Thought du Jour

Back in the 1960s there was a famous debate between economists (led by Joan Robinson and Piero Sraffa) of the University of Cambridge in England and economists (led by Paul Samuelson and Robert Solow) of MIT in Cambridge, Massachusetts. The debate, known as “the Cambridge capital controversy“, was over measurement and aggregation of physical capital. The Cambridge (England) economists argued that aggregate physical capital could not be measured without reference to the rate of return on capital. Cambridge (Massachusetts) generally agreed that the Cambridge (England) side won, though many professors of economics continue to teach aggregate production functions and economic growth theory as though the debate never took place.

A similar debate is now taking place, over human rather than physical capital. Noah Smith (HT Mark Thoma) provides a nice overview for those are interested.

Is “human capital” really capital? This is the topic of the latest econ blog debate. Here is Branko Milanovic, who says no, it isn’t. Here is Nick Rowe, who says yes, it is. Here is Paul Krugman, who says no, it isn’t. Here is Tim Worstall, who says yes, it is. Here is Elizabeth Bruenig, who says that people who say it is are bad.

Noah Smith, “Is human capital really capital?“, Noapinion, 21 February 2015.

Noah Smith offers an alternative view: human capital requires owners to work (give up leisure time) to obtain a return from it, so the more leisure is valued relative to other things, the less valuable human capital is. This will be different for each person. In consequence, you are “entitled to your own modeling conventions and definition of terms. So whether human capital is capital is up to you.”

This is an interesting, complex debate. I am still thinking about it but, as TdJ readers might predict, I am most persuaded by the arguments of Carleton University economist Nick Rowe. Before turning to Branko Milanovic and Nick Rowe, however, I would like to emphasize two points that are not always appreciated by participants in this debate. First, financial capital is not capital in an economic sense. Nick makes this point clearly, but others confuse financial capital with physical capital. Financial capital – stocks, bonds and the like – are just pieces of paper, IOUs. They are claims of lenders, and the loans may even have been made for the purpose of consumption rather than investment.

Second, even if human capital is a useful category of income-producing assets (and I think it is), it is as difficult to measure as physical capital is. In fact, it is probably even more difficult to measure. This does not really matter though, as it is impossible to measure aggregate assets of either asset apart from (only in theory!) the present value of the future income the assets produce. The problems of measurement of human capital are  very similar to the problems of measurement of physical capital. For example, if I purchase an automobile which I use for pleasure, and also – as an Uber driver – to generate income, part of the purchase represents investment (addition to physical capital) and part is consumption. Similarly, part of the expense of schooling represents investment (for the purpose of earning more income than I would without skills) and part is consumption (the satisfaction of obtaining knowledge and the ability to better understand the world in which I live).

There is much, much more at the links above. Bloggers will no doubt continue to debate this issue for weeks and months (years?) to come. Here, to get you started, are brief quotes from Branko Milanovic (on the ”No’ side of the debate, and from Nick Rowe (on the ‘Yes’ side, the one that I support):

If “human capital” and “real” capital are the same thing, how can there be a conflict between labor and capital?  If profits and wages are the same thing, why should we fight about distribution? You have your form of capital (which just happens to look like labor), and I have mine, which just happens to look like T-bills and stocks.

Branko Milanovic, “On ‘human capital’ one more time“, Global Inequality, 19 February 2015.

 

What we call “labour” is as much capital as labour. The wages on “labour” are as much a return to capital as they are a return to raw labour.

Some labour needs very little investment to make it productive; other labour requires a lot. Some labour gives a high return on investment; other labour gives a low return. It’s all different.

“Human capital” is not a synonym for “labour”. It tells us something important about the investment needed to make labour productive.

Nick Rowe, “Human Capital” and “Land Capital“, Worthwhile Canadian Initiative, 14 February 2015.

Once again, I encourage you to click on the links above, to get a feel for the full debate.