Human capital is property

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 week’s Swaminomics to Karl Marx. One reason is that I have little new to say about Mr. Rao’s 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. India’s 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 Marx’s 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, land-scarce 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.

What do you think?