It has been more than one year since my last entry about Wheelan´s book “Naked Economics”.
I am here again trying to finish the work I started. I have seized the opportunity that the extraction of the nail in my leg has given to stay at home, relaxed and with time enough to concentrate in a task that takes me more than the short periods of time I usually have on a daily basis.
Sincerely, I don´t exactly remember the line of thoughts and examples collected in the book so it will take me a bit more than before to recall the most important messages I want to summarize in my blog.
Remember, notes in quotes are transcribed directly from Wheelan´s book.
In this chapter “Economists study poverty and income inequality. They seek to understand who is poor, why they are poor and what can be done about it”.
The reason why there are impressively rich professionals while some others starve or live on meager salaries just enough to cover their basic needs is explained via the “human capital” concept. The ”Human capital is the total sum of skills embodied within an individual: education, intelligence, charisma, creativity, work experience, entrepreneurial vigor, even physical skills: fast, strong, etc”. Sometimes a specific talent is naturally born but mostly a great investment is needed to come to a certain set of skills.
The labor market behaves as any other market, some skills are more demanded than others and its price depends on such demand. The more scarce one skill is the more it will be paid off. An unique football player (Messi) is better paid that a Burguer King cashier vacant that can be quickly cover via a job advertisement. As Wheelan says and economists have proved, “a college education yields about 10% return on investment, about a 10% higher earnings”
Human capital growth (new technology inventors, operators, etc...), makes the economy grow, the economy pie is bigger and there are more opportunities to create new needs, markets and jobs. With some new jobs, some old jobs may be redundant (creative destruction), the workers more educated and with more skills have more chances to stand in the process.
Human capital is not only about increasing incomes but about making the society better off as a whole. E.g. with more educated woman in developing countries, there are higher chances for their children under five to survive; Educated parents take more precautions when looking after their children (car safety bells etc...) and invest more in their children´s human capital. As the Economy Nobel prize Gary Becker said “While all forms of capital – physical capital such as machinery and plants, financial capital, and human capital – are important, human capital is the most important. Indeed, in a modern economy, human capital is by far the most important form of capital in creating wealth and growth”. As an example compare Japan and Switzerland with almost to natural resources but with one of the biggest income per capita of the world vs other countries such as Nigeria or Venezuela with their mines and oil wealth but less developed.
That is why in some developed countries, the right to immigrate is based on skills and education – E.g. In Australia, general applicants to a job visa must have skills and qualifications for an occupation listed on Australia's Skilled Occupation List (SOL).
Other countries launch programs to attract talents such us the Start-Up Chile program sponsored by Chilean government to lure young foreign entrepreneurs, mostly technicians, to create an innovation and entrepreneurial hub. The pilot started in August 2010 and the official program launch was on January 11th 2011. Chilean government envisages to replicate Silicon Valley but they are also groping ideas from some other relevant innovation hubs such as the ones in Israel, Singapore or Finland.
Other countries favor specific skilled groups via fiscal benefits. E.g. Beckham Law in Spain, overhauled in 2010, but with huge fiscal benefits for high income expatriates in our country (they were charged half taxes an equivalent income Spanish worker). Now Spain faces other woes. The economic crisis is pushing our most skilled young population to look for a job outside of our country. We are starting to suffer from brain drain. Our young people educated at the expense of the country are leaving Spain. Those with lower skills have less opportunities to fly and stay.
“Human capital is linked to productivity. Productivity is the efficiency with which we convert inputs into outputs. Productivity is determined by natural resources but in modern economy, is more affected by technology, specialization and skills (human capital)”. Over the course of the last two centuries, the industrial revolution first and the technological revolution second, helped the countries, at least in the developed countries, in the developing countries also but in less percentage, to multiply their productivity and the working hours needed to cover the basic needs were reduced in double figure rates. The extra working hours have been devoted either to increase production, or to leisure activities creating new needs and in consequence leading to new markets and to economy growth.
New technology and innovation has increase the demand for skilled workforce, more productive, while repetitive tasks or jobs have been outsourced to other countries with lower production costs. The economy pie is bigger, countries are getting richer, society is better off. There are still poor but the levels of poverty equals the levels of wealth two centuries ago. People living in extreme poverty conditions have decrease and poor are progressively moving to higher levels of society.
Another consequence of industrial and innovation advances in the developed world is that the number of children decline. The number of children stops being a differential factor in terms of productivity while it is more costly to raise them (“in developing countries the cost of bearing and raising children is low”) and as women join workforce, families have less children while more resources to raise them.
“Productivity growth also depends on effective government institutions. Legal, regulatory and tax structures affect it either to promote or to diminish the incentive to increase production”.
“John Maynard Keynes once noted, “In the long run, productivity is everything”.
Although the economy pie is bigger, the gap between rich and poor has increase. The skilled workers are better paid-off in proportion to those similar some years ago and the less-skilled ones are less rewarded or even their jobs have been destructed towards other countries with lower production costs. There is a debate on “how much we should care about the size of the pieces”. On one side this could bring incentives to the people to increase their human capital, to improve their skills and abilities. On the other side, these inequalities may diminish people utility since it is proven that it is inherent to the individual to prefer lower incomes if they are higher than the neighbor´s ones to a higher income being this lower that the neighbor´s.
The real concern is that inequality could inhibit economy since people in the lowest rank could start rejecting public policies and private property (feel of dis-attachment) and those in the higher lever could “squander resources on increasingly frivolous luxuries (e.g., doggy birthday cakes)” instead of investing in the human capital growth.
But one has not to be poor to make someone else an economy winner. E.g. Bill Gates is very rich and has created wealth, jobs and contributed to make a lot of people better off although not everybody could get a share. “In theory, a world in which every individual was educated, healthy, and productive would be a world in which every person lived comfortably”. Even disgusting, menial jobs that we cannot be automated will have room in economy if the economy depends on them. This kind of tasks will become the best rewarded in society to incentive to do them.
In summary, “Human capital creates opportunities. It makes us richer and healthier; it makes us more complete human beings; it enables us to live better while working less”.
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