Human Capital

Classical economists use the term "human capital" to refer to the stock of skills and knowledge that enables people to perform any kind of work that creates economic value. The rudiments of the idea were present in Adam Smith's description of labor, to which he ascribed the status of a capital stock alongside useful machines, buildings, and land.

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 of 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 labour, and which, though it costs a certain expense, repays that expense with a profit (Smith 1776: Book Two).

The concept of human capital, however, was not explicitly elaborated until the twentieth century. The term gained currency through the work of the neo-classical Columbia-Chicago school of labor economics in the 1960s, particularly through the work of Mincer (1958), Schultz (1961, 1962), and Becker (1964). The concept has since played a prominent role in the evolution and application of both labor economics and development economics.

There is no single theory or even definition of human capital, although in the words of Mark Blaug:

Hard core of the human capital research program is the idea that people spend on themselves in diverse ways, not for the sake of present enjoyments, but for the sake of future pecuniary and non-pecuniary returns All these phenomena— health education, job search, information retrieval, migration, and in-service training—may be viewed as investment rather than consumption, whether undertaken by individuals on their own behalf or undertaken on behalf of society on behalf of its members (Blaug 1976:829).

Following Adam Smith's initial observation, education has always been an important focus of human capital theory, the demand for schooling and training being a particularly strong initial focus in the 1960s and 1970s, and which revealed a "chronic tendency of individuals to over-invest in their education as a function of the acquisition of previous schooling" (Blaug 1976:840). It also revealed the difficulties of standardizing the social value of education across a wide range of subject areas. However, such difficulties have not detracted from the durability of attempts to equate human capital with educational achievement. The author of the recently proposed European Human Capital Index, "defines human capital as the cost of formal and informal education expressed in Euros and multiplied by the number of people living in each country" (Ederer 2006:2). The educational and workforce training focus is also a major preoccupation of the Sainsbury Report (2007), which laments the low levels of take-up of physics and other "hard" sciences in British post-16 education, regardless of the United Kingdom's participation in a thriving global scientific labor market. Indeed, recent work suggests that we are now in an era of "brain circulation" in which highly skilled intellectual labor freely migrates in response to opportunities (Ackers 2005). Furthermore, as we shall see below when we come to discuss the concept of social (as distinct from human) capital, researchers such as Putnam (1993) have found no relationship between levels of education and the institutional performance of governments at the regional level.

Human capital approaches are deeply rooted in methodological individualism and aggregation. In all of these approaches, the knowledge, skills, or other relevant attributes are assumed to repose in the minds and bodies of individuals, even when, as Blaug (1976) goes on to say, "it takes only an additional assumption, namely that the decision maker in a household rather than an individual to extend the analogy to family planning and even the decision to marry." The individual remains the repository and therefore the primary unit of analysis for human capital, even when the provision of benefits such as health care and education are largely in the public sector. (Much of the early work on human capital was conducted in the United States, where the provision of health and education was, and remains, primarily the responsibility of private citizens.) Measuring the human capital of a community or nation-state is seemingly a question of counting the number and proportion of people with skills of a particular kind and level of performance that are assumed to yield a social rate of return. This aggregative approach to human capital formation remains dominant and is significant because it presupposes that the target of any policy intervention is also the individual citizen, consumer, or worker. Hence, the author of the recently published European Human Capital Index insists that "future policy making must be focused much more than is currently the case on investing in the individual citizen (Ederer 2006:2).

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