Physical vs. Human Capital: Key Differences

Capital refers to the wealth, i.e. assets or money that a company owns and which is used to either commence a new business venture or invest in an existing one. Capital is the life force of any corporation; it helps a business to maintain its liquidity while growing in stature. Generally, capital is referred to the physical assets in a company. However, a new concept of human capital has been introduced as well.

The difference between physical capital and human capital is as clear as day. Physical capital refers to a wealth that is tangible like machinery, buildings, money, furniture, etc. On the other hand, the concept of human capital is new. It implies the skill, abilities, and knowledge of individual employees, which is used by companies to meet their future goals. The company does not own this type of capital. Instead, they avail it against adequate remuneration.

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. Similar ratios used to measure and evaluate the performance of investments in physical capitals are also used in the case of human capital. Investments in both of these capitals lead to fundamental improvements in a business and better chances of achieving long-term goals.

Therefore, before moving on to the difference between physical and human capital, you need to know the definition of these capitals and what they represent.

Physical Capital

In economics, the term ‘physical capital’ represents the inputs, i.e. factors of production or human-made items that are owned by the business like machinery, properties, buildings, furniture, electronic items, and others which are used to convert raw materials into finished goods.

To commence a business, a substantial amount of investments is made to procure the necessary physical capital. It helps a company to start its production of goods and services and helps it to strengthen its position in the market.

After acquiring ample knowledge and calculating the outcome, an investment in physical capital is made. An owner or entrepreneur calculates the expected return from the investments that he/she is making and based on that calculation selects the option, which offers a relatively higher return. Therefore, it can be stated that the ownership of any physical capital is a product of planning and conscious decision-making.

Human Capital

Human capital implies the personal abilities that an employee brings to his/her organization. It is in the form of skills, knowledge, experience, expertise, intelligence, attitude, professionalism, value, and ethics, etc. As a result, employees are considered as assets whose value can be augmented via further training and development.

In simpler words, it portrays the cumulative value of a company’s intellectual capital. This capital is a constant source of innovation and creative solutions. This standard is used to determine the value of an individual’s skill set. However, this concept also makes it clear that every employee is not equal. They are differentiated based on what they bring to the company.

Companies do not own human capital. Instead, they rent it from their employees. Therefore, uncertainty surrounds this capital because when an employee leaves a company, it loses a portion of its human capital.

Physical Capital versus the Human Capital

Physical and Human Capital are different and are both essential for an organization.  There is a substantial difference between these two capitals; they are outlined below –

1. Meaning

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.

Contrarily, human capital is classified by the attributes that employees bring to a company. It is a culmination of talent, skill, knowledge, experience, abilities, attitude, etc. 

2. Nature

The nature of physical capital is tangible, which means it can be seen and touched. Whereas human capital is intangible, i.e. it cannot be felt and seen. It can only be visible through the inputs and outputs of individual employees. Human capital can be enhanced through training and skill development. 

3. Formation

The formation process is a significant difference between human capital and physical capital. The formation of human capital is not an industrial process; it is a social one. Additionally, it is also a result of the decision-making of an entrepreneur or manager. Recruitment and training play a big role in building up human capital.

On the other hand, the formation of physical capital is an industrial process along with an economic decision taken by the entrepreneur.

4. Tradability

Physical capital can be sold in the open market like any other commodity. However, human capital cannot be traded. It is the service that is sold.

5. Separability

Physical capital can be separated from its owner, but human capital is inseparable. In other words, physical capital is not bound to a person while human capital is an intrinsic part of a person and cannot be separated from the individual.

6. Financial Statement

Physical capital appears on the financial statement of the company. However, human capital does not appear on any financial statement.

7. Mobility

Mobility is a significant point that distinguishes between physical and human capital. Physical capital may be mobile, apart from certain government restrictions. Whereas, human capital is not portable. It is primarily restricted by nationality and immigration and relocation laws. Human capital cannot be easily transported like physical capital as the will of an individual also becomes a deciding factor for the move.

8. Depreciation

Both of these capitals go through depreciation, but the reasons are not the same. Physical capital is deprecated owing to its regular use. However, human capital is depreciated due to aging. 

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. Apart from this, for other topics related to economics and commerce, students can visit the official website of Vedantu.