They are educated people who will do what it takes to create wealth in the knowledge economy. A country that invests in its human capital grows faster, strengthens its political and economic institutions, competes better in the global market and improves the quality of life in general. The idea of using the capital markets to finance individuals’ education, which previously existed only as an academic exercise, is close to becoming reality. The concept of creating funds that invest in individuals instead of businesses is not new. In the 18th century John Locke and Adam Smith explored the idea that talent, although intangible, could create economic value just like tangible assets. In 1955, Milton Friedman took the idea further to propose risk investment in students in lieu of student loans. He said that loans were not adequate for risk investments such as education because the rates would be too high to offset the risk. Friedman said that private financing for education would be feasible if investors could share in the student’s economic success in the same way that they invest in a company- by legally acquiring a share or a shareholder’s percentage in the student’s future income (once he or she had graduated and for a specific period of time).
Research on the legal framework and financial model that could make this powerful innovation a reality in the capital markets has been conducted by the Batten Institute of the University of Virginia since 2004. This effort is led by two Latin Americans, Miguel Palacios and Felipe Vergara, founders of Lumni. I had the pleasure of meeting Felipe in 2004 during the IDB Congress in Lima.
His research is impressive and constitutes real innovation that is as powerful as what private pension funds meant in the 90´s. Friedman also proposed this concept (private pension funds) and Chile took the lead in promoting and implementing it, which now has global reach. Miguel and Felipe through Lumni Inc are currently exploring implementing this other old Friedman´s idea (human capital-education markets) which will eventually unlock the enormous potential possessed by a country’s people. This idea is as daring and innovative as a concept that emerged in 1994 when I was living in London.
On this occasion I was told about a Cuban American who wanted to sell books on the internet and was looking for investors (Amazon). Many people thought that this man was crazy and found his concept farfetched. I believe that with this idea (markets for human capital), we may be on the brink of something similar to Amazon and the private pension funds in Chile. The positive social and economic implications will be enormous.