Human Capital Theory

Human capital is a concept used by social scientists 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, enabling improved levels of quality and production.

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.

In the recent literature, the new concept of task-specific human capital was coined in 2004 by Robert Gibbons, an economist at MIT, and Michael Waldman, an economist at Cornell University. The concept emphasizes that in many cases, human capital is accumulated specific to the nature of the task (or, skills required for the task), and the human capital accumulated for the task are valuable to many firms requiring the transferable skills. This concept can be applied to job-assignment, wage dynamics, tournament, promotion dynamics inside firms, etc.

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.

Background

''Human capital'' in a broad sense is a collection of activities – all the knowledge, skills, abilities, experience, intelligence, training and competences possessed individually and collectively by individuals in a population. These resources are the total capacity of the people that represents a form of wealth that can be directed to accomplish the goals of the nation or state or a portion thereof. The human capital is further distributed into three kinds;
(1) Knowledge Capital
(2) Social Capital
(3
Emotional Capital

Many theories explicitly connect investment in human capital development to education, and the role of human capital in economic development, productivity growth, and innovation has frequently been cited as a justification for government subsidies for education and job skills training.

It was assumed in early economic theories, reflecting the context – i.e., the secondary sector of the economy was producing much more than the tertiary sector was able to produce at the time in most countries – to be a fungible resource, homogeneous, and easily interchangeable, and it was referred to simply as workforce or labor, one of three factors of production (the others being land, and assumed-interchangeable assets of money and physical equipment). Just as land became recognized as natural capital and an asset in itself, human factors of production were raised from this simple mechanistic analysis to human capital. In modern technical financial analysis, the term "balanced growth" refers to the goal of equal growth of both aggregate human capabilities and physical assets that produce goods and services.

The assumption that labor or workforces could be easily modelled in aggregate began to be challenged in 1950s when the tertiary sector, which demanded creativity, begun to produce more than the secondary sector was producing at the time in the most developed countries in the world. Accordingly, much more attention was paid to factors that led to success versus failure where human management was concerned. The role of leadership, talent, even celebrity was explored.

Today, most theories attempt to break down human capital into one or more components for analysisPaolo Magrassi (2002) "A Taxonomy of Intellectual Capital", Research Note COM-17-1985, Gartner Most commonly, Emotional capital is the set of resources (the personal and social emotional competencies) that is inherent to the person, useful for personal, professional and organizational development, and participates to social cohesion and has personal, economic and social returns (Gendron, 2004, 2008). Social capital, the sum of social bonds and relationships, has come to be recognized, along with many synonyms such as goodwill or brand value or social cohesion or social resilience and related concepts like celebrity or fame, as distinct from the talent that an individual (such as an athlete has uniquely) has developed that cannot be passed on to others regardless of effort, and those aspects that can be transferred or taught: instructional capital. Less commonly, some analyses conflate good instructions for health with health itself, or good knowledge management habits or systems with the instructions they compile and manage, or the "intellectual capital" of teams – a reflection of their social and instructional capacities, with some assumptions about their individual uniqueness in the context in which they work. In general these analyses acknowledge that individual trained bodies, teachable ideas or skills, and social influence or persuasion power, are different.

Management accounting is often concerned with questions of how to model human beings as a capital asset. However it is broken down or defined,
human capital is vitally important for an organization's success (Crook et al., 2011); human capital increases through education and experience. Human capital is also important for the success of cities and regions: a 2012 study examined how the production of university degrees and R&D activities of educational institutions are related to the human capital of metropolitan areas in which they are located.

In 2010, the OECD (the Organization of Economic Co-operation and Development) encouraged the governments of advanced economies to embrace policies to increase innovation and knowledge in products and services as an economical path to continued prosperity. International policies also often address human capital flight, which is the loss of talented or trained persons from a country that invested in them, to another country which benefits from their arrival without investing in them.

Measurement of human capital

World Economic Forum Global Human Capital Index

Since 2012 the World Economic Forum has annually published its Global Human Capital Report, which includes the Global Human Capital Index (GHCI). In the 2017 edition, 130 countries are ranked from 0 (worst) to 100 (best) according to the quality of their investments in human capital. Norway is at the top, with 77.12.

World Bank Human Capital Index

In October 2018, the World Bank published the Human Capital Index (HCI) as a measurement of economic success. The Index ranks countries according to how much is invested in education and health care for young people. The World Bank's 2019 World Development Report on ''The Changing Nature of Work'' showcases the Index and explains its importance given the impact of technology on labor markets and the future of work. One of the central innovations of the World Bank Human Capital Index was the inclusion and harmonization of learning data across 164 countries. This introduced a measure of human capital which directly accounts for the knowledge and skills acquired from schooling, rather than using schooling alone, now widely recognized to be an incomplete proxy. The learning outcomes data, methodology, and applications to the human capital literature underlying this effort were published in ''Nature''.

;Human Capital Index ranking (top 50 countries)

Other methods

A new measure of expected human capital calculated for 195 countries from 1990 to 2016 and defined for each birth cohort as the expected years lived from age 20 to 64 years and adjusted for educational attainment, learning or education quality, and functional health status was published by ''The Lancet'' in September 2018. Finland had the highest level of expected human capital: 28·4 health, education, and learning-adjusted expected years lived between age 20 and 64 years. Niger

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