Naked Economics: Undressing the Dismal Science pdfdrive com

CHAPTER
6

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Productivity and Human Capital:
Why is Bill Gates so much richer than you are?
L
ike many people, Bill Gates found his house a little cramped once he had
children. The software mogul moved into his $100 million dollar mansion in
1997; not long after, it needed some tweaking. The 37,000-square-foot home has
a twenty-seat theater, a reception hall, parking for twenty-eight cars, an indoor
trampoline pit, and all kinds of computer gadgetry, such as phones that ring only
when the person being called is nearby. But the house was not quite big enough.
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According to documents filed with the zoning board in suburban Medina,
Washington, Mr. Gates and his wife added another bedroom and some additional
play and study areas for their children.
There are a lot of things one might infer from Mr. Gates’s home addition, but
one of them is fairly obvious: It is good to be Bill Gates. The world is a
fascinating playground when you have $50 billion or so. One might also ponder
some larger questions: Why do some people have indoor trampolines and private
jets while others sleep in bus station bathrooms? How is it that roughly 13
percent of Americans are poor, which is an improvement from a recent peak of
15 percent in 1993 but not significantly better than it was during any year in the
1970s? Meanwhile, one in five American children—and a staggering 35 percent
of black children—live in poverty. Of course, America is the rich guy on the
block. At the dawn of the third millennium, vast swathes of the world’s
population—some three billion people—are desperately poor.
Economists study poverty and income inequality. They seek to understand
who is poor, why they are poor, and what can be done about it. Any discussion
of why Bill Gates is so much richer than the men and women sleeping in steam
tunnels must begin with a concept economists refer to as human capital. Human
capital is the sum total of skills embodied within an individual: education,
intelligence, charisma, creativity, work experience, entrepreneurial vigor, even
the ability to throw a baseball fast. It is what you would be left with if someone
stripped away all of your assets—your job, your money, your home, your
possessions—and left you on a street corner with only the clothes on your back.
How would Bill Gates fare in such a situation? Very well. Even if his wealth
were confiscated, other companies would snap him up as a consultant, a board
member, a CEO, a motivational speaker. (When Steve Jobs was fired from
Apple, the company that he founded, he turned around and founded Pixar; only
later did Apple invite him back.) How would Tiger Woods do? Just fine. If

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someone lent him golf clubs, he could be winning a tournament by the weekend.
How would Bubba, who dropped out of school in tenth grade and has a
methamphetamine addiction, fare? Not so well. The difference is human capital;
Bubba doesn’t have much. (Ironically, some very rich individuals, such as the
sultan of Brunei, might not do particularly well in this exercise either; the sultan
is rich because his kingdom sits atop an enormous oil reserve.) The labor market
is no different from the market for anything else; some kinds of talent are in
greater demand than others. The more nearly unique a set of skills, the better
compensated their owner will be. Alex Rodriguez will earn $275 million over
ten years playing baseball for the New York Yankees because he can hit a round
ball traveling ninety-plus miles an hour harder and more often than other people
can. “A-Rod” will help the Yankees win games, which will fill stadiums, sell
merchandise, and earn television revenues. Virtually no one else on the planet
can do that as well as he can.
As with other aspects of the market economy, the price of a certain skill bears
no inherent relation to its social value, only its scarcity. I once interviewed
Robert Solow, winner of the 1987 Nobel Prize in Economics and a noted
baseball enthusiast. I asked if it bothered him that he received less money for
winning the Nobel Prize than Roger Clemens, who was pitching for the Red Sox
at the time, earned in a single season. “No,” Solow said. “There are a lot of good
economists, but there is only one Roger Clemens.” That is how economists
think.
Who is wealthy in America, or at least comfortable? Software programmers,
hand surgeons, nuclear engineers, writers, accountants, bankers, teachers.
Sometimes these individuals have natural talent; more often they have acquired
their skills through specialized training and education. In other words, they have
made significant investments in human capital. Like any other kind of
investment—from building a manufacturing plant to buying a bond—money
invested today in human capital will yield a return in the future. A very good
return. A college education is reckoned to yield about a 10 percent return on
investment, meaning that if you put down money today for college tuition, you
can expect to earn that money back plus about 10 percent a year in higher
earnings. Few people on Wall Street make better investments than that on a
regular basis.
Human capital is an economic passport—literally, in some cases. When I was
an undergraduate in the late 1980s, I met a young Palestinian man named Gamal
Abouali. Gamal’s family, who lived in Kuwait, were insistent that their son
finish his degree in three years instead of four. This required taking extra classes
each quarter and attending school every summer, all of which seemed rather

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extreme to me at the time. What about internships and foreign study, or even a
winter in Colorado as a ski bum? I had lunch with Gamal’s father once, and he
explained that the Palestinian existence was itinerant and precarious. Mr.
Abouali was an accountant, a profession that he could practice nearly anywhere
in the world—because, he explained, that is where he might end up. The family
had lived in Canada before moving to Kuwait; they could easily be somewhere
else in five years, he said.
Gamal was studying engineering, a similarly universal skill. The sooner he
had his degree, his father insisted, the more secure he would be. Not only would
the degree allow him to earn a living, but it might also enable him to find a
home. In some developed countries, the right to immigrate is based on skills and
education—human capital.
Mr. Abouali’s thoughts were strikingly prescient. After Saddam Hussein’s
retreat from Kuwait in 1990, most of the Palestinian population, including
Gamal’s family, was expelled because the Kuwaiti government felt that the
Palestinians had been sympathetic to the Iraqi aggressors. Mr. Abouali’s
daughter gave him a copy of the first edition of this book. When he read the
above section, he exclaimed, “See, I was right!”
The opposite is true at the other end of the labor pool. The skills necessary to ask
“Would you like fries with that?” are not scarce. There are probably 150 million
people in America capable of selling value meals at McDonald’s. Fast-food
restaurants need only pay a wage high enough to put warm bodies behind all of
their cash registers. That may be $7.25 an hour when the economy is slow or $11
an hour when the labor market is especially tight; it will never be $500 an hour,
which is the kind of fee that a top trial lawyer can command. Excellent trial
lawyers are scarce; burger flippers are not. The most insightful way to think
about poverty, in this country or anywhere else in the world, is as a dearth of
human capital. True, people are poor in America because they cannot find good
jobs. But that is the symptom, not the illness. The underlying problem is a lack
of skills, or human capital. The poverty rate for high school dropouts in America
is 12 times the poverty rate for college graduates. Why is India one of the
poorest countries in the world? Primarily because 35 percent of the population is
illiterate (down from almost 50 percent in the early 1990s).
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Or individuals may
suffer from conditions that render their human capital less useful. A high
proportion of America’s homeless population suffers from substance abuse,
disability, or mental illness.
A healthy economy matters, too. It was easier to find a job in 2001 than it was

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in 1975 or 1932. A rising tide does indeed lift all boats; economic growth is a
very good thing for poor people. Period. But even at high tide, low-skilled
workers are clinging to driftwood while their better-skilled peers are having
cocktails on their yachts. A robust economy does not transform valet parking
attendants into college professors. Investments in human capital do that.
Macroeconomic factors control the tides; human capital determines the quality
of the boat. Conversely, a bad economy is usually most devastating for workers
at the shallow end of the labor pool.
Consider this thought experiment. Imagine that on some Monday morning we
dropped off 100,000 high school dropouts on the corner of State Street and
Madison Street in Chicago. It would be a social calamity. Government services
would be stretched to capacity or beyond; crime would go up. Businesses would
be deterred from locating in downtown Chicago. Politicians would plead for help
from the state or the federal government: Either give us enough money to