I call invested consumption. I argued in Chapter 3 that this tradition is sound,
although not logical certitude. | put it as
human cash flow = pay - invested consumption. (6.18)
Work is defined as the output of human capital. Summing (6.16) and (6.17) now
shows the pay rule
work = pay + self-invested work - recovered human depreciation, after cancellation of invested consumption. This says that the pay rule is not so exotic after all. It has been staring us in the face since the Schultz-led consensus, with Ben-Porath, figured out the human growth equation a half a century ago. We had effectively recognized human cash flow as pay less invested consumption since Farr a century before, without putting it in
those words. The total return truism does the rest.
A New Approach to the Y Rule
The marginalist tradition, which has dominated economic thought since its introduction by Jevons and Menger in 1871, has treated all consumption as the end point exhausting capital in satisfying tastes. It doesn’t follow that marginalists were unaware that some is invested in human capital. At least three of the leading ones understood human capital well. That includes Leon Walras, a third co-founder of the marginalist revolution in 1874. I also mentioned Marshall, who agreed with Farr in disputing Petty, and Irving Fisher. But all three, and marginalsts in general, preferred to locate human capital outside the economy proper. Whether they spoke of labor measured in dollars per unit time, or human capital meansured in dollars alone, the larger factor was taken to arrive exogenously. It provided its services
from outside and was paid their market value in return, as if on the books of a firm.
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