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Human Capital?

March 28, 2010

Nick Rowe has a post over at Worthwhile Canadian Initiative that is apparently from his colleague, Frances Woolley, about whether human capital is literal truth, myth, or fairy tale.

Perhaps we should think of human capital as a fairy tale, a reassuring bedside story. But the power of fairy tales is that they reflect certain elemental truths about the human condition. People who teach economics may find it deeply comforting to think that their pay is justified by their high levels of human capital.

But human capital is more than a comforting story – it is a myth that shapes our understanding of the world and thus public policy. Ontario’s government is urging universities to increase retention rates, so everyone who starts university completes a degree. If the human capital theory is true, then this is sound policy: more students completing university means more human capital means a more productive economy. If, however, the value of university education is as a signal of ability, then one of the most important things that universities do is fail students. Unless some students fail, the ability to complete a university degree confers no special distinction on the graduate.

I think the story fails to make the distinction between something real that is gained, and the societal institutions that have arisen to accommodate those gains. Or perhaps I read the article wrong, or too quickly. If that is the case, I apologize.

Way back, when apprenticeships were the norm of learning skills (and there was no patent law), society organized into guilds which rewarded their members with exclusivity. Similarly, trade unions train their workers in their craft (construction, electrical, etc.) and then reward their members by giving them the exclusivity of being in their “club”. My father is a union electrician, and that title denotes the quality of work of the union as a whole, and thus allows him to command a higher wage than non-union. This is simply one way of organizing around a particular gain.

The gains from a university education are organized around actually completing a degree. Is this optimal? Probably not. Some colleges around where I live allow people to “design their own degrees”, which seems pretty progressive to me (useless progress?). The way the university landscape has evolved and the way that it has related to the job market has certainly been shaped and conditioned — sometimes by fiat, sometimes by simple niche construction…but that arguably does not make it optimal.

Our current system represents an evolutionary “good trick” that we have found that allows a lot of people to be educated, and more productive. We have consciously designed Business Plans around this trick…but there is nothing to say that Business Plans couldn’t be designed around the individual courses people take.

So is human capital a fairy tale? I don’t think so. I think it is something that exists and can be improved. Are the stories we tell ourselves about the relationship of human capital to societal organization fairy tales? Perhaps. I think the better measure of the effects of human capital on the organization and evolution of business plans is to measure the jobs in which people are producing physical capital, and the jobs in which people are producing organizational capital. There are greater returns to organizational capital than physical capital, because there are severe limits to what we can physically produce per work hour.

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