Maureen and Fred Talk About Human Capital

Originally published at Am I the Only One Dancing?. Please leave any comments there.

*For those of you who have never met Fred, he is my inner 14 year old, the part of me that likes bawdy humor and inappropriate language and decidedly unfeminist stuff and has no inner critic.  If it’s fun, it’s cool.  In other words, Fred is my id.

Maureen: Hey, Fred, what are you doing over here?  You belong over at Am I the Only One Dancing?

Fred: I got bored.  You keep leaving me alone over there and coming over here and talking about “serious stuff” and I wanted to find out why it was so danged important to you.  I’ve already played all of my video games.

Maureen: All of them?  When do you sleep?

Fred:  When you do.  In other words, never.  So, what’s this place like?  (Looks around).  Lotta big ideas stacking up around here: ‘feminism’, ‘poverty activism’, ‘liberalism’ – hey, what’s this one?  ‘Human capital’.  Never heard that one before. 

Maureen: I borrowed it from economic theory.  Adam Smith defined it as “the acquired and useful abilities of all the inhabitants or members of the society. The acquisition of such talents, by the maintenance of the acquirer during his education, study, or apprenticeship, always costs a real expense, which is a capital fixed and realized, as it were, in his person. Those talents, as they make a part of his fortune, so do they likewise that of the society to which he belongs. The improved dexterity of a workman may be considered in the same light as a machine or instrument of trade which facilitates and abridges labor, and which, though it costs a certain expense, repays that expense with a profit.”. (ref. Wikipedia)

Fred: Whoa!  Maureen, I’m fourteen.  I may be smart, but I’m a kid.  What does that mean, and why did you steal it?

Maureen:  It means all of the combined abilities of all the people who are able to work.  This includes everything from raising babies to plowing fields to operating a computer to operating on a brain, to managing a small or large business.  Smith was saying that the more talents and skills the individuals in a society have, the better off the whole society is.

Fred:  So?  That just makes sense.  Of course if everyone’s got more skills, the whole place is better.  People with better skills get along better and aren’t as miserable and unhappy?

Human Capital is Potential (by fred g on flickr)

Maureen: (Gods above, I love fourteen year olds) I wish it were that easy, Fred.  But some economists, even some who are supposed to be smart, seem to think that humans are a fungible good.  That means that they think that humans are easy to replace and not particularly valuable.

Fred: Really?  Economics is whack! That’s messed up!  People mean something.  They’re important.  They matter.

Maureen:  (see what I mean?  His passion is priceless) Yes, but to a boss, one burger flipper is the same as another.  At least that’s the idea.  My thought, though, is that as an employer, I want a burger flipper who is going to be attentive, get it right, never spit in the food, learn all he can about the business, and open his own franchise, after which I make even more profit.  Even if he leaves my employ, while he’s on that learning curve, he’s far more valuable than the guy who shows up late if at all, and spits in the burger when he’s angry.

Fred: (makes a face)  People do that?  Gross!  I’m never eating at McDonalds again.

Maureen:  Good choice.  But you see my point.

Fred:  Sure.  Better trained, better treated employees are going to make more money for the boss.

Maureen: Yep, and business management literature backs it up.  But see, human nature is to take shortcuts, and to fib to get what we want.

Fred:  You mean ‘lie’, not ‘fib’.  Like the boss telling his employees that they’re not going to do layoffs, and then doing it anyway.

Maureen:  Where’d you hear about that stuff?  You’re just a kid.

Fred:  I’m your id, remember?  I read everything you do. 

Maureen:  How could I forget?  Anyhow, yeah.  Bosses will take shortcuts, because a lot of the time they’re not looking at the long term, but the short term.  A lot of people think about ‘quick bucks’ and how to retire early, and those are the folks making a lot of the business decisions.

Fred: I bet there’s good bosses, too, ones that think ahead.

Maureen: Of course there are.  We’re all humans, even bosses.  Heck, I’ve been a boss once or twice.  But the way the system is set up, short term thinking is what is most rewarded.  Shareholders rarely think past the next quarter, and if you don’t keep the shareholders happy, they move on.

Fred:  Okay, I get that, got to keep the deep pockets happy.  But what does this have to do with investing in human capital?  Making people more knowledgeable and skilled, I mean?

Maureen:  See, its in businesses’ interests to have skilled employees who take an ordinary task and make it into something more.  But it’s even more in businesses’ interest to make someone else pay for it.  None of the businesses want to put the money out for the long term training and investment in human infrastructure, because that leaves them at a serious enough short term disadvantage that other companies will push them out of their niche and at the very least they’ll lose market share.  Oh, sure, there’s a certain amount of training that all big and medium sized companies do, but things like building up the next generation of workers, ensuring that their employees have safe daycare and health care and enough leisure time to properly raise that next generation of workers?  That’s too expensive for any one company.  So they ‘outsource’ this to the one institution that has both the steady resources and the long term incentive to take care of it.

Fred: The family? 

Maureen: No, Fred, not the family.  Nearly every family has the incentive, but not all, or nearly all, have the resources.  No, the institution I’m talking about is government.  Paying taxes externalizes (that’s a fancy word for ‘spreads out and makes less painful for any one person or company) the costs of creating an education, a health care system, systems for caring for the disabled and poor, and other services. 

Fred:  So what you’re trying to say is that its in those businesses’ best interests to pay taxes, right?

Maureen:  No, Fred.  It’s in those businesses’ best interests to get ‘other people’ to pay taxes.  The tax battle in the modern era has been a constantly evolving game of ‘hot potato’, with everyone trying to get everyone else to pay for the things that benefit them in society.  One of interesting – or maybe appalling – things that is happening right now is that some people (often bosses and people with the goal of becoming bosses) try to claim that they get no benefit from taxes, and that taxes go to people who don’t ‘deserve’ them, hurting businesses, who ‘deserve’ to keep that money. 

Fred: Well, some people might not deserve it.  I could name names.  (Sees Maureen glaring and holds up his hands in surrender) – But I won’t.  Isn’t what you’re describing socialism?  That’s what I keep hearing on the news. 

Maureen: (See?  That’s what I get for letting my id watch the news):  Actually, Fred, its a system called ‘Social Capitalism’, that holds that ‘markets work best and output is maximized through sound social management of the macroeconomy.’ (Wikipedia)  In other words, capitalism (business) is the engine, and government is the steering wheel.  But Social Capitalism is another complex idea for another day.  And remind me never to let you read anything by Ayn Rand, Ludwig van Mises, or Friedrich Hayek.

Fred:  Too late.  How many times did you read Atlas Shrugged?  I usually fell asleep during that interminable speech at the end, but sometimes I paid attention.  And those other two dudes.  Boring.  Totally boring.  I’m bored.  Can I go back over to Am I the Only One Dancing? and play games again?

Maureen:  Sure Fred.  I don’t remember inviting you over here in the first place.  And thanks for telling everyone I read that tripe. 

Fred:  Do you want me to tell them how many times you read it?  Or all of the rest of that stuff?  Or how many stupid posts you wrote about it, littering the whole internet?

Maureen:  No, Fred.  I do not.  Go on back home.  I’ve got work to do.

Fred:  Sheesh.   I was only trying to help.  (Waves at the readers).  Nice meeting you guys.  See you later!  (Glares at Maureen)  See you later, too.  And you need to lighten up.

Maureen:  Go home, Fred.  Now.  (Sighs)  But at least now I know that human capital is so easy to understand a fourteen year old can get it.