Monday, February 16, 2015

Capital Errors.


Prof. Branko Milanovic wants economists to junk the phrase human capital. He gives two reasons for that, the "second and more important" of which reads:
"It leads to a perception - and sometimes to the argument used by insufficiently careful economists - that all individuals, whether owners of real capital or not, are basically capitalists. Even if you have human capital and I have financial capital, we are fundamentally the same. Entirely lost is the key distinction that for you to get an income from your human capital, you have to work. For me to get an income from my financial capital, I do not".
I'll repeat, in case the reader missed that:
  1. "For you to get an income from your human capital, you have to work". This for Milanovic is true of every single worker, whether highly skilled or not, or whether he enjoys his job or hates it with a passion.
  2. "For me to get an income from my financial capital, I do not".
I like that, kinda (but, where's private property?). See here.

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Prof. Nick Rowe, however, disagrees:
"Branko Milanovic (HT Mark Thoma) misses the point about the usefulness of the concept 'human capital'."
To make his case, that, well, "all individuals, whether owners of real capital or not, are basically capitalists" (paraphrasing Milanovic), Rowe begins by arguing for a similarity between "land capital", "labour capital", and, presumably, "capital capital" (to be coherent with "land capital").

Then, Rowe acknowledges Milanovic's main reason (emphasised and repeated above, which he, too, quotes verbatim in his post) and translates it thus:
"Labour gets disutility from working (at least at the margin, though some of us actually enjoy our jobs, and get positive total utility from working even if we get negative marginal utility from working an extra hour); land doesn't." (The emphasis is mine).
So far, so good. This is how Prof. Rowe argues against his own version of Milanovic's argument:
"So what? Does the highly-trained worker, with high human capital, get more disutility from working than the less-trained worker, with low human capital? (If anything, I would say it's maybe the other way around). Investment in human capital is not what makes work unenjoyable."
Something was lost after translation. Where's the reference to the "land capital" Prof. Rowe himself laboriously introduced? What was the point of introducing it, to drop it later?

Whether the work is more or less enjoyable (or produces more or less disutility) is irrelevant; what's relevant is that the the "labour capitalist" experiences disutility (humongous or itsy-bitsy, it doesn't matter: utility is unmeasurable and incomparable between individuals) but the real capitalist (the "capital capitalist", I suppose), does not experience disutility at all (nothing, zilch, zero, nada, niente, nichts, rien):
"To see this elementary fact, assume that you have human capital that yields $50,000 annually and I have stocks that also produce $50,000 annually. But to get the return on your human capital, you have to work eight hours a day for perhaps 250 days per year. I do not."
So, that's what. That's the fundamental difference between labour and capital, expressed in terms of his own choosing.

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I am sure that Prof. Rowe is ordinarily a very careful economist. Besides, as old priests say, errare humanum est. However, arguing that way he only proves Prof. Milanovic's point.


UPDATE: Maybe I should add that there are other things differentiating labour from capital, besides the "disutility" thing, or the fact that workers, well, work; while capitalists don't. Among them, the fact that capital is private property, mentioned above; the potential immortality of capital, versus the all-human mortality of labour is another, and such.

But those things are assumed not relevant in the basic neoclassical setup, which is the one Prof. Rowe discusses.

2 comments:

  1. "But those things are assumed not relevant in the basic neoclassical setup"

    What you describe as "neoclassical" isn't neoclassical, it's neoliberal, a notion that I've discussed here:

    http://taojonesing.blogspot.com/2010/10/neoclassical-economics-are-to-henry.html

    http://taojonesing.blogspot.com/2010/11/financialism-and-disappearing-of-labor.html

    It may be that labels don't matter, but I think they do in the sense that the genesis of the political theory behind the economic theory is more readily identifiable. Neoclassical economics only concerned itself with disappearing rents from the economic lexicon. What passes as "neoclassical economics" is actually dominated by Finance out of the Chicago School and further disappears labor from the economic lexicon. The term "human capital" is a political one, not an economic one, and it is distinctly neoliberal.

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  2. Hi Tao

    "What you describe as 'neoclassical' isn't neoclassical, it's neoliberal, a notion that I've discussed here".

    I don't know, Tao. Personally, I don't find those labels that important.

    The connotation of neoliberal is more general. By neoclassicism one generally means the strictly economic theory (the usage dates to Veblen, btw, so it has a long and venerable history). That's why I use them.

    But, like I said, I'm not wedded to them.

    Regarding your posts: recently, Prof. Mitchell has written about George and Georgism. You might want to read this:

    http://bilbo.economicoutlook.net/blog/?p=30215

    Incidentally, whether you call it neoliberalism, neoclassicism or whatever, Philip Wicksteed (one of the leading names of the second generation marginalists) was also a Georgist. Prof. Gaffney (a leading Georgist) defends Wicksteed's priority as inventor of marginal productivity over John Bates Clark.

    So, whether it's neoclassicism or neoliberalism it wasn't developed against Georgism, but it was partly developed by a Georgist.

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