human-capital-main

Like the capital controversy of the 1960s, the current controversy over human capital pits neoclassical economics against its critics.

The original capital controversy (also known as the Cambridge controversy, because it was staged between neoclassical economists at MIT, and thus of Cambridge, Massachusetts, and non-neoclassical economists at Cambridge University, and thus of Cambridge, England), which actually took place between the mid-1950s and mid-1970s, was narrowly about the internal consistency of neoclassical economics and more generally about the role of capital in economic theory. The basic idea is that, in a world of heterogeneous capital goods (e.g., a shovel and an automobile assembly-line), you need to know the price of capital (the interest rate or rate of return on capital) in order to determine the quantity of capital (i.e., in order to add up all those different kinds of physical capital). But, in neoclassical economics, you need to use the quantity of capital in order to determine the price of capital (via supply and demand in the “capital market”), which creates a fundamental problem for the neoclassical theory of capital.

Hence, Joan Robinson’s famous question, “What is capital?” To which neoclassical economists responded with gobbledy-gook. And so Robinson repeated her question, the neoclassicals with gobbledy-gook, and the controversy continued without resolution. Neoclassical economists, like Robert Solow, resorted to an aggregate production function (where the problem of heterogenous goods is simply defined away), while Robinson and the other anti-neoclassical economists on the other side of the pond entered into increasingly arcane areas of dispute, such as reswitching and capital-reversing.*

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 now there’s a new capital controversy, a debate about 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 skills to be used and wages to be paid) while other forms of capital are characterized not by work but by nonwork, that is, ownership (financial capital generates a return based on owning some of financial claim, and no work is involved in making such a claim).

why is “human capital” such a disastrous turn of phrase? There are two reasons. First, it obfuscates the crucial difference between labor and capital by terminologically conflating the two. Labor now seems to be just a subspecies of capital. Second and more important, it leads to a perception — and sometimes to the argument used by insufficiently careful economists — that all individuals, whether owners of real capital or not, are basically capitalists. Even if you have human capital and I have financial capital, we are fundamentally the same. Entirely lost is the key distinction that for you to get an income from your human capital, you have to work. For me to get an income from my financial capital, I do not.

I’m with Milanovic on this. There is a fundamental difference between doing and owning, between doing labor and owning capital. But I also think the human capital controversy has even larger implications.

First, a bit of history: the idea of human capital was invented in the early 1960s by neoclassical economist Theodore Schultz [pdf] as part of a more general attack on Marxian-inspired notions of capital (capital that is connected to profits and therefore exploitation), an extension of Adam Smith’s theory of the causes of the wealth of nations (which now, Schultz argued, should include the accumulation of all prior investments in education, on-the-job training, health, migration, and other factors that increase individual productivity), and an attempt to depict all economic agents, including laborers, as capitalists (who “invest” in and “manage a portfolio” of skills and abilities). Human capital can thus be seen as, simultaneously, a blunting of the critical dimension of capital (broadening it to matters other than profits and thus a particular set of claims on the surplus) and a step in the creation of the neoliberal subject (who seeks a “return” on its “investments” in itself).

Second, the problems associated with the notion of human capital, which Piketty’s correctly does not include in his definition of wealth (since, for Piketty, “capital is defined as the sum total of nonhuman assets that can be owned and exchanged on some market”), also serve to undermine at least part of Piketty’s project. One of the elements missing from Piketty’s approach to capital as wealth is any kind of “doing.” It’s all about owning (of “real property” as well as of “financial and professional capital”), without any discussion of the labor that has to be performed in order to generate some kind of extra value and thus a return on capital.

And so, as is always the case in economics, it comes down to a theory of value. In neoclassical theory, all factors of production get, in the form of income, an amount equal to their marginal contributions to production. Everyone contributes and everyone, within free markets, gets their “just deserts.” In Piketty’s world, the owners of capital manage to capture a larger and larger portion of the national income if the rate of economic growth is less than the rate of return on capital (which exacerbates the already-unequal distribution of income, based largely on CEO salaries). In a Marxian world, capital is a social relationship that both generates a surplus (because “industrial capital” exploits “productive labor”) and represents a distributed claim on one or another portion of the surplus (in the form of “financial capital,” the ownership of land, and so on), based on the idea that the “doing” of labor occurs simultaneously—as both cause and effect—with the “owning” of capital. Three different theories of value and thus three very different theories of capital.

But it doesn’t stop there. In recent years, we have seen a dreary expansion of the idea of capital beyond even physical/financial capital and human capital. It now includes—in the hands of business professors, economists, and other social scientists—intellectual, organizational, social, and other forms of capital. Somehow, if they call it capital, they think it deserves to be taken more seriously.

As I see it, all these new forms of capital, like human capital, are ways of expanding Smith’s wealth of nations; they are all seen as contributing to the production of more “stuff”—more use-values, the “immense accumulation of commodities.” But the expanding universe of capital also serves to hide the extent to which all that stuff, which is in reality socially produced, is then privately appropriated—leading to a growing gap between a tiny minority at the top and everyone else. In other words, it’s a pattern of private capitalist appropriation that creates a more and more unequal social distribution of income and wealth.

The capital controversy will remain with us, then, as long as we refuse to solve the problem of capital.

 

*Avi J. Cohen and G. C. Harcourt [pdf] provide a useful overview of the capital controversy.

**Nick Rowe and Tim Worstall have since criticized Milanovic and his call to junk the notion of human capital, and he in turn has responded to their criticisms.

Comments
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