Human capital and its implications in Economic performance

The origin of the theorizing of Human capital goes back to the emergence of classical economics in 1776, and after that developed as an economic theory (Fitzsimons, 1999). After the manifestation of that concept as a theory, Schultz (1961) recognized Human capital as a central factor for national economic growth in the modern economy. With the emergence and development of Human Capital as an academic field, some researchers attempted to clarify how human capital could contribute to the socio-political development and freedom (Alexander, 1996; Grubb & Lazerson, 2004; Sen, 1999). The most prominent economists to address issues of Human Capital were Adam Smith, John Stuart Mill, and Alfred Marshall. Irving Fisher expressed the pivotal arguments connecting early economic thought to contemporary human capital methodologies (Sweetland, 1996).

One of the most analyzed perspectives of Human Capital is the relation of the labor force to production. Romer (1990) refers to Human capital as a fundamental source for economic productivity. Rosen (1999) states Human Capital is an investment that people make in themselves to increase their productivity. More recently, Frank and Bemanke (2007) defined Human capital as ‘an amalgam of factors such as education, experience, training, intelligence, energy, work habits, trustworthiness, and initiative that affect the value of a worker's marginal

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product.' Considering the production-oriented perspective, Human capital is the stock of skills and knowledge embodied in the ability to perform labor so as to produce economic value (Sheffin, 2003). Furthermore, some researchers defined Human capital as ‘the knowledge, skills, competencies and attributes in individuals that facilitate the creation of personal, social and economic well-being’ within the social perspective (Rodriguez & Loomis, 2007).

The term ‘Human capital’ is semantically the combination of ‘human’ and ‘capital.' From an economic perspective, capital refers to ‘production factors used to create goods or services that are not themselves significantly consumed in the production process’ (Boldizzoni, 2008). The Human would be the subject to take charge of all economic activities such as production, consumption, and transaction. On the establishment of these concepts, Human capital means one of the production elements that can generate added-value through its input (Kwon, 2009).

The ways to invest in Human Capital can be classified into two types. The first is to use humans as a labor force. In the classical economic perspective, this means that economic added-value generates the input of the workforce with other production factors such as financial capital, land, machinery, and labor hours. Until the economic growth of the 1950s, most economists had supported the importance of such a quantitative workforce to create products (Kwon, 2009).

The second focuses on the assumption that the investment of physical capital may show the same effectiveness as Human capital in education and training (Little, 2003). Considering that the assumption accepts as a premise that Human capital broadly includes the meaning of

‘human as creator’ who frames knowledge, skills, competency, and experience originated by continuously connecting between ‘self’ and ‘environment.'

In the 1950s, some economists highlighted that the investment of Human capital was the primary element to raise individuals’ wages compared to the quantitative input of other components such as land, financial capital, and labor force (Salamon, 1991). Throughout the investment of Human Capital, an individual’s acquired knowledge and skills can easily transfer to certain goods and services (Romer, 1990). Considering that accumulation of knowledge and

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expertise is an important role for Human capital, there is a widespread belief that learning is the core factor to increase Human capital. In other words, learning is a significant piece in obtaining much knowledge and skills through many ways of acquisition including the relationship between an individual and society (Sleezer, Conti & Nolan, 2003).

Such accumulation of Human capital through learning activities significantly influences many sectors. Many researchers argue that accumulation of Human capital through education and training investment mostly affects the growth of the individual’s wages and the whole national economy (Denison, 1962; Schultz, 1961).

According to Lucas (1988), a microeconomic model shows that education investment for workers significantly affects their productivity in the workplace. Related to the previous idea, some scholars stress the importance of education and training in the Human Capital field (Griliches & Regev, 1995; Rosen, 1999).

From the microeconomic point of view, the foundations of Human capital theory were laid by Theodore Schultz (1961) and Gary Becker (1976). They developed a theoretical framework of individual decisions on Human capital investments (Schultz 1961), and of parental decisions on the investments in the education of children (Becker et al., 1960).

Over the last three decades, many scholars have been devoted to the generation of indicators of Human capital and their impact on well-being. This literature addresses the relation between Human capital and economic growth. With the emergence of the endogenous growth theory, scholars agree that Human capital is a crucial fact that explains why some countries are rich and others poor (Cinirella & Streb, 2013). In the 1980s some scholars tended to include Human Capital as part of the aggregate production function of the neoclassical growth model of Solow (1956). The aim of these scholars was to consider technology as endogenous, treating it as an exogenous variable in neoclassical economic growth theory (Romer, 1986; Lucas, 1988;

Rebelo, 1991).

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Around the 2000s the growth model of the unified growth theory proposed by Galor and Weil (2000) stressed that Human capital is a complement of technology since it is a necessary instrument for innovation. This idea focuses primarily in underdeveloped countries for the adoption of foreign technology (Galor & Weil, 2000; Galor, 2005, 2010). Given the importance of human capital for economic growth, many scholars created Human capital indicators to compare the origins of the economic disparities, in which Human capital seems to have been one of the reasons. Unfortunately, it is not possible to find direct measurements of human capital for pre-modern periods; hence scholars made an effort to approximate it according to different indicators. For example, Baten and Van Zanden (2008) argued that Human capital measured by book production as a proxy for literacy skills can explain differences in economic growth before industrialization. However, there is no agreement among scholars on whether Human capital was a driving factor for economic growth before the industrial revolution.

In the origins of inequality in Latin America, Human capital was closely related to the formation of institutions. For example, the work of Lipset (1960) claims that Human capital improves the quality of institutions. In the first place, it is required to generate institutions committed to the protection of human rights. Furthermore, educated people tend to resolve their problems by discussion and elections instead of violence (Swanson & King, 1991). The link between Human capital and institutions was empirically tested by Glaeser et al. (2004), Alvarez et al. (2000), and Barro (1999). The relation between institutions and Human capital formation is one of the most preferred explanations of the origins of economic and social disparities in the world. Over the past three decades, the economic history literature has claimed that the ‘good institutions’

are drivers of economic growth and ‘bad institutions’ are one of the main reasons of economic backwardness (North et al., 1999; Acemoglu, Johnson & Robinson, 2001, 2002, 2012; Bruhn

& Gallego, 2012).

However, the creation of Human capital indicators remains one of the main deficiencies of the pre-modern period since there is a lack of primary sources. In the next section, I will describe

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the characteristics of the measurement of Human capital, mainly for pre-modern periods, which is the subject of this thesis.