Human Capital

Difference between Human Capital and other Forms of Capital

There are some key differences that distinguish human capital from more traditional forms of capital such as physical assets and financial capital. A key difference is that human capital resides inside individuals and individuals own their own human capital. While organizations may try to use an individual's human capital, the ultimate choice to deploy human capital rests squarely with the individual. Closely related to this point is the fact that human capital is a mobile good. It can leave the firm temporarily; such is the case when a person leaves at the end of the workday or it can be lost on a more permanent basis (e.g., when an individual quits current employment to work for a competitor). Thus, a major goal of most firms, usually through the Human Resources (HR) function, is to encourage employees and managers to share their knowledge and skills with others inside the firm and systematize such knowledge in the firm's routines and practices. When such sharing occurs, human capital is transformed from a private good to a public form of capital that the firm can choose to exploit for competitive advantage. A firm's HR practices should, therefore, devise ways to develop, enrich, and retain human capital and ensure that human capital stays within the boundaries of the firm.

Another pivotal difference between human capital and more traditional forms of capital is that human capital can actually appreciate, not depreciate, with use. It is important to note, however, that just as human capital can work to the benefit of the firm, human capital can also work directly against a firm's goals or mission. This phenomenon can take several forms. Specifically, whereas a production line or an oil field as forms of capital cannot refuse authority or become unmotivated, that very possibility is clearly evident with human capital. Said differently, human capital can resist authority or can even slow down or stop working with ebbs and flows of motivation. At its worst, human capital can be used to extort or exploit the firm in terms of theft, corruption, or sabotage. Indeed, over the last several years, there have been notable and well-publicized cases in which knowledge and skills were used to hurt, not help, a firm.

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