Integrating Human Capital with Human Development:
The Path to a More Productive and Humane Economy
John F. Tomer
For the most part, human capital theory, at least the version most economists have subscribed to, has emphasized human cognitive development and the acquisition of knowledge and skills that enable enhanced productivity and earnings. In light of recent research findings, particularly that concerning neurodevelopment and early childhood development, it is becoming apparent that this standard version of human capital theory has a far too limited conception of human capabilities and how they are created. This human capital theory is much too focused on cognitive learning and on relatively tangible contributions to productivity at work. It gives too little consideration to intangible, noncognitive aspects of learning. Also, it doesn’t sufficiently consider the role of parents and a variety of others who provide childcare and therapeutic help to children and adults. Moreover, it doesn’t consider recently accumulated knowledge related to the human brain’s functioning and development.
Therefore, this book proposes in Chapter 2 an integration of the human capital concept with the concept of human development. Some efforts in this direction have already taken place or are underway. Clearly, James Heckman and his collaborators are doing outstanding work, notably in the area of early childhood development. But in addition to those efforts, what is needed is a full-fledged integration of human capital (HC) and human development (HD), one that considers not only development over the entire life cycle but one that considers the full depth of human potential (many different human capabilities and disabilities). Such an integration of HC and HD can help us better understand what has to happen for individuals to flourish and to develop to their full potential. With the perspective of such an integration, we will be able to get a much more clear idea concerning the types of HC investment that have been relatively neglected, types that may turn out to have a relatively high rate of return.
HD involves social, psychological, emotional, biological, cognitive, and other dimensions. Humans develop along a set sequence of steps involving a typical maturational path. If an individual’s environment is favorable, more or less full maturation may be attained, and the individual may reach his/her society sanctioned potential. However, in many cases in which the environment is not favorable, the individual may fail to negotiate the transition from a lower to higher stage of development or may get partially or fully stuck with respect to a particular phase of development. Arguably, these situations call for societal intervention, i.e., investments in HC, that enable the individual to accomplish the difficult development and move on to the next level. This conception of the HD process is much different than the standard HC view in which HC inputs (information, knowledge, etc.) are put into one end of the proverbial black box enabling capacity for producing higher output to emerge from the other end.
Conceptually, the HD concept used here can be represented by a three sided pyramid. One side represents HD as a somewhat standard conception of HC formation. It shows an individual developing cognitively stage by stage along the usual educational path. A second side represents important noneducational stages in an individual’s psycho-social-emotional development, a path reminiscent of Maslow’s need hierarchy. The third side represents important steps in a person’s neurodevelopment. Using the HD pyramid, provides a useful perspective on an individual’s overall lifetime development. The pyramid conception arguably provides a useful guide to understanding how different types of investment in HC can help the person develop toward different aspects of their potential.
Chapter 3 reviews the thinking of scholars like Herbert Simon, Daniel Kahneman and George Loewenstein from whom we have learned that people have limited cognitive capacity to deal with the complexity of the real world, make many cognitive errors, and generally make poor decisions when strong negative emotions are aroused. Another mental deficiency is that our minds in decision making are too often oriented to seeking what we want or desire, not what is really good for us. There is, however, some good news. We can learn how to avoid error and become good enough decision makers. Gerd Gigerenzer has explained how successful decision makers typically learn how to use rules of thumb or heuristics in the face of complexity. In other words, to counter decision-making deficiencies, people can raise their decision making capacities by making a variety of investments in intangible human capital. An important implication of the above is that decision-making deficiencies contribute to businesses’ internal inefficiencies (X-inefficiencies). These decision-making deficiencies imply below potential national productivity which can typically be remedied by appropriate investment in human capital.
The purpose of Chapter 4 is to explain about the inadequacy of the two stereotypical economic actors, economic man and psychological economic man, and to develop a more satisfactory alternative stereotype, smart person. The smart person is more human than economic man and less irrational than psychological economic man. Missing from the existing actors, but present in the smart person actor, is the human who develops in stages along a number of developmental pathways over a lifetime. Behavioral economics needs a smart person actor who, while far from perfect, develops, and all too often fails to develop, character and capabilities in a realistic way. Smart person’s character and behavior derive in good measure from the research of a variety of noneconomist scientists and careful observers of human development. Smart people can improve their capabilities and character, learning to overcome many tendencies to error, thereby becoming competent, boundedly rational, virtuous, even wise decision makers who make big and small decisions in their own best interest and the best interests of their societies.
Chapter 5 takes a deep look into the earliest phase of child development, from birth to two or three years of age, in order to understand the implications of this early development for human capital theory. Recently, important noneconomic research has revealed the growing prevalence of adverse childhood experiences (ACEs) among young children and the role this plays in impairing their brain functioning and contributing to later age physical and mental ailments. Chapter 4 explores the role of ACEs for understanding the growth of poverty and inequality of both income and academic achievement. This chapter develops a theory indicating how the magnitude and growth of ACEs and relatively poor parenting within the lower socio-economic class explains why the children of the lower group have relatively low levels of human capital, and consequently, relatively poor educational achievement and later workplace performance. Note that this chapter builds on James Heckman’s important contributions related to human capital formation in early childhood.
Chapter 6 explains about the main social and economic facts concerning obesity. To understand the rising prevalence of obesity, it is necessary to understand the role of the growing infrastructure of obesity. This infrastructure includes food processing firms, notably their behavior relating to the qualities of processed food, their marketing of “junk food” and fast food, and their food cost reducing technological changes. In essence, obesity is the expected result when vulnerable people, those with low intangible human capital resources, encounter the many influences of the infrastructure of obesity. These people have gotten stuck in dysfunctional eating and exercise patterns which socio-economic influences have encouraged. These unfortunate obesity patterns are a product of variety of poor human development patterns associated to a great degree with advanced industrial economies.
Chapter 7 is similar to Chapter 6 in that it is concerned with the socio-economic causes of not just obesity but all chronic health problems. Similar to obesity, many chronic health problems have their origin in the poor diets and behavioral problems characteristic of modern, affluent, civilized populations. The essence is that chronic health problems tend to occur when vulnerable individuals who have low personal capital, low social capital, low health capital, and genes predisposing them to particular chronic ailments encounter stressful situations, lower prices of unhealthy food, higher prices for exercise, and the large and growing business infrastructure associated with processed, low nutrition food, not to mention few favorable exercise opportunities. Again, it is these dysfunctional socio-economic patterns that leads to poor human development (low HC endowments), and thus, vulnerability to chronic ailments.
Chapter 8 argues for the kind of societal and policy efforts that would be necessary to resolve the social problem of obesity. Because of the large scale of the problem, this chapter explains about 1) why a social movement is necessary and 2) the kinds of government policy efforts that would have a real chance of eliminating or drastically reducing obesity . This chapter does not provide details of a specific antiobesity policy plan(s). It does, however, outline the kinds of efforts that need to happen to fix the obesity problem. The needed efforts are not just those of governments; they include efforts of communities, grass-roots groups, individuals, and food businesses. The needed efforts are numerous and taken as a whole constitute a socio-economic transformation which involves reversing the negative behavior patterns that contribute to obesity. In effect, what is needed is a kind of high level or aggregate HC formation that produces changes in socio-economic structure and behavior.
The purpose of chapter 9 is to provide a more general context in order to better understand the kinds of socio-economic problems involving human capital deficits which previous chapters have dealt with. These problems typically arise when new economic and technological developments occur, causing changes in the external environment of businesses and people. As businesses and people adapt, socio-economic patterns change, sometimes giving rise to negative dysfunctional patterns. Also important are two core underlying human motivations, self-interest and other interest (empathy). Problems are most likely when self-interest motivation is excessive (selfish, hedonistic, greedy) and when self-interest is not tempered, restrained or conditioned by empathic motivation. This chapter further explains how a developmentally oriented HC strategy could be an important step in moving toward not only a more productive economy but a more empathic, developmentally oriented society. Investment in appropriate types of human capital can help create a better motivational environment, moving toward a more caring socio-economy.
Chapter 10 provides conclusions. Economists ought to use a much broader concept of human capital (HC), one fully reflecting human realities that the standard HC concept does not consider. This book has analyzed a number of socio-economic problems in which humans’ developmental potential does not get realized. Among these are failure of brain development due to adverse childhood experiences, poor health due to obesity, poor health due to chronic ailments, failure to negotiate adult developmental stages, poor economic decision making, failure to realize important virtues and gain wisdom, and failure of capitalist societies because its citizens have not developed crucial virtues. A key factor in these is that people have not developed important capacities. Understanding these problems and remedies requires a broad, developmentally oriented concept of HC.
In conclusion, the integration of the concepts of HC and HD enables us to understand many possibilities for improving human capabilities, possibilities heretofore only dimly conceived of. It facilitates the formulating of HC strategies that are much more rational, efficient, and humane than those that simply follow from the standard HC conception. The integration is also an important step in making economics a more human and humanistic discipline.