Restating the Three Fourths Rule
Petty, neglecting human capital of children, measured total capital as about 2.5 times physical capital in 1664. Most estimates since have run higher. I myself model 4:1 or so as a first approximation. The ratio of human to physical capital might hold to some such lasting norm for the same reason that number of shepherds should hold in proportion to number of sheep. They own as many as they can manage. Human capital means value of skills, including skills in acquiring and employing physical capital. If the value of physical capital changes, so should the value of its management. There is truth behind the old doctrine that a rise in the productivity of labor explains growth in value of physical capital. But old skills can also be more in demand when improvements in physical capital productivity can get more good out of them. Drivers are worth more when there is more valuable freight to be trucked.
Arise in either kind of capital tends to invite a rise in the other.
The ratio of pure to invested consumption is unsettled in human capital studies. | just showed why I think Schultz gave the right clue in 1961 when he defined invested consumption as an outlay to be recovered with interest in consumption over the future, and pure consumption as an outlay bringing taste satisfaction now. It is the same distinction as with investment and operating expense in the firm. A professional’s meals and doctor bills, and even his subscription to trade journals, are expenses needed to keep his earning power intact rather than investment to raise it over the future. It seems to me that once we are physically mature, the only avenues of investment in skill building, not exhuast in skill maintenance, are self-invested
work and job training or other adult education.
And | argued that there is probably not much adult education. Only a few go back to school. From what I've seen, job training is concentrated in our first few months when schooling is over and full-time work begins. That’s why | think that the rise of pay with age, implying a rise in skills marketed, is explained more or less entirely by
self-invested work in the mainly subliminal accumulation of job experience. (Work
Chapter 5 Bringing Human Capital In 1/13/16 11
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