Businesses use three types of capital: physical capital

Businesses
use three types of capital: physical capital (factory, stocks etc.), financial
capital (investments), and intellectual capital. The very last one,
intellectual capital, is defined as “nonfinancial fixed assets-intangible
assets”. Human capital is a component of intellectual capital. It represents
the investments made on humans and encompasses human-related factors like knowledge,
skills, experience, sufficiency, business quality, employee relations,
emotional intelligence, entrepreneurialism, flexibility, employee loyalty,
employee satisfaction, education, and creativity. In businesses, investment on
humans is the most difficult investment to control. 

The
equivalent of human capital in the economy is labor, which is among the
production factors and operates in order to earn. The individual should produce
a good or a service to earn this wage. The knowledge, experience, and similar
qualifications used in producing this good or service constitute the
individual’s gears and such gears were termed as human capital until the end of
the 1950s. However, the focus here in is not only the physical power of the
individual but also the knowledge, experience, analytical thinking ability, and
similar intangible values. Later, human capital was defined not only as the
power spent in the production of a good or service, but also as the
qualifications of the individual. 

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Romer
regarded human capital as the source of economic efficiency. The OECD defines
human capital as the contributions of knowledge and skills made by an
individual to a country’s economy and thus as the improvement in social and
economic development made by an individual. Human capital can then briefly be
defined as the contributions of individuals and every kind of knowledge and
experience gained by an individual. 

Since
human capital is accepted as the qualifications acquired by individuals, in
other words, the dynamic of the economy, these qualifications can be summarized
as all kinds of knowledge and experiences which improve production. Human
capital material is directly proportional to the country’s economy. However, it
may be misleading to link the efficiency of human capital only to the  increase in a country’s population. In fact,
the quantitative traits of the population come into prominence in developing
countries, while knowledge, skills, experience, and education-like qualitative
traits come into prominence in developed countries. When we consider the
situation today, it is easy to see that not the countries with a large
population, but those with educated, healthy, and long-living individuals are
more developed. Such traits indicate that a large population alone is not
sufficient for the efficiency of human capital.

Throughout
the world in the mid-20th century, especially after the Second World War, an
educated labor force became a significant issue with countries’ conversion into
knowledgeable societies and countries assigned as much significance to human
capital as they did to physical and financial capital. Although Malthus’s
thesis “Increase in population reduces the income per capita” established a
presence in neo-classical theory, later this thesis was abandoned since
high-tech developments increased the income per capita despite the increasing
population. Kremer regarded the technological process as an increasing function
of the population and adapted the principle of “the higher the population, the
higher the number of people there will be to invent new technologies and the
higher the knowledge gain will be”. Such an opinion was approved by others with
the contributions made by technology to a country’s economy.

Lucas
pointed out the observable effects of both human capital and physical-financial
capital on economic models. The author also pointed out that individuals should
spend time on various activities to improve their performance and individual
skills, a recommendation that is commonly mentioned in human capital theory.
Despite different definitions of human capital, the generally accepted
definition encompasses every kind of individual-oriented knowledge and
experience.