Tribute to Gary Becker (1930-2014)
Richard Griffin reflects on the work of social economist Gary Becker and assesses its impact on how we value training
Noble prizewinning economist Gary Becker died earlier this month. One obituary described him as 'the man who tried to put a price on everything'. Becker was a member of the New Institutionalist School (NIE) of economists, which laid the foundation of modern behavioural economics. Essentially Institutionalists, old and new, think economics should be about a lot more than just the supply and demand for goods and services. Becker's interests roamed widely. His first book published in 1957 was about the economics of discrimination, not why it happens but why, from an economic perspective alone it makes no sense. Later interests included analysis of the costs and benefits of crime and the economics of marriage. Of interest to the readers of TJ is his work on why individuals and organisations invest in training.
In 1964 Becker published Human Capital: A Theoretical and Empirical Analysis, with Special Reference to Education. For labour economists it remains the standard work, the equivalent to Donald Kirkpatrick’s work on training evaluation published five years earlier. Both men laid solid foundations in our understanding of learning and development and it is sad to reflect on the loss of both Becker and Kirkpatrick this year. Both of them it can safely be said did that rare thing – actually change the way people think and act.
For Becker decisions to invest in education, including workplace learning is a rational calculation – does the financial benefit of training outweigh its cost? For workers the benefit of training is an increase in wages. Economists argue that training makes workers more productive and therefore they command higher wages. Studies do in fact show that trained workers earn more than untrained ones. The cost side of the equation may include the actual cost of the training but also the time it takes, which could be used in other ways.
For employers the cost of training is, well, it’s cost (a grand total of £45 billion in the UK last year) but also the fact that after training they will need to pay their workers more. Many articles have been written trying to establish what proportion of the benefit employees receive and what employers get. Becker said for employers the calculation has to be that the increase in profits arising from more productive workers outweighs the cost of training or they would not invest. Generally speaking organisations that invest in training do in fact perform better on a range of performance measures; improved team working, better employment relations, greater staff satisfaction, less sickness absence and profitability.
By the way this ‘marginalist’ economic approach was what Becker and others applied to other activities that had previously fallen outside the remit of economics like decisions whether to commit criminal acts or not, whether to take up smoking, get married or, believe it or not, to take drugs.
As well as setting out the business case for training and education more generally Becker also distinguished two types of training: general and specific.
General training provides knowledge and skills that are transferable between companies in the same industry, such as apprenticeships. Because employees can leave an organisation and work in another as soon as they have completed their training there is no incentive Becker said for companies to invest in general training but much incentive for workers too. This is the logic behind the UK government’s recent changes to 24+-apprenticeship training through the introduction of loans. It is worth borrowing to complete a Higher Apprenticeship if your earning potential rises by more than the cost of the loan. Research suggests they are right, although the take up rate of loans to date suggests employees are less convinced.
Specific training in contrast is unique to the company. Induction training is often used as an example of specific training.
That in a nutshell is the theory of human capital investment but does real life work like that? Are their meetings in companies where efforts are made to calculate the marginal cost and revenue of investing in a talent management programme or a presentation skills training package or e-learning for customer services? Probably not. We know, in fact, that identification of training needs is a more pragmatic process than Becker suggests often led by funding grants and government policy. Many companies do not have dedicated training budgets and the majority of employees being trained have not had that training identified through an appraisal.
Sometimes the decision to invest in learning and development is anything but rational. A while ago I evaluated a leadership programme. The only reason this particular training package had been bought was that a senior member of staff had ‘heard’ it was good! As economists are slowly coming to realise people do not always act rationally.
There are, in my view, a lot of holes in human capital theory. Since Becker wrote his classic book, for example, we have come to realise that probably the most potent source of learning in a workforce is informal in nature. Forget PowerPoint, hand-outs, group work, curriculum and assignments, it is the conversations that people have in the lift, by the water cooler and over sandwiches that really matter. In my forthcoming book, I tell the story from data scientist Alex Pentland's Social Physics1 about an American bank he helped to increase performance in its call centre by $15 million. How did he do it? He encouraged informal learning by introducing formal coffee breaks to allow staff to exchange knowledge. Economists need to measure and calculate tangibles. Informal learning is, by its very nature, nebulous. It does not fit into the equation.
In the real world, counter to Becker’s theory, companies do invest in general training like apprenticeships even though they may lose staff. In fact much workplace learning is funded by employers not employees. It is also clear that the market is not all that efficient. A recent CIPD survey found that 30 per cent of workers believed they are over qualified for their job, which suggests companies are over investing.
It is also obvious I should imagine to most TJ readers that categorising training as either general or specific is far too narrow. Learning is on a messy continuum. Personally I prefer Alison Fuller and Lorna Unwin's, notion of expansive and restrictive learning cultures. Expansive cultures allow, for example, employees discretion to make judgements. Seeing training simply in terms of ‘who gains’ as Becker did does not help, not least because it is hard to know who does gain.
For all the faults of human capital theory Becker is important in the story of modern learning and development. It is a shame that his obituaries neglected this aspect of his work. Becker was instrumental in drawing attention to the value of learning, including workplace learning. When he first wrote Human Capital he was accused of debasing learning. Surely learning is good in itself regardless of its economic outcome? I have some sympathy with that view, but I have more sympathy with the view that education, including workplace learning and development, delivers tangible benefits: better wages, better services, better care, better job satisfaction, services, wellbeing and better profits. This is almost taken for granted now. Becker is a big part of the reason it is and we should be grateful for that.
- Pentland, A, Social Physics: How Good Ideas Spread—The Lessons from a New Science, The Penguin Press, 2014
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