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Year : 2015  |  Volume : 24  |  Issue : 2  |  Page : 115-118  Table of Contents     

Human capital management: Economics of psychological perspective

1 Scientist 'F', Armed Forces Medical College, Pune, Maharashtra, India
2 Prof and HOD Psychiatry, Department of Psychiatry, Armed Forces Medical College, Pune, Maharashtra, India

Date of Web Publication4-May-2016

Correspondence Address:
Kalpana Srivastava
Department of Psychiatry, Armed Forces Medical College, Pune, Maharashtra
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Source of Support: None, Conflict of Interest: None

DOI: 10.4103/0972-6748.181717

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How to cite this article:
Srivastava K, Das R C. Human capital management: Economics of psychological perspective. Ind Psychiatry J 2015;24:115-8

How to cite this URL:
Srivastava K, Das R C. Human capital management: Economics of psychological perspective. Ind Psychiatry J [serial online] 2015 [cited 2022 Dec 6];24:115-8. Available from: https://www.industrialpsychiatry.org/text.asp?2015/24/2/115/181717

Human capital is a complex term that eschews a simple definition and measurement and is a concept that has been investigated from a variety of perspectives by social scientists. The importance of human capital to economic well-being cannot be overemphasized. Human capital is a collection of resources, it comprises of all the knowledge, talents, skills, abilities, experience, intelligence, judgment, and wisdom possessed individually and collectively by individuals. These resources are the total capacity of the people which represents a form of wealth which can be directed to accomplish the goals of the nation or state.[1]

India has developed as one of the most challenging and emerging economies in the world. Besides becoming a global hub of outsourcing, Indian corporate investment is supposed to grow by the year 2020 and it is to be expected to add about 250 million to its labor pool at the rate of about 18 million a year, which is more than the entire labor force of Germany. Human resource and its concepts have got Philip because of increased demand of investment in this area. This can very easily be accounted as the so-called “demographic dividend” and reason of enhancement of human resource practices in India.[2],[3]

The use of the term “human capital” in the modern neoclassical economic literature dates back to Jacob Mincer's article, “Investment in Human Capital and Personal Income Distribution” in the Journal of Political Economy in 1958.[4] Becker and Chiswick [5] also emphasized on human capital as similar to “physical means of production,” for example, factories and machines. It can be described as substitutable but not transferable as land, labor, or fixed capital.

Schultz and Becker [6] probably were among the few contributors who studied the role of human capital in the development of Nation. Schultz,[7] an American economist, who was the 1979 winner (jointly with William Arthur Lewis) of the Nobel Memorial Prize in Economic Sciences, has given considerable importance to human capital investment. He held that dividends of human capital investment were equivalent to the investment in education. Bontis et al.[8] defined human capital as a human factor in the organization and the combined intelligence, skills, and expertise that gives the organization its distinctive character. These are human elements of the organization which are capable of learning, changing, innovating, and providing the creative thrust.

Human capital management (HCM) is an old discipline frequently specialized and referred to by the financial and investment analysts as well as the accountants and HR professionals. HCM is concerned with obtaining, analyzing, and reporting on data and the direction of value-adding people management at the corporate level and at the level of front-line management.[9] HCM is a system approach to people management and refers to the discipline of acquiring, retaining, measuring, managing, and leveraging the workforce. It can aptly be stated that HCM treats employees as an asset rather than overhead.

   Human Development Index Top

The statistical indicator of estimating human development in each nation is Human Development Index (HDI). It is the combination of “life expectancy index,” “education index,” and “income index.” The life expectancy index corresponds with the standard of health of the population in the country; education index refers to educational standard and the literacy ratio of the population, and the income index reveals the standard of living of the population. The growth in all these sectors results in increase of HDI.

HDI clearly indicates that higher the human capital formation due to good standard of health and education, higher is the per capita income of the nation. Human capital is the backbone of human development and economic development in every nation. HDI has been defined at the macrolevel to be having three main capacities,[10] namely, capacity to develop talent, capacity to deploy talent, and capacity to draw talent from elsewhere. These three capacities form the backbone of any country's human capital competitiveness. Probably, there is a strong association between nurturing human capital and performance enhancement.[11]

   Facets of Human Capital Management Knowledge Management Top

Let us look at the dimensions of Human Capital Management (HCM).

Knowledge management, one of its key dimensions, has recently acquired significance in view of transformational learning and technological upsurge in people management. Knowledge management enhances the organizational productivity and also brings about innovative and creative ideas through collective wisdom.[12] Knowledge management is a bridge between organizational skill requirement and selection of people with expertise.

[Figure 1] shows economic capital, human capital, social capital, and positive psychological capital [13] applied to the workplace. This “flow” represents the good fit between personal and organizational goal alignments. It is indicative of the fact that chronological capital lies beyond human and social capitals.
Figure 1: Adapted from Expanding capital for competitive advantage. Business horizons 47/1 January–February 2004 (45–50)

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Intangible assets such as competencies and intellectual capital are the important aspects of the companies/organizations, besides financial investments. Bill Gates had rightly commented that the most important assets in his company walk out the door every night. In simpler words, he recognizes that the collective knowledge, skills, and abilities of his employees represent a distinctive competency that has created value and set Microsoft apart from its competitors. Researchers have also [14] found the significant positive impact of these abilities on performance outcomes.

   Socioeconomic Mobility Top

Socioeconomic mobility is one of the factors that constrain human capital development. Mobility has two-way relationship. Human capital having upward movement may facilitate vertical and horizontal growth and lack of mobility, can be counterproductive. Because of the ample opportunities available for growth, socioeconomic expansion is more than a predictable outcome. It becomes necessary from HCM perspective to attract, fascinate, and retain highly capable employees.[15]

Developing positive psychological capital

Positive psychological capital is drawn heavily from positive psychology. Any reference or mention of positive psychology is incomplete without mentioning the work of Martin Seligman. Martin Seligman in his book on authentic happiness [16] has suggested that “when we are engaged (absorbed in flow), perhaps we are investing, building psychological capital for our future.” There are four positive psychological capabilities highlighted by Seligman namely, confidence, hope, optimism, and resilience.


Stajkovic and Luthans [17] define confidence (or self-efficacy) as the “individual's conviction about his or her abilities to mobilize the motivation, cognitive resources, and courses of action needed to successfully execute a specific task within a given context.” It seems to incorporate cognitive, affective (motivation), and conative aspect of behavior. In fact, confidence is referred as a positive psychological capital capacity and work performance is affected by it.


Hope is a positive emotional state. It is also referred as “way power.” There is considerable evidence that it enhances performance across various domains. Researchers have found positive impact on work performance also.[18]


Positive psychology has contributed toward understanding of organizational behavior and role of traits in work performance. Apart from conscientiousness, one of the positive traits, optimism, is perhaps more closely associated with overall positive psychology than the other constructs.[19] Positive organizational behavior (POB) is the applied aspect of positive traits at workplace.[20] POB-oriented studies mostly address individual traits such as conscientiousness and trait-like states such as optimism, self-efficacy, and resilience and their outcomes, or organizational practices such as strong organizational cultures and human resource practices.[21]


Resilience is defined as capacity to “bounce back” from adversity. It has significant implications for promoting competence and human capital in individuals and society.[22] Primarily resilience is considered as initial attribute required to withstand stress and spring back with bigger force during adversity. This very fact makes it much more important in HCM because it can contribute to positive psychological capital and thereby affecting the positive outcomes of the organization.[23],[24]

It is worth mentioning here that the positive psychological capacities described above are dynamic and they have trainable aspects. The development program based on Bandura's work, emphasizes that employees can vicariously learn by observing and modeling relevant others, who are subjected to training by reinforcement.[25] In the similar manner program can be designed for developing these competencies and thereby influencing HCM.

   Indian Perspective Top

The strategies of focus on empowerment and emphasis on innovative challenges and ideas are practiced by Indian leaders. In India, rate of human capital formation has consistently increased after Independence due to qualitative improvement in each generation. In the second decade of the 21st century, the third generation of India's population is active in the workforce of India. The rapid growth of Indian economy in response to improvement in the service sector is an evidence of cumulative growth of human capital in India. The human capital has developed in the service sector namely financial services and software services.[26]

One factor that accounts for India's low human capital performance is education. Nearly half of India's 28 million tertiary students are pursuing degrees in the social sciences, business, and law. Nearly 20% are in engineering, manufacturing, and construction, and roughly 15% are in sciences. Humanities, education, agriculture, services, and health and welfare each account for 5% or less. It can be concluded that innovative and creative ideas contribute toward organizational productivity.[27]

   Conclusion Top

The human capital investment is directly proportional to the outcome of performance of the organizations. Social and emotional competencies form an integral aspect of this development. There is enough evidence that human capital interacts dynamically to maximize the organizational productive returns in terms of desirable outcomes. Hence, due emphasis should be placed to nurture positive psychological capital within the organizations.

   References Top

Haq MU. Reflection on Human Development. Delhi: Oxford University Press; 1996.  Back to cited text no. 1
Chatterjee SR. Human resource management in India: 'Where From' and 'Where To?' Res Pract Hum Resour Manage 2007;15:92-103.  Back to cited text no. 2
Babu MR, Emmani A. Human resource management: A Challenging Scenario In The Indian Context' International Journal of Research in Applied, Natural and Social Sciences 2014;2:135-42.  Back to cited text no. 3
Mincer J. Investment in human capital and personal income distribution. J Polit Econ 1958;66:281-302.  Back to cited text no. 4
Becker GS, Chiswick BR. Education and the distribution of earnings. Am Econ Rev 1966;56:358-69.  Back to cited text no. 5
Becker GS. Investment in human capital: A theoretical analysis. J Polit Econ 1962;70:9-49.  Back to cited text no. 6
Schultz TW. Capital formation by education. J Polit Econ 1960;68:571-83.  Back to cited text no. 7
Bontis N, Dragonetti NC, Jacobsen K, Roos G. The knowledge toolbox: A review of the tools available to measure and manage intangible resources. Eur Manag Journal 1999;17:391-402.  Back to cited text no. 8
Baron A, Armstrong M. Human Capital Management: Achieving Added Value Through People. London: Kogan Page; 2007.  Back to cited text no. 9
Mahroum S. Assessing human resources for science and technology: The 3Ds framework. Sci Public Policy 2007;34:489-99.  Back to cited text no. 10
Crook TR, Todd SY, Combs JG, Woehr DJ, Ketchen DJ Jr. Does human capital matter? A meta-analysis of the relationship between human capital and firm performance. J Appl Psychol 2011;96:443-56.  Back to cited text no. 11
Stankosky M. Can You Name Your Knowledge Asset? Paper Presented at European Conference on Knowledge Management, Consortia Escola Industrial de Barcelona, Spain; 2007.  Back to cited text no. 12
Jackson P. Knowledge asset management: A system approach for human capital management. J Inf Knowl Manag Syst 2007;37:399-403.  Back to cited text no. 13
Harter JK, Schmidt FL, Hayes TL. Business-unit-level relationship between employee satisfaction, employee engagement, and business outcomes: A meta-analysis. J Appl Psychol 2002;87:268-79.  Back to cited text no. 14
Lawler EE 3rd. Make human capital a source of competitive advantage. Organ Dyn 2009;38:1-7.  Back to cited text no. 15
Seligman ME. Authentic Happiness. New York: Pocket Books; 2002.  Back to cited text no. 16
Stajkovic AD, Luthans F. Self-efficacy and work-related performance: A meta-analysis. Psychol Bull 1998;124:240-61.  Back to cited text no. 17
Peterson SJ, Luthans F. The positive impact and development of hopeful leaders. Leadersh Organ Dev J 2003;24:26-31.  Back to cited text no. 18
Schulman P. Applying learned optimism to increase sales productivity. J Pers Sell Sales Manag 1999;19:31-7.  Back to cited text no. 19
Luthans F, Norman SM, Avolio BJ. The mediating role of psychological capital in the supportive organizational climate employee performance relationship. J Organ Behav 2008;29:219-38.  Back to cited text no. 20
Luthans F, Luthans KW, Luthans BC. Positive psychological capital: Beyond human and social capital. Bus Horiz 2004;47:45-50.  Back to cited text no. 21
Stahl GK, Mäkelä K, Zander L, Maznevski ML. A look at the bride side of multicultural team diversity. Scand J Manag 2010;26:439-47.  Back to cited text no. 22
Cutuli JJ, Masten AS. Resilience. In: Lopez SJ, editor. The Encyclopedia of Positive Psychology. Wiley-Blackwell; 2009. p. 837.  Back to cited text no. 23
Tugade MM, Fredickson BL, Barrett LF. Psychological resilience and positive emotional granularity: Examining the benefit of positive emotion on coping and health. J Pers 2004;72:1167.  Back to cited text no. 24
Bandura A. Self-efficacy: The Exercise of Control. New York: Freeman; 1997.  Back to cited text no. 25
Spencer S, Rajah T, Narayan S, Mohan S, Latiri G. The Indian CEO: A Portrait of Excellence. New Delhi: Response Books; 2007.  Back to cited text no. 26
India's Lagging Human Capital: The Diplomat. Available from: . [Last accessed on 2015 Jun 22].  Back to cited text no. 27


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