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 “human capital” to describe the things we have invested in in the past. And we can talk about how our human capital depreciates too, as we forget stuff, or technology changes so our skills become obsolete.

Now the word “capital” is deeply problematic, because time has many future periods, and so trying to convert a vector into a single scalar number is….tricky. That is true for both human and non-human capital. I prefer to say that “capital” isn’t really a thing; it’s just a name we give to a production process where time matters, because inputs and outputs come at different times. And once you start to think of “capital” as just the time-structure of production, then brain surgeons are just as much capital as blast furnaces. Costs come first, and benefits come later.

Nick Rowe, commenting on Max Speak, “For Noah and Nick”, 24 February 2015.

I find it difficult to understand Nick’s argument. If capital is not a ‘thing’, how can it be an input producing output “in a production process where time matters”? If it is an input, it is certainly not a measurable output.

The implication is that we should do away with the aggregate production function, and much of econometrics. I am sympathetic to this idea, and will give it more thought.

For much, much more, see

Nick Rowe, “Does capital income exist?“, WCI, 24 February 2015, and

Nick Rowe, “Ours the task eternal — investing in human capital“, WCI, 24 February 2015.

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

  1. Nick Rowe says:

    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.