Human capital formation, good employment opportunities & the firm.

AuthorPadhi, Satya Prasad


There is the evidence to the effect of a close association between 'formal' human capital--say educational system with higher degree of specialization--and higher good employment opportunities (and higher development status in production). This can evoke two different perspectives, emphasizing different causality chains. One, the much discussed, is the human capital theory where the (developed) formal human capital--as the output created by formal education system--creates good employment opportunities (Becker, 1993, 1964; Becker & Chiwick, 1966) and explains higher developed status in production (Schultz, 1961) (1). This perspective has its criticisms. There are instances where higher investment in human capital has not led to the creation of good employment opportunities (or transformation of production conditions) in the same (underdeveloped) regions (Frank, 2005). One implication is that even if there would the (public?) provision of 'education' that creates more skilled manpower, it is employment opportunities that give the value in the capital theory: for example, the underemployment possibility would assign a lower weight to human capital index (Mathur, 1984). The incidence of such underemployment possibilities is higher in the underdeveloped countries (Stiglitz, 1988; Rodriguze-Clare, 1994). Moreover, the formalization of such human capital as a growth fact encounters many problems. For instance, the new endogenous growth theories, using the production function approach to growth, emphasize that the resource allocation towards human capital formation can explain 'growth' facts if it creates 'externalities'. However, it has been pointed out that: (i) the Marshallian externalities created by human capital, as an independent argument in the production function, say the creation of 'aggregate knowledge capital' (Romer, 1986) are not empirically important (Pack, 1994), and (ii) a well behaved production function, targeting well behaved resource allocation based on individual initiatives, cannot admit of any such externality (Solow, 2000).

An alternative perspective, which has not received much emphasis, discusses the incidence of effective formal education as a specialization, which draws its strength from the higher developed status of specializations in production. If one acknowledges the existence of sophisticated business knowledge before modern times (for literature see, Burton-Jones and Spender, 2011: 67), a broader hypothesis is that it is the incidence of economic progress in specific countries, creating good employment opportunities, that provides the incentive to divert additional resources for investment in formal education to improve up on such commercial knowledge.

This causality chain has not been much discussed. The only discussion is one of learning by doing where the generation of ideas is a side effect of production of capital (Arrow, 1962) and the process could explain the scope for formal education to facilitate such generation of ideas (Lucas, 1988) with spillover growth effects. However, allowing for the fact that learning by doing arises from problem solving and could be specific to new problems or new 'employment opportunities', the basic problem is what explains such good employment opportunities? Why not traditional economies (with traditional firms) make the transition through learning by doing? If greater trading opportunities, new association with new things permit such employment (or production possibilities) (Chaney & Ossa, 2013), what explains such opportunities? The literature also highlights that the impact of learning by doing is limited to achieving only higher labor productivity and such scope of improving productivity through learning by doing decreases if one allows for a given set of production possibilities. Continuous learning depends on continuous growth of good employment opportunities. What explains such a process?

In these contexts, the paper maintains that an understanding provided by Young (1928), who gives primacy to initial creation of firm-specific informal human capital formation in this causality chain, needs elaboration. The focus is not as such on a firm that creates good employment opportunities. It is on the good employment opportunities that create dynamic external economies and permit the further growth of such employment opportunities, which in turn forms the basis of sophistication in formal human capital formation. More specifically, it highlights a process of change that marks a transition towards narrow specializations, including specialization in education. In this perspective, also, the external economies are important, but their conceptualization (and empirical relevance) could be different. In fact, the new growth theories also draw upon Young (1928) to stress the importance of external economies. The present paper, in this context, tries to show that the Young (1928)'s emphasis on external economies is different. They originate from specific sophisticated informal human capital created by growth-oriented firms, which in turn supports formal education (and formal inventions).

The Firm & Human Capital Formation

There are also theories of firms that highlight the specificity of 'human capital' at the level of firms, which is based on the sophisticated production structure (division of labor) that leads to resource heterogeneity and complexities (and uncertainty)--reflecting absence of universal markets. Here, the Austrian framework of analysis requires human capital at the level of firms to integrate and co-ordinate production (Lachmann, 1977; Lewin, 2011). On the other hand, it has been maintained that market processes reflecting heterogeneity of 'human capital' and the specificity of the nature of such human capital (inalienability) can account for market failures (Coase, 1937; Williamson, 1971; 1973), leading to firms to undertake many of the tasks. It enriches or provides firmer basis of the transaction costs based (Foss, 2011), principal-agent based (Spender, 2011), entrepreneurial based (Loasby, 2011) theories of the firm. (2)

In a way the literature supports the thesis that it is the highly developed status highlighting heterogeneity of human capital (complex production processes), and the existence of uncertainty, which calls for human capital at the level of firm. Such informal human capital formation at the level of firm however requires complex information processing capabilities...

To continue reading

Request your trial

VLEX uses login cookies to provide you with a better browsing experience. If you click on 'Accept' or continue browsing this site we consider that you accept our cookie policy. ACCEPT