Overview

You are a machine. You can be upgraded. Going to school, learning to code, or staying healthy is “investing in yourself.” It makes you more productive, so you earn more money. This is Human Capital. It explains why a brain surgeon earns more than a janitor.

Core Idea

The core idea is People are Assets. Just like a company buys a better machine to make more widgets, you can buy a better education to make more money.

Formal Definition

The stock of knowledge, habits, social and personality attributes, including creativity, embodied in the ability to perform labor so as to produce economic value. Popularized by Gary Becker.

Intuition

  • The Goose: You are the goose that lays the golden eggs.
  • Maintenance: You have to feed the goose (Health), train the goose (Education), and keep it happy (Mental Health). If you neglect the goose, the eggs stop coming.

Examples

  • College: It costs $100k and 4 years. Is it worth it? Yes, if the “Return on Investment” (higher future salary) is greater than the cost.
  • Health: A sick worker is an unproductive worker. That’s why companies have gyms. It’s not kindness; it’s maintenance.

Common Misconceptions

  • It’s dehumanizing: “I’m not capital! I’m a human being!” True. But economically, your skills are capital. It doesn’t mean you are a slave. It means you are valuable.
  • Signaling: Does college actually build human capital (teach you skills)? Or does it just signal that you are smart? (Probably a mix of both).
  • Brain Drain: When smart people leave a poor country to go to a rich country. The poor country loses its human capital.

Applications

  • Public Education: The government pays for school because it increases the Human Capital of the whole nation, which makes the economy grow.

Criticism / Limitations

  • Luck: It ignores talent and connections. You can have a PhD and still be poor if you are unlucky or have no social skills.

Further Reading

  • Becker, Gary. Human Capital.