A thought about human capital.

The Emancipation Proclamation of Lincoln during the Civil War had a strong economic motivation, as did the freeing of American slaves by the British during the Revolutionary war. This is clear because slaves were not freed in areas under control of the United States government, but only in the territories of the Confederate States. It was the 13th Amendment to the Constitution that actually enshrined the abolition of slavery nationwide.

I have read that an impact of the abolition of slavery was to sweep away most of the capital of the southern states. That is obviously wrong. What it did was to transfer the ownership of human capital from slave owners to newly freed slaves. The white slave owners lost what had been their property under slavery, but the human capital did not disappear.

Thinking about it, slavery gave monetary value to the human capital represented by the slaves. Indeed, slaves with useful skills were valued more highly than unskilled slaves.

Development economists have recognized human capital, and that investment in education and health services have been justified as investments in human capital. So too, the courts are willing to ascribe a value to human life in tort cases, focusing on the lost earnings due to death or disability. Indeed, we can consider there to be a moral hazard in life insurance that exceeds in face value the expected lifetime earnings of the insured.

Hernando de Soto, the Peruvian economist, has contributed greatly to development economics by pointing out that in developing countries property rights are often informal, and that lack of formal systems for vesting property rights in people's homes and property results in grave limitations in the abilities of people to utilize the capital embodied in that "informal" property. Giving people title to their land and homes allows them to borrow against that property; if they can use the loans to earn more than the interest that they have to pay, then that can be economically liberating.

So too, efforts to improve land registration in developing nations can be seen as creating the institutions which monetarize the capital embodied in the land held by poor rural people. Once there is title to the land it can be transferred, and thus it can be borrowed against.

Recall too that we have institutionalized mortgage insurance to protect lenders against the risk of failure to repay loans, and life and disability insurance to protect families against loosing mortgaged property due to disability or death.

We in this country allow people to borrow on human capital in some circumstances. In some cases we allow people unsecured loans based on earnings records and potential. We have student loans to allow people to invest in education, thereby increasing their own human capital. Indeed, one might think of the microfinance movement as based on institutionalizing means by which poor people can borrow against their own human capital (or by which groups of poor people can borrow against their combined human capital).

I wonder whether we have gone far enough in the process of accounting for human capital. It is clearly difficult to measure. In the past economists have estimated the current value of future earnings, and have measured the value of educational services by the increased present value of the future earnings stream due to added education. The problem with this approach is that there are external benefits to education -- not all the benefits to society are captured by the earnings of the educated. In developing nations, the social benefits of having some engineers and public health physicians can be much greater than their lifetime earnings.

Still, it seems useful to use the increase in a nation's capital as an indicator of development, and it would be useful to include not only the value of physical capital in that measure but also of human capital.

I leave working out the means of doing so to economists.