Whatever raises the worth of your firm is considered capital in the context of business. Physical, social, intellectual, and financial qualities may all be enhanced by it. There are two types of capital in economics and business: human and physical.
Human Capital Vs. Physical Capital
While physical capital refers to a company’s or economy’s resources, human capital is the worker’s talents, education, preferences, and so on that, they bring to the table. Physical capital, on the other hand, refers to items that have been manufactured by humans and are being brought or invested by a business in order to make products.
Human capital is the sum total of the human’s aggregate intangible resources. It encompasses a wide range of attributes that may be held by a person or a community, such as intellect, knowledge, discernment, and training. Human capital may be used to develop tangible wealth in an economy or a business.
The tangible resources created by humans and used in the production of products and services are referred to as “physical capital”. In classical economics, physical capital is regarded to be one of the most essential capitals of the manufacturing process. Machines, equipment, vehicles, and structures all fall under the category of “physical capital”. Physical capital is difficult to value because of its lack of liquidity.
A person or group’s total intangible assets include their human capital. It encompasses everything that makes a business or economy successful, from the people who work there to the things they know and have learned, to their personal preferences and the way they were educated.
A theory of human capital was created by University of Chicago economists Theodore Schultz and Gary Becker in the late 1950s and early 1960s, stating that investing in people is the same as investing in capital equipment since people are a key component in the production process.
A person’s general human capital and their unique human capital are separated by Gary Becker into two categories. Human capital, in general, refers to a person’s whole set of skills and abilities, regardless of where they work. Specific human capital on the other hand is the education and training that are solely helpful to the company.
Every part of an organization is involved in human capital management. A company’s employee-organization relations are taken into consideration while making management choices and actions. As a result, management decisions may have a favorable or negative influence on the organization’s success. Human capital may be developed with the assistance of organizations, but ownership of human capital stays with the owner.
The physical capital of a company is comprised of all of the company’s man-made assets, such as buildings, cars, and equipment. In the industrial process, physical capital is a critical component. Investing in physical capital necessitates a large financial outlay.
Physical capital has been seen as capital commodities since the advent of the mechanized production system and capitalism. An organization’s physical capital is a critical component that creates value. There is a long economic life for many forms of physical capital. During the manufacturing process, the physical capitals are not destroyed or consumed, but they might be depleted over time.
The inability to add value to physical capital is a result of its illiquidity. Equipment and machinery may be tailored to meet the specific needs of a manufacturing process or end-use. Because of this, valuing the company’s equipment and machinery becomes difficult. The resale of a bottle-making machine may harm a beverage firm with a certain bottle design since the equipment can only produce a single sort of bottle. A problematic valuation situation will arise if this is the case.
Difference Between Human Capital and Physical Capital
- There are two types of human capital: inanimate and animate. Inanimate human capital comprises things like machinery, buildings, cars, equipment, and so on. Human capital, on the other hand, comprises a person’s skills, experience, talent, method of education, abilities, and so on.
- The difference between physical and human capital is that physical capital can be seen and touched.
- You cannot sell human capital; only the service you give as its owner may be sold on the market. Physical capital may be traded on the open market just like any other commodity.
- Physical capital may be readily divorced from its owner, however, human capital cannot be.
- Migration and cultural obstacles make it difficult to move human capital throughout the world. Physical capital, on the other hand, maybe carried across borders with ease.
- The value of human capital increases with time as a result of increased education and health. Physical capital, on the other hand, depreciates over time since it is constantly used.
Human capital is inseparable from its owner because it is made up of the qualities that people possess individually and collectively, whereas physical capital is made up of the resources that companies acquire to support the manufacturing process, such as machinery, equipment, buildings, and vehicles, and can be easily separated from its owner.
Both physical and human capital, on the other hand, need a large outlay of resources in order to be acquired and developed. Both of these capitals must be carefully sought for and acquired by owners and managers if they are to provide value to the organization.