Human capital

The idea that human abilities contribute to economic output traces at least to Adam Smith, who wrote in 1776 that the acquired abilities of a nation's inhabitants should be counted as part of its capital. Arthur Cecil Pigou used the phrase "investment in human capital" in the early twentieth century, and Irving Fisher may have been the first to use the exact term. The concept remained marginal in economics for nearly two centuries.

In the late 1950s and 1960s, economists at the University of Chicago revived and formalized the idea. Jacob Mincer published a foundational article on investment in human capital in the Journal of Political Economy in 1958. Theodore Schultz, in his 1961 presidential address to the American Economic Association, argued that investment in human capital was more important than investment in physical capital for understanding economic growth. Gary Becker published Human Capital: A Theoretical and Empirical Analysis in 1964, which became the standard reference for decades and introduced the distinction between general human capital, valued by all employers, and firm-specific human capital, useful only within a single company.

The framework treats education as an investment decision made by individuals seeking future returns in the form of higher wages. Training is an expense that either the worker or the employer bears, depending on whether the skills produced are transferable. From this perspective, a person's knowledge is an asset that can appreciate through education, depreciate through unemployment or obsolescence, and be evaluated in terms of its return on investment. Schultz and Becker both received the Nobel Prize in Economics, Schultz in 1979 and Becker in 1992.

The term has drawn criticism from multiple directions. Karl Marx had earlier made a related but distinct argument about labor power, noting that unlike actual capital, a worker cannot sell their human capital in one transaction, making them fundamentally different from machines. The 2004 German Un-Word of the Year jury objected that the phrase degrades individuals by classifying their abilities according to economically relevant quantities. Some organizations have moved away from the term, renaming departments with labels such as "people operations" to avoid the implication that employees are assets on a balance sheet.