Friday, February 20, 2015

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.

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