Friday, April 3, 2015

The "Fragile Eggs" of Human Capital

In a recent post, Timothy Taylor references E.B. White, a notable twentieth century author of children's books:
White suggests the following analogy: economic rights are like croquet balls, and human rights are like eggs. If you jumble them together, the eggs are likely to get broken.
Why, then, do people shrug their shoulders and accept the "broken eggs" of human capital in order to get things done? In part, because those contractual agreements prove capable of reducing economic risks for everyone involved. Organizational patterns of repetition, labor divisions and concentrated resource application have provided gains in recent centuries which cannot be denied, for living conditions and increased wealth.

However, some preferred methods for organization become less efficient (or otherwise "unworkable") over time, as resource use and cultural patterns shift. As a result, earlier societal agreements of organization will be called into question, when gains become asymmetric or come into conflict with other patterns.

Until recently - mostly due to what was (previously) real knowledge based scarcities - primary wealth was realized by keeping most human capital in secondary positions. One crude aspect of this process involved the slaveholders who held economic rights to human capital. Once slavery (largely) disappeared, individuals remained somewhat "beholden" to firms.

Now, even this form of organization has largely transitioned to a somewhat unexpected pattern: that of human capital as "beholden" to housing investment rather than definitive work arrangements. Such investment is often government subsidized, and with good reason. Governments have more economic options because of housing liquidity (through both financial instruments and tax redistribution) than the owners themselves - at least until a house is sold.

Even though this method worked well for government generated services formation in the twentieth century, it is proving insufficient for the human capital flexibility which is needed in the 21st. Human capital needs a more substantial role which allows it to contribute to both aggregate demand and supply. The freeing - hence strengthening of human capital - would also address the passive investment problem of housing. Housing is part of a fixed production model which in turn exacerbates aggregate demand issues, that negatively impact the decision making processes of central bankers. As Kevin Erdmann recently noted: some ways human capital today carries some of the characteristics of pre-industrial capital, where landed elite captured very high profits, but were tied to their property. But, today's human capital comes from a much less stable context. While the earnings of a given individual may be inherited, the capital itself cannot be handed down through generations.
Without the rights for knowledge use that production reform could bring, there's no way to get at the vast potential of time aggregates. Only consider how many technological gains of the present appear as though incapable of providing measurable wealth, because they have yet to be applied in specifically local knowledge use context. Without such context, today's services provisions, productive capacity and societal contributions are anything but clear, hence they distort investment potential. More from Erdmann:
Human capital is basically the dark matter of economics. We know it's there. In the end it is probably the primary driver of everything that is important. And we can't see it.
Erdmann, one more time:
...We are the sole owners of the collected value of our individual experiences, training and skill. There is limited potential to diversify and share this value, which is a shame, because as with modern public corporations, this would add real value. We would be wealthier for it. In fact, some forms of income redistribution could be seen as a sort of planned diversification of human capital. In that way, some forms of redistribution or access to skill development could be seen as public goods - providing added aggregate value by reducing the discount rate applied to the future returns from human capital.
While housing as time arbitrage option worked reasonably well up to a point, this government strategy now exposes the fragility of both human capital and the economy as a whole. Human capital needs to rely on greater self sufficiency through production freedom, if income flows are to be maintained for the long term. But how to achieve this, when the most important forms of knowledge use are claimed - with government backing - by the (most) capable and the few?

One of the best examples in this regard, are special privileges granted to physicians by governments, regarding the right to heal. As a result, governments and citizens alike are left vulnerable. Even though this means governments are "supposed" to be responsible for populations, they made the mistake at the outset of setting up an artificially limited marketplace. Limited skills privileges leaves countless numbers of individuals in a bind, and they gradually become convinced they have little of value to offer others in their own midst.

Worse, a growing number now have few legal means to be responsible or accountable for their own existence. Citizens know that if they live in an "unhealthy" manner, this puts further strain on the healthcare system. Whereas if one lives a long and healthy life, the Social Security system gets the strain! In all of this self flagellation, individuals are also quick to judge anyone who appears incapable of "measuring up" as a responsible citizen.

Governments need to do their citizens a favor by allowing them to help one another, instead of letting economic circumstance to continue drifting towards scenarios where everyone turns on everyone else, immigrants are refused and anyone who is "different" gets chased out of town or state. Some of the contractual agreements needed now, would not only make human capital less fragile, they would eventually provide means for participation and shared responsibility.

Specifically, what is needed has nothing to do with rights towards desired economic ends on the part of anyone, because governmental attempts along these lines are what destroy freedom. The best present day example in this regard is the fact that populations should not even have expectations (let alone rights) for healthcare as consumers, when they do not have any corresponding, production based, right to heal. Time capacity between producers and consumers for this particular need, simply does not match up, otherwise.

Human capital could potentially be traded in local marketplaces which recognize time as the locus of internal coordination, on the part of both groups and individuals. Presently, time value is mostly assigned (priced) according to specific institutions and associations which exist outside of time aggregates. Too many struggles have ensued as a result: struggles which now affect the proportion of money central bankers are willing to allot for overall spending capacity. When it becomes difficult to discern intersecting points between human capital and resource use, central bankers sometimes take the easy route of aligning monetary policy where it does not belong - credit driven interaction, rather than human action.

Many of the freedoms which have come under threat could be restored, by providing a time based marketplace with new production rights. Without real choice sets for one's own abilities, time arbitrage mostly finds economic gains through housing, as Erdmann pointed out. Private property is understood in terms of land, buildings and - more recently - the knowledge gains of exclusionary wealth capture. But this latter method of wealth creation only serves to make human capital - in aggregate - too vulnerable. Even more so, than many of the earlier attempts to subordinate human potential to economic potential.

Presently, there is freedom of contract between institutions, and free trade for those who have the means to pay for the ticket. Ultimately, property rights will also need to be extended to knowledge use, if knowledge is to play the role so recently expected for the 21st century. If long term growth is to be maintained, citizens need to be much more than consumers by definition.

Citizens will also need production rights, which allow them to determine how to assist and provide services for one another. Human rights are not just about human desires. If they were, there would scarcely be means at all to preserve democracy. Citizens need price systems that continue to work efficiently well into the future: not just for goods separate from time, but also time in terms of the scarcity time actually represents in one's life. Should time value be realistically taken into account, perhaps human capital would not have to remain the "fragile egg" which it appears in the present.

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