Educational potential and human capital

Human capital (definitions):

  1. 1The individual’s potential capacity to make output // Economic and mathematical dictionary
  2. Knowledge, skills and experience possessed by people thanks to education, professional training and work // Economical dictionary
  3. Capital in form of intellectual qualities and hand-on experience gained in the process of education and practical activity // Financial dictionary
  4. Capital in the form of individual’s education, qualification, professional knowledge, and skills // Financial dictionary
  5. Education and competencies gained in the work process; knowledge and skills in the form of labor force // Great economic dictionary
  6. Evaluation of individual’s capabilities to generate income, including innate abilities and talent, as well as education and qualification // Economic dictionary
  7. Present discounted value of extra productivity of people having expertise and skills that surpasses productivity of unskilled labor // Economics. Explanatory dictionary
  8. A body of skills, knowledge, experience, wisdom, values and norms that raise good chances of an individual at labor market in terms of salary and labor conditions // Sociology: Encyclopedia
  9. Material, intellectual and financial resources used to get additional benefits // Investor’s encyclopedia
  10. Investment of capitals in people, human resources … // Great explanatory sociological dictionary

Human capital (HC) can be acquired through special education or on-the-job training. Unlike material assets, HC cannot be sold in the society that lacks slavery; this means that HC cannot be used as security for credits. One should pay for preparation to create HC. General or professional HC can be used by other employers, increases employee’s capabilities to get higher salary in other organizations; therefore, generally, employer is not willing to undertake such preparation.

Hence, the costs of creating HC are mainly born by people themselves, their families, charity organizations or the state.

It is widely thought that the human capital theory has been developed for more than two centuries. However, only since the early 1990s, “the instrumental value of human and the yielding power of investments in human” were recognized. By that time, a person has already considered as an object of “more effective investments” and the subject, who translates them into “a body of knowledge and skills for following utilization”. Given fact gave rise to the concept of “human capital”.

The term “capital” is one of the most complex economic categories. Contemporary economic dictionary gives the following definition: Capital/ the Latin word CAPITALIS – major/ in a broad sense – everything that is capable to generate income or factors of production that are used to create goods or services.

The term “human capital” was first mentioned in the work of Theodore Schultz, winner of the Nobel Memorial Prize in Economic Sciences, who stated that land, equipment and efforts of the poor are not the main factors of wealth but rather knowledge and called this qualitative aspect of economics as human capital. In one of his work he wrote: “Consider all human abilities to be either innate or acquired. Every person is born with a particular set of genes, which determines his innate ability. Attributes of acquired population quality, which are valuable and can be augmented by appropriate investment, will be treated as human capital.”

The base theoretical model was developed by another winner of the Nobel Memorial Prize G. Becker in his work “Human Capital” (1964), which served as a foundation for all further research in this area.

There are multiple definitions of the term “human capital”. Some authors consider HC as a constituent element of intellectual capital.

Often, HC is understood as “formed, as a result of investments, body of knowledge, skills and motivation that represent the set of physical, intellectual and psychological qualities and abilities of a person.

There is also an opinion that HC are those things invested in a person for development of his/her abilities. However, undoubtedly, the same investments in two different persons do not produce equal output, i.e. efficiency of investments is individual.

There is a relationship between human potential and HC. Since birth, human has some abilities. However, the current concept of human potential is rather vague. Its structure and elements have not been studied deeply yet. At the same time, it is beyond dispute that human in the process of development increases his/her potential through capital.

At the current stage, the concept of HC can be presented by the following:

  • Human has economic, social and individual dimensions;
  • In characterizing HC as a subject of labor, three groups of qualities and abilities are considered: physical, intellectual and psychological;
  • The HC theory necessitates investments in HC and makes it possible to get additional effects from these investments;
  • The concept of HC characterizes free individual or an actor in labor market.

Until now, “the main evaluation criterion of human capital is the level of general education and special training”, although HC includes a number of other characteristics (e.g. abilities, habitudes, motivations, etc.).

At the same time, some researchers consider HC in the context of labor activity only and describe it as a combination of the following groups of factors:

  1. Qualities that the person brings in his/her work.
  2. Human abilities to learn.
  3. Human intentions to share information and knowledge.

The assumption that HC is a part of human potential is proven by general characteristics. Hence, labor potential includes physiological, psychological potential and skills capacity:

  1. Physiological potential characterizes the general status of employee’s health, its working ability, endurance, etc.
  2. Skills capacity characterizes the level of professional knowledge (education), labor skills, as qualification implies degree of preparedness and suitability for labor.
  3. Psychological potential includes both individual-psychological characteristics and personality of employee and adaptation potential.

The problem in theory is the lack of universal methods for estimation of HC cost and assessment of labor potential. Literature shows numerous attempts to develop such methods but not all approaches were successful.

The issue of HC management as an essential element of human potential development is of strategic importance for the state.

The HC theory occurred in response to a need for deeper understanding of production factors, in particular, of the nature of unusually high portion of changes in total output that could not be explained by quantitative growth of production factors – labor and capital.

The concept “human capital” (HC) was introduced in science as a body of qualities, skills, abilities and knowledge of human used by him/her for production (income generation) or in consumer purposes.

The difference of HC from physical capital is that the former is indispensable of its host. The host of HC cannot be the subject of sale, at least, in modern society. The host can be only employed.

There are two main types of human capital:

  1. General human capital – knowledge and skills generated in process of formal education.
  2. Specific human capital – knowledge and skills that have value in place where that were acquired, i.e. in process of on-the-job training.

Human capital can be both positive and negative.

Positive HC is determined as accumulated human capital generating useful output from investments, while negative HC does not produce useful output.

Accumulation of HC depends on available human potential in the society. It is evaluated using the Human Development Index (HDI). HDI measures the following main factors of life: life expectancy, literacy rate, and standard of living.

The HC theory is based on achievements of institutional theory, neoclassical theory, and other economic theories that consider people as the same capital for society as machines.

The HC theory states that the higher is the quality and quantity of HC, the more financial and physical capital is concentrated. If quality of HC accumulated over centuries is low, its quantity cannot make a difference.

Sources (in Russian):
Kapital chelovetcheskiy / Slovari i enziklopediyi na Akademike
Maklakova E.A. Chelovetcheskiy capital: ponyatiye, otsenka, utchot / Vestnik Leningradskogo gosudarstvennogo universiteta im. A.C.Pushkina, 2010
Chelovetcheskiy capital
Chelovetcheskiy capital / Slovari i enziklopediyi na Akademike

Author: Rysbekov Yu. Kh., SIC ICWC

Selected bibliography