A point on “wealth”

People keep telling me that the top 1% own some large chunk of the wealth – and that this is obviously unfair.  And hey, it might be.  But I think the conception of wealth that is being used here isn’t really appropriate.

The wealth that is being looked at is the asset value of these people – so this tells us the expected discounted sum of profits from this physical capital.  Fair enough.

However, what we are missing is human capital – we can’t really compare “wealth” levels unless we look at all forms of capital.  As a result, we need to add in the expected discounted sum of labour income into peoples measured “wealth” before we can start to make any sort of comparison.  I suspect that this may change the story somewhat …

The thing here is that, we may feel that a lot of physical capital is “owned” by too few people – but the requirement of labour in this case implies that the surplus created by the physical capital will be shared between workers and capital owners through profits and labour income.  We can’t just look at one side of this and bemoan it – we would need to show that there is some type of issue in the wage bargain between workers and capital owners AND we would need to use a measure including human capital to get an idea of the true distibution of capital.  Once we have done that we can start throwing around our value judgments – but the current case is merely being cherry picked to fill a narrative that wealth is too concentrated (which is may be), without fully putting together the case.

  • Bill

    Good point that we should consider all forms of capital. However, this is precisely why some people are concerned with education getting more expensive for individuals. If only people with access to capital (in any form) can afford to invest in education to accumulate human capital, then ownership of total wealth becomes increasingly concentrated.

    • The availability of education is essential – it is a central part of equality of opportunity.  However, in net terms I would say that the broadening of skill training is probably improving availability.

      Furthermore, education is not the only factor that increase the value of human capital.  In order to really work this out we need to look at wages, or the compentation of employees, which are pretty high in NZ relative to history.

  • Kimble

    3 quick points responding to the first commenter, whose name is obscured by a graphic.

    1. There is a natural limit on the additional human capital that can be created through education.

    2. The current price of education is quite a distance from the price at which only those in the top 1% or 10% would be able to afford it.

    3. There are well known benefits to having an educated populace, and this would likely place a ceiling on the private cost of education.

    • What browser are you using Kimble? I just realised the site looks screwed in my work IE (which has certain security settings enforced) even though it looks completely normal on firefox..

      • Hopefully fixed now….

        • Kimble

          All good in the hood, agnitio.

        • Strange things often happen when I dabble in HTML coding!

  • Royal Albert Ross

    Second obscured-name person:  What is this natural limit on the additional human capital that can be created through education?   What are the constraints? 

    You surely can’t believe that if there is a limit, we are anywhere hear it?

    • Kimble

      The natural limit comes from a few things, like the diminishing marginal returns of education, and the mortality of humans.

      Even in an exceptional human, there comes a point when the amount of time/resources required to improve that persons human capital is simply not worth the benefits that would acrue over the remainder of that persons life. Past that point the human capital is actually being destroyed.

    • With regards to the idea of a limit – there are two margins here.  Investing in education increases human capital – but there are other external factors that also do.

      As a result, there is a clear limit to the gain from investment in education, but there is no clear limit to “total human capital” as technology improves!!