A Socialist Alternative to Human Capital Theory?

November 19, 2021   •   By Aashish Mehta, Christopher Newfield

The Death of Human Capital?: Its Failed Promise and How to Renew It in an Age of Disruption

Phillip Brown, Hugh Lauder, and Sin Yi Cheung

THE DEATH OF HUMAN CAPITAL?: Its Failed Promise and How to Renew It in an Age of Disruption, by Phillip Brown, Hugh Lauder, and Sin Yi Cheung, disputes the theory behind one of the strangest features of the past 40 years of neoliberal economics, one rarely tackled so directly. This is human capital theory (HCT), which tends to shift the responsibility for good jobs and wages from business to higher education. At one time, a company that laid off hundreds or thousands of workers would be admitting its managerial failure and incompetence; in the 1980s and ’90s, the mass layoff came to signal instead the kind of decisive cost-cutting that would pump up stock price. This was the era of corporate division-liquidators like Jack Welch at General Electric and Albert “Chainsaw Al” Dunlap at Sunbeam (and elsewhere), who were famed for moving from one firm to the next slaughtering jobs in droves, to the roaring approval of shareholders. Louis Uchitelle called his book on this subject The Disposable American (2006).

Disposing of workers was just the first step. The next was to demand that they embark on a journey of self-improvement. This would make them employable in the “new economy” for the “jobs of the future.” Public officials stopped expecting that firms maintain employment; they wrote tax law that favored companies that sent union jobs overseas. The once and future worker could only be worthy of new jobs if the country’s colleges — two-year and four-year, assisted by a new collection of for-profit colleges and training companies — acquired the proverbial “laser focus” on job-ready skills.

College in the English-speaking world had always been dual use, meaning intellectual development was to be combined with the preparation for work. But in the 1960s and ’70s, most college students majored in the liberal arts and sciences, which, then as now, deliver higher levels of learning than more practical majors. Proponents of the job training model have never explained the inconvenient truth that the largely liberal arts and sciences graduates of those decades were so good for economic productivity, whose growth was higher than in the job training age. Dual use meant that content about the contemporary world, including frontier technical knowledge, was paired with instruction in all of the fundamental intellectual capabilities required by modern inquiry. Intellectual development made an enormous indirect contribution to those collective abilities, though it was hard to measure. And yet, incessant criticism of liberal higher education, alongside the steady “gigification” of work, encouraged students to migrate out of academic majors like history and chemistry and into business and health. HCT encouraged everyone involved to define the value of bachelor’s degrees in terms of their earning power. Many politicians and much of the public now define college as providing job readiness, and individual colleges are ranked in part by the extent to which they and not the graduate’s private-sector employers provide social mobility. This familiar system is largely the result of the expansion of a theory few of us have ever heard of.

¤

HCT, which appealed to conservatives and liberals alike, had become the master paradigm of the “information society” and the “knowledge economy” by the early 1960s. Forerunners of the theory had drawn the interest of some 19th-century economic thinkers, such as John Stuart Mill and Alfred Marshall (who identified what he called “personal capital”), and crucial postwar contributions came from a set of Chicago School economists: Milton Friedman, Theodore W. Schultz, Jacob Mincer, and, most insistently, Gary Becker.

Friedman’s 1955 article “The Role of Government in Education” is now remembered for proposing school vouchers to enable the subsidizing of private schools, but it also shaped HCT by distinguishing between “general education for citizenship” and “specialized vocational education.” Fusing education with future economic benefits justified charging tuition to reflect “specialized” education’s status as a private, individual investment. Friedman did acknowledge the non-private benefits of education, since society needs to teach “some common set of values” and general knowledge. In this realm, public funding might be tolerated. But these “non-pecuniary” effects with clear social impacts — ones that can’t be measured as a set of individual gains — are a sideline compared to “vocational or professional education” with direct bearing on individual salaries and the overall economy.

This education, according to Friedman, has no public or social dimension that might require collective investment. Rather, it is a form of investment in human capital precisely analogous to investment in machinery, buildings, or other forms of nonhuman capital. Its function is to raise the economic productivity of human beings. If it does so, the individual is rewarded in a free enterprise society by receiving a higher return for his services than he would otherwise be able to command. Thus, individuals invest in education to increase their human capital, which an unregulated market correctly prices, so more human capital means a higher wage.

Among his many extensions of this basic idea, Gary Becker distinguished between general and special skills. The latter, relevant to a specific firm, should be funded by the company. But the former, general knowledge or skills, should be funded by the individual, since they can be taken from firm to firm to command their appropriate wage. Although Becker and other economists formally acknowledged learning that did not aim directly at financial gain, they shrank the scope of this knowledge and its public benefits — and thus its public funding — to something close to zero.

If conservatives focused on the idea of workers as embodied capital who invested privately in themselves and reaped the proportionate monetary rewards, liberals stressed the social benefits. HCT was taken up by university presidents like Clark Kerr to explain why universities were at the heart of the postwar economy, where new wealth came from knowledge as human capital and not just physical capital or physical labor. The theory was adopted by New Democrats in the 1980s and ’90s, who liked the claim that knowledge work, in alliance with technology, turbocharged the creation of value and wealth compared to regular industrial labor. In the apparent ebbing of direct colonial extraction, knowledge work was to keep the West on top of the economic food chain, relegating the Global South to manual labor on products conceived and designed in London, Stuttgart, and Cupertino. HCT was translated into policy; in his influential 1991 book The Work of Nations, Robert B. Reich (Bill Clinton’s first secretary of labor) synthesized an evolutionary theory of the economy in which production workers in the United States would (and should) be replaced by that more advanced employee, the “symbolic analyst,” who works with the mind on numbers, words, and ideas. HCT made the collective level of education — defined as its fit with advancing technology — the prime mover of contemporary capitalism. Getting this fit between education and technology became a main objective of public policy.

It also became the main point of education. Learning about your society, yourself, and what you might do were things that happened in college, but they were secondary to acquiring marketable skills. Developing complex intellectual capabilities — a reliable ability to think freely and clearly about difficult things — was wrongly classed as a private luxury good. When you graduated, mainstream economics claimed, your wage generally equaled the value your trained labor added to the firm’s output — assuming labor markets were not distorted by government interference (such as excessive minimum wages or extended unemployment benefits) or union militancy. The value of your labor — your productivity — was increased by education, so if you invested in your education, you would increase your productivity, and your increased productivity would lead to the market hiring you and paying you a higher wage. While Republican policy favored asset ownership, most Democrats stuck with labor — as long as it was labor at the supposed top of the value chain that embodied technical knowledge.

Democrats have now mostly come to oppose US businesses using globalization as an umbrella rationale for reducing their wage, pension, and tax obligations. Partly this has come along with a growing recognition that large employers can and do distort labor markets away from the ideal assumed by HCT, fixing wages below a worker’s contributions to production. This evolving view of the labor market, however, has failed to loosen HCT’s grip on higher education policy. Joe Biden carries on the Clinton and Obama tradition of addressing problems in the labor market with a squeeze on education policy. He is advancing free community college partly for good reasons of racial justice, but also because it’s the cheapest version of vocational higher ed. So far, he is reneging on his campaign promise of limited student debt cancellation, and there is likely an HCT angle here. Were their colleges functioning correctly, according to HCT, these students could repay their loans. If students can’t repay their loans, then their college wasn’t functioning and should be punished, not rewarded with federal funding. College presidents and governing boards don’t challenge HCT logic because it has excused big tuition hikes.

¤

HCT emerged near the end of a century of high economic growth — a period during which, as Robert J. Gordon documents in his 2016 book, The Rise and Fall of American Growth, productivity and wages grew mostly because of revolutionary inventions — think electric grids, cars, telephones, and elevators — coupled with Fordist and then New Deal approaches to the distribution of the resulting economic gains. During such a period of shared prosperity (for white citizens), with large expansions in college-going to be funded and with a college-educated middle class being formed, shifting the responsibility of paying for college to students may have seemed benign, even practical. Firms were flush, and they were willing to pay for employees possessing the skills and creativity needed to ride the waves of business opportunity that followed new technological developments. And as rich countries’ increasingly and uniquely skilled workers contributed to make these new inventions economically productive, it seemed reasonable to expect that investing in education would in turn boost economic growth. Thus, HCT reasons, if education spurs productivity, and if the gains from productivity growth can be captured by the educated workers who helped bring them about, why not have the students themselves fund these promising investments? We refer to this approach to higher-education finance as “student-pays.”

The key question today, which The Death of Human Capital? takes on adeptly, is whether these arguments work anymore. The book argues that they don’t, and it does so on the strength of three lines of attack. The first should be self-evident (but isn’t): education is about so much more than increasing firms’ productivity. The second is institutional: employers are increasingly free to avoid rewarding workers for their contributions to production. Growth has slowed, relocated to other parts of the world that are reaping the rewards of their own education revolutions, and corporate and political cultures sustain profits through cost-cutting and off-shoring. Unionization, full employment, and other means of translating productivity into wages are now off the table. The third line of attack is empirical: the authors argue that HCT and student-pays are underpinned by an incorrect understanding of how higher education, technology, and the labor market interact.

HCT makes three claims that the book takes on with varying degrees of success. The first, and most fundamental, claim is that attending college increases students’ earnings by a lot. Whether this is true or not matters both for policy-makers, who must decide how much of the cost of higher education can be loaded onto students, and also to students, who must decide whether to accept the deal. Chapter four tackles this claim, arguing that, while on average college graduates’ earnings are higher than those of high school graduates, these differences are insufficiently large or reliable to treat college as a sound financial investment. One key conclusion is particularly disturbing: “[O]nly the top decile of college graduates who attended for four years clearly benefit from their investment in education.” What matters most for salary is not completing college but being at the top of the cohort that completes college. Being at the top is a different practice than learning as much as you can. It includes picking a well-paid job, which often means working in private-sector professional services rather than in education or care work. This is not an educational matter but a matter of job markets as shaped by public policy. This is a point that bears constant attention given rising debt loads, and the authors’ figures pose troubling questions.

This chapter does have some methodological problems. The earnings comparison they offer may not suffice to support their argument. There are many reasons to expect that students who choose to attend universities differ in ways the authors cannot measure from those who don’t. For example, a high school graduate who inherits a plumbing business will earn more than a college-educated teacher. But their analyses should inspire further research as well as more public skepticism about the HCT claim that learning equals earning universally rather than for a subset, some of whose success owes much to non-educational (economic and social) factors.

The second claim is that technological change reliably drives employers to demand more college graduates. If this is true, then technological change will enhance, not threaten, the financial viability of the student-pays model by creating the jobs that enable graduates to recoup the costs of their training. As the authors note, however, this is a gross oversimplification, long since debunked by economists. Technological change boosts demand for many college-requiring occupations but actually reduces the demand for many others because these perform tasks that computers can take on more cheaply. Thus, technological change could depress the demand for college graduates. Public discourse on the future of work is clearly cognizant of this, but somehow the point never receives the attention it deserves in debates over education finance.

Yet, if technology fails to boost the number of “college jobs” or the wages they offer, graduates may seriously regret their educational expenditures and debts. This sense of looming regret has convinced many students to treat college as a scramble to the front of the queue for a limited number of plum jobs. Chapter six provides disturbing evidence that, insofar as their job prospects are concerned, these students are on to something. And chapter five shows that student-pays therefore exacerbate and replicate inequality across race and class lines.

Finally, the authors take on the most far-fetched claim associated with HCT: that expanding the supply of educated workers will make the economy more productive, and that those benefits will be shared with graduates, boosting their pay even as their numbers grow. Thus, supply creates its own demand, and student-pays will be benign forever. The authors’ critique of this third claim, while less well established, is a major contribution. Indeed, chapters seven and 11 are among the best in the book. They note that the global supply of education has increased enormously in recent decades (especially in lower-income countries), and they explain why this has led anxiety about the student-pays model to grow globally. The global education revolution was accompanied by increased high-skilled migration and international competition in product markets. The resulting competitive pressures and relocation of economic activity have served to depress productivity and wages in richer countries and depress the labor market returns to education worldwide. Global productivity increases, but not the imperative to share gains with workers. It is difficult to trace these global structural effects in a fully convincing causal fashion, which may be one reason why their treatment in journals is so piecemeal and nation-focused. But in this book the story is richly presented, well explained, and deeply resonant with the emerging evidence on the employment consequences of globalization.

Together, these empirical arguments cast serious doubt on the sustainability of the student-pays model. It follows that promoting education principally as human capital is not simply narrow-minded but increasingly dangerous. Using the monetary rewards of education to promote and finance it becomes an increasingly bad idea when those monetary rewards fail to materialize. This is particularly poignant because chasing the wage benefits of education distracts society from the core task of using its educational institutions to improve itself and address the core existential crises of the day. One may quibble with some details, but the argument must be taken seriously.

¤

The authors end their book with a carefully elaborated alternative model. To their credit, they don’t just take a few stabs at different options, but also offer several chapters on the subject. The various elements they discuss are important and should be developed. Yet the overall effect here is not fully satisfying.

Having done serious damage to HCT, the authors offer a new kind of human capital theory. This is somewhat confusing, unless we accept that their progressive educational theory, grounded in John Dewey, among others, seeks to combine educational contributions to production with human development rather than eliminating the productivity dimension. The result does read a bit like gene-splicing innovation economics with the capabilities approach to education and labor. Thus, they write: “[T]he emphasis of the new human capital is on education for personal growth, nurturing a holistic relation between knowing and doing.” But if their theory makes personal growth the central goal, it is still a human capital theory, whose focus includes without being limited to the “economic productivity of the human being.” The authors are invoking the capabilities approach rooted in heterodox economics as practiced by Amartya Sen and Martha Nussbaum, and also socially grounded political theory, philosophy, and the psychology of labor and creativity, whose key figures include Hannah Arendt, W. E. B. Du Bois, and C. L. R. James, as well as Aristotle and Karl Marx. The titles of the four chapters in this section are unhelpful, and the subsections place “humans as capitalizing” next to “the liberation of the self,” which is next to “the socioeconomic foundations of human capital.” One senses that the authors are trying to construct a socialist alternative to human capital theory, but they’ve buried its working parts here and there, perhaps in the knowledge that our censorious economic and policy worlds will ignore a critique of capitalist labor policy that rejects an exclusive imperative to serve production. The Cold War in political economy has not yet waned.

And yet the working parts are there, so we’ll conclude with a somewhat presumptuous reconstruction of Part III, as though the authors’ point really is to replace HCT with an understanding of education and labor as related but distinct modes of human empowerment. While both form and continuously re-form, expand, and transform capabilities, education focuses on the full development of all capabilities of each individual in the whole population. Schooling must be universal, and in the 21st century postsecondary education should be too (though modes and structures will vary widely). Education must develop the whole range of capabilities and not just those with manifest relevance to jobs and wages; capabilities go well beyond the life of homo economicus.

Which capabilities to emphasize will vary from person to person: a student who loves history, public policy, or set design should receive systematic education in the deep content and skills of history, journalism, and theater — and not, as now, given a smattering while being advised to be more interested in and better at math, coding, or accounting. For the authors, individual skill levels must develop beyond those required by the job as such, which in most cases remains at a low to middling level in the mass economy. Learning should be seen as central to the individual’s entire life and not mainly as an investment in a wage. Getting a job is important but must be treated as a (generally inevitable) byproduct of higher education and not its aim. Higher education must be completely inclusive across entrenched divisions of race, ethnicity, and national origin, both for reasons of justice (not the authors’ focus) and for reasons of efficiency, since “human capital is degraded by inequality.” Individual capabilities are fundamentally social, derived from overall social intelligence and embedded in social relations that mix labor and learning on an ongoing basis. This approach would seek to reduce and eventually eliminate the labor segmentation by social identity that is inherent in racialized capitalism. HCT, as currently formulated, squanders human intelligence, while a capabilities focus cultivates it and also makes it more completely available to society.

The authors’ new-HCT model would lead to a double transformation. The first is “the liberation of learning from the tyranny of earning.” Business has used HCT to cut education down to its own size, reducing social, cultural, and scientific knowledge that would serve the world in long-range and unpredictable ways. The same is ironically true of economic knowledge, whose influence has grown thanks to its practitioners’ skills with quantitative data, but which continues to struggle with anything that cannot be counted or marketized.

Second, if they couldn’t blame higher education, the political and business systems would be directly responsible for economic viability and social effects. This is where the death of human capital theory should be of interest to people who aren’t connected to education per se. Is work insecure? Does it not pay enough? Is it too ridden with “digital Taylorism” and workplace surveillance? Are wages too unequal? Does our workforce and wage structure exploit structural racism? Do CEOs and private equity managers make far too much, helping to starve common infrastructure? Is the uneven development of the world economy locking in climate catastrophe? Are too many people unable to afford retirement? Are college graduates underemployed? Are too many jobs too low-skilled? All these conditions are in fact controlled by a conjuncture of economic policy with private-sector preferences and practices. Without HCT, it would be far harder to scapegoat schools and universities for not teaching well enough or having too many arts majors or too much tenure, as has been the go-to blame game of the past 50 years, one that has covered up the effects of short-term corporate thinking, greed, mistakes, and policy errors that in their turn have created an unstable and unjust economy.

The Death of Human Capital? points toward a world beyond human capital theory, which has functioned as a (failed) alternative to industrial policy, impaired equitable social development, and constrained the power of education. Other authors should build on the project under way here.

¤

Aashish Mehta is an associate professor of Global Studies at UC, Santa Barbara. He is a development economist whose research examines the connections between globalization, economic development, education, employment, and inequality. His work has appeared in multiple peer reviewed economics, political science, and public policy journals. He worked at the Asian Development Bank prior to joining UCSB.

Christopher Newfield is a professor of English at the University of California, Santa Barbara. He is the author of The Great Mistake: How We Wrecked Public Universities and How We Can Fix Them (2016), among other books.