A:

Human capital is a loose term that refers to knowledge, experience and skills of an employee. The theory of human capital is relatively new in finance and economics. It states that companies have an incentive to seek productive human capital and to add to the human capital of their existing employees. Put another way, human capital is the concept that recognizes labor capital is not homogeneous.

In the 1960s, economists Gary Becker and Theodore Schultz pointed out that education and training were investments that could add to productivity. As the world accumulated more and more physical capital, the opportunity cost of going to school declined. Education became an increasingly important component of the workforce. The term was also adopted by corporate finance and became part of intellectual capital.

Intellectual and human capital are treated as renewable sources of productivity. Organizations try to cultivate these sources, hoping for added innovation or creativity. Sometimes, a business problem requires more than just new machines or more money.

The possible downside of relying too heavily on human capital is that it is portable. Human capital is always owned by the employee, never the employer. Unlike structural capital equipment, a human employee can leave an organization. Most organizations take steps to support their most useful employees to prevent them from leaving for other firms.

Not all economists agreed that human capital directly raises productivity. In 1976, Harvard economist Richard Freeman believed that human capital only acted as a signal about talent and ability; real productivity came later through training, motivation and capital equipment. He concluded that human capital should not be considered a factor of production.

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