Investment in human capital has opportunity costs, but investment in physical capital does not.

Opportunity cost refers to the special way that economics treats cost -- as a measure of everything given up to pursue an alternative. The opportunity cost of investing in physical capital consists of everything we cannot do as a result of that investment.

Consider a large building as an example of physical capital. If we build the large building, we cannot use the land for farming. That's part of the opportunity cost. We also cannot use the concrete in the building to line a swimming pool in my backyard - what a shame! That's also part of the opportunity cost. We cannot use the labor used to construct the building to assemble cars. That's part of the opportunity cost. We break down every resource used and realize that we cannot use that resource for something else. That's opportunity cost.

We could apply a similar logic to investing in human capital. The most obvious resource for this is time. If we consider an education system as an investment in human capital, we can also see that physical capital is often required to invest in human capital, so we could add those costs, too.

From an individual point of view, we each invest our own time in building our own human capital. But, we should probably consider all the other costs that contribute to our own human capital, too, even if we do not, individually, bear all those opportunity costs ourselves.

Now, about over-investment: think of it as a cost-benefit analysis. So, of course it is possible to over-invest, if the benefits we reap from the investment fail to reach the level of our opportunity costs.

All factors of production face declining marginal productivity. If we add physical capital in an economy, we generally get more production. But, we get more production at a declining marginal rate. In other words, creating the first factory adds a lot of productivity, but creating the millionth factory would not add as much productivity.

Human capital over-investment is a bit harder to see -- because I always seek to learn more. However, I played soccer in high school and college, and this provides an example. Sports skill is a form of human capital, the ability to produce something. In my case, I'm approximately 5'9" tall and have rather small hands. I make up for these handicaps by being not particularly quick or agile, either. You might wonder why I bothered playing sports at all, much less trying to play goalkeeper. Well, I found that with a lot of investment, I could be mediocre! Eventually, I had to face the fact that I was over-investing in that particular aspect of human capital. I would never play at a high enough level to make a living, for example.

I invested more heavily, eventually, in applied mathematics and economics training, a very different form of human capital. The benefits to me were obviously higher. But could I over-invest? Yes, because I value leisure time, too. Eventually, I trade off more leisure time for less income, and you can see that it is possible to over-invest in human capital, because we might value the benefits less than the opportunity costs.

Long answer, but this has several long questions!

Capital is the lifeblood of a corporation. It allows a business to maintain liquidity while growing operations. Generally, capital is used to refer to physical assets in business. It is also used to refer to how companies obtain physical assets. Both physical capital and human capital are important.

While human capital can be difficult to measure, the impact of investments in human capital can be measured and analyzed with the same ratios used to measure and analyze the investment performance of physical assets. Investments in physical and human capital both lead to fundamental improvements in the business model and better overall decision-making.

Physical capital consists of man-made goods that assist in the production process. Cash, real estate, equipment, and inventory are examples of physical capital. Physical capital values are listed in order of solvency on the balance sheet.

The balance sheet provides an overview of the value of all physical and some non-physical assets. It also provides an overview of the capital raised to pay for those assets, which includes both physical and human capital.

  • Both physical capital and human capital are important to businesses.
  • Physical capital consists of manmade goods that assist in the production process.
  • Human capital is represented by more than the company brand.

Physical capital is recorded on the balance sheet as an asset at historical cost, not market value. As a result, the book value of assets is generally higher than market value. Accountants refer to physical capital as a tangible asset.

Intangible assets are non-physical capital. A balance sheet only lists intangible assets when they have identifiable values. Intangible assets can't be touched, but they are often represented by a legal document or paper.

Human capital is represented by more than the company brand. Harvard University is not Harvard University because of its crimson logo. The value of Harvard University is in its human capital. Human capital includes the knowledge base of the employees and is often measured by the quality of the product. It also refers to the network of the employee base and the general level of influence they have on the industry.

Examples of intangible assets include intellectual property such as brands, patents, customer lists, licensing agreements, and goodwill. When one company acquires or purchases another, and the purchase price is more than the physical assets it purchases, it creates goodwill.

The difference is recorded as goodwill, and one of the largest components of goodwill is human capital. In fact, goodwill is one of the only places where an analyst can find a value for human capital on the balance sheet.

Capital is the lifeblood of a corporation. It allows a business to maintain liquidity while growing operations.

Unlike physical capital, which is easy to find on the balance sheet (and in the notes to the balance sheet), the value of human capital is often assumed. In addition to goodwill, analysts can value the impact of human capital on operations with efficiency ratios, such as return on assets (ROA) and return on equity (ROE).

Investors can also determine the value of human capital in the markup on products sold or the industry premium on salary. A company is willing to pay more for an experienced programmer who can produce a higher-margin product. The value of the programmer's experience is in the amount the company is willing to pay over and above the market price.