Twenty years ago, something happened when Pablo Peña sat in Prof. Gary Becker’s doctoral-level course at the University of Chicago. As the economist lectured on human capital theory, a concept he’d received a Nobel Prize for advancing, everything seemed to click into place.
“I felt a sense of very deep satisfaction—it just made so much sense,” said Peña, an assistant instructional professor in economics at UChicago. “I thought: Not only should every economist take this course, but every person would benefit from understanding the main concepts.”
Peña loved the course so much, he became a teaching assistant so he could take it again. Decades later, now teaching a version of the course to undergraduate students, Peña has made good on his desire to spread the good word.
In Human Capital for Humans, Peña uses Becker’s lectures as a jumping off point to break down human capital theory—the idea that investing in a person’s knowledge and skills has a wide range of economic effects. Using plain language flecked with humor and pop cultural references, he applies the framework across human history to everything from marriage to parenting to aging.
“The University of Chicago played a very important role in the development of human capital theory; it's part of our intellectual contribution to the social sciences, and I think it's often misunderstood,” Peña said. “I hope that this book helps clarify why it is important, powerful, insightful and, actually, fun.”
In this edited Q&A Peña discusses the basics of human capital theory and why we should be optimistic about our economic future.
What is human capital?
Human capital is a collection of skills, capabilities as well as knowledge that help us produce goods or services that are valuable to society. People usually associate human capital with formal schooling. Maybe you go to law school and learn how to be an attorney, or to vocational school and learn how to be an electrician. But it would be a mistake to think human capital is limited to what one learns in school.
You learn many things on the job. There are some skills—teamwork, for instance—that you may or may not learn inside a classroom but are very important. Also, there are characteristics like equanimity or having a good temper that help you be productive.
Health is another important form of human capital. It's very difficult to be productive if you are in pain, or if you are weak because you're malnourished. Anything that diminishes your capabilities is harming your human capital.
In the book, you’ve dedicated sections to marriage and parenting. How do you apply human capital theory to those core human experiences?
Human capital theory is the ultimate application of what is called Chicago price theory, or applying simple economic models that emphasize the role of prices. But not only prices like when you go to Trader Joe’s and buy a bottle of juice for $5. By “prices” an economist understands what we give up; the sacrifices we make.
For instance, when we have children, there's a price to be paid that goes beyond the money spent when we take a child to the doctor or to daycare. The caregiver who stays at home foregoes earnings. There are many things we cannot do when we have children—just ask any parent. When it comes to staying healthy, same thing. You have to watch what you eat, whether you smoke or drink, whether you work out. A Chicago economist would say, “there's always an implicit price.”
Economists frequently use money when talking about the value we place on things, but it's not because money is the ultimate measure of worth. It's simply because it's a way to convert different kinds of units into the same metric. That’s why we sometimes try to express in dollars the returns on human capital investment.
“Anything that diminishes your capabilities is harming your human capital.”
What role can a government have in developing and investing in human capital?
Isn’t it a huge coincidence that pretty much every country in the world has basic education financed with some form of general taxes? Why is that? I think human capital theory offers a very simple argument: The benefits are big but the market cannot provide enough investment.
It makes sense for society (parents as well as the government) to step up and set up a system that actually allows for efficient investment in human capital. In terms of returns, it makes sense to make sure young humans can stay in school for at least a number of years, allowing them to develop skills and reap their benefits in adulthood.
Investments in graduate education are also very important. If you discover something like a vaccine—in the book I talk about Jonas Salk—the benefits are going to surpass the cost of your education by a gigantic factor. Surely, that doesn't mean that everyone should go to graduate school, or that everyone who does is going to make a huge difference, but you only need one in 10,000 for it to be all worth it.
What do you hope readers will take away from the book?
First and foremost, I hope that readers feel good about what they learn. I think humans have an innate disposition to learn, and we feel good when we add knowledge to our own human capital.
Second, I hope that, at a personal level, people can better frame some of the decisions that they make in their life. Although this book is not intended to prescribe, sometimes we can make better choices if we understand what tradeoffs we're facing.
Third, I hope readers will gain some understanding of big picture patterns. Sometimes it seems there is excessive anxiety about short-term fluctuations of the economy. People obsess over whether the GDP is going to grow 3% or 0.3% and forget that we live with an incredible level of wealth and health relative to previous humans. Of course, that doesn't mean everybody in the world is doing well, but most people are doing much, much better than our ancestors 50, 100 or 500 years ago.
Speaking of anxiety, there is a lot of optimism and fear about the future of AI. What would you say to folks who are afraid their human capital will be replaced with AI?
When home theaters came out—DVDs, sound systems and large screens—people said it would be the end of performance arts. Why would you go to the theater or a concert when you can watch a movie or a music video at home? Yet, performance arts haven’t died. Just look at the money Taylor Swift made recently playing live.
If AI is to some extent analogous to what has happened in the past, there's going to be some shuffling of people across sectors, but it's not going to be a horrible tragedy. Things are going to evolve, and new sectors are going to be created. That’s how it’s been for the last few hundred years with multiple technological advances.
“It is our tastes and preferences—not efficiency in production—that give value to economic activities.”
Humans like to be with other humans. If you take that idea seriously, it means that there are technological advances that, yes, are going to affect how we do things. But we have a drive to, for lack of a better term, be humans.
People run marathons, not because they think they're going to win or because they are somehow increasing their productivity. They do it because it feels good to take on a challenge. An AI chatbot may say, “Don't run a marathon. It's a waste of time.” But we enjoy challenges, we enjoy creating, we enjoy socializing. So, is AI going to replace that? I don’t believe so. In the long run, it is our tastes and preferences—not efficiency in production—that give value to economic activities.
