Knowledge and Human Capital Miscellaneous on Philosophy, Methodology and Theories Miscellaneous on Philosophy, Methodology and Theories Patterns and Sources of Modern Economic Growth (Repetition) Patterns and Sources of Modern Economic Growth (Repetition) Knowledge and Human Capital – Concepts Knowledge and Human Capital – Concepts Investments in Human Capital Investments in Human Capital Indicators of and for Investments in Human Capital Indicators of and for Investments in Human Capital Indicators of Human Capital Indicators of Human Capital Human Development Index Human Development Index

Miscellaneous on Philosophy, Methodology and Theories Friedrich August von Hayek ( ) Friedrich August von Hayek ( ) Neo-Austrien School Neo-Austrien School Difference between information and knowledge Difference between information and knowledge Knowledge is linked with an individual being in specific time, place and circumstances and as such is untransferable Knowledge is linked with an individual being in specific time, place and circumstances and as such is untransferable George Stigler ( ) George Stigler ( ) New Chicago School (Neoclassical Reneissance) New Chicago School (Neoclassical Reneissance) Economic theory of information Economic theory of information Gary Stanley Becker (1930-) Gary Stanley Becker (1930-) New Chicago School (Neoclassical Reneissance) New Chicago School (Neoclassical Reneissance) Theory of human capital Theory of human capital

Miscellaneous on Philosophy, Methodology and Theories Joseph Eugene Stiglitz (1943-) Joseph Eugene Stiglitz (1943-) New Keynesian Economics New Keynesian Economics Father of the economic theory of information Father of the economic theory of information Importance of the assymetry of information Importance of the assymetry of information

Patterns and Sources of Modern Economic Growth

Different Conditions of the Two Growth Patterns Different Conditions of the Two Growth Patterns The Shift in the Importance of Technology The Shift in the Importance of Technology Kuznetz Pattern – institutionalization of scientific research and education Kuznetz Pattern – institutionalization of scientific research and education The Shift in the demand structure The Shift in the demand structure Kuznetz Pattern - from mass production to differentiated commodities each demanded in small quantity – increased importance of human capital Kuznetz Pattern - from mass production to differentiated commodities each demanded in small quantity – increased importance of human capital

Patterns and Sources of Modern Economic Growth Structural change in the USA from 1850 to 1990 Discussion Question: Is this related to the change from the Marx to Kuznetz pattern?

Knowledge and Human Capital - Concepts Human capital is a set of a person’s capabilities, abilities, health and other features, which help the person in his or her economic and non-economic activities, increasing thus his or her income, improving life, increasing satisfaction etc. Human capital is a set of a person’s capabilities, abilities, health and other features, which help the person in his or her economic and non-economic activities, increasing thus his or her income, improving life, increasing satisfaction etc. The main difference between traditional physical capital and human capital is the transferability of the former between different owners. Human capital cannot be transfered from the person who owns it. The main difference between traditional physical capital and human capital is the transferability of the former between different owners. Human capital cannot be transfered from the person who owns it.

Knowledge and Human Capital - Concepts Important Characteristics of Good Important Characteristics of Good A good is excludable if a person can be prevented from using it. A good is excludable if a person can be prevented from using it. Excludable: fish tacos, wireless internet access, human capital (embodied knowledge) Excludable: fish tacos, wireless internet access, human capital (embodied knowledge) Not excludable: FM radio signals, national defense, basic knowledge Not excludable: FM radio signals, national defense, basic knowledge A good is rival in consumption if one person’s use of it diminishes others’ use. A good is rival in consumption if one person’s use of it diminishes others’ use. Rival: fish tacos, human capital Rival: fish tacos, human capital Not rival: basic knowledge, national defence Not rival: basic knowledge, national defence

Knowledge and Human Capital - Concepts The Different Kinds of Goods The Different Kinds of Goods Private goods: excludable, rival in consumption Private goods: excludable, rival in consumption Example: food, human capital Example: food, human capital Public goods: not excludable, not rival Public goods: not excludable, not rival Example: national defense, basic knowledge Example: national defense, basic knowledge Common resources: rival but not excludable Common resources: rival but not excludable Example: fish in the ocean Example: fish in the ocean Natural monopolies: excludable but not rival Natural monopolies: excludable but not rival Example: cable TV Example: cable TV

Knowledge and Human Capital - Concepts Everything that applies to public goods in general applies to basic knowledge as well Everything that applies to public goods in general applies to basic knowledge as well What applies to public goods is summarized in following three slides What applies to public goods is summarized in following three slides

Knowledge and Human Capital - Concepts Public goods Public goods Public goods are difficult for private markets to provide because of the free-rider problem. Public goods are difficult for private markets to provide because of the free-rider problem. Free rider: a person who receives the benefit of a good but avoids paying for it Free rider: a person who receives the benefit of a good but avoids paying for it If good is not excludable, people have incentive to be free riders, because firms cannot prevent non-payers from consuming the good. If good is not excludable, people have incentive to be free riders, because firms cannot prevent non-payers from consuming the good. Result: The good is not produced, even if buyers collectively value the good higher than the cost of providing it. Result: The good is not produced, even if buyers collectively value the good higher than the cost of providing it.

Knowledge and Human Capital - Concepts For public goods, externalities arise because something of value has no price attached to it. For public goods, externalities arise because something of value has no price attached to it. So, private decisions about consumption and production can lead to an inefficient outcome. So, private decisions about consumption and production can lead to an inefficient outcome. Public policy can potentially raise economic well-being. Public policy can potentially raise economic well-being.

Knowledge and Human Capital - Concepts If the benefit of a public good exceeds the cost of providing it, govt should provide the good and pay for it with a tax on people who benefit. If the benefit of a public good exceeds the cost of providing it, govt should provide the good and pay for it with a tax on people who benefit. Problem: Measuring the benefit is usually difficult. Problem: Measuring the benefit is usually difficult. Cost-benefit analysis: a study that compares the costs and benefits of providing a public good Cost-benefit analysis: a study that compares the costs and benefits of providing a public good Cost-benefit analyses are imprecise, so the efficient provision of public goods is more difficult than that of private goods. Cost-benefit analyses are imprecise, so the efficient provision of public goods is more difficult than that of private goods.

Knowledge and Human Capital - Concepts Basic Knowledge and Applied Knowledge Basic Knowledge and Applied Knowledge Applied Knowledge – non-rival, but if excludable, private agents can have the motivation to produce it. Applied Knowledge – non-rival, but if excludable, private agents can have the motivation to produce it. Three externalities Three externalities It can spread over to other firms, often with job changes (human capital transfers the knowledge) – positive externality It can spread over to other firms, often with job changes (human capital transfers the knowledge) – positive externality It can be used in the production of further knowledge – positive externality It can be used in the production of further knowledge – positive externality It can make existing knowledge useless – negative externality It can make existing knowledge useless – negative externality We usually assume, that total externality is positive We usually assume, that total externality is positive

Knowledge and Human Capital - Concepts In the presence of a positive externality, the social value of a good includes In the presence of a positive externality, the social value of a good includes private value – the direct value to buyers private value – the direct value to buyers external benefit – the value of the positive impact on bystanders external benefit – the value of the positive impact on bystanders The socially optimal Q maximizes welfare: The socially optimal Q maximizes welfare: At any lower Q, the social value of additional units exceeds their cost. At any lower Q, the social value of additional units exceeds their cost. At any higher Q, the cost of the last unit exceeds its social value. At any higher Q, the cost of the last unit exceeds its social value. Government can internalize a positive externality through subsidies Government can internalize a positive externality through subsidies

Knowledge and Human Capital - Concepts 16 The market for results of applied R&D D S Social value = private value + external benefit P Q $ external benefit 25

Knowledge and Human Capital - Concepts Tacit knowledge Tacit knowledge Tacit knowledge Tacit knowledge Some part can be codified, the rest that cannot be codified can be transfered only through human capital – personal or collective Some part can be codified, the rest that cannot be codified can be transfered only through human capital – personal or collective Link to psychology and sociology Link to psychology and sociology consciousness, collective consciousness, personal unconscious, collective unconscious consciousness, collective consciousness, personal unconscious, collective unconscious consciousnesscollective consciousnesspersonal unconsciouscollective unconscious consciousnesscollective consciousnesspersonal unconsciouscollective unconscious

Knowledge and Human Capital - Concepts Can we measure tacit knowledge? Can we measure tacit knowledge? Maybe it is hidden in the progress ratio Maybe it is hidden in the progress ratioprogress ratioprogress ratio

Investments in Human Capital There are three basic types of investments in human capital: There are three basic types of investments in human capital: Schooling Schooling On-the-Job Training On-the-Job Training Investments in Health and Social Status Investments in Health and Social Status All have both personal and collective aspects – as Human Capital itself All have both personal and collective aspects – as Human Capital itself These types are more complements than substitutes in modern societies These types are more complements than substitutes in modern societies

Investments in Human Capital

Human Capital can be understood like an asset, in which personal wealth can be hold Human Capital can be understood like an asset, in which personal wealth can be hold Investments into all types of assets depend on: Investments into all types of assets depend on: Strength and Length of the Flow of Expected Costs – Direct and Indirect Strength and Length of the Flow of Expected Costs – Direct and Indirect Strength and Length of the Flow of Expected Revenue – Material and Psychological Strength and Length of the Flow of Expected Revenue – Material and Psychological Risk and Liquidity Risk and Liquidity Public policies can create incentives for more investments Public policies can create incentives for more investments

Investments in Human Capital Examples of Incentives Examples of Incentives Free schooling - is it optimal? Free schooling - is it optimal? Financial support for on-the-job training – who ought to finance this training? Financial support for on-the-job training – who ought to finance this training? Health Policy Health Policy Social policy Social policy

Indicators of and for Investments in Human Capital

Indicators of Human Capital Functional Illiteracy and Scientific Literacy Functional Illiteracy and Scientific Literacy Functional Illiteracy Scientific Literacy Functional Illiteracy Scientific Literacy Human Development Index Human Development Index Human Development Index Human Development Index

Indicators of Human Capital Human Capital is a state increased by investments and decreased by depreciation. It is impossible to measure it directly, we usually use like its indicator different indicators of investments to human capital. Human Capital is a state increased by investments and decreased by depreciation. It is impossible to measure it directly, we usually use like its indicator different indicators of investments to human capital. Maybe indicators of Functional Illiteracy and Scientific Literacy are close to indicating directly the state of human capital. Maybe indicators of Functional Illiteracy and Scientific Literacy are close to indicating directly the state of human capital.Functional Illiteracy Scientific LiteracyFunctional Illiteracy Scientific Literacy

Human Development Index Economist usually use GDP/capita like indicator of the standard of life. Economist usually use GDP/capita like indicator of the standard of life. HDI is a broader index of the standard of life, it includes GDP/capita as one of its indicators. HDI is a broader index of the standard of life, it includes GDP/capita as one of its indicators. All other indicators included in HDI are indicators of or for investments to human capital. All other indicators included in HDI are indicators of or for investments to human capital. We are pushed to leave linear reasoning (human capital like one of the factors of production impacts on GDP) and take feedbacks into consideration We are pushed to leave linear reasoning (human capital like one of the factors of production impacts on GDP) and take feedbacks into consideration

Indicators of Human Capital