In the evolving discourse around wealth and income, the interplay between human capital and financial capital takes centre stage. Total wealth, as I see it, is the sum of human capital and financial capital, net of financial liabilities. Here, financial capital represents tangible assets—those you can see and touch. Human capital, in contrast, is an intangible asset. Both are assets in their own right, defined as something you own that can generate future economic value. This foundational concept offers clarity on why human capital, by its very definition, correlates directly with earnings.
Human capital is simply the present value of future earnings from intangible assets. It could include education, skills, reputation, or even hierarchical rank. As intangible as these may seem, they underpin future income potential. This understanding highlights a crucial point: human capital and earnings are inherently linked.
Yet, confusion arises when studies attempt to narrow the definition of human capital. Take, for example, a scenario where education is measured as human capital while dismissing hierarchical power. Researchers often find that hierarchical rank correlates more strongly with earnings than education. Does this mean education is less important? Not necessarily. The truth is that both education and hierarchical rank are facets of human capital. You can “own” high rank and benefit from future earnings, just as you can “own” advanced education and reap similar benefits.
The Trouble with Oversimplification
Blair Fix’s critical examination of human capital theory in The Trouble with Human Capital Theory underscores some key pitfalls. Fix highlights the circular reasoning embedded in the traditional view: productivity is said to drive income, but this claim often measures productivity in terms of income, leading to flawed conclusions. When productivity is measured objectively—using outputs not linked to income—its disparity among workers fails to explain the vast income inequality we observe.
Moreover, defining human capital restrictively to elements like years of education offers only a partial view. Education does correlate with income, but this link is weak when seen in isolation. Broader definitions of human capital—which include social traits like hierarchical power—paint a clearer picture. Fix’s work shows that hierarchical rank, as a measure of power, often has a much stronger correlation with income than education alone. This is because rank represents control over resources and decision-making, translating into significant economic returns.
Hierarchical Power: A Form of Human Capital
Hierarchical rank is a potent yet often overlooked form of human capital. Within organisations, individuals higher up the ladder typically earn more, not solely due to personal productivity but because of their position within the hierarchy. Fix’s findings reveal that hierarchical rank accounts for nearly two-thirds of income variation in studied firms, overshadowing education’s contribution.
This insight challenges conventional human capital theory’s reliance on individual productivity as the primary driver of income. Instead, it suggests that income is influenced significantly by social structures and power dynamics. Recognising hierarchical power as a form of human capital helps demystify the link between rank and earnings.
Toward a Broader Understanding of Wealth
By embracing a holistic definition of human capital, we can better understand its correlation with income. Both tangible and intangible assets contribute to future economic value, and narrowing the definition of human capital risks oversimplifying this dynamic.
For professionals and individuals alike, this broader view of wealth—encompassing education, rank, skills, and other intangible traits—encourages a more nuanced approach to personal development and financial planning. By understanding human capital in its entirety, we can make more informed decisions that align with long-term goals.
In conclusion, human capital theory must evolve to reflect the multifaceted nature of intangible wealth. Hierarchical power, education, and other intangible assets are not mutually exclusive but collectively define the potential for future earnings. Embracing this broader perspective will not only enrich our understanding of income distribution but also empower individuals to build and leverage their unique capital for a secure, fulfilling future.
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