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does human (and physical) capital exist?

In the heated bloggers’ debate over human capital, I was surprised by the absence of discussion of how to measure human capital, a point that was crucial in the earlier “Cambridge controversy” over physical capital. Typically, human capital is measured as years of schooling. All this is added up (sometimes with adjustment for levels of schooling – counting a year in High School or University as more than a year in primary school). The sum total is then taken to be a nation’s stock of ‘human capital’, which becomes an input into an aggregate production function for the economy. This seems wrong, to me. Some schools are terrible, whereas others are excellent. How can we take account in differences in the quality of schooling?

Nick Rowe has a clever solution to the problem. “Capital” – whether physical or human – is not really a thing, so it is not necessary (impossible?) to measure it.

We invest in increasing our skills, our strength, our knowledge, etc. It just easier to use the words

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This entry was posted on Wednesday, February 25th, 2015 at 21:10 and is filed under Development Economics, Education. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.

One Response to “does human (and physical) capital exist?”

  1. Nick Rowe says:
    February 25, 2015 at 23:32

    Thanks!

    A thought experiment: suppose all the history books vanished, and everyone’s memory of the past was wiped clean. They all suffer a collective delusion that the existing stock of machines fell out of they sky. God created them, just like God created (Ricardian) land.

    So what? Bygones are forever bygones. It doesn’t matter. Existing machines are no different from land. (Dutch Capital Theory http://worthwhile.typepad.com/worthwhile_canadian_initi/2012/08/dutch-capital-theory.html ).

    But looking forward we have various production processes we could use, where those existing machines, like land, may play a role. And the only thing that matters to is the future stream of consumption goods (which may fluctuate over time) associated with each of those processes. If you build a new machine today, that means you produce fewer consumption goods today. So it’s equivalent to putting consumption goods into one end of a black box and waiting for consumption goods to come out the other end at various future dates.