The award of the Nobel prize for economics can capture a key moment in political economy. The award to Milton Friedman was the final seal of respectability for the monetarist account of inflation. The 1999 award to Robert Mundell raised topical questions about the euro. And the most recent award to James Heckman is another such moment. He is one of the world’s leading labour market economists, who has questioned the conventional wisdom about investing in human capital popularised in America by Robert Reich and in Britain by Gordon Brown. Heckman reaches his sceptical conclusions not on the basis of abstract theory but with the authority that comes from being the world’s foremost expert in the empirical evaluation of social programmes, especially in education, training, and welfare to work.

It has been an important part of New Labour’s political rhetoric to present their spending programmes as “investment.” Instead of Old Labour tax and spend we have New Labour investment in human capital. It is supposed to raise the economy’s growth rate without heavy-handed interventionism or Thatcherite deregulation. It is also supposed to tackle the international trend for a widening gap in the earnings of the unskilled and the highly skilled, not by redistributive taxation but by raising the earning capacity of the least well-off. As Tony Blair put it, “A better trained and educated population not only raises productivity and living standards. It helps reduce inequalities by giving people increased earnings power.” It is because this has become the conventional wisdom that the Nobel prize award to Heckman is so refreshing. He takes the political rhetoric at face value and appraises education and training schemes to see what returns they yield.

The evidence shows that returns to training and welfare to work schemes are much lower than claimed. But that is just the start. Heckman asks us to imagine that further education and training do indeed yield a very favourable rate of return-say, 10 per cent. In other words, imagine that every ?10,000 you spend educating or training someone over 16 yields an extra ?1,000 per year of earnings. How much do you then need to spend in order to achieve the reductions in inequality that are claimed to follow? I have replicated his methodology and applied it to Britain. One would have to secure an extra ?24 billion per year of income for the less well-qualified to restore the income differentials of 1979. Assuming a return of 10 per cent this means an investment in training of ?240 billion. It puts Labour’s ?4 billion New Deal into perspective.

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