CHAPTER 5: BRINGING HUMAN CAPITAL IN
Human capital is labor measured as a dollar sum rather than as so much per hour or year. It treats pay less invested consumption as our cash flow, and finds our present value (to ourselves) as expected lifetime cash flow discounted by our own time preference rates, meaning what we would charge for delay. Measurement in this way usually finds it as something near three fourths of all capital. Physical capital, much better understood because it can be bought and sold as well as hired, is only the visible tip of the iceberg. The term human capital itself is touchy because it can suggest that life has a price. Irving Fisher used it in quotation marks in 1898}, attributing it to earlier sources | haven’t found, but not in his two great books on the topic in 19062 and 1907. Wikipedia is mistaken in attributing the term to Arthur
Pigou a generation later.
History of the Idea
The concept began with Petty in 16644. He estimated the aggregate pay of English workers, and divided by the discount rate he had modeled in A Treatise of Taxes two years earlier. | have not read Verbum Sapienti, but have read two of his later
versions of the same argument>.
Petty’s method was criticized by William Farr in 1854, also in a paper I haven’t read, for neglecting what I call invested consumption. Farr, if] read the right description of his argument, was both right and wrong. Petty was modeling human capital of aggregate workers. These were mostly adults, who no longer receive invested consumption if my model is right. That makes his method sound in principle for measuring adult human capital separately. It follows that he underestimated the
human capital of England, rather than overestimating it as Farr claimed, by leaving
1 The Nature of Capital.
2 The Nature of Capital and Income.
3 The Rate of Interest.
4 Verbum Sapienti.
5 Political Arithmetic (1676) and A Gross Estimate of the Wealth of England (1685). 6 Vital Statistics.
Chapter 5 Bringing Human Capital In 1/13/16 1
HOUSE_OVERSIGHT_011020