Human capital is property

1993.Jul.24 Swaminathan S. Anklesaria Aiyar 0 Comment

SOME people ask me why, at a time when there are doubts whether the
Prime Minister and h is economic policies will survive, I devoted last weeks
Swaminomics to Karl Marx. One reason is that I have little new to say about
Mr. Raos survival chances. The second is that the errors of Marx hold many
more important lessons for us than the errors of Rao.
Education is a case in point. Indias terrible neglect of primary education
since independence means that barely half the population is literate. By
contrast, every Asian miracle economy had literacy rates approaching 80 per
cent I before it took off. An uneducated workforce cannot perform miracles,
and so the new economic reforms will not make much head-away unless
state governments see primary education as the key to prosperity, which can
enrich people far more than land or machinery. We now know that an
educated, skilled workforce absolutely essential for a prosperous country.
The recent decline of the United States relative to Japan is widely ascribed to
the poorer educational system of the US.
One great revelation of the twentieth century which neither Karl Marx nor
Adam Smith realize that education is a form of property, which can enrich
people far more than land or machinery. We now know that an educated,
skilled workforce is absolutely essential for a prosperous country. The recent
decline of the United States relative to Japan is widely ascribed to the poorer
educational system of the US.
Economists now recognize something called human capital. The
competitiveness of an industry does not depend just on physical capital
(land, machinery) or financial capita), but on the skills (human capital) that
go into production. The skills that matter are not simply those of
technologists and managers the skills of workers matter a great deal. The
success of Toyota owes something to over 10,000 suggestions per year for
ways of improving productivity from workers on the shop floor.
HIGH RETURN: Economists have shown that returns on investment in human
capital education, training are as high as in investments in farms. So
education enriches the owner no less than land or bullocks.
By keeping half our population illiterate we have kept them poor. The main
culprit is unquestionably the Congress Party, which has ruled most states
most of the time since independence. But the Left parties, and Left
intellectuals, in general, repeated Marxs error of emphassising physical
capital over human capital. In particular they stressed land reforms rather
than education as a way of alleviating poverty and reducing income
differences. This was a mistake. India is a land -scarce country in which land
reforms can never solve the problem of poverty. The population is
approaching 900 million, but the cultivated area is no more than 143 million

hectares, meaning land availability is barely one-sixth of a hectare per

person. So even if all the land is equally divided, the average family of five
will have less than one a recipe for eternal poverty.
ENRICH ALL: By contrast, education can enrich all. Land cannot be created,
but human skills can be created without limit. This is why skill rich, landscarce countries like Singapore and Hong Kong have become far richer than
land-abundant, skill-scarce countries, in Africa.
The abolition of zamindari in India in the 1950s was absolutely essential. But
if after that the intellectual debate and effort that went into land reforms had
instead gone into rural education, I have little doubt the rural poor would
have been far better off.
Without the spread of education, capitalism could not have defeated
Marxism. Not only Marx, but most thinkers over the last two centuries
thought property meant land and other physical resources, and felt that the
rich would never willingly share this property with the poor, leaving
revolution as the only course open for the poor to improve their lot.
This line of thought plausible, but failed to that human capital is also wealth.
True, the rich would not willingly part with land or machines, but they were
quite happy to educate the poor, as they saw mutual benefit in an educated,
skilled workforce.
EXTRAORDINARY: Education turned out to be an extraordinary form of
property, quite unlike others. If you gave land to another person, you no
longer had it. But if you gave education and skills to another person, you still
kept your own skills. Education was the first form of property which could be
retained even while it was given away. This meant it could be multiplied in
ways that land and machines could not, and made it far more revolutionary
than anything that Marx ever dreamed of. Thanks to education, it has
possible to enrich the poor masses without confiscating the property of the
rich, and the fundamental contradiction between the propertied and
unpropertied gradually diminished. This took time. But ultimately education
proved so revolutionary in its social impact that it made bloody revolution (of
the Marxist or anarchist variety) unnecessary and indeed undesirable.
In India, we have never understood this well enough. We have agitations
galore on temples mosques, farm prices, steel plants and multinationals. But
nobody leads an agitation for improving education, for providing schools of
decent quality in every village. The newspapers seem to see the future of
Narasimha Rao (and even of Harshad Mehta) as more important than the
future of primary education. This in not true.