"Capital is not an immutable concept: it reflects the state of development and prevailing social relations of each society." (Piketty, 2014; p. 47)
Mankiw, Romer, and Weil's (1992) seminal paper on growth empirics Memorably begins with "this paper takes Robert Solow seriously". In a similar way, this paper takes Thomas Piketty seriously. Mankiw, Romer, and Weil argued that Solow's (1956) simple growth model maintained relevance in the decades following its publication, but that it could be improved (particularly in empirical applications) by including human capital. This paper makes precisely the same claim about Piketty's Capital in the Twenty First Century. He has made a valuable contribution to the economics of inequality, but the contribution would be strengthened by more serious consideration of the role of human capital in income and wealth inequality.
After briefly reviewing the significance of the human capital stock, this paper will offer three claims related to Piketty's book: First, that contrary to Piketty's view, the alienability of capital is not a requirement for the consideration of a species of capital in an analysis of capital or the fundamental laws of capitalism. Second, that Goldin and Katz's (2008) work on education is more compatible with Piketty's (2014) thesis than many critics of Piketty suggest. Third, that the tremendous importance of human capital offers no necessary guard against the unequal distribution of financial and physical capital discussed by Piketty.
Estimation of the human capital stock is imprecise compared to estimation of the physical and financial capital stock, because human capital is not sold in a market (a difference imbued with considerable significance by Piketty that will be discussed in more detail below). Human capital values are typically estimated by taking the present value of a stream of future earnings, which the marginal worker sets equal to the costs of acquiring human capital. Various assumptions are used to allocate total future earnings between human capital and raw labor. This approach is conceptually similar to the capitalization method used by Saez and Zucman (2016) to estimate the physical and financial capital stock.
All estimates suggest that the stock of human capital in the modern economy is enormous. Jones and Fender (2011) find that the United Kingdom's human capital stock is two and a half times the total value of the country's tangible assets in 2010. This is smaller than estimates produced by Liu (2011) for a number of OECD countries, which range between three and seven times the value of physical capital. Christian (2010) produces an even larger estimate of the human capital stock in the United States, roughly sixteen times the stock of fixed assets and consumer durables. This range of estimates illustrates the enormity of the human capital stock as well as the inherent difficulties in measuring it.
Piketty, to his credit, accepts the significance of the human capital stock. He calls such large estimates "perfectly obvious," noting "whenever more than half of national income goes to labor and one chooses to capitalize the flow of labor income at the same or nearly the same rate as the flow of income to capital, then by definition the value of human capital is greater than the value of all other forms of capital" (Piketty, 2014; p. 163). (2) Nevertheless, Piketty is adamant that it is inappropriate to consider human capital in his analysis of capital in the twenty first century. He takes a surprisingly strong (and brief) stance against the consideration of human capital in the book. Piketty writes that "attributing a monetary value to the stock of human capital makes sense only in societies where it is actually possible to own other individuals fully and entirely--societies that at first sight have definitely ceased to exist" (Piketty, 2014; 163). This decision is closely tied to the standard approach for measuring the physical and financial capital stock, using actual or estimated market values. Without a market for trading human capital, Piketty considers this particular type of capital inadmissible in the...