The financing of the productive service through HCC*
Jiří Mihola, Radim Valenčík
The use of HCC in areas of acquisition, utilization, and preservation of human capital. Economic effects of such sectors – acceleration of professional fulfillment, better professional performance, longer zenith and horizon of productive fulfillment. Proposal and substantiation of the HCC based on the transferred price to ensure that economic effects through the relevant mechanisms (and not on the basis of the institutional system entities) serve as the source of financing for the entities that contributed to them and are distributed based on the contribution of such entities to the achievement thereof. A transferred price is a contract, where a productive service recipient makes payments based on the potential benefits accrued as a result of the productive service and based on the amount of returns generated from the productive service – directly to the productive service provider. Effects of some productive services only materialize in the form of longer horizon of productive fulfillment.
Key words:human capital contracts, transferred price, productive service
The idea of financing one of the forms of productive services – tertiary education – in the form of HCC (human capital contracts) was first formulated in 1955 by M. Friedman The Role of Government in Education (1955), even before he wrote A Theory of the Consumption Function (1957), where Friedman formulated the idea of productive consumption – i.e. consumption enabling the acquisition and preservation of human capital.
Since the 1960s, we have seen many attempts of applying the aforementioned idea in practice, in different variations and with different results. For a long time, the Australian HECS system seemed to be the most successful of those attempts; the US MyRichUncle system also looked promising. Many specialized papers came into existence in connection with the design, improvement, and analysis of functioning of these systems, whereas the most significant works in terms of theory are those of N. Barr (2012), B. Johnston (1972, 1986, 2006), M. Palacios (2004), H. Vossensteyn (2005, 2009). The last researcher considerably clarified the term "HCC” and also tried to expand its application to the area of healthcare financing. In terms of the Czech Republic, mainly the following people are engaged in theoretical research of the given area: P. Matějů (2003, 2005), V. Urbánek (2007). The problems of HCC-based systems show that it is necessary to proceed significantly further in the theoretical analysis and modeling of HCC.
The following article was created by the team that has already successfully resolved three related projects of Czech Science Foundation – Efficiency of investments in human capital (2003-2005), Investments in social capital and efficiency (2006-2008), and Theory of redistribution systems (2009-2011).
In a way (in the form of searching for a primary theoretical model), the area is also studied by important Czech teams concentrated around R. Richta (particularly in the 1960s), Y. Strecková (particularly in the 1980s), and M. Potůček (present), who focused on the role of human potential in economic processes.
Theoretical conclusions are compared with the results of international research of adults OECD PIAAC and international research SHARE.
Compared to existing approaches:
- We clarify the HCC in question (the principle of transferred price play the key role in this regard).
- We expand the application of the HCC to the area of conveyed application of transferred price (i.e. in areas, where the effects of productive services become apparent by longer horizon of productive fulfillment, for example).
- We corroborate the relationship with the perspective trend of economic development associated with the growing role of productive services aimed at acquisition, utilization, and preservation of human capital.
- We create general model of the said type of the HCC, which will make it possible to create feedback between economic effects (and assessment of such effects on different markets) of all types of productive services and their financing (or to verify the hypothesis of whether this is a sufficiently general principle).
- Based on the HCC model and improvement of the data analysis methods, we assess, significantly more accurately, the effects of productive services (particularly in the area of education and health).
In the article we define the basic characteristics of HCC based on transferred price and show its importance for the increased role of the productive service sector. Consecutively we show the effects of productive services grow on economic grow.
2. HCC based and the transferred price
It is possible to use HCC in sectors related to acquisition, utilization and preservation of human capital. These sectors comprise, in particular, education and healthcare, but they may also include family upbringing, provision of housing for young families, culture, some areas of relaxation and recreational activities, spa industry, professional (work-related) consulting, etc. Economic effects accrued in the aforementioned sectors are in the form of quicker professional fulfillment, better professional results, as well as longer zenith and horizon of productive fulfillment; see the following chart:
Figure 1: The Economic Effects of Productive Services
A general HCC model (subsequently specified for individual areas of productive services) based on a transferred price and conveyed application of transferred price (see below) enables to show, how economic effects in particular sectors are created. The effects arise through mechanisms and not through decisions of various entities operating in the institutional systems. The effects serve as the source of financing for entities which contributed to them (i.e. providers, users and mediators of productive services). The financing is distributed according to the contribution of these entities to the achievement of these effects. A transferred price is a contract, where a productive service recipient makes payments based on the potential benefits accrued as a result of the productive service and based on the amount of returns generated from the productive service; such payments are made directly to the productive service provider. It allows risk diversification, together with the financing of investments in human capital from future returns. It may be used to finance, for example, university education, as well as initial housing for young families or immigrants.
The term transferred price is based on the fact that valuation from another market (such as from the market of professional fulfilment) and form another time period is transferred to the area of human capital contracts. It generalizes the concept of price in terms of mutual interconnection of individual markets.
Effects of some productive services only become apparent in the area of longer zenith and, in particular, horizon of productive fulfillment. In this case, we talk about the conveyed use/application of transferred price, because the precondition for assessing such effects is the functioning of insurance markets or pension insurance/health insurance market, as appropriate.
Therefore, the definition and the settings of the mechanisms that make it possible to create the feedback between the economic effects of productive services and the financing of those, who contributed to such effects, also assume, among others, a fully contribution-based system of pension insurance. Confrontation of the model with empirical data (PIAAC, SHARE) relies on the models of H. Grossman (1972) and G. Becker (1993) for human capital valuation. Based on the theory of demand after health, we are able to define two basic types of human behavior in terms of healthy lifestyle:
- active, effective, and rational behavior of an investor type, consisting in the prevention of illnesses by promoting one's health;
- passive, ineffective, behavior of people with lower rationality (consumer).
The conveyed application of transferred price would motivate people to behave rationally.
The theoretical objective of the project is to verify the hypothesis that it is possible to define a mechanism for each area of productive services that would be based on general rules and enable the provision of financing for such services via the HCC on the basis of the transferred price principle or conveyed application of transferred price. In order to verify the given hypothesis, it is necessary to:
1. Specify the definition of the term "transferred price” and "conveyed application of transferred price”; consequently, describe – on the basis of a model – its nature to ensure that individual cases of its application rely on a common foundation.
2. Classify in detail individual types of productive services that allow the acquisition, utilization, and preservation of human capital; specify, for each of these types, some type of transferred price or conveyed application of transferred price that would enable the financing of the relevant productive service from its returns.
The practical objective of the project is to formulate theoretical bases of the basic concept of interconnected reforms in the area of social investments and social insurance (financing of education, healthcare, and pension insurance).
The concept of "economy based on productive services" is used in a similar sense as the concept of "knowledge society". We consider it more accurate for several reasons:
- It is more complex as it refers to education as well as to other attributes of human capital. And it is not only about the way of acquiring them but also of maintaining and applying them.
- It indirectly demonstrates that in order to be able to comprehend this economic system our society is directed at, we will need a micro-economic theory which exceeds the boundaries of the neo-classical economics. It does not take into account the productive (source-related) nature of the consumption.
In this context, I find it important to stress the substantial difference of the proposed approach from the R. Inglehart´s concept about a society based on "non-material" needs presented in his work called "The Silent Revolution" from 1977. Although the Inglehart´s concept might seem quite attractive and most popular at his time, there is one fundamental flaw. It does not deal with a specific idea as to how the satisfaction of "non-material needs" can change in a crucial factor of "material" economic growth. R. Inglehart does not even imagine a thing like this could be possible. Therefore, he cannot even create a concept of economic system where strengthening the role of "non-material needs" could – figuratively speaking – pay its way in order to compete with other tendencies within the social development.
In this area a long time ago, K. Marx developed this idea much further in his manuscript "Grundrisse" (1857-61) when he writes: "Real economy – saving – consists of the saving of labour time (minimum (and minimization) of production costs); but this saving identical with development of the productive force. Hence in no way abstinence from consumption, but rather the development of power, of capabilities of production, and hence both of the capabilities as well as the means of consumption. The capability to consume is a condition of consumption, hence its primary means, and this capability is the development of an individual potential, a force of production. The saving of labour time [is] equal to an increase of free time, i.e. time for the full development of the individual, which in turn reacts back upon the productive power of labour as itself the greatest productive power. From the standpoint of the direct production process it can be regarded as the production of fixed capital, this fixed capital being man himself. It goes without saying, by the way, that direct labour time itself cannot remain in the abstract antithesis to free time in which it appears from the perspective of bourgeois economy." (Marx 1974, p. 343, Marx online en 2002, p. 643)
R. Richta (and an Interdisciplinary Research Team) also progressed further with his famous work (highly regarded all over the world and published in many languages) Civilization at the Ccrossroads; social and human implications of the scientific and technological revolution (1969).
The fact that the needs in question (we call them "faculty needs", i. e. needs related to developing, maintaining and applying skills), are to "pay their way" is justified in terms of the existence of position investment, investment in social position which turns property advantage into privilege. It is the enhanced influence of the position investment in the last decades that results in suppressing optimistic trends that are mentioned by R. Inglehart in his work.
(To be continued)
* Následující text je zpracován s využitím materiálů prezentovaných na mezinárodní konferenci. Zařazujeme jej jako přípravný materiál na pracovní část 17. ročníku naší konference Lidský kapitál a investice do vzdělání mj. i vzhledem k tomu, že jsme její termín posunuli až na 5.12. a že se na její obsah dotazují i zahraniční zájemci.