human capital

When we think of sources of capital, we typically imagine bank accounts, IRA/401ks, stocks, bonds, pensions, land/structures we can rent or mortgage…

For most people, though, the largest source of wealth they have is their human capital, a concept economist Gary Becker won the Nobel Prize in 1992 for articulating.

Basically, human capital is the collection of characteristics someone has that allows him to get a job and make money.  The three main ones, according to Becker, are: education, training and health.

The way human capital is generally quantified is by creating a present value of future expected earnings.  One implication of this is that an individual’s human capital gradually diminishes as he ages.  It’s often said that that figure reaches zero when he’s 65, although I think this is more because no one will hire you, rather than that you suddenly lose your skills.

investments and politics

Human capital is an important idea in managing our investments …as well as in politics today.

investments

The investment issue is risk and diversification.

A key employee in a tech startup who owns a house in Silicon Valley and a portfolio stuffed full of tech stocks has no diversification at all.  And, no matter what his faith in his skills, the circumstances that would cause him to lose his job likely also substantially impair the value of his dwelling and his stocks.

In contrast, a tenured professor at a top-10 university probably has a job for life (my philosophy mentor is retiring next year at 82–so much for human capital reaching zero at 65!).  Having a stock portfolio that contains only utilities is probably excessively conservative.

politics

The political issue is jobs.

For some years, China has been facing the problem that economic prosperity has made sewing t-shirts, and other simple, labor-intensive industrial operations, unprofitable there.  Affected companies are closing down and relocating to lower cost places like Bangladesh, creating substantial unemployment.

If all a person in China can do is make t-shirts, his human capital, no matter what his age, is reduced to zero as industry leaves the country.  Economically, this is devastating.

What to do?

The obvious, well-understood answer is for government to help retrain the t-shirt makers for another occupation.  This restores the value of his human capital, most likely to a higher level than before.  It’s good for the country as well as the individual.

Which brings us to the US…

We have a similar problem to China’s, except that we’ve had it for much longer.  Despite this, the US pays very little attention to worker retraining, spending about 1/6 per capita of what the average advanced country does.  If that spending is anything like the VA’s “service” for veterans, the government effort is even weaker than that low figure suggests.

The  deep discontent that this failure has produced is, I think, the nerve that Donald Trump and his scary, crackpot, Ned-Ludd-reads-Mein-Kampf ideas have touched.  Their sole merit is that they make clear the scale of the problem that Washington has brushed under the rug for years.

I was going to end this by comparing Trump to Silvio Berlusconi, the former Italian prime minister who did so much damage to that country’s economy during four terms.  Yes, Berlusconi promised to fix serious problems.  But he made them worse instead.  As I was googling to make sure spelled the name correctly, I found this article from Politico.