Economic Theory on Human Capital Discounted Cash Flow

The expected future flow we discount to present value, allowing for transfers too, is exhaust plus transfer out less transfer in. This net difference is called cash flow. That is, cash flow = exhaust + transfer out - transfer in. (3.2) That’s the logic behind the present value rule interpreting capital as discounted cash flow. Human cash flow may not be defined in those words anywhere but in this book. But the flow discounted to find human capital is understood everywhere, | think, as pay less what Schultz called pure investment and | call invested consumption. | defended this idea in my analogy between human capital and the firm. Thus | endorse the tradition that human capital is pay less invested consumption discounted to present value. That is, human cash flow = pay - invested consumption. It turns out that this is not logical certitude, or an inference from axioms already given, and so it is not strictly part of the foundations. | will defend it in later chapters. The great convenience of the present value rule and its application to human capital is that it allows the factors to be added as a dollar sum. That helps in understanding the total return rule. That rule begins with the truism that growth of anything is internal creation plus flow passed in less flow passed out. That shows as growth = creation + flow passed out - flow passed in. (3.3) Chapter 3: Foundations 1/11/16 11 HOUSE_OVERSIGHT_010982