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Guest Lecture: Prof Les OxleyAre Brains Good For Growth? The Human Capital Debate

Page updated 20 Sep 2007

Key messages from Prof Les Oxley's Guest Lecture presented at the Treasury on 26 February 2002.

Prof Les Oxley

University of Canterbury

Key Messages

Human Capital = Brain power.how much we have, and how we use it - and does it relate to the economic growth in our country of residence. The big question is, why do different countries grow economically at different rates? New Zealand's economic growth has slowed dramatically; in the 60's we were on a par with, or better than other developed nations in the world; the 90's we had slipped badly. So we need to discover why since the 50's we have lost steam.

A large stock of human capital should allow for the hopefully constant creation of new ideas. For these ideas to aid a nation, they need to be non-rivalrous, and should lead to increasing returns, promoting endogenous economic growth.

But how do we go about measuring human capital? If we can't measure it, how do we know if we're lacking in our stock of capital? Can we see if it's growing? Is what we have being used sufficiently?

One approach to measuring human capital is to examine the expenditure on education; the reasoning being, the more money spent on educating the people of a country, surely the higher the human capital of that country. What this measure fails to reflect are the various degrees of education people may acquire.

If all the money is going into primary education, how much knowledge does the student really gain? Maybe spending has had to increase because more and more students have to repeat failed years? What is the actual quality of the education being attained? Book learning doesn't indicate the development of cognitive skills of an individual.

What we need to look at is how we can gain more substantial human capital; i.e. we need to look quality rather than quantity. We need to decide whether to have people constantly up-skilling whilst in the workforce, or do we allow the deferment of employment for a longer period so that they can gain a stronger base of learning. Technology has allowed for people to be more mobile, human capital can be home-grown but we have to finds ways to keep our stock within our country once we have developed it. We also have to become better at evaluating the ratio of human capital to physical capital - we need knowledge to operate machinery, but we need the physical capital to build that machinery, for it to be available.

So, the big question is how do we measure our human capital, thus allowing us to understand the effect it is having on our economy. If human capital is about ideas, how are we going to capture these ideas? Something to yet be fully answered.

The most consistent current view is that the more human capital we have the greater our economic growth. However, when it comes to causal relationships the evidence is far less conclusive, some countries seem to have causality running from more human capital causes more growth, many others appear to have the reverse effect.

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