Human capital or human assets is a concept used by economists to designate personal attributes considered useful in the production process. It encompasses employee knowledge, skills, know-how, good health, and education. Human capital has a substantial impact on individual earnings. Research indicates that human capital investments have high economic returns throughout childhood and young adulthood.
Companies can invest in human capital; for example, through education and training, improving levels of quality and production.
History
Adam Smith included in his definition of capital "the acquired and useful abilities of all the inhabitants or members of the society". The first use of the term "human capital" may be by Irving Fisher. An early discussion with the phrase "human capital" was from Arthur Cecil Pigou:
But the term only found widespread use in economics after its popularization by economists of the Chicago School, in particular Gary Becker, Jacob Mincer, and Theodore Schultz.
The early 20th century Austrian sociologist Rudolf Goldscheid's theory of organic capital and the human economy also served as a precedent for later concepts of human capital.
The use of the term in the modern neoclassical economic literature dates back to Jacob Mincer's article "Investment in Human Capital and Personal Income Distribution" in the Journal of Political Economy in 1958. Then Theodore Schultz also contributed to the development of the subject matter. The best-known application of the idea of "human capital" in economics is that of Mincer and Gary Becker. 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 outputs depend partly on the rate of return on the human capital one owns. Thus, human capital is a means of production, into which additional investment yields additional output. Human capital is substitutable, but not transferable like land, labor, or fixed capital.
Some contemporary growth theories see human capital as an important economic growth factor. Further research shows the relevance of education for the economic welfare of people.
Adam Smith defined four types of fixed capital (which is characterized as that which affords a revenue or profit without circulating or changing masters). The four types were: useful machines, instruments of the trade; buildings as the means of procuring revenue; improvements of land; the acquired and useful abilities of all the inhabitants or members of the society. Smith defined human capital as follows:
Fourthly, of the acquired and useful abilities of all the inhabitants or members of the society. The acquisition of such talents, by the maintenance of the acquirer during his education, study, or apprenticeship, always costs a real expense, which is a capital fixed and realized, as it were, in his person. Those talents, as they make a part of his fortune, so do they likewise that of the society to which he belongs. The improved dexterity of a workman may be considered in the same light as a machine or instrument of trade which facilitates and abridges labor, and which, though it costs a certain expense, repays that expense with a profit.
Therefore, Smith argued, the productive power of labor are both dependent on the division of labor:
The greatest improvement in the productive powers of labour, and the greater part of the skill, dexterity, and judgement with which it is any where directed, or applied, seem to have been the effects of the division of labour.
There is a complex relationship between the division of labor and human capital.
In the 1990s, the concept of human capital was extended to include natural abilities, physical fitness and healthiness, which are crucial for an individual's success in acquiring knowledge and skills.
As a result of his conceptualization and modeling work using Human Capital as a key factor, the 2018 Nobel Prize for Economics was jointly awarded to Paul Romer, who founded the modern innovation-driven approach to understanding economic growth.