Human education, training, health) and that these investments

Human capital is the stock of skills that the labor force possesses. The flow ofthese skills is forthcoming when the return to investment exceeds the cost (bothdirect and indirect). Returns to these skills are private in the sense that anindividual’s productive capacity increases with more of them. But there are oftenexternalities that increase the productive capacity of others when human capital isincreased. This essay discusses these concepts historically and focuses on twomajor components of human capital: education and training, and health. Theinstitutions that encourage human capital investment are discussed, as is the roleof human capital in economic growth. The notion that the study of human capitalis inherently historical is emphasized and defendedI. Human Capital and HistoryFor much of recorded history, income levels were low, lives were short and there waslittle or no economic growth. We now have healthier, longer, richer and hopefully happier lives.The regime shift involved increased knowledge and its diffusion, greater levels of training andeducation, improved health, more migration, fertility change and the demographic transition. Inshort, the process involved advances in human capital.A. What Is Human Capital?Human capital is defined in the Oxford English Dictionary as “the skills the labor forcepossesses and is regarded as a resource or asset.” It encompasses the notion that there areinvestments in people (e.g., education, training, health) and that these investments increase anindividual’s productivity.We use the term today as if it were always part of our lingua franca. But it wasn’t. Notthat long ago, even economists scoffed at the notion of “human capital.” As Theodore Schultznoted in his American Economic Association presidential address in 1961 many thought that freepeople were not to be equated with property and marketable assets (Schultz, 1961). To them,that implied slavery.But the concept of human capital goes back at least to Adam Smith. In his fourthdefinition of capital he noted: “The acquisition of … talents during … education, study, orapprenticeship, costs a real expense, which is capital in a person. Those talents are part of hisfortune and likewise that of society” (Smith, 1776).The earliest formal use of the term “human capital” in economics is probably by Irvin

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