Human capital, individual wealth and economic development: a second-hand idea?

It’s summer, so I have more time to read books. Amongst others, I am reading Second-Hand Time by the Nobel prize winning author Svetlana Alexievich. It is a phenomenal book : poignant, depressing, capturing the complexities of post-Soviet Russia (and, indeed, of the Soviet Union) through a collage of first-person interviews. Alexievich is an outstanding journalist, who discovers literature in the everyday lives and utterances of people she speaks to.

She raises journalism to an art form, and her book is a compelling read. Of course, it can be read in many ways – themes intertwine, and I can’t possibly do justice to them.

I’ll mention one that has caught my attention because it relates to economic development, planning and policy making – thereby overlapping with my own research on what makes regions and cities develop economically (i.e. generate jobs and income).

Human capital : believed to be key factor for individual and regional development

It is a commonly held belief that human capital – the degrees, certificates, knowledge and know-how that people accumulate over a career – is associated with the economic success of individuals and, by extension, of regions and nations.

Although Gary Becker’s pioneering work on human capital is multi-faceted, acknowledging the many social and institutional factors that contribute to economic well-being, the take-home message has often been that more human capital (as evidenced through high-school completion and university degrees) is a better thing.1

This quote from the forward to an OECD book on the topic is fairly typical:

” Education is the key factor in forming human capital. People with better education tend to enjoy higher incomes – a benefit that is also reflected in improved economic growth. But the impact of human capital goes beyond economics. Raising human capital raises health
levels, community involvement and employment prospects. Indeed, as globalisation increases the need for technological skills and adaptation, the importance of human capital will only grow in the years to come.
” OECD, 2007, Human Capital: How what you know shapes your life, p2

But is human capital over-hyped?

A major paradox that many of Alexievich’s interviewees allude to is that, in post-Soviet Russia, human capital is worth virtually nothing: engineers, writers, linguists, physicists, etc., scramble to survive by becoming cleaners, begging, or attempting to succeed in business.

This last endeavour is very risky, as the slightest success attracts gun-toting mafia-types: it is the unscrupulous, the dishonest, the powerful and the violent who seem to succeed, not those with human capital. Human capital may contribute to the success of criminals, but does little to ensure the success of those who detain it. Rather, at gun-point, clever people are made to apply their human capital to the designs of those holding the guns. Furthermore, in this context, holding a gun and being ready to use it is itself a form of human capital!

To be fair to post-Soviet Russia, the situation was not much different in the Soviet-Union, where human capital did not help people very much either: rather, devotion to the Communist Party – as well as luck (i.e., not being accused of disloyal behaviour) – were the key factors of personal success. Given the huge numbers of highly qualified, educated and knowledgeable people ending up in camps or dead, the Soviet-Union’s economic transformation after the 1917 revolution cannot have been tightly associated with human capital, though human capital – at gun-point – no doubt contributed somewhat. With so much human-capital detritus, human capital cannot have been that highly valued.

What about the West / Global North?

It is difficult to argue that human capital is highly valued in our own society : success is primarily associated with luck (patenting an idea first; seizing a market…), with not paying too much tax (e.g. Amazon, Google, George Soros), and with being powerful enough to do illegal things (e.g. Air BnB, Uber, Donald Trump…).

Human capital – i.e university degrees, technical know-how, knowledge – are not particularly valuable without these preconditions: the many underemployed PhD graduates, highly educated immigrants performing menial jobs, and educated women forced to stay at home because of child-care expenses, all attest to the fact that human capital in the Global North today is not really associated with economic development or personal well-being. Likewise, the low pay and status allotted to jobs such as child-care, nursing, fire-fighting or teaching – all of which require high skill and know-how – belie the idea that human capital is associated with individual success.

It would therefore be a mistake to think that the uselessness of human capital described in Alexievich’s interviews is a purely Russian phenomenon. It is alive and well in the West.

Human capital theory, ‘meritocracy’, and institutions

It seems that human capital’s connexion with personal and with society-wide well-being is fundamentally premised upon the institutional framework within which it is deployed. For individuals, human-capital is useless unless they adhere to dominant ideology and institutions. Conversely, society does not value human capital per se: it only values subservient human-capital. Knowledge and know-how that do not kow-tow to dominant ideologies and institutions are not valued – which flies in the face of the idea that human capital is a key factor of economic development2.

In the West, human capital is often presented as the cornerstone of our meritocracy : the fortunes of Soros, Bezos, Page, Trump, Gates, Slim. etc.., are deemed acceptable only because we are told that they are attributable to their unique brilliance. Yet meritocracy (backed by human-capital theory), which justifies individual fortune, tells us nothing about the wider distribution of wealth nor about the overall well-being of entire populations and eco-systems.

It is only within certain specific institutional and ideological frameworks that human-capital can be marshalled for the greater good3. The wealth of a society (i.e. of the wider population, of its ecosystems…) rests fundamentally on these institutions, which today serve mainly to underpin individual wealth and inequality.

As institutions in Britain, the USA, Hungary, France and many other countries (which maybe – during the immediate post-war years – served to marshal human capital for wider social ends) fray or break down at the behest of big-business and wealthy individuals (which see turmoil and upheaval, coyly called ‘disruption‘, as opportunities), we have a lot to learn from Alexievich.

  1. Note, however, that an increasing number of studies are questioning this simple connection between human capital and personal or regional development. I go over some of these in this working paper. Here is another example from the IMF. The problem is that these studies have not (yet?) had much impact on the widely held belief (as evidenced by Alexievich’s interviewees, as well as by many people I speak with every day in Canada) that more human capital is better (both for individuals and for regions). The lack of impact is, I think, because human capital theory underpins the belief that we live in a meritocracy – a belief which is itself increasingly questioned, but which is important because it allows today’s increasing inequalities to be ‘justified’. Alexievich’s book can be read as a scathing critique of meritocracy.
  2. An objection to this argument is that human capital is, by definition, knowledge and know -how which furthers economic development. Thus, if a society has decided that certain types of knowledge (for instance those that are not Communist, Capitalist or pro-Business enough) are useless, then this knowledge cannot be counted as human capital. This argument is a good one. It points to something more radical than I am saying in this post, viz. that there is no such thing as human-capital, only knowledge and know-how that furthers a dominant ideological or institutional framework. Should the framework change (as it did in the Soviet-Union, and as it seems to be in our current post-truth West), then so does the nature of human-capital. Where does this leave human-capital theory, if human-capital is fundamentally contingent upon ideology? Where does it leave meritocracy, if merit can so easily be overturned?
  3. ‘The greater good’ is a loaded term. Here I use it as short-hand for universally available health care, food for all, and meaningful action to curb climate change and deal with its consequences. None of these are available in the West. Climate change requires concerted global action, which itself requires buy-in from governments and big-business: we are nowhere near that. Health care is patchy (for instance, in Canada indigenous people have very poor access and treatment). Food for all is scarcely achieved in Canada.

Published by Richard Shearmur

I am a professor at McGill's School of Urban Planning. I perform research on innovation, on how we locate work activities (in a world where people often work from many places), and on urban and regional economic geography. I used to work in real-estate, and teach a course on this. I am an urban planner, member of the Ordre des Urbanistes du Québec and of the Canadian institute of Planners.

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