The problems with the term human capital

Branko Milanovic rightly critisizes the concept of human capital here and further develops his criticisms here. By equating labour and other forms of capital, the term leads to a terrible misunderstanding. As Milanovic explains, to "“human capital” differs from all other forms of capital, because for all other forms, one’s ownership of that capital guarantees income as such, that is income without work. This is true for financial capital, ownership of an apartment, patent, land or whatever else. Only, for “human capital”, one needs to exercise himself/herself, that is to work, in order to get an income." This is not just a theoretical debate but one that we all experience in our own lives: having 100 pounds in the bank is very different to accumulating knowledge (whatever that means) for an equivalent amount. By not recongnising it, we are failing to understand much of what happens at the microlevel in our lives and much of what happens at the macro-level in all societies. Unfortunately, the confusion remains. See, for example, the treatment of human capital that David Weill does in an otherwise interesting critical review on Piketty´s Capital in the 21st century: "One of the central objects of Piketty’s concern is the split in national income between payments to capital and payments to labor. The missing piece of this story is the change in the nature of payments to labor, and in particular, the increase in the fraction of such payment that represent payments to human capital. In the world of 1700, most wages were compensation for the raw 9 labor that workers supplied; today, a large fraction of the wage bill represents payment for skills acquired through education and training" Again, the point is not that skills and knowledge are not useful and increasingly important in most countries. The point is that for both the way we life, for our own security and for the reproduction of society, they have a very different impact than real capital. The whole debate, of course, reminds us of Polanyi and his criticisms to the commodification of labour.

Great video explaining inequality in the US... why don´t we have something similar for others?

Great video (via Duncan Green) on wealth inequality and its costs in the US. I am note sure that the ethical difference between income and wealth inequality is as large as they argue, but it is still a great explanation of the the size and importance of the problem. Every time I see a video like this I wonder why there is fewer discussions of inequality in Europe within the press and the blogosophere. And there same could be said about Latin America (and other parts of the developing world): we know that there the concentration of income and wealth is as bad as in the US if not worse... but popular debates and useful information about it is much scarer!

Minimum wages and what being modern means

Juan Carlos Moreno-Brid and Stefanie Garry build on this graph to show the problems of having such a low minimum wage. This policy has all kinds of problems, including its negative effect on aggregate demand and productivity. Yet they point out something which is almost as important. Having a sufficiently high minimum wage that is also consistent with legal commitments should be considered part of being modern and developed--a member of the OECD. Too many times, neoliberal economists have dominated the debate on modernization, equating it to free markets and limited rights. It is time that we actually start arguing that meeting the requirements of the ILO and building social institutions is actually a central part of being a modern society in a global context.

Towards a better way of doing Economics

Yesterday I was invited to give a talk on Latin America within a seminar series on The Future of the Neoliberal Society that a great group of graduate students is organising in Cambridge. Over dinner with three students, we discussed their efforts to change the way Economics is taught and, more broadly the best way to do research in Development Economics/Political Economy. All of this resonated when this morning I read Piketty's new great reflections on his book. Even if all his thinking is based on neoclassical models (which many heterodox economists have criticise, see here and here ), I think it is excellent on so many accounts: a. It shows the role of economic models as a baseline through which to think about other processes. The relationship between g and r should be seen as a general pattern that is then shaped and reshaped by institutional, political and social processes that evolve over time. "Models can contribute to clarifying logical relationships between particular assumptions and conclusions but only by oversimplifying the real world to an extreme point. Models can play a useful role but only if one does not overestimate the meaning of this kind of abstract operation. All economic concepts, irrespective of how “scientific” they pretend to be, are intellectual constructions that are socially and historically determined, and which are often used to promote certain views, values, or interests. Models are a language that can be useful only if solicited together with other forms of expressions, while recognizing that we are all part of the same conflict-filled, deliberative process." b. Economics is presented as a discipline grounded in history and aware of the role of social and political processes. c. For the study of many dimensions of inequality, cross country econometric studies will be less useful (not useful at all?) than case studies: "In my view, a more promising approach—on this issue as well as on many other issues—is a mixture of careful case studies and structural calibrations of theoretical models." d. Institutions are central to our understanding of economic changes, but should be studied in particular historical contexts and centred on struggle. In doing so, he criticises approaches a la Acemoglu and Robinson which, while illuminating on some key patterns, are too ahistorical and abstract. So right! "In their fascinating book Why Nations Fail, they develop a broader view of institutions and stress the distinction between “inclusive” and “extractive”.This broad concept might certainly include the type of institutions and policies on which I focus upon, including progressive taxation of income, wealth, and inheritance, or the modern welfare state. I must confess, however, that seeking to categorize institutions with broad terms like these strikes me as maybe a little too abstract, imprecise, and ahistorical. I believe that institutions like the welfare state, free education, or progressive taxation, or the effects of World War I, the Bolshevik revolution, or World War II on inequality dynamics and institutional change, each need to be analyzed in a precise and concrete manner within the historical, social, and political context in which they develop." I realise that many of these arguments have been developed by structuralist economists forever (see much of the work of Lance Taylor, for example). Yet the fact that one of the most influential economists in today's world is stating them so clearly is a great opportunity to think about a new economics that creates more conversation with qualitative researchers and accepts all kinds of useful evidences for the study of social, economic and political struggles.