Human Capital Explained: The Evolution of Human Capital

Human capital is the collective skills and knowledge of employees in a business. Human resources departments use categories like educational attainment and employee experience for measuring human capital and employees’ economic value.

Companies cannot quantify human capital precisely, so human capital is an intangible asset. Tangible assets include physical capital, financial capital, and intellectual capital. Physical capital includes factory machines and retail business buildings. Money in a business's bank or investments is financial capital, and intellectual capital includes things like media libraries.

While there is no single, fixed formula for determining human capital, companies can consider the following categories to analyze human capital:

• Education: Generally speaking, the higher one’s formal education level—from no high school diploma to advanced postgraduate degrees—the higher one’s pay. Formal education can boost human capital, an asset to companies.
• Knowledge: Years of schooling cannot measure knowledge and intellect. Knowledge can be challenging to quantify, as it often includes experience and past work performance.
• Specific skills: Many industries require employees to possess certain hard skills, soft skills, and competencies. Employees can demonstrate these with certifications or references from former employers.
• Health: Employees' mind and body health and overall well-being is an essential aspect of human capital. Corporations view healthy employees as better long-term investments since they are more likely to perform consistently in their role without much lost time or lag in productivity.

Human capital investment contributes to overall economic growth and productivity. When businesses, or even whole countries, invest in human capital—such as through increased funding for healthcare or higher education of the labor force—they often do so because these inputs improve economic value and growth.

Human capital has long been an applicable term in the discipline of economics. Below is a short history of human capital and its evolution:

• Early beginnings: Adam Smith, one of the first economists to theorize about capitalism, described elements of human capital in his book An Inquiry into the Nature and Causes of the Wealth of Nations (1776). He included "the acquired and useful abilities of all the inhabitants or members of the society" in his definition of capital. Later theorists of human capital would embrace these descriptors.
• Widespread popularity: Economists and Nobel Prize winners Gary Becker and Theodore Schultz of the Chicago School, a mid-twentieth century branch of US economic theory that stemmed from the University of Chicago, popularized the term “human capital.” As their version of macroeconomics became more popular and influential, so did the use of human capital management as an intangible but essential asset for businesses, nonprofits, and state economies.
• Modern usage: Today, economists break down human capital theory into different categories. General human capital—such as competitiveness, communication skills, and problem-solving—is distinguished from other specific skills, like a particular management technique or type of engineering skill.
• International economics: Human capital plays an essential role in international macroeconomics. The World Bank’s Human Capital Index (HCI), established in 2018, measures a country’s expenditures on the education and healthcare of young people. The HCI purports to be measuring investment in human capital and, thus, a country’s economic success. In the 2020 report, the United States was around the middle of the rankings, above countries including Estonia, Iceland, Latvia, but below the United Kingdom, Norway, Portugal, and Slovenia.
• Critiques: From the outset, many economists and social thinkers were critical of the way employers leveraged human capital. Karl Marx pointed out that workers' human capital led to profits for the owners of businesses and an underlying imbalance between workers and capitalists. Other scholars and critics felt that the term was too narrow and led to a treatment of workers as mostly interchangeable pieces of equipment rather than human beings deserving of a high quality of life.

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