Wednesday, October 7, 2015

Trust is human capital that isn't excludable

Paul Romer thinks this is ridiculous:
Now, here is an alternative micro-foundation for human capital. There is a little homunculus inside each person’s head who knows everything the person knows and who has his own low-powered ham radio station. When two people come into proximity, neither of them can prevent the homunculus in each head from broadcasting over the ham radio to the other homunculus, all the things it knows. So the mere fact of close proximity causes valuable bits of knowledge, such as how to make a right angle using only a measuring rod, to flow from one person’s head to the other person’s head, which then raises the productivity of the other person as a carpenter.
More specifically, this is how he characterizes "the idea that human capital is not fully excludable. In less precise language, it justifies human capital externalities or spillovers."

His preferred view is that it is "crystal clear that human capital is a rival good and that even without any legal protection, human capital is almost perfectly excludable."

This is a common trope in arguing against something you don't think is true: make it seem ridiculous. That's behind Galileo's dialogues. It veers into a straw man argument (because no one is arguing for the homunculus).

Let me rewrite Romer's story as a more realistic mechanism:
Now, here is an alternative micro-foundation for human capital. There is cognitive apparatus in  each person’s head who knows everything the person knows and that has the capability to communicate via non-verbal and signalling cues. When two people come into proximity, neither of them can prevent hundreds of thousands of years of evolution from broadcasting all these non-verbal signals. So the mere fact of close proximity causes valuable bits of knowledge, such as status, leadership or trustworthiness, to flow from one person’s head to the other person’s head, which then raises the productivity of the other person as part of a group work effort.
I actually proposed a mechanism whereby a talented CEO arriving at a facility can raise productivity simply by engendering trust (lowering transaction costs involved in the theory of the firm). It also makes sense of why CEOs travel. If the CEO's time was so valuable (paid her marginal productivity of several hundred times other employees), she shouldn't waste time in transit to any location -- people of lower marginal productivity should travel to her.

Romer thinks this idea is ridiculous on the face of it, but it doesn't make much sense to as to why. However Romer might be the one who wins the Nobel prize on Monday, so use that to calibrate your priors.

5 comments:

  1. Just because you're not (yet) on the short list for Stockholm, don't fret, Jason. After all, the only two Nobel prizes awarded for psychiatry (my academic field) were for insulin coma therapy and the frontal lobotomy, now both recognized as barbaric, inhumane forms of treatment. Seems to recognize more what is currently in vogue as opposed to what truly deserves to be recognized for all time, IMHO.

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    1. Ha!

      Although things that turn out wrong can be breakthroughs in the sense that they change the paradigm.

      Econ has the problem of e.g. Shiller and Fama -- whose contributions are roughly the negation of each other -- being awarded the prize simultaneously.

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    2. Yes I agree that was rather silly, especially because the two obviously don't get along. I do give Fama some credit because he started off his career working with Mandlebrot, looking at heavy tailed theories of asset prices. Now he's a bit of an ideologue, though.

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  2. Umm, what about, you know, "how to make a right angle using only a measuring rod"? Just going to ignore that point?

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    1. Hi Jeff,

      Romer's argument was, if H is the set of human capital,

      (1) ∀x ∈ H : x is excludable

      My argument above is

      (2) Ǝ x ∈ H : x is not excludable

      You are pointing out Romer's example:

      (3) Ǝ x ∈ H : x is excludable

      However, (3) neither proves (1) nor disproves (2).

      If the assertion is "all swans are white" and I say there exist black swans, then that disproves "all swans are white". Saying there exists a white swan doesn't prove all swans or white or disprove the existence of a black swan.

      Now it could be that my trust example above isn't truly "human capital", i.e. "trust" ∉ H, and that would be a fine counterargument.

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