Friday, February 20, 2015

Capital Errors: from Bad to Worst (of All).

Tim Worstall (a senior fellow of the Adam Smith Institute) takes issue in the “human capital” controversy (link).

Worstall thinks “that Milanovic is missing something” and proceeds to his own “rejigged” counter-example to show where that something is:
“We have two people with unskilled labor. They can earn $10,000 a year each. One of them also has a capital endowment which pays him $50,000 a year. His maximum income is thus $60,000 a year. The possession of that financial capital clearly leads to an inequality.
“Now our other unskilled laborer decides to go get himself some of that human capital…”
… And, as a result, he, too, gets paid $60k a year.

Let’s illustrate that. The second unskilled worker (say, both were initially janitors) “goes get himself” a job qualification, maybe a vocational course at TAFE (aged care nurse, for instance). After that, he gets a higher paying job (paying $60k).

Obviously, what Worstall calls “human capital” is simply “higher skill qualification/higher paying job”. His argument seems to be that to use one or the other is something like to-may-toes vs. to-mah-toes:

But if those phrases were synonymous, why the stubborn insistence on using “human capital”, instead of "skills"? Why he picks "to-may-toes" but emphatically opposes "to-mah-toes"?


Unlike "to-may-toes" and "to-mah-toes", "human capital" and "skills" aren’t perfectly exchangeable.

First. The “human capitalist” still has to work to get his $60k. What happens with the “disutility” he experiences? (Recall that "disutility" was centre-stage in Prof. Rowe’s own critique of Milanovic). One could suggest another “rejigging”: the “financial capitalist” could quit his job and still get $50k a year, no sweat (no "disutility"). Worstall can see that, surely?

(Strangely, Worstall does not use the word “disutility” at all: it appears once only in his post, in a literal quote from Milanovic. Why not? Does Worstall imply that basic microeconomic concepts are irrelevant to the point of being optional or even altogether disposable?)

Second. Can the “human capitalist” transfer his aged care nurse certificate as inheritance to his kids, as the other guy can leave his bank account balance to his?

Third: As Worstall admits: “So, no, the two things, financial capital and human capital are not the same thing nor do they have exactly the same effects”. Now, that's something.


So, we go back to our question: why Worstall’s single-minded insistence on using “human capital” when it is clearly not synonymous with “higher skill qualification/higher paying job” and he admits as much?

That usage is misleading, as Milanovic rightly asserts. Worse, it's evidently nonsensical, going against elemental English. Why his insistence on using misleading terms?

This brings us to Worstall’s earlier “argument”:
“The point [of Milanovic’s critique] being that if we start referring to ‘capital’ in this sense then we’ll end up declaring that we’re all capitalists. And, well, perhaps we won’t be able then to apply Marxian class analysis or something and wouldn’t that be bad.”
Frankly that suggests a very unflattering answer to those questions, but I'm not here to tell readers what to think. Judge by yourselves: read his post.

Leaving that aside, this may be news to Worstall, from the Adam Smith Institute, but poor economics is not a good thing, and worst-of-all is the astonishing ignorance of the relevant history of economic thought:
“What are the common wages of labour, depends everywhere upon the contract usually made between those two parties [capitalists and workers], whose interests are by no means the same. The workmen desire to get as much, the masters to give as little as possible. The former are disposed to combine in order to raise, the latter in order to lower the wages of labour.
“It is not, however, difficult to foresee which of the two parties must, upon all ordinary occasions, have the advantage in the dispute, and force the other into a compliance with their terms. The masters, being fewer in number, can combine much more easily; and the law, besides, authorizes, or at least does not prohibit their combinations, while it prohibits those of the workmen.”
Poor Adam Smith.


Personally, made to choose between Tim Worstall, and Fred Astaire and Ginger Rogers, it wouldn't break my heart to pick Astaire and Rogers for their far superior "human capital" (aka dancing, singing and reasoning skills). Let's call the whole thing off.

Branko Milanovic replies to Nick Rowe and Tim Worstall.

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