Paul Romer — Human Capital and Knowledge

In the market state of economic liberalism, only that which is quantifiable is significant and everything economic can be capitalized. Workers' capitalization is the wage or salary figure they are able to demand. This is key in a technological society, according to Romer's assumptions.

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.

Sandwichman — Labour Defended Against the Claims of "Human Capital"

Thomas Hodgskin and Karl Marx versus Gary Becker on "human capital."

Econsopeak
Labour Defended Against the Claims of "Human Capital"Sandwichman

Robert Paul Wolff — Human Capital

Enter Gary Becker, who resurrected the concept of "human capital" to take account not of the worker's body or her food and clothing but rather to incorporate into Economic Theory the important fact that in a modern capitalist economy, some categories of workers regularly earn wages significantly higher than the standard pay for semi-skilled machine operatives, as a consequence of their educational credentials and the skills supposedly thereby represented. These workers, it is suggested, have invested in themselves by holding themselves off the labor market while they acquire further education, often at considerable expense, thereby accumulating "human capital." . They are thus like business owners who use a portion of their profits [or take loans] to purchase more sophisticated machinery, the cost of which, amortized over the life of the machines, is a good deal less than the market value of the additional product churned out by the improved capital goods. 

This modern version of the old notion of human capital allows economists to blame the low wages of unskilled workers on their own improvident failure to invest rather than consume, an interpretation of poverty that is quite comforting to those sitting atop piles of accumulated capital. 

But the analytical concept of human capital has other interesting uses in our attempts to understand modern capitalism, which exhibits a segmented and highly pyramidal wage structure. It can, for example, be deployed to make sense of the notion of relative exploitation. High wage workers can be understood as both exploited by their employers and exploiting lower wage workers, a construal that seems to comport with our intuitive sense that corporate executives, lawyers, professors, and such like high wage employees occupy a social position more akin to the owners of capital than to hourly wage earners at the bottom of the income pyramid.

The Philosopher's Stone

Human Capital

Robert Paul Wolff | American political philosopher[ and professor emeritus at the University of Massachusetts Amherst

Max Sawicky — Noah and Nick, Too

Follow up from Max Sawicky that makes some further good points what labor should be treated as labor and not capital.

It's a category mistake aka category error, and it's a logical fallacy.

A category mistake, or category error, is a semantic or ontological error in which things belonging to a particular category are presented as if they belong to a different category,[1] or, alternatively, a property is ascribed to a thing that could not possibly have that property. An example is the metaphor "time crawled", which if taken literally is not just false but a category mistake. To show that a category mistake has been committed one must typically show that once the phenomenon in question is properly understood, it becomes clear that the claim being made about it could not possibly be true. — Wikipedia 

Not only is "human capital" a category error, so is the economic view it is based on. And this is the fundamental problem with conventional economics. There is no problem in choosing any modeling method as along as it contributes to the task one is undertaking, to think about some issue heuristically but precisely, or even just for fun. But that is not the use to which conventional economic models are put. They are used for policy formulation, or at least recommend for such use. Moreover, they are based on a world view that their advocates advance. The model is taken to be not only a simplified model of economics relationship but also a key piece in an ideology that expresses as world view. 

This is a jump from economic modeling to philosophy that is based on huge unacknowledged assumptions about ontology, epistemology, ethics, and social and political philosophy, as well as ignoring in put from relevant disciplines such as psychology and cognitive science, anthropology, sociology and history, all of which deal more critically with what economists tend to assume uncritically. Worse, The economic approach is used to plead for a point of view being representative of reality that favors the interests of a privileged social, political and economic class.

MaxSpeak
Noah and Nick, Too

Max Sawicky

Max Sawicky — For Noah and Nick

Max Sawicky rejects the need for and appropriateness of "human capital."

The traditional factors have traditionally been decompose as needed into types of capital, and types and uses of land such as agricultural, resource extraction, commercial and residential, as well as types and grades of labor, with the distinction of salaried versus wage, management versus worker, white collar versus blue collar, skilled versus skilled. The supposed need to introduce a new distinction or to fold land into capital are an unnecessary and confusing aggregation that clouds modeling instead of clarifying it.

Do firms use the concept of human capital? For sure. It's a buzz word. Management attempts to produce metrics on the dollar value employees produce over time, which is the ROI with respect to the cost of employing them. But they are still employees even if the firm seeks to capitalize them for management purposes, e.g., retention and promotion and compensation. They are still part of labor and not capital goods. Labor is not fixed investment and it is not depreciated. In fact, unlike capital, labor tends to appreciate over time rather than depreciate, especially in modern environments that don't wear down workers, although some business models are still based on this, especially for foreign labor in developing countries where protections are slight to non-existent.

MaxSpeak
For Noah and Nick

Max Sawicky

Matt Bruenig — Human Capital Confusion

More.

Demos.org 

Human Capital Confusion
Matt Bruenig

Matthew Martin — Is human capital capital?

More thoughts on human capital.

Of course, human capital is not capital. If it were, we'd just call it capital and lump it in with the rest--the purpose of the term "human capital" is to distinguish it from actual capital.

So, if it's not capital, what is human capital? At most, I'd say it's a modeling insight. The vague notion of "skills" and knowledge that it stands in for are very real, but when it comes to modelling we are really just pretending it's a kind of capital stock. The key insight was in recognizing that skills and knowledge share a few of the same kinds of intertemporal dynamics as capital, and that we can obtain accurate predictions by modeling them as such, even though they differ in lots other ways.…

Separating Hyperplanes — A blog between the spheres of Economic Theory and Policy Analysis
Is human capital capital?

Matthew Martin | health economist and programmer for the Cancer and Blood Diseases Institute at Cincinnati Children’s Hospital Medical Center

Lars P. Syll — The human capital controversy

Lars buries "human capital" with increasing returns to scale. "Human capital" is a modeling move to deal with increasing returns to scale, because ideas involve increasing returns to scale and increasing returns to scale is incompatible with the neoclassical model. The move does't work. If you are following this debate, you will want to read this.

Lars P. Syll’s Blog
The human capital controversy
Lars P. Syll | Professor, Malmo University

Noah Smith — Is human capital really capital?

Depends on context and modeling choices.

For some applications, actually, you can actually represent anything as capital - just calculate its expected present discounted value, and voila, you're done.

This is the financial aspect of capital rather than capital as a factor of production. It's sort of like the difference between firm investment as a type of expenditure versus financial investment as a form of saving.

Using the same sign for different symbols is an ongoing problem in economics. See, for instance, the running controversy over saving and investment. This is the second capital controversy and the first one is not agreed upon yet in the profession.

Bonkers for a "science." If you can't even get your definitions specified, what hope is there for clarity and consistency? No wonder economics is in such a mess if anything can mean whatever one wants it to mean.

Noahpinion
Is human capital really capital?
Noah Smith | Assistant Professor of Finance, Stony Brook University

Magpie — Capital Errors: from Bad to Worst (of All).

Magpie joins the human capital fray.

Magpie's Asymmetric Warfare
Capital Errors: from Bad to Worst (of All).
Magpie

David F. Ruccio — Human capital controversy

As I have long explained to students, the theory of capital is the most controversial topic in the history of economic thought because the theory of capital is the theory of profits—and therefore an answer to the question, do the capitalists deserve the profits they get? 

The original capital controversy was never resolved. But no there’s a new capital controversy, a controversy over human capital. It was launched by Branko Milanovic, based on Thomas Piketty’s refusal to include human capital in the other forms of capital he measures in his inquiry about the history and future prospects of wealth inequality.** 

Basically, Milanovic argues that labor is not a form of capital because labor involves a “doing” (work has to be performed in order for wages to be paid) while other forms of capital are characterized not by work but by nonwork, that is, ownership…
I’m with Milanovic on this. There is a fundamental difference between doing and owning.  

But I also think the human capital controversy has even larger implications.…

Occasional Links & Commentary
Human capital controversy
David F. Ruccio | Professor of Economics University of Notre Dame Notre Dame

Branko Milanovic — On "human capital" one more time

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.

In order to be clear on what I had in mind, let me summarize my points once again so that there is no misunderstanding.…

Global Inequality
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.

Sophie Quinton — The Trader Joe's Lesson: How to Pay a Living Wage and Still Make Money in Retail

Companies that invest in higher salaries for low-level employees find success in a competitive market

The Atlantic
The Trader Joe's Lesson: How to Pay a Living Wage and Still Make Money in Retail
Sophie Quinton

Contrast with Wal-Mart's business model: Sam Walton — "I pay low wages. I can take advantage of that. We're going to be successful, but the basis is a very low-wage, low-benefit model of employment." — Attributed in Adam L. Penenberg, "Why Google Is Like Wal-Mart", Wired, 21 April 2005 [Source: Wikiquote]

Steve Randy Waldman — K is not capital, L is not labor

Many good observations and take-downs concerning neoliberal shibboleths about capital, investment, and labor.

Let’s talk first about “labor”. As Jones hints in his “bonus implication”, labor is not in fact measurable in terms of homogenous hours. What a brain surgeon can do with an hour is very different from what a child laborer can accomplish. Macroeconomically, our collective capacity to produce improves. You might, as Jones does, refer to this incorporeal je ne sais quoithat enhances labor over time as “human capital”, or as labor-augmenting technology. Like physical capital, it seems to accumulate. In empirical fact, “human capital” and its more sociable, incorporeal twin “institutional capital” seem to be much more important predictors of the growth path of an economy than physical capital. Europe and Japan bounce back quickly after war devastates their infrastructure. But imagine that a Rapture clears the Earth and pre-agrarian nomads take possession of perfect gleaming factories. I think you will agree that production does not recover so fast. Human and institutional capital dominate physical capital. [3]

Like physical capital, and unlike hours of the day, the collective stock of human capital grows over time, without obvious bound. Yet, at least under existing arrangements, we have no means of distinguishing between “returns to human capital” and “wages”. “Capital taxation”, in conventional use, refers to levies on capital gains, dividends, and interest. As a political matter, results like Chamley-Judd are often used to support setting these to zero. But eliminating conventional capital taxes shifts the cost of government to wages, which include returns to human capital. If human capital accumulation is as or more important than other forms of capital accumulation, and if the quality of effort that people devote to building human capital is wage-sensitive, then taxing wages in preference to financial capital may be quite perverse. Further, while physical capital grows by virtue of nonconsumption, it seems plausible that human capital development is proportionate to its use, which would render a tax penalty on “wages” particularly destructive. Fundamentally, Chamley-Judd logic suggests that we should tax least the factor most capable of expanding to engender economic growth. You don’t have to be a new-age nut to believe that human and institutional development, which yield return in the form of wages, may well be that factor. It is perfectly possible, under this logic, that the roles of capital and labor are reversed, that the optimal tax onlabor should be zero or even negative, because returns to physical and financial capital are so enhanced by human talent that even capitalists are better off paying a tax to cajole it.

Interfluidity
K is not capital, L is not labor
Steve Randy Waldman

There Biggest "REAL" Problem for the USA is the Lost Capacity That Results From Having Human Capital Sit Idle

How to ‘fund’ hurricane Sandy

Open Knowledge Festival in Finland, Sept 17-22

"OKFest" in Finland to Study Benefits of Open Knowledge and Open Development.

A slideshow is accessible for online viewing.

Any mention of economics, accounting, currency operations or human capital? Not yet, though the Topic Stream page mentions things that are close, including development, accountability, open business, and open knowledge - and Open Government is mentioned in many places.

I'll try to reach the organizers, and suggest that they also invite discussants from the ongoing economic operations meeting in Brussells, about "Jobs for Europe".

"State of Human Capital Utilization"

commentary by Roger Erickson

A report and accompanying film are out.

State of the World's Minorities and Indigenous Peoples 2012

This Could be Generalized to "State of Human Capital Utilization"

What's money got to do with capital? Just another automatic stabilizer.

It's telling that the paradigm most commonly voiced by developers is that local people are standing in the way of others utilizing static "riches." Such a definition of development and "finance", as rape, is then a rallying cry to angrily take said riches by force from the "obstructionists," who are subsequently typically labeled as terrorists. Talk about not being able to see the human capital for all the people!

By this measure, the list of prominent terrorists throughout history would include most notable religious martyrs, nearly all regional tribes in every land, and, of course, all the signatories to our own US Constitution. Oh, and we must now also include that 99% of our current population who are standing in the way of our 1%, who simply want to put OUR resources to "better" use - by and for them, of course. But of what use is their form of use?  Their use always turns out to a confused state of the tail hoarding the dog.  Buddy can you spare a paradigm?  We seem to all be in the way of the one we have.

However, there are other paradigms to select from. One is as follows.

"Venimus, Vidimus, Perfecimus Eventus Accommodatos" 

[We came, we saw, we made a more perfect union.]

What is wrong with an education system that can teach superficial aspects of accounting, relativity, organic chemistry, and nuclear engineering to vast numbers of people, yet can't or won't teach a topic as rudimentary and fundamental as the difference between static and dynamic value?

Without that distinction, supposed "capitalists" show only an abject failure to compound net human capital. Some capitalists! If you're gonna aspire to be one, it might help to define and rank the forms of capital, and what they mean to citizens of a nation, and members of a social species.  Is dynamic value EVER mentioned in accounting classes?