Human Capital Theory: Investing in People

What is human capital?

Investment relates to machines and factories but it must not be forgotten that investment also relates to human capital.

According to Adam Smith, people contribute to economic growth. In fact workers, who have had higher education, have know-how, cultural knowledge and intellectual capacity. They are therefore more productive which enhances their effectiveness. This improved effectiveness and efficiency enables them to be more innovative. The human capital theory asserts that it is more profitable to invest in individuals’ education and training than in machines and factories, the return on investment is higher in the long term.

Analysis of human capital theory

This theory has limits, because for developed countries that experienced the Second World War, nations are fairly quickly rebuilt, thanks essentially to the workforce. In addition, developing countries have a great deal of ground to make up and these countries’ best brains go abroad, because they are better paid abroad than in their countries of origin. This phenomenon is known as the brain drain.

Quote about human capital

“People whose education and know-how are higher almost always tend to earn more than others.  “

Gary Becker