Early Research on the Concept of Human Capital

Human capital is a relatively new term, which is used differently in literature. That is why most Chicago Translation workers think that it is useful to clarify its meaning.

When discussing the concept of human capital and its development, we should mention those famous names in the history of economic doctrines such as William Petty, Adam Smith, Jean Baptiste Say, Irving Fisher and others.

For Petty (1691) labor is the “father of wealth,” thus it should be included in any accounting of national wealth. Therefore Petty tried to develop a methodology for monetary valuation of human capital. His method determined the value of human capital through capitalization of individual cash flow of earnings. As a percentage of capitalization here, he used the market interest rate.

A hundred and seventy-two years after Petty, W.Farrsuggested the first scientifically developed and grounded procedure for determining the capital value of an individual. He advocated replacing the English income tax system with a system of taxation of wealth (in wealth he includes the capitalised value of future expected earnings capacity). This idea requires calculating the present value of future net income of an individual (future expected income minus personal costs of living), taking into account the statistically determined average life expectancy.

A few decades later, Engel  developed a procedure for determining the monetary value of an individual, based on the “cost of production” approach. In an attempt to elaborate Petty’s method further, he modified it to account for the limited number of active labour years of an individual.

In 1867 Wittsteincombined Farr’s “capitalized-earnings” with Engel’s “cost of production” approaches as a methodology for assessing the value of human capital. As a result he arrived at the conclusion that the earnings of an individual throughout his lifetime are equal to the living and education expenses.

In conclusion, Philadelphia Translation Services workers say that historically two basic methods for assessing the value of man can be outlined: the cost of production method and the capitalized-earnings method. The capitalized-earnings method accounts for the present value of future earnings capacity.