to talk about. They prefer to look the other way and pretend that increasing returns are possible to seamlessly incorporate into the received paradigm — and talking about ‘human capital’ rather than knowledge/ideas makes this more easily digested.

  1. Blissex
    November 30, 2015 at 8:51 pm

    «pretend that increasing returns are possible to seamlessly incorporate into the received paradigm — and talking about ‘human capital’ rather than knowledge/ideas makes this more easily digested.»

    That’s a (neo)classic trick: even land (that is, renewable or exhaustible natural resources) is turned into “capital”.

    Prof. M Gaffney argues quite persuasively here that the great “putty-fication” of “capital” was the successful project of JB Clark motivated at the time by the political purpose of a defense of rent extraction by property owners against georgist approaches:


  2. BC
    November 30, 2015 at 10:25 pm

    In the high-tech industry, one needs 3-5 years’ worth of direct working experience with the latest, new, newer, newest, newiest tech or ensemble of programming languages, for example, to remain technically competent and current so as to retain gainful employment and be positioned to add value to the next iteration of tech innovation; otherwise, one is relegated to the virtual dustbin of history within the progression of a product cycle.

    It was once said in the Silly-Con (and now Social Mania) Valley that, if one had not become a techie decamillionaire by age 35, one’s career in tech was effectively over (whether or not one realized it). I can attest to that axiom and quote chapter and verse dozens who experienced a similar fate, which is why so many techies transitioned from tech to financial services during the hyper-financialization of the US economy during the 1980s-2000s.

    This is but one of many reasons why Silly-Con Valleyites are so desperate to “import” hundreds of thousands of techies each year from India, China, Israel, Eastern Europe, and elsewhere to ensure a growing supply of eager techies to add to the ever-churning meat grinder of progressive techie obsolescence and proletarianization.

    Yet, in the meantime, a growing majority share of the labor force is becoming increasingly deskilled, automated without net replacement, disassociated, alienated, marginalized, polarized, and disenhanced, with fewer jobs providing breadwinner or even subsistence compensation after tax.

  3. blocke
    December 1, 2015 at 8:18 am

    Human capital is a sociological concept associated with continental European economic thinkers, e.g., Friedrich List, who based economic analysis on the nation state, not the nominalism of classical economics, what List called with derision the materialistic cosmopolitical school. It is as much sapiential as knowledge (ideas) — about the tacitly acquired skills of the carpenter that go into woodworking, or the organizational skills of a Toyota plant that operates on the principles of management by means instead of management by results (See Mike Rother, Toyota Kata), or the esprit de corps of the Marines (if you want to know what that is then ask a Marine what was the essential ingredient in the Corps’ makeup that enabled it to take Iwo Jima.) Human capital has less to do with the American or English concept of knowledge as science than with the German idea of a third science, Technik, that network of skills (Koennen) and ideas (Wissen) that combined formed the mental capital of a nation or civilization. To try to talk about human capital with the analytical tools of neoclassical economics is a mistake, another example of the impoverishment of the blog I noted in my comment about Lars’ posting of November 26.

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