Chicago, 1960 The United States is mired in a long, costly, and dangerous Cold War with the Soviet Union. In the Economics Building at the University of Chicago, two academics are engaged in an intense private conversation. Theodore "Teddy" Schultz is tall and lanky. Raised on a farm in South Dakota and kicked out of school by his father, he still managed to achieve dizzying academic heights, first as chairman of the economics department in 1944 and then as president of the American Economic Association in 1960. Schultz has close ties to the Ford Foundation, an important front for CIA programs during the Cold War.
His junior sparring partner is Milton Friedman, who in 1946 joined the so-called "Chicago School". Although Friedman was short, only 1.52 meters, he already enjoyed a fierce reputation as a verbal opponent. In time, Friedman would flirt with the CIA as well, training Chilean economists in the art of neoliberal "shock therapy." His know-how came in handy after the US-sponsored overthrow/death of Chilean Marxist President Salvador Allende in 1973. Richard Nixon said he wants to hear the cry of the Chilean economy.
When two men ran into each other in a dark, oak-paneled office, they had a big problem. The US government was reshaping university economists in a new light; no longer clumsy professors (in a pipe and a tweed jacket), but the creators of ideological weapons as important as the intercontinental ballistic missiles being prepared at Vandenberg Air Force Base in California. Members of the Chicago school were confident that they could make a significant contribution to the struggle.
But how exactly?
Schultz fidgets nervously in his leather chair. Economic growth should be the answer, he argues. Friedman nods in agreement, but frowns softly as Schultz makes his case. In Moscow, Nikita Khrushchev had just declared that "the growth of industrial and agricultural production is the battering ram with which we will smash the capitalist system." This brazen provocation caused a stir when it was read to the Joint Economic Committee of the US Congress in 1959.
Friedman remains silent, a rarity that Schultz seizes on to expand his point of view. There is also a very pragmatic aspect to his plan. Not only did economic growth become a hot topic after Khrushchev's speech, but a number of influential technocrats in the US government are increasingly sympathetic to Schultz's views, especially the Council of Economic Advisers. They were tasked by the Oval Office to develop a growth strategy that would eclipse the USSR and leave it to die.
Although Schultz holds strong neoclassical ideas about growth and development, he learned from his earlier studies of agricultural productivity that increased public spending on education is absolutely essential to a national growth agenda. Not only would this give the US a scientific edge in the space race, but it would also enrich the country's broader pool of specialists, making it more productive and thus defeating the Soviets in their own "growth game."
Friedman intervenes abruptly. Yes, he intones, the issue of economic growth is vital. But public spending is not the way forward. It's easy to imagine Friedman bullying his weary chairman once again about the evils of "big government" and central planning. Instead, the Soviet enemy must be confronted strictly on American terms, where personal freedom and capitalist enterprise come to the fore. The state is the problem, not the solution. Friedman's ideal hero is a self-made entrepreneur. He often quoted a joke from vaudeville humorist Will Rogers to lash out at his government-friendly critics: Just be thankful you don't have a government you're actually paying for!
Here Friedman echoes the views of the Austrian free-market fanatic F. A. Hayek, who entered the University of Chicago in 1950. While in exile in London back in the 1940s, Hayek wrote the vehemently anti-communist tract The Road to Slavery. . An abridged version was published in the Reader's Digest and made the author famous. Hayek's almost fanatical belief in capitalist individualism and all that was directed against the USSR undoubtedly influenced the terms of the debate that Schultz and Friedman were currently engaged in.
The two academicians pause to collect their thoughts. Then the concept of human capital is introduced. Possibly Schultz, as it might help to get along with his tiny counterpart. Unfortunately, this proved to be the doom of the senior academician in the debate. In fact, the idea of human capital was not new. Adam Smith pointed out long before that the skills and abilities acquired by employees (eg training, education, etc.) can increase the economic value of an enterprise. But Schultz only recently became interested in this idea. He is ak
actively encouraged new faculty and graduate students to build a more robust and formalistic theory of human capital. Legend has it that Schultz suddenly realized its importance after visiting an impoverished farm. He asked the shabby owners why they were so pleased. Because they managed to send their children to school, they replied. This would guarantee a secure income for the family in the long run.
Friedman was also fascinated by the concept of human capital, but from a different perspective. Some younger colleagues, including Gary Becker, Friedman's graduate student who has made a name for himself in this field of economics, have made major breakthroughs. One of them particularly caught Friedman's attention. Unlike money or equipment, this type of capital cannot conceptually be separated from the person who owns it. It is an integral part of it. And, accordingly, someone's human capital cannot belong to someone else, since that would be slavery. Therefore, who exactly should be responsible for investing in it or enjoying its benefits? We get an idea of Friedman's position on this issue from Becker's earlier article in which he showed why it is not rational for a firm to fund employee training schemes, since the same investment could one day literally walk out the door and join a competitor.
Friedman likely agreed with Schultz that human capital theory was the ideal weapon they were looking for to counter the Soviet threat on the economic front. The phrase itself implied that the interests of the people naturally coincide with the values of capitalism. But therein lay the tension between the two economists. Schulz's introduction of human capital theory—with all his talk of public spending programs and central planning—threatened to blur that image of the independent, opinionated pseudo-capitalist that everyone thought he was.
The force of Friedman's argument seems to have hit a nerve. We see clear signs of this in Schulz's inaugural address to the American Economic Association in December 1960. As expected, he stressed the importance of national investment in human capital and its relationship to economic growth. Toward the end of the speech, Schultz mentions that a colleague asked for an important detail to be clarified: “Should the profits from public investment in human capital go to the people in whom it is made?”
Schultz wants to say yes. He believes that public investment in people's skills is necessary and should be managed as a public good. These skills can be used as a personal advantage by individuals, for example a publicly funded higher education is used to increase an individual's income throughout their life. But investment, in turn, will eventually have broader positive effects or “externalities” on the economy. However, Schultz begins to vacillate over this. He seems to be aware that the intellectual ground has shifted and soon seems a little bewildered:
The policy issues implied in this question run deep and are full of misunderstandings related to both resource allocation and welfare. Physical capital generated by public investment is generally not donated to individuals. Distribution processes would be greatly simplified if public investment in human capital were placed on the same footing.
In the footnote to the published version of the appeal, we find out who the annoying colleague was. Friedman, of course.
Friedman hilariously summed up the theory of human capital with a succinct phrase: there is no such thing as a free lunch.
The answer Friedman received from Schultz is understandably ambivalent, with two possible implications. First, the return on human capital derived from public investment (such as taxes) must remain in the hands of the state. The problem here is that it will be socialism. And besides, we have already learned that the individual cannot be separated from his human capital. So only the second conclusion remains. If the return on human capital derived from public investment (such as taxes) is not a "gift" to an individual benefactor, then he or she must bear some or all of the investment costs. In short, this is not a handout.
Schultz's camp fought a hopeless battle. Government attempts to apply his ideas and dramatically increase federal spending on education were crushed in 1961 and 1963.
More importantly, Friedman's showdown with Schultz still resonates today, and not in a good way. For example, one can trace a red thread from his victory in 1960 to the question of who exactly is responsible for investing in human capital and the student debt catastrophe currently unfolding in the US, UK and many other countries that took neoliberalism too uncritically. . Want to
graduate and succeed in life, but can't afford it? Then here is a student loan to get you through, with conditions that will haunt you to your grave. The basic idea of human capital theory turns out to be simple, and Friedman briskly summed it up in a pithy catchphrase in the 1970s: There is no such thing as a free lunch.
Friedman discovered in the theory of human capital something more than just a means of accelerating economic growth. His very concept of the human was also an ideological weapon, especially when it came to countering the work-centric discourse of communism both inside and outside the US. For isn't the theory of human capital the ultimate conservative answer to the Marxist slogan that workers should seize the means of production? If each person is already his own means of production, then the supposed conflict at the heart of the capitalist labor process logically dissolves. Schultz, too, was beginning to see the light and agreed that workers could be de facto capitalists: "workers became capitalists not as a result of the distribution of ownership of corporate shares, as required by popular law, but as a result of the acquisition of knowledge and skills of economic value."
One can only guess what the Soviet Union made of all this. The theory of human capital literally "disappeared" workers from the dominant narrative about what makes capitalism move. It was a brilliant ploy to spread pro-capitalist sympathies in the US, especially among the working class, who were beginning to suspect that their current employer might be the real enemy. Now the capitalists spoke in a different language: “How can you be against us? In fact, you are one of us!
With the election of Margaret Thatcher and Ronald Reagan, human capital theory found a hospitable political environment in the English-speaking world. What followed in the UK, the US, and elsewhere can best be described as a massive decollectivization movement. The society no longer existed. Only individuals and their families. In particular, Hayek was a great discovery for the Iron Lady, who praised him endlessly.
The history of human capital theory in Western economics has been about the abandonment of people.
In this new vision of the economy, workers cannot be seen as a special class with common interests. They didn't even belong to a company... too communal. For sure, perhaps they were not even working! Instead, Homo economicus qua human capital was somehow external to the firm, pursuing only its own interests and investing in its own abilities in order to achieve the best result. This fantasy of a "nation of free agents" often bordered on the supernatural. For this reason, airport pop management books from the 1980s and 90s are fun. According to Charles Handy's The Age of Paradox (1994), for example: "Karl Marx would have been surprised. He dreamed of the day when workers would own the means of production. Now they are doing it. Peter Drucker even felt comfortable announcing the onset of a "post-capitalist society", calling the US the most socialist country, because all workers eventually own some capital.
What is no joke is the bold new world of work that followed neoclassical ideas such as human capital theory. Only when the wage earner is created in this ultra-individualistic fashion will the regressive trend toward on-demand labor contracts (or "zero hours") ever take hold in the economy. What some call the uberization of the workforce occurs by reclassifying workers as independent business owners, thereby shifting all the costs of employment to the worker: training, uniforms, vehicles, and pretty much everything else.
Back in the 1960s, Friedman envisioned a society in which we would all be wealthy and successful entrepreneurs. In reality, we have received pay cuts, reduced vacation or sick leave, chronic skills shortages, credit card debt, and endless hours of pointless work. In any case, the history of human capital theory in Western economics has been about abandoning people, not the other way around.
This is because he was born during an extreme period in the history of the 20th century, when many believed that the fate of humanity was hanging in the balance. Therefore, it should be approached as a rather eccentric and largely unrealistic relic of the Cold War. It was only in this highly unusual environment that individualists like Hayek and Friedman could be taken seriously and listened to. In the face of communist collectivism, the Chicago school developed a diametrically opposed concept of a society populated by pod-like people who automatically shun all forms of non-transactional social cohesion.tions. These loners are driven only by the spirit of self-serving competition. Blindly attached to money. Insecure and paranoid. No wonder we are so unhealthy today.