2 The economic value of education In thinking about economic growth, one does not ask the traditional query: what is the

Box 9.2 The economic value of education In thinking about economic growth, one does not ask the traditional query: what is the

area of land, the size of the labour force, and the number of machines and structures? In allocating investment, one asks: what is the marginal increase in production from a particular additional investment? The productive services of land can be augmented by investment; investment in man can increase both his satisfactions and the productive services he contributes when he works; and the productive services of machines and structures can also be augmented in this manner. In addition, and to an increasing extent, there is the investment in organized research to acquire new information, a source of new skills and new materials (techniques), which can significantly alter the investment oppor- tunities in land, man and machines. In line with this approach, there is no assumption of

a rate of technical change but a search to determine the rate of return to organized research; no assumption with regard to population growth to account for the rate of increase in the labour force but a search to determine the rate of return to children (child capital) and to the acquisition of useful skills; no assumption of a fixed supply of natural resources but a search to determine the rate of return to investment in land improvements and in discovering and developing other natural resources; and similarly there is the analytical task of determining the rate of return to investment that changes the composition of the reproducible forms of material capital as new and better forms become available from the production activities of organized research. It is my contention that economic thinking has neglected two classes of investment that are of critical importance under modern circumstances. They are investment in man and in research, both private and public.

Extract from Theodore Schultz, The Economic Value of Education, Colombia University Press, 1963, pp22–23.

It can be seen that Schultz’s hypothesis was that calculating rates of return from investment in human capital would confirm the importance of investment in schooling and research for the productivity of the labour force and the economy’s capacity to grow.

Detailed work investigating rates of return from education to families and national economies was undertaken by George Psacharopoulos in the 1970s and 1980s. In his Returns to Education (1973), he brought together data from many countries on the role of education in economic growth and set out to examine how the profitability of investment in education compared with profits from investment in physical capital, symbolized in the rhetorical question about whether it was more profitable to invest in schools or steel mills. He was also interested in whether inter-country differences in human capital could explain differences in per capita income, what the rate of return by level of education was across countries, whether there were differences with regards to the level of public subsidies in education, and whether subsidies reduced or increased incentives in the long-term. Psacharopoulos’ findings, as detailed in Box 9.3, were to have a profound significance on international policy with regards to investment in education.

EDUCATION

Box 9.3 Returns to education [R]ates of return decline by the level of education. Looking first at the social rates of

return, the average for primary education is 19.4 per cent, for secondary 13.5 per cent and for higher 11.3 per cent. This pattern proved to be statistically significant when tested by means of individual country observations. Private rates show a similar pattern between the primary and secondary level (23.7 per cent and 16.3 per cent respectively), while the rate of return to the university level is 17.5 per cent. The second pattern in our data shows that the private returns to investment in education are about 3 to 6 percentage points higher than the social returns. The difference between private and social rates is even more pronounced in developing than in advanced countries, showing that the former group of countries subsidize their educational sector more heavily. . . . On the question of whether investment in the education of men is more profitable than that in the education of women, the examination of 8 case studies where the returns for males and females are reported separately shows that, on average, males show higher return by about 2 percentage points at both the higher and the secondary levels. The average return for males for primary school is 16.3 per cent while that for females is 9.8 per cent . . . . The widely debated issue about whether a country should emphasize technical secondary rather than general education was not resolved.

Extract from George Psacharopoulos, Returns to Education. An International Comparison, Amsterdam, Elsevier, 1973, pp5–6.

Although there was considerable criticism of the way Psacharopoulos calcu- lated rates of return and reached these conclusions, the policy implications of his work were enormous. It led the World Bank and other major institutions to engage in development assistance and many governments to emphasize the importance of investing in basic education because of these high rates of return.

Before turning to look at the ways in which writers working within the capability approach paradigm have posed questions about the notion of human capital, it is useful to ask some questions about these canonical works in human capital theory. How do they conceptualize the nature of the labour market and estimate the value of an economy? What assumptions do they make about the nature of schooling and its outcomes? To what extent do they take note of different social groups and relationships based on social division? What are the implications of analysis based on human capital for government policy in education?

Generally, work within a human capital framework assumes that labour markets work rationally and efficiently and that, once schooling has developed certain aspects of human capital, the labour market will allocate people to occupations that are appropriate for their level of skills. The framework does not take into account segregated labour markets where people, irrespective of their level of education, are allocated to particular jobs on the grounds of race, gender, or assumptions about class or caste. The framework tends to view

TOPICS

schooling as something like a machine, which children enter and exit with their human capital appropriately topped up. The ways in which different schools provide different learning environments for different children with very diverse outcomes is not considered. Thus, writers interested in human capital will generally consider whether the school is efficient. In other words, how many hours of instruction are provided? In addition, what is the level of teacher qualification? Can children pass? These writers are generally not interested in debates about the content or cultural dynamics of schooling, the social lives of teachers or learning processes. The ways in which inequalities in education are associated with race, class or gender and persist over generations are not a key focus. Social division is only a matter of concern with regards to whether it supports or impedes the development of human capital appropriate for economic growth. While some of the writing on human capital noted differ- ential rates of return for women and men, and for those in communities that experienced segregation, their general conclusion was not that the institutional structures of gender or race inequality in schooling and the labour market should be considered. Human capital theorists concluded instead that more education should be provided for these groups to improve levels of economic growth. It can therefore be seen that what is important for human capital theorists is to understand the economy as a system that will support growth. In this framework, schooling assists growth, and a major social obligation is thus to increase access to schooling so as to facilitate this very growth.