Here is the true micro-foundation that I used to think about human capital. Human capital is stored as neural connections in a brain. For example, when a person reads from a book how to use a 3-4-5 triangle to construct a right angle using only a measuring rod, this information is stored in a set of neural connections in his/her brain. These neural connections increase the productivity of this person as a carpenter. To get empirical proxies for human capital, we measure the time someone spends reading or this increase in productivity, as reflected in the carpenter’s higher wage.
Once you have this micro-foundation in hand, it is crystal clear that human capital is a rival good and that even without any legal protection, human capital is almost perfectly excludable. Short of torturing me, there is no way for you to get information out of my neurons that I do not want to give to you. When I give someone information, for example by answering a question, I’m engaging in voluntary exchange in exactly the same way as when I hand this person some object that is in my possession.
Now, here is an alternative micro-foundation for human capital. There is a little homunculus inside each person’s head who knows everything the person knows and who has his own low-powered ham radio station. When two people come into proximity, neither of them can prevent the homunculus in each head from broadcasting over the ham radio to the other homunculus, all the things it knows. So the mere fact of close proximity causes valuable bits of knowledge, such as how to make a right angle using only a measuring rod, to flow from one person’s head to the other person’s head, which then raises the productivity of the other person as a carpenter.
This micro-foundation justifies the idea that human capital is not fully excludable. In less precise language, it justifies human capital externalities or spillovers. As you may have noticed, this micro-foundation is also false.
If you accept micro-foundations that are false, you can reach all kinds of incorrect conclusions. (Sprinkle around the phrase “as if” and they will still be incorrect.) But if you stick to micro-foundations that are true, human capital is perfectly excludable. There are no human capital externalities. Zero. Nada. Zilch.Unstated assumption: methodological individualism based on ontological individualism.
What's false about this? It ignores the role of relationships is a social system. It is not even possible to think, which requires the use of symbols, without a pre-existent public context. There are no private languages.
Romer's excluded middle, which he uses to "prove" his assumption, is silly.
Human ability is socially determined as well as individually developed, and all use of human ability other than the most basic, shared with animals, is also socially embedded.
The notion that human knowledge is essentially rival and excludable is socially pernicious and it is the antithesis of a fundamental assumption of scientific method, that of shared results.
Paul Romer Blog
Human Capital and Knowledge
Paul M. Romer | Professor of Economics at the Stern School of Business at New York University, and formerly STANCO 25 Professor of Economics in the Graduate School of Business at Stanford University and a senior fellow at the Hoover Institution.
16 comments:
So there are individuals *and* a society. I can't find an actual rebuttal of anything in Romer's piece. What middle is Romer excluding, specifically. And do you reject the whole "information stored [privately] in neurons" model?
I'll let Jason Smith elaborate on it.
Trust is human capital that isn't excludable
It's not Individual *AND* society but individual *IN* society and *through* society. Human beings are social animals. Humans cannot survive without society. Societies determine individuals much more than individuals determining society.
Existentialist philosopher Jean Paul Sartre wrote eloquently about the nature of human being as freedom in his early years (L' Être et le néant, 1943). He later came to realize that this was nonsense and became a Marxist (Critique de al raison dialectique, 1960).
The only coherent approaches to economics from a holistic non-simplistic point of view come from Marxism, institutionalism, and systems theory. Methodological individualism is dead end.
Yeah, no. That doesn't elaborate. It ignores. Trying to recast discrete knowledge (how to make a right angle using only a measuring rod) into "trust" and other vagaries.
And I see no answers to my "excluded middle" and "neuron model" questions. Will those just be ignored as well?
Of course, one's ability (potential) is one's own as an individual — until one uses it (actualizes it). Then actualized potential becomes social.
Knowledge in use is only rival and excludable to the degree that one can keep it proprietary (secret or legally privileged through ownership of property rights). It is very difficult to keep useful knowledge secret (reverse engineering, commercial espionage, etc.). So that leaves legal privilege. Intellectual property rights are designed to make knowledge rival and excludable where it is not naturally.
Of course, there are different ability levels, very few of which are useable in isolation other than at the level of survivability outside society, so processes like markets develop in which to socialize ability. Positions in the labor market are rival and excludable where labor is scarce, and ability influences scarcity. Everyone "capitalizes" their potential in markets in terms of the wage or salary they can negotiate, or cost of providing services individually, or price for individual output they can negotiate as tradespeople. But this makes no sense outside of social systems that involve meso and macro causality in addition to micro.
Do others have prior claims on individuals' abilities? Of course. Even the most rudimentary abilities are acquired socially and only find value socially, regardless of individual aptitude. It begins with the processes of socialization and language learning, for example, which is socially acquired beginning with the family. In this sense the social system has a prior claim on individuals based on social determination of knowledge and skill, as well as its usability socially. Another way to put it is that individual freedom entails social responsibility.
Hoarding one's knowledge doesn't make much sense economically or socially. Nor does an individual have a "portfolio" of ability as portion of net worth.
Why is this significant?
In economics the traditional factors where land labor and capital. John Bates Clark combined land with capital as capital. Now the push is to combine labor with capital and argue that "we are all capitalists now." Not going to fly. While physical and neuron-dependent, human beings are neither capital goods nor parcels of real estate even though abilities vary and can be capitalized in markets.
Associated with this is the push of economic liberals to fold all economic factors into capital is the corresponding push to treat government as a firm on the level of other large firms. Apply marginalism under microfoundations and rational agency and output "just deserts." Not a big jump to TINA once one accepts the (false) assumptions that there is no such thing as society and the absence of meso and macro causality.
@Jeff,
I posted a response to your comment, but the basic idea is that just because some productivity improving capacity stored in humans is excludable it doesn't mean it's all excludable. I basically present a counterexample to complete excludability that follows Romer's definition of human capital. That's not ignoring the 3-4-5 right triangle; the existence of excludable human capital is irrelevant to the existence of non-excludable human capital.
True that the 3-4-5 right triangle can't be extracted from your head against your will, but your trustworthiness can be used by people and can't be written down in a copyrighted text. Trust goes immediately though the theory of the firm to higher productivity.
As Tom says (better than I do), there is human capital that is individual and human capital that derives from an individual being part of society.
@Jason, Romer is only talking about the right-triangle type of "human capital".
@Tom, No, actually there is a LOT of one's "ability" that is ONLY used non-socially. Mathematicians working out proofs, teachers working up lessons, and similar. "Society" only gets the finished products so to speak. And no one "has claims" on that ability. You pay me, I might share.
Romer is talking about rivalry and exclusion, which in econ, apply to goods. See theory of public goods.
The right triangle is someone's head is knowledge and knowledge is pure public good. The people who have the right triangle in their heads can rent or sell their ability to use it but they don't own the knowledge itself as property Use of knowledge and skill is called "labor" in economics. Knowledge and skill have generally not been considered capital goods. There seems to be a push on to reduce labor to unskilled labor (brawn) and to capitalize the rest.
Knowledge is widely recognized by courts as non-rivalrous and non-excludable. This is basic to progress. Once knowledge is revealed in behavior, it is in the commons as a pure public good. This is called "public domain." Pure public goods are non-rivalrous and non-excludable. Common goods may be rival but not excludable. One can own the copyright to a book but not the knowledge contained in it. One can teach a skill and even prevent its disclosure through non-disclosure agreements, but one cannot own the skill as property.
This is the reason a the creation of legal exceptions to aspects of knowledge and skill (such as design) in the form of intellectual property rights that limit such knowledge as a pure public good. But these rights are generally only temporary, for the purpose of creating incentive for innovation. Once that period expires the good enters the public domain as a free good. Existing knowledge is not scarce and can only be made scarce artificially. There is considerable pushback now over the trend to extend the periods over which such rights apply.
Actually, a lot of knowledge in the public domain or as common goods contributes the informal economy, which is estimated as the second largest in the world. A constant trend in capitalism is to monetize the informal economy by enclosing the commons through laws that create property rights where there were none in the past. Without governments establishing property rights, everything would be in the commons and it would be up to custom to determine use as was the case prior to the institution of law as an institution.
Bikram tried to do this by copyrighting his sequence of hatha yoga asanas to eliminate competition. A court recently ruled against him. He will likely appeal. The trend to capture traditional knowledge and skill as property is quite widespread and there is strong pushback there too.
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I am arguing against the tendency to equate most skilled labor and knowledge work with capital as "human capital,"because I think it is not only unhelpful in understanding economics but also because it is pernicious. We are not "all capitalists now," and the labor market is different from the land and capital goods markets as well as the financial markets because it involves people.
People are not just physical bodies similar to other physical goods. Conceptualizing labor as a good in markets similar to other goods is largely what is wrong with economic liberalism and accounts for the reason that economic liberalism in incompatible with political and social liberalism, which are based on persons and their inherent rights as persons. The same applies to folding land into capital as a good on the level of capital goods when the environment is the human nest, and ecology is existential for life. "Thou shalt not foul the nest."
In my view capitalizing labor, e.g., wages over a period, and calling it capital is sleight of hand with an agenda. That is redefining econ, just as folding land into capital was. Distinguishing the factors of production in the traditional way makes important distinctions in types of goods. Failure make such distinctions results in category errors with consequences that reach beyond economics.
The reality is that the factors are not even best characterized as "land, labor and capital" but the environment, people being productive, and the means of production.
People own the ability. That is what Romer says (neurons). That is what you say above ("can rent or sell their ability"). The ability is a good. The ability is stored in neurons. Neurons are rival.
The only way around that is to somehow assert that "my" neurons are in the public domain. That is implicitly what you say. That is pernicious.
The only way around that is to somehow assert that "my" neurons are in the public domain. That is implicitly what you say. That is pernicious.
Neurons in the head are just that and they remain valueless unless converted into something with value through application, and that is called "labor." The push is to claim that knowledge is part of one's "capital," since the ability to use knowledge-skill to create economic value is what is nonsense. The only way to "capitalize" knowledge and skill is through the labor market or through self-employment. Authors, designers, inventors working alone are still part of labor when they receive income from work that makes knowledge-skill valuable economically. This is so even if they are not remunerated if the informal economy is included, as many believe it should be in GDP, for example.
Knowledge is not part of capital on anyone's balance sheet. Knowledge is not capitalized in anyone's portfolio. The only way knowledge becomes valuable in market is through credentialing and documentable experience, e.g., work experience and recommendations.
Romer is saying nothing more than labor is skilled and unskilled and where there is a demand for it, skilled labor can command a higher wage or salary. but that is relative to demand. There are a many knowledge workers and highly skilled workers that are either unemployed or underemployed involuntary due lack of job offers.
Romer's 3-4-5 triangles in the head are irrelevant to both the economy and economics until they are place there as a good. Knowledge itself is a free good. It only acquires value in through application in labor, which may embed it in technology or organization, and it only become property through legal rights that supersede knowledge as a free good, e.g., patents and copyrights.But that is the result of the labor of authors, designers, inventors, etc.
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Why am I an others so insistent on this? Because the push to treat labor a part of capital is part of the program of economic liberalism to justify a market state in which the factor are treated equally as things that contribute to marginal productivity, for which they receive "just deserts."
Economic liberalism stands opposed to political and social liberalism, creating various paradoxes and actual contradictions within liberalism as whole. Economic liberalism is antithetical to liberal democracy, for example.
Social and political liberals disagree with the fundamental assumption of economic liberalism that the right to property is either exclusive or supersedes other rights. Generally, economic liberals consider what social and political liberals assume as other rights not to be rights but privileges.
Social and political liberals assume that human agents are not only different from other things like land, technology, materials, energy, and money in being persons. Persons alone have rights and human rights supersede property rights.
The purpose of a "state" is to constitute a government, laws and institutions based on popular sovereignty, as it the Preamble, "We the people.…" The state is constituted by the people to "promote the general welfare." The US Constitution states specifically in the founding document of the nation that the intention of the people with whom sovereignty lies are creating a welfare state (not a market state). Appended to the Constitution is the Bill of Rights, which are civil liberties established as the law of the land that give persons (rather obviously from the context natural persons) rights that supersede other laws and regulations.
When one realizes that the real issue is not so much economic but social and political — about what kind of society the people will live in under the rule of law, and that a cohort wants that to be a market state instead of the welfare state that the founding documents established — then one can see that this is not merely an intellectual argument about angles dancing on the head of a pin. Those kinds of philosophical arguments could also usually be deconstructed to reveal the real issues, which had to do with dominant ideology and therefore social and political control. Then it was couched in religions and now in science. This is why it is so important socially and politically to claim that economics is a natural science and the natural state is economic liberalism.
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The claim that one "owns" the knowledge in one head is similar to the claim that one "owns" oneself, which is the assumption underlying the individual sovereignty asserted by some Libertarians. This means that I am my own property so that I am free to do what I want with it, including sell myself into slavery if I choose.
That is actually an ancient argument that modern legal institutions based on human rights (social and political liberalism) rejects.
There are some who argue now that even renting oneself for work should be viewed as illegal. See the work of David Ellerman, for example.
Abstract
Liberal thought (in the sense of classical liberalism) is based on the juxtaposition of consent to coercion.
Autocracy and slavery were supposedly based on coercion whereas today's political democracy and economic "employment system" are based on consent to voluntary contracts. This paper retrieves an almost forgotten dark side of contractarian thought that based autocracy and slavery on explicit or implicit voluntary contracts. To answer these "best case" arguments for slavery and autocracy, the democratic and antislavery movements forged arguments not simply in favor of consent but arguments that voluntary contracts to legally alienate aspects of personhood were invalid "even with consent"—which made the underlying rights inherently inalienable. Once understood, those arguments have the perhaps "unintended consequence" of ruling out today's self-rental contract, the employer-employee contract.
— David Ellerman, "On the Renting of Persons" (Oct 2013)
Neurons are not valueless, of course. I value mine greatly. Perhaps you meant priceless (non-price-able)?
Yes, of course there are limits and pitfalls to economics.
The issue was not who owned neurons, the issue was whether the abilities stored in them are a good. They are. You can't get around it.
Are you arguing for intrinsic value independently of being established iaw some criterion? If not, what is the criterion or criteria you are assuming?
In modern econ, value is determined by the money price in markets. I agree that this is not the only way to assess value, so that while price equals value in many case, it doesn't in all, for example, in informal economies, which are by definition not monetary economies.
Firms regularly assess value of hires by looking at resumes, interviewing candidates, comparing industry standards, etc. They make monetary offers based on competitive evaluation, even when there is an established wage or salary if there is a scarcity of applicants relative to openings. Do firms always make the right choices in matching price and value. No. There are lot of people that can sell themselves as worth more than they are and there are also many who underestimate themselves and don't present well.
That's a reason that firms often hire on a trial basis or hire out of an intern pool. Same with promotions. Many times the wrong people get promoted because managers are not able to properly assess ability and output even after the fact. Scott Adams has made a fortune making us laugh about this by making it obvious. It's also the basis of the Peter Principle.
A good example is the story a friend who are an early programmer relates. She was criticized by here non-programmer manager in comparison with a fellow programmer because he generated so much more code than she did. She had to explain to him the principle of economy in programming. Writing a lot of code just uses up precious space. The core they were working with then was 256K and that was an IBM mainframe.
I know quite a few people who think that the knowledge in their head is very valuable and are sorely surprised to find that it doesn't live up to their expectations in practice. There is a psychological class of folks that regularly overvalue potential based on knowledge in the head and another class of folks that regularly undervalue it. The test is what is can do in practice and what the yields as a result. It's not just workers, either. Kids learn this by trial and error, and through competition with others.
Neurons in the head are valuable like blood in veins. They are valuable because people have intrinsic "worth" as persons, even through they may command different wages and salaries in the market place, have different level of fame and importance. etc.
In the view of social and political liberalism all human being are of equal "worth" as persons, and this has nothing to do with property or quantitative valuation. This implies human liberties and civil rights along with attendant responsibilities, equality before the law, and absence of privilege.
One criterion is the observation that without them (neurons), there would be no concept of value in the first place. Uber-value if you will.
Your intrinsic human valuation also works (neurons being a critical subsystem thereof).
The thing is that "neurons," actually brain and CNS function entangles knowledge and feeling, "positive and "normative," such that these aspects that are distinguished intellectually cannot actually be disentangled. They function comprehensively in a human being to make a human not only a human person but a unique individual.
Of course, individuals are unique in many ways, but knowledge is not even primary. It's not knowledge that is important but the ability to use knowledge. Moreover, firms don't hires only on the basis of ability. They ask for recommendations about character, check arrest records, call up credit reports, and so forth. An individual's "capitalization" in terms of wage or salary depends on a lot more than knowledge in the head, which is invisible to all others and may be misjudged even by the individual.
One could say that an individual with a 3-4-5 triangle is worth more than one without it, all things being equal. But all things are never equal. Like most abstract arguments, it's silly when compared with reality, even though many are duped by such arguments, which is a major reason other than force that 1% of the global population owns about half the world's assets according to a recent Credit Suisse report.
In the view of social and political liberalism, humans have "intrinsic worth" that cannot be quantified but only qualified. All human beings of equal worth as persons, even though they may have different value as individuals in social relationships, including economic ones that are quantifiable. Many are not quantifiable and remain indeterminate although no less real. Or one could argue that everything that one can get an insurance company to insure is quantifiable, I guess.
The social and politically liberal assumption that human beings have "intrinsic worth" as persons is taken to be self-evident. No criterion is appealed to in order to justify it. This is the basis of the Enlightenment assertion that human beings are ends in themselves and so it is immoral to treat a human being as merely a means.
Historically, this concept of person is the result of the secularization of the religious argument that all human beings have a soul and all souls are equal before the Creator. This is state explicitly in the Declaration, for instance. In this view, The criterion for the intrinsic worth of human beings is divine origin. Liberalism imported many historically established ideas such as this and secularized them. But this significantly weakened the criteria on which they rested and so they came under attack by those who viewed them as obstacles to their own more narrow interests.
Economic liberals would argue instead that the worth of individuals is based on what they produce and therefore come to own.
In US history, this is reflected in the sentiment expressed by first chief justice John Jay, "The country should be governed by those who own it." This stands against Lincoln's "government of the people, by the people, for the people."
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