Both the forms of capital formation are outcomes of conscious investment decisions. Decisions regarding investment in physical capital is taken on the basis of one's knowledge in this regard. The entrepreneur possesses knowledge to calculate the expected rates of return to a range of investment and then rationally decides which one of the investments should be made. The ownership of physical capital is the outcome of the conscious decisions of the owner - the physical capital formation is mainly and economic and technical process. A substantial part of the human capital formation takes place in one's life when she /he is unable to decide whether it would maximize her/his earnings. Children are given different types of  school education and health care facilities by their parents and the society. The peers, educators and society influence the decisions regarding human capital investment even at the tertiary level, that is , at the college level. Moreover the human capital formation at this stage is dependent upon the already formed human capital at the school level. Human capital formation is partly a social process and partly a conscious of the possessor of the human capital.
         You know that the owner of a physical capital, say a bus, need not be present in the place where it is used ; whereas, a bus-driver, who possess the knowledge and ability to drive the bus, should be present when the bus is used for transportation of people and materials. Physical capital is tangible and can be easily sold in the market like any other commodity. Human capital in intangible; it is endogenously built in the body and mind of its owner. Human capital is not sold in the market; Only the services of the human capital are sold and, hence, there arises the necessity of the owner of the human capital to be present in the place of production. The physical capital is separable from its owner, whereas, human capital is inseparable from its owner.
         The two forms of capital differs in terms of mobility across space. Physical capital is mobile between countries except for some artificial trade restrictions. Human capital is not perfectly mobile between countries as movement is restricted by nationality and culture. Therefore, physical capital formation can be built even through imports, whereas human capital formation is to be done through conscious policy formulations in consonance with the nature of the society and economy and expenditure by the state and the individuals.
         Both forms of capital depreciate with time but the nature of depreciation differs between the two. Continuous use of machine leads to depreciation and change of technology makes a machine obsolete. In the case of human capital, depreciation takes place with ageing but can be reduced, to a large extent, through continuous investment in education, health, etc. This investment also facilitates the human capital to cope with change in technology which is not the case with physical capital.
        Nature of benefits flowing from human capital are different from that of physical capital. Human capital benefits not only the owner but also the society in general. This is called external benefit. An educated person can effectively take part in a democratic process and contribute to the socio-economic progress of a nation. A healthy person, by maintaining personal hygiene and sanitation, stops the spread of contagious diseases and epidemics. Human capital creates both private and social benefits, whereas physical capital creates only private benefits. That is, benefits from a capital good flow to those who pay the price for the product and services produced by it.


Read the above paragraph carefully and write the answers of the following questions in comments section to improve your comprehensive ability.

1.  What do you understand by the term Physical capital?

2. Which of the two capitals is more important than other and why?

3. What are the social and private benefits of human capital?

4. How the physical & human capital differs in terms of mobility?

5. What is the relation between human capital and economic growth of country?

6. What are the advantages of human capital for the society?

7. How the human capital depreciates with time?

8. Which factors contribute to human capital formation?

GLOSSARY :

1. Intangible -  unable to be touched; not having physical presence.

2. Endogenously - Having an internal cause or opinion. 

3. Obsolete - No longer produced or used.

4. Epidemics -A widespread occurrence of an infectious disease in a community at a particular time.

5. Depreciates - diminish in value over a period of time.




POSTED BY:
SNEHA CHAVAN
TEAM SUPRAVI