October 1992, the Royal Swedish Academy awarded the Nobel Prize
in Economic Sciences to Gary S. Becker, University Professor of
Economics and Sociology at the University of Chicago. Becker was
cited at the time for “extending the domain of microeconomic analysis
to a wide range of human behavior and interaction, including non-market
behavior.” A big part of the research for which Becker was recognized
was his work on human capital, and specifically the return on
investment of education and training. His 1964 book Human
Capital was a landmark study and for all practical purposes
first put the concept on the map as a subject worthy of economic
discussion. Since then, he has both continued his research, expanding
and refining the topic even more, and also stimulated hundreds
of books, articles, and treatises of other scholars and commentators
who have replied to, challenged, or extended his original thinking.
It would not be overstating the case to say he spawned an intellectual
industry of debate about the most fundamental topic now in the
We were delighted
to have the opportunity to talk about human capital, more relevant
than ever, with this founding father of the topic. Follows are
some excerpts of the LiNE Zine interview, conducted with Gary
in late February at the University of Chicago.
LiNE Zine : It’s been
almost forty years since your first work on human capital and
almost a decade since your Nobel Prize. How has your thinking
evolved or changed on this topic since then?
Becker: Well, the first edition of my book was 1964,
and there were subsequent editions in the 1970’s and 1990’s. Of
course I’ve learned much since then. We were really dealing with
virgin territory in the early days; I suffered a lot of criticisms
for applying the notion of capital to people, to human beings.
We had to overcome a lot of initial opposition.
some factors have become more important recently and in a few
other cases I see that I didn’t really give certain factors enough
The New Economy
seems to have increased the value of education. In the early 1970’s,
it looked as if the returns for a person’s investment in education
were going down. Dick Freeman, a very good economist at Harvard,
wrote a book called The Over-Educated Americans, arguing
that we were getting too much education, and that the pay-off
wasn’t there. But just about the time that this book came out,
the trend started to reverse itself. For the last twenty-five
years we have had a remarkable expansion in the returns on that
kind of investment, especially college education, and in the 1990’s,
even more so, on graduate education.
In the New Economy
and our technologically more advanced world, skills conferred
by college education have become more important. Although other
factors may be at work, there are remarkable returns to be seen
now, and it’s observable in all groups: men and women, whites,
African Americans, Hispanics.
The second area
which has benefited from more recent work is on the macroeconomic
aspect of education and other human capital investments—that is
the contribution of education to economic growth. The research
began with my teacher and colleague Theodore Schultz who also
won the Nobel Prize in economics, but it has received further
emphasis in the last fifteen years or so years. There have been
studies of over one hundred countries and there’s hardly a country
that has achieved rapid economic growth without significant investments
in elementary and secondary schools, and finally in higher education.
(The one exception has been oil-rich countries like Arab sheikdoms
whose growth has been based on natural resources).
LiNE Zine: Gary, what do you see as the role of technology
and its place in either facilitating or extending the ability
of human capital to be a critical source of value? Is technology
really becoming more important, or is that overblown?
Becker: I think technology—computers, Internet, other
technologies—are important in many different ways. First, of course,
modern economies depend upon modern technology; you couldn’t have
a modern economy with the technologies of the 19th
century. Secondly, these technologies themselves are produced
by people with lots of human capital; you need human capital to
build and then make effective use of these technologies. One reason
that less-developed countries haven’t adapted more advanced technologies
is that they do not have the human capital that allows them to
effectively utilize the technology. Finally, the new technologies
are going to significantly impact the acquiring of this capital.
Education and training and knowledge will experience revolutionary
change through distance learning. Today, most learning in schools
still takes place in the same way that it did in the time of Socrates:
a group of people gather together with a teacher who conveys knowledge.
The problem here
is that it is costly to gather people together in the same room
in the same university. So people are now asking, “why not try
to utilize the technology so I can learn at work or at home and
pursue courses and degrees in this more remote fashion?” And by
the way, good distance learning is not a video where you just
see a professor lecturing. It’s got to be more interactive: graphics,
back and forth questions, chats with other people involved in
the learning experience, and the like. We’re just at the beginning
of understanding the possibilities.
LiNE Zine: Given your interest in market economics, what
do you make of the evolving phenomenon of so-called human capital
markets on the Internet? Or the idea of making skills more portable,
as in current discussions about knowledge workers each having
their own “skills passports”?
Becker: Well, I see this beginning to happen, and I’d
mention two dimensions of the evolution. First we can expect to
see more employment exchanges in which jobs and people are being
matched on the Internet, matching the right skill to the right
demander. That will increase in scale. The second dimension is
about the sourcing of skills from lower cost economies; that is
only going to grow. Since India is producing some very good software
engineers, why not farm out the work there, and have them communicate
through the Internet with other people working for the same company?
Some may be in South America, others may be in the United States
or China. The division of labor will become more and more worldwide
LiNE Zine: Given the kind of trends you see and we’ve
been discussing, what are the new management imperatives? What
should senior executives be thinking about in managing and developing
Becker: Well, a few thoughts—but understand
I’ve never had to meet a payroll! First, the need to keep updating
skills. Given the rate of change in technological progress, there’s
an ongoing need for investment. Skills don’t last a lifetime.
They depreciate. Any company has to recognize that not only is
the human capital of their employees a major asset, it is also
a depreciating asset that needs continuing investment. A finance
officer with an MBA in finance from say twenty years ago will
not know much about options markets, derivatives, options pricing,
and the like. These people need refresher courses, to learn new
techniques about the risk management of their company’s resources.
It’s the same in every area: marketing skills, IT skills, how
the Internet operates—everyone needs to keep updating skills.
LiNE Zine: You made a now famous distinction between so-called
generalized knowledge and company-specific knowledge in your work
on human capital. Do you still stand behind the different kinds
of knowledge, and how does that difference affect planning today?
Becker: That distinction is now either explicit or implicit
in most literature in the human capital area, and still has a
lot of common sense behind it. There are some skills that people
acquire that they can use in many companies, while other skills
or knowledge is really highly specific to a particular company
or maybe to only a small set of companies. For example, for me,
the culture at the University of Chicago is very different from
the culture of competitors like Stanford or Harvard; if I were
to leave Chicago, I would lose that knowledge and I would have
to acquire something comparable at another university. These differences
can be found in pretty much all companies now, and the distinction
also applies to particular technologies and the knowledge required
to apply them. Some technologies are transferable as one moves
from company to company; others are specific to how a particular
company is organized and run. If you leave that company, that
knowledge becomes obsolete. We can observe that when workers leave
a particular company, their earnings will often be less; their
company-specific skills are not as valuable, and thus they have
to start over with new skills in a new company.
LiNE Zine: Does that distinction imply that companies
should make much greater investment in the company-specific kinds
Becker: Yes, I would argue that most investments in learning
for employees should be in company-specific knowledge. If workers
acquire a general knowledge while employed, they’ll benefit more
than the company if and when they leave; accordingly, workers
themselves should pay for that knowledge through lower wages initially.
Companies should be willing to pay for company-specific knowledge
because it helps lock the worker into the organization. He or
she will earn less from that knowledge in another company.
LiNE Zine: Do you believe that in the future workers will
be paying for their own general knowledge or taking a lower wage
because they are essentially becoming more mobile with those skills?
Becker: Absolutely. Ever since my original work, study
after study has shown that workers are willing to invest in acquiring
general knowledge by accepting lower earnings. And as we said
before, we also see workers taking a hit when they move from one
company to another when they have acquired company-specific skills.
LiNE Zine: A lot of the work that began with yours has
equated human capital with knowledge and skills. Two professors,
Chris Bartlett of Harvard Business School, and Sumantra Ghoshal
of London Business School, have been working on a new management
theory of human capital—and they define it as also including so-called
social capital (value from relationships) and emotional capital
(value from engagement and commitment). What do you make of this
fuller definition of human capital?
Becker: I certainly think social capital is important;
I’ve worked on that myself and just came out with a book called
Economics. Yes, social capital is a form of human
capital. When I spoke about corporate culture before I was really
talking about social or corporate capital—how people are connected
with a company. Social capital as a concept has become very popular
in recent years; but it is very difficult to quantify, and emotional
capital would be even more so. But they do seem important because
they do affect the productivity of individual workers and certainly
of companies overall.
LiNE Zine: Gary, any closing remarks or advice for our
readers, looking ahead to the future?
Becker: I would start out with some obvious things that
are still sometimes forgotten: the basic resource in any company
is the people. Remember Bill Gates’ famous comment that if you
took away the top thirty employees at Microsoft, it would be a
pretty ordinary company. And what’s true for companies are true
for nations as well. In the New Economy, the reliance on people
hasn’t fallen, but has increased. We are much more a human capital
based economy than the economy was even thirty years ago.
The most successful
companies and the most successful countries will be those that
that manage human capital in the most effective and efficient
fashion—investing in their workers, encouraging workers to invest
in themselves, provide a good learning environment, and yes, include
social capital as well as skills and training.
I also think the
best companies will set up human capital accounting systems. Companies
don’t have to do that under present tax law because you can expense
all your expenditures on human capital, but in order for a company
to know more about just what human capital is costing and what
the payoff is, they want to track and assess the return on investment.
I can also foresee them publicly reporting what they spend and
invest in this area. In this age when human capital is such an
important form of capital, how could they not want to do that?
Gary S. Becker,
winner of the Nobel Memorial Prize for Economic Science in 1992,
is a Professor of Economics and Sociology at the University of
Chicago and a Senior Fellow at the Hoover Institution and University.
He is recognized for his expertise in human capital, economics
of the family, and economic analysis of crime, discrimination,
is the Publisher of LiNE Zine. Reach him at firstname.lastname@example.org.
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