employers’ expense is part of investment in human capital, and reasoned that
employers won't pay it unless they expect eventual recovery with interest.
What Becker stopped short of saying is that the same is true of any investment in anything by anyone. When we invest for our own benefit, we expect recovery by ourselves. When we invest for the sake of others, we expect recovery by them. Recovery means recovery of depreciation. Our parents would not have invested in our human capital without expected recovery of our human depreciation by us, and the young further invest the work of learning in themselves because they expect
that to be recovered with interest as well.
There is another proof which I call the deadweight loss rule. Capital of any kind is present value of cash flow, meaning expected realizations in transfer or taste satisfaction. Deadweight loss means decapitalization with neither. It follows that deadweight loss, although a common reality, is implicitly unexpected. But human depreciation, like plant depreciation, is expected from first investment. That rules out deadweight loss, and makes human depreciation expected as cash flow by
elimination of alternatives.
Each proof is sufficient. The first expresses what I call the maximand rule: we maximize risk-adjusted rate of return. Robert Turgot observed this in 1766. I'll say more about that in the next chapter. It takes little thought to realize that maximizing risk-adjusted return begins with recovery of investment, and that this means recovery of depreciation or amortization. We are depleted like the oil well, although we create value too. The second proof needs only the assumption that human depreciation is foreseen. It adds the specification that human depreciation is realized in human cash flow. That turns out to mean that it is realized in pay. The solution to the age-wage puzzle is that pay does not equal and compensate realized
work above. It compensates that plus human depreciation. I call this the “pay rule”.
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