The Neumann Lecture (By Prof. Glenn C. Loury, Brown University)*

The Neumann Lecture (by Prof. Glenn C. Loury, Brown University)* My lecture tonight will be about race and racial inequality in the United States. I will try to give you some idea of what I think I'm contributing to the study of this subject in my work. In order to do that I need to give some background, to create something of an intellectual context into which my work will fit. Indeed, I will begin by describing some aspects of the work of last year's von Neumann laureate – the renowned economist Gary S. Becker of the University of Chicago, who has addressed himself over the past few decades to related questions. Then I will try to convince you that my ideas extend and amplify and deepen Becker’s work. But I don't think it will be enough just to talk about my ideas. I think one also has to talk about what might be done about this situation – about the politics and the morality, the social morality, the social ethics that are raised by this question of social division, of “race,” within a society. I am aware that here in Hungary you know something about this question. I spent some time just today with the Minister of Equal Opportunities and her staff discussing the Roma question, and nationalities questions, and inequality questions that pertain to Hungary. I don't know very much about those things and I won't be speaking about those things directly here. I will be talking about the United States, which is the case that I know best. But I think the concepts, the ideas, the insights if you will, may be more broadly applicable. And so I'm quite excited to have initiated a conversation here, on this visit, with scholars and officials in Hungary about this question. I hope to continue to * Presented on the occasion of receiving the 2005 John von Neumann Award, Rajk László College, Corvinus University of Economic Science and Public Administration, Budapest, Hungary (9/30/05) Loury, Budapest Lecture, page 2 learn about these matters, and maybe also in some small way to make a contribution. So, in order to set the stage for a discussion of my work, I need to talk a little bit about human capital and social capital. It was again kindly mentioned that in my 1976 dissertation I used the phrase "social capital." In his important treatise, Foundations of Social Theory, James Coleman credits me with having been among the first to do so. (Actually, there's a writer named Jane Jacobs. Some of you who study urban economics or planning may know of her. She wrote some influential books in the 1960s about the social economy of cities, and she also used the term “social capital” in the context of her work.) But I'm one of the early progenitors of this idea. And there is Robert Putnam, the political scientist at Harvard, who studied the differences in government performance at the local level across various regions of Italy in a much cited book, and has gone on to examine the problem of declining civic engagement and social connectedness in American society, with a massive empirical project that has produced several books. He, too, has been kind enough to take note of the fact that I was an early progenitor of the idea of “social capital.” It's an important idea now. So, I'll be contrasting "social" with "human" capital. I begin with reference to Gary Becker. Those of you who have studied economics, or even those who just showed up at the lecture last year and did your homework, know that Gary Becker is very closely connected with the development of human capital theory in economics. I'll make what could be a very long story short. On the human capital front a paramount question is: How do we account for differences in the earnings capacity of persons in society? What is our theory, as economists, as to why the distribution of income and earnings looks as it Loury, Budapest Lecture, page 3 does? Why are the wages paid to workers in this occupation greater than what is paid to those pursuing that occupation? What, in a market setting, is the relationship between a worker’s remuneration, on the one hand, and activities undertaken by that worker which enhance productivity – like effort on the job, formal and informal training, delayed childbearing, migration (choice of location affects proximity to complementary productive factors), health (investing in preventive care and nutrition can enhance the productivity of the human organism)? Prof. Gary Becker has addressed these and other similar questions in his work. And, they are all, in one way or another, expressions of this view – this approach to explaining how people come to get whatever reward they get in the labor market – that is human capital theory. This theory builds on an analogy with between the well- developed theories of investment in economics – assuming competitive markets, rational choice by forward-looking individuals, and analyzing human investment decisions in light of an agent’s time preference, anticipated rate of return, and available alternatives for the use of time. So, human capital theory takes this intellectual framework -- well developed in economics for understanding investment -- and imports it into the realm of studying human inequality. Now, put simply, what I have been trying to do in some of my work is to explore the implications of the fact that this association between business and human investment is merely an analogy, not an identity. That is, I have been questioning this tendency to equate the mechanism of investment as it pertains to machines – to firms making plant and equipment decisions, with “investment” as it refers to the development of human beings. I'm saying that it's only an analogy, it's not a perfect fit. They're not the same Loury, Budapest Lecture, page 4 things. Important things are missing in the human capital framework -- with due respect to Professor Becker, and with no irony here intended. With due respect to the great Professor Gary Becker, the theory is not complete as it applies to human investment. And since my time is only now 35 minutes, I will have to say quickly and informally just how I see this theory as being incomplete. There are really two points about this theory, about the incompleteness of this theory, about the imperfectness of the analogy between investment and human development. OK. Now, just as an aside before I give you the two points, I want to declare that I have no ideological ax to grind here. For instance, I'm not against human capital theory because it's "markets applied to people," or some such nonsense. That would be unscientific. As the old aphorism goes, "the proof of the pudding should be found in the eating." That is, the theory is only so good as it is useful and productive in helping us understand the data. I'm not against human capital theory because someone has said "there's a shadow price on babies." There IS such an implicit price, most definitely. (No, wait a minute. Wait, wait, this is just basic economics. Opportunity cost. There are alternatives forgone. There is no free lunch. There is a shadow price on babies. There can be no doubt about that. There's a willingness to pay for babies. Right? We may not permit it to be expressed in explicit and enforceable contracts. We may make laws against it. Right? But a decision-maker's options are what they are. People are trading them off. There is a shadow price on babies. There's a shadow price on wives -- or, perhaps I should have said, on husbands. But this is a digression. I'm just saying that I'm not against human capital theory Loury, Budapest Lecture, page 5 because we're applying prices to people. I'm not one of those who think it is impossible to value a human life. I don't know the answer to the ultimate existential questions, but I do know that people make choices and that in those choices they reveal their willingness to pay for one thing or another. And some of those things pose a greater risk to human life than do other of those things. And, by systematically analyzing people's choices in this regard, we can learn something about how THEY value human life. This turns out not to be a trivial question, because if billions of dollars are going to be invested in cancer research, we might as well know what the value of the fruit of that advancement is going to be to society (cite K. Murphy's recent work, e.g..) And, one can't get there from here without, in effect, putting a price on human life. So I'm not one who says economics can’t be applied to this or ought not be used to think about that. Human capital theory is incomplete however, because human beings are not machines. There are two senses in which I want to emphasize this incompleteness. (1) My first observation is that all human development is socially situated and mediated. I.e., the development of human beings occurs inside social institutions. It takes place as between people, in the context of human interactions. The family, the school, the peer group, the youngsters who hang with each other in the neighborhood and play basketball or whatever it is together. These institutions of human association are the places where growth and development occur.

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