Simply put, the human capital of any given venture is the economic value that its employees add to it (1). In economics, the term ‘physical capital’ is used to denote the inputs (factor of production) or man-made goods, which are owned by the company such as computers, machinery, equipment, tools and so forth. It is used in the production process to enable conversion of raw material into finished goods. Social capital refers to beneficial social relationships developed over time such as a company’s goodwill and brand recognition, key elements of sensory psychological marketing.
- Here’s a comparison of physical capital and human capital presented in tabular form.
- Physical capital is the tangible assets used to make goods and services, such as machines and equipment.
- Comparisons may contain inaccurate information about people, places, or facts.
- As a result, the employees are perceived as an asset, whose value can be increased, by investing in their training and development, like any other asset of the company.
Social Capital
Technology companies often pour more resources into intellectual or human capital. Its value is in its human capital including the knowledge base of its employees. Indeed, the first step most developing countries take to advance is to improve the health and education of their people.
Human Capital Theory
Both of these capitals go through depreciation, but the reasons are not the same. So the valuation of the equipment and machinery becomes challenging for the organisation. So, management actions can affect the human capital difference between physical capital and human capital potential to impact the performance of the organisation both positively and negatively.
Investment (Quizlet Activity)
Many businesses choose to invest in the happiness and well-being of their employees because this investment indirectly benefits the bottom line by cultivating a happier, more efficient workforce. The term “capital” can refer to a number of different concepts in the business world. While most people think of financial capital, or the money a company uses to fund operations, human capital and social capital are both important contributors to a company’s overall financial health. Both physical and human capitals are the building blocks of any successful enterprise. Any company that can seamlessly integrate these two will achieve its targets more efficiently. In terms of economics, the difference between physical capital and human capital is a vital chapter.
The value of the programmer’s experience is factored into the amount the company is willing to pay over and above the market price. Employees are often an organization’s most valued assets but there are no generally accepted standards for measuring the value of people. Theoretically, an attorney would need only an office—perhaps just a desk, even—a phone, and a computer. The relatively small amount of physical capital is the reason, an economist might argue, that law firms outnumber steel manufacturers by a significant margin.
Physical capital is generally bought by a company and it’s used as the company pleases. Human capital is also acquired at a cost but the company has less control over it. Employees with special skills, qualities, and qualifications can eventually choose to leave a company. A company is willing to pay more for an experienced programmer who can produce a higher-margin product.
Policymakers make informed decisions regarding investment in physical capital, maintenance strategies, and technological adaptation to optimize productivity and competitiveness. Physical capital means an organization’s non-human assets such as buildings, land, plant and machinery, furniture, electronic items, office supplies, etc. In a nutshell, every non-human asset that plays a role in production can be labeled as physical capital. While the value of human capital in terms of money is not easy to measure, the influence of investments in it can be calculated and analyzed.