The use of leisure time to improve skills and knowledge for the most part, goes unrecorded. But in this way, the quality of human effort can be greatly improved and its productivity enhanced. Such investment in human capital accounts for the most impressive rise in real earnings per worker. By investing in themselves, people can enlarge the range of choice available to them.
The failure to treat human resources explicitly as a form of capital - as a produced means of production, as the product of investment, has fostered the retention of the classical notion of labor as a capacity to do manual work requiring little knowledge and skill a capacity with which, according to this notion, laborers are endowed about equally. Counting individuals who can and want to work and treating such a count as a measure of the quantity of an economic factor is no more meaningful than it would to count the number of all manner of machines to determine their economic importance either as a stock of capital or as a flow of productive services.
New capital from foreign countries can be put to good use, it is said, only when it is introduced slowly and gradually. But this experience is at variance with the widely held impression that countries are poor fundamentally because they are starved for capital and that additional capital is truly the key to their more rapid economic growth. The reconciliation is to be found in emphasis on particular forms of capital. The new capital from the outside that is going into the formation of structures, equipment and sometimes into inventories, is usually not available for additional investment in man. Consequently, human capabilities do not stay abreast of physical capital and they do become factors in economic growth. Human resources have both quantitative and qualitative dimensions. The number of people, the proportion who enter upon useful work, and hours worked are essentially quantitative characteristics.
How to distinguish between expenditures for consumption and for investment. This distinction bristles with both conceptual and practical difficulties. We can think of three classes of expenditures: expenditures that satisfy consumer preferences and in no way enhance the capabilities under discussion - these represent pure consumption; expenditures that enhance capabilities and do not satisfy any preferences underlying consumption - these represent pure investment; and expenditures that have both effects. Most relevant activities clearly are in the third class, partly consumption and party investment, which is why the task of identifying each component is so formidable and why the measurement of capital formation by expenditures is less useful for human investment than for investment in physical goods. In principle, there is an alternative method for estimating human investment, namely by its yield rather than its cost.
