Gary Stanley Becker Human Capital

Gary Stanley Becker Human Capital

Consumer durables and investment goods are overlapping categories: consider the case of a motor car owned by a travelling salesman. Unsurprisingly, therefore, Becker's interest in fertility was only part of a wider consideration of investment in people. He is, indeed, best known within the economics profession for his work on the concept of human capital.

Although economists ever since Adam Smith have recognised that expenditure on education or training can be considered as an investment, this insight was not systematically used to explain labour-market behaviour until the early 1960s. Prior to this it was often assumed that individuals lacked the information or the foresight to make rational investment decisions in this area. A corollary of this seemed to be that governments should subsidise education.

A number of econometric studies in the 1950s suggested that education was an important element in the explanation of a country's growth performance; in addition the US Government became increasingly worried that its educational system might be lagging behind that of the USSR. As a consequence a good deal of attention was directed towards the analysis of the economics of education. Already Becker had prepared a discussion paper (1960a) which expressed scepticism of the view that there was a shortage of American college places. At the time, however, the theoretical framework for such a discussion was sketchy. It was not until Becker, Theodore Schultz, Jacob Mincer and others had contributed to a special issue of the Journal of Political Economy on Investment in Human Beings, in 1962, that the debate really took off.

Becker's contribution to this symposium was subsequently expanded into a book, Human Capital (1964, 1975), which was soon recognised as a classic and which made his reputation. In this book Becker's starting point is the assumption that people spend on themselves or their children not just for present gratification, but also with the future in mind. Future gratifi­cation may be of a monetary or non-monetary kind, though Becker concentrates on the former. Future-oriented expenditures will normally only be undertaken, he argues, if the present value of expected benefits (discounted by an interest rate reflecting the opportunity cost of capital) at least equals the present value of the costs of the expenditure. Such expenditure includes overt costs such as fees and equipment, but a major element, he argues, is the value of earnings foregone during the period of training.

This category of investment includes far more than the formal systems of education and training which the debate was centred on. In Becker's hands, the concept of human capital embraces such activities as the purchase of health care, time spent searching for the best pay offer rather than taking the first available job, migration, and the acceptance of low-paying jobs which have a large element of learning on the job. In Becker's model, in the long run, all such human capital formation is taken to the point where the marginal returns to such activities are equal to the marginal cost of investment funds. In other words, in equilibrium (always Becker's concern) the rate of return on all investment activities - human and non-human - is equalised. From this, Becker deduces propositions which shed new light on a great many economic activities. Patterns of income distribution, the shape of age-earnings profiles, the duration of unemployment and the existence of male-female educational inequalities are all examples of issues which the approach illuminates.

To some writers, human capital theory also suggests a guide to policy; if the marginal rate of return on some form of training exceeds the cost of capital, for instance, this may be taken to provide a justification for the state to expand the provision of the training. Becker, however, has doubts about this; he points out that such variations may simply reflect underlying variations in the non-monetary benefits and costs of particular activities.

Despite the acclaim which greeted Human Capital, Becker's work in this field is by no means universally accepted. Blaug (1975), for instance, has attacked the weak empirical basis of much human capital theorising. Studies indicate major variations in rates of return on different kinds of human capital, he claims, and attacks Becker's attempts to explain this away by reference to auxiliary hypotheses about non-monetary factors as being the same kind of ad hocery Becker deplores in others. We are again struck by the curious way in which Becker tends to use evidence to support or illustrate a hypothesis rather than genuinely to test it.

Another criticism relates to possible alternative explanations of some of Becker's empirical generalisations. For example critics have argued that the positive correlation between the married female participation rate and the level of education achieved can be attributed as much to attitude changes as to Becker's explanation in terms of the high market value of educated women's time. Again, however, as in the case of fertility which we discussed in the last section, it is doubtful whether such alternat­ive explanations are as generally applicable.

Another whole set of criticisms which deserves more space than we can afford it here argues that Becker asks essentially the wrong questions. Educational systems are seen as devices for reinforcing social control. Thus Marxist critics emphasize in particular the supposed structural necessity to maintain the divisions inherent in a complex society. Capitalism creates and maintains educational systems which fulfil its objectives; Becker's individualistic ac­count of human capital investment cannot hope to deal with this. Criticisms on these lines are part of a wider critique of microeconomic reasoning to which we shall return later.