Before analyzing the effect of human capital on economic growth, the term of human capital itself should be explained. Obviously, one question emerges: “What is human capital?”. Generally speaking, human capital can easily be described as a collection of intangible assets owned by people, which creates value for different economic entity.According to this statement, human capital is the assessment of investments in population which is calculated by costs in education, science, health, security of citizens and businesses, economic freedom, etc.Human capital is not a new finding. The first mentioning of human capital can be found in Adam Smith’s book “An Inquiry into the Nature and Causes of the Wealth of Nations”. In the book, Smith (2007) stated that fixed capital not only contains tools and means of labour, but also knowledge, skills and experience of employees. In his opinion, all abilities possessed by workers, which is considered as an asset, should produce a gross profit as well as tangible assets.
Therefore, Smith claimed that costs in training should be counted as an investment in the ability of workers to gain revenue in the future.The other economist who emphasized the importance of spending on labour force was Karl Marx in his fundamental work “Capital: Critique of Political Economy”. In Marx’s opinion (1887), labour force was one of the key factors of production and all of the costs spent in order to acquire it was called “variable capital”. The variable capital is the labour cost which chiefly was counted as an outlay on wages and the efficiency of variable capital directly depends on set of skills, experience and knowledge of workforce in specific fields of work.However, it should be said that Adam Smith and Karl Marx did not present a clear definition of human capital. There was a number of economists who mentioned the significance of people’s knowledge and experience as well. For instance, Alfred Marshall (1920), who is known as one of the founders of neoclassical approach in economic science, in his book “Principles of Economics” stated that “The most valuable of all capital is that invested in human beings”The term of human capital began to be known as an economic definition only in the second half of the XX century. Such economists as Theodore Schultz and Gary Becker established a new view towards the importance of human capital in development of humanity.
These scholars published a number of remarkable works which had a tremendous change in economic view of human resources as means of production. For this creation of fundamental theory of human capital both scientists were awarded the Noble Prize in Economic Science.Nevertheless, the actual concept of the term “human capital” has not been clarified yet. The issue of this term arises with the word “capital”.
It should be said that until know the meaning of “capital” had different definitions and the way how economists widened the explanation of this word needs some attention. In Business Dictionary, the word “capital” is explained as one of the three factors of production which function is to maintain the creation of goods and services and does not involve itself in the procedure. According to Fritz Machlup (1982), in many economic books, the term of capital was used with relation to tangible assets which is only represented in physical form of assets. However, in his point of view, such definition can not be a clear description of the word “capital”, because it does not include intangible assets and consumer durables in itself.
Thus, he affirmed that capital has become a wider term and restrictions of the conception of capital by using only tangible assets is a fallacy. (Machlup, 1982, p 3.) Similarly, Theodore Schultz stated that the classical economics provided a wrong interpretation of labour as the factor of production. In classical economics, labour is represented as capital-free factor while capital is given as the factor which has a physical form and makes a profit. Schultz (1972) criticized such view of economists and proposed the idea where labour involves capital in form of knowledge and skills.