Capitalizing Humans
This deflection gradually exerted effects on macroeconomic theory, evident in the evolution of ideas concerning the valuation of human capital within the national income accounts.
As explained in Chapter 17, designers of the accounts explicitly chose to exclude non-market work. Keynes, often preoccupied with the challenge of financing British wars, raised no concerns about this decision beyond his expressed concerns about slow population growth. But the growing appreciation of human capital raised questions about how it should be valued in macroeconomic terms.National income accounting—like all accounting—focuses on results rather than motives. Growth in the stock of harvestable timber may represent a growth in capital assets, even if it is not the result of any conscious investment decision. Likewise, parental expenditures on children may represent a productive investment whether or not parents consciously view them in these terms. If education yields a positive rate of return for individuals in the labor market, then public expenditures on education should properly be categorized as investment rather than consumption.
Some consideration of these issues surfaced in a prescient analysis by John Kendrick, The Formation and Stocks of Total Capital, published by the National Bureau for Economic Research in 1976. Kendrick adopted a strategy that represented the exact opposite of Schultz and Becker: he focused entirely on the costs of producing human capital, rather than what it would yield. He also emphasized the difference between “tangible” human capital (the actual bodies and brains of working-age adults and “intangible” human capital (the capabilities developed by education and on-the-job training). Kendrick operationalized the tangible part as the ‘‘accumulated rearing costs (in constant prices) at age fourteen for each cohort.’’32 He included estimates of the depreciation of the tangible human capital stock (also known as ‘‘aging’’).
He also measured ‘‘intangible’’ human capital in terms of costs, tallying total educational expenditures after age fifteen.Yet Kendrick could not stomach the idea that parental labor was an input into human capital. He defined ‘‘accumulated rearing costs’’ entirely in terms of parental expenditures—the cost of purchasing food and diapers should be included, but not the value of the time devoted to bearing the child, feeding the child or cleaning its rear end. In this respect, Kendrick echoed Dublin and Lotka, even though he was clearly aware of the potential contribution of time use data on hours of non-market work. Indeed, he used such data to estimate the replacement cost of all non-market work, generating expanded estimates of total consumption and Gross National Product.33 He apparently assumed that non-market work—including the work of parents in general and mothers in particular could contribute to
consumption but not to investment.
Most national income accountants considered Kendrick’s efforts to calculate the value of non-market work interesting but uncomfortable. One of the few to take up his banner was macroeconomist Robert Eisner, who also developed estimates of the aggregate value of non-market work.34 Eisner chose not to include expenditures on children as a component of investment. Invoking Marshallian scruples without much explanation, he stated ‘‘the production of human beings themselves would better... be omitted from income and product accounts.”35 On the other hand, he emphasized that non-market work contributes to the development of “intangible” human capital in the form of enhanced capabilities. In his calculations of national product, he valued the time that parents devote to educating and instructing their children (through activities such as reading aloud) on a par with purchased educational inputs.
Like Kendrick before him, Eisner failed to exercise much immediate influence on the discipline. Most subsequent efforts to assign an aggregate value to human capital adopted Schultz's strategy—valuing it primarily in term of its future yield, rather than its costs of production.36 Yields can be adjusted to factor in and compensate for the effects of labor market discrimination.37 Estimates of rates of return call attention to the enormous contribution that investments in human capital can make to economic growth. But they deflect from the question of who pays for such investments—not, in most instances, the individual who captures the benefits. Parents and taxpayers—not wage earners themselves—pay most of the tab for the creation of their tangible and intangible human capital.38