# Human capital

In economics, human capital (often abbreviated as H as a mathematical variable ) describes the “personal knowledge components in the minds of employees”. In the human capital theory of economics , human capital is viewed from the perspective of investing in education . In the business factor theory according to Erich Gutenberg , human capital is just as much a production factor as physical capital . This term must be distinguished from social capital .

Related terms are the human resources, the human resources and human potential, which also often the English terms human capital, human resources and human assets are used. A historically related term is Ortner's personnel assets. In the more recent management literature, human capital is assigned to intellectual capital .

In growth theory , the human capital of an economy can be estimated using statistical methods .

## Use in economics

Preliminary considerations for a human capital theory already existed in the 19th century. The term "human capital" was coined (English human capital ) significant macroeconomic as part of the (modern) human capital theory. At the end of the 1950s - as a reaction to the " Sputnik shock " - the later Nobel Prize winners Gary Becker (1964) and Theodore William Schultz (1961) laid the foundations of this economically oriented, economic theory. The former focuses on the importance of education and knowledge for the long-term growth of an economy.

Nowadays, one mostly looks at educational qualifications or the number of years of schooling in order to measure and compare human capital of different population groups. In economic-historical contexts, however, this is often not necessary due to the data situation and for reasons of comparability. Therefore, different methods are used to measure literacy or numeracy skills. One such method is age-heaping, in which the proportion of those who can state their age “correctly” is determined. This method is used, for example, by Franziska Tollnek and Jörg Baten (2017) to analyze the role of different professional groups in the formation of human capital. They find out that this not only took place in the cities, but farmers also made a large contribution to human capital formation and thus economic growth.

The extended Solow model with the inclusion of human capital in which production is carried out according to the Cobb-Douglas production function can almost completely explain why some countries are poorer than others (see Solow model # Empirical Applications ). ${\ displaystyle Y_ {t} = K_ {t} ^ {\ alpha} H_ {t} ^ {\ beta} (T_ {t} L_ {t}) ^ {1- \ alpha - \ beta}, \, \ alpha + \ beta <1}$

The economic human capital theory was the starting point and the foundation of human resource accounting (mid-1960s in the USA) and human wealth accounting (mid- 1970s in Germany), in which the ideas were transferred to the operational area.

The term operational human capital describes the nominally great importance of qualified and motivated employees for the competitiveness of a company and is intended to clarify an essential basis of modern corporate and personnel policy: Employees are no more than mere production and cost factors. In order to increase production and reduce costs, the motivation and skills of employees, as well as all means and efforts to maintain and strengthen them, are now more than ever the focus of corporate and personnel policy objectives.

In particular, the operational appreciation of human capital will have to increase as soon as companies realize that, although the world population is growing, access to suitable qualifications is an increasing local bottleneck. The use of human capital as a purely static calculation variable for accounting for location-based replacement investments does not do justice to the dynamic entrepreneurial approach according to Schumpeter and the production theory approach according to Gutenberg. There will be no uniform definition of the term in the future either. The content of the term has constantly changed over time, depending on the economic, political and social framework.

In the 1970s, the focus was primarily on the potential embodied in the employees, which is made available to the company through an employment contract . The background to this was a “humanization of the world of work” driven by society and politics, which demanded a more significant role for employees in the economy and the world of work. In the 1980s, against the background of the increasing importance of the capital markets, the focus was on the economic efficiency of business operations. In the course of developing and establishing personnel controlling, the focus was on effectiveness and efficiency issues in operational personnel processes and employees.

From the 1990s onwards, the concept of intellectual capital was established based on resource theory (English resource based view of the firm ) . The intangible assets were identified and increasingly recognized as the main drivers of operational success. In this concept, human capital is the central factor. Human capital is explicitly named as the only category in all intellectual capital categorizations. The emotional components of economic life are promoted, among other things, through coaching and various efforts to combat bullying . Some aspects of women's policy and the promotion of family-friendliness in companies also have a positive effect here. In view of the demographic development, however, the contributions of health management and work design that allow older employees - and thus those with special operational knowledge, which in some cases cannot be explicitly formulated - to remain in the company until their age limit if possible must also be considered. Also, knowledge management helps to preserve this experience and knowledge to younger employees.

Taking these new developments into account, a definition of corporate human capital today can be:

The operational human capital is part of the operational intangible assets and contributes significantly to the long-term success of the company and thus to sustainable corporate security.

The following counts as operational human capital:

• The individual human capital embodied in the employees : This includes the abilities, skills, knowledge, experience, motivation and innovative ability of the employees, but also health as a prerequisite for physical and mental performance.
• the personnel processes (dynamic human capital), i.e. all processes for the procurement, development, deployment and release of employees. Essentially, this means operational human resources .
• the personnel structures (structural human capital), i.e. the structure and organization of the personnel area as well as the employee structure resulting from personnel management (according to qualifications, age, gender, etc.).

The planning, management and control of operational human capital is the subject of so-called "human capital management", English human capital management (HCM) or human asset management. It represents an extension of the operational personnel management (English Human Resource Management ). For the related reporting there is the term "Human Capital Reporting". One focus of this concept is the measurement and evaluation of company human capital.

In the case of the existing contributions to human capital management, it is almost unanimously emphasized that layoffs and the reduction of personnel development (the two main measures in the personnel area to increase profitability) can sometimes achieve a positive value contribution in the short term, but in the long term, value is destroyed and thus livelihood of the company is at risk.

More recently, institutionalized investors such as equity funds and the like, have increasingly led to company investments that are primarily interested in the short-term success of the investment, i.e. to quickly deprive the company of the values ​​that can be realized in the short term. Such investors tend not to be interested in developing the company strategically (the locust debate ). This is the reason for the apparent contradiction between short-term action, such as downsizing, and the knowledge about the long-term importance of human capital for company value.

## Human capital and human wealth

Some economists propose to use the term “human assets” instead of human capital, since the term “assets” has far less negative connotation than the term “capital”.

The term human wealth was established in Germany in the 1970s in the course of the discussion about a human wealth calculation . The aim of these calculation models was to reveal the value of the employees and thus to supplement the company accounting, which employees traditionally only consider cost factors. Ultimately, the aim was to balance the potential embodied in the employees.

In business administration, capital and assets characterize the same economic situation when viewed in the balance sheet, each from a different perspective. While the assets represent all goods and funds used in the company - the assets - the capital is recorded as the equivalent of the assets on the liabilities side of the balance sheet and provides information about the origin of the funds used. The term capital is not applicable when it comes to recording employee potential in the balance sheet. In addition to other variables used, it only makes sense to understand employee potential as assets, with which only the concept of wealth can come into question.

The majority use of the concept of (human) capital in literature and practice - especially in the English-speaking and Scandinavian countries - is attributed to the fact that general linguistic usage does not separate assets and capital for accounting purposes and that the forerunners and promoters of the human capital concept often do so were not or are not recognized accounting specialists.

## Quantification for Germany

In order to be able to describe the connection between economic and population development, there are various attempts to quantify human capital financially. One of the approaches is to calculate the expenditure that is necessary to develop a person from conception to professional maturity. Corresponding calculations were made in Germany, for example. B. carried out by Heinz Lampert and Georg Ewerhart . The family costs for bringing up a person are accordingly around 300,000 DM. In addition, there are state expenses, which primarily relate to training. Overall, the working-age population is calculated at DM 21 trillion (1991). This is significantly more than the gross fixed assets of the German economy of around DM 13 trillion (1991).

In this perspective, the birth shortage in Germany has been a neglected investment since 1970. From 1970 to 2000, 9.6 million births were missing compared to the level that would be necessary for population maintenance. This corresponds to 3 trillion DM from 1970 to 2000, converted into human capital.

## Human capital determination

In the Intellectual Capital Statement (ICS), all skills, knowledge, experience, innovation potential and talents as well as the knowledge of employees and managers, the “brains” of a company, are subsumed. These factors are used to creatively combine information, ideas and innovations in order to optimize the performance for the customer and thus the company's success. Corporate values, culture and philosophy are also counted as human capital.

The increase in human capital starts at two points. On the one hand with the employee, whose knowledge and skills, which are important for his job, should be increased. On the other hand, at the company, which is to be encouraged to use more employee knowledge in order to achieve success. VIC (Vocational Intellectual Capital) shows in this context that not every type of knowledge is useful for the company and can be implemented as an increase in value. However, the share of knowledge that drives business value can be actively influenced and increased.

In the Intellectual Capital Statement , the main focus is on employees with the greatest future potential for success. If this has not yet been fully exploited, investments in these people would be evaluated in the form of training or further education measures. On the one hand, it is about the optimal use of the existing performance, and on the other hand it is about investing in development potential , i.e. future, long-term performance through the expansion of latent, but also new capabilities. The focus on return or value creation is also in the foreground when defining goals in the VIC - compared to the resource and cost-oriented VIC. This means that all business decisions are made with regard to benefits or added value. This is especially true for investment decisions in human capital. The possibilities that arise here are that in addition to the costs of the measures, the benefit can also be assessed and the increase in value measured, whereby the quantifiability of the deficits is a clear factor for all those involved.

## Return on human capital

A common definition of return on human capital is simply:

Rendite des Humankapitals = (Erlös − operative Kosten − Personalaufwand) / Personalaufwand

It should not be overlooked that reducing personnel costs increases the return, but ultimately cannot be divided by zero. This basic mathematical rule seems to be disregarded in rationalization investments from a static point of view.

In order to do justice to the importance of human capital, the specific personnel expenditure per unit of production must be considered in the contribution to sales . The return on personnel can be effectively increased if the operating costs are reduced with unchanged personnel expenses. The task is then no longer to reduce the occupation, but to increase the performance of the people involved. However, in addition to additional qualifications, this requires more accompanying investments in property as opposed to the simple disinvestment of human capital.

The “Language Critical Action Unword of the Year” has chosen the term human capital as the German Unwort of the Year 2004. The word degrade not only workers in companies, but people in general "to only economically interesting figures", was the rationale of the six-member committee. As early as 1998, the jury criticized human capital as a way of describing the rearing of children. The occasion was the inclusion of the term in an official EU declaration, which defines “skills and abilities as well as knowledge that is embodied in people”.

Many economists are appalled by this argument and consider it wrong because the linguists did not understand the original meaning and intention of the term. In contrast to the term human material (the nonsense of the 20th century), human capital is a term with positive connotations. Anyone who examines the relevant literature would quickly find that human capital in the original sense is viewed as a success factor, resource or potential that determines future development and future corporate success or, at the economic level, the prosperity of entire nations. The only requirement is an appropriate human capital management, i.e. the planning, management and control of human capital. The use of the term does not mean that people are devalued, but rather that they are valued and objectified at the same time.

In the opinion of economist Michael Gebauer, "(the jury) obviously lacked economic expertise". Christian Scholz, professor of business administration, commented on the decision as follows: “The contribution of the Unwort jury [...] was unfortunately only a cynical attempt to counterproductive denunciation of a constructive approach in personnel management: away from the purely negative concept of employees as the cause of personnel costs towards a positive concept of employees as a company's value. "

Also, many human capital advocates explicitly point out that z. B. Layoffs or cuts cause a long-term decline in the company's value . If personnel development is carried out against the background of short-term improvement in earnings, they also see economic damage in the destruction of human capital.

## literature

• Gary S. Becker : Human Capital. A Theoretical and Empirical Analysis with Special Reference to Education. 3rd edition, University of Chicago Press, Chicago 1993, ISBN 0-226-04120-4 .
• Samuel Bowles, Herbert Gintis: The Problem with Human Capital Theory - A Marxian Critique . In: American Economic Review . tape 65 , no. 2 , 1975, p. 74-82 (English).
• G. Clar, J. Doré, H. Mohr (Eds.): Human capital and knowledge. Basics of sustainable development. Springer, Heidelberg, ISBN 3-540-63052-X .
• Michel Foucault : Neoliberal Governmentality II. The Theory of Human Capital. Lecture, session on March 14, 1979. In: Ulrich Bröckling (Ed.): Michel Foucault. Criticism of government. Writings on Politics. Frankfurt am Main 2010, pp. 177–203.
• Hermann Giesecke : “Human capital” as an educational goal? Limits of economic thinking for educational action. In: New Collection. H. 3/2005, pp. 377-389.
• Burkhard Jaeger: Human capital and corporate culture. DUV Gabler Edition Wissenschaft, 2004, ISBN 3-8244-8219-3 .
• Brian Keeley: OECD Insights: Human Capital. OECD Publishing, 2008, ISBN 978-92-64-04795-2 .
• Henning Laux : The manufacture of human capital. A practical theoretical analysis. Berliner Debatte Initial 2009, 20 (3): 4–15. Link to the text.
• Christian Scholz, Volker Stein, Roman Bechtel: Human Capital Management. Get out of the non-commitment! 3rd edition, Luchterhand, Cologne 2011, ISBN 978-3-472-07624-7 .
• Uwe D. Wucknitz: Handbook of personnel evaluation . Measurements, fields of application, case studies. 2nd, extended edition, Schäffer-Poeschel, Stuttgart 2009, ISBN 978-3-7910-2846-0 .