University of Chicago economist Gary Becker won the Nobel Prize largely for his advancement of human capital theory—the idea that investing in a person’s knowledge and skills has a wide range of economic effects. Becker’s writing on the subject was technical, but his teaching, especially in his famous doctoral course at Chicago, remains legendary for its accessibility, brilliance, and applications to everyday life.

We’re happy to share an excerpt from Human Capital for Humans, the forthcoming work from economist and former Becker student Pablo A. Peña. Human Capital for Humans channels Becker’s storied classroom approach to produce an accessible, essential guide to understanding the science that has become synonymous with modern life and the economy. In the following passage, Peña begins to unpack the human capital approach to domains such as parenting, aging, beauty, health, and athleticism. The result is an intellectually elevated and essential introduction for learners and teachers of this subject across business, management, economics, policy, and beyond.

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For people in a hurry, human capital can be defined as a form of capital that is embedded in humans. It’s the ability to produce goods and ser­vices that cannot be separated from the person possessing such ability. That’s it. Now, for people with more time and curiosity, human capital can be described by the list of skills we possess that allow us to generate ideas and create things that are valuable.1 Human capital lets us solve a wide range of problems, from the most trivial (which film we watch on a rainy evening) to the most consequential (what job we take or whom we marry). Human capital is knowledge as well as the skills needed to apply that knowledge in a valuable way. It includes intellectual and physical attributes. It’s brains and brawn. It also encompasses what we generally refer to as character, determination, self-regulation, and so on. The next time you buy a bestseller at the airport on how to improve your health or build better habits, you’ll be picking up a book that talks about human capital.

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The first thing to know about human capital is that it isn’t fixed or predetermined. Sure, like many other species on the face of earth, hu­man cubs are born already programmed to be able to do many things. However, by learning to read and write, add and subtract, and so on, they increase their ability to solve problems, generate ideas, and pro­duce things. Those are all ways to increase one’s human capital, and the process is not limited to what happens inside schools. We learn a lot at home or on the streets. Through everyday interactions with our parents, we learn about how society works and how we should behave to avoid becoming pariahs. The same can be said about our contact with neighbors and even random strangers in what is often referred to as the school of life. Even working out at the gym or playing video games can be thought of as a way to develop abilities that increase our human cap­ital. Not all abilities are equally valuable, however. Some abilities are just curiosities that may get you a round of applause in a talent show but no more.

Like other forms of capital—say, machinery—human capital depreci­ates. Perhaps the best evidence of this is that by age forty, we’ve forgotten much of what we learned in high school. To a large extent, human capital depreciates simply because the human body decays as it ages. Our ability to perform physical and mental tasks declines. Even great athletes and intellectuals eventually retire or stop being productive. Of course, not all abilities decay at the same pace. Physical skills tend to reach a maximum earlier than intellectual skills. Yet even among physical skills, some peak earlier than others. Female gold-medal gymnasts are usually teenagers whereas the fastest marathon runners are usually in their early thirties. In contrast, movie directors—whose occupation demands a mix of skills loaded more toward the intellectual than the physical—are, on average, nominated for Oscars when they are about fifty years old. Human capital increases early in life as we develop and learn, then it eventually decays at varying rates.

Taking good care of one’s health slows down human capital depreciation—not drinking or smoking excessively, having a balanced diet, exercising regularly, and so on. So does keeping active. Unlike a machine, moderate activity doesn’t wear us out, and it actually helps us stay in shape. Interestingly, as recently as the nineteenth century, people thought that physical exercise would shorten a person’s lifespan—like putting more miles on a car. That’s why some colleges were against sports on campus. Now we know regular physical activity slows down decay or, in our terms, reduces human capital depreciation.

Human capital is also subject to obsolescence. Some skills become ir­relevant as time passes. Think of the knowledge and craft that went into repairing VCRs. Those skills were rendered obsolete thanks to technolog­ical change, like the introduction of DVDs and then video streaming. A person may still be great at repairing those household staples from the 1980s. But now those skills are useless because—leaving museums and antique collectors aside—nobody owns VCRs anymore. More gener­ally, there was a time when physical strength may have been enough to get you a good job, but the proliferation of tools and machines has made brute force less and less valuable. Unlike with depreciation, the capacity to produce stuff may be intact. But it may have been rendered irrelevant by new technologies. Changes in societal preferences may also play a part. For instance, bans on bullfights have made the skills of bullfighters obsolete.

The opposite of obsolescence, which I will call resolescence, may also take place. Some knowledge or skills once considered irrelevant may be­come valuable. Consider the skills required to play video games. Not long ago, they seemed nonproductive, but today they are applied to piloting drones. Just as with obsolescence, changes in technology or societal pref­erences may drive resolescence. Perhaps the best example can be found in the movie Monsters, Inc., where a monster’s productivity was determined by their ability to scare children. But at the end of the story, when energy was harvested from laughter instead of cries of horror, the ability to scare became obsolete and the ability to make kids laugh became precious: it resolesced.

Another key feature of human capital is that it isn’t transferable, which means it cannot be moved from one person to another in the same way we can move machinery across factories or electronic files across computers. The driving skills of a NASCAR driver or the math knowledge of a physi­cist cannot abandon one human body to be hosted in another. That said, if we get a little technical, there is one exception to this nontransferability property, and that is the donation of organs. Organs provide physical capacity, and therefore transplanting them would fall in the category of transferring capacities. At this point, only a minuscule fraction of the pop­ulation participates in those kinds of transfers, and they are usually lim­ited to life-or-death situations. Perhaps in the future we will see more of them among living individuals. A related topic is the farming of tissue and organs. That type of technology, which is still at early stages, would fall in the category of human capital investment rather than transferability.

The discussion of organ transplantation may bring to mind other med­ical procedures such as plastic surgery, which is frequently used to boost a person’s physical beauty. If the attractiveness of a person helps create value—say, if a magazine ad showing a beautiful model increases the sales of a product—then we can say physical beauty is part of the human capital of that person. In this context, improving one’s appearance may be a form of investment, be it through exercise to be in good shape or through plastic surgery.

One formidable property of human capital is that under the right con­ditions, one person can learn a skill from another person. Sometimes that is the result of casual observation. For instance, you may learn to cook by watching how your mother-in-law works her magic in the kitchen or acquire coding skills by seeing how a colleague solves a problem while writing computer code. Other forms of learning are more deliberate, like what happens in schools, apprenticeships, training programs, or even TED Talks. People watch the latter with the goal of discovering something they didn’t previously know. But it is crucial to note that those we learn from, be it your mother-in-law or a TED speaker, don’t become any less knowledgeable while those watching them acquire their knowledge. It’s not a zero-sum game. By telling you that Chicago sits on a fossilized coral reef, I don’t become any less knowledgeable, and now you know more than you did three seconds ago. That’s why it is no surprise that fire is a popular allegory for knowledge. It can be spread without losing intensity.

With the exception of slavery, human capital cannot be bought or sold because it’s embedded in humans. Nonetheless, it can be rented in markets—that is, labor markets. In any job, a worker lets her employer use her knowledge and skills for a set number of hours per day and receives some compensation for that. In that sense, the employer rents the human capital of the worker in a way that, broadly speaking, is no different from renting a piece of equipment. Historically, there have been other more questionable contracts to rent human capital, like indentured servitude. When people were coming to America from Europe in the seventeenth century, some of them entered contracts to work for a few years in exchange for the passage. The harder the working conditions were, the shorter the period of commitment was. Nowadays, we hear of comparable arrangements among undocumented immigrants who commit to work for reduced pay for those who smuggle them into the US. However, by and large, human capital in legal labor markets is rented at will, and the owner of the human capital can quit a job if she desires.
              Since human capital is embedded in people, it isn’t good collateral for financial transactions. Other forms of capital don’t have that problem. It’s relatively easy for an individual to get a loan if they can offer a car or a house as a guarantee, and companies can offer buildings, machinery, or equipment as collateral for commercial loans, but any person will have a hard time convincing a bank to give them a loan by offering their human capital as a guarantee. The reason isn’t moral or philosophical but entirely practical. If the borrower doesn’t repay the loan, how could the creditor get its money back? Creditors can’t take knowledge and skills from a person in the same way they can take possession of physical property. Even if the person wanted, she wouldn’t be legally allowed to commit her work to repay. She would always be able to renege on such an obligation.
 

The difference between human capital and other forms of capital in terms of how good they work as collateral is very consequential. It means people without physical or financial assets will face challenges when trying to get financing to invest in their own human capital. Take the case of college education. Many college-bound individuals who cannot afford tuition don’t have sufficient assets to use as collateral to get loans. To address this challenge, society has stepped up in multiple ways. First and foremost, parents pony up resources to pay for their children’s college. Whether that support can be considered a loan or not is a story we will revisit later. Second, many students work before and during college to cover tuition and other expenses. Third, the government provides subsidies and guarantees for loans. In fact, higher education is free or almost free in many countries. In the US, where college tuition is rather expensive, the government guarantees student loans so that banks will serve this market and gives subsidies to students such as Pell Grants.

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Pablo A. Peña is assistant instructional professor in the Kenneth C. Griffin Department of Economics at the University of Chicago. He has worked as consultant for business and non-profit organizations and is a former chief economist of Mexico’s National Banking and Securities Commission.

Human Capital for Humans is available from our website. Use the code UCPNEW to take 30% off when you order from us directly.