Knowledge: Its Creation, Distribution and Economic Significance, Volume III

Knowledge: Its Creation, Distribution and Economic Significance, Volume III: The Economics of Information and Human Capital

Fritz Machlup
Copyright Date: 1984
Pages: 672
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  • Book Info
    Knowledge: Its Creation, Distribution and Economic Significance, Volume III
    Book Description:

    Volume III examines in clear and elegant prose the roles of knowledge and information in economics. Part One analyzes the effects of new or uncertain information on market performance; examines the formation and revision of expectations; and provides a classification of literature and an extensive bibliography. Part Two discusses private and social valuations of education and training, the controversy over nature vs. nurture," the issue of "credentialism," and the depreciation of human capital.

    Originally published in 1984.

    ThePrinceton Legacy Libraryuses the latest print-on-demand technology to again make available previously out-of-print books from the distinguished backlist of Princeton University Press. These paperback editions preserve the original texts of these important books while presenting them in durable paperback editions. The goal of the Princeton Legacy Library is to vastly increase access to the rich scholarly heritage found in the thousands of books published by Princeton University Press since its founding in 1905.

    eISBN: 978-1-4008-5602-2
    Subjects: Political Science, Business

Table of Contents

  1. Front Matter
    (pp. i-iv)
  2. Table of Contents
    (pp. v-vi)
    (pp. vii-xvi)
    (pp. xvii-xviii)
    Theodore W. Schultz

    In breadth and depth, this is a unique book in economic scholarship. The historical roots of the ideas are richly documented. The analysis is based on theory and evidence. What is said is lucid. The advances in the economics of information, and in human capital, are presented clearly both for economists and for intelligent general readers who are not concerned about the technicalities of economics.

    To appreciate the complexity of modern economics, it is necessary to see that its achievements have in large measure been made possible by the division of labor in what economists do. Economics has become highly...

    (pp. xix-2)
    Mary Taylor Huber and Fritz Machlup
  6. CHAPTER 1 Introduction
    (pp. 3-12)

    I begin with a declaration of independence for each of the volumes completed or planned for this series. They all deal with knowledge, its creation and distribution, and several deal also with the economic significance of the generation and dissemination of knowledge; but each volume can be sampled or read, understood, and perhaps even enjoyed, by people who have not read any of the preceding volumes and do not plan to read any of the forthcoming ones.

    I do not mean to say that readers would not benefit from becoming familiar with the intellectual offerings in the other volumes. I...

  7. Part One: The Economics of Knowledge and Information
    • CHAPTER 2 Old Roots and New Growth
      (pp. 15-41)

      Choice is at the core of economics. This is quite explicit in pure economic theory, with its emphasis on the “logic of choice” and the “economic principle”; but it is true also at all’ levels of applied economics, from problems regarding consumers’ decisions and business management to problems of public policy, welfare economics, and benefit-and-cost analysis. Of course, not blind choice but informed choice underlies economic decision-making and intelligent human action, however imperfect the decisionmakers’ accumulated knowledge and obtainable information may be. Thus, stocks of knowledge and flows of information guide the choices and decisions that result in economic action....

    • CHAPTER 3 Information and Prices: Futures, Insurance, and Product Markets
      (pp. 42-77)

      In this chapter and the next we will survey those areas of the economic theory of knowledge and information that relate to the significance of information in the working of various markets for goods and services and, particularly, in the formation of market prices. The problems analyzed are chiefly those raised by the acquisition of new and timely information; and some of the complexities arise from the fact that such information may be highly uncertain, incomplete, biased, misleading, costly, available to some but not to others, and giving rise to expectations of further changes.

      I should repeat that it is...

    • CHAPTER 4 Labor Markets and Financial Markets
      (pp. 78-120)

      That labor markets and financial markets are treated in a separate chapter in this survey of the economics of knowledge and information should not indicate a thematic break. The reason for the break is merely a concern that few readers like to go over so many pages in one sitting and may prefer to have a breather at an appropriate point. Refreshed, we can now proceed.

      Problems of information are of special importance in the working of the labor market: searching, signaling, and screening are activities affecting the supply of and demand for labor, the dispersion of wage rates, the...

    • CHAPTER 5 Public Decisions and Public Goods
      (pp. 121-158)

      The two preceding chapters have reviewed issues discussed in the literature of the economics of information that emphasized market phenomena, market processes, and market results. In this chapter and in the one that follows the review will be continued, but the accent will be more on social and political valuations and on procedures that may qualify as “nonmarket techniques” of obtaining information about individual valuations for purposes of public choice. This statement may sound mysterious, but it will become clearer as we proceed. The point is that in some areas public decisions are inevitable, and many political economists agree that...

    • CHAPTER 6 New Knowledge, Dispersed Information, and Central Planning
      (pp. 159-204)

      The discussions of “Public Decisions and Public Goods” in the preceding chapter are fully pertinent to the topics dealt with in the present chapter; indeed it might have made better sense to have the discourse on these closely related issues pressed into one chapter. It would have been, however, an excessively long chapter, which few readers could finish in one sitting. If the reader wants a break, it may be expedient to suggest an appropriate place for it. A break at this point can be well defended: in the discussion of public choice—at least up to the section on...

    • CHAPTER 7 Empirical Research, Theoretical Analysis, Applied Inquiry
      (pp. 205-244)

      The reader and I may disagree on whether this chapter is really necessary, but perhaps I can persuade him that exposure to this sort of discourse can improve the social scientist’s quality of life. Some of the literature on the economics of knowledge and information is “purely theoretical,” some “entirely empirical,” at least in the judgment of the academic community. But do we know what we mean by these opposites? Are we aware that “empirical” research can mean several very different things, and that “theoretical,” also, has many shades of meaning? And what about the many papers that are intended...

    • CHAPTER 8 Economic Agents, Equilibria, and Expectations
      (pp. 245-282)

      The ideal type “economic man” has served economic theory in the analysis of many general problems. For the analysis of special problems, however, economic man has to specialize: the all-around “utility maximizer” has to be transformed, for example, into a sophisticated corporate manager considering his alternatives in raising capital funds for the company; or into a job seeker considering his options in different locations and different occupations, including that of collecting unemployment benefits; or an inventor considering his chances of forming his own firm to exploit his idea, either patented or in secrecy, or selling it to others for ready...

    • CHAPTER 9 The Expanding Specialty: Surveys and Classifications
      (pp. 283-312)

      Six of the preceding chapters have been given to the task of telling the reader about the variety of subjects discussed under the heading “Economics of Information and Knowledge.” One may say, without undue exaggeration, that all areas of economics—micro- and macroeconomic theory, monetary theory, international trade and finance, and every one of the applied fields—are being reformulated with special emphasis on knowledge gaps, uncertainty, new information, and changing expectations.

      From this point of view the fast growth of the literature on the economics of information and knowledge does not seem surprising. If all chapters of books and...

    • CHAPTER 10 A New Classification
      (pp. 313-334)

      I shall now propose my own classification of the literature on the economics of knowledge and information. I cannot, after all that I have said, expect that my attempt will satisfy all specialists in the field or even be workable for years to come. The flow of writing in some subspecialties may dry up before long, and new subspecialties will attract the interest of researchers. For the time being, however, the following scheme may be serviceable.

      The scheme consists of 17 subject groups divided into 115 subgroups. To facilitate an all-encompassing overview I shall first present the 17 main headings....

    • CHAPTER 11 A Sample Bibliography
      (pp. 335-400)

      This chapter provides a sample bibliography of the economics of knowledge and information, containing more than a thousand titles of books and articles. A bibliography approaching complete coverage of the subject would probably contain at least twenty thousand titles. Thus, my sample is at best 5 per cent of the total. No claim can be made that the sample is representative of the total; I have made no attempt to construct a scientific random sample. I have selected relevant titles from the Index of Economic Articles, Volumes 11-16 (1969-1974), the Journal of Economic Literature, Volume 13-16 (1975-1978), and lists of...

  8. Part Two: Knowledge as Human Capital
    • CHAPTER 12 Basic Notions of Capital Theory
      (pp. 403-418)

      The theory of capital is a highly complex area of economic analysis, and I must not assume that most readers are familiar with it. I shall therefore begin with a sketch of the relations between the flow of reai investment and the accumulation of real capital, that is, physical capital goods. If some readers find this chapter forbidding, they may settle for a merely intuitive grasp of the ideas and not bother with excessively technical notions.

      All theories of capital deal with four fundamental concepts: (1) valuable stocks of resources, durable but exhaustible or depreciating; (2) investment, or accumulation, additions...

    • CHAPTER 13 Investment in Human Resources and Productive Knowledge
      (pp. 419-438)

      In an application of capital theory to human resources, we need not immediately use all the conceptual tools exhibited in the preceding chapter. The tool most difficult to handle, the rate of returns to the capital stock and to new investment, can be left aside for a while. In this and the next few chapters, investment and returns will play the main roles, as magnitudes, not as ratios (such as per cent of capital per year). The difficulty with the concept of returns to investment or to capital becomes “compounded” by the calculation of “rates.”

      To comprehend the capital character...

    • CHAPTER 14 Private and Social Valuation
      (pp. 439-452)

      In the preceding chapter I spoke of private returns and social returns to private and social investments as though these concepts were generally accepted and fully understood. Yet, these are difficult concepts, involving fundamental methodological questions that ought to be examined more closely before we proceed with an analysis that relies heavily on the way they are answered. This is why I feel compelled to deal with private and social valuation.¹

      Who actually estimates investment expenditures and differences in incomes? Who discounts future incomes or benefits, pecuniary and nonpecuniary, to determine their present values? And who compares these values with...

    • CHAPTER 15 Human Capacity, Created by Nature and Nurture
      (pp. 453-467)

      In this chapter I attempt to explore issues not usually considered integral parts of the theory of human capital, yet definitely linked with the analysis of human resources and the creation and development of human ability to learn and capacity to perform.

      One of the issues in question concerns the extent to which mental abilities can be attributed to genetic endowment rather than to improvements achieved through environmental influences, in particular, through conscious investment activities. More important, however, is the problem of gradual improvements in the individual’s mental abilities and capacities over periods of time, chiefly as a result of...

    • CHAPTER 16 The Route from Investments to Returns
      (pp. 468-491)

      The causal linkage between educational investments and returns is by no means simple. There is no “through train” going, without intermediate stops, from investments to returns, even if some econometrically inclined travelers seem to sleep through the long trip and take notice only of the origin and the destination—the investments and the monetary returns. I propose that, for an adequate analysis of the causal linkage, the most likely intervening variables must be considered. The connections shown in the following schedule may look reasonable:


      1. endowment and investment ability

      2. ability and attitudes capacity

      3. capacity and its utilization...

    • CHAPTER 17 Production Functions: The Choice of Variables
      (pp. 492-522)

      In the preceding chapter the route from investments to returns was described with special attention to intermediate stops—intervening variables that seem to make the assumed causal connections more plausible. The possibilities of testing these connections empirically and of ascertaining and estimating the strength of various influences supposedly affecting the selected variables were viewed with great skepticism. Such skepticism, however, is out of tune with the econometric fashion of our time. Even if the hypotheses are only tentative, the proposed surrogates for the relevant theoretical constructs rather questionable, the empirical data notoriously unreliable, and the computed coefficients of correlation or...

    • CHAPTER 18 Productivity versus Credentials
      (pp. 523-537)

      A wide choice of titles is available to announce the topic or problem to be discussed in this chapter. Listing some of the possible titles may not only help the reader see the range of semantic options but may also circumscribe the questions we have to probe regarding the effects of longer schooling. “Real Capacity versus Certification” comes closest to the title selected, but “Actual Improvement versus Easier Marketability” may even more sharply point up the contrast. Other possibilities are “Increasing Working Power versus Increasing Worker’s Appeal,” “Performance Effect versus Sheepskin Effect,” or “Producing Greater Capacity or only Signals to...

    • CHAPTER 19 Depreciation of Knowledge Stocks and Human Capital
      (pp. 538-576)

      The agenda for this chapter is largely determined by what is to come after it. The next chapter will deal with profiles of outlays for learning and of receipts of earnings. The chapter after the next will deal with rates of return. Because rates of return are ratios of earnings to sums or “stocks” of capital, it seems clear that the present chapter has to be devoted to the discussion of stocks. The value of a stock increases by additions and appreciation and diminishes by withdrawals and depreciation. Since additions (investments) have been discussed all along and appreciation of previous...

    • CHAPTER 20 Profiles of Lifetime Learning and Earning
      (pp. 577-589)

      In reporting about theoretical and empirical research on educational investment in human capital—both in school and on the job—it is important to distinguish between different objectives of the inquiries. To try to explain earnings (and, hence, differences in earnings) of individuals or small groups of persons in particular professions or occupations is one thing; it is another thing to attempt an explanation of observed patterns in the income distribution of a large population composed of persons in all sorts of occupations; and, assuming that one has succeeded in estimating the effects of humancapital accumulation on earnings (and differences...

    • CHAPTER 21 Rates of Return to Investment in Education
      (pp. 590-610)

      This chapter is to serve a variety of purposes. I intend it to make a more explicit and didactic statement about the size of returns to capital and the rate of return; to report on findings from empirical research on rates of return to investment in learning; to question some of the theoretical and statistical premises of this kind of research, perhaps even to cast doubt regarding its basic presuppositions; and to provide a summary of several issues treated in the preceding chapters.

      In simplest terms, the size of returns means dollars and the rate means per cent. If the...

  9. INDEX
    (pp. 611-644)
  10. Back Matter
    (pp. 645-645)