Measuring what matters – human capital

| September 7, 2023

What do we know about wealth inequality, and does it matter?

In Australia, we have a large amount of data on income and its distribution, generated by the Australian Bureau of Statistics (ABS), and analysed and interpreted by university researchers and organisations such as Australian Council of Social Service (ACOSS).

By comparison, however, we have little information about wealth and its distribution. The ABS, drawing on its surveys of income and housing, provides some data on wealth distribution, the most recent publication relating to 2019-20.

Unsurprisingly, that survey reveals that over the ten years from 2010 to 2020, there has been some widening inequality in wealth. In 2020, households in the two highest wealth quintiles – that is 40 percent of households – held 83.3 percent of household wealth, that share having risen from 81.8 percent in 2010. Or, from another perspective, the share of wealth held by the other 60 percent of households fell from 18.2 percent to 16.7 percent over those ten years. At the very top of the scale, the proportion of households reporting household net worth above $5 million rose from 1.6 percent to 2.4 percent.

These figures tell us something about the distribution of wealth, but not much, because they relate almost entirely to financial wealth (including superannuation) and to the market value of housing.

As any observer of the stock market knows, changes in financial wealth can be subject to wide fluctuations, dependent on interest rates, sentiment and speculators’ short-term incentives, rather than any changes in firms’ real assets.

Similarly, housing has been on a wild inflationary ride: remember the headlines in 1978 when a mansion at Sydney’s Elizabeth Bay was the first to break the $1 million mark?

If we are fortunate enough to own a house, its market value may go up and down, but in terms of its value in providing shelter and a convenient location to live, it does not change much over time. In fact, its real value – its “value-in-use” as opposed to its market value – probably falls over time.

Even if, through processes of smoothing and indexation, statisticians could overcome these limitations, such measures of wealth would still be only partial, because they would not cover the wealth of human capital – our skills, knowledge and experience.

When Karl Marx wrote Das Kapital 156 years ago, economists had a pretty good idea of what “capital” was – factories, ships, railroads, and other expensive equipment. To use Barry Jones’s definition, capital was about things that hurt when dropped on your toes. If Marx were writing today, he would surely be paying far more attention to the distribution of human capital.

The government is well aware of the need for our indicators of wellbeing to go beyond financial metrics. In July, it released the second iteration of its Measuring What Matters Statement, an attempt to track our progress towards a society in which we are “healthy”, “secure”, “cohesive” and “prosperous” and in which those benefits can be sustained.

It’s still an early-stage work-in-progress, picking up from the ABS Measures of Australia’s Progress project, which was dropped by the Coalition government in 2013.  While the Statement acknowledges the importance of “access to education, skills development and learning throughout life”, it is actually short on indicators of our progress to building our human capital and on indicators about the distribution of human capital. Yet in view of the changing nature of our economy, human capital must surely rank at least equally with financial capital in terms of policy attention.

What we do know about trends in human capital is not positive. Over the last six years, there has been a fall from 83 percent to 76 percent in the proportion of students in government schools finishing high school, and recently released NAPLAN results show widening disparities in school education attainment. Children from immigrant background are doing better than those whose parents were born in Australia. Similarly, children whose parents have a basic university degree are far more likely to go on to TAFE and university than those whose parents who did not go past high school. And there are significant rural-urban divisions.

Such disparities are the seeds of what could develop into a US-style social division, between so-called “elites” and those who feel left behind. We see that playing out in the US as the processes leading to the 2024 election get under way.

For a democracy to function, it is necessary for citizens to be equipped with basic skills of reasoning, so that they can apply a filter of scepticism when considering the claims of those seeking their vote. Those who miss out on such basic skills, through shortened or poor quality schooling, are unlikely to make wise choices, particularly in this age when the voices of reason are easily overwhelmed by the din of false claims, gut-feeling opinion, unsubstantiated conjectures, sectoral interests presented as the public interest, smart sophistry and blatant lies that dominate the offerings on social media.

Closer to home, Gabrielle Appleby’s post on this same forum – The arguments for yes and no – illustrate how the debate on the Voice has developed Trumpian characteristics. The most telling aspect of her analysis is not the weakness of the “no” case, but rather her description of the way the “no” advocates have handled the debate.

They could have mounted a reasoned case for voting “no”, but in factchecking their points and exposing their logical fallacies, Appleby demonstrates that they have avoided any reasoned engagement with the electorate. The “no” case is not about countering the “yes” case: rather, it about countering the basic proposition that political argument should be based on logic and reason.

That destructive pattern of public discourse can be countered only with a widespread distribution of human capital, particularly in the skills of sceptical analysis, as a basic requirement for a sustainable society of healthy, secure, cohesive and prosperous citizens.