Abstract
Conventional financial planning commonly treats labour income as an input into a financial model while concentrating the substantive analysis on accumulated financial capital. Human capital theory suggests that this reverses the economic relationship for many households. Knowledge, skills, experience, health, adaptability and productive capacity constitute forms of capital that may generate income, enhance resilience and expand future choice over substantial periods of the life course.
This article reviews six studies concerned with human capital theory, formation, measurement and economic development. The literature establishes a broadly positive relationship between investment in education, health, skills and technological capability and subsequent productivity and earning capacity. However, it also reveals important limitations. Human capital is difficult to measure; qualifications do not necessarily indicate usable capability; investment does not guarantee a return; skills may become mismatched with economic opportunities; and human development cannot adequately be reduced to productivity or income.
For Total Wealth Planners, the central implication is that financial capital should be considered alongside the client’s capacity to create, sustain and adapt their livelihood. The relevant planning question is therefore not merely, “What does this person earn?” but, “What capabilities does this person possess, what could they become, and what conditions allow those capabilities to be converted into a life they value?”
1. The overlooked capital on the household balance sheet
Financial planning has traditionally become most sophisticated around the forms of wealth that are easiest to measure.
Pensions have valuations. Investments have market prices. Property has estimated values. Liabilities can be placed on a balance sheet.
Human capital is less cooperative.
It resides within the person.
The literature reviewed by Voichuk traces the concept from classical economic thought through Schultz and Becker to contemporary multidimensional approaches. Modern treatments extend human capital beyond education alone to include knowledge, skills, abilities, experience, health, motivation and, in some formulations, intellectual, social, entrepreneurial and cultural dimensions. Voichuk ultimately describes human capital as a synergistic and multidimensional phenomenon extending beyond a narrowly economic conception.
That matters for planning.
For many people, particularly earlier in life, the capacity contained within the person may be considerably more economically significant than the financial assets currently owned by the person.
A 35-year-old nurse, engineer, tradesperson, entrepreneur or designer might possess relatively little investable wealth but several decades of productive capability.
A conventional balance sheet can therefore describe someone as financially poor while omitting what may be their largest economic resource.
The first lesson for the Total Wealth Planner is consequently straightforward:
Do not confuse financial capital with total wealth.
2. Human capital is a stock of capability, not simply current earnings
Human capital theory does not merely suggest that people can earn money. It proposes that knowledge, skill, health and related capabilities constitute productive assets capable of generating future benefits.
Schultz’s formulation, as reviewed by Voichuk, incorporates acquired knowledge, skills, experience, health, abilities, motivation and energy. Investment in healthcare, workplace training, formal education, other training and geographical mobility can all contribute to its formation.
Becker similarly includes education, professional experience, healthcare, mobility and information acquisition within human-capital investment because these can improve knowledge, skills or health and thereby affect future monetary or non-monetary returns.
This makes a distinction important for financial planning:
Income is a flow. Human capital is part of the productive capacity from which that flow may arise.
Someone earning £60,000 is not therefore adequately described by “£60,000 employment income.”
The planner should want to understand the machinery underneath the number:
What knowledge produces it?
Which skills make the person valuable?
How transferable are those skills?
How dependent is the income upon physical health?
How dependent is it upon one employer, one industry or one professional licence?
Could the person deploy the same capability differently?
Could new capability materially expand future options?
What might cause existing capability to depreciate?
A cash-flow forecast models the income.
A human-capital assessment investigates its source.
3. Human capital investment can alter the future opportunity set
Education occupies a central position throughout the literature.
Son’s review finds that, although macroeconomic studies of human capital and economic growth have sometimes produced inconsistent results, microeconomic studies more consistently associate education with greater labour productivity, better employment opportunities and higher earnings. Education is therefore interpreted as an investment in knowledge and skills that can improve productive capacity and employability.
Purmiyati’s empirical study of 32 Indonesian provinces between 2013 and 2017 similarly found statistically significant positive relationships between regional GDP per capita and expenditure on education, domestic investment and its proxy for technological literacy. Notably, however, school enrolment itself was not statistically significant in the model.
That distinction deserves attention.
Being enrolled in education is not the same as acquiring economically useful capability.
A planner considering a client’s proposed £20,000 postgraduate course should therefore avoid reducing the question to:
Can you afford £20,000?
The better inquiry is multidimensional.
What capability will the programme create?
Is that capability scarce?
Is there evidence of demand for it?
Does it complement the client’s existing experience?
Could the same capability be developed more cheaply?
What income is being sacrificed while studying?
What is the uncertainty surrounding the expected benefit?
What non-financial benefits does the person value?
The expenditure may be consumption, investment, or—as the literature suggests—some combination of both. Kang’s review highlights precisely this difficulty: education may provide present well-being while simultaneously developing capabilities that could increase future earnings.
Total Wealth Planning therefore requires something more sophisticated than labelling expenditure “good” or “bad”.
Some expenditure consumes financial capital while creating human capital.
4. Qualifications are not human capital
One of the most important methodological findings concerns measurement.
Human capital cannot be directly observed in the way a bank balance can.
Son reviews commonly used proxies including literacy, school enrolment, years of schooling and test scores. Each is imperfect. Years of education may capture the quantity of educational exposure without measuring the quality of the skills actually acquired; test results may provide information about capability but create comparability and representativeness problems.
Daru’s paper similarly distinguishes between education, health and wellness, workforce experience and an enabling environment within which returns on human capital can arise.
This suggests a useful planning rule:
Credentials are evidence about human capital. They are not human capital itself.
Two people with the same degree may possess very different levels of usable capability.
One may have accumulated specialist expertise, confidence, reputation, relationships and practical experience.
The other may possess a certificate.
The same reasoning applies to professional qualifications, years of employment and job titles.
A human-capital inventory therefore needs to move beyond credentials towards capability:
knowledge;
technical competence;
experience;
problem-solving ability;
health and energy;
communication;
networks;
reputation;
entrepreneurial capacity;
digital capability;
adaptability;
and the capacity to learn.
For the planner, the measurement problem is not a reason to ignore human capital.
It is a reason not to pretend that what is easily measured is necessarily what matters most.
5. Human capital can exist without being economically realised
Perhaps the most important lesson from these studies is that human capital does not automatically produce income.
Son provides an especially useful example. In the Philippines, increasing levels of secondary and tertiary education occurred alongside declining worker productivity and declining real returns to education. Educated workers were increasingly occupying low-productivity jobs. Possible explanations included insufficient creation of suitable jobs, mismatch between skills supplied and demanded, and shortcomings in educational quality.
Daru similarly identifies poor workforce planning as capable of producing the “wastage and misallocation of human skills.”
Kang’s discussion of South Korea develops the point further. Investment in education cannot be analysed independently of evolving demand for skills. As an economy moves towards higher-value production, the skill mix it requires changes; educational strategy therefore needs to develop alongside the economic environment into which those capabilities will be deployed.
This allows an important distinction for Total Wealth Planning:
Human potential is not the same as realised human capital.
Voichuk explicitly distinguishes human potential—including opportunities developed through education, life and work experience—from realised benefit, noting that potential does not necessarily result in returns.
We might therefore model the relationship as:
Potential → Capability → Opportunity → Deployment → Value
A person may possess substantial capability but lack the opportunity to deploy it.
An unemployed engineer has not ceased to possess engineering knowledge.
A parent undertaking unpaid care has not ceased to possess professional competence.
A migrant whose qualifications are not recognised has not suddenly lost their expertise.
A worker displaced by automation may retain considerable human capital while experiencing a collapse in the market value of a particular application of it.
This is why assessing salary alone is inadequate.
What matters is not only what capability exists, but whether the surrounding system permits that capability to become usable opportunity.
6. The environment determines the return
Human capital theory can become excessively individualistic if every outcome is attributed to the person’s education, effort or skill.
The literature does not support such a simple interpretation.
Daru identifies an “enabling environment”—including legal frameworks, infrastructure and surrounding conditions—as one of the pillars affecting returns to human capital.
Voichuk similarly notes that instability, insecurity, poor access to quality education and healthcare, weakened social investment and other environmental conditions can impair human-capital development.
And Kang’s review concludes that human-capital policies cannot be applied mechanically because individuals, cultures and economic environments differ.
The implication is significant.
Capability belongs to the person. Opportunity exists in the relationship between the person and the system around them.
This is especially important in the age of AI.
A person’s future earning capacity cannot be estimated simply by extrapolating their current salary at inflation.
Technology changes the environment in which skills acquire value.
Some capabilities become more productive.
Some become commoditised.
Some disappear.
New combinations become valuable.
Purmiyati’s finding that technological literacy was positively associated with regional economic output is context-specific and should not be turned into a universal causal claim, but it supports a broader proposition running through the literature: the ability to use new technology forms part of the mechanism through which human capability can be converted into economic value.
For a Total Wealth Planner, technological adaptability is therefore becoming part of human-capital resilience.
7. Health is productive capital—and more than productive capital
The literature repeatedly includes health within human capital.
Voichuk identifies physiological, labour and intellectual dimensions and notes broader classifications incorporating health, cultural, social, entrepreneurial and psychological resources. Scientific_Approaches_to_the_Un…
Daru treats health and wellness alongside education, workforce capability and the enabling environment.
Kaur’s paper goes further, drawing upon the capability approach associated with Amartya Sen. Development should not be judged only by per-capita income but by whether people’s capabilities and choices expand, including their ability to avoid illness, sustain livelihoods, maintain self-respect and participate in meaningful relationships.
This creates an important correction to a purely economic interpretation of human capital.
Health matters because it supports productive capacity.
But health does not matter only because it supports productive capacity.
A person is not an income-producing machine.
The planner therefore needs to distinguish between two related ideas:
Human capital asks: what can this person do?
Human development asks: what kind of life can this person actually live?
Kaur makes essentially this distinction explicitly: human capital formation is a means; human development is an end.
That distinction may be one of the most important boundaries in Total Wealth Planning.
8. Human capital depreciates
Financial planning routinely models the depreciation, volatility and risk of physical and financial assets.
Human capital also changes over time.
Kang’s review notes that human capital is inseparable from its owner, bounded by the person’s lifetime and liable to change in value as circumstances change.
Skills can become obsolete.
Health can deteriorate.
Industry demand can disappear.
Professional knowledge can become outdated.
Technology can substitute for activities that previously commanded high wages.
Conversely, experience, reputation, relationships and specialist knowledge can compound over decades.
Human capital therefore has something resembling duration, concentration risk, obsolescence risk and reinvestment requirements.
Consider two people earning £100,000.
One has highly transferable skills across multiple sectors, good health, a strong professional network and the ability to work independently.
The other’s salary depends upon one employer, one narrow technical capability and an industry undergoing rapid automation.
A conventional financial plan may record identical employment income.
A human-capital assessment sees two very different risk profiles.
9. Human capital cannot be valued like a portfolio
There is a temptation, once human capital is recognised, to place a discounted monetary valuation upon it.
That can be useful.
But the literature provides strong reasons for caution.
Kang’s review identifies longstanding difficulty in determining the rate of return on human-capital investment. Returns may be uncertain, delayed and difficult to separate from innate ability, employment circumstances, family environment and other influences.
Son likewise emphasises the fundamental difficulty of observing and comparing actual individual skill.
Voichuk notes that human capital may require both monetary and non-monetary measures.
This is a useful warning for planners.
Not everything important becomes more useful when converted into pounds.
Estimating the present value of someone’s future earnings may illuminate the scale of their economic capacity. But treating that number as the person’s “human capital value” risks creating a false precision that conceals health, uncertainty, adaptability, preference, care responsibilities, discrimination, technological change and the person’s freedom to choose another path.
Human capital should therefore be mapped before it is monetised.
10. The planner’s task is not human-capital maximisation
There is also a deeper normative limitation in classical human capital theory.
If the purpose of education, health and skill acquisition is simply to maximise productivity and earnings, the person becomes instrumental to the economy.
Yet several papers push beyond this position.
Son explicitly acknowledges the intrinsic value of human-capital development rather than regarding it solely as an input to production.
Kaur places the argument within a capabilities framework: the objective is to expand people’s choices and freedoms so that they can live lives they regard as meaningful.
Kang concludes by returning ultimately to intrinsic human worth, quality of life, satisfaction and happiness rather than economic output alone.
That changes the role of the planner.
The objective is not:
Maximise the client’s lifetime labour income.
It is:
Help the client understand and develop the capabilities that expand the lives available to them.
Someone might rationally exchange income for autonomy.
They may leave management for teaching.
Work four days instead of five.
Retrain at 50.
Start a business.
Care for a parent.
Move country.
Return to university.
Spend time raising children.
Retire from paid employment while continuing productive activity in their community.
Human capital creates possibilities.
Agency determines which possibilities are worth pursuing.
11. A human-capital lens for Total Wealth Planning
Taken together, these studies suggest that a Total Wealth Planner should examine at least six questions.
1. What capability exists?
Knowledge, skills, qualifications, experience, health, motivation, reputation, relationships and adaptive capacity.
2. What capability could be developed?
Training, education, experience, health improvement, technological competence and new combinations of existing skills.
3. Where can that capability be deployed?
Employment, self-employment, enterprise, caring, voluntary activity, creative work or other forms of economically and socially productive activity.
4. What enables or constrains deployment?
Geography, caring responsibilities, health, regulation, discrimination, technology, labour-market demand, infrastructure, time and access to opportunity.
5. How resilient is the capability?
How transferable are the skills? How exposed are they to technological or economic change? What would happen after illness, redundancy or sectoral disruption?
6. What does the person actually want the capability for?
More income?
More security?
More autonomy?
More meaningful work?
More time?
A new career?
Contribution?
Connection?
A life that simply feels more like their own?
These questions move the planner from projecting an income stream towards understanding the human system generating it.
From possibility to usable opportunity
The literature ultimately exposes a distinction that financial planning has largely overlooked.
People contain possibilities.
Education, health, experience and relationships can increase those possibilities.
But capability alone is insufficient.
There must also be circumstances in which capability can be exercised.
A qualification without demand may produce little economic return.
A skill without access creates frustration rather than livelihood.
A healthy earning capacity may become unusable when caring commitments consume the available time.
An experienced worker may possess substantial capability yet find that technology has altered its market value.
Human capital therefore sits between possibility and usable opportunity.
And that may be the most important lesson for the Total Wealth Planner.
A portfolio tells us something about the resources a person has accumulated.
Human capital tells us something about what they may still be able to create.
Human development asks whether either of those things expands the person’s genuine freedom to live well.
Financial planning becomes Total Wealth Planning when we learn to see all three.
Financial capital is accumulated possibility. Human capital is embodied possibility. Agency is the ability to turn possibility into a life.
References
Daru, M. U. (2015). ‘Human Capital: The Tool for Economic Growth and Development’. International Journal in Commerce, IT & Social Sciences, 2(8), 50–57.
Kang, S. (n.d.). Human Capital Theory: A Review and Critique. MA International Education and Development, School of Education and Social Work, University of Sussex.
Kaur, S. (n.d.). ‘Role of Human Capital Formation in Economic and Human Development’. DIPS College of Education, Hoshiarpur.
Purmiyati, A. (2019). ‘The Impact of Human Capital on the Economic Growth: An Education Approach’. Advances in Economics, Business and Management Research, 101, 252–255. Paper presented at the 1st International Conference on Islamic Economics and Business (ICONIES 2018). Atlantis Press.
Son, H. H. (2010). ‘Human Capital Development’. Asian Development Review, 27(2), 29–56. Asian Development Bank.
Voichuk, M. (2021). ‘Scientific Approaches to the Understanding of Human Capital Concept’. National Interest, 4, 53–66.
