Human capital is where it’s at!
Continuing from my last posting, I stated the World Bank has seen the light. It has put out a report: Where is the Wealth of Nations?
Reason Online has an interview with the prime author Kirk Hamilton.
Oil, soil, copper, and forests are forms of wealth. So are factories, houses, and roads. But according to a 2005 study by the World Bank, such solid goods amount to only about 20 percent of the wealth of rich nations and 40 percent of the wealth of poor countries.
So what accounts for the majority? World Bank environmental economist Kirk Hamilton and his team in the bank’s environment department have found that most of humanity’s wealth isn’t made of physical stuff. It is intangible…Hamilton’s team found that “human capital and the value of institutions (as measured by rule of law) constitute the largest share of wealth in virtually all countries.”
The World Bank study defines natural capital as the sum of cropland, pastureland, forested areas, protected areas, and nonrenewable resources (including oil, natural gas, coal, and minerals). Produced capital is what most of us think of when we think of capital: machinery, equipment, structures (including infrastructure), and urban land. But that still left a lot of wealth to explain. “As soon as you say the issue is the wealth of nations and how wealth is managed, then you realize that if you were only talking about a portfolio of natural assets, if you were only talking about produced capital and natural assets, you’re missing a big chunk of the story,” Hamilton explains.
The rest of the story is intangible capital. That encompasses raw labor; human capital, which includes the sum of a population’s knowledge and skills; and the level of trust in a society and the quality of its formal and informal institutions. Worldwide, the study finds, “natural capital accounts for 5 percent of total wealth, produced capital for 18 percent, and intangible capital 77 percent.”
For under developed or undeveloped countries you can see what direction they have to go in. But what about our country? We have had discussions about infrastructure. We have talked about the need for education. When I skimmed the report (200+ pages), savings was a must in order to be able to invest in the intangible capital. We have debated the share of benefit a person receives from the country’s infrastructure and institutions based on the wealth and/or income they control. We always argue about where growth comes from such that it raise all boats. (Sing that jingle!) And there is the “free market” debate revolving around regulation. Oh that nasty governance issue! If only we hadn’t signed on to form a more perfect union.
My quick assessment of this report is that it is a testament to the misdirection of our policies. We do not make money from money even though we have been trying to. You did catch the reference to “labor”. These breakouts of wealth suggest that there is a bottom limit to taxation as taxation reflects our investment in us. In the study, European countries dominate the top wealth and England is not in the top 10. This report implies that the wealthy do benefit more from the country’s structure and investment because the majority of their wealth is from this “intangible capital”. The few of the wealthy have accumulated their wealth from the investment of the many in the intangible. It also means capital gains should be tax equal to labor if not higher.
Rich countries are largely rich because of the skills of their populations and the quality of the institutions supporting economic activity,” the study concludes. According to Hamilton’s figures, the rule of law explains 57 percent of countries’ intangible capital. Education accounts for 36 percent.
With only 18% of wealth from produced capital and less from natural resources as a country becomes wealthier, freeing up money to produce money as we have been promoting is very poor investment strategy it would seem when 77% of our wealth is from the human element. In a broad sense, we are talking about what ideology concerning the conduct of human life works best to produce wealth.
An economy with a very efficient judicial system, clear and enforceable property rights, and an effective and uncorrupt government will produce higher total wealth. For example, Switzerland scores 99.5 out of 100 on the rule of law index and the U.S. hits 91.8. By contrast, Nigeria gets a score of just 5.8, while the war-torn Democratic Republic of the Congo obtains a miserable 1 out of 100.
It is not just that we need to invest in education,or just have a legal system or just fix the bridges. These can be measured as noted in the World Bank Doing Business chart.
“Trust” seems to be the real intangible the report is talking about. We as a whole can be educated to the hilt, but if we can’t trust that our efforts will be put to constructive use, we have problems. Think habeas corpus, FISA, election fraud, threatening of the press, intimidation of speech, extension of free speech to none human entities, the equating of one voice-one vote to spending of one’s money, K Street project, etc. Think of the use of fear. If only a few are educated to the hilt or have access to the governance, we can not build capital.
If the country is 100 people large, but only 10 trust each other to do for each other, then how much wealth can they actually build if 93% of the 77% of intangible capital is related to law access (trust) and education (the removal of fear; trust) of the populace? But then, our founders seemed to have already reasoned this. Jefferson started the free education to including college!
So why should this report seem so “new”. This makes me think of the years of government bashing we have been hearing from the republican side. Reagan’s infamous “nine most dangerous words in the English language: I’m from the government and I’m here to help you.” It makes me realize we have to dump the Bush/neocon ideology here and in our foreign policy if only to remove the fear so that trust can return.
Mr. Hamilton’s example of the difference in thinking is in when he discusses pollution as a resource management issue:
It’s not a pollution problem; it’s a natural resources management problem. How do you maintain soil quality? How do you generate profits with the assets that you have, which in this case is land that can be invested in other things? The problem in China is they’ve figured out how to grow 9 percent a year pretty successfully but they’re now facing the environmental consequences of uncontrolled growth.
This is policy that he is talking about. Policy of what to spend on and policy governing relationships both boiling down to regulation. (What was that Milton quote the other day?)We’re talking government. I interpret this report as making a case that shrinking government to where it can be drowned in a bath tub is not the way to build wealth. The market will not solve our problems of growth for us. It is not the answer to Save the Rust Belt’s question of how to save the rust belt? We have to do it and we have to do it in a manor that is inclusive for that is the only way to maximize the “intangible capital”. It also means we have to do as Cactus is attempting to do; qualify our policy results related to specific ideology. Just charting to see what GDP is doing or just looking at supply and demand theory won’t do it. That’s just bench racing.
The World bank has done some qualifying and changed their ideology:
Hamilton: In the old days, we thought if you built the infrastructure then development would come-the Field of Dreams model of development. It turns out to be a lot harder than that.
Dare I suggest that the World Bank has discovered that an economy exists for our benefit and not for it’s own sake? Maybe they read our Declaration and our Constitution.
“Human capital” is a misnomer in this sense. As Piketty observes, capital is property and “human capital” properly means ownership of human beings as property. Historically, more capital was human capital than capital goods. Owners of land also owned those that worked the land.
That changed with technological innovation and the rise of capitalism and the mechanization of agriculture. While there is still a good deal of slavery in the world, and a lot of it is sex slavery, “human capital” is now a blip on the screen and mostly illegal.
“Human capital” in the contemporary sense is not related even metaphorically to the historical meaning of “human capital” and it should be dropped like a hot potato by those who promote capitalism in that the leftist analysis is that wage labor is from of slavery where the employers owns the wage-earner’s time, expertise and effort for the specified period under the conditions of the labor contract that the employer gets to write.
I don’t agree with the analysis although I would agree that there is an analogy operative that can be useful in thinking about capital-labor relations and share.
What we see actually is that all “human capital” in this analogous sense is produced by labor but a significant share is not owned by it. Employees generally agree that what is produced in employment is the property of the owners of the firm. This is the case with most intellectual property, for instance. It can be called “soft capital” to distinguish it from “hard capital” like factories and machines. A great deal of the capital that is now being created in the knowledge era is soft capital owned by firms and therefore by the owners of the firms rather than the labor that created it, just as the design of hard capital has been owned by the firms whose labor created it.
Some soft capital was and is the contribution of entrepreneurs who both own and work for the firm and are payed a salary like employees. In addition, with the advent of the joint stock company some employees are also owners. But this doesn’t alter the fact that the soft capital in the form of intellectual property is owned by the firm rather than belonging to the creators.
In summary, capital signifies ownership of property that serves as means of production or as finance. Capital is an asset that commands a return based on ownership of property rather than compensation from work, which defines labor. Some people’s labor is worth more than others owing to knowledge, skill, experience and performance. That has nothing to do with their having more “capital.”
If we don’t keep this straight, we are going to become confused very quickly. BTW, this is why Adam Smith proposed a labor theory of value. It seemed obvious to him that what just lay about in nature had to be organized in order to become socially useful and gain an economic value. It’s a no brainer that any one can see.
On that score, Piketty observes that everything that human work adds to nature can be capitalized. But as he also emphasizes, capitalizing labor doesn’t turn labor into capital in the economic sense that capital is used technically in differentiating capital (ownership) from labor (work) as different factors of production in capitalist economies.
Piketty specifically criticizes the view of “intangible capital” put forward vaguely above. For him, intangible capital is soft capital that exists as legal property, e.g., as intellectual property such as patents, copyrights, trademarks, and other proprietary intangibles. Legal property belongs to either households or firms and firms belong to households, so we can talk about capital in terms of ownership of property, and that is defined institutionally. This is possible to determine or at least estimate from accounting records, legal records and other such documentation that can be collected historically. Otherwise, it’s mostly introspection and handwaving.
BTW, the informal economy is estimated to be the second largest globally, but it doesn’t not figure into economics at all because no formal exchanges or monetary transactions are recorded. Historically, it has been the primary economy of humanity and it is still a huge factor in producing social value and contributing to the social fabric. The push now is to monetize as much as possible of it as quickly as possible as well as to privatize what remains of the commons, which is also not counted economically.
Workers don’t legally own their knowledge, skill, etc simply as capabilities. Workers own what they produce from their capabilities unless they confer ownership, such as is required in employment contracts. Workers that work for themselves to produce capital as means of production are called entrepreneurs and are supposedly the backbone of capitalism. Subsequent owners of capital acquire capital when entrepreneurs sell all or some their share of ownership.
I would also argue that while land can be capitalized similarly to labor, land is not capital any more than labor. These should be treated as separate factors of production. But I won’t get into that argument here.
Call me an old-fashioned fossil; I can live with that.
But the day one of these “human capital” theorists explains to me how they would settle a bankruptcy procedure and how much of the “human capital” goes to creditors and how much of it goes to shareholders is the day I’ll change my mind.
In the mean time, and with all due respect, for me any talk about “human capital” is mumbo jumbo, and a metaphysical one at that, no different from “utilities”, “confidence fairies”, and “bond vigilantes”.
But that’s me.