In business, capital can be anything that increases the value of your business.
It can add value across a wide range of factors like physical, social, intellectual and financial. In economics and businesses, the two main capitals are human capital and physical capital.
Key Takeaways
- Human capital encompasses the knowledge, skills, and abilities of an individual or workforce.
- Physical capital refers to tangible assets like machinery, buildings, and technology.
- Investments in human capital can increase productivity and innovation, while investments in physical capital can expand production capabilities.
Human Capital vs Physical Capital
Human capital is the skills, knowledge, and experience that people possess and that can be used in the production of goods and services. It includes factors such as education, training, experience, and expertise. Physical capital is the tools, equipment, machinery, and infrastructure used in the production of goods and services. It includes items such as buildings, machines, vehicles, and technology.
Human capital is the collective intangible resources that are possessed by the human. It includes skills, talents, abilities, intelligence, wisdom, judgement, experience and training which can be possessed by an individual or a group.
Using human capital, an economy or a company can generate material wealth.
Physical capital is the man-made tangible resources that support the manufacturing process of goods and services. Physical capital is considered one of the most important capitals of the production process in classical economics.
Physical capital includes machines, equipment, vehicles and buildings. Due to its illiquid nature, the valuation process of physical capital is quite challenging.
Comparison Table
| Parameter of Comparison | Human Capital | Physical Capital |
|---|---|---|
| Meaning | Human capital refers to the skills, talents, experience, abilities, preferences, manner of education, expertise, judgement and training that humans possess individually or collectively. | Physical capital refers to the man-made resources which support the manufacturing process of goods and services. It includes machines, buildings, equipment, vehicles and so on. |
| Nature of resource | Human capital is intangible. | Physical capital is tangible. |
| Formation process | The formation process is not industrial. The formation of human capital is more of a social process in nature. | The formation process of physical capital is industrial. |
| Mobility | Human capital is not portable as there are many restrictions culturally and nationally. | Physical capital is portable between countries except for some government restrictions. |
| Separability | Human capital is not separable from its owner. | Physical capital is separable. It can be separated from its owner easily. |
What is Human Capital?
Human capital is the collective intangible resources possessed by human beings individually or collectively. It includes skills, talents, experience, abilities, preferences, manner of education, expertise, judgement and training, which generates wealth for a company or an economy.
In the late 1950s and the early 1960s, economists from the University of Chicago, Theodore Schultz and Gary Becker, developed a theory of human capital, where they said investing in workers means investing in the capital equipment
as the workers are one of the main factors in the production process.
Gary Becker categorised human capital into two sections- general human capital and specific human capital. General human capital is the qualities and training that have beneficial values to the individual at any organisation.
On the other hand, specific human capital is the education and training which have beneficial values only to the organisation.
Human capital management is spread out all over an organisation. Management actions and decisions that can affect the relationship between the employee and the organisation are considered very important.
So, management actions can affect the human capital potential to impact the performance of the organisation both positively and negatively. Organisations can help to develop human capital, but the ownership of human capital remains in the control of the owner.
What is Physical Capital?
Physical capital is the man-made resources like machinery, buildings, vehicles and equipment which are owned by the organisation. Physical capital is one of the main factors in the production process.
Physical capital demands an extensive amount of investment.
Since the birth of the mechanized production system and capitalism, physical capital has been seen as capital goods. Physical capital is a very important component that adds value to an organisation.
Many types of physical capital are fixed assets that have years of economic life. The physical capitals are not destroyed or consumed during the process of manufacture, but they can be diminished over time.
Physical capital is illiquid, which challenges adding value to the physical capital. Sometimes, equipment and machinery are customized according to the production process and purpose.
So the valuation of the equipment and machinery becomes challenging for the organisation.
For instance, a beverage manufacturing company that has a particular bottle design can suffer from the resale of the bottle-making machine as the machine can manufacture a certain type of bottle. In this case, the valuation process of the machine will be difficult.
Main Difference Between Human Capital and Physical Capital
- Human capital includes inanimate man-made assets like machinery, buildings, vehicles, equipment and so on. On the other hand, human capital consists of skills, experience, talent, manner of education, abilities and so on, which humans possess both individually or collectively.
- Human capital is intangible, and on the other hand, physical capital is tangible.
- Human capital can not be sold at the market, only the service provided by the owner of the human capital can be sold in the market. Like any other commodity, physical capital can be sold in the market.
- Human capital can not be separated from its owner, but physical capital can be easily separated from its owner.
- Human capital is not that easy to transport Internationally as there are migration and cultural barriers. But physical capital can be easily transported internationally.
- Human capital appreciates over time with additional good training and education, and good health. Contrary, physical capital depreciates over time for constant use.
References
- https://dash.harvard.edu/handle/1/34309590
- https://www.tandfonline.com/doi/abs/10.1080/0142569042000236961
Last Updated : 28 July, 2023
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Chara Yadav holds MBA in Finance. Her goal is to simplify finance-related topics. She has worked in finance for about 25 years. She has held multiple finance and banking classes for business schools and communities. Read more at her bio page.
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