Wednesday, October 15, 2014

On "human capital"

Some time ago, Daniel Becker put up the following quote from the World Bank's Where is the Wealth of Nations? at Angry Bear. After reading in Piketty, I though to comment:
Oil, soil, copper, and forests are forms of wealth. So are factories, houses, and roads. But according to a 2005 study by the World Bank, such solid goods amount to only about 20 percent of the wealth of rich nations and 40 percent of the wealth of poor countries.

So what accounts for the majority? World Bank environmental economist Kirk Hamilton and his team in the bank’s environment department have found that most of humanity’s wealth isn’t made of physical stuff. It is intangible…Hamilton’s team found that “human capital and the value of institutions (as measured by rule of law) constitute the largest share of wealth in virtually all countries.”

The World Bank study defines natural capital as the sum of cropland, pastureland, forested areas, protected areas, and nonrenewable resources (including oil, natural gas, coal, and minerals). Produced capital is what most of us think of when we think of capital: machinery, equipment, structures (including infrastructure), and urban land. But that still left a lot of wealth to explain. “As soon as you say the issue is the wealth of nations and how wealth is managed, then you realize that if you were only talking about a portfolio of natural assets, if you were only talking about produced capital and natural assets, you’re missing a big chunk of the story,” Hamilton explains.

The rest of the story is intangible capital. That encompasses raw labor; human capital, which includes the sum of a population’s knowledge and skills; and the level of trust in a society and the quality of its formal and informal institutions. Worldwide, the study finds, “natural capital accounts for 5 percent of total wealth, produced capital for 18 percent, and intangible capital 77 percent.”
"Human capital” is a misnomer in this sense. As Piketty observes, capital is property and “human capital” properly means ownership of human beings as property. Historically, more capital was human capital than capital goods. Owners of land also owned those that worked the land, which as the capital of the time.

That changed with technological innovation and the rise of capitalism. Moreover, it was redundant with the mechanization of agriculture. While there is still a good deal of slavery in the world, and a lot of it is sex slavery, “human capital” is now a blip on the screen and mostly illegal.

“Human capital” in the contemporary sense is not related even metaphorically to the historical meaning of “human capital,” and it should be dropped like a hot potato by those who promote capitalism in that the leftist analysis is that wage labor is from of slavery where the employers owns the wage-earner’s time, expertise and effort for the specified period under the conditions of the labor contract that the employer gets to write.

I don’t agree with the analysis although I would agree that there is an analogy operative that can be useful in thinking about capital-labor relations and share.

What we see actually is that all “human capital” in this analogous sense is produced by labor but a significant share is not owned by it. Employees generally agree that what is produced in employment is the property of the owners of the firm. This is the case with most intellectual property, for instance. It can be called “soft capital” to distinguish it from “hard capital” like factories and machines. A great deal of the capital that is now being created in the knowledge era is soft capital owned by firms and therefore by the owners of the firms rather than the labor that created it, just as the design of hard capital has been owned by the firms whose labor created it.

Some soft capital was and is the contribution of entrepreneurs who both own and work for the firm and are payed a salary like employees. In addition, with the advent of the joint stock company some employees are also owners. But this doesn’t alter the fact that the soft capital in the form of intellectual property is owned by the firm rather than belonging to the creators.

In summary, capital signifies ownership of property that serves as means of production or as finance. Capital is an asset that commands a return based on ownership of property rather than compensation from work, which defines labor. Some people’s labor is worth more than others owing to knowledge, skill, experience and performance. That has nothing to do with their having more “capital.”

If we don’t keep this straight, we are going to become confused very quickly. BTW, this is why Adam Smith proposed a labor theory of value. It seemed obvious to him that what just lay about in nature had to be organized in order to become socially useful and gain an economic value. It’s a no brainer that any one can see.

On that score, Piketty observes that everything that human work adds to nature can be capitalized. But as he also emphasizes, capitalizing labor doesn’t turn labor into capital in the economic sense that capital is used technically in differentiating capital (ownership) from labor (work) as different factors of production in capitalist economies.

Piketty specifically criticizes the view of “intangible capital” put forward vaguely above. For him, intangible capital is soft capital that exists as legal property, e.g., as intellectual property such as patents, copyrights, trademarks, and other proprietary intangibles. Legal property belongs to either households or firms and firms belong to households, so we can talk about capital in terms of ownership of property, and that is defined institutionally. This is possible to determine or at least estimate from accounting records, legal records and other such documentation that can be collected historically. Otherwise, it’s mostly introspection and handwaving.

BTW, the informal economy is estimated to be the second largest globally, but it doesn’t not figure into economics at all because no formal exchanges or monetary transactions are recorded. Historically, it has been the primary economy of humanity and it is still a huge factor in producing social value and contributing to the social fabric. The push now is to monetize as much as possible of it as quickly as possible as well as to privatize what remains of the commons, which is also not counted economically.

Workers don’t legally own their knowledge, skill, etc simply as capabilities. Workers own what they produce from their capabilities unless they confer ownership, such as is required in employment contracts. Workers that work for themselves to produce capital as means of production are called entrepreneurs and are supposedly the backbone of capitalism. Subsequent owners of capital acquire capital when entrepreneurs sell all or some their share of ownership

I would also argue that while land can be capitalized similarly to labor, land is not capital any more than labor. These should be treated as separate factors of production. But I won’t get into that argument here.

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