Valuing Knowledge: The Impact of Human Capital Accounting on Global Economic Governance
Since the 1990s, with the rise of endogenous growth theory, the internet and the new economy, knowledge – or ‘human capital’ – has been widely understood as the central factor underpinning growth and competitiveness in advanced post-industrial economies. There’s just one problem: no one has known how to measure it. Recent efforts to develop monetary estimates of human capital are deeply problematic, however, because they capture only a narrow measure of value, and push countries with supposed deficits of human capital towards market-oriented welfare and labour market policies. This blog also appeared on the PERC website.
Post-GDP accounting
Human capital measurements for a long time remained crude – unmonetized indicators of educational attainment, such as the % of the population with a college degree. Standardised comparisons of school pupils’ performance attempt to measure skill attainment directly, but still fail to measure the economic value of these skills. This means that, unlike the produced and financial assets that show up in the balance sheets in the national accounts, human capital has not had a monetary value and cannot enter growth accounting models or other types of economic analysis.
As I explored in a recent article published in RIPE, this has been changing over the last decade as global economic governance institutions have sought to develop a more formal accounting framework for estimating the monetary value of a country’s ‘human capital stock’. As a recent UNECE document indicates:
Understanding and quantifying human capital is becoming increasingly necessary for policymakers to better understand what drives economic growth and the functioning of labour markets, to assess the long-term sustainability of a country’s development path, and to measure the output and productivity performance of the educational sector.
We can situate this measurement agenda within a broader ‘post-GDP’ movement in global economic governance that has sought to adjust national accounting systems to better capture the realities of post-industrial economies and societies. Under this governance agenda, the ‘wealth accounting’ approach to sustainable development has emerged as dominant since the late 2000s, with the publication of a key UN, Eurostat and OECD report as well as the Stiglitz commission on the reform of global socio-economic statistics.
According to this framework, to account for all the non-produced assets and resources that modern economies increasingly rely on (‘natural capital’, ‘human capital’ and ‘social capital’), we should extend national balance sheets to show whether ‘total wealth’ across all asset classes is being preserved or depleted. A recent UN taskforce suggested that:
If these stocks are calculated using a common measure and assumptions are made about the substitutability of various capital stocks, changes in the total stock of wealth (per capita) will provide information on the sustainability of the development path of each country.
This is an elegant idea: a way for economic analysis to internalise the externalities that GDP growth relies upon, re-embedding the market economy in its ecological and social context.
Knowledge as capital
Regarding human capital, however, operationalising this framework is fraught with methodological difficulties. The way in which global governance organizations have confronted these valuation challenges is little understood, buried in technical accounting manuals and methodological appendices – but it exerts an ever-increasing influence on development discourse and policy.
Most notably, emerging international standards for valuing human capital – used by the UNECE and the World Bank – are heavily influenced by neoclassical capital theory first outlined by Irving Fischer in the 1900s. This views the accounting value of a capital asset as the discounted market income that its owner can expect during the lifetime of the asset.
The conceptual sleights of hand needed to translate this methodology to the valuation of human knowledge are heroic. For instance, we must assume that knowledge and skill are something separate from, and ‘owned’ by their bearer. This has meant that ‘knowledge’ is quickly reduced to formal qualifications in these frameworks, since these can (if one squints hard enough) be seen as something owned by the student, unlike informal skills gained on-the-job. Perhaps most bizarrely, cost-based estimates require accountants to assume that ‘like physical capital, human capital depreciates over time’, due to ‘the wear and tear of skills due to aging’, in a manner analogous to the deterioration of aging physical equipment.
Even with more commonly used output-based methods, which value knowledge based on discounted future wages, the human capital of the unemployed falls to zero (as this ‘asset’, the skills of the worker, is no longer generating an ‘income’ stream) and that of the elderly close to zero. They also assume that education spending is pure investment – that there is no intrinsic pleasure or ‘consumption’ aspect to learning and that it is something endured purely for the enhanced wage prospects it offers the student.
Human capital metrics and the commodifying of care
Methodological choices made on these issues would be of academic interest if monetary estimates of human capital were confined to experimental papers in economics journals. But increasingly they are used by global governance agencies to pathologise certain countries and judge which welfare regimes and labour market policies are deemed ‘sustainable’.
An illustration of this is the use of human capital wealth estimates by the World Bank, within its Human Capital Project (HCP) launched in 2018. Based around ‘using policy and results-based lending to support critical human capital reforms’, this agenda plays a central role in the Bank’s wider development strategy for poverty eradication by 2030. In 2019 the Bank launched human capital plans for the MENA region and Africa, to support the HCP. In MENA, human capital targeted financing is set to increase from $1.119bn in 2019 to $2.5bn by 2024, while in Africa it is set to reach $15bn by 2021-23.
In both strategies, these regions are pathologized on the basis of comparative analysis of their human capital wealth. For instance, the MENA human capital plan laments how ‘with the lowest percentage of human capital as a share of total wealth per capita of any region in the world (35%), MENA faces a severe human capital gap’. This is, moreover, linked explicitly to their relative lack of labour commodification and an insufficiently developed free market economy. By comparison, Bank analysis of human capital in China applauded the ‘very rapid increase in urban human capital from the mid-1990s, in part because of the transition to a market-oriented economy’.
In the MENA region as well as in Africa the World bank strategy outlines a number of ‘priority interventions that can help build, protect, and utilize human capital’. These involve using targeted funding and policy consultancy to adapt education systems to competitive job markets, encourage entrepreneurship and focus teaching on young people’s employability in the private sector.
An interesting feature of this agenda is the way in which it interacts with the Bank’s discourse on gender equality and female empowerment. Human capital estimates are used to justify the commodification of care work, by bringing female labor market participation up to parity with male workers. The MENA strategy prioritises ‘closing the gap in female employment by improving conditions that facilitate women’s insertion into the labor market to realize their potential as productive workers’.
This is not of course to suggest that moves towards gender parity in labour markets are unwelcome. Notably, however, human capital estimates render one particular means of achieving this (full-time employment for both genders in the context of commodified care provision) as a contribution to the national balance sheet, while other routes (for instance, job sharing and work redistribution or commons-based care networks) cannot.
As this case illustrates, currently dominant human capital accounting methodologies naturalise the assumption that ‘sustainability’ depends on a particular market-oriented development trajectory. These policy recommendations are a tautological result of methodological choices. Because the value of a nations’ human capital wealth has been made to depend upon its projected contribution to labour market income, countries with higher levels of de-commodified care provision will necessarily have lower human capital wealth.
Global governance discourse frames these policy recommendations as neutral, technical assessments of how to build human capital. However, by unpacking the black box of the concepts these valuations rely on, we see that they are based on highly contentious assumptions grounded in neoclassical wealth accounting theory.
