Physical Capital Vs Human Capital

Introduction

Companies need money and/or assets to start a new venture or expand the existing one. These assets and money that a company owns are known as capital. No company can run successfully without capital. Money is needed in every business aspect while monetary and non-monetary assets help organizations run smoothly. Usually, the term capital is used to indicate physical assets, but nowadays, human capital is also realized as an essential asset for organizations.

Human capital comprises the knowledge base and skills of the workforce. Although it is hard to measure human capital directly, the investments made in improving human capital can be measured similarly to physical capital. Investments in human capital also impact the profitability of an organization. As is obvious, human capital is an intangible asset that is connected with the workforce of an organization. It is directly related to the various necessary qualities and attributes the workforce of an organization has.

What is Physical Capital?

Physical capital refers to investment inputs; such as factors of production or man-made items that are owned by a business. Physical capital may include machinery, equipment, property, furniture, building, electronic items, etc. that are used to produce final goods from raw materials.

Businesses usually need to make a substantial amount of investment in procuring physical capital that helps them start a business and run it thoroughly. Businesses cannot work without physical capital because finished goods and services cannot be offered without physical capital. Physical capital is also needed to strengthen the position of the business in the market. Moreover, companies cannot start producing goods without investing money or resources that constitute the physical capital of a business.

Business owners need to have enough information about the requirements before they invest in physical capital. It is notable that the production of goods requires the idea of how much investment in physical capital is necessary to avoid losses. The investment should always be lower than the income generated by the investment in order to earn a profit.

Therefore, it can be understood that investment in physical assets is a process of conscious understanding and decision-making by the owners of the business. The idea of having good knowledge of investment is required because the business must earn higher returns than the investments made in the production process. If the business owners cannot estimate the accurate amounts of physical capital needed for the production, they may end up investing more or too less both of which can lead to substantial losses.

What is Human Capital?

Human capital refers to the personal abilities and attributes of the workforce of a company. It is obtained in the form of skills, experience, knowledge, expertise, attitude, intelligence, professionalism, ethics, values, etc. Therefore, recognizing the value of human capital, the employees of an organization are considered an asset the output of which can be increased further by training and skill development.

In simpler words, human capital is the intellectual capital of the workforce of a firm. Human capital results in constant innovation and creativity which cannot be obtained from physical assets. The standard of human capital indicates the skillset of every individual employee in an organization. However, it also means that since every employee is different in terms of their attributes, the human capital is differentiated for every employee based on their skills and knowledge base.

It is further noticeable that, unlike physical capital, human capital cannot be owned by organizations. Instead, the companies obtain human capital by paying remunerations. Usually, companies pay salaries, wages, and bonuses depending upon the value of human capital an employee brings to the organization.

Physical Capital Vs Human Capital

The following table shows the major differences between physical and human capital.

Physical Capital	Human Capital
Physical capital refers to the non- human assets owned by a company. This may include buildings, machinery, equipment, electronic items, land, etc.	Human capital is the human attributes of a company. This comprises skill sets, knowledge, values, experience, ethics, etc.
Physical capital is tangible in nature. It can be seen and touched.	Human capital is intangible. It cannot be seen or touched. However, it can be felt by the results and outcomes it brings to a process.
Physical capital has a set amount of maximum output which is known to all and can be understood by knowledge.	Human capital is not a set standard. The value of human capital can be increased often by training and skill development programs.
Physical capital is related often to industrial processes because it is availed by non-human assets that are industrial in nature.	Human capital is social in nature. It is produced out of social processes and hence cannot be obtained via physical assets that are non-human in nature.
Physical capital can be traded. It has a set price that is determined by the producer. It can be used for the profit of the company.	Human capital is non-tradeable. It cannot be classified according to a set price by the owner. However, the remunerations for human capital can be paid depending on the overall result of the process related to particular human capital.
Physical capital is a separate entity. It is not intrinsic to the owner of the asset.	Human capital is non-separable from its owner. Only the results obtained using human capital can be segregated.
Physical capital is noted in the financial documents of the company. It has a set price and hence can be included in the books of accounting.	Human capital cannot be included in the books of accounting because the exact value of human capital is unknown.
Mobility is an easy and necessary attribute of physical assets. Physical assets can be moved from one place to another easily depending on government restrictions.	Human capital is an intrinsic part of human beings and cannot be moved from one place to another easily because the will of the owner is involved in the process.
Physical assets go through depreciation because of their use of the assets.	Human assets go through depreciation due to aging.

Conclusion

It is important to understand physical and human capital because both are necessary for an organization. While physical assets refer to tangible ones, human capital is intangible. Both assets have their own value and are essential for organizations. It is therefore notable that business owners realize the value of the physical and human capital of their organization to make better decisions during the operation of the business.

FAQs

Qns 1. What is meant by the physical assets of a company?

Ans. Physical capital refers to the non-human assets owned by a company. This may include buildings, machinery, equipment, electronic items, land, etc.

Qns 2. What is the difference between physical and human assets regarding mobility?

Ans. Mobility is an easy and necessary attribute of physical assets. Physical assets can be moved from one place to another easily depending on government restrictions. Human capital is an intrinsic part of human beings and cannot be moved from one place to another easily because the will of the owner is involved in the process.

Qns 3. What is the difference between physical and human assets regarding depreciation?

Ans. Physical capitals depreciate via regular use while human capital depreciates due to aging.