Sunday, May 26, 2013

Book Review: Human Capitalism

We're all petty bourgeois now.

That's the thesis of Brink Lindsey's e-book, Human Capitalism. Lindsey denotes the investment made in  skills, abilities and children as human capital. In a previous post I called the concept social capital, and suggested that people so invested were petty bourgeois. The example I used were college professors, who because of their large human capital investment are more like small businessmen than proletarian laborers.

Lindsey quotes Gary Becker as claiming that "some 70 percent of all the capital in the United States today consists of investments in health, knowledge, and skills." In a word, we live in a very different era from the bourgeois world of plant and equipment. This is obvious for companies like Google or Facebook--for these firms human capital is obviously the bulk of their investment.

It's less clear for a company like Walmart, but there, too, the investment is mostly human. Walmart's competitive advantage is logistics, i.e., bringing product directly from the manufacturer to the consumer as cheaply as possible. This involves a lot of algorithm development and computer programming--that is, human capital. The physical plant, by comparison, is very simple--cheaply built, big-box stores, and some trucks.

So are we all petty bourgeois now? Not so fast, says Mr. Lindsey, for he suggests that only about one third of Americans have the human capital necessary to be successful. He puts human capital into three categories:  education (including an IQ component), personal charisma, and time management (especially an ability to defer gratification). Many of these qualities are innate--heritable in the technical, current lingo--and therefore difficult to change. But Mr. Lindsey disagrees with Charles Murray and Richard Herrnstein who give disproportionate weight to IQ.

Instead, Lindsey suggests that education is among the most significant sources of human capital, and this society can do something about. Most importantly, parents matter. Children are much better served being raised in two-parent families with biological parents, rather than in single-parent or blended families. He recommends all the usual, good advice we hear all the time: talk to your kids, read to them, enrich their lives, care about their schooling. Tiger Moms are better at developing human capital than those with a the kids can raise themselves attitude.

His public policy suggestions all aim to enhance education, including many ideas dear to the Libertarian heart. He advocates for much more competition in K-12 and higher education, breaking up the public employee monopolies and putting parents and children in charge. He strongly opposes the recent trend requiring licensure for many occupations, including lawyers, accountants, interior decorators, teachers, beauticians, taxi drivers, etc., etc. These requirements simply enhance poverty, and here he simply echoes what Milton Friedman said many years ago.

More controversially, Mr. Lindsey advocates for early childhood education programs, similar in purpose to Head Start (a program he acknowledges didn't work very well). Fortunately, he anticipates the potential critic who (like me) suggests that such programs won't succeed. Mr. Lindsey is full of Libertarian humility, and cites Peter Rossi's Iron Law Of Evaluation, which says that "The expected value of any net impact assessment of any large scale social program is zero." This is accompanied by Mr. Rossi's Stainless Steel Law: "The better designed the impact assessment of a social program, the more likely is the resulting estimate of the net impact to be zero." All very depressing for potential social engineers.

So what could go wrong? The rising importance of human capital enhances social inequality. Smart, well-educated, hard-working, attractive people (think Richard Branson or Sam Walton) will do extremely well and become billionaires. On the other hand, a person with below average intelligence, raised by a single mom, and neither athletic nor good looking, is pretty much doomed to a life of relative poverty. Opportunities to earn a living through proletarian labor are rapidly closing.

If all of Mr. Lindsey's social engineering suggestions are implemented and maximally successful, then at very best only about 50% of the labor force will have sufficient human capital to compete. In reality, social engineering is likely to result in squat, so we're probably stuck with 60% or more of the population being unable to participate in productive economic activity. Mr. Lindsey suggests that the resulting social unrest will destabilize the entire system, resulting in everybody being poor.

There are two ways to deal with this. One is to set up the Mother Of All Welfare States, where approximately 60% of the labor force would be on the public dole. There are some who suggest that work is a human right, and everybody has a right and an obligation to do something socially productive with their lives. Sitting around drinking beer and watching TV is not a satisfying career. But I think this attitude is easier to change than implementing Mr. Lindsey's social engineering projects. Honestly, I don't think slaving all day for The Man is something everybody wants to do. So the welfare state option could actually work. Think Mitt Romney's 47%.

The second option--the one that I think will actually come to pass--is that new wealth will create new markets, and hence new employment. These new jobs are frequently classed as "personal services," i.e., butlers, maids, gardeners, and other positions that are in some way degrading. Such work exists in part because they award status to the employer at the expense of the employee. And there will be some of this, but I don't think these will be the majority of future jobs. Personal services will still be on offer, but they'll be provided for impersonally--i.e., the service will be sold without the status transfer.

An example is the barista--a job that didn't exist twenty years ago. Today I am an avid Starbucks customer, whereas in my youth I'd go to the local diner and settle for a very mediocre cup of stale coffee. Few people are going to hire their own private barista, but this is an example of a personal service on offer that exists today only because people are rich. When I was a kid growing up in a college town, there was exactly one, mediocre Chinese restaurant. Today there are sushi bars, Indian restaurants, a variety of restaurants specializing in regional Chinese cuisines, good Mexican food, etc., etc. This is all because society as a whole is vastly richer than it was before. Unlike even ten years ago, now there are spas, threading parlors, waxing, massage, dog walking, etc., etc. The list is endless, and as human capital investment makes us richer, the list of personal services will get very much longer.

I predict that the free market will save us from ourselves--just as it has in the past.

Further Reading:

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