Sunday, May 23, 2010

The Human Capital Standard

I've been having some light debates with various people about the efficacy of returning to the Gold Standard. This is very much an intellectual debate because the chances of doing that are about nil. But its natural for a libertarian minded individual to be in favor of it because it prevents monetary manipulation by the central bank. At least that's how I understand this issue.

But gold is just metal. Money is just paper. We assign a value to gold (collectively through the markets), but that value fluctuates just like everything else. Here's a picture I dug up:

But what is money anyway? Just a means to make transactional exchange more efficient which allows for more specialization. I can focus on my thing and get paid for it. You can focus on your thing and get paid for it. Now I can purchase your services, you can purchase my services. Currency just makes all of this more efficient.

But how many physical dollar bills do we need flowing in our economy? Well, if you have too many dollars chasing too few goods and services, you get inflation. Too few dollars chasing a surplus of goods and services, you get deflation. Both inflation and deflation hurt. Inflation hurts savers - as the price of goods and services grows, the pile of cash you have saved away buys less and less stuff. Deflation hurts borrowers - as the prices of everything drops, the debt becomes more and more difficult to pay off. What's required is price stability which gives both savers and borrowers some expectations for the future.

But to achieve price stability, you need the ability to float your currency - to increase or decreases the supply of money to match the fluctuations of goods and services. And ultimately, how much stuff we can buy is largely dependent on the individual skill of those who inhabit this good earth. The more capacity we have in human ingenuity and the more well off we all are, the more the money supply has to grow to match the growing supply of people and the growth of skill within the people.

Conversely, right now what we've experienced was a collapse of confidence - in the system and in each other. And for good reason, we built up this bubble financed on debt borrowed from notable savers (China most of all) with basic assumptions that were, can I say it, in retrospect, insane. That house prices would sky rocket continuously and never fall. That everyone could keep borrowing and investing that borrowed money and get rich for basically doing not much of anything. And with that collapse of confidence, people have stopped spending - in fact it fell through the floor.

We have capacity, talent, and factories, but they are currently under-utilized, in other words, too few dollars chasing too many goods - and we risk deflation. Which is why it was so important for the Federal Reserve to inject money into the economy - to stave off deflation. To get money in people's pockets that they've lost as they've lost employment.

So, really our money supply should be based not on gold, but on human capability which exactly is what the core of our economy is based on.

I remember one day a while ago I had this epiphany, I imagined in my mind's eye a world where you had a sea of amazing musicians and artists, engineers and athletes, trained by capable, energetic and passionate teachers. This vision came easily to me after trips to New York City, a magnet of artists, and I was thinking - why can't we duplicate this everywhere? Why can't the community arts and local symphony's also play inspiring music?

If you want to increase wealth, the way to do it is to increase human capacity. Find ways to motivate our youth (and our adults) to strive harder, to always learn and to cultivate their skills.

I've been thinking of these kinds of things a lot especially in relation to our kids. So, naturally I get pretty excited to read stuff like this post. Here, an economic professor at Princeton talks about the primary wealth generators in our society:
  1.  Mothers - "Anyone who has raised children to maturity appreciates the magnificent contribution conscientious parents can make to this human-capital formation, because much of the education of youngsters takes place in the home. Conscientious parents — and especially mothers — rank as the major wealth creators in modern societies, as, of course, do the offspring whose own effort is crucial in assembling that capital."
  2. Teachers - "Next come educators, especially the visionary and dedicated elementary and high school teachers who succeed in getting their students interested in learning and motivated to amass human capital. The role of such teachers in the wealth-creation process is not sufficiently appreciated in our latitudes."
Developing human beings to make a difference, is a significant contribution to society, even a priceless one. And wealth is generated whether we pay for it or not:
"None of the forgoing is to say that being highly educated and skilled is either a necessary or a sufficient condition for contributing value and wealth to society. Anyone who works, be it for pay or as a volunteer, does so."
This wealth is enjoyed by anyone who is the recipient of a gift - of money or of time. Sometimes what one gives as a volunteer has much more implicit value than what we give in paid labor. I see this in spades in many of the programs my daughter has participated in both in the violin and in her piano endeavors.

So, if human production is the primary source of wealth, can you understand why I may be for a pretty liberal immigration policy? If a country is not providing the infrastructure necessary to allow its residents to product to their potential, the world is better served for those people to move elsewhere where they can.

Hard-working immigrant labor benefits both the laborer (as long as they aren't being exploited) and those receiving the fruits of that labor. The world is richer. As immigrant children get access to better educational opportunities in the host country - an education unobtainable otherwise, the groundwork is being laid for much more wealth in the future.

Ultimately, we want every country to provide favorable circumstances for its citizens to grow, develop, innovate and produce. Solving immigration ultimately requires helping struggling countries to develop and promoting freedom and liberty throughout the world.

So, rather than the gold standard, we should call it the human capital standard. That's the ultimate gold standard.


H said...

Wow Scott. There are so many tangents and discussions we could have off of this post, and I didn't even see immigration coming up. Well done, well researched, and we communicated. I'm with you all the way. As I was reading, I was thinking of all the ways we tell people not to work and how that really lowers their will to be productive contributers to society. How sad- for them and us. Everyone has something to offer and when you take pride in what you do, and do it well, we all benefit.

I go to the park across the street often. This is the second Monday morning that I have seen and talked with the same city worker picking up trash. He has a strong Spanish accent and he always initiates the conversation. He asked me today, "you don't work today?" I pointed to Payton and said, "he's my job." We both smiled and he went about his business cleaning up the park... for the homeless that live there. That's where this post really hits home. It is such a waste that the people that live at the park have to have city workers come and clean up for them.

Anyway, like I said, so many discussions, so little time and space. Thanks for your thoughts.

proud parents said...

I love this post.