Becker and Melamed on Human Capital and Financial Markets

If the U.S. economy is to make a full recovery and retain its economic leadership, human capital will play a big role. University of Chicago economist Gary Becker has studied the impact of human capital on businesses and economies more than anyone, and in fact, invented the idea.

In part one of our discussion with Becker and CME Group Chairman Emeritus Leo Melamed, Becker illustrated the popularity of the idea by telling us that “no politician can speak one sentence without mentioning human capital nowadays.”  In part two of our discussion, Becker and Melamed give their analysis of how human capital has affected the economic recovery, and how it can come back. They also discuss the importance of financial markets to an economy’s health, their online presence, and Becker’s Presidential Medal of Freedom.

Read Part one of our interview here.


In the current economic environment, what has happened to human capital?

Becker: On the one hand, since 2008 we’ve had a lot of unemployment.  Any economy can tolerate a lot of short-term unemployment.  So you’re out of work for a month.  Okay, you get another job.  That doesn’t really have any bad effects. Now, unfortunately, the U.S. Economy since 2008 has been stuck in a situation where roughly 40 percent of the unemployed are unemployed more than six months.

Human capital depreciates when it’s not being used. Let’s say you studied a language in college you never used again.  Now if I asked you speak that language, you wouldn’t know it. So I think there’s been a lot of loss in the labor market of people’s human capital for people who have been out of work.  That’s been one important loss as a result of the financial crisis.

Do you see human capital bouncing back? Either through job gains, or improved skills?

Becker: It’s bounced back slowly.  After the Great Depression, the economy eventually bounced back enough where it reached the level of GDP it would’ve reached if it had continued to grow at the rate it’d been growing before the depression. It didn’t just recover to the level of income in 1929.  It went way beyond that, so it went up this growth path.  We have been growing slowly and so we’re getting further and further behind what we call this path where we should be.  And that’s a very disturbing statistic.

Melamed: If you’re talking 2008 and 2009,  some of it has to do with technology.  Because a lot of jobs were displaced by technology. That didn’t cause the recession, but it’s an ongoing process.  So maybe it didn’t happen in 2008 specifically, but cumulatively, since the late 1990s, that is a process that’s been happening.  That isn’t an excuse, because you’re never going to get some of this back, and it’ll take human capital to get it back.  Without human innovation, you’re not gonna get those jobs back.

Becker: There’s no question a lot of jobs are moved abroad.  I would just add one thing to what you said, Leo.  The economies, if they’re running well, can create a lot of jobs.  The whole history of the last 150 years of U.S. and other parts of the world show that.

There have been various times when people have thought, “Well, we wouldn’t be able to create jobs.  There’s new technologies.  There’s the automobile,” et cetera.  Well, we create jobs.  When the economy isn’t running well, it’s very hard to recover those jobs.  And our economy has been limping along.

Melamed: Absolutely.  We experienced it at the Merc because  technology displaced a big broker community.  Okay, but guess what?  We created a whole community of proprietary traders,  high frequency traders and all kinds of technology jobs that had never existed before. That happened in our industry.


What role do financial markets play in the recovery from the financial crisis and the pattern of slower growth?

Melamed: Financial markets to me are the economic engine for a country. I’m very biased.  But, nevertheless I’m objective enough to know that over the course of the last 30 years, our industry in futures was an engine of all kinds of innovations that were used in markets everywhere, and of course, copied worldwide. And so, the financial markets are critically important in creating ideas and jobs. Those ideas create manufacturing jobs as well.  Without that, you really can’t make an idea work.

Becker: I agree.  Obviously financial markets are central to any modern economy and efficient functioning of a modern economy, and make the modern economy go.  You take it away, and the economy will collapse.

If we don’t have healthy financial markets, we don’t have a healthy economy no matter how much human capital we have, no matter how much other stuff we have.  We won’t have a healthy economy.  Won’t have the innovation.  We won’t have the new enterprises that are important.


Let’s talk about your online presence.  Gary, you started the popular Becker-Posner blog before blogging was popular. How important is that format for you in sharing your ideas?

Becker: I wrote a monthly column for Business Week for 19 years.  And finally, they terminated me. The magazine got terminated too not long after that. Then I figured, ‘Well, I got used to writing for a popular media.’  It was really great practice.  I mean, before I wrote for Business Week, I hadn’t written one word for a popular audience. Not one word.  I had been as  ivory tower as ivory tower economists get.

I’m not a high-tech guy, but I knew about blogging.  I contacted my good friend, Dick Posner.  And I said, ‘Dick, why don’t we start a blog.  And the way we’ll do it is, you know, we each write a position discuss it back and forth, and we’ll change topics every week.’ And basically, we worked out the format together.  And we haven’t changed since then. It’s been pretty successful.  We’ve differed a lot, (laughs) particularly on this recession.  But it’s good when you’re differing some.

I enjoy doing it.  I can’t say I enjoy it all the time.  Anybody who does writing knows writing is hard.  And while I’ve become a pretty good writer, I can write pretty quickly still, it’s a chore.  I’m teaching fulltime. I’m doing a lot. And it gives me ideas sometimes for research, and sometimes I’ll develop it into an op-ed for the Wall Street Journal, or some other news media.


Leo, you’ve also compiled a lot of your ideas on your website.  How did that come about for you, and what’s been the feedback?

Melamed: When I write an essay, I use it as a speech later.  But I write the essay first, and then take from it what I need for the speech. So it’s the writing of the essay that counted.  And one day, in 1996, Milton Friedman was staying at our house in Arizona for the weekend with his wife Rose.

And he says to me, ‘Let’s look at your website.’  I said—‘What website? (laughs) I don’t have a website.’  So he said, ‘What do you mean you don’t have a website?  I’ve been reading all these remarks you make, all these essays you send me.  And I know you’ve got tons of them.  Put it on a website.’  I said, ‘They’re gonna plagiarize them.’  He says,’Exactly.  That’s what you want.  You want your ideas to go out there.’(laughs).  You know, I had never thought of it that way. ‘Exactly,’ he said.  “Let them do that. Get those ideas to work.’  And as soon as he left I started that.  Fortunately, I saved my writings, and it was not that hard. And I get a lot of compliments from it, a lot of new readers.

Melamed: I have one question for Gary before we depart.  Is there any story about the Medal of Freedom, the highest award any non-military or a citizen can get. What can you tell us about that?

Becker: I hold that award very high, naturally.  George W. Bush gave it to me.  I felt really honored that I was selected.  There’re very few economists who’ve won the Nobel Prize, the Presidential Medal of Freedom, and the Medal of Science:  Milton Friedman, myself. maybe there’s another one, not many. I was in pretty distinguished company.  So it’s a great award.



Evan Peterson is director of corporate marketing at CME Group and managing editor of OpenMarkets.

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