Theses on Human Capital and the Second Modernization*

Prof. Laszlo Garai, Dr. Acad. Sc.


1. From the end of 19th century the capitalism underwent such a transition that in an after World War I writing Schumpeter observed: "Capitalism is so obviously being transformed into something else, that it is not this fact, but its mere interpretation that may evoke disputes", and that for those disputes it turns out to be "a matter of mere taste and terminology to call Socialism or not" what Capitalism is going to turn into.

2. That transition occurred in connection with changes in the economic status of human faculties and needs.

3. The Capitalist economic system might have afforded during its great century (i.e. the 19th) to consider only the material conditions of its running, because from human conditions the system's functioning was made maximally independent by effective mechanisms: the machine in a large scale industry set free the production from the producing faculties of the population; while the accumulation process gets its liberty from the population's need to consume due to the capital's property relations.

4. Material conditions were dealt with by the Capitalist economic system correspondingly to the modernization paradigm: the system manufactured these conditions by artificial intervention into natural processes.

5. On the other hand, the modern dealing with material conditions was ensured by investing capital that got increased when the product of that manufacturing process was marketed. This was so even when the investor into the manufacturing of an essential condition (e.g., into the development of networks of transport or public utilities) was not some private person or company but the state: such processes were financed not necessarily from the citizens' taxes, but to an increasing extent from an investment which became profitable when the state started to charge money for the use of the given infrastructure.

6. As far as for the system's functioning some human conditions were, however, still needed, they were trivial, hence, unlike material conditions, not manufactured, but merely extracted by the economic system. Thus, both the practice and the mentality of the system were that of exploitation [1]: human resources were treated as something that is available independently from any economical efforts, as if the profit that could be produced from it would be gratis, not brought in as the interest from a capital invested into human.

7. The mechanisms (evoked in the Thesis 3) that enabled the economic system during the 19th century to leave human conditions out of consideration, by the end of that century had discontinued to be effective: e.g., for the employment of the machinery, that would set free the system’s functioning from human faculties, newer and newer faculties were needed.

8. Since this alteration the Capitalist economic system, its run being no longer independent from human conditions, has no more alternative but to provide them for itself the same way as it did with the material conditions, i. e., by manufacturing them. From this time on, the practice of a second modernization, which, together with the material conditions of the economic system's functioning, will manufacture the human conditions, too, replaces the one evoked in the Thesis 6.

Hence, from this time on, the capital and work invested in cultivating faculties are as productive as investments into developing machinery.

9. In the period of the second modernization, any human potential will yield profit only if the costs, required to its production, allocation, maintenance, running and renewal, are really assigned. Such assignation will no longer be prescribed by pious moral imperatives (well known to be either hypocritical or impotent in the nineteenth century), but by solid business calculations.

10. In the light of these business calculations, one may no longer hold the formerly evident assumption that costs assigned to the human would withhold resources from the accumulation and put them to the credit of the consumption – instead, human assignations will only regroup resources from one side of account to another: "A sizable portion of what is termed consumption means nothing but investment into the human capital", Theodore W. Schultz argues.

11. For such an approach, expenditures on education has to be booked among the production costs for the human potential, health expenditures will appear as maintenance costs, housing and transport allowances as costs for the allocation of the latter, cultural expenditures as costs for the running of these specific capital assets, and expenditures related to the management of unemployment will be regarded as amortization costs for the human potential considered as fixed capital.

12. A key issue in human capital related calculations is to define who should be the investor: be it the household of the individual whose skills are developed by the investment; be it the enterprise who intends to apply the trained knowledge, or be it the state.

13. When the investor is the state, a misinterpretation may be generated by the fact that by this expenditure a kind of providence is at issue. Nevertheless, this is not some Divine or humanistic kind of providence, but rather the pragmatism of the good craftsman, who provides for tools before he would start working.

14. During the second modernization, in competition with the material and energy economy an information management comes to the front; in that information management the qualified man is as important a device as the lathe for the material or the power plant for the energy economy.

15. It is immanent in the nature of information management that its factors become effective in it not by each one's atributs but by their relations to each other.

A particular person develops its communication potential only if the correlated potential is similarly developed in other people as well: nobody ever may have a capacity to communicate with others, e.g., in writing or in some foreign language if there is nobody in his environment who has the corresponding capacity to communicate in writing or in that foreign language. Besides, the communicated information, too, gets its meaning only against its background, in correlation with it.

16. By force of the previous Thesis, for an information management not only personal attributes of individuals become economic factors but also their social interrelations: equality and unequality, exclusivity and commonness, solidarity and struggle for survival. Thus, what used to be traditionally factors of a merely moral universe that was detached from the world of economy are turned by the second modernization into factors for this very economic universe.

17. By force of the Theses 15 and 16 the output of the information management is determined not only by the input but to a not (or not significantly) less extent by externalities as well. As regards such kind of processes, the natural attitude is what the economic psychology calls free-riding. Hence, the expenses of cultivating faculties according to norms of the information management may only up to a rather limited extent be charged by market measures to the individual's account.

18. These inputs and their outputs can be managed rather in an organization which has the power to lay a charge, impose certain share of risks to the related individuals and counter-balance it not exclusively in the market way. Such an organization can be, for example, the state.

19. What was put in Thesis 5 about state investment into infrastructural development will also be true for the human expenditures administered by the state: the investment into the human capital will not necessarily be financed from the citizens' taxes, but in various possible forms of a profitable business enterprise.

20. However, if the investor into the human capital is the state (and so when it is a company) the question of Thesis 12 will be supplemented by another one: who profits from the employment of the human potential produced by that investment?

21. This question is related to its twin question formerly evoked by the Thesis 12 by an intermediating third question: who is the owner of the produced human potential?

22. The issue of ownership has to be raised with particular emphasis because the capital invested by the state or by a company into the formation of a person's potential will be organically integrated in his body and mind, and will be inseparable from the physical and mental faculties that were originally given to him. Now, property means, first of all, power of disposing, hence the question is put for the human potential whether this indecomposable neoformation is dominantly disposed by the bearer of the endowments or by the owner of the money invested into its qualification.

23. The correspondence of the answers to the three questions is only an abstract possibility. Two formulations are known in which this abstract possibility is realized:

if the interested person invests his own savings into the development of his own skills and abilities it is he himself who disposes over his own developed potentials, and it is he himself who gains the profit of the accumulated capital;

if the totalitarian state invests into the human capital it does it in such a way that it has total control over the manufactured human potantial, and thereby ensures for itself recovering with profit its money tied up in living persons.

24. The more highly qualified human potential is involved the larger and larger amount of capital is required for its manufacturing and, at the same time, the larger and larger autonomy is required for that human potential's running. This antinomy represents the basic dilemma of the second modernization: as far as the required capital is ensured by the involvement of a totalitarian State the autonomy turns out to be in short supply – but if the aspect of the autonomy makes the State get out from the human business by charging the costs of human development to the individual's account then capital will be scarce (if only by virtue of Thesis 17).

25. Both succes and failure of both versions of the socialism have been linked to attempting to resolve that basic dilemma.

26. In its successful periode the socialism

by its Bolshevik version constructed a psycho-economic structure that kept in operation (by joining in the Nomenklatura the status of the official and that of the commissary and by running a self-establishing machinery of the democratic centralism) a peculiar processing industry whose final mass-product was a rather peculiar version of the autonomy (the victim's complicity) [2]; and

by its social democrat version it dealt with the antinomy by adjusting the modernization's interest and the socialist values in promoting in a capitalist State the labour power as capital: the welfare State succeeded in the optimal distribution of the capital's enlarged reproduction among the multiplied material and the equally multiplied human capital.

27. The periode of the socialism's failure came about because

from the Bolshevik version everything but factors directly and plainly serving the consolidation of power got extincted or eroded;

the welfare State, being an investor into human capital without being its owner or beneficiary (cf. Thesis 12, 20 and 21), turned out to be unable to function indeed (as it has been stated in the Thesis 19) as a profitable business enterprise and this experience reiterated the accusation that here again (contrary to what is stated in Thesis 10), resources are withheld from accumulation.

28. The failure of these socialist attempts established a claim for the neo-liberal renaissance, although those attempts merely catalysed a trend that has not been originated from them but from the compulsion referred at by the Thesis 8.

29. That claim gets worded in terms of merely cancelling the validity of Keynes' procedures in ensuring for the national economy

Spontaneous functionning of a capitalist market aimed at by that claim seems to supply a radical disposal of the dilemma: societies' new splitting in an élite and a mass at this end of the 20th century. On the side of the élite there is focused both the capital required for the manufacturing of a highly qualified human potential and the autonomy that is required for its running (cf. Thesis 24), and on the side of the mass there is both factor's lack.

30. In this context George Soros' warning is particularly pertinent: "The main enemy of the open society... is no longer the communist, but the capitalist threat".

31. The warning is pertinent in spite of (or just because) the fact that the new split does not replicates the one that splitted the middle class during 19th century into an élite and a mass. This latter was then compelled to participate in the production of assets from the consumption of which it was eliminated (just from this discrepancy Marx used to deduce his prognosis about a proletariat that is forced by it to overthrow its basis, the capitalist system). By the new split of the society the unformed mass is just as well eliminated from the production as from the consumption.

32. The new split is a particular way for the second modernization to manifest the force of its tendency for making the schooling a conditio sine qua non of the production.

33. This unprecedented elimination of the unskilled mass from the economy would be enabled by the transformation of the material economy leaving much room for the employment of unskilled work into an information management (cf. Thesis 14) demanding much less but qualified human resources.

34. However, the same transformation disables the economic system from separating those individuals qualified from those not qualified since for an information management the human potentials at stake are not represented by atributs of separate persons but by their relations (cf. Thesis 15).

35. Thus, philosophical problems related to the open society and pragmatic problems related to the information management may have only common solution.


















* These theses are developed and argued by the author in the monograph The human potential as capital: An approach by the economic psychology ("Aula" Economic University Press, Budapest, 1998. – in Hungarian) and the collected studies About the path of modernization and the man who migrates on it, I–II. (Scientia Humana. Bp., 1995 – in Hungarian).









The term is used here not in the same sense as in the Marx' theory and the related ideology, but as a manner of use of some (material or human) resources which not only that does not implicate the active reproduction of these resources, but not even affords to them the opportunity to be reproduced by their own.



























2 Both The human potential as capital and the vol. I of The path of modernization of the author include a chapter entitled "The Bolshevik version of the second modernization" presenting this unknown psychoeconomic aspect of well-known configurations of an "existierende Socialismus".