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.Global Inequality
In order to be clear on what I had in mind, let me summarize my points once again so that there is no misunderstanding.…
On "human capital" one more time
Branko Milanovic | Visiting Presidential Professor at City University of New York Graduate Center and senior scholar at the Luxembourg Income Study (LIS), and formerly lead economist in the World Bank's research department and senior associate at Carnegie Endowment for International Peace
In my view, and that of many others, capital is an asset that is owned as property, which is alienable and which is government by property rights and law. Labor is not an asset that is owned by either the employer or workers. There is no self-ownership in custom or law and human and civil rights are not based on self-ownership. Moreover, in modern societies in which ownership of human beings is prohibited, individual freedom is an inalienable right that cannot be sold or transferred and it can only be forfeited with recourse to due process under constitutional protections and criminal law.
Therefore, conflating labor with capital is simply nonsensical.
Capital is an entirely different category than land under custom and law also. Moreover, capital is produced by labor, whereas land is a natural resource, which may be improved and even recovered by labor, but it is not produced by labor. The amount of capital is limited, while the amount of land is for most purposes limited, although it can be converted for use through labor.
Land, labor and capital are three separate and distinct factors of production, in that order. Land precedes labor, and labor generates capital goods used for production of commodities and more capital goods.
Turning everything that factors into production capital is either silly or based on ulterior motives, as Branco points out about Becker's ideological economics designed to commodify labor and make distribution irrelevant.
16 comments:
Tom:
It's "Branko" with a k.
"In my view, and that of many others, capital is an asset that is owned as property, which is alienable and which is government by property rights and law."
That is true of land too.
But if we changed the law, so you could not sell your land or machines, but could sell your labour into indentured servitude or slavery, things would be very different. But land, labour, and capital would still exist.
I agree that land should be seen as capital. It is a productive resource that can be bought and sold in the market. That's enough.
A farmer can leave his farm, machinery, seed stock, fertiliser, and all his other assets to their heirs. In principle, these heirs can, in turn, leave those assets to their own heirs, and so on forever.
Imagine Bob, who is a janitor, takes a vocational course to become an assistant nurse. The increased income he obtains would be the return to his human capital, right?
Could Bob transfer his human capital to his heirs, so that they, too, would enjoy those returns? Or would his human capital perish with him?
The farmer is getting old and tired. Instead of leaving the farm to his kids, he decides to sell it and live the rest of his life on the interests from the money he gets from selling the farm.
Can Bob sell his human capital, so that he may live the rest of his life on the interests generated?
"But if we changed the law, so you could not sell your land or machines, but could sell your labour into indentured servitude or slavery, things would be very different. But land, labour, and capital would still exist."
Let's consider this idea of changing the law.
A beautiful, sunny morning, we wake up to the big news: from now on, you don't own any more any form of capital. It belongs to the community. No longer can you sell the land, the machines, inventories or whatever used to be yours. Neither can you rent it, lease it, mortgage it, or do anything with it.
For short: private property of the means of production is abolished.
Would this imply that the land, machines and whatever vanished? Clearly, not. They would still be there, just like the night before.
But they would cease being capital: that's why the new regime of property is called communism.
Balance sheets would change a bit, wouldn't they?
Pity economists don't learn biology, chemistry, physics ... or their history.
Branko reveals once again that orthodox economics is an extension of dimwitted feudalism.
Wouldn't be surprised if he also thinks the Earth was created in 6 days by magical beings, who rested on the 7th day ... or something.
Nick, thanks for the heads up about the misspelling. Profuse apologies to Branko while I wipe the egg off my face.
Still disagree about conflating land with capital. There is a relatively fixed quantity of land, and as people touting land sales say, they don't make land.
Growth and productivity are supposedly the result of technological innovation and capital formation. Unlike land, the amount of capital is variable, both actual capital goods that are booked as real assets and depreciated as such, and financial "capital" which is considered savings in accounting rather than a real asset.
Technological innovation is the outcome of knowledge work. The knowledge is not an asset on anyone balance sheet, regardless of "investment" of time and money in education and training.
Look at how these things show up on accounting statements — balance sheets and income statements. These distinctions are meaningful in accounting terms and accounting is the language of business and finance, just as math is the language of science.
As scientists economists may overlook the accounting but at the risk of violating stock-flow consistency. As Branko says, one can use terms are one wishes for particular purposes, but when violates accepted conventions such as accounting then one is isolating oneself from that universe of discourse.
We see this the ongoing controversy (that I would call confusion) among many economists over saving and investment, where the meaning and use of these terms is clear in accounting based on accounting rules and context.
And when a term is applied over many categories its meaning increases in order of abstraction and become less precise.
Dand K: I agree that land should be seen as capital. It is a productive resource that can be bought and sold in the market. That's enough.
That is the neoliberal view based on the notion that what is owned legally and traded in markets is essentially the same, so that the factors of production are really one and the same. The moral argument then is that just deserts prevails.
The contending view is that capital is produced by labor or other capital goods that are ultimately produced by labor and land is the common heritage of humankind that was enclosed, generally by force and administered by law that result of power asymmetries based on social class and political power. The moral argument is that asymmetries result from social and political forces based on class and power through privilege, domination, and exploitation.
These views are embedded clashing world views. World views are neither true nor false, right nor wrong, without criteria to decide. And the parties holding different world views disagree over criteria.
Th single criterion that is agreed upon is pragmatic, which world view produces the "best" result. But then "best" requires a criterion. Is it, say, growth per capita as neoliberals claim, or it is distributed prosperity as social democrats and socialists claim?
So the consequence is that the matter will be decided by the stronger party which can impose its will on the other parties.
That is the neoliberal view based on the notion that what is owned legally and traded in markets is essentially the same, so that the factors of production are really one and the same. The moral argument then is that just deserts prevails.
Tom, it has nothing to do with neoliberalism. The idea that capital goods are non-financial assets employed in production is classical and pre-dates neoliberalism.
This is not moral theory; it's just a matter of convenient definitions for understanding different aspects of economic processes. No moral conclusions of any kind follow from this account. How, whether, and to what degree the owners of different factors of production should be rewarded is a separate question.
The idea that capital goods are non-financial assets employed in production is classical and pre-dates neoliberalism.
Classical economists distinguished between land and capital. Locke found it necessary to come up with a myth to explain land ownership based on use.
The classical economists, coming at the transition of feudalism to capital knew that land was different from capital produced by labor. Land was common until it was enclosed by force and made alienable by a legal system that conveyed title. Titles can be traced back to the title granting governments.
Classical economists were not so much concerned with economic rent arising from capital. but there were very concerned about economic rent arising from land, which separated the rentier land owners who produced nothing from the agricultural workers who were vastly predominant in the labor force.
Capital and land were conflated later by neoclassical economists, and it is arguable that this was in reaction to Henry George's proposal to tax land rent, which was popular at the time. See John Bates Clark.
In 1888 Clark wrote Capital and Its Earnings. Frank A. Fetter later reflected on Bates' motivation for writing this work:
The probable source from which immediate stimulation came to Clark was the contemporary single tax discussion. ... Events were just at that time crowding each other fast in the single tax propaganda. [ Henry George's ] Progress and Poverty... had a larger sale than any other book ever written by an American.
... No other economic subject at the time was comparable in importance in the public eye with the doctrine of Progress and Poverty. Capital and its Earnings "... wears the mien of pure theory .... But ... one can hardly fail to see on almost every page the reflections of the contemporary single-tax discussion. In the brief preface is expressed the hope that 'it may be found that these principles settle questions of agrarian socialism.' Repeatedly the discussion turns to 'the capital that vests itself in land,'...[6]
The foundation of Clark's further work was competition: "If nothing suppresses competition, progress will continue forever".[7] Clark: "The science adapted … is economic Darwinism. … Though the process was savage, the outlook which it afforded was not wholly evil. The survival of crude strength was, in the long run, desirable".[8] This was the fundament to develop the theory which made him famous: Given competition and homogeneous factors of production labor and capital, the repartition of the social product will be according to the productivity of the last physical input of units of labor and capital. This theorem is a cornerstone of neoclassical micro-economics. Clark stated it in 1891[9] and more elaborated 1899 in The Distribution of Wealth.[10] The same theorem was formulated later independently by John Atkinson Hobson (1891) and Philip Wicksteed (1894). The political message of this theorem is: "[W]hat a social class gets is, under natural law, what it contributes to the general output of industry."[11]
As far as morality goes, one view is the naturalistic view of Social Darwinism that sees progress as the goal and the driver of progress as the survival of the fittest, that is the rule of the stronger, whether than is strength of mind or body is immaterial. The criterion is winning.
This explains the double standard of morality and law in which the privileged are free to do as they please but the rest are held to the standard of "civilization" to maintain order and control the masses. In order to do this propaganda is employed as well as force.
For example, previously in history religion was a major means of propaganda. With the onset of the scientific age, propaganda shifted away from religion to other cultural conventions and institutions.
Adam Smith said that capital was "that part of a man's stock which he expects to afford him a revenue." The classical political economist Friedrich von Hermann explicitly included land in his account of capital stock.
None of this matters much. Most of these discussions boil down to idle ideological bullshit with no clear reasoning to back them up, and a lot of vague but arbitrary moralism erected on top of the bullshit.
The moral question of how the returns from production should be legally organized and distributed in a society has nothing to do with which productive factors one decides to place on the "capital factors"/"non-capital" factors divide. No matter how you slice these factors up terminologically, the same moral questions arise.
Everyone agrees that land is necessary for the production of a large variety of kinds of goods and services; and everyone agrees that land can be owned - by private firms and individuals by governments or by states. Beyond that, the terminological discussion is frivolous.
I blame the Georgists in particular for introducing massive confusion into the whole discussion.
?Everyone agrees that land is necessary for the production of a large variety of kinds of goods and services; and everyone agrees that land can be owned - by private firms and individuals by governments or by states. Beyond that, the terminological discussion is frivolous."
Not frivolous in terms of the rationale that justifies a moral stance intellectually, such as marginalism and just deserts, and marginalizing other points of view. This is what the issue around capital is about.
In the final analysis, the conflict is among classes and their interests and is based on class power rather than "morality." "Morality" is just about who is "right."
The upper class and its cronies and minions can only maintain position without overt violence (which provokes a violent reaction necessitating greater violence to suppress it) by either duping the rubes with propaganda about, e.g., just deserts, or else distracting them with "bread and circuses," now devices and celebrities.
John Rawls' 1973 lectures on the theory of justice, as quoted by Daniel Little (at the time Rawls' teaching assistant):
"Capital seems to be a description of an unjust society. The owners of the means of production live in relative abundance and idleness at the expense of the ever-growing class of wretched laborers. But Marx doesn't make any attempt to present an argument that capitalism is unjust, nor any concept of justice which would back up such an argument. Moreover, we have vitriolic criticisms of utopian socialists who did condemn capitalism on the grounds of justice. Marx asserts on the contrary, that capitalism is perfectly fair, perfectly just. Why so?
"(a) It is not enough to say Marx is averse to preaching or moralizing. He is so averse; but judgments of justice can be reasoned and hence not properly described as 'preaching'.
"(b) It is not enough to say that he didn't want the critique of capitalism to rest on some social ideal. He does reject the utopian socialists' program; but that would not prevent him from stating his own opinion. And he doesn't do that either. He reproaches the utopians for not realizing that some major social change must precede an adjustment along moral lines."
http://understandingsociety.blogspot.co.uk/2010/03/rawls-on-marx-december-1973.html
To the two parties discussing: Make of that what you will.
Stanford Encyclopedia of Philosophy — Marx » Morality.
1. Marx was offering what he considered to be positive rather than normative account.
2. Marx essentially agreed with Hegel that the direction of history is toward greater freedom.
a. A basic idea of freedom that Marx adopted from Hegel is that for one to truly free, all must be free. The master has relative freedom and the slave, relative bondage. But as long as the master does not acknowledge the slave, whom he does not recognize as free and therefore not as truly human, then the slave is incapable of freely recognizing the master as free.
The master-slave relationship contains an apparent contradiction (paradox) that one who is free is not yet truly free and therefore the historical dialect has work to do to overcome this partial freedom on the way to complete freedom, which is the essence of human being.
b. Hegel (and Marx) distinguished among (1) freedom from (constraint), (2) freedom to (freedom of choice) and (3) freedom for (self-determination). For true freedom to exist and for humans to live up their natural potential, all three must co-exist. A truly free individual can only be exist in a free society, in which citizens determine the laws they live under themselves, acting freely together in concert.
3. Marx viewed the historical dialectic in terms of historical determinism. This is just what's happening in accordance with that unfolding of potential. Truth and right are matters of self-discovery through that inexorable dialectic.
Marx famously said that he stood Hegel's dialectic of the historical unfolding of the Absolute Idea on hits head, replacing philosophical idealism with materialism.
In The German Ideology Marx and Engels contrast their new materialist method with the idealism which had characterised previous German thought. Accordingly, they take pains to set out the ‘premises of the materialist method’. They start, they say, from ‘real human beings’, emphasising that human beings are essentially productive, in that they must produce their means of subsistence in order to satisfy their material needs. The satisfaction of needs engenders new needs of both a material and social kind, and forms of society arise corresponding to the state of development of human productive forces. Material life determines, or at least ‘conditions’ social life, and so the primary direction of social explanation is from material production to social forms, and thence to forms of consciousness. As the material means of production develop, ‘modes of co-operation’ or economic structures rise and fall, and eventually communism will become a real possibility once the plight of the workers and their awareness of an alternative motivates them sufficiently to become revolutionaries.
Summary of Marx and Engels, The German Ideology
I should clarify the above by saying that the Stanford article on Marx clarifies the scholarly thinking on this.
The rest of the article is my own interpretation of Marx independent of that article, which I do not comment on.
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