Sufficient affluence/sustainable economy: Economics for everyone (episode fourteen): The measurement of human capital

By John F. Sase, Ph.D.
Gerard J. Senick, senior editor
Julie G. Sase, copyeditor
William A. Gross, researcher

“Morality is dictated by family, state, society, church, God, and conscience. Speculative Metaphysics imagines forces and adds them on to what is actually experienced. Materialism makes human beings into automatons whose conduct is the result of mechanical law. Spiritualism makes human beings into slaves of the Absolute.”

—Rudolf Steiner, “The Philosophy of Freedom: The Basis for a Modern World Conception” (Rudolf Steiner Press, 1893)

As a practicing forensic economist, my work includes the measurement and analysis of economic losses; preparing written determinations in respect to these losses; consulting with attorneys and their clients; participating in discovery depositions that are initiated by opposing counsel; and providing testimony of my findings, conclusions, and opinions in courts of law.

Throughout my career, the majority of the cases on which I have worked have involved the determination of economic losses accruing to human beings over time. These damages are due to severe injury or loss of employment as well as to the losses that beset the families of victims who have suffered wrongful death or permanent disability from their injuries or from medical malpractice. In order to perform such work, forensic economists must remain objective while relying upon data, theories, and literature from the subfield of economics that is known as Human Capital Economics (HCE), the stock of competences, knowledge, and personality attributes embodied in the ability of a person to perform any kind of labor that produces an economic value. In order to maintain sufficient affluence in a sustainable economy, it is important to consider human beings in terms of their capabilities, regardless of their physical and mental abilities.

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Human Capital

Roman writer and statesman Cicero (106-43 BCE) described a slave as an instrumentum vocale — a tool that talks. In this current millennium, enfranchised workers not only employ inanimate tools that talk but also use HCE as a language that speaks for us. Nevertheless, this body of theory and methodologies does not entail the reduction of human status to that of machinery, regardless of what Cicero suggests.
Instead, HCE constitutes our science for measuring the economic outcome of independent human decisions. Furthermore, HCE helps us to document, to predict, and to support the value of forensic economic analysis scientifically to any legislative or judicial body.

In the field of economics, the work of American economists and authors Gary S. Becker, a Nobel Laureate in 1992, and Jacob Mincer form the cornerstone of the Theory of Human Capital. A half-century ago, Becker and Mincer developed modern Human Capital Theory (HCT), which emerged through the publication of Becker’s “Human Capital: A Theoretical and Empirical Analysis, with Special Reference to Education” (Chicago University Press, 1964) and Mincer’s “Schooling, Experience, and Earnings” (National Bureau of Economic Research, 1974).

The Theory of Human Capital encompasses many concepts and methods. We can summarize these as 1) mathematical formulae to provide cost/benefit analysis directed toward solving social problems; 2) methods of calculating the economic dividends derived from an investment in education or job training; and 3) formulae for determining the economic benefits of any activity, from reading a book to removing lead from our supply of gasoline to improve public health.

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Metaphysical Economics?

Modern society holds the common, though albeit superficial, belief that the simple increase in our access and exposure to cable television, the Internet, and their myriad permutations result in our current “Information Age.” In his book “The Medium Is the Massage” (Penguin Books, 1967), the Canadian author and philosopher Marshall McLuhan foresaw this phenomenon when he referred to television as a “cool media,” one that draws us into the medium itself and demands our involvement to compile the information that we assimilate. However, writing at a more fundamental economic level in “Schooling, Experience, and Earnings,” Jacob Mincer describes technical “know-how” to which we will refer as a contrasting definition of the Information Age. He states, “The investment-earnings relation is a sense of describing equilibrium loci in the capital market as well as in the labor market in which Human Capital is supplied as a factor of production.”

In other words, technical know-how (information) has emerged as an element that has become as fundamental to economic success as those of raw materials, tools, or financial capital. In addressing this issue, Becker  and Mincer both provide the methods for the calculation of the economic value of individual “Human Capital” through the analysis of factors that include formal education, on-the-job training, age, experience, and social background. Furthermore, we now use these methods to determine mathematical trajectories through the measurement of these combined factors, which vary over time. As a result, the tools developed by Becker and Mincer provide us with a motion picture of Human Capital rather than a still-life snapshot. Nonetheless, their economic models remain mechanistic ones.

On the base level, Human Capital reflects accumulated know-how, a point addressed by American author, architect, systems theorist, designer, and futurist R. Buckminster Fuller in his last book, “Critical Path” (St. Martin’s Griffin, 1982). “Bucky” explains “The large issue today is the technical know-how that governs the transformations of energy between its two states. Know-how is metaphysics. Metaphysics now rules.”
(Note:  Metaphysics is concerned with explaining the fundamental nature of being and the world.) Furthermore, Fuller describes metaphysics as “consisting only of weightless, dimensionless, abstract thoughts and mathematical principles….” Therefore, in its essence, we can consider modern HCE to be “Metaphysical Economics.”

Fuller continues, “When the head of one of the USA’s largest banks was asked what ‘commodities’ were involved in that bank’s import-export dealings with the rest of the world on behalf of the Chinese government, he answered that know-how was the prime commodity being acquired by the Chinese through that bank.” Therefore, following this line of thought to its conclusion, we can say that Human Capital gains its value when know-how is translated into human action.

However, let us ratchet up our discussion to a higher notch through the paraphrasing of Rudolf Steiner’s explanation of the preceding phenomenon from his Anthroposophical point of view (Note:  Anthroposophy postulates the existence of an objective, intellectually comprehensible spiritual world that is accessible to direct experience through inner development.) The individual, whose “I” manifests his/herself through the “Id,” in turn develops an “Idea” through the Human Mind. One transforms this Idea (i.e., the know-how) into action through the Human Heart. This postulation suggests that Human Capital must transcend the simple mechanics and metaphysics that cloud our perception, which contributes to our superficial vision in this Information Age. Instead, the concept of Human Capital must act through our individual and collective Human Hearts. Therefore, such action must remain true to stay a critical course that leads to positive long-run outcomes for humanity.

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The Practical Application of HCE

Within the legal sphere, a forensic economist relies heavily on the methodology and intellectual weight of Human Capital Economics. However, the measurement of Human Capital without higher vision runs the risk of degeneration into Cicero’s instrumentum vocale. Even though maintaining intellectual and emotional clarity is not easy in the face of the human tragedies that call for our professional services, forensic economists need to maintain an empathy with the human condition that we measure. Steiner emphasizes that, in our struggle to be free, it is people, not machines, that we must be.

In part, clarity and vision come to all of us through the metaphysical understanding of Human Capital as verbalized by Fuller and through the esoteric Anthroposophical intuition of human and spiritual freedom proffered by Steiner, along with any path that espouses goodness in the world through the teachings of wise and holy men and women throughout the ages. Maintenance of clarity and higher vision must accompany us as we remain firmly grounded, plying the economic tools derived from the practicable works of Becker and Mincer. Their theories, derived from empirical research, support time-tested ways of measuring and determining economic damages.

Though less than perfect in their ongoing development, these tools continue to work for all of us. The United States Departments of Labor and Education utilize the formulae of Becker, Mincer, and others to arrive at published estimations. The U.S. Congress relies upon researchers who use these same economic tools as a means for testing the future impact of current federal programs. On a more immediate level, we who work as forensic economists use specific forms of HCE in our determination of losses in cases of wrongful death, personal injury, and employment law.

It behooves the forensic economist to implement the social philosophy of economics, which stands as the bridge between the social science of economics and human behavior based upon deeper beliefs or, at least, upon “Animal Spirits” (an ancient term reintroduced by English economist John Maynard Keynes in the early 20th Century to describe the naive optimism of putting aside the thought of ultimate loss in any venture). However, the source of animal spirits remains something of a mystery. Therefore, let us consider an illustrative example for the purpose of clarification — a conundrum posed many times throughout human history.

We find this conundrum in the dilemma that a soldier faces in understanding his/her decision either to fight or to take flight. The seemingly contrasting dimensions of Human Capital Theory cannot explain fully why this soldier makes an instantaneous decision in the heat of battle:  Should s/he stay at his/her post and face certain death rather than flee? What exacerbates the issue is that the soldier may be serving with comrades-in-arms on the battlefield. If the soldier is alone, s/he may run. However, when serving with others, the soldier may decide to stay, even if it means laying done his/her life for the sake of fellow soldiers.
Embracing the unity of both dimensions of Human Capital helps to clarify our understanding of such a difficult and instantaneous decision. American director Steven Spielberg presents his study of this dilemma quite effectively in his film “Saving Private Ryan” (Amblin Entertainment, 1998).

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Takeaway

In summary, much of the work performed in the field of forensic economics involves the valuation of human life. Practicality in courts of law demands that we determine a measure of individual worth to self and to family as accurately as possible. Therefore, our concept of Human Capital Economics has developed and continues to evolve.

If we heed the adroit warning provided in the writings of Cicero, then we must avoid considering human beings as mere tools that talk, lest we retrace the exoteric path that led to the denigration of humanity that occurred in Europe during the 1930s and early 1940s as well as elsewhere throughout the world in the succeeding decades. The measurement of human value must embrace both sides of human nature, which should be taken as a whole rather than as two separate, opposing parts. This challenge remains as a matter of ultimacy to us as the human species. In closing, let us recall the words of English economist Alfred Marshall, the great-grandfather of Modern (Neo-Classical) Economics, who stated in his “Principles of Economics” (Macmillan, 1892), “The most valuable of all capital is that invested in human beings.”

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Dr. John F. Sase teaches Economics at Wayne State University (www.saseassociates.com, drjohn@saseassociates.com).
Gerard J. Senick is a freelance writer, editor, and musician. He earned his degree in English at the University of Detroit and was a supervisory editor at Gale Research Company (now Cengage) for over twenty years. Currently, he edits books for publication (www.senick-editing.com).
Julie G. Sase is a copyeditor, parent coach, and empath. She earned her degree in English at Marygrove College and her graduate certificate in Parent Coaching from Seattle Pacific University. Ms. Sase coaches clients, writes articles, and edits copy (royaloakparentcoaching.com).