Экономические науки/14. Экономическая теория

Онюшева И.В., магистр экономических наук, докторант Ph.D

Университет международного бизнеса, Алматы, Республика Казахстан

Theoretical Backgrounds of Human Capital and Its Role in Economic Growth and Development

‘Human Capital’ is increasingly recognized as the most important factor of national competitiveness of a country and the most important source of economic wealth and engine of economic growth over time. The term 'human capital' is a shorthand name given by economists and other social scientists to the skills, knowledge, and capabilities of the workforce of a firm, or of the population of a country, as well as the organizational arrangements and networks of relationships those people have formed that enable them to be more innovative and productive. The phrase is meant to evoke two related ideas: that the capabilities of the workers are critical inputs into production, and that resources spent on education, training, team-building, and other forms of 'human capital investment' can be analyzed and understood in a way similar to the way economists and social scientists understand investments in physical capital, such as factories and equipment.

The idea that improvements in human capabilities are important to production goes back at least to Adam Smith (1937), who noted that the division of labor in a factor)' made it possible for some workers to specialize in certain tasks and thereby build up special skills and capabilities. Arthur Pigou (1928) may have been the first economist to use the phrase 'human capital', but the term became widely used by economists, social scientists, and business people after Gary Becker (1964) wrote his classic book on the subject, which examined the role of education and training in increasing the knowledge and skill resources of people, and thereby helping to explain differences in wages and salaries across different workers.

Despite its widespread use, the phrase, as well as the theories of labor productivity and wage determination that it represents, has been controversial. 'Passions are easily aroused on this subject and even people who are generally in favor of education, medical care, and the like often dislike the phrase 'human capital' and still more any emphasis on its economic effects', Becker acknowledged in the introduction to his book [1]. The reasons are varied. At its essence, 'human capital theory' says simply that workers with different levels of knowledge and skill differ in their productivity and, therefore, earn different rates of compensation according to their skill level. Moreover, the theory explains that education and training are likely to increase the knowledge and skills of workers, thereby increasing their expected earnings. By analog}' to investments in physical capital, expenditures on education and training, therefore, operate like investments in better and more efficient machines to increase labor productivity. Such investments, the theory says, can thus be analyzed in ways analogous to the way social scientists analyze investments in physical capital.

Some critics of the term have argued, however, that treating education and training as if they are like investments in physical assets is misleading because it directs attention away from the personal and cultural reasons that individuals seek out particular educational experiences or seek to master certain bodies of knowledge. Some social scientists regard these personal and cultural factors as more important than, or as important as, the economic reasons, and argue that education should be regarded as a 'consumption good', not an investment (Becker, 1964).

Others have argued that the expression and the idea it represents are demeaning because they reduce human experience to a type of commodity. A third criticism relates to the way the concept has been used in models explaining economic growth. This criticism emphasizes the importance of understanding the mechanism by which education and training can lead to increases in productivity and in economic output, and argues that simply referring to such activities as 'investments in human capital' tends to short-circuit the analysis that might uncover the mechanism and how it works (Blaug, 1987).

Although the concept 'human capital' can obscure some important issues about how people and societies become more productive over time, the idea has proved to be an extraordinarily evocative and powerful way to frame economic discussions about factors that lead to economic growth or to better performance in firms. Hence, in the last forty years, human capital has become a central concept not only in labor economics, but also in macroeconomics, economic growth theory, development economics, trade theory, the economics of education, the theory of the firm, and the theory and practice of human resources management and strategic planning.

Generally, the idea of 'capital' has a long and complex history in economic thought. For purposes of this discussion it is sufficient to note that neoclassical economic theorists have generally settled on a definition of 'capital' as a factor of production that is itself produced from other inputs. The 'primary' factors of production are understood to be 'land' (which is taken to include raw materials such as minerals and timber taken from the land) and 'labor', where labor is usually measured in terms of the amount of time that workers spend in production. In addition to these primary factors, some output from earlier production maybe used in current production to enhance total current output per unit of labor input. These produced inputs - tools, machines, railroad tracks, steel sheets, textiles, semiconductors, and so on-are collectively called 'capital'. Capital comes into existence only if some of the output of prior rounds of production is not consumed immediately but is either used as is or traded for materials and tools that can increase productivity in later rounds. Farmers, for example, historically have had to save some of the grain from one harvest to plant in the next planting season and sell some of the grain to buy tools and fertilizer in order for the farmers' grain output to continue in perpetuity or even grow over time. This notion that 'capital' is an input or factor of production produced in earlier rounds of production, then, links economic growth and productivity in one period to savings and investments in prior periods to give a dynamic account of output and productivity.

Like land, capital inputs are owned by some party to the production process, and just as landlords must be paid 'rents' for the use of land, the owners/providers of capital must earn a return in the form of' ‘interest' or 'profits' for contributing their capital inputs. In contrast, labor inputs cannot be separated from the workers who contribute them and, in that sense, the inputs cannot be 'invested' in a lump sum into the production process but must be contributed over time as workers work. Workers must then be compensated with 'wages' as they contribute hours and days to productive activity. By analogy to physical capital, however, some workers have special knowledge or skills or better insights into how to organize the production process that they acquire through experience, education, and training, and these acquired traits, which we call 'human capital', enable them to produce more with the same inputs of land, machines, materials, and time than other workers could produce without those traits. Under standard neoclassical economic theory, when a worker has better physical capital to work with-more efficient machines, better raw materials, and so on-that worker is expected to have a higher productivity and thus to earn a higher wage. Similarly, economists say that if a worker has superior skills or other traits that enable her to produce more with the same time, tools, and raw materials as another worker, that worker also has a higher productivity (by definition), and thus earns a higher wage. Superior knowledge and skill-the 'human capital' of the worker-can be 'produced' if the worker defers consumption of leisure time and goods and invests some of those goods and time in acquiring new or better skills. Such an investment can lead to greater output in the future [2].

Human capital is thus like physical capital in that it can be produced by deferring consumption and devoting some of current output to improving the health, well- being, knowledge, and capabilities of workers. And it is like physical capital in that the worker who makes the investment in improved human capital may expect to earn a return on that investment because that worker will be more productive than she would otherwise be. Human capital is also like physical capital in that it can 'depreciate' over time if workers become ill, weaker, or less physically or mentally able as they age. It can also 'depreciate' if certain skills become obsolete (such as, for example, the ability to communicate via Morse code).

But human capital is different from physical capital in a number of important ways. First of all, human capital is, obviously, a trait of the worker and cannot be separated or conveyed or traded to another party. For this reason, the capitalist (the party who invests to own or develop physical capital to contribute to production) generally cannot 'own' the human capital that works with the capitalist's goods and machines. This difference raises important questions about how work is organized and how output should be shared in order to provide incentives for all parties to make optimal investments. This issue will be discussed further below. But, in general, we note here that it is likely to be important to the party who makes an investment in capital, whether physical capital or human capital, to be able to control its use, to be sure that it is deployed in its highest and best use, and to be compensated adequately. For physical capital, the party who invests can 'own' the capital and control its use.

But the problem is much more complex in the case of investments in human capital. Even if an employer pays for training that enhances the human capital of its workers, the employer in no way 'owns' that new human capital. The employee in fact takes it with her if she goes to work for another employer. Thus, it turns out to be useful in many situations for employers and employees to form long-term relationships, or to develop contracts and legal rules to govern the circumstances under which employees and/or former employees can use knowledge acquired on the job. This issue of providing incentives and protection for investments in human capital has been extremely important to organizational theory, contract theory, theory of internal labor markets, and theory of the firm, as will be discussed below and/or in other articles in this volume.

Secondly, human capital can only be contributed to production if the worker spends time in productive activity. Unlike the contributor of physical capital, who can invest, and then sit back and wait for the return, the contributor of human capital must actually work in the productive activity (Marx and Engels, 1952).

Thirdly, while a worker's time may be used up in the production of some goods, that worker's skill and knowledge will probably not be used up. In fact, it may very well appreciate or grow over time as the worker 'learns by doing', using her special knowledge and skills in current production. In the process she may actually acquire new human capital, such as special insight into how the tasks might be accomplished more efficiently in future production. This also has implications for understanding the benefits that come from forming long-term relationships between employer and employee and for how economists model the contracting problem between them.

At the macroeconomic level, most economists believe that the knowledge and skills of the labor force, as well as innovations in production technology, are important to economic growth and to the development of nations and regions. Until the late 1980s, neoclassical models of economic growth generally assumed that both labor and capital were subject to 'diminishing returns', meaning that the addition of more labor or capital to the model yielded progressively smaller increments in output (Solow, 1957). The rationale for this assumption was that ultimately the amount of land available for production was understood to be finite because land cannot expand at the same rate as labor and capital and, as a result, land becomes scarce, and labor and capital eventually become crowded and less productive. These early growth models, however, included a fourth factor: technological progress, or knowledge, that made it possible for existing labor and capital to produce more output on given quantities of land (Solow, 1957). The level and rate of change of this fourth factor was taken as exogenous to the model-knowledge simply expanded continuously on its own and not as a result of investments accounted for within the model (Solow, 1957).6 But analyses of the possible sources of growth in national output over time showed repeatedly that this poorly understood and non-measurable factor, technological change, accounted for a very large share of total economic growth throughout the twentieth century (Denison, 1983) [3].

Economists, of course, did not believe that knowledge grew on its own, and so some variations on this model allowed for the 'labor' input to grow not only by adding people and hours of work, but also by assuming that the human capital of the labor force could, effectively, grow through education and training (Harrod, 1948; Domar, 1957)." This approach is highly arbitrary, and, in the view of many economists, hardly better than simply treating technological change as a residual factor that 'explains' the part of economic growth that cannot be explained by growth in population or investment in physical capital.

In the 1980s, economists became interested in a modeling approach called 'New Growth Theory', which endogenizes the contributions of increases in human capital and in technological change. Beginning with the work of Paul Romer (1986 ), economists traced out the implications of assuming that knowledge is characterized by increasing returns rather than diminishing returns. This could be true because, unlike equipment or labor hours, knowledge is not 'used up' in the course of production, hence knowledge costs per unit of output decline with each additional unit of production. Moreover, many people can use the same knowledge at the same time without experiencing crowding or congestion. 'Knowledge' is not exactly the same in these models as human capital, although knowledge is developed by human capital and adds to human capital when it is acquired and used by workers. Some knowledge can be, and is, codified, and once it is, it is no longer part of human capital. But some knowledge is tacit. The sequence of notes that we recognize as Beethoven's Violin Concerto is codified knowledge (and this knowledge can be represented symbolically by musical notation), but the knowledge of how to play a violin to perform the concerto is mostly tacit knowledge, acquired by years and years of practice. Tacit knowledge is a part of human capital embedded in the individuals or communities that have the knowledge and share it among themselves [4].

The new interest on the part of economists in the creation, use, and codification of knowledge has encouraged economists to think more about the role played in economic welfare and growth by institutions which facilitate the creation, sharing, and use of knowledge, and the associated development of human capital.

To sum up, the research on human capital is now well established, demonstrating the significance of education, qualifications, and skill levels for economic outcomes at the individual, organizational, and societal levels. However, the dominant paradigm in which knowledge and skills are treated as relatively unproblematic attributes of the individual, accessible and transferable with limited regard for context, is coming under increasing scrutiny. Human capital can be considered as individual or community asset, and its value in practice depends on a wide range of economic and social factors and relations.

References:

1. Becker, G.S. (1964,1993). Human Capital (Chicago: University of Chicago Press).

2. Batler, H., and Lewin, P. (2007). Can Ideas be Capital: Can Capital be Anything Else? Working Paper, 83, Mercatus Center, George Mason University.

3. Janine Nahapiet. A social perspective: exploring the links between human capital and social capital’. Oxford University Press, 2011.

4. Margareth M.Blair. An economic perspective on the notion of human capital. Oxford University Press, 2011.