Human Capital Development Theory: Implications for Education - Comparison of

Influential Twenty-First Century Economists Samuel Bowles and Gary S. Becker

By ANGELA FANTOM KERN on December 17, 2009 10:10 PM | 0 Comments | 0

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Abstract

This paper compares the work of two contemporary economists who made
significant contributions to human capital theory, Samuel Bowles and Gary
Becker. Two reoccurring themes in the work of Becker and Bowles with regards
to modern human capital theory are examined. First, human behavior is based
on the economic self-interest of individuals operating within freely competitive
markets and second, education increases worker productivity. Both Becker's and
Bowles' work is important for the future of workforce education because the
current system of compulsory education does not appear to be working. Bowles
work, in particular, illuminates reasons for inefficiencies in the modern
educational system. A comprehensive study of both Bowles' and Becker's work,
may lead to a new educational system, securing the economic status of the U.S.
in the new global knowledge driven economy.

Human Capital Development Theory concludes that investment in human capital

will lead to greater economic outputs however the validity of the theory is
sometimes hard to prove and contradictory. In the past, economic strength was
largely dependent on tangible physical assets such as land, factories and
equipment. Labor was a necessary component, but increases in the value of the
business came from investment in capital equipment. Modern economists seem
to concur that education and health care are the key to improving human capital
and ultimately increasing the economic outputs of the nation. (Becker 1993)
In the new global economy hard tangible assets may not be as important as
investing in human capital. Thomas Friedman, in his wildly successful book,
"The World is Flat" (2007), wrote extensively about the importance of education
in the new global knowledge economy. Friedman, not to be confused with the
famous economist Milton Friedman, is a journalist. His popular book has exposed
millions of people to human capital theory. The term itself is not introduced, but
evidence as to why people and education (human capital) are vital to a nation's
economic success, is a common reoccurring theme in the book.
Economists and historians commonly recognize British economists Sir William
Petty (1623-1687) and Adam Smith (1723-1790) as the primary cultivators of
human capital theory. Petty's main contribution was the Treatise of Taxes and
Contributions (1662). Petty examined the role of the state in the economy and
touched on the value of labor. Adam Smith is routinely credited with

establishing the basis of the economics of human capital. (Becker 1992) In his
series of books entitled "The Wealth of Nations" (1776), Smith discussed his
theories with the prosperity or "wealth" of a nation. "The main cause of
prosperity", argued Smith "was increasing division of labor." Smith is widely
regarded as the first to make a connection between the skill of the worker and
higher wage levels. (Becker 1992)
Modern economists call Smith's insight the theory of "compensating wage
differentials". (Rosen 1986) Compensating differential is a term used in
economics to explain the relationship between the wage rate and undesirable
attributes of a particular job. A compensating wage differential is an equalizing
force. The additional amount of pay that a worker must be offered in order to
encourage them to accept an undesirable job is a compensating factor. (Rosen
1986) English philosophers John Locke (1632-1704) and John Stuart Mill (18061873), and German social theorist Karl Marx (1818-1883) all argued that training,
not natural ability was key to understanding wage differentials. (Becker 1993).
Human capital theory resurged in the 1960's primarily through the work of
American economists Theodore Schultz (1902-1998) and Gary Becker (1930- ).
During this time, economists began making tangible connections between
education and its impact on the ability of humans to earn higher wages. Schultz,
a Nobel prize-winning economist is credited with establishing the term "human
capital". (Becker 2006) In his 1958 paper, "The Emerging Economic Scene and
Its Relation to High School Education", Schultz was the first to write about the
connections between education and productivity. Schultz identified people as the
source of the economic growth when other economists were attributing national
growth to improvements in technology. (Fitz-enz, 2000). Schultz argued that
traditional economics did not correctly calculate or consider the value of human
knowledge. Jac Fitz-enz in his book, The ROI of Human Capital (2000), quoted
Schultz's description of human capital:
"Consider all human abilities to be either innate or acquired. Every person is
born with a particular set of genes, which determines his innate ability.
Attributes of acquired population quality, which are valuable and can be
augmented by appropriate investment, will be treated as human capital."
This paper compares the work of two contemporary economists who made
significant contributions to human capital theory during the last half of the
twenty-first century, Samuel Bowles (1939- ) and Gary Stanley Becker (1930- ).
There are many notable economists, who have influenced human capital theory,
but this paper focuses on two of the more recent influential figures who have
shaped modern human capital theory, but more importantly, continue to
contribute to the field of economics and human capital theory. This paper
examines two reoccurring themes in the work of Becker and Bowles with regards
to modern human capital theory. First, human behavior is based on the
economic self-interest of individuals operating within freely competitive markets
and second, education increases worker productivity.

In modern human capital theory it is commonly regarded that all human behavior
is based on the economic self-interest of individuals operating within freely
competitive markets, but this assumption is where Bowles and Becker disagree.
Bowles contends that all human behavior is NOT based on the economic self
interests of individuals operating within freely competitive markets. Becker
generally supports and promotes the notion that humans are motivated by self
interest and operate freely within markets. However, Becker also writes
extensively about discrimination in the market place which seems to indicate
that there are factors that preclude the individual from operating within markets.
Becker concludes that discrimination reduces the real incomes of those that
discriminate as well as those of the minority. (Becker 1992) Ironically, Becker
never seems to make the connection that individuals might not be operating
freely in the market if discrimination is present.
Bowles challenges traditional human capital theory and postulates that human
capital theory formally excludes the relevance of class and class conflict which
thereby imposes restrictions on an individual's ability to operate within the
market. (Bowles, Gintis 1975)
Both Becker and Bowles appear to agree that education enhances worker
productivity. On the topic of schooling and compulsory education, Bowles and
Becker provide two similar but ultimately divergent opinions which will be
discussed in greater detail later in this paper. Bowles transfers his ideas of class
and class struggle into education where Becker stays within the realm of his
traditional views of education in a capitalist society and its ability to improve the
human condition. Interestingly Becker's ideas were once considered radical, but
now his views seem fairly straightforward and reasonable. In contrast, Bowles
viewpoints, to some, may appear to be radical. It is important to note that many
prominent economists where considered radical in their early views and ideas
therefore Bowles may be eventually be regarded by history as an important
economist with regards to human capital theory.
Both Bowles and Becker have received many awards for their work and are
widely recognized as experts in their field. In 1992 Becker was awarded the
Nobel Memorial Prize in Economic Sciences, officially named The Sveriges
Riksbank Prize in Economic Sciences in Memory of Alfred Nobel for his work in
investments in human capital; behavior of the family (or household), including
distribution of work and allocation of time in the family; crime and punishment;
and discrimination on the markets for labor and goods. (nobelprize.org 2007)
In 2006 Bowles was awarded the Leontief Prize for his outstanding contribution
to economic theory by the Global Development and Environment Institute.
Wassily Leontief (1905 - 1999), was a German born economist known for his
research on how changes in one economic sector may have an effect on other
sectors. Leontief won a Nobel Prize in Economics in 1973. The Leontief Prize was
subsequently established in his honor. The Leontief Prize was awarded to
Bowles for his studies on cultural evolution. Essentially, Bowles challenged the
conventional economic assumption that people are motivated entirely by self-

interest. Some of his work in this area includes mathematical modeling and
agent-based computer simulations of the evolution of altruistic behaviors by
means of multi-level selection and behavioral experiments in 15 hunter gather
and other small-scale societies. Bowles' current research also includes both
theoretical and empirical studies of the role of incomplete contracts in labor
markets and financial markets in explaining income inequality. (Bowles 2007)

President Bush, in 2007, bestowed one of the highest civilian awards, the
Presidential Medal of Freedom, to Becker. The Presidential Medal of Freedom
recognizes individuals who have made "an especially meritorious contribution to
the security or national interests of the United States, world peace, cultural or
other significant public or private endeavors." (medaloffreedom.com 2007)
Becker is commonly recognized for leading economics into social science
disciplines such as sociology, demography and criminology. (nobelprize.org
2007) He argued that many different types of human behavior can be seen as
rational and utility maximizing at a time when human behavior was considered
irrational and erratic.
Becker was heavily influenced by Milton Friedman (1912 -2006). An advocate of
economic freedom, Friedman made major contributions to the fields of
macroeconomics, microeconomics, economic history and statistics.
(nobelprize.org 2007) In 1976, he was awarded the Nobel Memorial Prize in
Economic Sciences for his achievements in the fields of consumption analysis,
monetary history and theory, and for his demonstration of the complexity of
stabilization policy. It is no wonder that Becker earned a Nobel Memorial Prize.
He was tutored by Nobel Prize laureate.
In 1951, at the University of Chicago, Becker took Friedman's course on
microeconomics. Friedman renewed Becker's excitement about economics by
emphasizing that "economic theory was not a game played by clever
academicians, but was a powerful tool to analyze the real world". (Becker 1993).
Becker's early focus, and training in mathematics helped prepare him for the
quantitative rigors of economics. But Becker was also driven by the need to
solve important social problems. (Becker 1993) Becker's early work (in the late
1950s) was widely ignored and considered radical. According to Becker in his
autobiography, "Most economists did not think racial discrimination was
economics, and sociologists and psychologists generally did not believe I was
contributing to their fields." (Becker 1993)
In 1957 Becker published "A Statistical Illusion in Judging Keynesian Models",
with Friedman. Friedman was a major influence on Becker along with T.W.
Shultz's and his ground- breaking theories on human capital. In the book,
Becker and Friedman begin to use economic theory to analyze the effects of
prejudice on the earnings, employment and occupations of minorities. It was
this experience with Friedman that started Becker down the path of applying
economics to social issues. Becker also cites Gregg Lewis's use of economic
theory to analyze labor markets as major influence on his work. Gregg Lewis

(1914 - 1992) is commonly recognized as one of the founders of modern labor

economics. (Duke University 2007) Other influences on Becker were Aaron
Director's applications of economics to anti-trust problems, and industrial
organization, and L.J. Savage's research on subjective probability and the
foundation of statistics. (Becker 1993) Becker's 1957 book with Friedman was
favorably reviewed in journals, but did not attract much interest from academia.
If it had not been for the confidence and support of Friedman, Lewis, Schultz, and
others at the University of Chicago Becker might not have continued his work in
applying economic models to social problems.
Samuel Bowles was influenced by Karl Marx (1818 - 1883) Bowles wrote an
influential paper in 1975 entitled, "The Problem with Human Capital Theory - A
Marxian Critique." In this paper, Bowles exuded insight into human capital theory
that was not considered by early economists. His first idea was that "human
capital theory extends the tradition of Ricardian and Marxist ideologies in
treating labor as a produced means of production, who characteristics depend on
the total configuration of economic forces". (Bowles 1975) Second, Bowles
figured that "human capital development theory rejected the simplistic
assumption of homogenous labor and centered attention of the differentiation of
the labor force" and third, Bowles believed that "modern human capital theory
brought basic social institutions (such as schooling and family), previously
relegated to the purely cultural and superstructural spheres, into the realm of
economic analysis". (Bowles 1975) Becker was most likely the influence on
Bowles with regards to the latter of the three, having already published
significant material on the subject by 1975. Bowles' radical argument was that
human capital theory provided a good ideology for the defense of the status quo.
(Bowles 1975) Bowles asserted that the repressive nature of schooling was a not
a contribution to human welfare but merely a reproduction of social relations
necessary to promote a disciplined and obedient workforce. (Bowles 1975).
Bowles was also influenced by Swiss born economist Marie-Esprit-Lon Walras
(1834 - 1910). Walras was a mathematical economist responsible for the
creation of the general equilibrium theory. Bowles work applies Walras'
equilibrium theory with respect to human capital theory. Bowles studied
extensively, the work of Austrian born economist Friedrich August von Hayek,
(1899 - 1992). Hayek won the Nobel Prize for economics in 1974 and is known for
his defense of classical liberalism and free-market capitalism against socialist
and collectivist thought. (nobelprize.org 2007) Bowles made numerous
references to Hayek's work in his 1999 book, "The Politics and Economics of
Power", in particular, Hayek's references to problems in society being caused by
lack of knowledge. (Bowles 1999)
Bowles seems to be following in the work of Becker and Hayek with regards to
social economics but deviates somewhat with Marxist based ideas of class and
class structure influencing wage differentials and individuals' ability to operate
within markets. What seems odd is that Becker writes extensively about social
issues such as discrimination and inequality which at the very core could be
considered class driven issues, but he never mentions the Marxist concepts of

class and class structure. Becker firmly believed that humans are motivated by
self-interest and developed the human capital approach into a general theory of
determining the distribution of labor income. (Becker 1975) Becker, in his 1975
paper, "The Division of Labor, Coordination Costs, and Knowledge" examines how
specialization and the division of labor depend on coordination costs, and also on
the amount and extent of knowledge. (Becker 1992) Becker builds on the work
of Hayek but never mentions him instead preferring to focus on the work of
Smith and Roy's Model (1951) of self selection and earnings inequality. Becker
dismisses Roy's model and prefers not to assume that "workers have intrinsic
comparative advantages at different tasks", and instead offers "all workers are
intrinsically identical" as he attempts to prove that
"greater knowledge tends to raise the benefits from specialization, and thus
tends to raise the optimal division of labor." (Becker 1992)
Bowles observes that modem human capital theory has all but "eliminated class
as a central economic concept." (Bowles 1975). Human capital theory has
moved steadily away from attributing control of factors of production to
identifiable groups (classes) and toward a theory of every worker is a capitalist.
(Bowles 1975) Bowles challenged the conventional economic assumptions that
people are motivated entirely by self-interest. In Bowles' view, wage structure,
the individual attributes valued on the labor market, and the social relations of
the educational process can only be explained through an analysis of class and
class structure. (Bowles 1975)
In contrast Becker asserts that every worker is a capitalist, acting in their own
best interest. Becker's has expanded human capital theory with his research on
the relationship between earnings and human capital. Becker is responsible for
developing a systematic framework for studying the return on education and onthe-job training, in addition to wage differentials and wage profiles over time.
(nobelprize.org 2007) This framework is the major reason why Becker was
selected for the Nobel Prize.
Bowles recent research (2005) examines the evolution of altruistic behaviors by
means of multi-level selection and behavioral experiments in 15 hunter-gatherer
and other small-scale societies. Bowles research in this project reveals that
individuals do not always act in the interest of self. This is a departure from
commonly held human capital theory and especially from the work of Gary
Becker. The implications for workforce education are that compulsory education
may not be an effective system and radical overhaul of the U.S. education
system may be necessary.
Bowles work is extremely interesting and has many implications for workforce
education. Bowles, in his critique of human capital theory, supposes that
education, training, child rearing and health care perform a dual economic
function in production and perpetuation of the social order. (Bowles 1975). In
other words, the reproduction of capitalist class structure is assured through the
education, training and bearing children. It is Bowles' belief that education can
raise a person's earnings not because it makes people smarter, but because it

creates "incentive-enhancing preferences". Education, Bowles asserts, makes

people more obedient. So what does this say for the power of education to make
people smarter? Further readings into the research and methodologies of Bowles
may reveal the answers.
Interestingly, and of importance to workforce education, academia has already
begun questioning the future of schooling, specifically compulsory schooling.
Alexander Sidorkin (1958 - ) wrote a paper entitled "Human Capital and the
Labor of Learning A Case of Mistaken Identity" (2007). In this paper, Sidorkin
claims "human capital development theory does not explain the practice of
compulsory schooling and that education is not an investment but rather a form
of labor that should be subsidized". (Sidorkin 2007) Sidorkin references both
Bowles and Becker work in his paper and conclude that both economists view
education and schooling as an investment in that it raises individual earnings
potentials. Sidorkin takes Becker's ideas one step further and extrapolates that
Becker is suggesting that the government should pay students to attend school.
Specifically, Sidorkin extrapolates his claim from Becker's 1993 book, "Human
Capital: A Theoretical and Empirical Analysis with Special Reference to
Education", page 128:
"Since the purpose of a minimum standard is to offset the effects of poverty and
niggardliness, appropriate subsidies could in principle achieve the same result
without compulsion. The effectiveness of voluntary investment in human capital
is often underrated because subsidies to human capital usually cover, at best,
only a portion of earnings forgone. If they cover all costs, including those
forgone, almost all children I am confident, would continue in school through the
age desired."
Imagine the implications for education! Sidorkin makes a rational argument to
establish schooling as a form of labor (instead of investment) and makes norm
shattering recommendations for the reform of traditional education. Sidorkin, a
Russian born educator and now director of the School of Teacher Education and
executive director of the Philosophy of Education Society at the University of
Northern Colorado has written some truly fascinating articles on education and
human capital.
Both Becker and Bowles are well published and mathematically sound
economists. Both are credited with developing complex formulas and equations
which might leave the average intellectual feeling a bit inadequate. Both have a
large body of papers and books that could take years to read and digest. On
many topics such as human capital and education they seem to agree but with
deeper research into their work one begins to see fundamental differences.
What is remarkable, is that a great deal of younger economists, sociologists and
intellectuals have embraced Becker's and Bowles work and are using it to make
an argument for fundamental changes in education. Both Becker's and Bowles'
work is important for the future of workforce education because the current
system of compulsory education does not appear to be working. (Friedman 2007)
Bowles work, in particular, seems to touch on the reasons for inefficiencies in

modern educational systems. A comprehensive study of both Bowles' and

Becker's work, may lead a path to a new educational system that will reinforce
and maintain the economic status of the U.S. in the new global knowledge driven
economy.

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