Investments in Human Capital


The Social Market

Never give anyone the advice to buy or sell shares, because the most benevolent price of advice can turn out badly.

- Francois de La Rochefoucauld

Robert Minor "Child Labour" The Daily Worker 22 December 1924 Source:

by David Jones

Could there be options to raising your child in poverty?  Here's a far-fetched one, but at least it's a start.

Last week Daedalus proposed that students should be supported, not by grants or loans, but by shares.  He is now taking this scheme to its ultimate conclusion, combining capitalism and communitarianism.  Every human activity, he says, should be directed not by ideologies but by market forces, and funded not by taxation but by shares.

A newborn baby, for example, can be regarded as a promising technical project in a very early stage.  It will make a profit only after years of development.  At present, the parents may back it with their own resources, or depend on State benefits.  Their quality of management can vary wildly, and may be very poor - as with a deprived single mother.

But suppose such a mother, instead of relying on the State, has to fund her offspring by issuing share capital in it.  To attract investors, she will have to bring it up as best she can, keep it out of crime and not burden her portfolio with further potential loss-makers.  lf she fails, the child's share price will decline, and it may be taken over by another mother or a specialised institution which can manage it better.

When the child finally grows up, he will pay dividends to his shareholders.  This need not be much of a burden.  Nearly all State spending these days goes on benefits and entitlements; once these are abolished, income tax can go as well, with the purely personal dividend in its place.  The sound financial discipline which constrained the parents will now devolve upon the offspring.  If he seems not to be fulfilling his potential, his share price will suffer, and he will find it hard to raise capital for projects of his own.  If he goes seriously to the bad, he will probably be taken over and turned round by some firm specialising in rescuing bad risks such as dead-end kids, drifters and midlife crisists.  An efficient market solution will supersede clumsy, costly social services.

Even in old age, he need not suffer.  During his productive lifetime, he will himself have bought stock in the next generation of children.  Their dividends will be his pension, and he will trade mainly as a holding company.

At every stage in life, his shareholders will be there, providing support and discipline: backers, managers and godfathers combined.  The incompetent State will be rolled right back, replaced by a collective social market which will grow ever shrewder and more efficient as it gains experience.  And our modern, dangerously diverse society will be unified and harmonised, as each member acquires multiple financial interests in all the others.

Source: Daedalus column Nature Vol 375 4 May 1995

Exactly how does this differ from indentured servitude?  IS this better than being poor?  Certainly it would be for some - but, then, so was slavery.

Kids Need Liquidity, Too

To abolish child labour, create more efficient capital markets

That child labour is still so pervasive upsets many people in rich countries.  The issue sends them clambering towards the moral high ground.  In his speech accepting the Democratic nomination for the presidency, Al Gore made a pledge to squelch child labour by setting standards for American imports.  McDonald's recently came under fire for buying the toys it hands out to children from a Chinese firm that employed 14-year-olds.  Vicente Fox, Mexico's president-elect, received similar treatment when under-age workers were found on his family farm.

Yet the conventional outrage about child labour is at odds with the orthodoxy followed not just by economists but by non-governmental organisations (NGOS) that work with poor children.  Both groups have pointed out that children's work can be in their own interests: a family's survival may depend on it.  Of course, nobody wants to seem "pro-child-labour", let alone to condone the conscription of children as soldiers, or their exploitation in prostitution.  In rich countries, governments can spend tax revenues to ensure these fates are avoidable.  They can guarantee parents a minimum income based on family size, for example.  But many poor countries do not have that option.

One theoretical solution is to ban child labour.  This would make labour scarcer, so parents' wages might rise.  And, in the long run, it might help countries' growth rates, since better-educated children would become more productive workers.  Nevertheless, a ban is hardly likely to lift families out of poverty in the short term.  For that reason, organisations such as the World Bank (in its World Development Report, released this week, which focuses on poverty) and the United Nation's Children's Fund, UNICEF, advocate total bans only for work that can harm children's development.  Moreover, bans - and the policies that go with them, such as compulsory education - are often high-principled but heavy-handed ways of tackling what is at heart an economic problem.

That problem can be seen, in essence, as a lack of liquidity.  Children themselves are not necessarily poor in terms of their whole life-cycles; their futures hold decades of paid work.  But they cannot borrow today against the earnings that education will bring tomorrow.  The key is to unlock those future earnings so that children can be free to study (or maybe even play) in the present.  Forcing them out of factories and into schools may actually hurt them; unless their families are compensated for the lost income, such a policy can worsen their destitution.

This little kid went to market

Child labour's effects on social welfare are the subject of a recent paper by Jean-Marie Baland of the University of Namur and James A. Robinson of the University of California at Berkeley.  In a theoretical model, the authors show that there can be two reasons for a child to work: the imperfection of the capital markets, as outlined above, in translating future earning-potential into present spending-power; and the inability of parents to make "negative" bequests to their children.  If parents were able to bequeath debts to their children, they could, in effect, borrow against their offspring's future earnings in order to pay present expenses.

Messrs Baland and Robinson acknowledge that negative bequests might be hard to implement, for both social and legal reasons.  But the day when children themselves can borrow against future, education-enhanced, earnings may not be too far away.  A capital market for such transactions could be established by governments or multinational organisations and could attract funds from individuals, institutions or governments.  Children, or more likely parents acting on their behalf, could sign contracts promising to repay educational stipends during their working lives.  Poor countries might also require assurances that signatories would use their state-funded skills at home rather than moving abroad.  Such contracts already bind many state-funded scholars who study abroad.

If the investor is a government, it could recoup its investment by making adults surrender a percentage of their wages in return for earlier subsidies.  But this would merely add to marginal tax rates.  It would be better to demand lump-sum payments over flexible time-periods.  In the United States, where loans for university students are packaged and sold as securities guaranteed by the government, much post-secondary education is already financed in this way.  The system might also link subsidies to students' performance. In this scenario, children might ease their families' economic burdens while happily skipping off to school; and parents might encourage learning to the exclusion of all other activities.

The World Development Report discusses the problems of child labour and poor families' limited access to financial markets on the same page, yet it fails to make a connection between the two.  Instead, it highlights the successes of governments and NGOS that have tackled children's lack of liquidity in the traditional way - by giving their families money.  Government schemes in Mexico and Bangladesh, both cited in the report, have indeed enhanced school enrolment among children of "working age" by supplying money and monitoring attendance.  However, an earlier study by the World Bank, which examined an NGO'S subsidy programme in Bangladesh, demonstrated that more studying does not always mean less working.  Though school-attendance rates in the target group rose, fewer than ΒΌ of the newly enrolled children left their jobs.

Neither unofficial nor government schemes, as they exist today, appear capable of moving all needy children from work to school.  Their scope is limited by the amount of tax revenues and donations from rich countries.  The wages that children earn are therefore likely to remain crucial to ensuring their families' survival unless and until a lasting solution to the liquidity problem emerges.

Source: The Economist 16 September 2000 from "Is Child Labour Inefficient?" taken from the Journal of Political Economy August 2000

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