In its most basic sense, “human capital” refers to the group of people who work for or are qualified to work for an organization—the “workforce.” In a larger sense, the various elements needed to create an adequate supply of available labor form the basis of human capital theory and are critical to the economic and social health of the world’s nations.
Key Takeaways: Human Capital
- Human capital is the sum of knowledge, skills, experience and social qualities that contribute to a person’s ability to perform work in a manner that produces economic value
- Both employers and employees make substantial investments in the development of human capital
- Human capital theory is an effort to quantify the true value of an investment in human capital and is closely related to the field of human resources
- Education and health are key qualities that improve human capital and also directly contribute to economic growth
- The concept of human capital can be traced back to the 18th-century writings of Scottish economist and philosopher Adam Smith
Human Capital Definition
In economics, “capital” refers to all of the assets a business needs to produce the goods and services it sells. In this sense, capital includes equipment, land, buildings, money, and, of course, people—human capital.
In a deeper sense, however, human capital is more than simply the physical labor of the people who work for an organization. It is the entire set of intangible qualities those people bring to the organization that might help it succeed. A few of these include education, skill, experience, creativity, personality, good health, and moral character.
In the long run, when employers and employees make a shared investment in the development of human capital, not only do organizations, their employees, and clientele benefit, but so does society at large. For example, few undereducated societies thrive in the new global economy.
For employers, investing in human capital involves commitments like worker training, apprenticeship programs, educational bonuses and benefits, family assistance, and funding college scholarships. For employees, obtaining an education is the most obvious investment in human capital. Neither employers nor employees have any assurances that their investments in human capital will pay off. For example, even people with college degrees struggle to get jobs during an economic depression, and employers might train employees, only to see them hired away by another company.
Ultimately, the level of investment in human capital is directly related to both economic and societal health.
Human Capital Theory
Human capital theory holds that it is possible to quantify the value of these investments to employees, employers, and society as a whole. According to human capital theory, an adequate investment in people will result in a growing economy. For example, some countries offer their people a free college education out of a realization that a more highly educated populace tends to earn more and spend more, thus stimulating the economy. In the field of business administration, human capital theory is an extension of human resources management.
The idea of human capital theory is often credited to the “founding father of economics” Adam Smith, who in 1776, called it “the acquired and useful abilities of all the inhabitants or members of the society.” Smith suggested that differences in wages paid were based on the relative ease or difficulty of doing the jobs involved.
Marxist Theory
In 1859, Prussian philosopher Karl Marx, calling it “labor power,” suggested the idea of human capital by asserting that in capitalist systems, people sell their labor power—human capital—in return for income. In contrast to Smith and other earlier economists, Marx pointed to “two disagreeably frustrating facts” about human capital theory:
- Workers must actually work—apply their minds and bodies—in order to earn income. The mere ability to do a job is not the same as actually doing it.
- Workers cannot “sell” their human capital as they might sell their homes or land. Instead, they enter into mutually beneficial contracts with employers to use their skills in return for wages, much in the same way farmers sell their crops.
Marx further argued that in order for this human capital contract to work, employers must realize a net profit. In other words, workers must do work at a level above-and-beyond that needed to simply maintain their potential labor power. When, for example, labor costs exceed revenue, the human capital contract is failing.
In addition, Marx explained the difference between human capital and enslavement. Unlike free workers, enslaved people—human capital—can be sold, although they do not earn incomes themselves.
Modern Theory
Today, human capital theory is often further dissected in order to quantify components known as “intangibles” such as cultural capital, social capital, and intellectual capital.
Cultural Capital
Cultural capital is the combination of knowledge and intellectual skills that enhance a person’s ability to achieve a higher social status or to do economically useful work. In an economic sense, advanced education, job-specific training, and innate talents are typical ways in which people build cultural capital in anticipation of earning higher wages.
Social Capital
Social capital refers to beneficial social relationships developed over time such as a company’s goodwill and brand recognition, key elements of sensory psychological marketing. Social capital is distinct from human assets like fame or charisma, which cannot be taught or transferred to others in the way skills and knowledge can.
Intellectual Capital
Intellectual capital is the highly intangible value of the sum of everything everybody in a business knows that gives the business a competitive advantage. One common example is the intellectual property—creations of the workers’ minds, like inventions, and works of art and literature. Unlike the human capital assets of skill and education, intellectual capital remains with the company even after the workers have left, typically protected by patent and copyright laws and non-disclosure agreements signed by employees.
Human Capital in Today's World Economy
As history and experience have shown, economic progress is the key to raising the standard of living and dignity of people worldwide, especially for people living in impoverished and developing countries.
The qualities that contribute to human capital, particularly education and health—also directly contribute to economic growth. Countries that suffer from limited or unequal access to health or educational resources also suffer from depressed economies.
As in the United States, the countries with the most successful economies have continued to increase their investments in higher education, while still seeing a steady increase in the starting salary of college graduates. Indeed, the first step most developing countries take to advance is to improve the health and education of their people. Since the end of World War II, the Asian nations of Japan, South Korea, and China have used this strategy to eliminate poverty and become some of the world’s most powerful players in the global economy.
Hoping to emphasize the importance of education and health resources, the World Bank publishes an annual Human Capital Index Map demonstrating how access to education and health resources affect the productivity, prosperity, and quality of life in nations worldwide.
In October 2018, Jim Yong Kim, president of the World Bank, warned, “In countries with the lowest human capital investments today, our analysis suggests that the workforce of the future will only be one-third to one-half as productive as it could be if people enjoyed full health and received a high-quality education.”
Sources and References
- Goldin, Claudia (2014). Human Capital, Department of Economics, Harvard University and National Bureau of Economic Research.
- Smith, Adam (1776). An Inquiry into the Nature and Causes of the Wealth of Nations. Copyright 2007 MetaLibre.
- Marx, Karl. The Buying and Selling of Labour-Power: Chapter 6. marxists.org
- World Development Report 2019: The Changing Nature of Work. World Bank
