Human capital

Human capital is a way of defining and categorizing peoples' skills and abilities as used in employment and as they otherwise contribute to the economy. Many early economic theories refer to it simply as labour, one of three factors of production, and consider it to be a commodity -- homogeneous and easily interchangeable. Other conceptions of labor are more sophisticated.

Origin of concept

The term human capital was first discussed by Pigou: "There is such a thing as investment in human capital as well as investment in material capital. So soon as this is recognised, the distinction between economy in consumption and economy in investment becomes blurred. For, up to a point, consumption is investment in personal productive capacity. This is specially important in connection with children: to reduce unduly expenditure on their consumption may greatly lower their efficiency in after-life. Even for adults, after we have descended a certain distance along the scale of wealth, so that we are beyond the region of luxuries and "unnecessary" comforts, a check to personal consumption is also a check to investment (Pigou, 1928, "A Study in Public Finance", p. 29).

The use of the term in the modern neoclassical economic literature dates back to Jacob Mincer's pioneering article "Investment in Human Capital and Personal Income Distribution" in The Journal of Political Economy in 1958. The best-known application of the idea of "human capital" in economics is that of Mincer and Gary Becker of the Chicago school. Becker's book entitled Human Capital, published in 1964, became a standard reference for many years. In this view, human capital is similar to "physical means of production", e.g., factories and machines: one can invest in human capital (via education, training, medical treatment) and one's income depends partly on the rate of return on the human capital one owns. Thus, human capital is a stock of assets one owns, which allows one to receive a flow of income, which is like interest earned. Human capital is substitutable: it will not replace land, labor, or capital totally, but it can be substituted for them to various degrees and be included as a separate variable in a production function.

Knowledge and capital

The introduction of the term is explained and justified by the unique characteristics of knowledge. Unlike physical labor (and the other factors of production), knowledge is:

Expandable and self generating with use: as doctors get more experience, their knowledge base will increase, as will their endowment of human capital. The economics of scarcity is replaced by the economics of self-generation.
Transportable and shareable: knowledge is easily moved and shared. This transfer does not prevent its use by the original holder. However, the transfer of knowledge may reduce its scarcity-value to its original possessor.

Human capital and labor power

In some way, the idea of "human capital" is similar to Karl Marx's concept of labor power: to him, under capitalism workers had to sell their labor-power in order to receive income (wages and salaries). But long before Mincer or Becker wrote, Marx pointed to "two disagreeably frustrating facts" with theories that equate wages or salaries with the interest on human capital.

The worker must actually work, exert his or her mind and body, to earn this "interest." Marx strongly distinguished between one's capacity to work (labor-power) and one's very human activity (practice) of working.
A free worker cannot sell human capital to receive money revenues; it's far from being fungible, a liquid asset. Even a slave, whose human capital can be sold, does not earn an income him- or herself; instead, the slave-owner gets the income. Under capitalism, to earn income, a worker must agree to the labor conditions (including obedience to the rules and directives) of an employer who wants to hire for a specific period of time.

The latter means that the employer must be receiving an adequate rate of profit from his or her operations, so that workers must be producing surplus-value, i.e., doing work beyond that necessary to maintain their labor power. (See Capital, volume III, ch. 29^*, pp. 465-6 of the International Publishers edition.) Though having "human capital" gives workers some benefits, they are still dependent on the owners of non-human wealth for their livelihood.

The term appears in Marx's article in the New-York Daily Tribune article "The Emancipation Question," January 17 and 22, 1859.^*

Debates about the concept

Modern labor economics has criticized the simple Chicago-school theory that tries to explain all differences in wages and salaries in terms of human capital. The concept of human capital can be infinitely elastic, including unmeasureable variables such as personal character or connections with insiders (via family or fraternity). This allows the theory to be tautologically true without explaining anything. Often, it is not the education or training that one has which determines the value of one's education, but the prestige of the credential or degree received. Someone who gets a degree from an elite school will likely get a higher income than one from a large government-funded one, even if they have exactly the same knowledge.

Others point to the existence of market imperfections (which are especially rampant in labor markets) that imply the existence of non-competing groups or labor-market segmentation. In these theories, the "return on human capital" differs between different labor-market segments. Similarly, discrimination against minority or female employees imply different rates of return on human capital.

Following Becker, the human capital literature often distinguishes between "specific" and "general" human capital. Specific human capital refers to skills or knowledge that is useful only to a single employer (and who will likely be willing to pay for it), whereas general human capital (such as literacy) is useful to all employers.

Other analysis, for instance in human development theory, differentiate social trust (social capital), shareable knowledge (instructional capital), and the individual leadership and creativity (individual capital) as three distinct capacities of a human applying him or her self in economic activity. The term human capital in human development theory, thus refers to ambiguous combinations of these. Interactions with the welfare, education and health care systems can be modelled even past retirement (whereas, according to classical and neoclassical analysis, human capital would be zero, as no "labour", "employment" or "goods" are now involved).

Mobility between nations

There is a global debate regarding the fair distribution of human capital. This is most pointed with respect to educated individuals, who typically migrate from poorer places to richer places seeking opportunity, making 'the rich richer and the poor poorer'. When workers migrate, generally, their early care and education now benefit the country where they move to work. And, when they have health problems or retire, their care and retirement pension will typically be paid in the new country.

African nations have invoked this argument with respect to slavery, other colonized peoples have invoked it with respect to the "brain drain" or "human capital flight" which occurs when the most talented individuals (those with the most individual capital) depart for education or opportunity to the colonizing country (historically, Britain and France and the U.S.A.). Even in Canada and other developed nations, the loss of human capital is considered a problem that can only be offset by further draws on the human capital of poorer nations via immigration.

The rights of individuals to travel and opportunity, despite some historical exceptions such as the Soviet bloc and its "Iron Curtain", seem to consistently outweigh the rights of nation-states that nurture and educate them. Thus, the problem continues, and developed nations deny reparations are appropriate, necessary, or effective, as developing nations lose their talent.

This debate resembles, in form, that regarding natural capital.

Human capital determination

At the Intellectual Capital Statement we understand all qualifications, knowledge and experience, potential of innovation and talents and also the knowledge of employees and managers, all kind of brains of a company. By these factors all kind of information, ideas and innovation are combined creatively to optimize all kind of achievement for the customers and therefore optimize company success. To Human Capital we add also all company´s values, culture and philosophy.

The increase of human capital starts at two points. On the one hand there is to increase the employee´s knowledge and qualifications, which are essential for his job. On the other hand there is the company, which has to be stimulated, to use more of the employees`knowledge to be successful.

The VIC (Vocational Intellectual Capital) shows in this connection that not any kind of knowledge is useful for a company and is able to be increase the company´s value. The part of knowledge useful for the company can be influenced and can be increased. At the VIC – the intellectual capital statement there the focus will be laid on the employees with the largest success potential. If this is not fully optimized, investments in these people has to be evaluated by educational and training measures. So it refers on the one hand to the optimized use of the present ability for achievement, on the other to investments for developing potentials, this means long term future qualifications by building up present hidden abilities but also building up new qualifications. The return of investment or orientation to value addition stands also on the top by the definition of VIC – in comparisonto resources orientated or cost oriented VIC. This means that all entrepreneurical decisions are focusing on usage and value addition. This, however, is valid for investments in the human capital. The possibilites, which arise therefore, are that besides the costs for these measures also the usage can be figurized, and the value addition can be measured, whereas the quantification of the deficits presents here a clear factor for all stakeholders.

See German Sample:

Sample PDF

External links

The Human Capital Institute
Journal of Performance Management
New papers and articles on human Capital, a free Newsletter edited by the RePEc academic Project
http://www.osce.org/documents/eea/2005/05/14497_en.pdf

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