Human Capital Development Theory: Implications for Education - Comparison of Influential Twenty-First Century Economists Samuel Bowles and Gary S. Becker

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Abstract

 

This paper compares the work of two contemporary economists who made significant contributions to human capital theory, Samuel Bowles and Gary Becker.  Two reoccurring themes in the work of Becker and Bowles with regards to modern human capital theory are examined.  First, human behavior is based on the economic self-interest of individuals operating within freely competitive markets and second, education increases worker productivity.  Both Becker's and Bowles' work is important for the future of workforce education because the current system of compulsory education does not appear to be working.  Bowles work, in particular, illuminates reasons for inefficiencies in the modern educational system.  A comprehensive study of both Bowles' and Becker's work, may lead to a new educational system, securing the economic status of the U.S. in the new global knowledge driven economy.   

 

Human Capital Development Theory concludes that investment in human capital will lead to greater economic outputs however the validity of the theory is sometimes hard to prove and contradictory.  In the past, economic strength was largely dependent on tangible physical assets such as land, factories and equipment.  Labor was a necessary component, but increases in the value of the business came from investment in capital equipment.  Modern economists seem to concur that education and health care are the key to improving human capital and ultimately increasing the economic outputs of the nation.  (Becker 1993)

In the new global economy hard tangible assets may not be as important as investing in human capital.   Thomas Friedman, in his wildly successful book, "The World is Flat" (2007), wrote extensively about the importance of education in the new global knowledge economy.   Friedman, not to be confused with the famous economist Milton Friedman, is a journalist. His popular book has exposed millions of people to human capital theory.  The term itself is not introduced, but evidence as to why people and education (human capital) are vital to a nation's economic success, is a common reoccurring theme in the book.

Economists and historians commonly recognize British economists Sir William Petty (1623-1687) and Adam Smith (1723-1790) as the primary cultivators of human capital theory.   Petty's main contribution was the Treatise of Taxes and Contributions (1662).  Petty examined the role of the state in the economy and touched on the value of labor.   Adam Smith is routinely credited with establishing the basis of the economics of human capital. (Becker 1992)  In his series of books entitled "The Wealth of Nations" (1776), Smith discussed his theories with the prosperity or "wealth" of a nation.  "The main cause of prosperity", argued Smith "was increasing division of labor."   Smith is widely regarded as the first to make a connection between the skill of the worker and higher wage levels.  (Becker 1992)

Modern economists call Smith's insight the theory of "compensating wage differentials". (Rosen 1986) Compensating differential is a term used in economics to explain the relationship between the wage rate and undesirable attributes of a particular job.  A compensating wage differential is an equalizing force.  The additional amount of pay that a worker must be offered in order to encourage them to accept an undesirable job is a compensating factor. (Rosen 1986)  English philosophers John Locke (1632-1704) and John Stuart Mill (1806-1873), and German social theorist Karl Marx (1818-1883) all argued that training, not natural ability was key to understanding wage differentials. (Becker 1993).    

Human capital theory resurged in the 1960's primarily through the work of American economists Theodore Schultz (1902-1998) and Gary Becker (1930- ). During this time, economists began making tangible connections between education and its impact on the ability of humans to earn higher wages.  Schultz, a Nobel prize-winning economist is credited with establishing the term "human capital". (Becker 2006)  In his 1958 paper, "The Emerging Economic Scene and Its Relation to High School Education", Schultz was the first to write about the connections between education and productivity. Schultz identified people as the source of the economic growth when other economists were attributing national growth to improvements in technology. (Fitz-enz, 2000).  Schultz argued that traditional economics did not correctly calculate or consider the value of human knowledge.  Jac Fitz-enz in his book, The ROI of Human Capital (2000), quoted Schultz's description of human capital: 

"Consider all human abilities to be either innate or acquired.  Every person is born with a particular set of genes, which determines his innate ability.  Attributes of acquired population quality, which are valuable and can be augmented by appropriate investment, will be treated as human capital." 

This paper compares the work of two contemporary economists who made significant contributions to human capital theory during the last half of the twenty-first century, Samuel Bowles (1939- ) and Gary Stanley Becker (1930- ).   There are many notable economists, who have influenced human capital theory, but this paper focuses on two of the more recent influential figures who have shaped modern human capital theory, but more importantly, continue to contribute to the field of economics and human capital theory.   This paper examines two reoccurring themes in the work of Becker and Bowles with regards to modern human capital theory.  First, human behavior is based on the economic self-interest of individuals operating within freely competitive markets and second, education increases worker productivity.

In modern human capital theory it is commonly regarded that all human behavior is based on the economic self-interest of individuals operating within freely competitive markets, but this assumption is where Bowles and Becker disagree.  Bowles contends that all human behavior is NOT based on the economic self interests of individuals operating within freely competitive markets.  Becker generally supports and promotes the notion that humans are motivated by self interest and operate freely within markets.  However, Becker also writes extensively about discrimination in the market place which seems to indicate that there are factors that preclude the individual from operating within markets. Becker concludes that discrimination reduces the real incomes of those that discriminate as well as those of the minority. (Becker 1992)  Ironically, Becker never seems to make the connection that individuals might not be operating freely in the market if discrimination is present.   

Bowles challenges traditional human capital theory and postulates that human capital theory formally excludes the relevance of class and class conflict which thereby imposes restrictions on an individual's ability to operate within the market. (Bowles, Gintis 1975) 

Both Becker and Bowles appear to agree that education enhances worker productivity.  On the topic of schooling and compulsory education, Bowles and Becker provide two similar but ultimately divergent opinions which will be discussed in greater detail later in this paper.  Bowles transfers his ideas of class and class struggle into education where Becker stays within the realm of his traditional views of education in a capitalist society and its ability to improve the human condition.  Interestingly Becker's ideas were once considered radical, but now his views seem fairly straightforward and reasonable.  In contrast, Bowles viewpoints, to some, may appear to be radical.  It is important to note that many prominent economists where considered radical in their early views and ideas therefore Bowles may be eventually be regarded by history as an important economist with regards to human capital theory.

    Both Bowles and Becker have received many awards for their work and are widely recognized as experts in their field.   In 1992 Becker was awarded the Nobel Memorial Prize in Economic Sciences, officially named The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel for his work in investments in human capital; behavior of the family (or household), including distribution of work and allocation of time in the family; crime and punishment; and discrimination on the markets for labor and goods. (nobelprize.org 2007)

In 2006 Bowles was awarded the Leontief Prize for his outstanding contribution to economic theory by the Global Development and Environment Institute.  Wassily Leontief (1905 - 1999), was a German born economist known for his research on how changes in one economic sector may have an effect on other sectors. Leontief won a Nobel Prize in Economics in 1973.  The Leontief Prize was subsequently established in his honor.   The Leontief Prize was awarded to Bowles for his studies on cultural evolution.  Essentially, Bowles challenged the conventional economic assumption that people are motivated entirely by self-interest.  Some of his work in this area includes mathematical modeling and agent-based computer simulations of the evolution of altruistic behaviors by means of multi-level selection and behavioral experiments in 15 hunter gather and other small-scale societies. Bowles' current research also includes both theoretical and empirical studies of the role of incomplete contracts in labor markets and financial markets in explaining income inequality. (Bowles 2007)

    President Bush, in 2007, bestowed one of the highest civilian awards, the Presidential Medal of Freedom, to Becker.  The Presidential Medal of Freedom recognizes individuals who have made "an especially meritorious contribution to the security or national interests of the United States, world peace, cultural or other significant public or private endeavors." (medaloffreedom.com 2007)  Becker is commonly recognized for leading economics into social science disciplines such as sociology, demography and criminology. (nobelprize.org 2007)  He argued that many different types of human behavior can be seen as rational and utility maximizing at a time when human behavior was considered irrational and erratic. 

Becker was heavily influenced by Milton Friedman (1912 -2006).  An advocate of economic freedom, Friedman made major contributions to the fields of macroeconomics, microeconomics, economic history and statistics. (nobelprize.org 2007)  In 1976, he was awarded the Nobel Memorial Prize in Economic Sciences for his achievements in the fields of consumption analysis, monetary history and theory, and for his demonstration of the complexity of stabilization policy.  It is no wonder that Becker earned a Nobel Memorial Prize.  He was tutored by Nobel Prize laureate.

In 1951, at the University of Chicago, Becker took Friedman's course on microeconomics.  Friedman renewed Becker's excitement about economics by emphasizing that "economic theory was not a game played by clever academicians, but was a powerful tool to analyze the real world". (Becker 1993).   Becker's early focus, and training in mathematics helped prepare him for the quantitative rigors of economics.  But Becker was also driven by the need to solve important social problems. (Becker 1993)    Becker's early work (in the late 1950s) was widely ignored and considered radical.  According to Becker in his autobiography, "Most economists did not think racial discrimination was economics, and sociologists and psychologists generally did not believe I was contributing to their fields." (Becker 1993)  

In 1957 Becker published "A Statistical Illusion in Judging Keynesian Models", with Friedman.  Friedman was a major influence on Becker along with T.W. Shultz's and his ground- breaking theories on human capital.   In the book, Becker and Friedman begin to use economic theory to analyze the effects of prejudice on the earnings, employment and occupations of minorities.   It was this experience with Friedman that started Becker down the path of applying economics to social issues.   Becker also cites Gregg Lewis's use of economic theory to analyze labor markets as major influence on his work. Gregg Lewis (1914 - 1992) is commonly recognized as one of the founders of modern labor economics. (Duke University 2007)  Other influences on Becker were Aaron Director's applications of economics to anti-trust problems, and industrial organization, and L.J. Savage's research on subjective probability and the foundation of statistics. (Becker 1993)   Becker's 1957 book with Friedman was favorably reviewed in journals, but did not attract much interest from academia.   If it had not been for the confidence and support of Friedman, Lewis, Schultz, and others at the University of Chicago Becker might not have continued his work in applying economic models to social problems.

Samuel Bowles was influenced by Karl Marx (1818 - 1883)   Bowles wrote an influential paper in 1975 entitled, "The Problem with Human Capital Theory - A Marxian Critique." In this paper, Bowles exuded insight into human capital theory that was not considered by early economists. His first idea was that "human capital theory extends the tradition of Ricardian and Marxist ideologies in treating labor as a produced means of production, who characteristics depend on the total configuration of economic forces". (Bowles 1975)  Second, Bowles figured that "human capital development theory rejected the simplistic assumption of homogenous labor and centered attention of the differentiation of the labor force" and third, Bowles believed that "modern human capital theory brought basic social institutions (such as schooling and family), previously relegated to the purely cultural and superstructural spheres, into the realm of economic analysis". (Bowles 1975)  Becker was most likely the influence on Bowles with regards to the latter of the three, having already published significant material on the subject by 1975.  Bowles' radical argument was that human capital theory provided a good ideology for the defense of the status quo. (Bowles 1975)  Bowles asserted that the repressive nature of schooling was a not a contribution to human welfare but merely a reproduction of social relations necessary to promote a disciplined and obedient workforce. (Bowles 1975).

Bowles was also influenced by Swiss born economist Marie-Esprit-Léon Walras (1834 - 1910).  Walras was a mathematical economist responsible for the creation of the general equilibrium theory.  Bowles work applies Walras' equilibrium theory with respect to human capital theory.  Bowles studied extensively, the work of Austrian born economist Friedrich August von Hayek, (1899 - 1992). Hayek won the Nobel Prize for economics in 1974 and is known for his defense of classical liberalism and free-market capitalism against socialist and collectivist thought. (nobelprize.org 2007)   Bowles made numerous references to Hayek's work in his 1999 book, "The Politics and Economics of Power", in particular, Hayek's references to problems in society being caused by lack of knowledge. (Bowles 1999) 

Bowles seems to be following in the work of Becker and Hayek with regards to social economics but deviates somewhat with Marxist based ideas of class and class structure influencing wage differentials and individuals' ability to operate within markets.   What seems odd is that Becker writes extensively about social issues such as discrimination and inequality which at the very core could be considered class driven issues, but he never mentions the Marxist concepts of class and class structure.  Becker firmly believed that humans are motivated by self-interest and developed the human capital approach into a general theory of determining the distribution of labor income. (Becker 1975)  Becker, in his 1975 paper, "The Division of Labor, Coordination Costs, and Knowledge" examines how specialization and the division of labor depend on coordination costs, and also on the amount and extent of knowledge. (Becker 1992)  Becker builds on the work of Hayek but never mentions him instead preferring to focus on the work of Smith and Roy's Model (1951) of self selection and earnings inequality.  Becker dismisses Roy's model and prefers not to assume that "workers have intrinsic comparative advantages at different tasks", and instead offers "all workers are intrinsically identical" as he attempts to prove that
"greater knowledge tends to raise the benefits from specialization, and thus tends to raise the optimal division of labor." (Becker 1992)

Bowles observes that modem human capital theory has all but "eliminated class as a central economic concept." (Bowles 1975).    Human capital theory has moved steadily away from attributing control of factors of production to identifiable groups (classes) and toward a theory of every worker is a capitalist. (Bowles 1975)  Bowles challenged the conventional economic assumptions that people are motivated entirely by self-interest.  In Bowles' view, wage structure, the individual attributes valued on the labor market, and the social relations of the educational process can only be explained through an analysis of class and class structure. (Bowles 1975) 

In contrast Becker asserts that every worker is a capitalist, acting in their own best interest.  Becker's has expanded human capital theory with his research on the relationship between earnings and human capital.   Becker is responsible for developing a systematic framework for studying the return on education and on-the-job training, in addition to wage differentials and wage profiles over time. (nobelprize.org 2007)  This framework is the major reason why Becker was selected for the Nobel Prize. 

Bowles recent research (2005) examines the evolution of altruistic behaviors by means of multi-level selection and behavioral experiments in 15 hunter-gatherer and other small-scale societies.  Bowles research in this project reveals that individuals do not always act in the interest of self.  This is a departure from commonly held human capital theory and especially from the work of Gary Becker.  The implications for workforce education are that compulsory education may not be an effective system and radical overhaul of the U.S. education system may be necessary.    

Bowles work is extremely interesting and has many implications for workforce education.  Bowles, in his critique of human capital theory, supposes that education, training, child rearing and health care perform a dual economic function in production and perpetuation of the social order. (Bowles 1975).  In other words, the reproduction of capitalist class structure is assured through the education, training and bearing children.  It is Bowles' belief that education can raise a person's earnings not because it makes people smarter, but because it creates "incentive-enhancing preferences".  Education, Bowles asserts, makes people more obedient.  So what does this say for the power of education to make people smarter?  Further readings into the research and methodologies of Bowles may reveal the answers.     

Interestingly, and of importance to workforce education, academia has already begun questioning the future of schooling, specifically compulsory schooling. Alexander Sidorkin (1958 - ) wrote a paper entitled "Human Capital and the Labor of Learning A Case of Mistaken Identity" (2007).  In this paper, Sidorkin claims "human capital development theory does not explain the practice of compulsory schooling and that education is not an investment but rather a form of labor that should be subsidized". (Sidorkin 2007)  Sidorkin references both Bowles and Becker work in his paper and conclude that both economists view education and schooling as an investment in that it raises individual earnings potentials.   Sidorkin takes Becker's ideas one step further and extrapolates that Becker is suggesting that the government should pay students to attend school.  Specifically, Sidorkin extrapolates his claim from Becker's 1993 book, "Human Capital: A Theoretical and Empirical Analysis with Special Reference to Education", page 128:  

"Since the purpose of a minimum standard is to offset the effects of poverty and niggardliness, appropriate subsidies could in principle achieve the same result without compulsion.  The effectiveness of voluntary investment in human capital is often underrated because subsidies to human capital usually cover, at best, only a portion of earnings forgone. If they cover all costs, including those forgone, almost all children I am confident, would continue in school through the age desired."

Imagine the implications for education!  Sidorkin makes a rational argument to establish schooling as a form of labor (instead of investment) and makes norm shattering recommendations for the reform of traditional education.  Sidorkin, a Russian born educator and now director of the School of Teacher Education and executive director of the Philosophy of Education Society at the University of Northern Colorado has written some truly fascinating articles on education and human capital.  

Both Becker and Bowles are well published and mathematically sound economists. Both are credited with developing complex formulas and equations which might leave the average intellectual feeling a bit inadequate.  Both have a large body of papers and books that could take years to read and digest.  On many topics such as human capital and education they seem to agree but with deeper research into their work one begins to see fundamental differences.  What is remarkable, is that a great deal of younger economists, sociologists and intellectuals have embraced Becker's and Bowles work and are using it to make an argument for fundamental changes in education.  Both Becker's and Bowles' work is important for the future of workforce education because the current system of compulsory education does not appear to be working. (Friedman 2007)  Bowles work, in particular, seems to touch on the reasons for inefficiencies in modern educational systems.  A comprehensive study of both Bowles' and Becker's work, may lead a path to a new educational system that will reinforce and maintain the economic status of the U.S. in the new global knowledge driven economy.   

 

 

 


 

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