Human Capital Versus Financial Capital: Which Is More Important?

Several days ago, a close friend forwarded me a very interesting article that appeared in the New York Times on March 5, 2010. The article, written by Paul Sullivan, entitled “Learning How to Hedge Yourself, and Not Just Your Portfolio” poses two (2) key questions. First, “[h]ow much are your working years worth?” Second, “[o]r put another way, what is the impact of joblessness on your financial future?” This article was very thought-provoking.

The article discusses the differences between human capital (i.e. your future job-related earnings) and financial capital (i.e. income received in the future from your financial investments). Sullivan points out that economists have long debated the distinctions between human capital and financial capital. Indeed, Sullivan notes that society has placed very little emphasis on human capital until it is far too late. In view of near 10% unemployment rates in the United States, and a substantial dip in the stock market and investment portfolios, the value of work and future earnings from job-related activities has found new importance.

In his article, Sullivan interviewed Michael Gordon, a vice president at New York Life Insurance, who posed an interesting question—“If the stock market goes down, would your income increase, decrease or not change?” At the moment, if you are doing bankruptcy and corporate work-outs, your income might increase. If you are a stockbroker, at least over the past few years, your income might have decreased. If you are a tenured college professor your income has probably stayed the same and largely remained unchanged.

This article left a major impression in my mind. Tuesday, I had lunch with colleague of mind here at Capital Law School, and a former student we both taught who recently graduated. My former student is a litigator in a large law firm, who at the moment happens to be extremely busy. My former student lamented about the down-turn and lack of work at the law firm for young corporate and transactional associates to undertake. Generally, we talked about the general lack of opportunities for young law school graduates over the next several years. We all agreed that we might see a “lost generation” in many industries, not only in the legal profession, for years to come as a direct result of our poor economy. A great deal of human capital has been lost in our current financial crisis. How much of this human capital will we recover over time? Does human capital recover like the stock market? As you can see, talking and thinking about a "lost generation" the other day got me a little depressed.

Mr. Sullivan’s article in the New York Times made me think about how our society needs to place more value and emphasis on human capital through education and training initiatives. As parents we need to impress upon our children the importance of understanding, developing, and valuing their own human capital. If you have a moment I suggest that you take a look at Mr. Sullivan’s article. Please share your thoughts and impressions. Do you agree, or disagree with Mr. Sullivan’s premise? I look forward to hearing your feedback!