Capital alludes to the company’s wealth in the form of money or assets, that can be utilized for commencing a business or investing in a running business, to generate more money. It can be of two types physical capital or human capital. The physical capital implies the capital which is tangible in nature, such as money, plant and machinery, furniture and fixture, building etc.
On the contrary, human capital is relatively a new concept, which implies the collection of an individual’s skills, abilities, talent, knowledge, etc, used by the company to meet out its long term goals. It is not owned by the company, but by the employees, which they rent to companies for adequate consideration.
Take a read of the article excerpt that attempts to shed light on the differences between physical capital and human capital.
Content: Physical Capital Vs Human Capital
|Basis for Comparison||Physical Capital||Human Capital|
|Meaning||Physical capital implies the non-human assets of the company, such as plant and machinery, tools and equipment, office supplies etc. that help in the process of production.||Human capital refers to stock of knowledge, talent, skills and abilities brought in by the employee, to the organization.|
|Formation||Economic and technical process.||Social process and conscious decision of the possessor.|
|Tradability||It can be traded in the market.||Only the services of human capital can be sold.|
|Separability||It is separable from its owner.||It is not separable from its owner.|
|Financial Statement||Shown in financial statement.||Not shown in financial statement.|
|Restriction on mobility||Occurs due to trade barriers.||Occurs out of nationality and culture.|
|Nature of depreciation||Constant use, results in depreciation.||Ageing leads to depreciation, but it can be minimized.|
Definition of Physical Capital
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.
When one wants to start a company, a huge amount of physical capital is invested in the initial stage, so that the company can mark its existence in the marketplace.
On the basis of sufficient knowledge, decision is taken to invest in the physical capital. For this purpose the entrepreneur, finds out the expected returns from the range of investments and then the one, generating relatively higher return is chosen. Therefore, the ownership of physical capital is a result of planned and conscious decision of the entrepreneur.
Definition of Human Capital
Human Capital connotes the experience which an employee takes to the organization in the form of knowledge, skills, abilities, talents, intelligence, values etc. which he/she has accrued over time. 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.
The concept makes it clear that all the employees at work, are not equal and they differ in their proficiencies.
Simply put, it portrays the aggregate value of the firm’s intellectual capital, which is a sustained source of creativity and innovation. It is a standard used to ascertain the economic value of an employee’s skill set.
Key Differences Between Physical Capital and Human Capital
The substantial differences between physical capital and human capital are outlined below:
- Physical Capital, is used to mean, the company’s non-human assets like plant and machinery, building, computers, office supplies etc. that assist in the production of goods and services. On the contrary, human capital is defined by collection of knowledge, talent, skills and abilities possessed by an employee or a group of employees working in an organization.
- Physical capital is tangible in nature, i.e. it can be seen and touched. Unlike human capital is intangible, that can only be experienced.
- The creation of physical capital is an economic and technical process. Conversely, the formation of human capital is a social process, but it is also a result of conscious decisions taken by the entrepreneur in this regard.
- Physical capital can be sold in the market directly, whereas human capital cannot be traded in the market, rather the services are sold.
- Physical capital can be separated from its owner easily. On the other extreme, human capital is inseparable from its possessor.
- Physical capital is usually mobile, but some restrictions occurs out of trade barriers imposed by different countries. However, when it comes to the mobility of human capital, it is not fully mobile between countries, as the mobility is restricted by nationality and culture.
- While physical capital appears in the financial statement of the company, human capital is not shown in the financial statement.
- Both physical and human capital undergo depreciation, but the reason is different, in the sense that physical capital is depreciated because of costant use. On the other side, human capital is depreciated out of ageing factor but can be reduced to a larger extent by making investment in health and education.
When a company invests in its physical and human capital it leads to improvement in the overall level of performance of the business entity, as well as in decision making. Both physical capital and human capital are two building blocks, whose combined use can lead to the production of goods and services.