Human Capital Theory: Is It True That Investment in Education Will Grow the Economy and Reduce Economic and Racial Inequalities?

There is little proof to the claim that investment in education will improve the economy and reduce inequalities. In fact, since the 1960s, in theories that investment in education will grow the economy, there has been little relationship between the quality of schools and the health of the economy. Economic swings are more affected by other factors than the quality of schools, such as the cost of wars, mortgage market crashes and pandemics.

For my purposes, I am using the definition of human capital given in The Oxford Handbook of Human Capital: “The stock of knowledge and skills that enables people to perform work that creates economic value.”8 The original 1960s human capital arguments were based in part on Edward Denison’s 1962 study The Sources of Economic Growth in the United States.9 Denison estimated the contribution of physical capital, labor and other factors to US economic growth. After subtracting their contribution growth, Denison labeled the residual “advancement in knowledge.”10 In other words, from Denison’s perspective, education and schools were an important contributor to economic growth. Economist Gary Becker, awarded a Nobel Prize in 1992, used Denison’s research in his pioneering 1964 book Human Capital."

In the context of human capital, students are considered resources to be educated for the good of the general economy. Its message is that investment in education will grow the economy, thus establishing a direct relationship between school performance and economic performance. The concept continues to influence governments and global policy with its message to invest in education to grow the economy.12 Becker asserted that economic growth depended on the knowledge, information, ideas, skills and health of the workforce. Investments in education, he argued, could improve human capital, which would contribute to economic growth.13

Pioneers in applying economics to education included other Nobel Prize winners, such as Milton Friedman and Theodore Schultz. These economists are responsible for what I call the economization of education, which includes increasing involvement of economists in education research, evaluating the economic effectiveness of schools and promoting school choice in a competitive marketplace, resulting in charter schools, educational vouchers and government scholarships to attend private schools.

Economist Milton Friedman is credited with introducing the idea of educational choice and vouchers in his now-famous 1962 book, Capitalism and Freedom.'4 Becker and Friedman’s application of market principles to education had a lasting impact on the language of education, introducing terms such as competition, investment, consumer choice, for-profit schools and vouchers.

Friedman advocated school choice, vouchers, and for-profit education making economic claims, such as “vocational training ... increases economic productivity,”15 “schooling adds to the economic value of the student,”16 “the ‘education industry,”’17 and “vocational and professional schooling ... is a form of investment in human capital precisely analogous to investment in machinery, buildings.”18

Written for the general public, Free to Choose: A Personal Statement, coauthored with his wife Rose Friedman, refers to students as “consumers,”19 teachers as “producers,”20 colleges as “selling schooling,”21 colleges as producing and selling “monuments and research”,22 higher education as improving “economic productivity of individuals”23 and colleges providing an “incentive” to attend by offering an opportunity for “higher earnings.”24

Human capital economist Theodore Schultz in The Economic Value of Education referred to schools as “firms” that “specialize in producing schooling.”25 He also called the educational establishment “an industry” that makes “production” decisions.26 Schultz portrayed student actions in economic terms: “Suppose, then, that all of the costs of schooling are charged to the investment in the production capabilities of students.”27 Schultz stressed the importance of human capital: “economists have long known that people are an important part of the wealth of nations.”28 Schultz argued that people invested in themselves through education to improve their job opportunities.

In Human Capital, Gary Becker stressed that government support of education was a public “investment in human capital.” Becker suggested measuring educational outcomes with estimates on “the money rate of return to college and high-school education in the United States.”29 Becker tied investment in education with economic growth, increased productivity, higher incomes, decreased economic inequalities, and the ending of poverty. One would hear the refrain to the present that investment in education would reduce poverty. But for this to occur, inequality in educational opportunities needed to be eliminated.

For instance, the 1964 Annual Report of the Council of Economic Advisers, “The Problem of Poverty in America,” claimed,

Equality of Opportunity is the American dream, and universal education our noblest pledge to realize it. But, for the children of the poor, education is a handicap race; many are too ill motivated at home to learn in school [author’s emphasis].30

This statement foreshadowed the increasing concerns by economists with changing family life to prepare children for school and make poverty disappear.

Some in the business community may support the idea of the human capital approach to education because it emphasizes teaching skills needed in the workplace. In this context, human capital goals for education trump other educational goals, such as education for social justice, environmental improvement, political participation and citizenship training.

A major result of human capital arguments is schools focusing on teaching skills that can be used in the workplace or, as it is now referred to, skill-based education.

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