Equality in the Age of Human Capital

Three quarters of America’s wealth is invested in its people, writes Gary Becker. He argues that while physical capital is still matters, human capital now matters more. Where once a nation’s wealth lay in the fertility of its soil, today it lies in the knowledge, skills and health of its population. The increasing interest in human capital has had a profound impact on the politics of egalitarianism. How do you redistribute wealth if it isn’t something people have but is part of who they are?

How much are you worth?

In his Treatise on the Family, Becker writes about the ‘quality’ of children. High quality children are able to benefit from future investments in education and, as adults, are likely to command a high price in the labour market. Low quality children are more likely to struggle at school and are likely to graduate to low-paid unskilled work (or dependence on welfare). Becker’s definition of quality is uncannily similar to Thomas Hobbes‘ definition of worth:

The value or worth of a man is, as of all other things, his price; that is to say, so much as would be given for the use of his power, and therefore is not absolute, but a thing dependent on the need and judgment of another.

In the language of human capital, people are commodities. Each of us is an elaborately transformed good — the product of the raw material of our genes our diet, our upbringing and our education. Human capital isn’t something that we have, it’s who we are. It’s almost impossible to imagine ourselves without the human capital we’ve developed since we were born. To do that, is to imagine ourselves as different people.

The poor are different

Educational attainment is one of the clearest markers of human capital. Researchers sometimes use it as a proxy for socioeconomic status. In a recent post, Ezra Klein points to a new study showing that highly educated Americans are far less likely to die prematurely than poorly educated Americans. He slides effortlessly from this finding about low educational attainment into a discussion about poverty:

… the poor are not just different because they have less money, but because their lives are substantially worse, and worse in ways that better social policy could help alleviate.

Klein’s commenters were quick to speculate about how the poor might be different. Sancho pointed to a quote by one of the researchers — "The trend is best explained by tobacco, obesity and high blood pressure". Sancho’s conclusion was that poor people were making themselves unhealthy. Another commenter, MFA, suggested that poor people were incapable of making healthy choices :

The poor receive low-quality education. They grow up in environments that retard both physical and mental development. As a result they are less likely to properly assess the risks of the behavioral choices they make.

At The Fly Bottle, Will Wilkinson argued that lack of education and poor health had a single cause — time preference. Getting an education means sacrificing time and income in the short term in order to reap larger benefits in the long term. In the same way maintaining good health means sacrificing junk food and indulging in exercise now in order to reduce the risk of death and disease later.

In a review of the literature, economist James Heckman writes that, "Cognitive and noncognitive skills — self-regulation, motivation, time preference, far-sightedness, adventurousness and the like — affect the evolution of health capital through choices made by parents and children." He argues that many of these skills develop during early childhood and form the foundation for later learning. Children who miss out on these early opportunities for development are unlikely to benefit from the kinds of education and training that could give them access to high income jobs as adults.

Heckman’s solution is to create programs specifically targeted at children from disadvantaged backgrounds. In contrast to thinkers like Peter Saunders (CIS) who focus on intelligence, Heckman argues that: "Enriched early intervention programs targeted to disadvantaged children have had their biggest effect on noncognitive skills: motivation, self-control and time preference."

Saving Epponnee-Rae

These research findings on early childhood create a dilemma for egalitarians. On the one hand, the research suggests that publicly funded investments in early childhood could significantly improve the well being of children from disadvantaged families. But on the other hand, they seem to be stigmatising less educated adults — particularly those who are unable to work and depend on welfare benefits. The poor are portrayed as underdeveloped human beings — ignorant, lethargic and unable to control their impulses. Worse still, their parenting practices have been identified as an important cause of intergenerational disadvantage.

This has a familiar ring to it. In the early 19th century Alexis de Tocqueville warned that England’s system of poor relief was cultivating a class of unproductive and disorderly citizens:

The number of illegitimate children and criminals grows rapidly and continuously, the indigent population is limitless, the spirit of foresight and of saving becomes more and more alien to the poor. While throughout the rest of the nation education spreads, morals improve, tastes become more refined, manners more polished — the indigent remains motionless, or rather he goes backwards. He could be described as reverting to barbarism. Amidst the marvels of civilisation, he seems to emulate savage man in his ideas and his inclinations (pdf).

It’s a fear that’s never really gone away. Recently, the Age’s Russell Skelton spoke with a group of Indigenous elders in Walgett about the effect of the Australian government’s baby bonus:

"My daughter has four kids and she cannot read or write," says a member of the group, who feels powerless as a parent. It will become a terrible circle, predicts another: "Kids who cannot read or write have babies that won’t be able to read or write. But nobody can tell them that. They don’t want to listen."

Some egalitarians worry that embracing the rhetoric of human capital means joining with conservatives to slander to disadvantaged. Social welfare initiatives become less about social justice and more about social control. Instead of focusing on the obligations of the rich, the human capitalists increasingly focus on the behaviour of the poor.

There is also a tendency for policies directed towards the highly disadvantaged to bleed over into those directed towards all less educated people. For example, taxes on junk food are premised on the idea that consumers will make better food choices if policy makers use financial incentives to make up for inadequate levels self control. It’s no secret that these initiatives are often created with less educated consumers in mind.

Having a cabernet quaffing university graduate tell you that they’ve taxed your ready-to-drink bourbon and Coke for your own good can sound a little elitist. And who wants to have some over-educated do-gooder telling you that the country would be better off if your children grew up to be less like you and more like them? It’s no wonder conservatives have had so much success winning over voters from less educated households.

Looking backwards

Nineteenth century egalitarians like Edward Bellamy argued that the rich were parasites who fed off the labour of the poor. In his socialist utopia this unproductive leisure class was abolished and the means of production were put back into the hands of the workers. In old fashioned socialism, social justice was fundamentally about the redistribution of material wealth. But today, many highly educated egalitarians see unskilled labour as drain on productivity. They see wealth as a product of investments in education, creativity and innovation rather than long hours, physical dexterity and effort.

Karl Marx must have had an inkling of how risky it was for socialists to think this way. In the the Grundrisse he argued that technological progress was not so much the application of scientific knowledge and human creativity to production as the absorption of the workers’ activity in the machine:

Thus, the specific mode of working here appears directly as becoming transferred from the worker to capital in the form of the machine, and his own labour capacity devalued thereby. Hence the workers’ struggle against machinery. What was the living worker’s activity becomes the activity of the machine. Thus the appropriation of labour by capital confronts the worker in a coarsely sensuous form; capital absorbs labour into itself – ‘as though its body were by love possessed’.

This strange imagery of machinery possessing the bodies of workers seems like an elaborate way of avoiding a simple question — if technology is the product of the creativity or the few, then how can unskilled labour be the ultimate source of value? This is the kind of question that leads to Ayn Rand’s upside-down, inside-out Marxism. According to her theory, it is unskilled workers who are parasites and inventors and engineers who are the source of value. For Rand, minimum wages and welfare are nothing short theft.

Prices aren’t values

To come to terms with the new focus on human capital egalitarians need to reject the idea that a a person’s moral entitlements are somehow tied up with their productivity. Egalitarianism flows from the idea that all human beings are entitled to equal concern and respect. It has nothing to do with the meritocratic claim that a parasitic class of super-rich business executives and investors are feeding off the wealth created by ordinary working people. Egalitarian redistribution is not about giving people back what they’ve earned.

Egalitarianism also has nothing to do with the claim that all human beings are born with the same cognitive potential. A person’s life is not less worth living just because they have trouble learning calculus, interpreting legislation or writing essays on Heidegger. And, despite anything Thomas Hobbes might say, a person’s value as a human being has nothing to do with their ability to be economically productive. It certainly has nothing to do with the price of their labour.

So it seems to me that the reason it’s important to develop human capital is not because an educated person’s life is worth more than that of an uneducated person’s, but because greater productivity means greater opportunities for everyone.

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47 Responses to Equality in the Age of Human Capital

  1. Pingback: Will Wilkinson / The Fly Bottle » Blog Archive » The Politics of Human Capital

  2. Pretty much nobody is an egalitarian then, and you can prove it empirically by asking them the following question: Say you have the chance to donate a kidney to save the life of one of two people. One is a highly skilled doctor who saves dozens of people’s lives every year, the other is an illiterate manual laborer. (Assume both are nice people and both have a wife and two kids.) Do you: A) give your kidney to the doc, B) give it to the laborer, or C) flip a coin. The latter would be the egalitarian answer, if egalitarianism means what you say it means. Want to place any bets on what the distribution of responses would look like?

    Of course you could argue that saving the doctor is really the egalitarian choice since saving his life would also save lots of other people’s lives, and concern for them should weigh into the decision too. But then it just collapses into standard consequentialism. I don’t think you’d find anyone credible who’d argue that remuneration perfectly tracks value — measuring value is an epistemically hard problem, and while market rewards do a surprisingly good job of approximating it they’re really only as good as our knowledge, which isn’t always very good — but to say that someone’s productivity has *nothing* to do with what they’re morally entitled to is just as indefensible, I think.

    Also, self-control *is* a cognitive skill. “Executive function” is used synonymously with “cognitive control” in the psych literature, and measures of it are tightly correlated with measures of other things like working memory and fluid intelligence. But conscientiousness (in the Big Five sense) is only about 40% heritable, which means there probably is a lot that can be done to inculcate values and habits that promote it at a young age. Being that it’s the second-best predictor of productivity after IQ (IIRC), it could indeed be hugely beneficial.

  3. Patrick says:

    To someone raised a Catholic, those penultimate two closing paragraphs all sound very familiar and uncontroversial. The final paragraph is a good point, too, and a good way of looking at it.

    Thanks for the interesting post!

  4. Don – As before, you get Pete S a bit wrong – as you’d have seen if you’d kept reading from part 1 of the paper you cite to part 2. There is not much you can do to increase a person’s intelligence, but you can improve their social and other skills.

  5. Gummo Trotsky says:

    There is not much you can do to increase a persons intelligence, but you can improve their social and other skills.

    And by improving their social skills, make them fit for careers of personal and domestic service. Saunders’ vision of the way forward for ‘low ability workers’ is to return to the Edwardian era. The main social skills he wants to see improved in ‘low ability workers’ is the the habitual deference of an Edwardian domestic servant.

  6. Gummo – Your assumption that service work is demeaning is just the kind of problem that Don is talking about in his post.

    Personally, I fail to see why assembling things in a factory is better work than providing personal services.

  7. Gummo Trotsky says:

    Where did I express the opinion that service work is demeaning Andrew?

    What I find demeaning are the assumptions that underpin Saunders’ argument that ‘low ability workers’ should be taught social skills to make them fit for service occupations:

    (1) That such workers exist, and are identifiably dumber than average;

    (2) That, since they’re useless for anything else, the best thing to do is to train them up in ‘social skills’ – mainly how to dress nice and be polite – so that they can take up jobs in personal and domestic service at minimum wages.

    To define someone as ‘low ability’ and therefore fit only for factory work or such work as might be available to someone whose main skills are keeping themselves nice is demeaning to that person – not because of the nature of the work, but because they’ve been deemed inherently inferior and therefore not worthy of better.

  8. Gummo – I haven’t read Pete’s paper for a few months, but as I recall it (and the associated literature) it is extremely difficult to successfully build academic success in adulthood with people who did not master the basics at a young age. This is also what the left says these days (indeed, their argument on early childhood education is remarkably similar to the intelligence argument – except that they say it is all over a 4 or 5 rather than birth).

    Given the realistic alternatives are welfare or service work. There is nothing demeaning about doing any task well, even if some tasks are more valuable to the society as a whole than others.

  9. Dave Bath says:

    While I’m in total agreement with the thrust of the article, and the arguments it uses, I think that the discussion of relevant metrics leaves the wider debate open to criticism of being “touchy-feely”.

    It’s surprising that an article on human capital doesn’t mention the United Nations Human Development Program (unhdp.org), nor the human development indices (HDI) that munge together metrics for both health and education (which are key determinants of productivity), and a primer on measuring human development.

    A greater focus on human development indices (nearly synonymous with human capital) rather than indices based on gross and per capita dollars, would shift government policy to more useful outcomes for citizens.

    It’s worth noting that HDI are not entirely correlated with national income and GDP, because different countries are more efficient at supplying health and education. NZ is more efficient than Australia, Bangladesh than PNG. Cuba, despite a third world income, has better HDIs than many EU wannabees (more doctors per capita than anywhere else, and infant mortality lower than the US might have something to do with it!).

  10. observa says:

    Or you could redesign the constitution of our marketplace to increase demand for those with mainly their physical labour to sell. More reward for honest toil rather than burning fossil fuels. Anyway, with peak oil perhaps it’s the meek shall inherit the dearth soon.

  11. RnBram says:

    This is the kind of question that leads to Ayn Rands upside-down, inside-out Marxism. According to her theory, it is unskilled workers who are parasites and inventors and engineers who are the source of value. For Rand, minimum wages and welfare are nothing short theft.

    Nothing like an out of context butchering of another’s ideas in order to make a completely phony point, and seem smart. Either you cannot read effectively, or you should work with Michael Moore. Such dishonesty is apparently marketable.

    So here is this site, discussing long bankrupt arguments such as Utilitarianism, and the intrinsic worth of various classes of people (which is about as intellectually original as the despicable Indian caste system). There is no distinction as to context, so it is unclear whether statements about a person’s ‘worth’ are ascertained metaphysical;y, politically or ethically. Bottom line: * metaphysically humans are unique individuals, no matter how many may exist.
    epistemologically each human has his own ideas and is not free if he cannot act on them (which means he cannot interfere, willy nilly, with the ideas and actions of another, thus each individual is protected from every other. (See the Declaration of Independence and U.S.Constitution on Rights).
    * ethically every human must live for himself, never coerce another out of liberty or property, and resist those who would do so to him.

    Gulliver’s Travels made fun of ‘scientists’ arguing over how many angels could dance on the head of a pin. Well, here, at this site, his vision has materialized.

  12. Gummo Trotsky says:

    Gullivers Travels made fun of scientists arguing over how many angels could dance on the head of a pin.

    Must be a different edition of Gulliver’s Travels to the one I’ve got. And epistemology is a branch of metaphysics. If you’re going to dress up your spluttering in the finery of philosophical jargon, at least try to get it right.

  13. Matt C says:

    Thanks for this post. Things like this keep Troppo firmly ensconced in my RSS reader.

  14. Patrick says:

    I wonder what proportion of the people on this site are in professional services? I am, and I don’t find it demeaning. In fact, I didn’t find working as a waiter demeaning either.

    I agree with Andrew Norton that overcoming social prejudice against working in personal services is very important. Consider doing without aged care workers, nurses, cleaners, hospitality staff, taxis, etc.

    ~ ~ ~

    Cuba, despite a third world income, has better HDIs than many EU wannabees (more doctors per capita than anywhere else, and infant mortality lower than the US might have something to do with it!).

    So Cuba does better than most of the ex-soviet bloc and ex-Yugoslavia (but not Poland, the Czeck Republic, Croatia, Slovakia, Slovenia, Cyprus, Lithuania, Latvia or Estonia). Those countries’ excuse for such dismal performance is self-evident, what’s Cuba’s?

    Oh, wait, they have all emerged from corrupt dictatorships and/or ruinous war.

  15. Fred Argy says:

    Don, you raise some difficult and challenging issues and you have started a great debate.

    From a purely ethical stance you are of course right: a persons value as a human being has nothing to do with their ability to be economically productive but you and I have agreed in the past that a government cannot convince the electorate to support ambitious human capital programs if the effect (through higher taxes) is to make the size of the cake smaller and most people worse off – especially when a country is facing an ageing population – or if it risks adding to welfare dependence. So governments have to spread their social investment over time and ensure that the programs they select are economically productive i.e. self-funding over the long term. Fortunately it is possible to find many human capital programs which (on the evidence) achieve both goals giving individuals greater opportunity to fulfill their potential and broadening the productive base of the economy. That is the way I am able to wear my two hats as an egalitarian and as an economist.

  16. Dave Bath says:

    Patrick – One of the HDI components involves money – something trade embargoes tend to stifle. It’s the EFFICIENCY of turning money into human outcomes that makes Cuba outstanding, and the fact that it is the ONLY country in the world that meets UN goals for both human capital and environmental sustainability (via the GHA metric – Global HectAres per person), something even The Economist gives Castro grudging respect for.

  17. Patrick says:

    I noticed that it looked like they included carbon emissions in the stats – wtf? The poorer you are the higher your DHI?? That’s insane.

    I don’t really give Cuba any credit at all – consider these posts from the much-better informed-than-I Brad DeLong and Tyler Cowen.

    In particular:

    A simple checklist would start with the question of whether an apologist has visited both the Dominican Republic and Cuba. And a non-communist Cuba could have done much better than the DR. It is a fascinating place for visitors, but right now the quality of life in Cuba isn’t close to that of the DR or for that matter Honduras, the second-biggest Latino mess in the hemisphere. While we’re at it, let’s not forget northern Mexico or even central Mexico. It’s time to stop apologizing for communist dictatorships; are you really so taken with the idea of confiscating property as to overlook decades of tyranny, impoverishment, and human misery? Yes I am familiar with the UN social indicators; I say you need to visit each of these countries, preferably speaking Spanish, and then report back to me.

  18. RnBram says:

    Gummo you may be right. First, the proper saying is “how many angels can dance on the point of a needle?”. Second, I found no specific mention of the saying attributed to Gulliver’s Travels. However, Swift was indeed making fun of the tortured intellectual arguments used by ivory tower academics. I likely associated that saying from angelology with Swift. My point remains, however, that arguments get so at odds with reality that they lose all reason… which is rationalizing.

    For example, David Bath et al‘s positive remarks on Cuba are based on a couple of statistics, while context-dropping all sorts of other very important and over-riding truths. These truths show Cuba to be a terrible place to live, as having inadequate health care and egregious shortages of even the most basic pharmaceuticals (Tylenol 3, for example) although anything one could ever want is available near the tourist resorts which provide the money that lines the pockets of the Castro power clique. It must take a heck of rationalist mind to be so approving of Castro given the large number of Cubans in Florida, and lost to the sea, who risked their lives to leave… see comment 17. It’s pretty clear they knew the Cuban system well, and did not benefit from whatever the (socialist) UN statistics indicate about Cuban demographics. Cuba does not even deserve “grudging” respect.

    Metaphysics and epistemology are indeed very intertwined, since one has to ask how one can know reality, which presumes there is a reality and something that has a means to know of it. However, once mysticism (Heaven, the World of Essences, Hell, the Supernatural, angels & Holy Ghosts, reincarnation etc.) have been rightfully purged from metaphysics, it becomes quite a small subject. On the other hand, the subject of epistemology is quite large: concept formation by abstraction, induction & integration; logic (non-contradictory identification); the validity of the senses; the hierarchical nature of knowledge and concepts and so on. When the trappings of mysticism are included in metaphysics that branch can expand ad infinitum. This then serves to add all sorts of rationalistic elements to epistemology as well, making it so dependent on the various mystical approaches that it becomes, inappropriately I thinhk, subordinate to metaphysics.

    Without mysticism metaphysics and epistemology are best treated as two separate branches of philosophy. Many writers do so.

  19. Don Arthur says:

    Andrew N – I think Saunders leans towards the kind of genetic determinism Heckman argues against. Where Heckman concentrates on improving non-cognitive skills through early childhood interventions, Saunders recommendations relate to training for adults and young adults:

    Teach social skills early and reinforce them in schools. Demands to increase the number of students remaining at school to year 12 should be resisted, for we saw in part 1 that marginal students do not benefit from extra schooling, and may even be disadvantaged by it. Yet it is crucial that all students learn basic literacy and numeracy skills, and that schools pay more attention to the informal curriculum, which transmits values like punctuality, respect for authority, politeness, attention to personal appearance, and reliability. Teachers have a crucial function here as role models.

    Id like to see more evaluation research on this. Andrew Leigh has some data on the school retention issue and it would be useful to see some evidence about the effectiveness of training in punctuality, reliability etc.

    As I understand it, Heckmans argument is that the early childhood programs are far more cost effective than programs that try to alter the behaviour of youths and adults.

    I take Gummos point about the disrespectful way conservatives often frame discussion about welfare to work programs.

  20. Don – I think the research is clear that both intelligence and personality have a strong genetic component, but that developmental factors can influence both. This is an orthodox view that I cannot recall any of Pete’s work disputing. There is currently a great interest in the early years of childhood, with the disputes over to what extent formal childcare/pre-school is important. The research suggests that children from severely disadvantaged backgrounds can significantly improve their prospects if removed from grossly incompetent parents and given professional care and assistance. It is far less clear that there are significant advantages for middle-class children, a point Heckman has made in response to what he sees as a misuse of his research.

    The point about the ‘bourgeois virtues’ of punctuality, reliability etc is that they are very valuable attributes that almost anyone can learn, even people with low intelligence, though they are easier for some personality types than others.

  21. David Rubie says:

    Andrew Norton wrote:

    The research suggests that children from severely disadvantaged backgrounds can significantly improve their prospects if removed from grossly incompetent parents and given professional care and assistance.

    You’ll trust the government to do that?

  22. Gummo Trotsky says:

    The last thing I want to do this week is write another bloody blog post on Peter Saunders’ quaint desire to remake Australian society as an Edwardian paradise, where CIS policy wonks can employ cheap nannies and governesses to look after their little wonklings. I don’t particularly want to waste much of today reading the ‘policy analysis’ in my ‘CIS guff’ folder either but it seems that one or two commenters aren’t completely up to speed on Saunders’ actual proposals so a few choice excerpts with commentary may be of some value.

    Here’s the last point of the executive summary of Part I:

    Persistent calls for more education and training ignore the distribution of intelligence in the population. The employment prospects of those in the bottom quartile of the IQ distribution will not be helped by more spending on education and vocational training courses from which they are unlikely to benefit. The best way to help them is to increase the demand for unskilled labour and to equip them with the social skills needed to perform these jobs successfully.

    The consequences for education are fleshed out on page 13:

    With an IQ in the eighties, you should be able to complete year 10 at school, and there is no reason why you should not attain basic numeracy and literacy skills, but you will struggle with the abstract reasoning and complex problem-solving skills required by additional education.

    Other things being equal, we would therefore expect about one quarter of the populationthose with IQ scores in the eighties or lowerto complete their education at year 10. As we have seen, this is exactly what happens in Australia today, where school retention rates have flattened out at around 75% (figure 3).

    Not only will the quarter of the population with IQ scores below 89 tend to finish school earlier, but we should also expect them to gravitate towards relatively low-skilled jobs where complex reasoning is not required.

    Saunders’ sources on the distribution of IQ, and its relation to social status is Hernstein and Murray’s The Bell Curve: Intelligence and Class Structure in American Life. Murray also scores an acknowledgement for his help in writing the paper.

    The educational regime Saunders’ is advocating is that the lower quartile on the IQ distribution be streamed out of schools at year 10 – because any further education would actually disadvantage them domestically – with those all important social skills of “punctuality, respect for authority, politeness, attention to personal appearance, and reliability”. In part two of the paper he discusses how to expand employment opportunities for these punctual, polite, respectful, reliable and well-groomed morons, starting with an old favourite:

    No single policy can expand low-skilled employment. Simultaneous action is needed on four
    fronts: (1) reducing the cost of unskilled labour to employers, (2) making employment more
    attractive than welfare, (3) boosting new personal service employment, and (4) improving
    peoples social skills and competences.

    The ‘new personal service employment’ he’s talking about isn’t ‘professional service’, such as lawyerin’, doctorin’ or policy wonkin’- remember that the lower quartile haven’t got the cognitives to cope with that. What Saunders wants to explore is:

    increased employment in home-based services for the elderly, child care for working parents, mentoring for children in poorer neighbourhoods, and other community-based services.

    This is taken up in more detail on page 9:

    I cannot outsource my lawn-mowing, car-valeting, child-minding, or pizza-delivery needs to low-wage workers in Beijing or Mumbai. Tasks like these cannot easily be mechanised or automated, either.40 At the moment, because the minimum-wage laws make it too expensive to employ people to do these jobs, they are either not done or are performed in the domestic or informal economies (I do it myself, or I pay someone cash-in-hand and off the books). But if minimum wages were lower, more people would be formally employed to perform low-skilled personal service tasks like these. With lower minimum wages, demand for unskilled labour could be expected to rise in many existing service sector industries, like fast food, office cleaning, and laundering, but it is also likely that new job opportunities would open up in services where high minimum wages currently stop people being employed at all. (i.e. mowing the Saunders’ lawn, cleaning the Saunders’ car, riding herd on the Saunders’ policy wonklings and delivering their Friday night pizzas)

  23. DR – I did not mean permanently removed, just during the day for childcare/pre-school.

  24. James Farrell says:

    This is all very interesting, Don. I just have one quibble.

    Youve implied, without explicitly saying so, that weve recently entered an age of human capital. Certainly the concept is relatively new, but that doesnt mean that its application is any more useful now than in earlier phases of capitalism. The attempt to relate income inequalities to skill differentials goes back to Adam Smith, who has an excellent discussion of it, and earlier. The problem is that, in order to establish that skills affect wages in some systematic way, you need to quantify the skills independently of their capacity to capacity earning. The obvious way to do this is in terms of some measure of the quantity of education the worker has undertaken. Once you do this, you can model household education decisions in the same way you model decisions to invest in physical capital, whereby households are guided by the rate of return on their outlay (in terms of fees and income foregone while studying). At the macroeconomic level, you can investigate to what extent educational attainments can account for per capita income disparities between countries disparities that cant be explained, as it happens, by differences in physical capital. Thats what human capital theory is about.

    If it turns out that wage inequality has widened in the last few decades, the question of course is what is driving that development. Is it technological change, altering the proportion of people capable of acquiring the high-earning skills (in the jargon, education has a higher cost for some individuals than others)? Or is it globalisation, which has radically undercut the cost of basic, unskilled labour? But my point and it may not be a very exciting one is that these are fundamentally the same questions Adam Smith was trying to answer. Human capital theory just happens to provide a useful apparatus for answering them.

  25. James Farrell says:

    Translation: ‘capacity to capacity earning’ = ‘earning capacity’.

  26. Saunders Tragic Gummo Trotsky says:

    One last thing on Saunders.

    As evidence that ‘different kinds of jobs require different kinds of intelligence’ Saunders cites a US study by Robert Hauser, and reproduces a graph which plots IQ ranges according to occupation, with occupations ranked by the median IQ of workers in that job. You can view it here.

    I’ve added red lines at the 25th, 50th and 75th percentile divisions and the top of the bar for “janitors and sextons” at the left of the graph, to show how many of these low median IQ workers could be working in higher status, better paid occupations.

    At the top end of the IQ range, some of those janitors and sextons could even be doctors it seems. Or maybe those people at the bottom end of the doctor range should be struck off, as they’re no more intelligent than the most intelligent janitors and therefore a hazard to their patients’ health.

  27. Gummo – Are you arguing against IQ in particular as a specific measure of some generic underlying intelligence, or against the idea that people vary significantly in the cognitive abilities and that this has real implications for the jobs they can competently carry out?

  28. David Rubie says:

    Andrew Norton wrote:

    DR – I did not mean permanently removed, just during the day for childcare/pre-school.

    So, this is an argument advocating compulsory education? I thought that kind of thinking was restricted to leftists?

  29. Gummo Trotsky says:


    In my last comment I’m stating something very simple – Saunders’ evidence that intelligence as measured on an IQ scale is a determinant of occupation and hence social status and income is seriously deficient – the plot of occupations ranked by IQ against IQ ranges in occupations is at bottom, a plot of IQ against IQ. The fact that there are significant degrees of overlap in the IQ ranges for occupations (for example, the bottom 50 percent of social scientists – fifth from the right – which presumably including economists, sociologists and policy wonks) overlaps to a large extent with the top end of janitors and sextons – the occupational group with the lowest median IQ. So what makes the difference between a smart janitor and a dumb social scientist? Since its not IQ, some other factor must be in play. Saunders analysis ignores the large areas of overlap, in favour of a simple reduction of the question to ‘some jobs require smarter people than others’.

    Since Binet first devised his ‘IQ’ test as a diagnostic test, to identify students who were likely to fall behind curriculum requirements, a whole pseudo-science of IQ measurement and IQ determinism has unfortunately grown up, mostly in the US. Saunders’ use of IQ studies to prop up his arguments on the subject of ‘low ability’ workers is in that long, and dishonourable, intellectual tradition.

    There’s no doubt that people differ in particular cognitive abilities and that this shows in childhood development – some kids learn to play the violin quickly, others turn out more or less tone deaf. And so on. It’s one thing to recognise these differences in aptitude and interest and foster them, for the benefit of the child (and the adult she will become). It’s quite another to argue, on the basis of a spurious measure of general intelligence, that some people should just be written off as too dumb to educate and streamed out of the education system as quickly as possible into dumb-worthy menial jobs where all that’s required is to turn up for work on time with nicely polished shoes and a tug of the forelock. I find the latter pretty noxious. YMMV, as gilmae might say.

  30. Gummo – I don’t know the IQ literature well enough to discuss this point in any detail, but I don’t think social scientists believe in ‘determinants’ of anything – just varying degrees of correlation, which when reasonably high and backed by a plausible causal theory give rise to social science generalisations. While I am surprised that high-level professionals get below average IQ scores, there are plenty of reasons why people with jobs that don’t require high intelligence might nevertheless have it: the familiar left-wing ones (discrimination, lack of opportunity) plus life cycle reasons (students working as labourers and shop assistants), lifestyle choices, and bad luck.

    The basic hypothesis that at some point there are diminishing returns from education seems to me to highly plausible, as does the idea that there are bell curves of ability. That some people might be sensitive about where they are on the bell curve is something to take into account, but not a reason to force them to pursue education that may not do them much if any good.

  31. Patrick says:

    While I am surprised that high-level professionals get below average IQ scores, there are plenty of reasons why people with jobs that dont require high intelligence might nevertheless have it

    I would have to go all lefty here and say that high-level professionals are often more highly socially apt than they are necessarily intelligent. Social ease and the ability to communicate will get someone of modest intelligence very far indeed. Assuming a minimum amount of intellectual reserves in the firm, there would often be a greater benefit to hiring an extra socially gifted person at the expense of an extra intellectually gifted person.

    But I wonder if Gummo’s point is just rehashing the debate we had a decade or so ago about trades, TAFEs and yr 12/uni. IIRC that debate was resolved pro-trades anti-uni (for those so inclined/suited) but with a preference for even would-be tradies to complete yr 12.

    There would appear to be a completely separate argument about whether schools should teach people more skills directly useful in life, such as working out interest, mortgage repayments or a post-tax salary, or reading a PDS, etc.

  32. Gummo Trotsky says:

    But I wonder if Gummos point is just rehashing the debate we had a decade or so ago about trades, TAFEs and yr 12/uni. IIRC that debate was resolved pro-trades anti-uni (for those so inclined/suited) but with a preference for even would-be tradies to complete

    I hope not, Patrick. The immediate issue is the idea (imported from the US, where so many bad ideas in the social sciences come from) that IQ is the dominant determinant of social standing. The converse of which (since it seems the point has to be laboured) is that if people are in janitorial jobs, it’s because they’re not intelligent enough to do better.

    And let’s be clear on this (another point that needs to be laboured, it seems): Saunders is quite definitely arguing that view in his analysis of the (very weak) correlation between the median IQ found in various occupations and the total range of IQs around those medians. With other questionable evidence, from questionable sources.

    Now it’s time for me to be off, before I blow even the least semblance of civility. [exit stage left, snarling]

  33. Ken Parish says:

    My own unscientific impression is that you can do quite well in most professions (including law) provided you’re hard working, well-organised and (as Patrick suggests) have good social skills. High IQ is not a critical attribute at all.

    In law, it means “average” students have to work harder at uni to master the more complex and subtle areas, and once they graduate they probably wouldn’t thrive in very complex areas (e.g. as top QCs) but that leaves plenty of scope. In most areas of law, hard work, good organisational and interpersonal skills are actually much more valuable than raw intellect. Quite a few of CDU’s more academically “plodding” undergraduates that I’ve taught have gone on to very successful careers as lawyers.

    I’m pretty confident that this would also be the case in most other disciplines, except ones like (say) philosophy, nuclear physics, pure mathematics etc where sheer intellectual analytical power is a critical attribute. In other words, Saunders is full of the proverbial.

  34. David Rubie says:

    Andrew Norton wrote:

    but I dont think social scientists believe in determinants of anything – just varying degrees of correlation, which when reasonably high and backed by a plausible causal theory give rise to social science generalisations.

    I guess this means we can remove Mr Saunders from the list of social scientists, given he demonstrates no plausible causal theory for his prejudice. Aside from the usual easily debunked IQ correlations that Gummo pointed out, bringing up a confusion (as Andrew does) of what genetics is and what it isn’t doesn’t help. Genetics is not mechanistic as Andrew seems to intimate:

    I think the research is clear that both intelligence and personality have a strong genetic component, but that developmental factors can influence both.

    as if “Genetics” were some kind of computer program that just need the right data (what you inherit) and the right inputs (your environment). It’d be hard to back this assertion up.

    That’s a simplistic view that is now widely understood to be incorrect. From what we know of animal genetics, it’s clear that we can influence a population in particular directions for a small number of easily measured things (physical attributes), but complex things requiring many genes and environmental interactions are far harder to influence. The important thing to remember is that you can statistically influence a population, but you cannot guarantee results for a particular individual – some really poor rams have been responsible for some stunning offspring, and some very poor lambs have occasionally grown up to be effective sires, but pre-judging them by their lineage is a guarantee of failure. It’s performance that counts, and is generally reflected in population statistics.

    While it’s tempting to think there might be a “social gene” or a “dumb gene” in the same way we’ve found Double Muscling, a lot of the genetics guys here think that the easy stuff is finished and the harder stuff will be orders of magnitude harder to decode in much the same way that particles are harder to find in Physics. It’d be best if social scientists stayed out of it if they didn’t want to appear foolish, like new-age healers co-opting the terminology of quantum physics.

    In fact, if you wanted to be seriously wonkish about social policies and genetics, you’d be promoting social mobility and racial blending as a way of finding the best genetics, but I’d guess Saunders wouldn’t be too interested in that.

  35. DR – I wasn’t talking about breeding to improve genetics, just that what you are born with is an important factor in who you become (as the numerous studies of separated identical twins suggest).

  36. JC says:

    David R:

    I know very little about genetics. But does genetic specialization induced by evolution stop at the neck or is the 6,000 year earth theory still a plausible scenario in earth history:-)

  37. David Rubie says:


    The Saunders study is basically broken from the get-go. What’s the point of taking an existing set of results (a product of the current system), then positing that particular people end up in professions based on that system? It’s asking a question you already know the (incorrect) answer to.

    If the system was changed, the breakdown of participants in professions could change too.

    You missed my point: genetics are best considered as potential (in the case of physical characteristics) but intelligence isn’t easily measured like scanning the back of a sheep for eye muscle depth. The statistics behind classical genetics require simple traits and known percentage heritabilities. We know neither of these in the case of intelligence and anyone who tells you that is wrong. IQ is repeatable (one of the requirements) but you can’t directly correlate it with (say) earning potential in the same way you can count the number of tasty chops in a sheep by it’s eye muscle depth.

    Now, I know what you’re trying to get at (anecdotes suggest that human intellectual performance could be heritable, because sons follow fathers into professions) but that might be telling you about their environment, not their potential. We just don’t know what’s heritable in human behaviour and a lot of it might simply be learned behaviour.

  38. David Rubie says:

    Whoops – forgot about the twins studies.

    Andrew, while I know you weren’t talking about breeding, it’s almost impossible to invoke the genetics genie without it. Sure, my parents pretty much ensured that I’ll never run the 100 metres in less than 15 seconds, but that doesn’t mean I can’t learn how to sell a used car, memorise the right passages out of a law book or produce a credible thesis on string theory given enough time and resources. Brains are plastic and the difference in performance of your brain simply isn’t limited in the way that your physical characteristics are. To condemn classes of people to types of jobs by stratifying them with IQ tests makes no sense (unless you’re hankering for a class based society and are looking for specious evidence to back it up). That twins generally end up at similar levels in society when separated may be a simple reflection of their color or personalities, not their potential.

  39. Don Arthur says:

    The attempt to relate income inequalities to skill differentials goes back to Adam Smith, who has an excellent discussion of it …

    James – After reading your comment I went back to the Wealth of Nations and read this:

    … 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 expense, 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 expense, repays that expense with a profit.

    Gary Becker makes an interesting comment about Smith’s approach to human capital. Becker distinguishes between ‘egalitarian’ and ‘elite’ approaches. The ‘egalitarian; approach assumes that most people are able to benefit from higher education but that some are held back by poverty, prejudice etc. The ‘elite’ approach, on the other hand, assumes that people differ in their ability to benefit from education and that income inequality is not the result of structural causes but from differences in individual ability.

    Becker classifies Smith’s approach as ‘egalitarian’. Smith writes:

    The difference of natural talents in different men is, in reality, much less than we are aware of; and the very different genius which appears to distinguish men of different professions, when grown up to maturity, is not upon many occasions so much the cause as the effect of the division of labour. The difference between the most dissimilar characters, between a philosopher and a common street porter, for example, seems to arise not so much from nature as from habit, custom, and education.

    So I take your point. This is a very old argument. As for the technological change vs globalisation argument, that probably deserves an entire post of its own. I’ve noticed it’s a hot topic in the US at the moment.

    I suspect that you might be better qualified to sift through rival explanations for rising earnings inequality than I am.

  40. JC says:


    Genetics is intricately linked with evolution. To believe in evolution but to avoid one part uncomfortable part genetics in the evolution of humanity is as close to creationism as it comes.

    Are there overlapping circles when it comes to human intelligence? Sure. However it doesn’t mean there isn’t a strong link. We are our genes and the children of evolution.

    At present the world seems to suit the geeky types. At some other time the geeky types could eventually be not so valued. Let’s not always assume things run in a straight line or that we don’t suffer some cataclysm that makes the few Kalahari Bushman the new kings.

  41. David Rubie says:

    JC wrote:

    Genetics is intricately linked with evolution. To believe in evolution but to avoid one part uncomfortable part genetics in the evolution of humanity is as close to creationism as it comes.

    I dunno JC – my brane ain’t 100% aw nuffink but youse lost me. I’m not ignoring the idea that cognitive abilities aren’t influenced by genetics, I’m saying that it’s far less important for performance than is the case for physical abilities due to the brains inherent ability to learn. Some might be faster, some slower, some not particularly interested, but don’t mistake that for missing potential.

    What’s it got to do with creationism, if anything?

  42. JC says:

    Sure, my parents pretty much ensured that Ill never run the 100 metres in less than 15 seconds, but that doesnt mean I cant learn how to sell a used car, memorise the right passages out of a law book or produce a credible thesis on string theory given enough time and resources.

    A 15 second 100 meter dash isn’t that fast, Dave. 8 seconds is (is it 8 seconds now). I bet you would never have reached anywhere close to that level.

    Brains are plastic and the difference in performance of your brain simply isnt limited in the way that your physical characteristics are.

    But what you assume to do for one brain, you ought to be doing for another in order to analyze this correctly. You can increase say IQ by 10 points through better food intake and decent education/committed parents etc. for someone with an IQ of a 90 start rate. But why assume some of that benefit won’t accrue to one with an IQ of 120 using the same methods.

    I’ll give you an example. I once saw an interview of Chopper Read on Denton. The striking thing about the oaf was his obviously strong command of the language, which pointed that he MAY have a very high IQ. What would his potential have been instead of being a self confessed wholesale killer. Not he was pretty good at his chosen profession.

    To condemn classes of people to types of jobs by stratifying them with IQ tests makes no sense (unless youre hankering for a class based society and are looking for specious evidence to back it up).

    It doesn’t work that way. There’s no way to stop firms from using IQs yet some do and some don’t. Macquarie uses such a method and so does Microsoft and Google although they call them something else because the US places limitations on their use (unlike us). It doesn’t stop other people from getting to the top. But to be perfectly honest, you kind of have to be pretty smart of your going to buy Yahoo say and make it work.

    Look the smartest people I ever worked with were the geeky quants, or at least they appeared that way. There were quite a few Russian immigrants in this category especially after the war came down. There was no way any of those dudes was ever, ever going to make it to dept. head or CEO. Nearly all had the personality of a cold brick and you just fed them through the crack underneath the door each lunch time. There was one of these dudes and I cant tell you how many times he asked me and others which way the toilet was. It was Aspergers Central.

  43. David Rubie says:

    JC wrote:

    Theres no way to stop firms from using IQs yet some do and some dont. Macquarie uses such a method and so does Microsoft and Google although they call them something else because the US places limitations on their use (unlike us).

    Perhaps things have changed at Macbank, but the test I did there wasn’t an IQ test, it was a personality profile that included a few things to judge your ability with figures. It’s fundamentally different to IQ – they want to know whether you’ll fit within a Myers-Briggs coloured view of particular roles. Yes, you get Aspergers central among quants, but the good ones (who can do the maths AND know the business) generally aren’t like that (although they rarely stay quants, either).

    The basic beef with IQ is that while it’s repeatable and consistent, nobody really knows what it is supposed to represent. It’s too broad to give us any measure of mental agility, memory, the ability to learn or apply complex patterns to new situations (which I would have thought constituted a large proportion of intelligence). I assume Brendan Nelson (for example) has a high IQ and an aptitude for academic performance, but he’s a hell of a slow learner when it comes to Malcolm Turnbull. It would be a mistake to dismiss him just on those grounds though, wouldn’t it?

  44. JC says:

    Look Dave truth is that it’s a very wide band.

    Look I think anything can happen between a range of say 90 to 120 IQ. And this is where the real problem lies. People try to grope around trying make that range seem exact when it isn’t. The stark difference is above and below.

  45. Brent Howard says:

    Suppose its true that what people can, and do, do is largely determined by their genes and that education and training for the less genetically fortunate has fairly limited value. Considerations of fairness then suggest that, since they will disproportionately come from disadvantaged households and their prospects for substantial social mobility upwards are not very good, we compensate the less genetically fortunate via relatively high public expenditure on such things as health care and social security for this group. (People who have less capacity for rational behaviour will tend to behave in more imprudent ways, with adverse consequences for their health, and if genes largely determine IQ why shouldnt they also largely determine capacity for rational behaviour as it relates to behaviour with implications for health and other aspects of wellbeing? Criminals are generally of below-average intelligence and rates of smoking, excessive drinking, etc. are higher among groups with lower IQs.)

    However, Peter Saunders advocates relatively low social security payments and I dont think he should be described as a supporter of high, as distinct from moderate, public expenditure on health care for the less genetically fortunate. Furthermore, Dr Saunders wants stringent obligations placed on working-age social security recipients (with the exception of some such as the more severely disabled and sole parents with pre-school children). He even advocates forcing the long term unemployed to work full-time in return for unemployment benefits of around $250 per week, thereby effectively slashing the minimum wage.

    It seems unlikely that such stringent obligations generally benefit those they are imposed upon. More obligations means that some will get a job sooner, but even if getting a job sooner is a benefit in many cases it isnt a benefit in all cases. Some who are ill-suited to the work they are obliged to take, and some who struggle to combine work with child-rearing or coping with health problems, will be worse off. And the lower low net wages are, the more people will fall into this category. Also, if the extra coercion is a negative for those who are subjected to it and do people really enjoy filling out a dole diary and applying for more jobs for which they are rejected? – the costs here may exceed any benefit from getting a job sooner (when this is a benefit and when this occurs).

    Greater obligations means more people being penalised and loss of income isnt good for these people who were already on relatively low incomes. There is also an equity issue here because disadvantaged groups such as Aboriginals and people with mental health problems are disproportionately likely to be penalised for non-compliance. Of course Dr Saunders also argues that the stringent obligations he recommends are just, but I dont find it plausible that without such stringent obligations the relevant social security recipients will generally be overly privileged and hence owe a debt to other members of society, including high-income people who contribute significant amounts of net tax. The life of someone on social security is generally significantly worse than that of the average person who is not on social security and I dont think there is any basis for deeming social security recipients as a group to be less deserving than others.

  46. David Rubie says:

    JC wrote:

    Look I think anything can happen between a range of say 90 to 120 IQ. And this is where the real problem lies. People try to grope around trying make that range seem exact when it isnt. The stark difference is above and below.

    To a certain extent, that makes sense, but Stephen Jay Gould (a smarter bloke than either of us) said this:

    the abstraction of intelligence as a single entity, its location within the brain, its quantification as one number for each individual, and the use of these numbers to rank people in a single series of worthiness, invariably to find that oppressed and disadvantaged groupsraces, classes, or sexesare innately inferior and deserve their status. (pp. 2425)

    , from The Mismeasure of Man.

    You can’t take a persons existing status and categorically state they “deserve” it. I have no problem with IQ tests being a diagnostic, I have a serious problem with them being used as a determination of your future worth. That is just plain old prejudice, dressed up as science, and Saunders is on shaky (if not outright fraudulent) ground.

  47. To be fair, IQ tests – used diagnostically – can be liberating. There’s nothing more satisfying than discovering that the underperforming Aboriginal kid in your school has an IQ of 140, which behooves a little more effort on the part of teaching staff to ‘reach’ him. I’ve seen that happen a few times.

    It’s also very useful for picking up dyslexia, and was used to diagnose mine.

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