Knowledge and Human
Capital
 Miscellaneous on Philosophy, Methodology and Theories
Patterns
and Sources of Modern Economic Growth
(Repetition)
 Knowledge and Human Capital – Concepts
 Investments in Human Capital
 Indicators of and for Investments in Human Capital
 Indicators of Human Capital
 Human Development Index
Miscellaneous on Philosophy, Methodology and
Theories



Friedrich August von Hayek (1899-1992)
 Neo-Austrien School
 Difference between information and knowledge
 Knowledge is linked with an individual being in specific
time, place and circumstances and as such is untransferable
George Stigler (1911-1991)
 New Chicago School (Neoclassical Reneissance)
 Economic theory of information
Gary Stanley Becker (1930-)
 New Chicago School (Neoclassical Reneissance)
 Theory of human capital
Miscellaneous on Philosophy, Methodology and
Theories

Joseph Eugene Stiglitz (1943-)
 New Keynesian Economics
 Father of the economic theory of information
 Importance of the assymetry of information
Patterns and Sources of Modern
Economic Growth
Patterns and Sources of Modern
Economic Growth

Different Conditions of the Two Growth
Patterns
 The
Shift in the Importance of Technology
 Kuznetz
Pattern – institutionalization of scientific
research and education
 The
Shift in the demand structure
 Kuznetz
Pattern - from mass production to
differentiated commodities each demanded in small
quantity – increased importance of human capital
Patterns and Sources of Modern
Economic Growth
Structural change in the USA
0,8
0,7
0,6
0,5
Agriculture
Industry
Services
0,4
0,3
0,2
0,1
year
1990
1980
1970
1960
1950
1940
1930
1920
1910
1900
1890
1880
1870
1860
0
1850
Employment share (%)
Structural change in
the USA from 1850
to 1990
Discussion Question:
Is this related to the
change from the
Marx to Kuznetz
pattern?
Knowledge and Human Capital Concepts

Human capital is a set of a person’s
capabilities, abilities, health and other
features, which help the person in his or her
economic and non-economic activities,
increasing thus his or her income, improving
life, increasing satisfaction etc.

The main difference between traditional physical
capital and human capital is the transferability of
the former between different owners. Human
capital cannot be transfered from the person who
owns it.
Knowledge and Human Capital Concepts

Important Characteristics of Good

A good is excludable if a person can be prevented
from using it.



Excludable: fish tacos, wireless internet access, human capital
(embodied knowledge)
Not excludable: FM radio signals, national defense, basic knowledge
A good is rival in consumption if one person’s
use of it diminishes others’ use.


Rival: fish tacos, human capital
Not rival:
basic knowledge, national defence
Knowledge and Human Capital Concepts
The

Different Kinds of Goods
Private goods: excludable, rival in consumption


Public goods: not excludable, not rival


Example: national defense, basic knowledge
Common resources: rival but not excludable


Example: food, human capital
Example: fish in the ocean
Natural monopolies: excludable but not rival

Example: cable TV
Knowledge and Human Capital Concepts


Everything that applies to public goods in
general applies to basic knowledge as well
What applies to public goods is summarized in
following three slides
Knowledge and Human Capital Concepts

Public goods
Public goods are difficult for private markets to
provide because of the free-rider problem.
 Free rider: a person who receives the benefit of a
good but avoids paying for it



If good is not excludable, people have incentive to be
free riders, because firms cannot prevent non-payers
from consuming the good.
Result: The good is not produced, even if buyers
collectively value the good higher than the cost of
providing it.
Knowledge and Human Capital Concepts



For public goods, externalities arise because
something of value has no price attached to it.
So, private decisions about consumption and
production can lead to an inefficient outcome.
Public policy can potentially raise economic
well-being.
Knowledge and Human Capital Concepts




If the benefit of a public good exceeds the cost of
providing it, govt should provide the good and pay for
it with a tax on people who benefit.
Problem: Measuring the benefit is usually difficult.
Cost-benefit analysis: a study that compares
the costs and benefits of providing a public good
Cost-benefit analyses are imprecise, so the efficient
provision of public goods is more difficult than that of
private goods.
Knowledge and Human Capital Concepts

Basic Knowledge and Applied Knowledge
 Applied Knowledge – non-rival, but if excludable, private
agents can have the motivation to produce it.
 Three externalities
 It can spread over to other firms, often with job changes
(human capital transfers the knowledge) – positive
externality
 It can be used in the production of further knowledge –
positive externality
 It can make existing knowledge useless – negative
externality

We usually assume, that total externality is positive
Knowledge and Human Capital Concepts

In the presence of a positive externality,
the social value of a good includes



The socially optimal Q maximizes welfare:



private value – the direct value to buyers
external benefit – the value of the
positive impact on bystanders
At any lower Q, the social value of
additional units exceeds their cost.
At any higher Q, the cost of the last unit exceeds its social
value.
Government can internalize a positive externality
through subsidies
Knowledge and Human Capital - Concepts
P The market for results of applied R&D
$50
external
benefit
40
S
30
Social value
= private value
+ external benefit
20
10
D
0
Q
0
10
20 25 30
16
Knowledge and Human Capital Concepts

Tacit knowledge
 Some
part can be codified, the rest that
cannot be codified can be transfered only
through human capital – personal or
collective
 Link to psychology and sociology

consciousness, collective consciousness, personal
unconscious, collective unconscious
Knowledge and Human Capital Concepts

Can we measure tacit knowledge?
 Maybe
it is hidden in the progress ratio
Investments in Human Capital
There are three basic types of investments
in human capital:
 Schooling
 On-the-Job Training
 Investments in Health and Social Status
 All have both personal and collective
aspects – as Human Capital itself
 These types are more complements than
substitutes in modern societies

Investments in Human Capital
Education vs. Life expectancy
90,00
Japan
Switzerland
Kuwait
Canada
Mexico
Malay sia Hungary
USA New Zealand
Tunisia
Czech Republic
Turkey
Life expectancy
80,00
70,00
Swaziland
60,00
50,00
Nigeria
GabonKeny a
Philipines
South Af rica
Burkina Faso
40,00
Rwanda
Zambia
30,00
20,00
10,00
0,00
0,00
0,20
0,40
0,60
Index of Education
0,80
1,00
1,20
Investments in Human Capital



Human Capital can be understood like an asset, in
which personal wealth can be hold
Investments into all types of assets depend on:
 Strength and Length of the Flow of Expected Costs
– Direct and Indirect
 Strength and Length of the Flow of Expected
Revenue – Material and Psychological
 Risk and Liquidity
Public policies can create incentives for more
investments
Investments in Human Capital

Examples of Incentives
 Free
schooling - is it optimal?
 Financial support for on-the-job training –
who ought to finance this training?
 Health Policy
 Social policy
Indicators of and for Investments in
Human Capital
Total average lenght of school attendance
13,9
CR '90
14,5
CR '96
15,6
CR '00
16,7
Country
CR '05
15
EU '90
16,8
EU '96
14,6
Greec e
18,3
Belgiu m
16,3
Germany
Netherlands
17,5
UK
17,4
Spain
17,3
0
2
4
6
8
10
12
Number of years
14
16
18
20
Indicators of and for Investments in
Human Capital
University and non-university tertiary education
% of population aged 18-21
40
35
30
13
25
1
5
Non-university
20
15
10
5
4
University
21
24
22
14
26
3
8
0
Czech
Republic
USA
UK
Netherlands
Country
Germany
Spain
Indicators of and for Investments in
Human Capital
Average per cent change in wage (%)
Returns to education and to work experience
10
9
8
7
Male: 1 year of schooling
6
5
Male: 1 year of work practice
4
Female: 1 year of schooling
3
Female: 1 year of work
practice
2
1
0
1988
1992
1996
Indicators of and for Investments in
Human Capital
Participation in post-school education in selected countries
Netherlands
91
Country
Germany
88
EU
65
UK
56
Spain
39
Czech Republic
31
Greece
25
0
10
20
30
40
50
60
Population share (%)
70
80
90
100
Indicators of and for Investments in
Human Capital
Investment in on-the-job training
% of total labor costs
2,50
2,00
1,50
2,37
1,00
0,50
0,93
1,13
1,50
1,67
1,70
EU
Ireland
1,93
0,00
Czech
Republic
Spain
Germany
Country
Netherlands
UK
Indicators of and for Investments in
Human Capital
Unemployment in population groups with different levels of
completed education in 1996
Unemployment (%)
25
22
20
5
14,5
13
11
9,5
9
7
2,5
3
6,5
4 3,5
7,5
4,5
3,5
19,5
lower secondary
14,5
15
10
18,5
17,5
6,5
5
7
5
tertiary non-university
10,5
9
tertiary university
5,5
total
3,5
1
0
Czech
Republic
UK
Netherlands
Germany
Country
higher secondary
Ireland
Spain
Indicators of Human Capital


Functional Illiteracy and Scientific Literacy
Human Development Index
Indicators of Human Capital


Human Capital is a state increased by
investments and decreased by depreciation. It is
impossible to measure it directly, we usually use
like its indicator different indicators of
investments to human capital.
Maybe indicators of Functional Illiteracy and
Scientific Literacy are close to indicating directly
the state of human capital.
Human Development Index




Economist usually use GDP/capita like indicator of the
standard of life.
HDI is a broader index of the standard of life, it
includes GDP/capita as one of its indicators.
All other indicators included in HDI are indicators of
or for investments to human capital.
We are pushed to leave linear reasoning (human capital
like one of the factors of production impacts on GDP)
and take feedbacks into consideration
Indicators of Human Capital
Human Development Index vs. Per Capita GDP
30 000
Norway
Switzerland
Japan
Per capita GDP
25 000
USA
20 000
Kuwait
15 000
Sweden
Netherlands
Belgium Canada
Ireland
Australia
UK
New Zealand
10 000
Spain
Gabon
5 000
Burkina Faso
0,000
0,100
0,200
0,300
RwandaZ ambiaNigeria
0,400
Keny a
0,500
HDI
Malay sia
Argentina
South Af rica
Hungary
Turkey
Czech Republic
Swaziland
Mexico
Tunisia
Philipines
0,600
0,700
0,800
0,900
1,000
Indicators of Human Capital
100
500
100
10
10
0,9
90
400
90
9
8
80
0,8
80
300
80
8
6
0,7
70
0,7
70
200
70
7
4
0,6
60
0,6
60
100
60
6
2
50
sec.
school
enroll.
5
educ.
exp.
5000
1
100
1
4000
0,9
90
3000
0,8
2000
1000
0
Per
capita
GDP
0,5
HDI
50
0,5
50
0
literacy education life
doctors
per
expect.
100000
Czech Republic
Malaysia
0
annual.
popul.
growth
Indicators of Human Capital
20000
1
100
1
100
500
100
10
10
16000
0,9
90
0,9
90
400
90
9
8
12000
0,8
80
0,8
80
300
80
8
6
8000
0,7
70
0,7
70
200
70
7
4
4000
0,6
60
0,6
60
100
60
6
2
50
sec.
school
enroll.
5
educ.
exp.
0
Per
capita
GDP
0,5
HDI
50
0,5
50
0
literacy education life
doctors
per
expect.
100000
Czech Republic
Kuwait
0
annual.
popul.
growth