The Rise of Human Capital Theory
February 4, 2022
Originally published at Economics from the Top Down
Blair Fix
If there was an award for the most pernicious scientific idea ever, what theory should get first prize? I would vote for eugenics, a theory that claims we can ‘improve’ humanity through selective breeding.
If there was a second prize, I’d give it to human capital theory. I think of human capital theory as ‘eugenics light’. It purges the idea that abilities are innate (and that we should selectively breed the ‘fit’). But human capital theory keeps the Nietzschean idea that humanity’s success can be attributed mostly to gifted übermensch.
Among us, human capital theory claims, walk individuals who are unfathomably productive. These übermensch produce more in an hour than most of us do in a week. Take just 1% of these top individuals, and you’ll find that they outproduce the bottom half of society!1 According to human capital theory, then, we could do away with half of society with no great loss to economic output. Of course, few human-capital theorists advocate such atrocities. But my point is that their theory contains the seeds of eugenics … even Nazism.
The ethical problems with eugenics and human capital theory are easy to spot. But what about the scientific problems? These are more difficult to tease out. Eugenics is based on the hard truth that many traits are heritable. Similarly, human capital theory is based on the reality that some people earn hundreds of times more income than others. Where both theories go wrong, however, is that they misunderstand humanity’s social nature.
Yes, many individual traits are heritable. But it is a fallacy that traits that are good for individuals are also good for society. That’s the core scientific flaw in eugenics. And yes, it’s true that some people earn far more than others. But it’s a fallacy that this income is caused by traits of the individual. In reality, income is a social trait.
My goal in this post is not to rigorously debunk human capital theory. (I’ve done that here.) Instead, I’m going to chart its rise and speculate about its eventual fall. I’ll do so by looking at the rise and fall of eugenics. What’s ominous is that the theory that debunks eugenics is today still more obscure than eugenics itself. In a century, will something similar hold for the theory that debunks the idea of human capital?
The rise and fall of eugenics
When Charles Darwin published his opus On the Origin of Species in 1859, it was only a matter of time before his ideas would be abused.2 Darwin argued that species arose by survival of the fittest. Each generation, some individuals reproduced more than others, passing on their traits to the next generation. Over time, this caused organisms to adapt to their environment, eventually giving rise to new species. It was evolution by natural selection.
In the wild, this process is blind. (Nature has no goal.) But when humans entered the equation, natural selection started to have a conscious overseer. For millennia, humans have selectively bred domestic animals to have traits that we desired. Darwin called this guided process ‘artificial selection’. Its success in creating distinct breeds of domestic animals, he argued, was evidence for the wider process of evolution by natural selection.
If we could change the traits of domestic animals through selective breeding, it seemed plausible that we could do the same with humans. And with that idea, eugenics was born. The word (which means ‘well-born’) was coined by 19th-century polymath Francis Galton, who was himself of impeccable pedigree. He was Charles Darwin’s half cousin.
The prospect of selectively breeding humans raises obvious ethical problems. It requires first deciding who is ‘well-born’ and who is not. (What are the criteria for this decision? And more importantly, who gets to decide?) And once this decision is made, the reproductive rights of the non-well-born must be removed. That rings of fascism.
Despite the dubious ethics, eugenics became shockingly popular in the early 20th century. In the United States, ‘feeble minded’ individuals were sterilized en masse. And later, Nazi Germany simply exterminated (by the millions) ‘unfit’ individuals.
This monstrosity is written in mass graves throughout Europe. But it is also written in the scientific record. Figure 1 shows the frequency of the term ‘eugenics’ in scientific papers. Its use exploded at the turn of the 20th century and remained popular until the end of World War II. It wasn’t until the horrors of the Holocaust were revealed that eugenics became disgraced. On that front, the German term for eugenics — ‘rassenhygiene’ (racial hygiene) — peaked ominously as the Holocaust was perpetrated.
Productive individuals, productive society?
Barbarous as it is, let’s put aside the ethical problems with eugenics. Even then, the science is bullshit. The premise is that if we selectively breed for traits that we (the eugenicists) find desirable, the spread of these traits will lead to a better society. What are these ‘good’ traits? I’ll let the eugenicists speak for themselves. Figure 2 shows a eugenics poster from 1926. It reads:
Some people are born to be a burden on the rest.
Every 15 seconds $100 of your money goes for the care of persons with bad heredity such as the insane feeble-minded, criminals & other defectives.
Every 7½ minutes a high grade person is born in the United States will (sic) will have ability to do creative work & be fit for leadership. About 4% of all Americans come within this class.
The logic in this eugenics poster is hard to miss. Some people, the eugenicists claim, are unproductive and do not contribute to society. These people should reproduce less. Meanwhile, ‘high-grade’ productive individuals should reproduce more. The result will be a better society.
This sentiment is morally repugnant, yes. But might it be true? If we selectively bred ‘productive’ individuals, would the result be a more productive society? Fortunately, no one has done this experiment on humans. But it has been done on domestic animals. And the results completely undermine the eugenicists’ arguments.
In the 1990s, geneticist William Muir conducted experiments on chickens to see what would improve egg-laying productivity. In one trial, he did exactly what the eugenicists recommend — he let only the most productive hens reproduce. The results were disastrous. Egg-laying productivity didn’t increase. It plummeted. Why? Because the resulting breed of hens was psychopathic. Instead of producing eggs, these ‘uber-hens’ fought amongst themselves, sometimes to the death.
The reason this experiment didn’t work is that egg-laying productivity is not an isolated property of the individual hen. It is a joint property of the hen and her social environment. In Muir’s experiment, the most productive hens laid more eggs not because they were innately more productive, but because they suppressed the productivity of less dominant chickens. By selecting for individual productivity, Muir had inadvertently bred for social dominance. The result was a breed of bully chicken that couldn’t tolerate others.
The lesson here is that in social animals, traits that can be measured among individuals (like productivity) may not actually be traits of the individual. Instead, they are joint traits of both the individual and their social environment. Here’s evolutionary biologist David Sloan Wilson reflecting on this fact:
Muir’s experiments … challenge what it means for a trait to be regarded as an individual trait. If by “individual trait” we mean a trait that can be measured in an individual, then egg productivity in hens qualifies. You just count the number of eggs that emerge from the hind end of a hen. If by “individual trait” we mean the process that resulted in the trait, then egg productivity in hens does not qualify. Instead, it is a social trait that depends not only on the properties of the individual hen but also on the properties of the hen’s social environment.
(David Sloan Wilson in When the Strong Outbreed the Weak)
A key problem with eugenics is that it neglects the social nature of human traits. It assumes that productivity is an innate trait of the individual, and that breeding for this trait would lead to a better society. It’s a seductive idea that is deeply flawed. In all likelihood, selectively breeding people for productivity would, like chickens, lead to a psychopathic strain of human.
The rise of human capital theory
After the horrors of the Holocaust, eugenics fell into disrepute. As a result, few people today dare argue that we should selectively breed humans for productivity. Still, the sentiment behind eugenics (that some people are far more productive than others) lingers on in mainstream academia. It survives — even thrives — in human capital theory.
The ground work for human capital theory was laid just as eugenics fell out of favor. In the 1950s, economists at the University of Chicago tackled the question of individual income. Why do some people earn more than others? The explanation that these economists settled on was that income resulted from productivity. So a CEO who earns hundreds of times more than a janitor does so for a simple reason: the CEO contributes far more to society.
The claim that income stems from productivity was not new. It dated back to the 19th-century work of John Bates Clark and Philip Wicksteed, founders of the neoclassical theory of marginal productivity.3 Clark and Wicksteed, though, were concerned only with the income of social classes. What the Chicago-school economists did was expand productivist theory to individuals.
Doing so required inventing a new form of capital. The idea was that individuals’ skills and abilities actually constituted a stock of capital — human capital. This stock made individuals more productive, and hence, earn more income. Figure 3 shows key papers that initiated human capital theory.
The idea that skills constituted ‘human capital’ was initially greeted with skepticism. For one thing, the term itself smacked of slavery. (Capital is property, so ‘human capital’ implies human property.) For another, human capital theory overtly justified inequality. It implied that no matter how fat their incomes, the rich always earned what they produced. Any attempt (by the government) to redistribute income would therefore ‘distort’ the natural order. During the 1950s and 1960s, there was little tolerance for such views. It was the era of welfare-state expansion, driven by Keynesian-style thinking. Yes, big government may have been ‘distorting’ the free market — but society seemed all the better for it.
Until the 1970s, human capital theory remained obscure. But then politics began to change. In the words of Ronald Reagan, “People were tired of wasteful government programs and welfare chisellers”. The welfare system was not a social safety net, Reagan declared. It was a “creator and reinforcer of dependency.”
Reagan’s language, you’ll note, is eerily similar to the eugenics sentiment of old:
Some people are born to be a burden on the rest.
Yes, Reagan removed the crass genetic component. But the sentiment remained the same:
Some people are a burden on the rest.
The stage was set for a return to eugenics-style thinking — to the idea that the poor were a burden on the rich (not the other way around). As a result, the fortunes of human capital theory rose.
Figure 4 tracks this rise. I’ve plotted here the portion of scientific papers that contain the words ‘human capital’ in their title. The first spat of papers appeared in the late 1950s and early 1960s, authored by Chicago-school economists Jacob Mincer, Gary Becker, and Theodore Schultz. This trio constituted the first generation of human capital theorists. By the 1970s they were famous, but their academic output soon tapered off.4 In the 1990s, a second generation of economists took up the human-capital mantle. By then, neoliberal politics was in full swing. The fact that human capital theory explicitly justified inequality was no longer a liability. It was a selling point. And so the theory proliferated.
Today, the fortunes of human capital theory seem to have peaked. Like eugenics before it, will human capital theory soon fall into disrepute? Or are we headed for a third wave of human-capital propaganda? Hard to say. But what is scary is that eugenics collapsed not from any scientific reckoning, but because of a genocide. Will human capital theory collapse only when we plumb the depths of despotism? I don’t want to find out.
Fiction over fact
As a scientist, I’m fascinated by the human ability to delude ourselves — to choose convenient fiction over inconvenient fact. On that front, the collapse of eugenics (Fig. 1) appears to be a victory. But it is only a partial one. Eugenics collapsed for ethical reasons (it produced a genocide). Yet the scientific reasons why eugenics is wrong remain obscure.
We can see the scientific flaws by returning to William Muir’s chicken experiment. I’ve already told you about his psychopathic chickens, created by breeding the most productive hens. But I haven’t told you about his alternative trial. In it, he bred the most productive group of chickens. The result was an astonishing increase in egg-laying productivity.
The reason this group selection worked is that chickens are social animals. That means productivity is influenced by the social environment. By selecting productive groups, Muir selected for egg-laying ability, but also for sociality. The resulting social hens flourished together.
Something similar holds true for humans. The abilities of individuals cannot be separated from the social environment in which they occur. For this reason, any selective breeding based on individual traits is likely to have unintended consequences. If Muir’s chicken experiment is any indication, breeding übermensch wouldn’t create an uber-productive society. It would create a psychopathic one.
The reason comes down to the unit of selection. As social animals, humans have been strongly shaped by the selection of groups. This group selection has tended to suppress selfish tendencies that are otherwise beneficial for individuals.
Back to eugenics. Yes, eugenics has collapsed into disrepute. And yet the reasons why it is scientifically flawed remain obscure. Today, papers containing the word ‘eugenic’ in their title still outnumber those containing the word ‘group selection’ or ‘multilevel selection’. No, these modern eugenics papers are not advocating eugenics … they are investigating its history. Still, they appear not to be discussing a key scientific flaw in eugenics theory.
Now to human capital theory. If, in the future, human capital theory falls into disrepute, my guess is that its scientific flaws will remain obscure. Let’s review these flaws.
Human capital theory supposes that income stems from productivity, and that this productivity is an isolated trait of the individual. This thinking, when taken to the extreme, is ludicrous. It implies that an Egyptian Pharaoh was thousands of times more productive than his slaves. Moreover, because this productivity was embodied in the Pharaoh, he could do away with his slaves and still retain his wealth. It gets worse. According to the logic of human capital theory, the Pharaoh’s slaves were actually a burden on the kingdom’s per capita productivity. If the Pharaoh exterminated them, per capita productivity would skyrocket.5
Idiocy.
The reality is that the Pharaoh owed his wealth to his tremendous power. He sat atop a massive hierarchy — an army of slaves who answered his beck and call. Do away with the slave army and the Pharaoh’s wealth would vanish.
When applied to a feudal society, we recognize that human-capital logic is bullshit. But when applied to our own society — as economists do everyday — it passes for ‘science’. Yet reality remains the same. Today (as ever) wealth and income stem from power.
There are a variety of theories that acknowledge the realities of power. Jonathan Nitzan and Shimshon Bichler’s theory of ‘capital as power’ is one. My own investigation of how income relates to hierarchical rank is another. (Read about it here). The truth, though, is that these theories are flies on the human-capital elephant. As Figure 6 shows, scientific articles with ‘human capital’ in the title outnumber those with ‘capital as power’ or ‘hierarchical rank’ by a factor of 100.
In the future, human capital theory (like eugenics before it) may fall into disrepute. In that case, the number of human-capital papers will surely shrink. But will theories that acknowledge the realities of power become wildly popular? My guess is no.
Again, we can take a cue from the fall of eugenics. Eugenics is scientifically flawed because it conceives of traits as residing in the individual, not their social environment. Yet when eugenics collapsed, the theory of group selection (which focuses on the social environment) did not become wildly popular. Why? A big reason is ideological. Like economics, biology has been seduced by methodological individualism — the dogmatic focus on traits of individuals.
When it comes to human capital theory, the problem is even worse. Here, when we expose the realities of power (a social trait), we undermine the legitimacy of the social order. That’s a dangerous business. It can be done safely in obscurity. But if the realities (and injustices) of power become widely known, that means the social order has been put into question. That’s good … if it leads to a more just society. But often, widespread discontent leads to reactionary repression.
If human capital theory someday becomes the fly on the power-theory-of-income elephant, it would signal not only a scientific revolution, but also a social one. I doubt I’ll live to see it happen. And if I do, I have no idea what type of society would emerge from the other side.
Sources and methods
As my sample of scientific papers, I’ve used metadata from the Sci-Hub database (about 80 million papers). You can download the metadata from Library Genesis. The raw data comes as an SQL database dump. If you’re interested in doing some analysis, I’ve built an R function that can parse the SQL data. Check it out at Github.
Notes
- In the United States in 2019, the top 1% of earners took home 18.7% of all income. The bottom 50% of earners, in contrast, took home just 13.5% of all income. (Data is from the World Inequality Database, pre-tax income share of US adults, equal splits.) If human capital theory is correct, this income indicates productivity. So the top 1% produced more than the bottom half of society. And the average member of the top 1% produced abut 70 times more than a member of the bottom 50%. (The math: 18.7% / 13.5% × 50 = 69.2). So an übermensch member of the top 1% produced more in an hour than a bottom-50 percenter did in a week. Or so human capital theory would have us believe.↩︎
- Actually, the seeds of abuse appear in the full title of Darwin’s opus. The main title (still used today) was On the Origin of Species by Means of Natural Selection. The subtitle, however, has fallen out of favor. Darwin called it the Preservation of Favoured Races in the Struggle for Life.↩︎
- You can go further and trace productivist sentiment back to the 17th-century philosopher John Locke, who argued that property comes from the exertion of (productive) labor.↩︎
- A human capital theorist would say that Becker, Mincer and Schultz’s output tapered with age because their human capital (much like a used car) depreciated with time.↩︎
- Imagine an economy consisting of the Pharaoh and 1000 slaves. In terms of living standard, imagine that the Pharaoh earns 1000 times the ‘income’ of the average slave. In human capital theory, that means the Pharaoh is 1000 times more productive than each slaves. With this ‘fact’ in hand, let’s do some productivity accounting. Let the productivity of a slave be 1. We find that national productivity per person is roughly double the productivity of a slave:
\displaystyle \begin{aligned} \text{productivity per capita} &= \frac{(1 \text{ Pharaoh} \times 1000) + (1000 \text{ slaves} \times 1)}{1001 \text{ people}}\\ \\ &\approx 2 \end{aligned}
According to human capital theory, if the Pharaoh wants to increase national productivity, he should exterminate the slaves. Per capita productivity will then grow by a factor of 500:
\displaystyle \begin{aligned} \text{productivity per capita} &= \frac{1 \text{ Pharaoh} \times 1000}{1 \text{ person}} \\ \\ &= 1000 \end{aligned}Never mind that in reality, the Pharaoh’s wealth depends entirely on his army of slave labor. In human capital theory, reality is turned on its head — the slaves are a burden on the Pharaoh.↩︎
Further reading
Fix, B. (2018). The trouble with human capital theory. Real-World Economics Review, 86, 15–32.
Fix, B. (2019). Personal income and hierarchical power. Journal of Economic Issues, 53(4), 928–945.
Muir, W. M., & Wilson, D. S. (2016). When the strong outbreed the weak: An interview with William Muir. https://evolution-institute.org/when-the-strong-outbreed-the-weak-an-interview-with-william-muir/
Nitzan, J., & Bichler, S. (2009). Capital as power: A study of order and creorder. New York: Routledge.
Selden, S. (2005). Transforming better babies into fitter families: Archival resources and the history of the American eugenics movement, 1908-1930. Proceedings of the American Philosophical Society, 199–225.