Grumbling 5: Human Capital

Well, it was another beautiful sunny day in Rightwood, and I was speaking with my neighbor Ed’s granddaughter, Broomhilda (we call her Broomie) about her future. (I am convinced that parents should not have the right to name their children!) She is very smart, a talented tennis player, beautiful, and joyful, except an understanding of the rules of the game … the economic rules of a market economy …. in particular the rules of human capital markets.

“Mr. Charkins, I plan to be a professional tennis player. Coach says I have what it takes. So I don’t have to worry about all this school stuff.” 

Well, it appears that Coach (who runs a for profit tennis clinic and does quite well) has a serious incentive to keep Broomie in his clinic. 

“Broomie, I admire your confidence, and I hope you achieve your goals, but it might be a good idea to develop a Plan B, just in case the tennis thing doesn’t pan out.”

“Oh, you’re such a downer. I’m going to make plenty of money with my tennis skills!”

“Well, just in case, what might you like to do if that doesn’t work out.” 

“Marine Biologist,” she said with a grin. 

“OK, how did you do in your biology class.”

“C- but Ms. Mendel had it in for me because I was late a bunch of times. It was the only grade I got lower than a B!”

And there is the problem. Often, students don’t have a realistic plan for a job or a career after high school. We don’t want to dash their dreams, but we do want to make sure that they have a plan. 

In most Economics textbooks, the topic of human capital comes in the resource section towards the end of the book. The text may not even use the term “human capital” but rather “labor.” Labor is some amorphous mass of homogeneous stuff, much like a lump of coal.  (It probably doesn’t make much difference anyway since many instructors never get to that chapter.) Human capital, on the other hand, is personal and unique. Every student has a bundle of knowledge, skills, experience, and personal qualities that is unique. In the classroom, you are now talking about each student, not some fictional “firm.” This leads to the question, “How do I optimize my chances for success as defined by achievement of my life goals?”  This question should be posed on the first or second day of class.

When I mentioned this to Broomie, she said that her econ course didn’t have anything to do with her but with some mythical “firm”.  If we want to relate economics to our students, doesn’t it make sense to begin talking about them in the early part of the course? Shouldn’t we begin the course by discussing our students’ goals, and the relationship between their human capital and their ability to achieve those goals. We should be discussing the “theory of the student” instead of the “theory of the firm.” 

An appropriate question for the first day of class is, “What kind of life do you want as an adult?” The answer to that question can lead to further questions concerning lifetime goals including family, housing, location, working conditions, etc. The question can then be asked, what human capital will you need to live that life and how are you going to develop that human capital. The diagram below summarizes the links between human capital and lifetime goals and answers the question, “Why am I in school?” 

School → human capital → job/career/entrepreneurial opportunities → income/profit → goals

A discussion of human capital follows.

This approach seems more likely to grab their attention than the search for the optimal output of a firm where marginal cost equals marginal revenue. Instead, we can teach the skill of marginal thinking by helping students consider how much school and/or training will optimize their chances of success by guesstimating the point where the marginal benefit is just equal to the marginal opportunity cost of that school and/or training. 

Send them to the Bureau of Labor Statistics’ Occupational Outlook Handbook,  Home : Occupational Outlook Handbook: : U.S. Bureau of Labor Statistics , and have them type in an occupation that interests them in the “Search Handbook”  box near the upper right hand corner of the screen. Search to investigate jobs or careers that they would like to have that will provide the income to allow them to live the lifestyle they have described. Most importantly, what human capital will they need to work in those jobs or careers. 

There are many advantages to this approach. 

1. Your students know that you are interested in them because you are asking about them.

2. Every student has a unique bundle of human capital so you are immediately relating the course to them. This approach can be a wakeup call to some students. “Hey student, your incredible good looks and personality are not necessarily going to get you where you want to go. You are going to have to develop your human capital.

3. You can now teach the major reasoning skills of economics in the context of student goals. 

Broomie assured me that she was paying close attention, went to college on a tennis scholarship, majored in biology and became a marine biologist. Who knew?