Everyone a Capitalist

Fresher ideas emerged from the efforts of those who sought to reconcile neoclassical individualism with the feminine realm of family life. Adam Smith had first deployed the concept of human capital and Alfred Marshall had embraced its significance, but neither sought to explain the production of human capital in economic terms.

Largely ignoring family inputs into the development of children’s cap­abilities, Schultz focused on earnings foregone by ‘‘mature students’’. He conceded the desirability of measuring the value of human capital goods by the same means as physical capital goods—namely adding up the costs of producing them. Unfortunately, he noted, there was no way to distinguish between those expenditures that merely satisfied utility and those that enhanced capabilities, or between ‘‘consumption’’ and ‘‘investment’’. The best alternative, he argued, was to measure human investment in terms of its yield, ignoring its cost of production.²⁶

This was a significant departure from historical precedent. Farr had tried to estimate the difference between the value of what a man produced and what he consumed; Dublin and Lotka had tried to determine what lump sum insurance payment could compensate a family for losses resulting from a death (see earlier discussion in Chapter 17). But Schultz sought to measure the value of human capital to the adult individual who had acquired it, and to no one else. Should a man invest in an additional year of education? Only if the net present discounted value of the resulting increase in his future earnings exceeded the cost.

Gary Becker, who earned his Ph.D. at the University of Chicago in 1955 and returned as a faculty member in 1969, initially followed Schultz’s lead. Becker's classic Human Capital starts with a broad definition of human capital as ‘‘activities that influence future monetary and psychic income by increasing the resources in people.''²⁷ It quickly narrows its focus to adult decisions to acquire education and labor market experience, emphasizing that most human capital accumulation takes the form of ‘‘self-investment''.²⁸ The investments people make in themselves are pre­ceded by the investments that families and communities make in them. Parental expenditures of money and time on children have discernable effects on success in school and later in life, a point eloquently made by Arleen Leibowitz in an early volume edited by Schultz.²⁹

But the new wave of research on human capital, developed by Jacob Mincer and Reuben Gronau, as well as Becker, initially treated individuals rather than families as the basic unit of analysis. Like Thomas Hobbes, who asked his readers to assume that adult men, like mushrooms, had simply sprung from the earth, early human capital theorists stipulated that indi­vidual preferences and endowments should be taken as a given. Like Stanley Jevons, they postulated that individuals always acted to maximize their own utility—or, in more ordinary language, their own happiness. Those who chose to invest in education and to accumulate valuable labor market experience would earn more money than those who did not. Tampering with these outcomes ran the risk of penalizing—and thus discouraging— human capital investment. If every person represents capital, then of course every person is a capitalist.

Here came the familiar refrain. If everyone acted in their own self­interest, society as a whole would gain. Becker emphasized that not every­one, at least initially, was sufficiently enlightened. Some employers might have discriminatory tastes.

The basic human capital model, developed in more detail by Jacob Mincer, provided a happy opportunity for econometric analysis of large data sets.³¹ Individual earnings represented the dependent variable, or outcome to be explained. Measures of self-investment such as years of education and labor market experience represented one set of independent variables, those that represented social virtue. Another set of independent variables, those indicating the sex or race of the individual, capturing the possible effects of discrimination, represented social vice. More complex causalities (such as the possibility that potential earnings might determine labor market experience, or that individuals were unable to gain access to their preferred level of education) were largely set aside.

The human capital model virtuously highlighted its own measure of discrimination. The empirical results consistently showed that women and blacks were paid significantly less than white males, even controlling for differences in their level of human capital. These results, in turn, sparked new efforts to explain why discrimination might prove more persistent than Becker's original formulation had suggested. Becker himself began to shift his attention from individual to family decisions. But the model seemed to suggest that an economy in which wages could be completely explained by differences in education and experience would be entirely fair. It also deflected attention from the costs of creating human capital to the individual benefits of education.