Human Capital and its Critics:
Gary Becker, Institutionalism, and Anti-Neoliberalism
Lawrence H. White*
December 2016
Abstract:
Gary Becker’s contribution to labor economics can be highlighted by contrast to his
predecessors and critics. Human capital analysis was not much developed before Becker,
although the concept was recognized by such prominent figures as Adam Smith, Alfred
Marshall, and John Bates Clark. Rational-choice microeconomics, including human capital
analysis, displaced the previously dominant Institutionalist approach to labor. Becker further
applied human capital insights in his theories of crime, household production and the family,
and personal preference development. Illuminating objections to an emphasis on human capital
have come from mainstream economists in the 1960s (who offered the signaling theory of
education), non-mainstream economists in the 1970s (who offered theories of labor-market
segmentation), and current critics of neoliberalism.
JEL codes: B21, E24, J24
* Professor of Economics, George Mason University. Discussion draft prepared a Liberty Fund
symposium on the work of Gary Becker, 20-23 April 2017, Chicago, IL. Send comments to
[email protected]. I thank John Kroencke for research assistance.
Human Capital and its Critics: Gary Becker, Institutionalism, and Anti-Neoliberalism
Lawrence H. White
People seek to raise their future incomes by investing time and money to enhance their
productive knowledge and skills, aka their human capital. Academics who have spent years to
get their Ph.Ds. should find this statement easy to accept. The concept of investment in human
capital covers not only graduate education but also undergraduate studies, vocational training
programs, second-language classes, on-the-job training, and so on. In his Nobel Lecture, Gary
Becker (1993) defined “the human capital approach” as the study of how “the productivity of
people in market and non-market situations is changed by investments in education, skills, and
knowledge.” The approach seems uncontroversial today. And yet, some economists and cultural
critics have raised objections, and a few continue to object. They suspect that an emphasis on
human capital undermines their preferred vision of the world. And in some cases it does.
In a memorial lecture for Gary Becker, his former colleague James Heckman (2014)
briefly indicated the challenge that Becker’s work on human capital posed to the status quo in
labor economics as of 1960. He noted that before Becker’s landmark book Human Capital
(1964), with the exception of University of Chicago economists and a very few economists
elsewhere,
labor economics was the province of industrial relations, negotiators and
bargaining experts, and descriptive empirical scholars. … The quality of the
work in labor economics in the 1940s and 1950s was vastly different from what
it now is today. Then it was a body of facts with no interpretation or theory.
Becker helped change all of that.
Becker’s work on human capital (together with that of his co-pioneers, whom he once
(Becker 1994, p. 15) identified as “Ted Schultz, Jacob Mincer, Milton Friedman,
1
Sherwin Rosen, and several others associated with the University of Chicago”1) brought
the explanatory method of neoclassical economics – phenomena are to be explained as
the outcome of individual optimization and market equilibrium – to bear on a field that
was still dominated by Old Institutionalist approaches. As Ronald Coase (1984, p. 230)
once dryly remarked, from the neoclassical perspective the Old Institutionalists lacked
any coherent theory, and “without a theory they had nothing to pass on except a mass of
descriptive material waiting for a theory, or a fire.”
Here we seek to provide fresh perspective on Becker’s contributions by contrasting his
human capital approach to what was then the Institutionalist status quo in labor economics. We
consider the objections that non-Chicagoan mainstream labor economists of the 1960s initially
raised against the emphasis on human capital. We also consider objections from economists
associated with the New Left in the 1970s, and similar objections from current critics of
neoclassical economics who consider human capital analysis to be a component of neoliberal
ideology.
Despite the noun in the label, Becker’s work on human capital was not a contribution to
capital theory. If it had been, it would not have attracted even a small fraction of the attention it
did attract, capital theory being almost entirely absent from the agenda of postwar mainstream
economics.2 Becker implicitly followed the approach that Theodore W. Schultz (1972, p. 4)
1
Presumably Becker’s dissertation adviser H. Gregg Lewis was one of the “several others.”
Elsewhere Becker (1975, p. 15) cited the “important and pioneering work … on the economic
return to various occupations” by “Smith, Mill, and Marshall,” Friedman and Kuznets (1945),
Stigler and Blank (1957), and T. W. Schultz (1961). Schultz (1961, pp. 2-3), for his part, cited
Adam Smith, Heinrich von Thünen, and Irving Fisher as distant predecessors, and Friedman and
Harry Johnson as contemporary contributors to the human capital concept.
2
I say this as someone who edited F. A. Hayek’s The Pure Theory of Capital for the Hayek
Collected Works (2009), and who devotes the first third of a graduate macroeconomics course
to capital theory, mostly using Jack Hirshliefer’s Interest, Investment, and Capital (1971).
2
later enunciated: “Because of the ambiguities that burden capital theory, we do well to bypass it,
and rely on a theory of investment and the rates of return to investment opportunities.”
Human capital and labor economics before Becker
The concept of human capital was suggested by many economists before Becker, but
was little developed theoretically and seldom applied empirically before Becker (1958) and
Mincer (1958).3 Arthur C. Pigou (1928, p. 29) mentioned the concept and is often credited with
being first to use the two-word phrase “human capital.” Becker himself begins Human Capital
(1975, p. 13) with an epigram from Pigou’s teacher Alfred Marshall: “The most valuable of all
capital is that invested in human beings.”4
Marshall did not justify the quantitative judgment or develop the idea extensively, but he
did surround the statement with a few paragraphs that discussed apprenticeship and other sorts
of worker training. He worried that the trainer is typically under-compensated by the trainee for
the costs of training, with the consequence that training is inefficiently under-provided
(marginal benefit remains above marginal cost), apart from exceptional cases such as sons who
receive training by working alongside their fathers. The under-provision is due to “the difficulty
that whoever may incur the expense of investing capital in developing the abilities of the
workman, those abilities will be the property of the workman himself: and thus the virtue of
those who have aided him must remain for the greater part its own reward.” Becker (1964)
would take up this difficulty, distinguishing between (a) training in skills completely specific to
the worker’s present job, the cost of which training the present employer recoups and therefore
3
For a review of the history of economic thought on the concept see Kiker (1966).
The quoted statement appears in Book 4, chapter 4 in the 8th edition of The Principles of
Economics (Marshall 1920).
4
3
finds it worthwhile to provide, and (b) training in portable general skills. He recast Marshall’s
difficulty as the difficulty of a worker financing investments in his or her own general skills
when the human capital formed is inalienable (as Marshall assumed) and thus cannot be pledged
as collateral for a loan. As we will discuss below, Becker did not entirely reject Marshall’s
suggestion that the market fails to attain efficiency here, nor the further suggestion that this
warrants government finance of some education.
Well before Marshall, Adam Smith (II.I.17) wrote that an individual’s or a society’s
“fixed capital” consists chiefly of four items: equipment, structures, land improvements, and
one more thing:
Fourthly, of 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 expence,
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 of 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
labour, and which, though it costs a certain expence, repays that expence with a
profit.
Smith (1981, pp. 118-119) even enunciated the equilibrium condition for investment in human
capital, and its implication for wage differentials across professions:
When any expensive machine is erected, the extraordinary work to be performed
by it before it is worn out, it must be expected, will replace the capital laid out
upon it, with at least the ordinary profits. A man educated at the expense of much
labor and time to any of those employments which require extraordinary dexterity
and skill, may be compared to one of those expensive machines. The work which
he learns to perform, it must be expected, over and above the usual wages of
common labor, will replace to him the whole expense of his education, with at
least the ordinary profits of an equally valuable capital. It must do this, too, in a
reasonable time, regard being had to the very uncertain duration of human life, in
the same manner as to the more certain duration of the machine.
4
The difference between the wages of skilled labour, and those of common labour,
is founded upon this principle. … It is reasonable, therefore, that in Europe the
wages of mechanicks, artificers, and manufacturers, should be somewhat higher
than those of common labourers. They are so accordingly … Education in the
ingenious arts and in the liberal professions, is still more tedious and expensive.
The pecuniary recompense, therefore, of painters and sculptors, of lawyers and
physicians, ought to be much more liberal: and it is so accordingly.
This last point can be found before Smith, in Mandeville’s Fable of the Bees (as quoted in
Smith, p. 118 n. 7), which noted that those professions “will always be the most lucrative” that
one cannot enter “but in great length of time, by tedious study.”
Smith’s insights were neglected in the subsequent Ricardian classical theory of wages,
which focused on determining the wage rate for unskilled laborers as a class. In the short run,
“the” wage rate was determined by the ratio of the “wages fund” to the labor force. Any wage
above subsistence would cause the labor force to grow, so that the wage rate tended toward its
“natural price”—subsistence—in the long run. Wrote Ricardo (as quoted by McNulty 1980, p.
66):
The natural price of labor is the price which is necessary to enable the labourers,
one with another, to subsist and to perpetuate their race, without either increase or
diminution. … However much the market price of labour may deviate from its
natural price, it has, like commodities, a tendency to conform to it.
The Marxist economist Samuel Bowles rightly noted in a letter to T. W. Schultz (1972, p. 6 n.
7) that the simple division of total income between the worker class, the capitalist class, and the
landlord class forbade a recognition of workers as capitalists:
The absence of any systematic treatment of human capital in either the classical or
the Marxist scheme results from the fact that both Marx and the classical writers
defined their factors of production in terms of the way they perceived the class
structure of the period.
5
Bowles added a second reason for the non-recognition of human capital, namely “the fact
that the role of education and skills in the economy was considerably less than today.”
This reason is, however, at odds with Adam Smith’s recognition that investment in
remunerative “acquired and useful abilities” was already an important fact in his day.
In broad strokes, the Marginalist Revolution of the 1870s, and Marshall’s Principles that
followed, replaced the classical cost-of-production theory of prices and subsistence theory of
wages with subjective demand and somewhat-subjective supply determination derived from the
now-familiar marginal utility and marginal productivity theories. John Bates Clark (1908, ch.
11, para. 2), in his then-authoritative development of the implications of marginal productivity
theory for wages, recognized the similarities of human capital (productive abilities acquired by
costly training) to physical capital. Clark nonetheless stipulated that only physical capital
counted in the capital stock when apportioning inputs between capital and labor, although he
recognized that he was contravening Adam Smith’s treatment:
Capital consists of instruments of production, and these are always concrete and
material. This fact is fundamental. In claiming for capital a material existence,
we go beyond many classical economists, since we do not consider acquired
abilities of workmen as a part of the fund of productive wealth. Man does not
add to his capital, when he spends money in training or educating himself for a
useful occupation. He gets something, indeed, that increases his productive
power; and in getting it he is obliged to practise abstinence. He deprives himself
of pleasure, in order that thereafter he may produce more than he otherwise
could. There is, it must be admitted, a certain similarity between the effects of
money spent on a technical education and those of money spent in buying a tool.
In using the term, however, we shall be strict constructionists, and shall insist
that capital is never a quality of man himself, which he uses for productive
purposes. The capital of the world is, as it were, one great tool in the hand of
working humanity—the armature with which humanity subdues and transforms
the resisting elements of nature.
6
In a later footnote Clark returned to the issue of the returns to investment in training. Having
arbitrarily excluded higher wages due to training from being counted among the returns to
capital, he (1908, ch. 16, n. 26) was compelled to consider it a return to labor, which he did by
counting a skilled laborer as more than one unskilled laborers:
We can add to the supply of labor by making workmen more efficient, as well as
by making them more numerous. Educating and training men adds new
increments to the supply of human productive energy. … [I]t is the productive
power of the final increment of labor, thus defined, that in reality governs the
rate of wages.
(Ironically, given that Clark considered his theory a refutation of the Marxist claim that capital
exploits labor, this was basically the same question-begging dodge that Marx had taken in
trying to reconcile the labor-time theory of price with the greater hourly productivity of skilled
labor.) Clark might have gone on to say that a skilled laborer will then earn a corresponding
multiple of the hourly wages of an unskilled laborer, but he did not, and simply left off the
analysis there. Having explained “the” rate of wages on marginalist principles, although not
wage differentials across workers, he apparently had completed the task he set himself.
The Institutionalist approach to labor
The neoclassical analysis of wage determination continued on from Clark, but as a
minority pursuit in American labor economics. Indeed the field of labor economics, understood
as the pursuit of economic explanations for labor phenomena, hardly existed in any coherent
form. Rather, between 1880 and 1920 the focus of labor studies was on the enterprise of
identifying current problems and reforms (McNulty 1980, pp. 127-8). The leading American
academics in this enterprise were Richard T. Ely, trained in historical methods at a German
7
university, and John R. Commons, trained by Ely at Johns Hopkins. Commons went on to teach
for many years at the University of Wisconsin. Both Ely and Commons were Institutionalists
who pushed for labor reforms along progressive lines. Ely was President, and Commons was
Secretary, of the American Association for Labor Legislation. The American Institutionalists
generally, following the German Historical School, offered not deductive theorizing or
statistical testing, but induction from concrete case studies and cases for progressive reforms
(see White 2012, pp. 19-20, 99-125).
Many of the labor economics programs at other leading universities, Bruce E. Kaufmann
(2010, p. 129) observes, were similarly rooted in the Institutionalist study of industrial relations
or labor history, while “none was neoclassical or ‘analytical’ in the modern sense.”5 Kaufmann
(2007, pp. 48-49) describes the institutional and normative orientation of the literature during
this period:
Nearly every labor textbook of this early period (e.g. Adams and Sumner, 1905;
Estey 1928) began with several chapters devoted to “Evils,” “Problems,” or
“Grievances” and included a standard list of topics, such as low wages, excessive
work hours, child labor, employment insecurity, industrial accidents, and
autocratic shop governance. … The cause of labor problems, in turn, was traced
back to defects and maladjustments in the existing institutional structure. …
Documenting and publicizing the existence of numerous serious labor problems
was crucial to the institutional project because it provided empirical evidence
that both called the orthodox body of economic theory into question and created
a compelling case for social reform … These economists thus became famous for
detailed case studies and field investigations of labor conditions and institutions.6
5
Kaufman (2010, p. 219) is clearly wrong, however, in trying to explain this state of affairs by
adding, “for a price theory approach to the subject simply did not exist.” John Bates Clark’s
(1908) well-known analysis took a neoclassical price theory approach.
6
McNulty (1980, pp. 153-156) gives an extensive rundown on the content of the widely used
Adams and Sumner text, entitled Labor Problems, and places it in the context of Institutionalist
thought.
8
Sherwin Rosen (Ashenfelter 1994, p. 140) similarly comments that “Institutional approaches
dominated labor economics prior to the 1930s.” This dominance continued during the period
from 1930 to 1960:
[T]he mass unemployment of the Great Depression and the rise of trade
unionism made a thoroughgoing economic approach to labor unattractive to most
economists. Rational models were ridiculed, marginal productivity and the
theory of the firm were considered irrelevant by labor economists and wage
determination was thought to be largely immune from competitive forces. …
Industrial relations had a stranglehold on the field, and few gains from trade were
perceived from bringing much economics into it.
The Institutionalist dominance described by Kaufmann and Rosen should not,
however, be overstated. The neoclassical theory of wages received continuing attention
from a number of economists. The period 1928-35 alone saw book-length neoclassical
treatments of wage determination by Willem L. Valk (1928), J. W. F. Rowe (1928), W.
H. Hutt (1930), J. R. Hicks (1932), and Paul H. Douglas (1934).7 A. C. Pigou (1933)
offered a neoclassical Theory of Unemployment, soon to be singled out for abuse by
John Maynard Keynes. In the journals, Charles W. Cobb and Paul H. Douglas (1928)
pioneered the statistical estimation of the marginal productivities of labor and capital, an
effort to which John M. Clark (1928) offered refinements. J. R. Walsh (1935) estimated
the returns to education in various professions, explicitly couching the study in a human
capital framework (with a citation to Adam Smith). Still, the neoclassical approach was
in the minority among labor researchers in the United States.
7
All but the Hutt volume were reviewed together by Z. C. Dickinson (1934). Hutt (1939) also
provided a pioneering contribution to the neoclassical search theory of unemployment.
9
Institutionalist-oriented labor researchers did not seek to explain wage differentials
across workers or occupations by reference to a competitive labor market in which firms must
offer higher wages to get workers with higher marginal productivity associated with their higher
human capital. Rather, as Richard England (1972) observed, researchers “emphasized the
institutional origins of labor market segmentation and its effects on wage rates. Among the
institutional variables used to explain inter-industry and inter-regional wage differentials were
the degree of unionization, profit rates, industrial concentration, and capital intensity.” Here
England cited an article by Clark Kerr (1954) on “The Balkanization of Labor Markets,” among
others.
The study of labor at Chicago
A useful window into the state of labor economics in the first half of the twentieth
century is provided by Kaufmann’s (2010) review of labor economics at the University of
Chicago. In the first and second decades the recognized expert at the University was Robert
Hoxie, who followed the Institutionalist approach of Commons. Kaufmann (2010, p. 129)
reports that “Hoxie attended union conventions, did field interviews with workers and toured
manufacturing plants to observe methods of labor management.” Hoxie had previously taught at
Cornell, where he established the economics department’s first course in labor under the title
“Problems of Organized Labor” (McNulty 1980, p. 150). Hoxie published articles and books on
trade unionism expositing “the trade-union point of view” and providing a taxonomy of union
types. Hoxie was succeeded by Harry Millis, who became a nationally known labor arbitrator
and collective bargaining expert. Millis co-authored with Royal E. Montgomery a three-volume
set entitled The Economics of Labor (published 1938-45), which approached the field almost
10
entirely in historical and sociological terms. Volume One dealt with Labor’s Progress and Some
Basic Labor Problems, Volume Two with Labor’s Risks and Social Insurance, and Volume
Three with Organized Labor.
The outstanding exception to the dearth of analytical labor economists at Chicago was
Paul Douglas, who joined the department in 1920, famously developed and estimated the CobbDouglas production function, and published The Theory of Wages in 1934. But Melvin Reder
(1982, p. 3) has characterized Douglas as a man of two minds: one part quantitative neoclassical
labor economist, one part “conventional institutionalist” who “wrote non-quantitative
descriptions of wage earners’ living and working conditions, freely blended with advocacy of
various reforms.” Kaufmann (2010, p. 131) finds that “Millis and Douglas shared similar views
on issues of labor theory.” Both saw neoclassical marginal-productivity theory as a useful
framework for explaining long-run tendencies in wage rates under competition, but “both men
also agreed that orthodox theory was a poor and somewhat biased account of wage
determination in the short run” because the assumption of a competitive labor market often
failed to hold. Douglas (1934, p. 94) himself wrote that “the assumptions which depart most
from reality are those which ascribe more power to the workers than they actually possess.”
Without unionization, both Millis and Douglas believed, labor typically suffers from inferior
bargaining power. Douglas (1938, p. 214) also defended minimum wage legislation on the
grounds that “there is a considerable degree of monopoly or imperfect competition in the
purchase of labor, as to make one skeptical about wages being fixed solely by natural law.” The
early 1930s were not only the high point of Great Depression unemployment, but also the era of
the highly influential “monopolistic” or “imperfect competition” models of Edward
Chamberlain and Joan Robinson.
11
The emergence of the neoclassical and pro-market Chicago School in the late 1940s,
following the appointments of Jacob Viner and Milton Friedman, prepared the way for a
neoclassical reconquest of labor economics. H. Gregg Lewis, who has been called “perhaps the
father of modern labor economics” (Ashenfelter et al. 1994, p. 138), had been an instructor at
the University of Chicago since 1938, having learned price theory from Henry Simons and
quantitative methods from Henry Schultz and Paul Douglas. Lewis had been pursuing
neoclassical research in labor economics since the early 1940s, although he did not receive his
Ph.D. until 1947. It was Lewis who supervised Gary Becker’s dissertation. Becker pursued his
master’s and doctoral degrees at Chicago from 1951 to 1955 and even before he finished (in
1954) was hired on as an assistant professor. He left Chicago for Columbia University in 1957.
There he collaborated with Jacob Mincer, who was already working on human capital (Mincer
1958), and directed an NBER project on “Investment in Education” (Becker 1958). During his
Columbia years Becker published his early work on human capital (Becker 1962, 1964),
returning to Chicago in 1970.
The modern development of human capital theory is often credited jointly to Gary
Becker, Theodore Schultz, and Jacob Mincer. Schultz (1961) identified human capital as an
important factor in economic development, emphasizing the effect on productivity of
investments in nutrition, health and migration. Becker, like Mincer, initially emphasized rates of
return on education and training. Later in his career Becker used human capital as an
explanatory device in a remarkable array of novel applications to such topics as crime,
household production, addiction, marriage, and fertility. Chicago economists Paul Romer (1986,
based on his Chicago dissertation of 1983) and Robert E. Lucas, Jr. (1988) took up Schultz’s
emphasis on human capital as a core element of economic development, which they did by
12
constructing “endogenous growth” models where investments in human capital drive the
explanation of changes in real per capita output level across decades and differences in real per
capita output across nations.
The place of human capital in Becker’s larger research program
In his Nobel lecture, entitled “The Economic Way of Looking at Behavior,” Becker
(1993) described the approach that unifies the many parts of his lifelong research program. In an
earlier collection of essays similarly entitled The Economic Approach to Human Behavior,
Becker (1976, p. 5) explained that for him the “economic approach” meant “the combined
assumptions of maximizing behavior, market equilibrium, and stable preferences, used
relentlessly and unflinchingly.” In other words, Becker’s approach is neoclassical. Taking
underlying preferences as given, it builds models embodying rational choice (individual
optimization) and market equilibrium to offer explanations for observed patterns of human
action. Empirical work gives an estimate of how much real-world variation the model explains.
In the Nobel lecture, Becker spelled out his applications of the economic approach to
explaining phenomena in four specific areas: discrimination against minorities (taking as given
that some agents have anti-minority preferences), investments in human capital, crime, and the
family (marriage, divorce, child-rearing). The economics of discrimination was the subject of
Becker’s doctoral dissertation and his first book. His interest in human capital grew out of one
aspect of that research. As he explained (Becker 2011, p. xiii):
When I started my NBER research on human capital in 1957, my goals were
modest. I had noticed from my study of discrimination against minorities in
American labor markets that earnings of both white and black males rose
significantly with their years of schooling. The main goal of my human capital
13
study was to calculate rates of return on investments in education for different
groups, after costs of education were netted out of earnings benefits.
But in his efforts to restate the theory of investment in education, Becker (1975, p. 15) found
that “more than a restatement was called for” because “there had been few, if any, attempts to
treat the process of investing in people from a general viewpoint or to work out a broad set of
empirical implications.”
Becker’s theoretical restatement in Human Capital proceeds somewhat awkwardly. It
begins not with preference and production functions, but with the labor-market equilibrium
condition equating the marginal revenue product of labor to the wage rate, MPL = w. He then
modifies it to allow the equilibrium current wage rate for a worker to be reduced by the cost to
the employer of providing that worker with on-the-job training in general skills. (In this way a
worker can pay for general training without borrowing.) He expresses the equilibrium condition
in present-value form, discounting by (1+i), where i is the given interest rate. Thus the method
is Marshallian partial equilibrium analysis. Other worker investments in human capital are
treated as variations on this model of on-the-job training.
The claim to fame for the book and related articles was not the restatement of
equilibrium conditions but the wealth of explanatory content Becker coaxed from the concept of
human capital. In Becker’s hands it helped to explain a long list of labor market phenomena: the
shape of age-earnings profiles; earnings inequalities by years of schooling across individuals or
across regions (e.g. between the northern and southern United States); male-female earning
differentials; why time spent in schooling declines with age; why young workers are more
mobile; patterns in quits and layoffs by level of specific skills; “hoarding” of skilled labor in
recessions; the effect of family background on earnings; variations over time in the share of
14
high school graduates who go on to college, or college graduates who go on the graduate
school; the allocation of time between investment in human capital, labor market, and
household production; the historical age-price profiles for slaves.
In addition, Becker (1975, pp. 9-10) noted that the concept offers an improvement in
growth accounting. Because “the growth of physical capital, at least as conventionally
measured, explains a relatively small part of the growth of income in most countries,” we need
to consider the explanatory potential of “less tangible entities, such as technological change and
human capital.” He casually asserts that “few if any countries have achieved a sustained period
of economic development without having invested substantial amounts in their labor force.” He
largely left the suggested research program to others, but Becker, Murphy, and Tamura (1990)
offered a human-capital-driven growth model with endogenous fertility.
For the rest of his career Becker continued harvesting further implications from the
concept of investment in human capital. One crop of results fills his book The Economic
Approach to Human Behavior (1976), a collection of published articles. Another crop fills his A
Treatise on the Family (1981), where Becker framed many family decisions (marriage, divorce,
fertility, child-rearing) as human capital investment decisions.
Still later, in Accounting for Tastes, where he offered rational-choice explanations for
such phenomena as habits, addiction, and cultural norms, Becker (1996, pp. 4-5) posited two
new “basic capital stocks" to explain seeming inconsistencies in preferences over time. An
individual’s stock of personal experiences forms his “personal capital,” while social experiences
form “social capital,” both of them constituting “part of his total stock of human capital.” In
justification of this departure Becker commented:
15
Although the human capital literature has focused on education, on-the-job
training, and other activities that raise earnings, capital that directly influences
consumption and utilities are sometimes even more important. Fortunately, the
methodology that has been developed to study the effects of investments in
human capital on earnings is applicable to investments in personal and social
capital, although rates of return on such capital cannot be directly measured since
utilities cannot be observed.
To give the concept of investment in personal capital intuitive appeal, Becker (1996, p. 28)
offered the example of investments in music appreciation that an individual makes to “increase
the productivity of time spent listening … to music.” Here it can be argued that the label
“capital” is more metaphorical than in the case of “human capital.” Unlike human capital, it
does not generate income other than what is metaphorically called “psychic income.” The
concept of “social capital” is still more metaphorical.
Criticisms by book reviewers
Reviews of Human Capital in economics journals were largely favorable. The longest
was a review-article in the Journal of Human Resources by Melvin Reder, who was then
teaching at Stanford University but who would move to the University of Chicago in 1974.
Reder (1967) declared that the book was “already considered a locus classicus of conceptual
analysis of investment in human capital.” He praised the book for its “subtlety and finesse,” for
providing “the best theoretical treatment of investment in human capital extant,” and for
furnishing “an excellent example of applied economic theory” that “will be a major reference.”
Reder noted that Becker’s was only a partial-equilibrium theory, but considered this a smart
way to avoid needless entanglement in difficult issues of general-equilibrium capital theory:
16
The argument is conducted entirely from the viewpoint of an individual investor,
i.e., prices are taken as parameters. By this restriction of the scope of the enquiry,
the author avoids such thorny questions as how to measure changes in a capital
stock and in its rate of return when relative prices change. Bypassing this and
related questions is shrewd expository strategy; it enables Becker to focus on
those matters in which he is interested and keep his message from being obscured
by the clamor of Joan Robinson and her sparring partners.
Reder praised Becker for “sagaciously” discussing, in Human Capital’s Chapter V,
“Underinvestment in College Education?,” the welfare issue of “the external effect on output of
the increase in knowledge associated with an increase in the number of college-trained
persons.” Reder did not specify how an increase in college graduates is believed to shower
unpriced useful knowledge on the economy. Nor did he consider whether such an effect may
operate infra-marginally, but not at the relevant margin of college admissions. For his part,
Becker (1975, p. 195) acknowledged the complaint that college graduates “are (allegedly) only
partly compensated for their effect on the development and spread of economic [i.e. outputboosting] knowledge” due to “external economies produced by college graduates,” but did not
fully embrace the complaint. He rather emphasized that “economists (and others) have generally
had little success is estimating the social effects of different investments.”
In his review of the book in American Economic Review, Albert Rees (1965), then on
the faculty of the University of Chicago, declared: “Although this work is very different from
much of the traditional work of labor economics, it will have an important place in the literature
of the field for many years to come.” Like Reder, Rees also raised the possible discrepancy of
social returns from private returns to college education. But Rees suggested that student’s
private returns from education might overstate society’s returns because the salaries offered to
graduates include a premium (unwarranted by greater productivity) due to employer bias in
17
favor of graduates. Here was an early hint of the screening or signaling view of higher
education, further discussed below.
Robert Solow (1965) in the Journal of Political Economy credited Becker with “skill
and ingenuity,” but criticized several results. He considered the book’s estimates overstated the
private rates of return to education, by failing to control for native ability. (Becker had in fact
tried to control for ability using the data available to him.) Yet on the other hand he argued that
the estimates understated the full rates of return by failing to include the (admittedly
unmeasurable but possibly large) external and “consumption benefits of secondary and higher
education,” which “might run up the rate of return very substantially.” Like Rees, Solow further
suggested that the private return may overstate the social return because a diploma is rewarded
merely for signaling “persistence and stability” rather than being a proxy for the acquisition of
productive knowledge: “That is to say, employers may insist on, and pay for, high-school
graduates for jobs that could be as well performed by grade-school graduates … because
graduation from high school is a screening process.”
Finally, Graham Pyatt in The Economic Journal (1966) faulted the book for having
“little discussion” of a “deeper interpretation” of the estimated high returns to educational
investment: “Is it a sociological phenomenon that what matters is a college education rather
than ability in the United States, or is it that the labour market finds it convenient to use a
dummy variable defined with respect to college education in place of the continuous variable
‘ability’?” Becker’s view, of course, was that it was neither of these, but rather that the educated
achieve higher earnings because education installs useful knowledge and skills.
18
Mainstream skepticism
In the journal literature of the 1960s and 1970s, as in the book reviews, the signaling or
screening theory of education was the most important challenger to human capital theory as an
explanation of the economic returns to education. In his introduction to the 2nd edition of
Human Capital, Becker (1975, p. 6) responded to the challenge from what he referred to as “the
rather odd notion that education is largely a device to screen out abler persons for employers,
and that, therefore, only a small part of earnings differentials by education can be attributed to
education per se.” Here he cited works by Michael Spence, Joseph Stiglitz, and Kenneth Arrow.
Becker acknowledged that hiring on the basis of signaling “must occur in a world with
imperfect information,” but in his empirical judgement “is a relatively minor influence in
determining earnings differentials by education.” How much of the observed returns to
education are due to signaling, and how much to human capital, is not an armchair but an
econometric question.
A second empirical challenge came from those who argued that regressions of earnings
on education did not adequately control for native ability or social class, which is correlated
with investment in human capital, and so may be the real source of education-earnings
correlations across individuals (Renshaw 1960). A third challenge argued that reverse causation
may explain the cross-sectional correlation of education per capita with national income per
capita: richer people buy more college educations for their consumption and status value, just as
they buy more luxury automobiles. Better statistical tests since the 1960s have rejected these
hypotheses, and they are no longer prominent.
R. S. Eckaus (1963) of MIT, in a comment on the Becker (1962) JPE article that later
became the two theoretical chapters of Human Capital, objected – somewhat as an
19
Institutionalist would – that Becker was taking the assumptions of perfect competition too
seriously. Eckaus noted that Becker assumed “perfect mobility of labor” in a market of perfectly
competitive bidding for workers in reaching the conclusion that firms must pay for special firmspecific training but workers must pay for general training (which will raise competing wage
offers). In Eckaus’ view Becker should also have considered the effects of relaxing this
assumption: “But if there is some degree of immobility, firms can collect part of the extra
product training creates and therefore can consider such general training as if it were an
investment in fixed capital. … On the other hand labor immobility would reduce the need for
firms to pay premiums above alternative wages in order to keep ‘specially trained’ workers.”
Similarly, Eckaus thought it important to consider the results of relaxing the assumption that
worker training and firm output are strictly disjoint products. Theoretically, these are friendly
amendments to Becker’s theory. Eckaus acknowledged that Becker had recognized the
existence of “market imperfections and obstacles to the working of the price system that impair
the arguments based on perfect markets” but complained that “he seems to regard these as only
minor qualifications to the main conclusions.” Of course whether they are minor -- whether
immobility and other obstacles in practice create large or negligible deviations from the
perfectly competitive model – is an empirical question.
Turning from the question of who pays for training, Eckaus in his concluding paragraphs
raised the more central question of how to explain wage differentials across occupations. For
Becker, “differentials in occupational wage streams would, in perfect markets, reflect the
differences ‘human investment.’” Cautioned Eckaus: “In actuality relative differences may
measure primarily the significant market imperfections among occupations.” Becker of course
had no problem accepting – indeed cited as one source of his interest in labor economics – the
20
Friedman and Kuznets (1939) finding that legal restrictions on entry into the medical profession
reduced supply and raised physician salaries in the United States. If Eckaus meant rather
“market imperfections” due to information and relocation costs, Becker would have responded
that we should expect these to impart noise rather than to preserve permanent rate-of-return
discrepancies.
Skepticism from the left
From the late 1960s through the 1970s, sweeping objections to the human capital
perspective were largely relegated to the left margin of the economics profession.
Barry Bluestone (as quoted by English 1972) lamented the swing of labor research in the
1960s from the Institutionalist pole of focusing on structural features of the firms and industries
demanding labor, to the neoclassical human capital pole that supposedly focused only on the
suppliers of labor:
Abstracting from, or often just overlooking, the effect of industry and institutional
structure on wages and labor force participation, the human capital oriented social
scientists concentrated on the education, skills, training, health, mobility, and
attitudes of the labor force … In the 1950s too little attention was paid to
differences in the [human capital] of the workforce; in the 1960s, too little to the
real economic and institutional differences among industries and firms.
The contrast between Institutionalism and Neoclassical theory was not, however, just a matter
of focus on different sides of the market. Institutionalists assumed “segmentation,” meaning that
the firms in one part of the market effectively do not compete for workers with other firms in
other parts, while Neoclassicals assumed competition on both the supply and the demand sides
for labor. Workers can seek better pay outside their current employ, and firms can seek to hire
away workers who are being underpaid elsewhere.
21
Samuel Bowles (1971) and Herbert Gintis (1971), without referring explicitly to Becker
or human capital research, radically rejected the hypothesis that education builds productive
knowledge and skills, in favor of the hypothesis that secondary and college education mainly
reproduces the occupational hierarchy and inculcates the kind of obedience that factory-owners
want from their employees. Schools prepare children of professionals for professional jobs, and
children of the working class for working-class jobs. Howard Wachtel (1972, p. 189-90) drew
on Bowles, Gintis, and early work on labor market segmentation by Michael J. Piore (see
below) to reject the notion of competitive labor markets in favor of a new radical version of the
old Institutionalist proposition that different workers earn different incomes principally because
they happen to be located in different market segments:
The next question is—how do labor markets function to yield differential
probabilities of becoming poor for the participants in labor markets? The
emerging radical analysis views labor markets as stratified, consisting of more or
less permanent divisions within the working class. … This contrasts with the
harmonious, frictionless, and equilibrating propositions of orthodox theory in
which individuals are atomized, and their behavior is not influenced by their class
or status positions.
As Dickens and Lang (1988, p. 129) noted, “segmented labor market models” implied “a radical
departure” from the standard neoclassical assumptions of informed and rational actors in a
competitive environment. Partly for that reason, the perspective’s proponents were “mostly
radical political economists,” who chose “to develop their own research program outside the
mainstream.”
Michael J. Piore (1975, 1983; Doeringer and Piore 1971) was perhaps the best known
non-Marxist labor economist associated with segmentation. His version characterized the labor
market as divided into just two parts, high-wage (“primary”) and low-wage (“secondary”), and
22
so was called “dual labor market” theory. Piore (1983 p. 249-251) noted that “In most
discussions, labor market segmentation is contrasted with human capital theory.” Unlike human
capital research, involving “econometric estimation of deductive neoclassical models,” the idea
of labor market stratification was inductive, based on “relatively open-ended, unstructured
interviews with the economic actors themselves.” Piore acknowledge the Institutionalist roots of
this approach:
To find a precedent in economics for this kind of research, one has to go back to
the old institutional labor economics of the 1930's and 1940's, and the generation
of scholar-practitioners whose theory was an effort to organize their experience as
arbitrators, mediators, and wage-control administrators.
In the 1970s, in his view, he was fighting an uphill battle because labor economics had taken a
neoclassical turn: “the economics profession was in strong reaction to the ‘eclectic’ nature of
this research methodology and the ad hoc theories which it generated.” Consequently it was “no
accident that many of its chief exponents are radical economists.”
In the 1980s, segmented labor markets made something of a comeback in more
neoclassical guises (Dickens and Lang 1988). Becker’s Chicago colleague James Heckman, in a
paper with V. Joseph Hotz, tested for dual labor markets using a rich data set on earnings of
Panamanian males. Heckman and Hotz (1986, p. 509) found that the evidence “appears to be
consistent with theories of labor market segmentation,” but only because of the non-decisive
ways that tests of the theories have been formulated. They downplayed the non-rejection of
market duality on the grounds that “tests of these hypotheses … are poorly formulated as
statistical hypotheses” and “because critical data on intersectoral mobility do not exist.” After a
dissection of the standard tests’ inbuilt problems of sample selection bias they concluded (p.
529-30) that “the purported tests of the dual labor market hypothesis, both those presented
23
above and the test of Dickens and Lang, are intrinsically unconvincing. Dual labor market
theory produces no empirical predictions for the type of data at our disposal.” But they added,
humbly: “This is not to say, however, that human capital theory has any more refutable
implications.”
Dual-labor-market proponents Dickens and Lang (1988, p. 129), for their part, exhibited
a certain measure of schadenfreude in describing the Heckman and Hotz article as one in which
Heckman “undertook an empirical test of a dual market model, failed to reject the model, and
then devoted much of the rest of the article to attacking his and other tests of the dual labor
market view.”
Criticism by the anti-neoliberal left
Gary Becker and the human capital concept have been derided by some recent
economists on the left, particularly Thomas Piketty and Philip Mirowski, who consider Becker
the apotheosis of something they call neoliberalism. Most interestingly, as we discuss in the
following section, the important French philosopher Michael Foucault devoted three lectures,
later published in unrevised form as book chapters, to grappling with Becker’s ideas including
human capital. Foucault exhibited so much respect for Becker’s work, and offered so little
apparent criticism, that the lectures have sparked a major debate as to whether Foucault really
was a man of the left or whether he harbored neoliberal sympathies. (The meaning of
“neoliberal” differs from user to user, but the term is used pejoratively.)
Thomas Piketty. In his best-seller Capital in the Twenty-First Century, Thomas Piketty
(2014) argues that the uneven distribution of inherited capital poses a growing danger. (He uses
the terms “capital” and “wealth” interchangeably in the passages discussed here.) He defines
24
capital (p. 46) as “the sum total of nonhuman assets that can be owned and exchanged on some
market," explicitly excluding human capital from capital. Piketty’s growing-danger thesis
requires him to challenge the “optimistic belief,” which he attributes to Gary Becker, that
human capital has been growing in importance relative to inherited capital. Piketty mentions
Becker by name just once in the text (p. 385), and once again in a footnote to that passage. He
cites no particular work of Becker’s, leaving the reader in the dark about the specific sources of
Piketty’s impression of Becker’s view.
In the text, Piketty (2014, p. 385) describes the view that “inherited wealth has tended
over time to lose its importance” because human capital has grown in importance. He then
comments:
There is no logical reason why this optimistic belief cannot be correct, and it
permeates the whole modern theory of human capital (including the work of Gary
Becker), even if it is not always explicitly formulated.7 However, things did not
unfold this way … as can be seen in the fact that the capital/income ratio seems to
be about to regain the record level attained in the Belle Époque and earlier.
Leaving aside questions about the factual status of the claims Piketty makes about the
capital/income ratio (instead see Magness and Murphy 2015 and Jones 2014), here we consider
only the second half of the first sentence. Is it true that “the whole modern theory of human
capital (including the work of Gary Becker)” is permeated by a belief in the growing importance
of human capital?
Piketty’s footnote 7 elaborates:
Becker never explicitly states the idea that the rise of human capital should
eclipse the importance of inherited wealth, but it is often implicit in his work. In
particular, he notes frequently that society has become “more meritocratic” owing
to the increasing importance of education (without further detail).
25
Piketty does not cite a source for the phrase he puts in quotation marks, but he may have
had in mind (in light of the otherwise inexplicable suggestion that Becker provides no
“further detail”) a New York Times opinion piece (Stille 2011) that quotes Becker saying
about the United States: “I think we have become more meritocratic — educational
attainment has become increasingly predictive of economic success.” The appearance of
this quotation in a newspaper piece explains its being “without further detail,” but further
detail is not hard to find in Becker’s published work.
Piketty seems to interpret Becker’s statement as a description of the trend in
aggregate wage and salary income derived from human capital relative to aggregate
interest and dividend income derived from nonhuman capital. But it is nothing of the
kind. Becker does not mention income from inherited wealth. As evidence of how
educational human capital has “become much more important in determining economic
success than was the case in the past,” Becker (2006) noted some “basic facts” about
earnings in the United States during the previous 25 years:
There has been a general trend toward rising gaps between the earnings of
more and less skilled persons. With regard to education, real earnings (that
is, earnings adjusted for changes in consumer prices) earnings of high
school dropouts did not change much. Earnings of high school graduates
grew somewhat more rapidly, so that the gap between dropout and
graduate earnings expanded over time. The main action came in the
earnings of college graduates and those with postgraduate education. They
both increased at a rapid pace, with the earnings of persons with MBA's,
law degrees, and other advanced education growing the most rapidly. All
these trends produced a widening of earnings inequality by education
level, particularly between those with college education and persons with
lesser education.
26
Here Becker describes a trend in the coefficient on years of education in a regression
explaining differences in income across individuals, not any trend in the aggregate
income shares that Piketty cares about.
I have not found a work where Becker makes a size ranking of the stock of human
capital against the stock of nonhuman capital. In a recorded panel discussion, Becker (in
Becker, Ewald, and Harcourt 2014, p. 11) did speak to the relative “importance” of the two
forms of capital:
What I like to say is: Human capital puts people at the center of an economy.
Traditional economics put machinery, physical capital, and land, and, somehow,
some undistinguished labor … at the center. But human capital says: “No. …
[L]and isn’t so important in modern economies—but physical capital is clearly
important, but the really important form of capital is people. It’s people. And not
simply what they are born with, but what they, or the government, or the parents
do to them—what we call, ‘invest in them.’”
It would be a large stretch to interpret this statement as a serious size ranking of the
human capital stock or its income stream against those of nonhuman capital, much less as
a statement that human capital is eclipsing nonhuman capital.
Philip Mirowski. The historian of economic thought Philip Mirowski (2007), in a
discussion of the Chicago School’s treatment of “knowledge as commodity,” has referred to
“Gary Becker, who took vague metaphoric appeals to knowledge as ‘human capital‘ and turned
them into a protean neoliberal celebration of thing-like knowledge as the pivotal analytical
innovation within labor economics.” If there is a serious criticism lurking here, it is in the
suggestions that (a) human capital research is an ideologically driven “celebration,” a mere
confirmation of political biases, rather than a social-scientific program seeking better
understanding of the world, and (b) that “thing-like knowledge” is an epistemologically
27
incorrect approach to knowledge. Here we will leave epistemology aside and consider (a). This
will provide an opportunity for discussing the policy implications that Becker drew from human
capital research.
When Becker proselytized for human capital analysis, he did not in fact promote it as an
engine for producing or supporting policy positions, liberal or otherwise. Rather, he stressed its
explanatory fruitfulness. He began his Ryerson lecture on “Human Capital Revisited” (Becker
1994, p 17) with the following advertisement:
I will try to avoid technical analysis and jargon, and concentrate on showing how
the analysis of investments in human capital helps in understanding a large and
varied class of behavior not only in the Western world, but also in developing
countries and countries with very different cultures.
Later in the lecture (p. 18) he noted disapprovingly that “research in social sciences responds,
sometimes excessively, to public policy issues.” The word policy does not again appear in the
lecture.
But Becker did of course think that his human capital research had public policy
implications. He wrote more than 130 columns for Business Week, some of which derived those
implications from his and others’ research – but reportedly did so reluctantly. In the
introduction to a book collection of those columns, awkwardly written in the third person
(apparently because his wife Guity Nashat Becker was credited as co-author of the book for her
editorial contributions, although her name was not on the original columns), Becker identified
himself as a classical liberal (Becker and Becker 1997, p. 5).8 But he insisted (p. 6) that his
8
Becker (in Becker, Ewald, and Harcourt, p. 12) elsewhere remarked: “I don’t use the word
“neoliberal.” … I feel I belong in a classical liberal tradition.” Becker was a member of the
Mont Pelerin Society, so he was quite aware of the classical liberal tradition.
28
initial motivation in writing for a popular audience was decidedly not to promote classical
liberal policies:
Despite his classical liberalism, Gary wanted the columns to follow his research
and avoid taking positions on policy issues. The first few did refrain from doing
this, but he soon realized that readers want columnists to indicate where they
stand on contemporary issues. … Gary soon decided to recommend ways to
improve the problems highlighted by the columns. But the foundation would still
be the analysis of incentives and choices over a broad class of behavior. He would
try to show how policy recommendations naturally emerge from this approach to
behavior.
Did Becker’s policy views drive his research to pre-determined conclusions? Was he an
ideologue of that sort? The evidence points the other way. Becker’s classical liberalism was
pragmatic and not dogmatic: he believed that the practical evidence of history showed by and
large that markets work well and government works poorly to promote prosperity for the typical
individual.9 But he recognized exceptions, accepted the general logic of the public-goods
argument that markets fail to achieve efficiency under certain conditions, and did not advocate a
strictly minimal state. With respect to investment in human capital, he identified what he
considered a private market failure to capture all the expected gains because the borrower
cannot offer the investment object (himself or herself) as collateral, and he called for
government action to remedy private underinvestment in human capital. In a panel discussion
(Becker, Ewald, and Harcourt, 2012, p. 11) Becker was quite explicit that, in his view, “one of
9
Asked in a panel discussion what was his basis for calling himself “a small government
person,” Becker (in Harcourt, Becker, and Ewald 2013, p. 19) responded: “It comes from a
belief that the government usually makes things worse, rather than making them better, for the
bulk of the population. … I am making the judgment that whatever the imperfection when the
private sector operates, the effects are worse when I see the government operating. Now other
people may say that the evidence for that is not so clear, that in other sectors it is different. I
recognize that. But that is what it would be based on.”
29
the basic implications of the theory of the investment in human capital is that there is underinvestment in people coming from poorer backgrounds.”
Here are five statements calling for government intervention into the human capital
market from his Business Week columns (Becker and Becker 1997):
The federal government has a limited but valuable role to play in raising skills. Its
loan program to college students should be expanded. [p. 66]
One way to provide incentives for poor parents [in the Third World] to look out
for their children’s interests is to give them a bonus that offsets the income loss
from keeping children out of the labor force. [p. 68]
I advocate subsidies to improve the job skills of dropouts as part of my “G. I.
Bill” for ghetto youth. [p. 71]
We should change the present welfare system to make benefits depend not manly
on the number of children but on what parents do for each child. Benefits should
rise when children attend school regularly or when they are taken for health
checkups, and they should fall when parents are on drugs or when children do
poorly in school. [p. 72]
Federal assistance can help college students finance the large and rising cost of
higher education without imposing the burden on taxpayers. Student loans with
appropriate fixed interest rates and with paybacks contingent on the financial
success of borrowers would achieve this worthwhile purpose. [p. 81]
Ben Jackson. Historian Ben Jackson (2016) has described human capital theory as “a
further strand of neoliberal thought” that attempted “to abolish altogether the distinction
between labour and capital.” In this manner the theory threatens that “the category of labour,
and associated ideas of class” will be “displaced from social analysis altogether by the
expansion of the concept of ‘capital’ to include the very economic interests that purportedly
stand in opposition to it.” It is true that human capital theory creates problems for a Marxian or
other analysis that posits an inherent antagonism between a labor class and a distinct capitalist
class. But this is not an argument against human capital theory except for someone
30
precommitted to using class analysis even when non-holistic (marginalist and methodologically
individualistic) explanatory tools become available.
Jackson correctly recognizes that human capital analysis “could even be turned in a
social democratic direction, since it could be used to argue that substantial public investment in
education and healthcare would enhance economic dynamism and efficiency.” He does not
seem to recognize that Becker made such arguments himself in Business Week and elsewhere,
as quoted above.
Becker (1999, p. 16) offered a straightforward explanation for why academic thinkers
committed to Marxian exploitation theory did not like human capital theory:
I should add that the concept of human capital remains suspect within academic circles
that organize their thinking about social problems around a belief in the exploitation of
labor by capital. It is easy to appreciate the problems created for this view by the human
capital concept. For if capital exploits labor, does human capital exploit labor too—in
other words, do some workers exploit other workers? And are skilled workers and
unskilled workers pitted against each other in the alleged class conflict between labor
and capital? If governments are to expropriate all capital to end such conflict, should
they also expropriate human capital, so that governments would take over ownership of
workers as well? You can see why an idea developed to understand the economic and
social world has been thrust into ideological discussions.
Becker and Foucault
During January through April of 1979, the celebrated philosopher Michel Foucault gave
a course of twelve lectures on political economy, in French, which have been transcribed from
tape recordings, edited for clarity, and made available in an English translation (Foucault 2004).
Lectures 4-6 deal with “German neo-liberalism”, which is to say Ordo-liberalism. Chapters 9-11
deal with “American neo-liberalism,” focusing respectively on Becker’s analyses of human
capital (9), crime and punishment (10), and further applications of the economic approach to
human behavior (11). The respect that Foucault accords to Becker’s work touched off
31
something of an ongoing intellectual crisis among followers of Foucault on the left: Could the
master really have been as sympathetic to neoliberalism as he seems? David Newheiser (2016,
pp. 4-5) notes that “the neoliberal reading of Foucault remains influential.”10 Our focus here is
not on Foucault’s relationship to neoliberalism, but on his assessment of human capital analysis
and its importance. Gary Becker did not respond directly to Foucault himself, but he did
participate in two panel discussions at the University of Chicago with two leading scholars of
Foucault, François Ewald and Bernard E. Harcourt. There Becker commented on the lectures,
having read them in advance, and responded to his co-panelists’ interpretations (Becker, Ewald,
and Harcourt, 2012; Harcourt, Becker, and Ewald, 2013).
In a nice turn of phrase, Foucault (2004, p. 226) ascribed to Becker the concept of a
homo economicus who is not just an exchanger, as classical economics had it, but who is “an
entrepreneur of himself.” Foucault then described the concept of human capital quite well:
So, we arrive at this idea that the wage is nothing other than the remuneration, the
income allocated to a certain capital, a capital that we will call human capital
inasmuch as the ability-machine of which it is the income cannot be separated
from the human individual who is its bearer. …In other words, the neo-liberals …
are led to study the way in which human capital is formed and accumulated, and
this enables them to apply economic analysis to completely new fields and
domains.
10
Newheiser immediately adds: “For this reason, I aim to rebut its main claims by examining
Foucault’s engagement with the economist Gary Becker. …In my reading, Foucault shows that
neoliberal economics allows behaviour to be governed with a light touch, by manipulating the
range of choices available. …Rather than valorizing the tolerance of Becker’s approach,
Foucault observes that ‘in Becker’s definition . . . this homo oeconomicus appears precisely as
one who can be manoeuvred, someone who responds systematically to systematic modifications
that one introduces artificially in the environment’ (Foucault, 2004: 274).”
32
Gary Becker’s response (Becker, Ewald, and Harcourt, 2012, p. 10) to lectures 9 and 10 was
predictably positive: “I was very happy to read these two lectures, which impressed me in a
number of directions. They are very clear, I thought. He had a good understanding of what
human capital consisted of. I didn’t find a clear criticism there of human capital.”
Becker was pressed by Harcourt (p. 9) to respond to what he considered Foucault’s
“sharpest critique of the idea of human capital,” namely that “the notion of investing in human
capital” as a matter of national policy will lead policy-makers to make “discriminations as to
which parts of the population you invest in, and which parts of the population ... are not worth
investing in.” Harcourt implied that such discriminations would be invidious. Becker (pp. 1112) pushed back by arguing that for any rational investor, public or private, choice among
investment projects on economic grounds (not invidious grounds, but on expected rate of return)
is unavoidable. But discrimination of that sort, focusing on potential rate of return, works in
favor of the disadvantaged in society, in contrast to a policy of replicating existing economic
and political classes. I quote this passage at length because here Becker made it clear that the
policy aim of his economic liberalism was to criticize and not to bless the status quo:
I feel I belong in a classical liberal tradition, and human capital expands on that
liberal tradition by saying, yes, it’s important who you invest in, but it doesn’t
mean you’re only going to invest in people coming from rich backgrounds. …
[T]he problem is how do we get more investment in people who have the talents
and so on, but they’re at the disadvantage of being born into poor and low
educated families, and they’re suffering because after a few years they are already
behind in the starting point? That’s what the human capital analysis would stress.
… How do you overcome the, what we call, under-investment in the human
capital of people who are disadvantaged. Now, maybe that’s because of power
relations. They don’t have enough power, and they’re neglected in society. … So
we try to create an analysis that fights against that view. That says that neglect of
this part of the population is not only inequitable, but also inefficient. … That’s
one of the aspects of the neglect of the human capital investment in people from
poorer backgrounds. You can invest in them more. That’s more equitable, most
33
people would say that’s more equitable, but it’s also more efficient in a variety of
circumstances.
Becker was then challenged by François Ewald (p. 17) as to whether his treatment of the
economic agent as a predictable responder to incentives did not play into the hands of illiberal
governments: “we can modify his behavior with a choice of stimuli. And what government is,
what power is, is the use of different kinds of stimuli.” Government can use Becker’s theory to
control people “like dogs in a Pavlov experiment.” Becker (pp. 17-18) responded that he
thought about human capital theory in very different terms:
I see human capital as really doing just the opposite, if I can be blunt: as freeing
up individuals. … What the theory of human capital says is that people—it’s part
of the theory of human development—people can develop themselves in various
ways. …
I would say the vision of man is rich in this approach, because you enrich … what
people do … in terms of their education, how they might invest to respond to
different government laws, how they might evade bad laws. … It wasn’t part of
the so-called economic man before the theory of human capital was developed.
That broadened the choices available to people, not narrowed them.
Becker (p. 18) credited the human capital concept with leading to his later work pushing the
model of individual choice beyond the traditional homo economicus to include other-regarding
preferences, and self-investments in “personal capital” and “social capital”:
[The] traditional view of economic man—they’re selfish, and they have certain
particular preferences, ideas and they just do it, they don’t care about anything
else—yes, that’s a caricature. … The movement pushed by the human capital
point of view, is to say that’s a bad fiction. People are much more complicated
than that. They have concerns about other people, not only in the family and
outside the family, and they can take actions to improve themselves. They’re in
different dimensions, so to me it’s an uplifting point of view, rather than a
limiting point of view. … So I find it very difficult to agree with the notion that
it’s a demeaning view of the individual.”[18]
34
Conclusion
Human capital analysis, as pioneered by Gary Becker and others, has proven itself a
valuable addition to the toolbox of neoclassical labor and growth economists. The success of the
human capital research program is reflected in the fact that, as the decades have passed, its
opponents have moved to the margins of economic discourse.
35
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