Human Capital
Introduction
Human capital refers to the accumulated skills and talents that a person learns in order to increase his or her success in life. Your human capital consists of what you’ve learned in school, and what you’ve learned via your family upbringing that may have taught you values such as the importance of showing up on time for work or finishing what you begin, and what you’ve learned from any on-the-job training you’ve received, and how you may have learned to get the most from your singing voice or your sprinting skills, and even from whatever you’ve been reading or thinking about regarding what you want to do in life that you may not yet have put into practice. Your human capital includes your unique genetic predispositions or endowments that make you special, as well as the unique ways your brain and body have developed or learned over your lifetime to adapt to circumstances.
Many people see the word “capital” and immediately think it must have something to do with the stock market or perhaps with finding funding to help start up a business. In fact, to economists, the word “capital” or “capital goods” or “physical capital” has nothing to do with the stock market or financial matters. Capital means anything that persists over time. Examples of capital include a perennial plant such as an apple tree or the seeds saved till the following year to plant tomatoes or corn or a new peach tree, a non-perishable item such as a hammer, or the building in which you live or work. Financial assets you hold title to in the stock market do also persist over time–so they are also a part of your “capital”. All these items last–persist–over time. By contrast, things that are used up in a short period of time–say, within a few days, months, or a year–are called “consumption goods.” Examples of consumption goods are the apples or tomatoes or corn produced by the plant or tree, or even a textbook you use in place of a hammer to smack a nail into the wall, or a temporary lean-to you build when you camp out. Or perhaps any dividends you receive via your stock market holdings.
Think of it this way: Capital goods are not exhausted by use. Consumption goods, by contrast, are items that are completely exhausted–consumed–when you use them. Capital goods are sometimes described as giving off services or goods that are then used as consumption goods. For example, a lightbulb is a kind of capital good that gives off the services of light–which services are consumed and don’t of themselves persist over time. An apple tree gives off apples. A hammer gives off the services of driving nails. A house gives off the services of shelter.
Now, let’s get back to human capital.
Human capital refers to the aspect of human knowledge that persists and is manifested in us as we grow up.
Some of what humans provide is a service. So, for example, I can be hired to hammer nails into a roof. That’s an example of a temporary good/service–what is called labor.
But: Other of what humans do is learn how best or better to hammer nails. I can learn that hammering nails into a roof tiles is better done in ways different from hammering nails into drywall. That extra knowledge of how to do it in different circumstances is an example of human capital.
One of the most obvious sources of human capital is that we become educated as we grow. We acquire human capital by accumulating education, by taking classes, by learning, by learning on the job, by thinking, by reading, by learning from our families and our friends and our grandparents, by learning from our surrounding culture–and sometimes ineffably by absorbing life experiences as we grow.
Your human capital also interacts with your basic ability to merely provide what economists call your ability as a human to provide”labor” or “labor services.” As an individual, you provide a combination of an ability to provide basic labor, plus special abilities that you’ve inherited or learned that constitute your human capital.
But the main point is that human capital persists. Human capital is analogous to the lasting and indestructible aspect of physical capital. It does not get used up when you exercise it. Any time you use or exercise your human capital, it provides services–sheds services–with minimal if any deterioration to its own existence. Gary Becker, the economist who highlighted this analogy, received the Nobel Prize for, among other things, this insight.
Acquiring human capital, like acquiring any form of capital, requires forethought and sacrifice. You may not be able to go to take time off from work or child-rearing to go to school or read more or try out creating new items with a 3D printer. See the related materials on Saving and Investment, and on Entrepreneurship.
Definitions and Basics
Human Capital, by Nobel Prize winner Gary Becker from the Concise Encyclopedia of Economics
To most people capital means a bank account, a hundred shares of IBM stock, assembly lines, or steel plants in the Chicago area. These are all forms of capital in the sense that they are assets that yield income and other useful outputs over long periods of time.
But these tangible forms of capital are not the only ones. Schooling, a computer training course, expenditures of medical care, and lectures on the virtues of punctuality and honesty also are capital. That is because they raise earnings, improve health, or add to a person’s good habits over much of his lifetime. Therefore, economists regard expenditures on education, training, medical care, and so on as investments in human capital. They are called human capital because people cannot be separated from their knowledge, skills, health, or values in the way they can be separated from their financial and physical assets….
In the News and Examples
Dan Pink on How Half Your Brain Can Save Your Job. Podcast on EconTalk, June 11, 2007.
Author Dan Pink talks about the ideas in his book, A Whole New Mind: Why Right-Brainers Will Rule the Future. He argues that the skills of the right side of the brain—skills such as creativity, empathy, contextual thinking and big picture thinking—are going to become increasingly important as a response to competition from low-wage workers overseas and our growing standard of living….
Weinberger on Everything is Miscellaneous and the Wonderful World of Digital Information. Podcast on EconTalk, June 18, 2007.
Author David Weinberger, a fellow at Harvard’s Berkman Institute for Internet and Society, talks with EconTalk host Russ Roberts about the ideas in his latest book, Everything is Miscellaneous: The Power of the New Digital Disorder. Topics include the differences between how we organize and think about physical and digital information, the power of the internet to let us consume information in unique and customized ways and the implications for retailing, politics and education….