The 09ers

Now that I have graduated college I have been blessed with the fantastic gift of a ginormous pile of debt.  Lately, this burden has brought me a large amount of anxiety and I'm almost positive it is actually interfering with my productive labor. It's a strain on my own mental health to be constantly worrying about repayment.

For the past couple months I have been doing some thinking around a new type of investment vehicle. I'm calling it investment in human capital. I have to be honest in saying that I have done very little real research on this topic, and maybe some sort of derivative of this already exists. However, to my knowledge, I have never seen or heard of anything remotely close to what I am proposing, and for all I know, maybe for a very good reason.

So how would something like this work? What the hell does investment in human capital even mean?  I'm going to use myself as the "human capital" that will seek investment for this thought experiment. I'm going to further define  "investment in human capital" as the act of exchanging capital for a percentage of all potential productive wealth from labor in hopes of a greater return. In other words, if an investor believes that my lifetime productivity were to return[1] him a greater value of his initial investment, and I, the store of human capital, prefers capital now rather then later, we would both agree to such an exchange.

He [a consumer] buys because he believes that to acquire the merchandise in question will satisfy him better than keeping the money or spending it for something else.  -Mises. The Ultimate Foundation of Economic Science p76

First of all, for me to be seeking such an exchange in the first place it means that my marginal willingness to pay for relief from debt now, rather then later will be higher. In fact, my real willingness to pay, would be a number well over the principle + interest of my current debt. My next step would to seek investment, much like a firm does for venture capital. I would literally give them my pitch. This would be a process of due diligence between the firm and myself. Since there is a significant amount of imperfect information prior to this meeting(s), this process of getting to know each other would be a an opportunity for the investing party to get a better idea of my character. Even with a simple set of facts, the investor could probably quickly come up with a term sheet. I could imagine simply plugging in some facts about my height, education, weight, birth place, and looks into a statistical model that could spit out the appropriate profit-making magic numbers. I would guess that even more prevalent would be the process where successful investors would mix in some of their own "secret sauce". Like many companies, it's not always a black and white process understanding which firm is going to give you a 10x return on your investment.  Some investors may simply just have a hunch! Depending on how risk averse the investor or firm is, they may believe that they know what sort of special characteristics in finding the individuals with highest return.

I think it is also important to realize these investments don't have to be exclusively about debt recovery. Perhaps some individuals have, what they believe, the next huge business idea. Do not confuse an investment in human capital as the same function of a loan. They are two very different tools with two extremely different incentive structures. An investor in human capital would have long term fiduciary incentives to promote the success of the individual where a lender is only concerned about the return of his principal and interest. The objectives of both parties align in their own self interest. There is of course always the risk that the human capital takes a trip to Europe for a soul searching session and comes back to forever retire his labor and becomes a street performer. (Although I hear they do pretty well) It is also true that the individual does not have the urge to default, since his repayment is always a proportion of his income and he will face the same financial burden as the investor. Even with such aligned incentive structures problems may arise such as the most obvious, death. Like with all matters of uncertainty in trade, the market has provided signaling through the price system and produced products and services to account for such risk. Even more interesting then these differences in incentive structures is the difference in time horizons. When a self-employed entrepreneur seeks capital through debt financing, or venture capital, the focus is completely on the near term success of the company, not the individual. Although an individual may seek human capital investment for a particular business idea, the investor is much more concerned about the individuals long term success, and will probably be less interested in immediate success.

Lets say after a few months of talking to "SuccessStartsWithUs.com" they are ready to offer me a term sheet. During these months I gave them my school transcripts, my grandmas phone number, my favorite type of scotch, and my favorite dance move. I knew from the beginning that the process with this firm was going to be an arduous process, especially since this firms usually makes well informed decisions for "home run" investments. Sure, I could have gone for firms who have a 5min process, but I was willing to spend time and reveal a lot more of myself so they could get a better understanding of my potential life long value of labor. As the market usually provides choices for consumes, we could assume that various types of investments in human capital would take place.

Let us now imagine that the investment company or individual has offered me a term sheet of $77,334 in exchange for 1.234% of all my earned income until death. At this point it is difficult to say exactly how the exchange contract will look. My guess is that there would have to an extremely transparent payment with low overhead. There would need to be a system set up that would allow the human capital to pay his investors quickly and easily, or perhaps automatically. There also needs to be an efficient way for the investor to know that the human capital is not committing fraud by hiding income. I imagine that these services could free ride off the god awful service of the current IRS administration. My guess is that it would not suffice and entire services would arise to assist in lowering the costs of such transactions.

I know there will some of you screaming something absurd like "slavery!" or "feudalism" which only proves how ignorant you really are. I'm also certain there are a bunch of you moaning "Zomg! That is a rip off! $77,334 for 1.234% for life is a crime, and people would just take advantage of someone in an irrational state." Shame on you. Just because it is a subjectively bad deal for you doesn't mean it is for the person making the exchange. I don't know whats more absurd, you, some white rich power-tripping bureaucrat looking out for the irrational, or you, the individual that gives 40% of your entire earned income while gleefully listening to all things considered talking about the next bailout. If you were so concerned for the poor, stop raping them and the generations to come before you start regulating exchange.

Again, let us remind ourselves.

In a game there are winners and losers. But a business deal is always advantageous for both parties. If both the buyer and the seller were not to consider the transaction as the most advantageous action they could choose under the prevailing conditions, they would not enter into the deal. -Mises.The Ultimate Foundation of Economic Science p90

Buyers remorse happens to us all, but these things are always considered at purchase time. We act in order to lessen our displeasure. If we later find that we have miscalculated the magnitude of this outcome, or our own preferences change, it is invalid to suggest that the purchase was irrational. In making such arguments, we fail to recognize the opportunity cost of not acting. What was the next best alternative of not making the exchange. Buyers remorse has nothing to do with fraud. When you make an exchange, and someone commits a crime, the feeling of disappointment (anger, sadness, etc etc) is not buyers remorse. It's a crime, and you are a victim.

[1] That "return" doesn't have to come in the form of money, eg. altruism