Pioneer of human capital

  • 5 May 2014
  • From the section Business
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Gary Becker

Human capital is a term that is used widely to refer to a person's education, skills, etc. The pioneer of 'human capital' was economics Nobel laureate Gary Becker of the University of Chicago, who has passed away at the age of 83.

His work spans a wide range of what can perhaps be termed the Economics of Life, the title of one of his books.

He has written on topics ranging from the economics of crime to which restaurant we choose to eat in. His application of the tools of economics to what had been considered to be more sociological areas won him the highest prize in economics in 1992.

In the area of human capital, his work altered the thinking on the subject.

In his book, Human Capital, published in 1964, he described how a person's education and skills should be viewed as investable assets, like a steel plant or shares of a company.

Capital is anything that yields income and other returns over time.

He was concerned that education could be underinvested in, because a young person who would benefit from education or training may not have money to pay for it now. In other words, those building their human capital faced a liquidity constraint.

An university education is estimated to net someone $1m (£592,000) more over her lifetime than a non-graduate. So, Becker asked, why can't a person borrow against this investable asset?

By re-framing the concept as "capital", Becker changed the way that education was viewed.

Although human capital isn't the type of collateral that banks would accept, it was a basis for governments to offer student loans to help invest in human capital, whose returns accrue not only to the individual, but to society.

His work on the economics of discrimination has also been widely influential.

If a manager maximises utility - an economic concept that refers to everything that makes up a person's well-being - instead of profit, then there is scope to discriminate against, say, women or minorities. Such a firm should be competed out of the market, but that would be the case only if the market was very competitive.

Not all agree with applying economics so widely. But his influence is evident, as policy debates are now over the returns to human capital and who should pay for higher education.