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Describe the theory of human capital.

      

Describe the theory of human capital.

  

Answers

Kavungya
- The concept of human capital developed in the late 50’s and early 60’s in United States. In the 1960’s Schultz re-known American economist studied the growth of economy and was later
joined by Dennison in the study. The two scholars wanted to account for the US economic
growth. In the 1930’s the US economy was very poor while 30 years later (1969) the economy
was very strong. These economists wanted to explain the factors that caused these growth they
tried the accounting equation Y= C + S and the equation could not balance. They realized that
there was a factor missing in the equation that was responsible for the growth. The equation was found to be incomplete in the absence of this factor responsible for the growth. They explained that the alpha or residual factor was in fact human beings.
- In the US economy it is the investment in human beings through education that was responsible for the growth. They formulated or developed the theory of human capital and stated that the theory refers to the idea that people are motivated/encouraged to spend in themselves in diverse ways not for the sake of present enjoyment but for the sake of future monetary and non monetary benefits.
- Human capital therefore is the ideal notion that people are motivated to spend on themselves by purchasing education not for present consumption but for future benefits or returns. It is concerned with the way people are motivated to spend in education. This expenditure is considered an investment in education. While purchasing education we incur both direct and indirect costs.
- Direct costs include money that you pay in form of fees, books, upkeep, transport,
accommodation etc. these are costs included in the process of buying education.
- Indirect costs include the opportunities forgone while purchasing education. (the
opportunity cost of education)
- Both direct and indirect costs are investment and people are ready to forgo present consumption and purchase education and this is looked as an investment. This will lead to future benefits that are either private or social. Private benefits refer to the benefits that come to an individual that has invested in education. While social benefits refer to the benefits that comes to society that has educated people.
- The theory of human capital also includes all the expenditure on education, health, training, migration from one employment to another, time taken looking for employment etc.
Kavungya answered the question on April 3, 2019 at 05:41

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