Capital Gains: Realizing America’s human potential
In 1928, the English economist Arthur Pigou coined the term “human capital” to describe investments in the acquisition and application of knowledge, asserting that these investments, just like traditional physical capital, were essential ingredients of economic production. Today, we might divide human capital into three major components. Education plays an important role in developing human capital, of course. Equally important is whether a society’s farms, factories, offices, and shops take advantage of its workers’ abilities through efficient management and the latest technology. And welcoming foreigners infuses a country’s stock of human capital with fresh energy and initiative.
Americans have long been deeply committed to building up all three aspects of human capital, even if they haven’t called it that. The United States pioneered the idea of schooling all children (as opposed to only the children of the rich); as early as 1890, it had more schools per capita than any European country, and 35 percent more of the population went to school than in England, France, and Germany, the next-best-educated large nations. American industry and agriculture were generally the first to harness the most advanced technologies in production, transportation, and communications, as well as the most apt to hire, pay, and promote workers on the basis of merit (see “Who Killed Horatio Alger?”). Continuously replenished by eager and well-assimilated migrants, the American workforce outshone its rivals in its high aspirations, openness to opportunity, and extraordinary diligence. All this paid off handsomely: by 1900, perhaps even earlier, America was the world’s most productive and prosperous nation.
There are signs, however, that America’s era of human-capital superiority may be coming to an end. That has disturbing economic implications. For one thing, the severity of the recent recession—and the limping recovery—can be attributed partly to deficiencies in human capital. For another, when economic growth eventually resumes, the condition of the country’s human capital will determine how well Americans profit from the recovery. A recent study from the Organisation for Economic Co-operation and Development (OECD) estimates that if the school performance of Americans born this year could be raised to the level of their higher-scoring international peers, the resulting U.S. economic growth would boost GDP by $41 trillion within 20 years.
Happily, Americans have always done their part by acquiring as much human capital as they can. What is left is for federal, state, and local governments to do their part by fashioning more effective human-capital policies.