Call it the human factor, the X factor, the unquantifiable variable unique to each individual. Professor Gary Becker, of the University of Chicago, calls it human capital and says it is what modern developed economies, including Hong Kong, will increasingly be relying on to drive growth and stay competitive. As the world's rich countries come to rely less and less on natural resources, human capital will grow more important. That includes Hong Kong, which has nearly completed its transformation from a manufacturing economy to a service economy. People will need to use their brains rather than brawn to survive in the new knowledge-based economy. Even the government is pushing value-added industries. But what exactly is human capital? Professor Becker, who won the Nobel Prize in economics a decade ago for his work on human behaviour and how it relates to the field, says it includes the 'skills, information, even health' of people. 'The world economy is based on specialisation and co-ordination of knowledge, and we co-ordinate that knowledge by markets,' he said, slouching on a dark leather sofa, in the Island Shangri-La's 39th floor library, sporting a blue blazer, khakis and a red tie. 'Hong Kong is almost entirely based on knowledge and will be increasingly so as it finds its place in the world,' said Professor Becker, in town over the weekend to give a lecture on the subject at Hong Kong University. The roots of the idea of human capital go back to the 1960s and the work of Theodore Shultz, of the University of Chicago, who did pioneering research on the effects of education on agricultural output levels and the importance of human resources in economic development. Professor Becker expanded on those theories, winning the Nobel in 1992 for extending micro-economic analysis to new areas, including family and household behaviour and crime and punishment. Along the way, he had to face a lot of sceptics who believed economic analysis could not be applied to humans. He said: 'When we started working on human capital, there was a lot of hostility, not only among economists but also educators and businessmen.' They believed machines and plants were crucial to growth, not the ability of people to run those machines and plants effectively. People did not like the term human capital, he said. 'It sounded like we were treating people as machines.' But that has all changed in the past 25 years, thanks to what Professor Becker calls the third Industrial Revolution, which has been driven by the development of computers, the Internet, and genetic and biotechnology research. Whereas the second Industrial Revolution at the end of the 19th century brought great advances in transportation by rail, car, boat and plane, this third revolution will emphasise knowledge. And just as the latest Honda sedan or Boeing jet will one day grow obsolete and need replacing, so will people's knowledge and skills constantly need upgrading. 'Like a machine depreciates, human capital depreciates,' Professor Becker said, so everyone will need to stay sharp by taking courses, on-the-job training and distance learning. He said such knowledge was the key to Hong Kong's survival as China's economic might grew. 'Hong Kong can benefit from a stronger China . . . but you'll have to do different things,' he said. 'You'll be an information-based economy, a services-based economy. You'll provide knowledge-based services to China, to the rest of the world.' That does not necessarily mean Hong Kong's star has to fade in the face of nascent rivals in the mainland. 'It doesn't mean that Shanghai is going to be greater, and you'll be weaker,' he said. 'Change and competition don't mean that what one country or region gains, another country loses. Hong Kong will get stronger if you have the right environment.'