When the subject of investment comes up in economics, it is often with hard, physical assets in mind. Companies talk of investing in factories, governments in infrastructure, and people in houses. But there is a softer, less tangible focus of investment that, in many cases, is more important: knowledge and skills. Companies try to cultivate these in their workforces, governments in their populations, and people in themselves. Economists use the concept of “human capital” to describe this kind of investment. The thinking is that just as spending on buildings or roads generates physical capital, so to investment in knowledge generates human capital.
The theory of human capital was developed half a century ago. Although classical economics had noted that people’s abilities, and not just land and equipment, were crucial to the production process, little thought was given to what that actually meant. In the 1950s Gary Becker, a young American economist, recognized this blind spot when studying the link between education and incomes.
To explain what was going on, Becker distinguished between specific and general human capital. Specific capital arises when workers acquire knowledge tied to their firms, such as how to use proprietary software. Companies gladly pay for this because it is not transferable. But they are far less willing to pay for general human capital since it can be applied to many different jobs. Instead, individuals must to a significant extent invest in general capital themselves, whether directly through tuition fees or indirectly through lower wages at the start of their careers.