Human Capital: The solution to poverty?

Despite Bolsa Familia’s accomplishments, it will never be enough by itself to solve poverty in Brazil. Surprisingly, this is a well-known fact that both Lula and the World Bank acknowledge. As the following quotes show, they both see Bolsa Familia as a temporary and complementary measure.

Higher quality and more equitable access to education (including secondary and tertiary education) are key to reducing poverty and inequality in the long run. However, the positive impacts of education reform take time to materialize. Reforms to social assistance programs and a more equitable pension system can achieve complementary results sooner and substantially reduce inequality and alleviate poverty (The World Bank 2004a, 1). Bolsa Famlia is not our salvation, merely an emergency measure . . . and the ideal is that in a few years’ time Bolsa Famlia will no longer be necessary (Hall 2006, 704).

The difference, however, is that the World Bank holds education as the ultimate long term eradicator of poverty due to its capacity to build up “human capital”.²⁹ The theoretical framework and the assumptions underlying this approach to poverty reduction remains, unfortunately, largely unchallenged and unexamined in the literature. The notion that education has the power to lift people out of poverty is an entrenched and mainstream narrative that is reproduced on academic and popular outlets alike. However, the entire notion of human capital rests on a flawed theory of marginal productivity that was challenged and disarmed by the Cambridge capital controversy in the 1960s.³⁰

The implications of the logical inconsistency in marginal productivity theory shattered the notion that value of the factors of production can be measured independently from income distribution—i.e. the illusion that we get what we deserve because income is somehow determined by what we contribute to the production process. The poor can get all the education in the world, but their “human capital” will not help them get better wages.

A separate argument against the human capital approach would be the fact that the poor confront structural unemployment. College graduates without jobs will still remain poor and indebted, as many American citizens are finding out these days. To this criticism, neoclassical economists, such as those presiding over the World Bank, would reply that under perfectly competitive markets, there is full capacity utilization and therefore no unemployment (or a very low Natural Rate of Unemployment). To the extent that this ideal situation does not exist in any country in the world, the blame would be put on imperfectly competitive markets. However, as many economists in the classical vein have argued, full capacity utilization is not a feature of industrial production. In other words, unemployment is a structural feature endogenous to how capitalist firms operate (Moudud 2010).

The consequences of this theoretical argument are quite serious. It implies that poverty due to unemployment or underemployment will be a permanent feature of any capitalist economy. This insight, while surprising to some, is not new to those elites in power. The State, since the times of Vargas, has considered the exclusion of large segments of the population as inevitable and an acceptable price for growth and modernization. Cardoso, for example, openly admitted that a significant portion of the population was not part of the dynamic segment of the economy, and that he could not offer them a place in the new globalized order (Pereira 2003, 50).

²⁹ This quote reflects their human capital approach: “The objectives of the new Bolsa Familia Program itself include: (a) reducing poverty and inequality today, through the provision of direct monetary transfers to poor families; and (b) reducing poverty and inequality tomorrow, by providing incentives and conditions for investments in human capital on behalf of beneficiary families, and by linking beneficiary families to complementary services that could help them invest and grow out of poverty in the future” (The World Bank 2004b, 9).

³⁰ Marginal productivity theory stems from neoclassical economics, and is the formulation that determines income distribution- i.e. how much each factor of production is remunerated, wages for labour and interests/profits for capital. This marginal productivity (mp) is a function of the additional output over the additional unit of factor employed. In other words, mp is the economic value produced per each utilized input. If labour is the input, mp will be high if one hour of work can produce a lot of goods. If fewer goods are produced per hour of work, then mp will be low. The level of mp is then used to determine wages. In other words, if your work is very productive, then you will be paid a lot, and very little otherwise. It all depends on how much one’s labour can produce, that is to say, one’s human capital. The implication of this theory is that workers are paid what they contribute to the production process. If poverty exists, it is largely because people do not possess enough human capital to raise their mp/wages. Therefore, they need education to improve their contribution to the economy. To put it another way, the poor are responsible for being poor. Unfortunately, the Cambridge capital controversy brought this theory’s logical inconsistencies to light. To calculate the mp of capital, and settle the income distribution—i.e. profit/interest rates/wages—the formula needs to know the prices of heterogeneous capital goods such as machinery. However, the prices of machinery and other capital goods change according to the income distribution! The circular reasoning is impossible to overcome (Edwards 1985).