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December 4, 2013


Capital can be anything of value, and that covers a lot of territory – well beyond money – though capital values are typically expressed in dollar terms for ease of accounting. We have been conditioned to think of capital as the value of the stock of a given corporation, but there are all kinds of capital. In this essay I will write about human capital and compare it with money capital.

The literature has sharply distinguished between labor and capital long before Marx came on the scene to talk up revolution between the classes. In a capitalist society, we have identified (among others) the following agents (or “means” per Marx) of production: capital, labor, natural resources and real estate. I think that definition too broad. I think there is little difference between money capital and human capital in terms of production. One without the other is worthless except in fully automated factories and workshops, and even there at least some human labor was involved in building the buildings and assembling the robots.

Money in the abstract has no intrinsic value; its only value lies in what it can command in the marketplace, and that can vary with the value of the money itself (see the inflation of post-WW I Germany and present-day Zimbabwe). There was a saying in post-WW I Germany that “it takes a wagonload of marks to buy a wagonload of bread,” and in Zimbabwe several months ago it took 58 million Zimbabwean dollars to buy a Coca Cola! Warren Buffett and Bill Gates wouldn’t last long in such an economy – perhaps a week.

Human capital is what an individual brings for sale to the labor marketplace and involves a complex but measurable value: education (vocational and academic), work ethic, reliability, loyalty and the like. Such an individual may have spent a lot of money and many years in acquiring such capital, years in which he/she might have been doing something else. Like money, the value of such prospective labor varies with supply and demand and inflationary pressures. Unlike money, which is benign, labor must perform.

Risks and rewards in the marketplace are fashioned by politicians via the tax and bankruptcy codes and favor money capital. Thus oil companies can take “depletion allowances” off their taxes because the oil they are pumping is a wasting asset. As humans age their ability to earn wages may also be depleted, but there is no “depletion allowance” available to them under the internal revenue code. Corporate assets used in the production of income are also subject to depreciation, another tax break not available to human capital. Politicians plainly prefer to reward money capital over human capital in the internal revenue code even though both are essential to the productive process.

Similarly, Chapter 11 of the bankruptcy code has turned into a playground for money capital, especially for vulture capitalists and airline companies. There is no major airline that has not been through a Chapter 11 bankruptcy at least once.

All sort of atrocities are committed under cover of Chapter 11 as labor contracts and pension plans are routinely scrapped, huge commissions are paid to vulture capitalists from the assets of dying corporations, debts of the bankrupt to trusting creditors are denied or settled for pennies on the dollar, and, depending upon whether the court approves a “Plan,” the bankrupt corporation, thus relieved of its liabilities to creditors (and its human capital workforce via the court’s order that its labor agreements and pension liabilities are no more), and though clearly bankrupt by any rational standard, may survive, and thus relieved of balance sheet liabilities, go back into business. Some such corporations have gone through multiple Chapter 11 filings.

Those representing human capital have no such opportunities, and indeed their Chapter 7 bankruptcies (unlike the Chapter 11 bankruptcies afforded to businesses) have been limited by the politicians while giving businesses carte blanche to go broke but somehow stay in business.

I have often blogged in times past that the internal revenue code and the bankruptcy code are in need of radical change. The foregoing description of the fundamental unfairness of how government treats money capital versus human capital should give the reader some insight why. We have tilted the playing field in favor of corporate money and the chicanery that comes with it while denying bankruptcy relief to real people, many of whom are trapped in student loan and home mortgage situations for which the code expressly denies relief in discharge. Thus corporate relief is expanded while human relief is denied or severely curtailed.

Chapter 7 and Chapter 11 of the bankruptcy code were redone during the Bush years when he had a majority in both houses of Congress (2005), so I suppose I should not be shocked by the obvious bias extant in that code, a bias in favor of corporate America but against American workers. It is not surprising that wages are flat in America since corporate employers can add Chapter 11 threats to bust  labor contracts and pensions along with their existing threats to go to Mexico and China – powerful tools indeed. Workers who worry about their jobs are unlikely to press for raises, hence the family median wage has been stagnant or falling for the past several years in America (adjusted for inflation).

Thus in terms of risk and reward, it appears to me that workers are taking great risks in working for employers who have so many opportunities to (legally) rough them up via Chapter 11 filings. Typically risk and reward has to do with whether a corporation is profitable; no one discusses the risks workers take in agreeing to be employed. They should. Ask the former employees of Enron, who were rendered both jobless and pension-less with the criminal antics of Enron’s management.

I suppose the fact that Enron in its heyday was the number one contributor to George Bush’s campaign is coincidental, but I could be persuaded otherwise. GERALD  E


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