Human Capital Theory

HUMAN CAPITAL THEORY

MEGHNA GEORGE MEENATHEKONIL

TYPES OF FIXED CAPITAL

• 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.

ORIGIN OF THE TERM

• Jacob Mincer's article "Investment in Human Capital and Personal Income Distribution" in The Journal of Political Economy in 1958.

ORIGIN OF THE TERM

• Was not used due to its negative undertones till Arthur Cecil discussed.

ORIGIN OF THE TERM

• T.W. Schultz who is also contributed to the development of the subject matter

HUMAN CAPITAL

•Human capital is the stock of competencies, knowledge, social and personality attributes, including creativity, embodied in the ability to perform labor so as to produce economic value.

HUMAN CAPITAL

• “….. the ability to read and write, or in specific terms, such as the acquisition of a particular skill with a limited industrial application…”

HUMAN CAPITAL

• 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

HUMAN CAPITAL

• “A means of production, into which additional investment yields additional output. Human capital is substitutable, but not transferable like land/ labor”

ORIGIN OF THE TERM

• The best-known application of the idea of "human capital" in economics is that of Mincer and Gary Becker of the "Chicago School" of economics.

GROWTH OF HC-INDIAN SCENARIO

• Consistently increased after Independence due to qualitative improvement in each generation.

• 3RD Gen -qualitatively most superior human resource in India.

THE THEORY

• Education or training raises the productivity of workers by imparting useful knowledge and skills, hence raising workers’ future income by increasing their lifetime earnings.

THE THEORY

• It postulates that expenditure on training and education is costly, and should be considered an investment since it is undertaken with a view to increasing personal incomes.

SOURCES OF HC DIFFERENCE

• Innate ability

• Schooling

• Training

• Pre-labour market influences

HUMAN CAPITAL MODEL

CRITICISM

• It is unable to understand human activity other than as the exchange of commodities

• Notion of capital employed is purely a quantitative one

• Misses the point that capital is an independent social force where the creation of social value comes about through its capital accumulation.

CRITICISM

Education in fact improves productivity and thus could explain higher wages. ??

• Did not take into the account of the transfer of learning.

• Does the duration of education and training really could increase productivity?