Human capital

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Human capital, in its economic application, refers chiefly to the store of knowledge and skill substantiated in the population of the economy of a particular territory. The term refers to the individuals who by virtue of their education, training and experience form an important part of the production machinery, thus contributing to the economy of the country.

Contents

Supporters

The term human capital was invented during 1960s by noted economist Theodore Schultz. Theodore Schultz had an opinion that human capital was similar to any other form of capital. He opined that it one could invest in human capital by way of education and other enhanced benefits like training. This, he believed, would have a positive effect on level and quality of production.

Heinz Kremer considered human capital as an integral part of the fixed capital. The economist Adam Smith defines human capital as follows: The greatest improvement in the productive powers of labor, and the greater part of the skill, dexterity, and judgment with which it is any where directed, or applied, seem to have been the effects of the division of labor.

Economist Isaac Ehrlich is a contemporary proponent of human capital. He has founded the Journal of Human Capital under the University of Chicago Press and the Center of Excellence on Human Capital at the University at Buffalo in New York.

Mathematical explanation

Let A = learning technology
Let H0 = physical endowment or raw labor (this is endogenous or inherent)
Let ht = investment in human capital by current generation in future generations

Ht+1 = Human capital today
ht+1 = A (H0 + Ht+1) Ht+1

Human capital increases as current generations invest in the learning of future generations. This will build on the endogenous abilities these new generations will inherently have. The more this investment is made, the greater h will be. Knowledge tomorrow is a linear function of it tomorrow. It builds on itself.

Knowledge is the only asset that is not subject to the law of diminishing returns. Knowledge is transferable and education increases the chances of future generations to learn new things. Modern, affluent families often sacrifice quantity of children for quality, as opposed to the times of before the Industrial Revolution and Malthus when a woman would bear as many children as her fertile years would permit. Moreover, in the past, more children led to more prosperity (help in a farm, more labor) but today it means much higher expenses, especially in education.

The following formula illustrates continuous growth education based on the magnitude of h. 

Ht+1/Ht = 1 + g = AH0ht/Ht+Aht

This formula tells you that you cannot take growth for granted.

Factors that affect h

  1. Family partnership: This is the most intimate link across overlapping generations. The roles of altruism, old-age insurance, and longevity are important. Parents substitute quantity of children for quality, unlike in the past.
  2. Firms: Overlapping generations of workers linked by owners' interests. They play a critical role of investing in entrepreneurial capacity.
  3. Government: Encouragement of a competitive and open economy led by the private sector. The rule of law and protection of intellectual property rights are essential, as are avoiding over-regulation and bureaucratic intervention in private enterprise. Public subsidization of schooling (especially at the tertiary level) is critical. Governments must also design pro-growth policies.

Concepts related to human capital

  • Assets
  • Intangible assets
  • Capital
  • Kaizen
  • Capital appreciation
  • Man-years
  • Economics
  • Productivity
  • Endogenous growth theory
  • Social capital

Human development index

It is a summary measure of human development published by United Nations Development Programme (UNDP).

Assets

Assets are resources that have an economic value. They are owned by an entity like an individual, country or a corporation with an expectation of drawing financial benefits from it. In accounting terms an asset is an owned item in balance sheet of a particular company.

Capital

In economics capital is defined as financial assets. It is also defined as financial worth of assets like cash for example. Factories, equipments and other machines owned by a particular business establishment are also regarded as capital in economics.

See Also

Further reading

References

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