Human capital: a brief historical review

2. Human capital: a brief historical review

The concept of human capital was first introduced and estimated by Petty 1690. Cantillon 1755 discussed the concept of HC and estimated the cost of rearing a child until working age. Smith 1776 presented a clear analysis of the concept of HC and included it as a part of the ‘general stock human and non-human capital of any country or society’, where this general stock is composed of the following resources, i of all useful machines and instruments of trade which facilitate and abridge labor; ii of all those profitable buildings which are the means of procuring a revenue; iii of the improvements of land; and iv of the acquired and useful abilities of all the inhabitants or members of the society. Afterwards, he added, the ‘‘acquisition of such talents, by the maintenance of the acquirer during his education, study, or apprenticeship, always cost a real expense, which is a capital fixed and realized, as it were, in his person’’. Although Smith did not engage himself either in any human capital estimation or in the proposition of a particular approach to estimate it, he implicitly adopted the cost of production approach. He advanced the following five basic determinants of inequalities of earned income Smith, 1776, ‘‘first, the agreeableness or disagree- ableness of the employment themselves; secondly, the easiness and cheapness, or the difficulty and expense of learning them; thirdly, the constancy or inconstancy of employment in them; fourthly, the small or great trust which must be reposed in those who exercise them; and, fifthly, the probability or improbability of success in them’’. Since Smith until the middle of the 20th century, distinguished economists, statisticians and econometricians accepted the concept of HC as a proxy for genetic and acquired skills and abilities. Among them, we mention Bentham, Say, Senior, J.S. Mill, List, von Thunen, Engel, Walras, Marshall, I. Fisher, Pareto, Beneluce, Nicholson, de Foville, Barriol, Dublin, Lotka, Gini, Mortara, Pietra, J.M. Clark, Ros Jimeno and Sensini. With the exception of Bentham, Say, Senior, Mill, List, Walras and von Thunen, all the others dealt with some form of quantitative HC estimation. On the other hand, based on ethical considerations, Mill and Marshall objected the notion of HC. Similar position is taken by Perroux 1974, who used instead the concept of human resources. By the end of 1950s, with the pioneering contributions of Mincer 1958, 1970, Schultz 1959, 1961, Becker 1962, 1975, HC theory became an important field of theoretical and applied research. These authors undertook a thorough study of the concept of HC and analyzed the main forces that contribute to its formation and accumulation. However, they did not engage in any quantitative estimation of the amount of HC. Mincer managed to bypass its estimation, arriving at the specifica- tion of the earnings function as a reduced form of HC equation with different years of schooling and adding the mathematically convenient and controversial counter- factual assumption of the equality of their present values at the time training begins. Afterwards, Becker 1974 derived the earnings function as a function of years of schooling and of working experience from a consideration of the rate of return of investment in HC, such as education, on the job training and mobility. More generally, as Willis 1986 observed, ‘‘the term ‘earnings function’ has come to mean any regression of individual wage rates or earnings on a vector of personal, market, and environmental variables thought to influence the wage’’. Departing from the approach of Gibrat 1931, Rutherford 1955, Mandelbrot 1960, 1963, who considered chance as a dominant variable determining the levels of earnings, whereas individual choice was not, Mincer 1958, 1970 specified the first model of earned income derived from individual investment behavior, i.e. individual choice. He took ‘‘the length of training as the basic source of heterogene- ity of labor incomes’’ Mincer, 1970. This training raises productivity and post- pones the entrance age into the labor market. The specification of Mincer’s earning function is derived from four highly simplifying assumptions, where the first and the fourth are only mathematical devices to rationalize an obvious explanatory variable, i.e. years of schooling, which suggests instead a direct specification based on factual observations. The assumptions of Mincer 1970 are, A.1: ‘‘In a competitive equilibrium, the distribution of earnings is such that the present values of future earnings discounted at the market rate of interest are equalized al the time training begins’’. A.2: ‘‘The model is formulated in terms of training periods which are completed before earnings begin’’. A.3: ‘‘No further investments in human capital are undertaken by individuals after completion of their schooling’’. A.4: ‘‘The flow of their earnings is constant throughout their working lives’’. Becker 1975 extended Mincer’s approach by including postschool investments in HC, which can be disaggregated to deal with different types of investment, such as, training, health, and migration. After a sequence of simplified assumptions, Becker specified earned income as a function of years of schooling and postschool investments in HC, i.e. log E t = log E + rs + rP t , 3 where, in period t, E stands for earnings, s for years of schooling, and P for net postschool investment, whereas E stands for raw earnings, i.e. earnings without schooling and postschool investment in HC; r, r and E are parameters to be estimated.

3. Human capital: methods of estimation