The idea that expenditure on such things as education, on-the-job training and healthcare can be thought of as an investment in an individual's future ability to generate income is not a new one. An early statement of the concept of human capital was made by Adam Smith in 1776, and while human capital theory has been developed and expanded over the last two centuries, a number of its basic ideas can still be found in The Wealth of Nations. First, expenditure on the productivity-enhancing skills of people has similarities with investment in physical capital which can be expected to generate income in the future. Second, expenditure on education, on-the-job training, healthcare or migration to areas with greater employment opportunities, can all be thought of as investments which are normally rewarded in the future by higher income. Third, differing levels of investment in human capital can explain productivity differences between individuals and therefore differences in their rates of pay. Fourth, it is in the individual's interests to invest in human capital when the net benefits exceed the net benefits of investing in an alternative asset.

It is not only private individuals who make decisions to invest in human capital but also in most countries, the state undertakes considerable investment in this area, for example in education and health. One rationale for this intervention is that benefits from investment in human capital accrue not only to the individuals directly involved but to society at large; for example, a more educated and informed community should make better political decisions and raising public health standards reduces the incidence of disease to everyone.

Anne Daly