You can't put a value on human beings

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The Independent Online
WE ARE are in a world of league tables. The one sure-fire way of landing a story in the papers is to produce a new chart, be it of the world's richest people, the "competitiveness" of nations, or the weekly sales of classical music CDs. The international organisations know this too, so the United Nations does the Human Development Report, which draws public attention to the fact that the conventional ways of calculating national wealth, gross national product or gross domestic product per head ignore other features of human well-being, such as the health of the population or the inequality between the sexes.

Now the World Bank has launched a new measure of national wealth which, instead of looking at the flow of wealth - GNP or GDP per head per annum - looks at its stock. It is as though one were looking at the amount of assets people have - their houses, their savings, their pension rights, and their future earning capacity - rather than their annual income at any one particular time.

The World Bank has done this for countries. It divides "wealth" into four categories: natural capital (natural resources such as land, water, timber, minerals, oil and gas etc); produced assets (factories, infrastructure, roads, railways etc); human resources (people's productive capacity as determined by their education, nutrition etc); and social capital (the value of groups or human institutions such as families and communities).

The first three measures of wealth are pretty self-evident. Obviously the volume of mineral resources has an impact on wealth in certain countries - that is why the Middle East oil states are so rich. By looking at the stock of wealth in this form and allowing for its depletion, you can make an estimate of whether the country's living standards can be sustained. The calculation takes into account countries which deplete their water tables, or pollute their environments.

Similarly, countries which have already built their cities, put in the water and sewage systems and have decent telecommunications are richer than those that have pumped resources into producing more exportable goods but cram their people into shanty towns.

And third, a well-educated and healthy population almost self-evidently can produce more than a badly educated, sick one.

The final form of wealth - the idea that human capital can exist in group as well as individual form - might sound odd to many people, and at the moment the World Bank is not yet measuring this separately. But it is an important concept that can be illustrated in the following way. Suppose you have two otherwise identical countries, one of which has a high divorce rate and the other a low one. The first will generate a lot of extra economic activity from its family break-ups: legal fees, payments to social workers, additional child care and so one. But objectively, not having so many secure families makes it poorer. Human capital comes in many forms.

What, then, are the results? As the graph shows, Australia and Canada, two countries with enormous natural resources and relatively small populations, are first and second. An Australian family of four will be encouraged to know that it is "worth" more than pounds 2m. Then comes one tiny country with very few natural resources but with very high human resources, Luxembourg, followed by Switzerland, Japan and (another country with considerable natural wealth) Sweden. Britain is a fair way down the top 30, just ahead of two countries with no natural resources at all, Singapore and Hong Kong. At the very bottom of the league (and not shown on the graph) comes Ethiopia, with wealth per head of $1,400 (pounds 880), just below Nepal, Burundi, Malawi, Uganda, Tanzania and Vietnam.

The report is useful in that it takes into account countries that are running down their natural resources and those which have poured resources into educating their people. But are these calculations really right? Take natural resources. Australia and Canada have these in abundance, but demand for different resources changes over time.

They are only useful if they are appropriate to the technology of the day. A century ago, coal was an enormously important resource, as it was virtually the sole fuel for transport and the principal one for much domestic cooking and heating; now it is mainly used for electricity generation. In another century, it is at least conceivable there may be no economic use for it at all.

Next, take "produced assets". Factories are only useful if they make things people need. The former Soviet Union has a vast industry producing weapons. Not needed. Japan has perhaps a one-third excess in its car-producing capacity. Cities (with all their associated services) are only useful if they are in the "right" place: look at the existence of ghost towns or run-down inner-city districts, or conversely at the way in which a town created for one purpose (say, mining) can be transformed into another (like a ski-resort).

But the most questionable calculation surely must be the value put on human capital. Without looking into the detailed methodology of the calculation, it is a bit unfair to criticise the World Bank's valuations, but to say that the human capital of a Luxembourg citizen is worth three times that of an Australian seems a bit odd. Maybe they know more languages, or are better at investing the money that has come across the border from Germany to avoid German taxation.

It also seems odd that Japanese human capital should be rated higher than American, given that the US has the world's largest surplus on trade in intellectual property and Japan has the largest deficit. Finally, I would back the human capital of the Vietnamese, right at the bottom of the table, against that of just about any other country in the world. They may not have doctorates, but in another generation or two they will have created an economic miracle akin to that of places like Hong Kong and Singapore. The really interesting thing, surely, is just how difficult it is to measure human capital. There is absolutely no point in having large numbers of people trained to do jobs which are no longer needed. How do you measure the human capital of pop musicians? Or an author?

Surely we are moving to a world where ingenuity and entrepreneurship count for far more than technical, taught skills. Every country can train people to be engineers, accountants and lawyers provided it puts the resources into this. Maybe we are not training enough, but these are not areas where it is possible to sustain a comparative advantage for long. It is very difficult to know how to produce a Bill Gates. Yet the United States' utter domination of the world software market for PCs has happened because of him and the people about him.

It must be right to invest in human capital and we should thank the World Bank for reminding us of this, just as we should thank it for warning about the effects on future generations of running down natural resources. But let's remember that human capital also consists of the ability to surprise, to invent, to think counter-cyclically, to entertain, even to thrill.