Capital is what the shareowners own - and can sell.
It's not the labor, at least not directly. Tho IBM sold off its PC & server divisions to Lenovo, and many new Lenovo workers were ex-IBM, without explicitly looking to change - with the freedom to leave.
Becker was wrong to talk about "human capital", which muddies the ownership clarity. Humans own themselves, and they invest in themselves to increase their ... value? competence? ability? skill? "Skilled labor" is actually the continuum that should be discussed, since even the low IQ Down Syndrome young man who can barely make an expresso coffee can, actually, make and sell coffee.
Most companies have "bands" of compensation, which is roughly "skill & knowledge relevant to that company" worth paying for (at the lowest market price which the employee agrees to - women often agree to lower amounts.)
And, even under communism or socialism, there will be humans who become more skilled than others, including the intra-party fighting and backstabbing and bootlicking and demanding one's boots be licked. (I recently had to explain what "brown nosing" meant to a German American.) Sucking up is a skill, as is advertising/ publicizing your own elite status thru virtue signaling.
Our handling of intangible "capital", which can be easily copied and duplicated, needs serious review. For all digital products, the socialist goal of "to each according to their need" (or desire), is actually now economically feasible, in a way that houses, cars & medical care from humans is not.
Copyrights & patents have been very good for innovation, but the enforcement costs are now increasing and in some cases are already having enforcement costs of old, Mickey Mouse copyrights (literal and figurative) much higher than the benefits.
Accounting, tax policy, econ statistics - so much could change ... it's unlikely much will be done soon other than more decisions about copyrights with ai-learning; Getty Images is already suing (Open AI?) for their unpaid use of images publicly available on the internet. (I think with watermarks, that many image ai programs can easily delete, but I'm not yet following details.)
Re: "If you give them leaf blowers, it will go faster still."
A pet peeve from long observation and experience:
Leaf blowers make a din -- "negative externality" for neighbors on the block, or professors and students in classrooms on a leafy campus) -- and hardly reduce the time it takes to clear leaves.
Don't give them leaf blowers. Tell them: Don't be afraid to pick up a rake. Or tax the noise until close to zero. Or find a way to reduce transactions costs so that I can make a Coasean bargain to stop the madness. (A cup of coffee for switching to a rake?) Or have the COO impose a regulation against leaf blowers, with strict audit by the CA. End of rant!
I challenge the claim that leaf blowers aren't significantly faster than raking. But even if they didn't they would still get used universally by professional landscapers because they are way way less physically taxing, which is very important when you've got a lot of leaves/grass to clear.
DC just required electric over gasoline leaf blowers. I think it helps and a Pigouvian noise tax was infeasible. What I don't understand is why we do not apply the same logic to loud vehicle noise. (No I do not mean requiring electric cars :) but fining and refusing to renew registrations of cars that make/can make excessive noise.
Recent article in HBR by Peter Capalli titled "How Financial Accounting Screws up HR". He discusses how current GAAP rules don't allow companies to report development expenditures as an asset - even though people and knowledge are assets.
There is probably a thread here worth pulling on about how this lack of easily reportable data makes it even more difficult for economists to break away from the labor/capital model of the world.
Employees - almost every CEO says their most important asset is their employees. Yet this doesn't show up in accounting - employees are just an expense line.
If you could report them as an asset you could justify spending more on employees development because it would show an increase of value on your books. Because you can't do that there are some reasons to underinvest in employee development.
Being reported as an asset on the books no more implies ownership of the individual than reporting payroll expenditures. In fact it may actually cause businesses to care more about their people if they stop thinking of them purely as a cost.
At a sufficient level of abstraction, there's no distinction between labor and capital. Everything is just capital, generating some rate of return. The main thing that makes labor special is that it doesn't just generate a return but also consumes it. All income is someone's.
Modeling the perishability of intangible capital, especially "tacit knowledge" distributed among a community of productive practice, seems especially important for current economic analyses. Think for example of the difficulty of building an efficient semiconductor fab in the US because we've lost the community of practice that Taiwan now has; or consider that part of the reason it's now so expensive to build nuclear reactors nowadays is that we build so few that the relevant construction personnel are out of practice.
I agree, but does that not just reinforce the uselessness of looking at income distribution in terms of sources of income rather than who receives the income. I agree that this mistaken way of thinking about income distribution may lie behind special tax treatment of some kinds of income.
Thanks for explaining your view on labor vs capital. Now maybe you could explain your proposal for how to divide labor and capital is any more useful than what we currently have. In particular, I have a few concerns to address. I don't know how one would determine the market rate for unskilled labor. It seems like it varies greatly between communities, sometimes even within a larger community. Then one has to consider that different employers offer more to get more dependable employees. Is that capital? And what about premium pay for more strenuous or dangerous work? And then there's the basic supply and demand issue. The last few years demand for labor has been very high and unskilled labor rates have risen very fast. This has a much larger impact on your proposed calculation than on the traditional one. Does that really mean a shift in the labor-capitol as large as calculated?
As demonstrated by the rapid recovery after the total devastation of WW11 and the lack of progress in less developed economies, human capital is the most relevant consideration in understanding economics.
This classical capital/labor division and categories are just left over garbage from the false thinking of Marx trying to make oppressor/oppressed political divisions to exploit. When your categories don't match reality, time to try different categories.
I like the idea of limiting the definition of labor income to an unskilled worker's wages, but I would go much further. Don't unskilled laborers usually have hands? Or legs? Or eyeballs? Shouldn't those productive assets be considered capital too? I've long felt that all capital is just extensions or augmentations of someone's body, whether we are talking about college degrees or limbs or gloves or leaf blowers or trucks or factories or shares in a multinational corporation. It's how we keep growing when our biological growth stops. As far as I'm concerned, all capital is human capital.
I struggle with the proposed concept. If 2 workers, one unskilled and one skilled, produce a widget in a single time period, any physical capital used would be captured by depreciation, all of the unskilled worker's wage would be labor expense; but would the skilled worker's wage be divided into labor expense and depreciation? Is that how the accounting would work?
I'm not sure about your definition. It implies that if a programmer leaves Microsoft, Microsoft loses $25k of labour and $175k of capital. That seems weird to me.
Labour should be something like the value gained or lost when a worker joins or leaves an organization.
I actually kind of like the notion that when the programmer leaves he takes a whole lot of capital with him. I have seen instances of individuals leaving companies that drastically changes how the company works. In one case I worked for a firm where there was exactly one guy who knew the programming language that their primary scheduling system was run on, and so he was the only guy who could fix it and that was his only job because he damned well knew he didn't have to do anything else. We used to joke that he had perfect job security until someone decided that it was worth spending a few million to replace the scheduling system, and since they only had to pay him a hundred thou a year or so, that was never going to happen. If esoteric program man died, the company was hosed and would have to drop those millions immediately to get a replacement program up and running before the other broke and couldn't be fixed.
So, yea, I can see a model where a single person leaves and takes $175K of capital with him. His labor is replaceable, but the capabilities of that capital are not. (We call this "organizational risk" in fancy business talk.)
I guess that's true. But it's more useful to divide value into two parts: value that changes as people change; and value that does NOT change when people change. The first is labour, the second is capital. From this point of view, "intellectual capital" is in the labour bucket, regardless of the name.
I like that too, although the strange thing with human and organizational capital is that they are positive sum. That is to say, if I leave a company I both take human and organizational capital away from the company, but I don't get to keep it and take it somewhere else exactly either. It is just gone.
In the example of esoteric program man, everyone knew he wasn't going to leave of his own accord, either. No other company wanted to hire someone whose sole skill was a hideously obsolete coding language and knowledge of a system that no other company used. If he quit his next salary would be much, much lower, even as the company loses a ton of money too.
I think in part the problem is just that "labor" and "capital" are too broad, and thus limiting, definitions. It is almost like trying to classify all living things as predator and prey, and only as one or the other. It makes me think the goal of a "production function" that you can dump in various values for different types of capital and labor and get a consistent answer is just a fool's errand. It is too complex a system for a simple function to work. We end up doing too much backwards correction, looking at the output of a company and saying e.g. "well, they weren't as productive as they should have been, so this uhm... human capital must not have been as high as we thought. Yea, that's the ticket!"
It wouldn't actually be $175,000 in capital, it would be X times $175,000, with X being ~ 12-15, so the company would lose $2.1 to $2.6 million in capital- but only if they can't replace the person leaving. If you think about it that way, if a car manufacturer had a $2 million dollar piece of equipment brake and they couldn't replace it then it makes a lot more sense.
I do like this - the next iteration I'd like to see considers 'over-education' and perhaps 'specialization.' John's point makes sense but loses the idea that on small plots, leaf blowers can be counter-productive as well. An expensive machine may not actually do the job better; nor an expensive education.
Capital is what the shareowners own - and can sell.
It's not the labor, at least not directly. Tho IBM sold off its PC & server divisions to Lenovo, and many new Lenovo workers were ex-IBM, without explicitly looking to change - with the freedom to leave.
Becker was wrong to talk about "human capital", which muddies the ownership clarity. Humans own themselves, and they invest in themselves to increase their ... value? competence? ability? skill? "Skilled labor" is actually the continuum that should be discussed, since even the low IQ Down Syndrome young man who can barely make an expresso coffee can, actually, make and sell coffee.
Most companies have "bands" of compensation, which is roughly "skill & knowledge relevant to that company" worth paying for (at the lowest market price which the employee agrees to - women often agree to lower amounts.)
And, even under communism or socialism, there will be humans who become more skilled than others, including the intra-party fighting and backstabbing and bootlicking and demanding one's boots be licked. (I recently had to explain what "brown nosing" meant to a German American.) Sucking up is a skill, as is advertising/ publicizing your own elite status thru virtue signaling.
Our handling of intangible "capital", which can be easily copied and duplicated, needs serious review. For all digital products, the socialist goal of "to each according to their need" (or desire), is actually now economically feasible, in a way that houses, cars & medical care from humans is not.
Copyrights & patents have been very good for innovation, but the enforcement costs are now increasing and in some cases are already having enforcement costs of old, Mickey Mouse copyrights (literal and figurative) much higher than the benefits.
Accounting, tax policy, econ statistics - so much could change ... it's unlikely much will be done soon other than more decisions about copyrights with ai-learning; Getty Images is already suing (Open AI?) for their unpaid use of images publicly available on the internet. (I think with watermarks, that many image ai programs can easily delete, but I'm not yet following details.)
Re: "If you give them leaf blowers, it will go faster still."
A pet peeve from long observation and experience:
Leaf blowers make a din -- "negative externality" for neighbors on the block, or professors and students in classrooms on a leafy campus) -- and hardly reduce the time it takes to clear leaves.
Don't give them leaf blowers. Tell them: Don't be afraid to pick up a rake. Or tax the noise until close to zero. Or find a way to reduce transactions costs so that I can make a Coasean bargain to stop the madness. (A cup of coffee for switching to a rake?) Or have the COO impose a regulation against leaf blowers, with strict audit by the CA. End of rant!
I challenge the claim that leaf blowers aren't significantly faster than raking. But even if they didn't they would still get used universally by professional landscapers because they are way way less physically taxing, which is very important when you've got a lot of leaves/grass to clear.
DC just required electric over gasoline leaf blowers. I think it helps and a Pigouvian noise tax was infeasible. What I don't understand is why we do not apply the same logic to loud vehicle noise. (No I do not mean requiring electric cars :) but fining and refusing to renew registrations of cars that make/can make excessive noise.
Recent article in HBR by Peter Capalli titled "How Financial Accounting Screws up HR". He discusses how current GAAP rules don't allow companies to report development expenditures as an asset - even though people and knowledge are assets.
There is probably a thread here worth pulling on about how this lack of easily reportable data makes it even more difficult for economists to break away from the labor/capital model of the world.
Tiny part of the problem of taxing business income.
But why can't "development expenditures" just be expensed. Why would a firm WANT to treat them as assets to be depreciated.
Are we talking about employees or slaves?
Employees - almost every CEO says their most important asset is their employees. Yet this doesn't show up in accounting - employees are just an expense line.
If you could report them as an asset you could justify spending more on employees development because it would show an increase of value on your books. Because you can't do that there are some reasons to underinvest in employee development.
Being reported as an asset on the books no more implies ownership of the individual than reporting payroll expenditures. In fact it may actually cause businesses to care more about their people if they stop thinking of them purely as a cost.
I don't know about CEO psychology, but expensing "investments" in employees is better for the bottom line than capitalizing them.
At a sufficient level of abstraction, there's no distinction between labor and capital. Everything is just capital, generating some rate of return. The main thing that makes labor special is that it doesn't just generate a return but also consumes it. All income is someone's.
I thought you were going to say everything is labor. :)
Modeling the perishability of intangible capital, especially "tacit knowledge" distributed among a community of productive practice, seems especially important for current economic analyses. Think for example of the difficulty of building an efficient semiconductor fab in the US because we've lost the community of practice that Taiwan now has; or consider that part of the reason it's now so expensive to build nuclear reactors nowadays is that we build so few that the relevant construction personnel are out of practice.
I agree, but does that not just reinforce the uselessness of looking at income distribution in terms of sources of income rather than who receives the income. I agree that this mistaken way of thinking about income distribution may lie behind special tax treatment of some kinds of income.
Taking human capitol seriously would quickly lead to anti-woke conclusions. This is why it is not taken seriously.
Thanks for explaining your view on labor vs capital. Now maybe you could explain your proposal for how to divide labor and capital is any more useful than what we currently have. In particular, I have a few concerns to address. I don't know how one would determine the market rate for unskilled labor. It seems like it varies greatly between communities, sometimes even within a larger community. Then one has to consider that different employers offer more to get more dependable employees. Is that capital? And what about premium pay for more strenuous or dangerous work? And then there's the basic supply and demand issue. The last few years demand for labor has been very high and unskilled labor rates have risen very fast. This has a much larger impact on your proposed calculation than on the traditional one. Does that really mean a shift in the labor-capitol as large as calculated?
As demonstrated by the rapid recovery after the total devastation of WW11 and the lack of progress in less developed economies, human capital is the most relevant consideration in understanding economics.
This classical capital/labor division and categories are just left over garbage from the false thinking of Marx trying to make oppressor/oppressed political divisions to exploit. When your categories don't match reality, time to try different categories.
I like the idea of limiting the definition of labor income to an unskilled worker's wages, but I would go much further. Don't unskilled laborers usually have hands? Or legs? Or eyeballs? Shouldn't those productive assets be considered capital too? I've long felt that all capital is just extensions or augmentations of someone's body, whether we are talking about college degrees or limbs or gloves or leaf blowers or trucks or factories or shares in a multinational corporation. It's how we keep growing when our biological growth stops. As far as I'm concerned, all capital is human capital.
I struggle with the proposed concept. If 2 workers, one unskilled and one skilled, produce a widget in a single time period, any physical capital used would be captured by depreciation, all of the unskilled worker's wage would be labor expense; but would the skilled worker's wage be divided into labor expense and depreciation? Is that how the accounting would work?
I would think the skilled worker's wage would be divided between labor expense and rent on capital the company doesn't own itself.
I'm not sure about your definition. It implies that if a programmer leaves Microsoft, Microsoft loses $25k of labour and $175k of capital. That seems weird to me.
Labour should be something like the value gained or lost when a worker joins or leaves an organization.
I actually kind of like the notion that when the programmer leaves he takes a whole lot of capital with him. I have seen instances of individuals leaving companies that drastically changes how the company works. In one case I worked for a firm where there was exactly one guy who knew the programming language that their primary scheduling system was run on, and so he was the only guy who could fix it and that was his only job because he damned well knew he didn't have to do anything else. We used to joke that he had perfect job security until someone decided that it was worth spending a few million to replace the scheduling system, and since they only had to pay him a hundred thou a year or so, that was never going to happen. If esoteric program man died, the company was hosed and would have to drop those millions immediately to get a replacement program up and running before the other broke and couldn't be fixed.
So, yea, I can see a model where a single person leaves and takes $175K of capital with him. His labor is replaceable, but the capabilities of that capital are not. (We call this "organizational risk" in fancy business talk.)
I guess that's true. But it's more useful to divide value into two parts: value that changes as people change; and value that does NOT change when people change. The first is labour, the second is capital. From this point of view, "intellectual capital" is in the labour bucket, regardless of the name.
I like that too, although the strange thing with human and organizational capital is that they are positive sum. That is to say, if I leave a company I both take human and organizational capital away from the company, but I don't get to keep it and take it somewhere else exactly either. It is just gone.
In the example of esoteric program man, everyone knew he wasn't going to leave of his own accord, either. No other company wanted to hire someone whose sole skill was a hideously obsolete coding language and knowledge of a system that no other company used. If he quit his next salary would be much, much lower, even as the company loses a ton of money too.
I think in part the problem is just that "labor" and "capital" are too broad, and thus limiting, definitions. It is almost like trying to classify all living things as predator and prey, and only as one or the other. It makes me think the goal of a "production function" that you can dump in various values for different types of capital and labor and get a consistent answer is just a fool's errand. It is too complex a system for a simple function to work. We end up doing too much backwards correction, looking at the output of a company and saying e.g. "well, they weren't as productive as they should have been, so this uhm... human capital must not have been as high as we thought. Yea, that's the ticket!"
It wouldn't actually be $175,000 in capital, it would be X times $175,000, with X being ~ 12-15, so the company would lose $2.1 to $2.6 million in capital- but only if they can't replace the person leaving. If you think about it that way, if a car manufacturer had a $2 million dollar piece of equipment brake and they couldn't replace it then it makes a lot more sense.
I do like this - the next iteration I'd like to see considers 'over-education' and perhaps 'specialization.' John's point makes sense but loses the idea that on small plots, leaf blowers can be counter-productive as well. An expensive machine may not actually do the job better; nor an expensive education.
“Woman” is easy. Define “Capital” or “Capitalism”😏