Capitalism with a human face

Years ago, buying shares of people in the same way you’d invest in shares of a company sounded like ham-fisted sci-fi satire. Today, these “human capital” contracts are very real.

In a report for Business Insider, Alison Griswold looked at startups Upstart and Pave, which are pioneering the field of direct human capital investment. They work like this: Young people put together their credentials and request a target amount from a pool of investors. Upstart and Pave run applicants through a prediction algorithm that generates an interest rate based on their expected future incomes during five- or 10-year contracts. Over the life of these contracts, investors own minority shares not in ideas or plans, but in people themselves.

In other words: the startups allow venture capitalists to pay a lump sum to workers up front in exchange for a portion of their future earnings.

The idea of investing in people, rather than their ideas or their companies, isn’t entirely new. An economist named Gary S. Becker was part of the team that originally developed the concept of “human capital” at the University of Chicago in the early 1960s. Becker — who was a central member, alongside Nobel laureate Milton Friedman, of the Chicago School of free-market economics — quickly dismissed the idea of direct investment, writing in his equations that it was “prohibited by assumption.” Free-flowing human capital investment markets were an ideal that these Chicago School economists would have loved to see in action — after all, they’re the logical extension of a market-based society — but there’s a feeling of uneasiness with the concept in Becker’s original writing. It’s as if he didn’t want to associate himself any further with human bondage.

What Becker and his colleagues were doing — whether they liked to put it in these terms or not — is making people analogous to machines. Human capital contracts make no bones about treating workers like pieces of equipment by measuring their lifetime usefulness up front. Technically speaking, human capital is the “present value of the person’s future expected earnings”; plainly speaking, it’s a person’s imagined value at sale.

Becker’s fundamental equation looks complicated, but it boils down to the return on a person’s basic ability, plus the total return on every human capital investment they make, with an extra variable tossed in for luck (yes, there’s an extra variable that stands for luck). Upstart’s model is centered on the work of its first user: Paul Gu, a Thiel Fellow who dropped out of Yale to work on income-prediction algorithms that the startup is using to fill in a version of Becker’s equation. The stakes for this project are high: an accurate income-prediction program would make human capital trading both lucrative and safe. Upstart’s risk projection promises that investors will reap private equity returns with Treasury bond stability.

What ultimately turned Becker off was his belief that American courts wouldn’t find contracts of indenture enforceable, and that dissatisfied servants could (theoretically) do a lousy job until they were released. The Chicago School economists were fans of coercing people to work through their need for food, not by contract. But as human capital trading normalizes, investors will be able to depend on people’s need to support themselves as well. There’s little doubt in my mind that America’s courts will back aggressive debt collection.

Five years ago, Macalester College media studies professor Morgan Adamson wrote a paper called “The Human Capital Strategy,” which predicted that direct investment was at a nascent stage, all while recognizing in it older forms of labor: “Emerging markets in human capital are symptomatic of a tendency towards forms of exploitation of human life that are both innovative and anachronistic, in that they deploy long-standing forms of exploitation through new financial technologies,” she wrote, comparing the investments to indenture. Indentured servitude had obvious flaws — in addition to violating America’s relatively recent commitment to ostensibly free labor — but with tomorrow’s predictive algorithms, investors will be able to profitably pool, rate and trade human potential like mortgages or pork bellies.

Investors, clearly, will benefit from this. They say up front they plan to reap solid profits. Which leaves one question: Why would anyone want to sign up for it in the first place?

The people-products interviewed for Business Insider mostly said they’d spend their contract money on student loan payments (income-based loan repayment plans are already an option in many countries, including the U.S.). It makes sense: with the 70 percent of indebted graduates finishing school with an average of just under $30,000 owed, entering the same depressed labor market to compete against the same unpaid interns for the same stagnant wages, the future might not seem too precious to sign away.

From the neoclassical economist’s perspective, the whole system misses out when a Harvard graduate has to take a job at an environmental nonprofit instead of founding a successful Flappy Bird clone. Apart from by hiring people and investing in startups, there hasn’t been a profitable way to absorb this overflow of abilities.

Abetted by a bottomless bag of government loans and encouraged by rhetoric about the lifetime value of an education, more young people are investing more money in their education than ever before, only to find fewer places that will pay them to put their self-investment to use. If the college graduate working for minimum wage can’t shake the feeling she’s worth more, it’s because, in Becker’s equations, she technically is. 

These days, un- and underemployed young workers are an untapped battery of potential, a herd of half-milked cows competing for poorly paid jobs that often don’t give them a chance to use their skills to their full potential. Human capital contracts could prove a very successful solution, connecting investors who need something profitable to invest in with young people who need someone solvent to invest in them.

The money they get could turn into a business, a novel or just the time needed for a decent job search, all of which could yield dividends for the investors. Just imagine: If the markets work efficiently, every young person could access the financial support she needs to become her most productive self.

And because the economy needs it, because underemployment is a lose-lose situation for everyone and because every young American wants to feel like a first-round draft pick, it will feel normal.

We know how industrial finance behaves when it sinks its teeth into something with the investment potential that Upstart promises. Mortgage-backed securities went from an obscure financial instrument to a multitrillion-dollar market in less than a decade. The Ivy League early entrants into the human capital markets are establishing the prime rate, but investors won’t stop there, and subprime borrowers will have to offer more of themselves for longer periods to attract interest. Once the ball starts rolling, there’s no telling where it will stop. Before we know it, we’ll be living in a society where human capital trading is big business and a sizable portion of our young workers are partly owned by other people — at least the ones who can find buyers.

We will caution small children to think of their future price the same way we now tell them to think of college admissions. We will know exactly how much the markets think we’re worth, and which of our fellow human beings are worthless. We will create secondary markets. We will look at the upsides, the inspirational success stories, and we will rationalize the same ways people have always rationalized buying and selling each other. The ham-fisted sci-fi future of capitalism is clear because it’s already here; what’s not yet clear is the end.