Adam Smith's Legacy: His Place in the Development of Modern Economics

By Michael Fry | Go to book overview

8

ADAM SMITH AND HUMAN CAPITAL

Theodore W. Schultz

I begin this paper with a discussion of Adam Smith's concept of the useful abilities acquired through education, study or apprenticeship, always at a real expense, which consists of capital fixed in people. Investment in this form of capital is motivated by the expected rate of return. I then consider the implications of the lack of a theory of the extension of markets. A compelling theory is still an unfinished part of economics. Lastly I turn to human capital in the modernizing economy with its proliferation of human capital, vast specialization and its increases in the value of human time and advances in useful knowledge.

The significance of human capital is receiving increasing analytical attention, especially so since the Second World War. However, an awareness of the existence of this form of capital has a long history. It is clearly evident in many parts of The Wealth of Nations. Adam Smith boldly included all of the acquired useful abilities of the inhabitants and members of the society as capital. Smith reckoned that the acquisition of this class of capital by a person through

education, study, or apprenticeship, always costs a real expense, which is a capital fixed and realized, as it were, in his person…. The improved dexterity of a workman may be considered in the same light as a machine or instrument of trade which facilitates and abridges labour, and which, though it costs a certain expense, repays that expense with a profit. (II, i, 17)

Smith treats the incentives to invest in this class of human capital in much detail along with many historical accounts of such investment processes. Ponder, however, Smith's jaundiced views of the value of public education for women and of the diligence of public teachers being corrupted by the endowments of schools and colleges.

A great deal of economics is condensed by Smith in the following paragraph (V, i, b, 8).

-130-

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