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Alfred Hofflander writes: A great many philosophers and economists have contributed to the development of the human capital concept. Some semblance of the idea existed in the old Anglo-Saxon Law where it was used to determine the compensation to be allowed to the relatives of an individual who was killed by a third party.

peopleSir William Petty (1623-1687) is credited with being the first economist to recognize the economic value of man. The purpose of his discourse was to show that factors other than area and population were important in determining the wealth and strength of a nation. He attempted to demonstrate through statistics that England, while small in area, had natural advantages (e.g. excellent and inexpensive shipping facilities) which could make it the greates of all nations and "that the impediments of Englands Greatnefs [sic] are but contingent and removable." In order to measure the national wealth of England, Petty felt that he had first to determine the value of the population. He started by assuming that England had six million people and their annual expense was £7 “per head,” producing a total annual expense for the population of £42 million. Rent of land was computed to be £8 million and the yearly profit of all personal estates was £8 million more. He therefore concluded that the labor of the people must have supplied the remaining £ 26 million per year (total expense minus rent and profit). When multiplied by twenty ("the mass of mankind as well as land being worth twenty years purchase") this £28 million yielded a value of the whole people equal to £520 million. This, divided by the population of six million, gave the value of each head of man, woman, and child at something more than £80 sterling. In such a manner, he concluded, the loss sustained due to plague, war, and by sending men "abroad into the service of foreign princes" could be estimated. Since land continues in perpetuity, multiplying its yield by twenty is equivalent to capitalizing it at five per cent. Man, however, does not live forever and so multiplying this yield by twenty is equivalent to capitalizing him by some figure less than five per cent. (The actual percentage can be determined only if a given set of mortality statistics is assumed.) Petty’s method and logic appealed greatly to his followers and were used in most calculations of national wealth for about one hundred years after his death.

About fifty years passed before another economist made a contribution to the concept of human capital. Philip Cantillon’s (1680-1734) evaluation was based on the cost of maintaining the slave and his offspring rather than on the earnings that the slave created. <>

Unlike his predecessors, Adam Smith (1723-1790) was not interested in determining the value of human capital. He was interested in the difference in wages in different fields of endeavor, and tried to explain these differences in terms of the concept of human capital. Smith actually dealt with this topic only twice in his Wealth of Nations. The first reference was to the inequalities of wage and profits where he explained that a man educated at the expense of much labor and time may be compared to an expensive machine (fixed capital). Further, his income should cover the usual wages of common labor plus the cost of education:
... with at least the ordinary profits of an equally valuable capital. It must do this too in a reasonable time, regard being had to the very uncertain duration of human life.
It would appear from this that Smith considered man as human capital, but in a later chapter, where he listed the components of fixed capital, he listed not man, bur rather "the acquired and useful abilities of all the inhabitants or members of the society."

Johann H. von Thünen (1783-1850) in the second part of Volume Two of The Isolated State reflected upon the view of man as capital. He derived an equation to measure the value of a human life, but he died before completing this work and the equation was published after his death. The origin of the formula used is not given and substitution of reasonable values in the equation does not produce meaningful results. Von Thünen states that should man be considered capital, it would be necessary for the state:
  1. to compensate the family of every soldier killed for the cost of his upbringing,
  2. to pay the disabled soldier the amount of his upbringing plus maintenance, and
  3. to pay the soldier who returns healthy for the depletion of his strength.
Unfortunately, he did little to estimate the losses involved so that the real worth of his work appears to be in the stimulation it provided to those who followed (e.g., Marshall). The fact that a man had value as property when he was a slave, but not when he was free, perplexed von Thünen and he viewed it as a paradox without solution.

raboteurs_parquetSir William Farr (1807-1883) completes the cycle by essentially returning to the method used by Petty. Farr, however, was much more sophisticated in his approach in that he realized that the populace cannot be considered as a whole, but must be taken in small homogeneous groups. He attempted to find an equitable system of taxing the populace and felt that each member of the community should contribute every year to the public expenditure in a fixed proportion to the amount of property in his possession during that year. Farr believed that no more exact measure of a man’s ability and duty to contribute to the public revenue exists than the value of his property. He defined property as:
Anything which yields produce that will sell for money although it may itself be inalienable; consequently, all the free labourers, artizans (sic), professional men of the United Kingdom, having within them this power of production, are essentially property as the things usually designated by that name, and characterized as personal or real, movable or immovable. Exclusive of all his external property every man is worth something.
Farr then sets down his method of determining the value of a person’s property (i.e. his human life value). His method is based upon the concept of surplus. He states that "the present value of the person’s probably future earnings, minus the necessary outgo in realizing those earnings is the present value of that person’s services." {Mathematically}

Here (JSTOR) is the whole paper.

related items:
Specifying Human Capital, Ludger Wößmann (2003), Journal of Economic Surveys
Proxying Human Capital, Me, Marginal Revolution



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