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GARY BECKER ON HUMAN CAPITAL
INTRODUCTION
Gary Becker was a leading theorist of human capital at the University of Chicago; he
is best known for extending the scope of economic analysis from market to non-
market phenomena to include crime, education, law, racial discrimination, and
human capital.1 Though Becker wrote extensively on human capital from as early as
1962-64, much of his empirical work is extremely technical.2 This brief essay will set
out a simple introduction to the concept of human capital that will be of interest to
both economists and experts in human resources. In order to do so, I will invoke the
main arguments in two important papers in which Gary Becker tried to explain in a
nontechnical way what he was doing for both academics and the layperson by
developing the concept of human capital. The first of these papers is an excerpt from
the third edition of his book on human capital; the second paper is based on a lecture
that he delivered at the World Bank on December 16, 1994.3 The former is an
introduction to the concept of human capital; the latter is an attempt to deploy the
1 See Gary S. Becker (1993). ‘The Economic Way of Looking at Life,’ Coase-Sandor Institute
for Law and Economics, John M. Olin Law and Economics Working Paper No. 12, Second
Series, University of Chicago Law School.
2 Gary S. Becker (1962). ‘Investment in Human Capital A Theoretical Analysis,’ The Journal of
Political Economy, Vol. 70, No. 5, Part 2: Investment in Human Beings, pp. 9-49.
3 Gary S. Becker (1964, 1975, 1993), ‘Human Capital Revisited,’ Human Capital: A Theoretical
and Empirical Analysis with Special Reference to Education, Third Edition, (Chicago: University
of Chicago Press), pp. 15-26 and Gary S. Becker (1995). ‘Human Capital and Poverty
Alleviation,’ Human Resources Development and Operations Policy, Working Papers Series,
HROWP 52, World Bank.

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concept of human capital in the context of poverty alleviation in third world
countries. There are both microeconomic and macroeconomic dimensions to the
concept of human capital. Both firms and economies need a strategy to identify and
deploy human capital as a form of value addition and value generation. And,
needless to say, there is a growing literature on human capital for those who would
like to explore this topic further in the contexts of economics, human resources, and
strategy though this essay focuses mainly on Becker’s formulation of human capital.4
HUMAN CAPITAL & STRATEGIC HUMAN RESOURCES
The relationship between human capital, human resources, and competitive
advantage has also been explored by experts in strategic HR.5 What theorists of both
human resources and human capital share in common is the need for developing
adequate HR and human capital metrics. They also have to make an effective case
for demonstrating that human resources do have an impact on a firm’s bottom-line.
It would not be an exaggeration to say that this is, in fact, the main problem in
dealing with both human resources and human capital. The theoretical challenge is
to move the analysis of firms and a firm’s performance from an intangible model of
human resources and human capital to one that is susceptible to measurement. In
the absence of objective measures, experts in these areas fear that they will at best be
4 See, for instance, the working paper by Philip Stiles and Somboon Kulvisaechana (1999,
2003), ‘Human Capital and Performance: A Literature Review,’ The Judge Institute of
Management, University of Cambridge. The authors provide a broad based introduction to
the literature on human capital including intellectual capital, social capital, organisational
capital, and knowledge. They then go on to evaluate the role played by human capital in
increasing a firm’s level of performance. This paper also has an analysis of what is at stake in
measuring the existence, levels, and deployment of human capital in firms. It concludes with
an annotated bibliography of the different forms of human capital. Those who are interested
in situating how Gary Becker’s concept of human capital relates to his work in economics
might want to look up Steven Pressman (1999). ‘Gary Becker,’ Fifty Great Economists
(London: Routledge), pp. 185-189 and Richard A. Posner (1993). ‘Gary Becker’s
Contributions to Law and Economics,’ The Journal of Legal Studies, Vol. 22, No. 2, pp. 211-215.
5 Patrick M. Wright, Gary C. McMahan and Abagail McWilliams (1993). ‘Human Resources
and Sustained Competitive Advantage: A Resource-Based Perspective,’ Centre for Effective
Organizations, Marshall School of Business, University of Southern California, Los Angeles.

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champions, evangelists, or humanists but not scientists.6 Furthermore, attempts to
measure and assess the value of human capital are related to the ongoing attempts to
think through the value of intellectual capital in a knowledge-based economy.7 The
main impetus for such forms of research is to manage and increase the levels of
‘knowledge-worker productivity’ since knowledge is increasingly thought to be the
only sustainable source of competitive advantage in firms.8 In other words, the
preoccupation with HR and human capital necessarily culminates in theories of
learning and in the learning organization as the paradigm of the knowledge
economy that is highly dependent on human capital in constituting its value chain.9
This knowledge-based model of the firm that emphasizes a relentless approach to
learning has important implications for organizational hierarchy. These knowledge-
based firms believe that ‘the authority of ideas’ is more important than ‘the idea of
6 On these themes, see Dave Ulrich (1997). Human Resources Champions: The Next Agenda for
Adding Value and Delivering Results (Boston: Harvard Business School Press) and Dave Ulrich
and Wayne Brockbank (2005). The HR Value Proposition (Boston: Harvard Business School
Press). For an analysis of HR metrics, see Mark A. Huselid, Brian E. Becker, and Richard W.
Beatty (2005). The Workforce Scorecard: Managing Human Capital to Execute Strategy (Boston:
Harvard Business School Press. The background to ‘analytics’ as an approach to enterprise
management is available in Thomas H. Davenport, Jeanne G. Harris and Robert Morison
(2010). Analytics at Work: Smarter Decisions Better Results (Boston: Harvard Business School
Press).
7 Thomas A. Stewart, ‘Human Capital,’ Intellectual Capital: The New Wealth of Organizations
(New York and London: Doubleday), pp. 79-106. See also Stewart’s ‘appendix’ for a
description of measuring tools for intangible forms of capital including human capital, pp.
223-247.
8 Peter F. Drucker (1999). ‘Knowledge-Worker Productivity,’ Management Challenges for the
21st Century (New York: Harper Business), pp. 133-159.
9 Thomas H. Davenport (2005). Thinking for a Living:Howto Get Better Performance and Results
from Knowledge Workers (Boston: Harvard Business School Press). See also David A. Garvin,
‘Building a Learning Organization,’ Harvard Business Review on Knowledge Management
(Boston: Harvard Business School Press, 1998), pp. 47-80 and Morten T. Hansen, Nitin
Nohria, and Thomas Tierney, ‘What’s Your Strategy for Managing Knowledge?’ Harvard
Business Review on Organizational Learning (Boston: Harvard Business School Press, 2001), pp.
61-86.

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authority.’10 That is why it is important to appreciate the links between knowledge,
learning, and talent and develop a strategy to manage them more effectively.11 This
is especially the case in professional service firms that are based purely on the
availability and management of human capital.12
HUMAN CAPITAL & THE ECONOMICS OF EDUCATION
It is hard to believe when we look back that the theory of human capital began as a
specific topic in the economics of education in Gary Becker’s work in 1962-64. Becker
incidentally was interested both in schooling and non-schooling investments in
human capital. Becker’s definition of human capital includes not only returns to
schooling and a college education, but also investments in education, on-the-job-
training, increasing women’s participation in the workforce, reducing the different
forms of discrimination, analysing the decline in fertility rates (contra Malthusian
predictions), and in the provision of medical services and child care to workers.
Becker emphasizes that most of us think of ‘capital’ only in terms of physical and
financial capital, but the invocation of human capital is more than just a figure of
speech. The work of economists at the University of Chicago has been revolutionary
in that the concern with human capital has moved to the mainstream of economic
thought. It is now possible to at least consider treating investments on different
aspects of the workforce as a form of capital expenditure. But whether human capital
will become a financial concept or remain just a figure of speech depends on the
availability of accounting conventions in firms. In the absence of the requisite accounting
conventions, expenditures in human capital will be treated as a cost or an expense
rather than as an investment. So in order to find a place for human capital in a firm’s
10 See, for instance, Lawrence H. Summers (2004).‘The Authority of Ideas,’ Harvard Business
Review on Leadership in a Changed World (Boston: Harvard Business School Press), pp. 189-
191.
11 See Jeffrey M. Cohn, Rakesh Khurana, and Laura Reeves (2008). ‘Growing Talent as if
Your Business Depended on It,’ Harvard Business Review on Talent Management (Boston:
Harvard Business School Press), pp. 43-62.
12 See Thomas J. Delong, John J. Gabarro, and Robert J. Lees (2007). When Professionals Have to
Lead: A New Model for High Performance (Boston: Harvard Business School Press), passim.

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value chain, it is important to relate how a new concept is accommodated within the
existing and emerging conventions of accounting.
MEASURES OF HUMAN CAPITAL
What this means is that it is important for economists and HR experts to find
measures of human capital on the basis of which firms can calculate their
investments and returns on investment. That is basically the link between what
economists mean by human capital and what those in HR mean by human capital,
and why the quest for effective HR metrics is the locus of interaction between these two
professions. Becker points out that the concept of human capital was at first
misunderstood as a form of exploitation of labour by capital. But, subsequently, the
concept of human capital was taken up across the ideological divide. It is now used
in all parts of the world – both capitalist and communist – and is essential for how
economic reformers think about the macro-economy when they calculate the costs
and benefits to investments in education, on-the-job training, skill-building on a
large scale, and in providing health care for their workers. Becker’s empirical
research has tried to demonstrate that the returns to schooling and college education
are high not only in the United States, but in ‘over one hundred countries with
different cultures and economic systems.’ So, contrary to those who think that the
Americans are ‘overeducated,’ Becker argues that the main concern going forward is
whether given the present levels of economic competition, American workers are
getting adequate training in the workplace. A further cause for concern is the decline
in levels of performance in standardised tests amongst school children in the United
States seeking college admission.
MONETARY RETURNS TO EDUCATION
Another important trend in human capital studies is the increase in the number of
women (including married women) who are going to work. Women are increasingly
moving away from the more feminine occupations and moving into professional
schools of business, engineering, law, and medicine. These trends are not specific
only to the United States, but encompass a number of countries including emerging

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economies. The gains that accrue for women from participation in the workforce go
a long way to explain ‘the behaviour of women than have traditional ideas about the
proper role of women.’ Women are to be found in both full-time jobs and highly
skilled jobs now than ever before. These trends accelerated in the late 1970s and
constitute an important feature of the contemporary workforce in the United States
and elsewhere. The civil rights movement has also played an important role in
empowering women and in bringing them into the workforce in large numbers.
Some of the demographic factors that affect women’s participation in the workforce
include the rate of fertility, the rate of divorce, and the expansion of the services
sector. What analysts of human capital assume at the outset of their empirical
studies on these trends in the workforce is that education increases not only
productivity, but also earnings by providing workers with new forms of
‘knowledge, skills, and a way of analysing problems’ that are not reducible to merely
picking up credentials. This formal education is accompanied by on-the-job training
for most workers since schools cannot anticipate and provide all the skills that
employers seek in their workforce.
RETURNS TO ‘ON-THE-JOB TRAINING’
Becker points out that, according to recent estimates, ‘the total investment in on-the-
job training may be almost as large as the investment in education.’ It is usually on-
the-job training and learning that makes it possible to bond workers with their
employers for the long haul. Skilled workers are less likely to job-hop than unskilled
workers; the former are likely to find that the recruitment practices of their
employers are more highly differentiated than the latter, and therefore an
inducement to stay on longer. It is important to remember that though Becker
emphasizes monetary returns to investment in human capital in his empirical and
theoretical studies on the economics of education, he does not discount the
importance of non-monetary returns. Investments in human capital enable workers
to not only be more productive and earn more, but also ‘to appreciate literature,
culture and the good life.’ The monetary side of human capital analysis has however

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got more attention because it is easier to measure and not because human capital is
reducible to the monetary returns to education and training.
THE ROLE OF THE FAMILY
Another important factor in the analysis of human capital is the role played by
supportive families. Children from supportive families usually do much better at
school and college. It is therefore imperative for families to develop good habits in
their children as early as possible. Families characterized by low levels of education,
early pregnancy, and marital instability are less likely to generate high levels of
human capital than those who emphasize the cultivation of good habits in their
children. Families with low levels of education and income are also less likely to
invest in their children or make only conditional investments in the next generation.
It is therefore important for the government to supplement investments that families
make on their children with long-term financing in the forms of loans, grants, and
scholarships. There is an extensive loans program, for instance, in the United States
to make college affordable for the majority of Americans who may not otherwise be
able to attend college. Many of these programs are tied to social security programs
for the elderly; so when students repay their loans it becomes possible to provide
welfare and retirement benefits for the elderly.
INVESTING IN CHILDREN
The patterns of spending and investment on human capital in families are also
important; typically families share the total resources available for education and
health with their children. The main decision parents have to make is the trade-off
between the quality of upbringing that they can provide and the number of children
that they have. The fewer the children, the higher the standards of living for the
family as a whole; and the quality of attention that children get from their parents in
their quest for a better life. The success of certain ethnic groups in the United States
in educating their children, and in raising their levels of income, relates to the fact
that they have as few children as possible. Rising levels of education and income
then are usually accompanied by a decline in rates of fertility. That is what Malthus

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did not anticipate when he feared that the population would expand faster than a
society’s ability to feed its members. In other words, a macroeconomic approach to
human capital studies has important implications for areas like demography and
governance since it will be able to predict trends in fertility rates and population
patterns much more effectively.
ECONOMIC DEVELOPMENT & POVERTY ALLEVIATION
An important problem in growth theory is to explain why some countries grow
consistently year after year while others lag behind. The factor that makes such
growth possible is not science and technology as such (since underdeveloped
countries have their share of these), but the deployment of science and technology in
the context of both industrial production and in the generation of human capital. In
other words, systematic investments in human capital are a prerequisite to
increasing output amongst ‘scientists, scholars, technicians, and managers.’ Societies
who understand the importance of human capital invariably have universal
schooling for all sections of the population; attending school is not a function of
whether the parents can afford to get the children educated. Increases in per capita
income are related to the fact that the educational system can prepare students for
life in a knowledge-based society. Becker points out that the rise of many Asian
economies which lack natural resources indicates the importance of human capital
as an important factor in economic growth. Japanese companies for instance
invested heavily in their workers and provided life-time employment as a way of
investing in their stock of human capital. But this was not always the case; in the first
half of the twentieth century, for instance, it was common for Japanese workers to
hop between jobs.
HUMAN CAPITAL & AGRICULTURAL GROWTH
Becker also explains the importance of human capital in the context of agriculture.
Unlike traditional farms where children learn all that they have to from their own
parents, modern approaches to farming require a high level of training and the
ability to ‘deal with hybrids, breeding methods, fertilizers, complicated equipment,

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and intricate futures markets for commodities.’ That is why in modern economies,
farmers are well educated. In the absence of education and training, farmers will
neither be able to cope with changes in agricultural science and technology nor be
able to compete effectively in terms of their total output. Educating farmers then in
the modern ways of agriculture is an important tool for the alleviation of rural
poverty. The alleviation of poverty, incidentally, happens to be the main goal of
economics; the tool that will make this possible is systematic investments in human
capital and in providing the markets that will value and enable commercial
transactions in any given instance of agricultural produce or industrial output. The
pervasiveness of poverty in an underdeveloped country is a symptom of inadequate
investments in human capital since the systematic need for investment in human
capital has been understood only late in economic history. That is why, according to
Becker, we are increasingly moving into the Age of Human Capital.13
THE AGE OF HUMAN CAPITAL
The main challenge in the Age of Human Capital is to find ways of harnessing ‘the
skills, knowledge, health, and habits of its population.’ It is not widely known or
understood that the bulk of the wealth of the advanced nations is in the form of
human capital. Becker estimates this amount to be almost eighty percent of the total
wealth. That is why no country in the world can afford to neglect its stock of human
capital. Poverty alleviation is however not the same as wealth maximization. What
emerging economies need is a strategy to do both. Becker is full of praise for many
Asian economies that have been able to develop and deploy their human capital
despite lacking in natural resources to generate financial capital. What these Asian
economies have is ‘a well-trained, educated, and hard-working labour force, and
dedicated parents.’ The success of many Asian, Latin American, and a few African
economies is all the more interesting because it was thought for long that they were
socio-culturally incapable of making progress because they were easy going or too
13 Gary S. Becker (2002). ‘The Age of Human Capital,’ available at:
http://media.hoover.org/sites/default/files/documents/0817928928_3.pdf

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hierarchical by temperament; they were therefore thought of as traditional societies
that are incapable of modernization. Increase in per capita incomes in countries
which lack natural resources invariably demonstrates the importance of human
capital in explaining higher levels of economic performance. The importance of
elementary education, secondary education, and health turned out to be crucial. It
took a while to understand what appears to be obvious in hindsight because the
model of economic development in closed economies was dependent on ‘physical
capital, heavy machinery, and import substitution.’ This approach led to a distortion
of the model of growth that would be necessary for underdeveloped economies to
utilize their stock of human capital more effectively. That is why it was important for
Becker to not only share his research findings with the World Bank, but also
encourage them to continue to invest in human capital through their ‘lending
practices’ given that human capital is the ‘engine of economic growth.’
HUMAN CAPITAL & GROWTH THEORY
What growth theory needs to do, according to Becker, is to formally represent ‘the
relationship between development and human capital investment.’
The importance of these formal representations is that it helps a country to choose
between the path of high or low growth rates by moderating the levels of birth,
education, marriage, fertility, and health. An important tool to make development a
reality is to encourage the active participation of women in education and the

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workplace. It is therefore extremely important to close the gap between the levels of
education for male and female children in traditional societies. This will increase the
probability that a virtuous cycle can be initiated since the more educated a married
couple is, the more likely is it that they will invest in the education and health of
their children. This will have an important effect in increasing the average life
expectancy in a given society and reduce bad habits amongst the population. So, for
instance, Becker observes that eating habits tend to be healthier amongst the
educated; they are also less likely to smoke; and more likely to use contraception and
practice safer forms of sex thereby reducing rates of HIV infection in the population.
The decrease in rates of adult and infant mortality in the developed world is related
to compulsory schooling.
HUMAN CAPITAL & THE MARKET SYSTEM
But while education and health are important factors in generating human capital, it
is also important to deploy human capital effectively. The economic system of
incentives, wages, organizational design, and the existence of competitive markets
are also important factors in alleviating poverty and generating economic growth. In
the absence of these market-based factors, communist countries could not grow
despite investments in education and health. It is therefore important for growth
theorists to identify what forms of interactions are required between human capital
and public policy as preconditions for economic growth and prosperity. Education
policy, in other words, can play an important role in reducing income inequality. An
important aspect of education policy that Becker analyses is the importance of
vouchers to enable poor families to access private schools since they may happen to
be in a neighbourhood which does not offer the type of schools that they are looking
for. Unlike rich families, they cannot afford to move to another neighbourhood to
merely get their children admitted in public schools; that is why it is important to
have a ‘voucher system that is limited to poor families.’ Comparative studies of
public and private schools in the United States and elsewhere show that children
from poor families gain a lot by ‘attending private schools.’

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CONCLUSION
And, finally, Becker concludes by pointing out that education in developing
countries must have a ‘broad reach’; it is absolutely important that ‘the vast majority
of the population attain decent schooling levels.’ Developing countries are more
likely to attract foreign investment if they have a population that ‘are sufficiently
skilled or can be taught’ and ‘that they can be used to produce the products that the
companies are thinking of locating there.’ Both training and re-training programs are
important; it is important to involve the private sector in this since the rates of return
are higher in the private sector than in the public sector. Becker is in favour of
vocational schools and on-the-job training and the part that can be played by
vouchers in making this possible. Becker emphasizes vouchers ‘because a voucher is
just a general technique of using government funds to finance private activity.’ So
while vocational training is important in building skills on a ‘very large scale,’ it may
not be possible for schools to carry the entire burden of training for vocational skills;
instead the government must ‘harness that to the private sector.’
These steps will ensure, Becker points out, that there is huge increase in the total
stock of human capital in any given knowledge-based economy.
SHIVA KUMAR SRINIVASAN