Cliometrics and the Concept of Human Capital
The role played by human capital in the historical process of economic development is an important issue in cliometrics. This chapter traces the history of the human capital concept and underlines that it has undergone criticism since its origins. Among these criticisms, we stress that the human capital research program was plagued with measurement difficulties. This issue has recently fostered a sense of strong reluctance toward the concept. Portraying a growing debate in cliometrics – the role of human capital in the first stage of the industrialization process in the late eighteenth and early nineteenth centuries in Western Europe – we emphasize that recent cliometric contributions on the issue open up stimulating lines of thought about what human capital is and how it can adequately be measured.
KeywordsHistory of human capital Education Industrialization Cliometrics
Analysis of the economic role of individuals’ skills and abilities long preceded that intellectual moment which is today referred to as the “human capital revolution.” But the formalization of these ideas and their introduction into the core of economic theory emerged only in the 1960s, under the impulse of Theodore Schultz, Gary Becker, and Jacob Mincer. Prior to the 1960s, human beings or their skills were indeed considered in certain analyses as a particular form of capital, but they appeared therein only in a metaphorical way. The human capital theorists of the 1960s provided solid and precise theoretical foundations for that metaphor by using the analytical framework of standard capital. By considering human skills and abilities in analogy with physical capital, they laid the foundations of human capital theory.
Several moments are habitually recognized as fundamental steps in the building of the human capital research program. Schultz’s articles published in 1959, 1960, and 1961a, the issue of the Journal of Political Economy, “Investments in Human Beings” in October 1962, Gary Becker’s book Human Capital (1964), and the work of Mincer (1957, 1958), are identified as crucial contributions (see, for instance, Blaug 1976, Teixeira 2000, Ehrlich and Murphy 2007). Schultz, Becker, and Mincer, through different approaches, are generally seen as the fathers of the “human capital revolution.” Since that time, a huge literature has developed.
Although this revolution was a success in the sense that the concept came into wide use both in economics and in various social sciences, human capital theory has come in for a great deal of criticism. These critiques are diverse, but the thrust of a large number of them concerns the major empirical challenges faced by the theory: at root, they address the difficulty of measuring human capital, especially at the macro level.
This chapter traces the history of the human capital concept by providing an overview of the way the idea of human capital was conceptualized, the historical background in the late 1950s against which the human capital revolution took place, and the critiques that have been levelled at it since. In particular, we point out that the concept has recently come under severe pressure through a resurgence of criticisms based on the problem of measuring human capital.
The cliometric approach quickly embraced the theoretical insights provided by human capital theorists. The role of human capital in the process of industrialization is a prominent issue for today’s economic historians. Early analysis on the issue had come to the paradoxical conclusion that human capital was not important as regards the first stage of the industrialization process, but this thesis is currently under re-evaluation. By reviewing the cliometric contributions on the role of human capital in the first phase of industrialization, we highlight that this re-evaluation opens new and innovative avenues to tackling the issue of human capital measurement.
The chapter is organized as follows. Section “The Development of the Human Capital Research Program” provides an account of the human capital revolution of the late 1950s. We highlight the context in which the revolution took place, stress the importance of the figure of Schultz in promulgating the research program, and finally describe the theoretical synthesis it achieved. Yet while Schultz, Becker, and Mincer succeeded in imposing human capital theory in the mainstream economics, it nevertheless met criticisms from competing methodological perspectives also to be found within the mainstream. Section “Reservations, Old and New, About the Concept of Human Capital” retraces these criticisms and underscores that the empirical difficulty in measuring human capital is an issue that has been and is still currently a source of misgivings about the concept. In section “Human Capital and the Industrialization Process,” we describe a growing debate within the field of cliometrics, namely, the (re-)evaluation of the role of human capital in the first stage of the industrialization process. The view that human capital played only a minor role in the first stage of industrialization is currently under reconsideration. The revisionist literature builds upon the idea that early literature was plagued by shortcomings concerning the way the human capital endowments were evaluated. This view has spawned new and innovative reflections within cliometrics about which type of knowledge was truly productive in eighteenth- and nineteenth-century Western Europe, which types of skills can be assimilated to a form of (human) capital, and thus how to accurately measure human capital.
Section I. The Development of the Human Capital Research Program
Analysis of the economic role of individuals’ skills and abilities long preceded the human capital revolution of the 1950s and 1960s. Many authors have considered human beings, and their skills, as capital. Kiker’s survey (1966) refers in particular to Petty, Smith, Say, Senior, List, von Thünen, Roscher, Bagehot, Ernst Engel, Sidgwick, Walras, and Fisher.1 For his part, Sweetland (1996) considers that “the most prominent economists to address issues of human capital were Adam Smith, John Stuart Mill, and Alfred Marshall. Irving Fisher, prominent in his own right, expressed the pivotal arguments connecting early economic thought to contemporary human capital methodologies” (Sweetland 1996, p. 343). As pointed out by Kiker (1966), some authors attempted to provide a monetary evaluation of human beings or their skills via cost-of-production (costs of “producing a human being”) or capitalized-earnings procedures, which refer to the estimation of the present value of future income streams. Different motives led them to the following monetary evaluation of what is recognized today as human capital: demonstrating the power of a nation, estimating the cost of the war, and assessing the economic effects of education, health, or migration. Other authors never attempted to provide monetary evaluations yet still considered human beings and their skills as a form of capital, whether explicitly or implicitly. This is notably the case for Adam Smith, Jean-Baptiste Say, John Stuart Mill, William Roscher, Walter Bagehot, and Henry Sidgwick.
Smith’s thought on the issue deserves special attention. The treatment of human skills within the analytical framework of capital is in fact very explicit in Smith’s thought. Recalling that Smith was “concerned with education for the betterment of men, not for the creation of human resources,” Bowman (1966, p. 113) rightly notes that Smith’s analysis of human skills is by far the closest to the concept developed in the 1960s.
For this reason, Smith is generally recognized as having laid out the premises on which the modern concept of human capital has drawn. Spengler (1977) and Schultz (1992) explicitly attributed it to him, while Rosen (2008) refers to Petty and Marshall but acknowledges Smith as the forerunner of the concept. Becker (1962) himself,2 in his formulation of the analytical framework explaining investment choices in human capital, invokes the Smithian analysis.
In the Wealth of Nations (1776, p. 282), Smith wrote:
The acquisition of such talents, by the maintenance of the acquirer during his education, study, or apprenticeship, always costs a real expense, which is a capital fixed and realized, as it were, in his person. Those talents, as they make a part of his fortune, so do they likewise that of the society to which he belongs. The improved dexterity of a workman may be considered in the same light as a machine or instrument of trade which facilitates and abridges labor, and which, though it costs a certain expense, repays that expense with a profit.
When any expensive machine is erected, the extraordinary work to be performed by it before it is worn out, it must be expected, will replace the capital laid out upon it, with at least the ordinary profits. A man educated at the expense of much labor and time to any of those employments which require extraordinary dexterity and skill, may be compared to one of those expensive machines. The work which he learns to perform, it must be expected, over and above the usual wages of common labor, will replace to him the whole expense of his 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, in the same manner as to the more certain duration of the machine. (Smith 1776, pp. 118–119)
The idea that acquiring skills is costly but that it contributes to the accumulation of a particular form of capital that yields future returns is clear in Smith’s analysis. Yet that “investment” orientation is precisely what, in Blaug’s words (1976, p. 829), forms “the ‘hard core’ of the human-capital research program” developed at the end of the 1950s. More particularly, Smith’s analysis comes very close to the analytical framework Becker developed in his landmark 1964 book. Despite these early developments, the acceptation and generalization of this theoretical perspective made no progress until the end of the 1950s.
Schultz’s Early Developments and the Opportunity of Solow’s Residual
As we have emphasized, the human capital revolution does not mark the emergence of a new analytical perspective but rather the acceptation and the concrete deployment of this perspective at the core of economic analysis. The 1950s saw a renewed interest in the issue of economic growth and growth accounting exercises, which are commonly recognized as the decisive factors in the success of the human capital revolution: “Much of the original work that led to the ‘human capital revolution’ of the late 1950s and early 1960s followed an earlier revolution in economic thought spawned by the neoclassical growth model (Solow 1956)” (Ehrlich and Murphy 2007, p. 1).
Teixeira (2000) cites some other features of the intellectual context of the 1960s which created favorable conditions for the human capital revolution. Besides the flourishing of analysis concerned with the sources of economic growth – growth accounting research after World War II and the rise of development studies – he points outs the methodological and institutional dimensions that underpinned the human capital research program and ensured its rapid development. He underlines the role of the Chicago Department of Economics and the rise of Milton Friedman’s positive economics, which promoted an empirical trend in economics more widely. The political context was also favorable: the “spread of the Keynesian gospel” had shaped the idea that public education expenditures are economically meaningful and, according to him, created an environment conducive to the emergence of human capital theory. Finally, he underlines the influence of some international institutions, which rapidly endorsed human capital ideas (especially the World Bank and the OECD).
Growth theories, in fact, played a critical role in the development of human capital theory, notably through the puzzle of the residual which was brought to light by the growth accounting exercises of the 1950s and 1960s. Showing that much of the US economic growth was not explained by the rate of growth of inputs but by the residual contribution of total factor productivity (TFP), Tinbergen (1942), Fabricant (1954), Abramovitz (1956), and in particular Solow’s contribution of 19573 sets the stage for new challenging research opportunities. Considerations about the quality of the factors of production, especially the labor input, were raised in order to resolve the puzzle, and these made a crucial contribution to the rise of human capital thinking. The problem of the residual highlighted the inconsistency between the theoretical insights and the empirical evidence in growth approaches, which in fact provided Theodore Schultz, who is recognized as “the father of the human investment revolution in economic thought” (Bowman 1980, see also Blaug 1966), a favorable context in which to promote the reflections he had developed since the 1940s in his works on agriculture. While Schultz’s articles published in 1958, 1959, 1960, and 1961a are often regarded as a starting point for the human capital research program (see Bowman 1966, 1980, Sobel 1978), his thought on human capital traces its origin back to his analysis of agricultural poverty. The great influence these works on agricultural economics exerted on the later development of human capital theory has been outlined by Nerlove (1999) and has been examined in further detail by Le Chapelain and Matéos (2018).
As early as 1943, in his book Redirecting Farm Policy, Schultz identifies differences in educational expenditures as lying at the origin of labor productivity inequalities in agriculture and, consequently, of income inequalities. From this analysis, he sketched out the idea that educational expenditures can be regarded as a form of investment. These first forays into the idea of human capital, developed in a rather piecemeal fashion in the 1940s and 1950s, evolve into a full-blown research program from the end of the 1950s onward.
The principal hypothesis underlying this treatment of education is that some important increases in national income are a consequence of additions to the stock of this form of capital. Although it will be far from easy to put this hypothesis to the test, there are many indications that some, and perhaps a substantial part, of the unexplained increases in national income in the United States are attributable to the formation of this kind of capital. (Schultz 1960, p. 571)
Denison’s work of 1962 provided empirical support for the hypothesis formulated by Schultz (Schultz never properly proceeded to growth accounting research). His approach relies on an estimation of the quality of labor measured through education, and it shows that taking this “educational capital” into account sharply reduced the value of the residual. But Schultz is recognized as one of the founding fathers of human capital theory because he explicitly linked the empirical analysis of aggregate input-output series with the theme of investment in human beings.
The Synthesis Provided by Schultz, Becker, and Mincer
The human capital revolution marks a shift in the way economic analysis examines individual skills and capacities (accumulated through education, experience, health, etc.). These skills would henceforth be considered a form of capital and therefore be seen as arising as the result of an investment, whereas education-related spending had hitherto only been addressed through the prism of consumption. For Bowman (1966), this investment orientation is the prime characteristic of the human capital revolution (“investment in human beings”).
I propose to treat education as an investment in man and to treat its consequences as a form of capital. Since education becomes a part of the person receiving it, I shall refer to it as human capital. (Schultz 1960, p. 571)
Besides Schultz’s prominent role in the early conceptualization of the human capital idea, Becker (1964) and Mincer (1958) are recognized as two other great leaders of the human capital revolution. Their respective works exerted great influence on the diffusion of the concept of human capital within economic analysis at the end of the 1950s.
Becker’s 1964 monograph Human Capital is well known for providing a framework for analysis of individual investment decisions in human capital, based on a cost-benefit assessment. Relying on rational choice theory as a framework of analysis (Teixeira 2014), Becker gave solid micro foundations to Schultz’s proposals,5 and his text is now recognized as one of the most decisive contributions to the emerging research program: indeed, his 1964 monograph is considered the locus classicus of human capital theory (Blaug 1976). In Becker’s canonical model, education yields future income flows under the form of wage increases coming from the enhanced productivity due to higher individual human capital. Education also involves direct and indirect costs, which correspond, respectively, to expenditures directly related to education – such as education fees, transportation costs, or books – and to earnings forgone due to continuing schooling. Through this cost-benefit approach, and by an analogy with physical capital, the rate of return to human capital investment is defined as the rate of discount that equalizes the stream of discounted benefits with the stream of costs. This analytical framework explaining the individual’s choices of investment in education has progressively become the most representative piece of a theory of human capital grounded on methodological individualism,6 that is on “the view that all social phenomena should be traced back to their foundation in individual behavior” (Blaug 1976, p. 830).
The starting point of an economic analysis of personal income distribution must be an exploration of the implication of the theory of rational choice. (Mincer 1958, p. 283)
Mincer’s theoretical proposal treated education as a determinant for wages. In this way it contributes – albeit unintentionally, since Mincer’s first developments were isolated8 – to the development of human capital theory. His work was deployed mainly in the field of labor economics (Teixeira 2007, 2011).
While Schultz, Becker, and Mincer developed a body of work research arising from distinct questions and motives and took different routes of analysis, their respective works constituted the human capital research program, which rapidly spread to the various fields of economic analysis.
Section II. Reservations, Old and New, About the Concept of Human Capital
Although the success of human capital theory is undeniable – as attested by the broad usage of the concept in economics and beyond – the human capital program has faced criticism ever since its inception. This section reviews the history of these concerns.
Section “Theoretical and Methodological Objections” offers an overview of major criticisms stemming from a reluctance to apply standard capital theory to the question of individual skills and capabilities or based on a rejection of the methodological foundation of human capital theory, i.e., the rejection of methodological individualism.
We then turn to questions that arise from the mixed results of the empirical literature on economic growth. We show in the section “Skepticism About the Measurement of Human Capital” that the ambiguous findings of analyses exploring the contribution of education to economic growth have led to the resurgence of doubts about the concept of human capital. The criticism here is distinct from those stemming from theoretical objections or methodological disputes. It arises out of the issue of the measurement of human capital that has bedeviled the human capital research program since its origins. This issue has more recently led to a radical revision of the concept, prompted by the so-called “quality of education” approach.
Theoretical and Methodological Objections
Marshall’s critique of the idea of human capital was the most influential in the period preceding the human capital revolution itself. The status of the concept of human capital in Marshall’s thought was controversial. The debate between Kiker (1966, 1968) and Blandy (1967) is enlightening in this respect. The thrust of this debate lies in the question of whether Marshall analyzed human skills within the analytical schema of capital – which is precisely what was done by the proponents of the “human capital revolution.” According to Kiker (1966, p. 481), “Marshall discarded the notion as ‘unrealistic’.” Yet Marshall did not neglect the importance of human investments and their economic consequences, quite the contrary. As quoted by Becker in the introduction to his landmark book (1964), Marshall wrote: “The most valuable of all capital is that invested in human beings” (Marshall 1890, p. 469).
Marshall built upon Smith’s legacy to assert:
The motives which induce a man and his father to invest capital and labour in preparing him for his work … are similar to those which lead to the investment of capital and labour in building up the material plant and the organization of a business. In each case the investment (so far as man’s action is governed by deliberate motive at all) is carried up to that margin at which any further investment appears to offer a balance of gain, no excess or surplus of utility over ‘disutility’. (Marshall 1890, p. 514)
But, according to Kiker, Marshall was reluctant to place human skills within the definitional scheme of capital; a view which Blandy (1967) opposed, even though he recognized that Marshall “felt that its [the idea of human capital] inclusion in the notions of wealth and capital in all circumstances was not in harmony with the usage of ordinary life and would lead to confusion if it were included in his general definition” (Blandy 1967, p. 875). Sweetland (1996) also supports Kiker’s view, claiming that Marshall discarded the notion as unrealistic. Without a market for human capital, determining its value was a gamble. He was therefore not convinced that there was any possibility of providing a reliable estimation of the monetary value of human beings or their skills.
According to Schultz, Marshall’s reluctance about the application of capital theory to individual skills and capabilities played a major role in the belated acceptance of the concept of human capital.
But Fisher’s approach to capital was not accepted by the mainstream of economists, mainly because of Marshall’s adverse reactions to it, backed by his great prestige. Although Marshall at many points in his own work refers to the abilities man acquires by schooling and by working as an apprentice and to the economic role of knowledge, his view was that, whereas human beings are incontestably capital from an abstract and mathematical point of view, it would be impractical to extend the traditional market place concept of capital to include human capital. (Schultz 1972a, pp. 6–7)
Shaffer’s commentary (1961) on Schultz’s presidential address delivered at the annual meeting of the American Economic Association in 19609 offers a snapshot of the criticisms addressed to the idea of human capital at the time. These criticisms did not question the proposal that educational expenditures enhance productivity nor did they deal with the fact that considering men or their abilities as a form of capital raised moral issues. The core of Shaffer’s criticism is that disentangling the consumption and the investment part of total expenditures on man (education, health, etc.) is unfeasible.
As with Marshall’s qualms developed 50 years earlier, Shaffer doesn’t ignore the importance of human skills, and he accepts that it can be considered as a form of human capital but only in a metaphorical sense. He claims, in fact, that considering men and their abilities as a form of capital should be regarded as a metaphor but can be analyzed within the framework of and with the tools of capital theory.
Any attempt to show that rational individuals tend to undertake expenditure on education up to the point where the marginal productivity of the human capital produced by the process of education equals the rate of interest – a point at which the marginal expenditure on education yields a return equal to the return on marginal expenditure for any other factor of production – would be a mockery of economic theory. (Shaffer 1961, p. 1028)
On this occasion, Schultz, Becker, and Mincer definitively won the battle against human capital’s skeptics. But new offensives arose at the turn of the 1970s.
The new criticisms came, on one side, from competing methodological approaches. The radical school articulated its criticism around the rejection of the individual choice framework and took a firm stance against the methodological individualism that characterized human capital theory (see Bailly 2016). The objection it raised concerned the fact that the human capital research program traces the dynamics of the education system back to individual choices alone and neglects the role of class conflicts in determining inequalities in education: “Human capital theory is the most recent, and perhaps ultimate, step in the elimination of class as a central economic concept” (Bowles and Gintis 1975, p. 74).
The institutionalist approach – which had dominated labor economics before the rise of human capital theory (see White 2017) – also rejects the methodological orientation of the human capital research program. Institutionalist-oriented analyses of the dynamics of the education system reject the individual choice model as a basis for a theory of the supply of education (see Chirat and Le Chapelain 2017) and, in opposition to human capital theory, confer a leading role to corporations and the requirements of technology. “Nothing is more alien to the human capital research program than the manpower forecasters’ notion of technically- determined educational requirements for jobs” (Blaug 1976, p. 846).
On the other side, within this set of challenges to human capital theory that flourished in the 1970s, criticisms also emerged from within mainstream economics. The filter theory of education (Arrow 1973) and the theory of “screening” (Stiglitz 1975) didn’t attack the neoclassical methodological basis of the research program, but both put forward a criticism targeting a pivotal argument of the human capital theorists: namely, the positive link between education and productivity. These theories consider that education reflects an individual’s productivity potential, but they oppose the view that educational investment contributes to the accumulation of skills that enhance agents’ productivity.
Henceforth, as emphasized by Sobel at the beginning of the 1980s, “Human capital, with its individualistic approach, while still the dominant theory, is not the only game in town” (Sobel 1982, p. 268).
Skepticism About the Measurement of Human Capital
The first questions about the positive relationship between human capital and growth arose at the turn of the 1970s (see Demeulemeester and Diebolt 2011). In the economic context of the 1970s, marked by falling economic growth rates, doubts began to be expressed about the virtues of mass higher education (see notably Freeman 1976).
Endogenous theories of growth (Romer 1986, 1990, Lucas 1988) revived the idea of great importance for human capital on the growth process. This strand of literature expects there to be a positive relationship between growth and human capital accumulation (mainly, in these models, through education) (Lucas 1988) or – emphasizing the role of human capital on technological imitation and innovation – predicts that stocks of human capital are decisive as regards growth inequalities. In the 1990s, this literature, as well as the exogenous growth models incorporating human capital (Mankiw et al. 1992, for instance), led to a series of empirical exercises aimed at improving the understanding of the relationship between human capital (education) and growth. This empirical literature has given rise to puzzling results. Benhabib and Spiegel (1994) and Pritchett’s (2001) studies, notably, have called into question the contribution of education to economic growth and hence have questioned the relevance of the human capital theoretic approach itself.
Several contributions have outlined the paucity of the educational proxies used in the empirical macro literature and their weakness in correctly reflecting different amounts of stocks and flows of knowledge and skills (see Woessmann 2003, Cohen and Soto 2007, Folloni and Vittadini 2010, and Prados de la Escosura and Roses 2010). According to these approaches, the ambiguous empirical findings about the contribution of human capital to economic growth can directly be explained by the poor quality of the data (as advanced by Cohen and Soto (2007)) or by the human capital proxies inappropriately reflecting the nature of the theoretical concept.
Woessmann (2003) has stressed the weaknesses of the three most commonly used human capital proxies in the empirical literature: the literacy rate, the enrollment rate, and the average years of schooling of the active population. According to the author, an appeal to literacy rates leads to an underestimation of the stock of human capital in an economy, as this proxy ignores all human capital investments that go beyond reading and writing itself. Nor do enrollment rates provide a more suitable appraisal of the endowments in human capital: as the students do not belong to the active population, assessing the effective stock of human capital of this population by using this indicator is likely to induce significant gaps. Appeal to the average number of years of schooling of the workforce does overcome the previously mentioned limitation. Different methods, based either on the enrollment rate (when sufficiently long-term data allow for it) or on censuses, are used to assess the average years of schooling of the active population (see, for instance, Lau et al. (1991) and Nehru et al. (1995)), and this seems to constitute the least imperfect indicator of human capital among the indicators previously mentioned. This measure, however, has its own weakness: it considers that a year of education leads to an equivalent accumulation of human capital, independent of the grade which the year of education covers, i.e., its rank in the schooling hierarchy,10 and independent of the quality of the education system itself.
This last channel, i.e., the effect of the unequal quality of teaching on the effective accumulation of human capital, has a vast literature devoted to it. The seminal work of Hanushek11 contributed significantly to promoting the idea that purely quantitative educational variables were only poorly able to illuminate the role of human capital on wages at the individual level or on economic growth at the macroeconomic level.
This field of research firstly considered different educative outputs (education-related spending, size of classrooms, level of training of the teachers, etc.) to reflect the differences in the quality of education systems and their impact on the accumulation of human capital (see, for instance, Behrman and Birdsall (1983)). Progressively, the ability of these indicators to accurately reflect differences in the quality of schooling has been called into question. The use of scores in international tests (e.g., PISA, TIMSS) now permits a more direct evaluation of these differences by measuring the skills accumulated through education.
The research program on the quality of education has made salient the difficulty of measuring human capital. First, due to inequalities in the quality of education, the same amount of education can lead to different levels of human capital accumulated. Second, research has shown that education quality matters for growth and, accordingly, that the human capital proxies commonly used have failed to properly estimate human capital endowments at the macro level.
The conclusion of the analysis we develop in this book is that Adam Smith was right: human capital, as we now call it, is extraordinarily important for a nation’s economic development. The significance of education, however, has been obscured by measurement issues. (Hanushek and Woessmann 2015, p. 2)
Hanushek and Woessmann’s critique of the concept of human capital does not turn on doubts about the relevant theoretical framework – i.e., the theoretical logic driving the human capital program – but rather on the inability of this framework to accurately contribute to economic policy recommendations due to the overwhelming empirical difficulties it faces. They emphasize that the measurement problem thus seriously threatens the credibility of the human capital research program.
The measurement of human capital is a major issue for cliometric approaches to the question of the industrialization process. These approaches have recently opened up new avenues of thought on the measurement problem, which though not so radical as to propose the abandonment of the concept tout court, nevertheless raise knotty and fascinating issues.
Section III. Human Capital and the Industrialization Process
The human capital revolution at the end of the 1950s coincided with another revolution, albeit a distinct one, namely, the development of the New Economic History, or cliometrics, also initiated in the United States (Diebolt and Haupert 2017). In its analysis of the determinants of growth, the cliometric approach quickly came to appropriate the theoretical synthesis fostered by Schultz, Becker, and Mincer.
The issue of the growth process, which motivated the development of human capital theory at the end of the 1950s, is a prime question for cliometric studies (see Goldin 2016). The understanding of the determinants of economic growth has in fact been a main challenge for cliometrics ever since its origin. In tackling this field of inquiry, cliometricians have naturally built on the contributions provided by human capital theorists, and the concept of human capital is widely used in the examination of national or regional growth trajectories. The concept has also been appealed to in support of cliometrics’s new interest in unified growth theories, which builds on the idea of the inverse relationship between fertility and human capital to provide a unified explanatory model of the transition from Malthusian stagnation to modern growth (Galor and Weil 2000, Galor and Moav 2002, Galor 2011).
In the investigation of the causal relationships linking human capital and growth, namely, in its attempt to illuminate the contribution of the endowments in human capital to the growth processes, the cliometric synthesis was primarily applied in a specific field of investigation: the industrialization process experienced by Western European countries in the eighteenth and nineteenth centuries. It is in fact out of the industrial revolution, and the associated massive accumulation of human capital, that the complex question of the underlying relationships linking these two phenomena arises.
The role of human capital at the time of the second industrial revolution is close to the predictions of contemporary theory, which considers human capital as a driver of growth and defends the idea of “skill-biased technological change.” In contrast, and paradoxically, the role of human capital in the first stage of the industrialization process has long been regarded as minor (Human Capital and Early Industrialization: A Paradox in Economic History). This dominant view is currently under review (The Paradox Under Review: Re-evaluating What Human Capital Is).
Human Capital and Early Industrialization: A Paradox in Economic History?
As regards human capital and early industrialization, cliometricians have addressed two main issues. On one side, a large strand of literature has examined the importance of human capital as an explanatory factor in the industrial takeoff and of the subsequent transition to the modern regime of economic growth. On the other, the effect of the industrialization process on the formation of human capital has prompted attention. By showing that human capital was not a key factor in the industrial takeoff and that the industrialization process did not trigger human capital accumulation, these two interrelated strands of research have emphasized the inconsistency between neoclassical growth models – and of human capital theory – and the features that had characterized the first stage of the industrialization process.
Indeed, the early literature in this field didn’t see human capital as a key factor in the industrial takeoff. On the basis that Britain experienced a low and stagnant level of education at the time of its industrial takeoff, Mitch (1999) was one of the first to assert that human capital endowments didn’t play a major role in the British industrial revolution. Allen (2003) and Clark (2005) also support the view that human capital theory cannot provide a convincing explanation of the British transition from the Malthusian era to modern growth. Sandberg (1979) helped diffuse the same idea by highlighting that despite a large stock of human capital, in the mid- nineteenth century, Sweden experienced low and stagnant income levels (“the theory of the impoverished sophisticate”). Emphasizing the role of culture and values, Mokyr (2016) and McCloskey (2006, 2010, 2016) – though on different grounds – provide a more nuanced account of the role of human capital in the transition to modern growth. For McCloskey, the great enrichment experienced by Western European countries since the eighteenth century is rooted in the evolution of culture and ideas, and more precisely in changes to expressed attitudes to capitalism and in changes in thought about the bourgeois (“The bourgeois ‘Revaluation’”), but not in capital accumulation nor human capital accumulation (nor in institutions, coal, etc.). Mokyr’s argument, while distinct from McCloskey’s, also stresses the importance of culture – the culture of the intellectual elites, not the role of bourgeois culture – as a key root of the great enrichment. Mokyr points out that the transition to modern economic growth in eighteenth-century Europe must be regarded as the result of the development in Europe between 1500 and 1700 of new values and new ideas that diffused notably through the influence of the Republic of letters. This new culture – and not the narrow differences in literacy rates – is regarded as decisive for having set the stage for the industrial revolution.
Besides the thesis that human capital was unimportant to the industrial takeoff, early cliometric contributions dealing with the effect of the industrialization process of the eighteenth and nineteenth centuries on human capital accumulation came to the conclusion that industrialization was, first, a deskilling process. Early views on the issue have argued that industrialization and technological change were not skill-demanding but, on the contrary, at least in the first stage increased the relative demand for unskilled labor (see, for instance, Nicholas and Nicholas 1992, Mokyr 1993, Mitch 1999). Expansion of production and the mechanization of industry notably increased the demand for female and child unskilled labor (Sanderson 1972), thus impairing school participation and human capital accumulation. Early contributions on the issue have all suggested that the tasks required by booming production during the first stage of the industrialization process didn’t require a workforce with a high level of skills. According to Goldin and Katz (1998), the complementarity between innovation and skills took place in the early twentieth century with the technological shift from steam power to electricity.
Overall, whether the issue is the determinants of the takeoff or the complementarity between industrialization and skills, cliometric analyses have spread the message that human capital mattered little in the first phase of industrialization. But this conclusion is currently under reconsideration.
The Paradox Under Review: Re-evaluating What Human Capital Is
A new wave of analysis is currently challenging the idea that human capital is not a relevant dimension in the analysis of the industrialization process. Interestingly, this recent literature has developed on the basis that early accounts of the human capital-industrialization relationship are subject to limitations because of their unsatisfactory evaluation of human capital endowments. This has opened up new paths of reflection about what human capital is and hence how to measure it.
On the one hand, efforts have been made to improve the quality of the human capital estimates. Jacob (2014) stresses the weaknesses of British educational records prior to 1850. According to her, the weak role attributed to education in the first industrial revolution partly derives from the poor state of the relevant historical sources. Work by De Pleijt (2018) provides a reassessment of the evolution of formal education in Britain between 1307 and 1900 by estimating – on the basis of information on literacy rates, primary, secondary, and tertiary schooling – average years of education over the period. These estimations bring to light that literacy rates alone are misleading, since they underestimate human capital accumulation in the period of the industrial revolution. Trends in the evolution of educational attainment are rather poorly reflected in literacy rates on the eve of the industrial revolution.
Madsen and Murtin (2017) also provide a reassessment of British human capital over the long run, based on educational attainment at primary, secondary, and tertiary levels. Analyzing the determinants of GDP growth over the period 1270–2010, they come to the conclusion that education was the prime driver of British economic growth over the period, a result which contrasts starkly with early contributions. They also put forward the fact that primary education was of prime importance in explaining growth in the pre-1750 period and that the role of secondary and tertiary education became predominant from 1750 onward.
More generally, faced with the difficulties raised by the nonavailability of historical data, the cliometric approach has developed new and innovative strategies to measure human capital. Within the spirit of the procedure based on marriage registers, the age heaping method has recently been developed (see, for instance, A’Hearn et al. 2009, Crayen and Baten 2010, Baten et al. 2014, Baten and Fourie 2015, Tollnek and Baten 2016, Cappelli and Baten 2017). This method relies on “the tendency of poorly educated people to round their age erroneously. For example, they answer more often ‘40’, if they are in fact 39 or 41, compared with better educated people” (Crayen and Baten 2010, p. 452). Age heaping uses accuracy of age reporting as a proxy for numeracy.
On the other hand, another path of research builds on the idea that human capital endowments are badly evaluated, not because of the quality of the data or of the estimates used in empirical exercises but because assessing human capital through literacy rates or crude enrolment rates only (the common practice in empirical exercises at the macro level) shows just one side of a larger picture.
In the context of measuring human capital endowments, the effort required for an extensive understanding of the historical context necessarily highlights the need to keep the institutional and organizational features of the education systems under close review. From this knowledge, highly aggregated educational attainment measures of human capital, which are commonly used in early literature, quickly become unsatisfactory as they cannot reveal the differences in national experiences – i.e., the orientation of knowledge taught (general vs. vocational), the importance of apprenticeships, the presence of knowledge elites, the degree of centralization of the education, the way it was financed, etc. All of these dimensions may have an impact on the level of human capital effectively accumulated at the aggregate level but are ignored as soon as empirical approaches come to rely on aggregate enrolment rates or literacy rates only.
Clearly human capital as a concept is indispensable, but we need to be far more specific as to what kind of human capital was produced, for and by whom, what was the source of the demand for it, and how it was distributed over the population. (Mokyr 2005, p. 1155)
At stake in this revisionist literature, which builds on the idea that there are different types of human capital, is the determination of what type was important for industrialization. Yet the early literature, by the way it measured human capital, has only considered differences in basic knowledge, namely, differences in literacy, without considering the other forms of accumulated skills.
Some approaches underline the idea that the human capital of the elite was decisive in the industrialization process, not the basic or average level of human capital (of the country), i.e., the human capital of the mass of workers. Mokyr (1990, 2005) has emphasized the need to “focus not on the mean level of human capital […], but just on the density in the upper tail of the distribution, that is, the level of education and sophistication of a small and pivotal elite of engineers, mechanics, and chemists” (Mokyr 2005, p. 1157). Emphasizing that science and technique were concretely connected in the industrialization process, Jacob (1997, 2014) places at the forefront the role of scientists’ and innovators’ human capital. In that vein, Meisenzahl and Mokyr (2012) outline the key influence of the human capital of the elite in the British industrialization process. Because innovation and technological change were at the core of the industrial revolution, they argue that prime importance must be attributed to “the top 3 to 5 percent of the labor force in terms of skills: engineers, mechanics, millwrights, clock and instrument makers, skilled carpenters and metal workers, and wheelwrights.”
Recently, Squicciarini and Voigtländer (2015) have developed a similar thesis about French industrialization. Relying on subscription density to the Encyclopédie (Diderot, d’Alembert) to measure the repartition and the density of French scientific elites (knowledge elite), they show that the human capital of the elites in the eighteenth century, unlike the average human capital, played a significant role on the subsequent French industrial takeoff, starting in the first half of the nineteenth century.
Besides approaches that focus on the elites, analysis concentrating on the role of the apprenticeship system has also played a role in reviving the idea that human capital was of importance in the first stage of the industrialization process. A key argument behind the idea of a key role for apprenticeships is that the skills accumulated through it – the skills of the technical or mechanical workers – were decisive in fostering technological change, not because they promote technological innovation but because they were crucial in promoting the capacity to implement devices and maintain them while also promoting incremental innovation on the shop floor. “These characteristics did not require much science or even originality, but they needed people who were good with their hands and had been taught how to use them. It is that resource that the apprenticeship institution in Britain supplied better than anywhere else” (Zeev et al. 2017, p. 245). Zeev et al. (2017) suggest that the flexibility and effectiveness of Britain’s system of apprenticeship is an important factor in explaining why England entered first into industrialization. Kelly et al. (2014, p. 364) assert explicitly that if the early literature has rejected human capital as a key driver of industrialization, it is because it “focuses on the wrong variables.” For them too, Britain had a decisive advantage in terms of the quality of labor. The high level of technical competence of artisans and workers was linked, according to them, to the effective British apprenticeship system, and this explains the rapid industrialization. Humphries (2003) also sees in apprenticeship a decisive explanatory dimension behind early industrialization in Britain, pointing out that, in connection with the Elizabethan Poor Law, it played a role in reallocating labor to industry in eighteenth-century England. Focusing on pre-industrial growth, De La Croix et al. (2018) emphasize the role of apprenticeship as a driver for tacit knowledge diffusion and stress its importance in the technological and economic advance of Western Europe in the century before the industrial revolution.
The importance of the British apprenticeship system in the second stage of the British industrialization process has been emphasized by Broadberry (2005, 2006), who opposes the widely held view that low levels of education in the British labor force, as compared to Germany or the United States, explained the British productivity decline at the end of the nineteenth century. In order to provide a convincing analysis of the relationship between human capital and productivity performance, he sought to disaggregate productivity indicators (according to the different sectors of the British economy) from education variables. By considering formal education and vocational training, he shows that “the key institutions of human capital accumulation in Britain were the system of apprenticeships and the body of professional associations” (Broadberry 2006, p. 128). Through the examination of the whole education system, he rejects the view that human capital endowment in Britain was low or that it explains the British productivity decline from the end of the nineteenth century until the eve of World War I. He therefore puts emphasis on the necessity of considering “human capital accumulation strategies” in order to provide proper measures of human capital. In fact, commonly used proxies of human capital, such as literacy rates or average years of education of the workforce, would have completely concealed what historical analysis has here brought to light: the key importance of specific vocational paths of education in Britain at the end of the nineteenth century.
Turning to the still open debate on the role that industrialization played on the accumulation of human capital, investigations into other forms of human capital (i.e., other than literacy standards and enrolment rates in primary education) have called into question the early consensus that industrialization was a deskilling process. Franck and Galor’s (2017) seminal analysis was the first to question the idea that the path of economic development during the first industrial revolution was characterized by unskilled-based technological change. Examining early French industrialization (1839–1847), they show that technological change did indeed foster human capital accumulation. Showing that the number of apprentices and their share in the cohort of 15-year-olds increased in response to inventions, Feldman and Van der Beek (2016) also claim that technological progress was conducive to skills acquisition in eighteenth-century England. De Pleijt and Weisdorf (2017) show that there was a large decrease in average skills in agriculture and industry from the end of the sixteenth century to the beginning of the nineteenth century in England. They claim that deskilling generally occurred along with technological progress, despite a modest increase in the share of “high-quality” workers. This finding gives support to the view, already defended by Mokyr (1990, 2005) and more recently for the French case by Squicciarini and Voigtländer (2015), that upper-tail knowledge played a prominent role in early industrialization. For De Pleijt et al. (2016), the effect of industrialization on human capital is mixed. They show that in the first phase of British industrialization, more steam engines were associated with a higher skilled labor force, and thus they claim that technological adoption was skill-demanding. But they also highlight that adopting new technologies was not conducive to elementary education (where this is approximated by literacy rates and enrolment rates). Diebolt et al. (2017) distinguish the accumulation of basic human capital (basic literacy skills) from intermediate human capital (basic scientific and technical knowledge and basic knowledge in law and trade) in nineteenth-century France. They show that French industrialization was not deskilling but that a shift in the kind of skills required occurred in the second half of the nineteenth century. Focusing on lifelong training, Diebolt et al. (2018) provide evidence that technological change contributed significantly to the development of adult education during the period 1850–1881 in France. They show that steam technology adoption was skill-demanding, highlighting that it triggered the development of evening classes for workers and apprentices.
Finally, the education systems at the time of the first industrial revolution evolved following different patterns, which privileged different types of institutional organizations. The focus on general vs. vocational education, the nature of the skills taught, the degree of centralization, types of funding – private or public – but also their attitudes toward social and gender inequalities (girls’ access to education) are important dimensions that single out the education systems of the countries that entered industrialization in the eighteenth and nineteenth centuries. These dimensions also inflect the respective paths of human capital accumulation.
Goldin (1998, 2001, 2016) and Goldin and Katz (1999, 2008) have shown that the US educational model differed profoundly from European elitism, having been based since the nineteenth century on the principle of egalitarianism. Several characteristics reflect this principle of egalitarianism: public financing, the separation of church and state, the decentralized functioning, and the access of girls to education (gender neutrality). Goldin and Katz (2008) point out that this orientation of the education system constitutes an incremental ingredient of the accumulation of human capital in the United States and of the economic success of the country in the twentieth century.
Contrary to Mitch’s (1999) findings, which call into question the contribution of formal education to the British takeoff, Becker et al. (2011) show that the Prussian education system, characterized by the large and early diffusion of elementary education, created favorable conditions for the adoption of existing technologies in Prussia and therefore contributed to its industrial takeoff. Consequently, they assess the importance of the education system in the process of industrial catch-up in Prussia in the nineteenth century. Analyzing primary, secondary, and higher education separately, they argue that secondary and higher education were not of significant importance in this process.
Cinnirella and Streb (2017) consider different types of human capital and their influence on innovation at the time of the second industrial revolution in Prussia. They outline how highly skilled craftsmen were still important – as recent literature has maintained in the case of the first stage of industrialization – for the innovation process in the second stage of Prussian industrialization. Contrary to the first phase, they claim that the quality of basic education became important at the end of the nineteenth century, since it fostered both labor productivity and firm innovation. In addition, Cappelli (2016) has recently shown that the decentralization that characterized the organization of the Italian education system before 1911 negatively influenced human capital accumulation. His analysis shows that the move to centralized primary schooling in the early twentieth century was an important driver for the increase in Italy’s human capital endowment.
This chapter has sketched the development of the study of human capital. We have noted some of the challenges to the human capital revolution. There were theoretical objections to the idea of analyzing human skills within the framework of capital theory and opposition to the methodological orientation of the program. The radical school and the institutionalist approaches both criticized the failure of human capital theory to adequately describe the mechanisms and driving forces behind the dynamics of human capital accumulation.
Somewhat surprisingly, however, the most severe criticism directed against the human capital program comes from what we might describe as an operational problem of measurement. Currently, the deadlock faced by human capital as regards the issue of empirically measuring stocks of skills (at the macro level) severely threatens the achievements of the late 1950s. We have emphasized in this chapter that, in its analysis of the role played by human capital in the first phase of the industrialization process, the cliometric revisionist literature paves the way toward renewed insights into the measurement of human capital. Due to its particular methodological character, lying at the crossroads between theory, measurement, and history, the cliometric synthesis promotes a reformulation of the question of the measurement of human capital in a unique and, we believe, successful way, as regards the empirical challenges faced by the concept. The question of measurement is raised through the question of national and/or regional strategies of human capital accumulation and of their efficacy regarding economic growth. This distinction is not trivial. It indicates that the difficulties of measuring human capital should not be reduced to a purely operational problem but are linked with a more fundamental challenge: the accurate and precise understanding of education spending, at the aggregate level, that effectively contributes to the accumulation of human capital, i.e., by relying precisely on investments, and not on a form of consumption. This perspective brings us back to an original challenge of the human capital revolution, which was to disentangle the investment and the consumption part of education expenditure. This challenge has never been fully taken up; which led Schultz to assert that “a satisfactory theory of economic growth should explain the mechanism that determines the formation of human and nonhuman capital, including the accumulation of knowledge” (Schultz 1972b, p. S6). Cliometric approaches have recently embarked on this route.
For an exhaustive analysis of the authors who treated human beings as capital, see Kiker (1966).
Becker also mentions Mill and Marshall’s legacy.
Solow’s contribution of 1957 was a landmark in the development of growth accounting.
The residual was not the only puzzle that led Schultz to build the foundations of human capital theory. We must also cite the Leontief paradox (see Schultz 1972a). But the residual appears to be by far the most decisive element in the development of human capital theory.
Schultz pays explicit tribute to Becker’s theoretical model of investment in human capital, developed in the 1960s. See, for instance, Schultz, 1961b, p. 1037; at about the same time he also wrote: “I have placed the paper by Gary S. Becker first because it gives the reader an overview of the pervasiveness of human capital and because it reveals many vistas awaiting to be explored” (Schultz, 1962, p. 2).
For a critical review of the meanings associated with methodological individualism, as well as its contradictions, see Hodgson (2007).
“Becker and Mincer were not engaged in making aggregative estimates of the contribution of education to income growth” (Bowman, 1964, 453).
As underlined by Teixeira (2005, p. 137): “A peculiar aspect was that the initial development was isolated and only after Schultz saw Mincer’s dissertation and decided to invite him to Chicago for a post-doctoral fellowship (1957–1958), they interacted more closely. Then, they became aware of the closeness of their research and its unplanned complementarity”. See also Biddle and Holden (2016).
Schultz’s presidential address to the American Economic Association in 1960 is seen as one of the fundamental moments in the emerging theory of human capital (see, for instance, Teixeira 2000).
Eric Hanushek significantly contributed to the development of the so-called approaches of the “quality of education.” His early work on the subject began in 1970. Regarding the role of the quality of education in the contribution of human capital to growth, see, for instance, Hanushek and Kimko (2000), Jamison et al. (2007), or Hanushek and Woessmann (2008, 2011, 2012).
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