Human Capital
Theory
Economics and Education
Are private returns to education
What shapes the decisions of shaped by the number of years an
How do families choose between
individuals and families to invest individual spends in school or by
different types of schools?
in education? the type of skills acquired while in
school?
Why should the government What are the social pecuniary and What motivates teachers to put in
devote scarce public resources to non-pecuniary returns to effort towards improving pupil
finance/provide education? education? learning?
How can schools be held
accountable to education
outcomes?
Throughout Western countries, education has
The early 1960s witnessed what has been
been re-theorised under Human Capital Theory
described in the economics literature as the
as primarily an economic device. Human Capital
"human investment revolution in economic
Theory is the most influential economic theory
thought" (Bowman 1966). Expenditures on
of Western education, setting the framework of
education, whether by the state or households,
government policies since the early 1960's. It is
have been treated as investment flows that build
seen increasingly as a key determinant of
human capital.
economic performance.
Introduction
Capital means goods that can help
Wealth in the form of money or assets, produce other goods in the future, the
taken as a sign of the financial strength result of investment. It refers to
of an individual, organization, or nation, machines, roads, factories, schools,
and assumed to be available for infrastructure, and office buildings
development or investment. which humans have produced in order to
produce goods and services.
What is Capital?
When an organization invests in physical capital, it is
Analogously, investment are made in human capital.
acquiring some assets that is expected to enhance the
When a person (or person’ s parents or society at large)
firm’s flow of net profits over a period of time. For
makes a current expenditure on education and training, it
example, a company might purchase new machinery
is anticipated that the individual's knowledge and skills
designed to increase the out put and therefore sales
and therefore future earnings will be enhanced. The
revenues over, say, the 10-year projected life of the
important point is that expenditures on education and
machinery. The unique characteristics of investment is
training can be fruitfully treated as investment in human
that current expenditures or costs are incurred with the
capital just as expenditure on capital equipment can be
intent that these costs will be more than compensated by
understood as investment in physical capital.
for by enhanced future revenues or returns.
Human Capital Theory
Although it is obvious that people acquire useful skills and
Human capital refers to the collection of innate and acquired
knowledge, it is not obvious that these skills and knowledge are a
individual abilities that are substantially durable, persisting over
form of capital, that this capital is in substantial part a product of
some significant portion of the life of the possessor.
deliberate investment
The personal attributes referred to under this rubric are restricted to
positive “abilities” and “capabilities”. In other words, their nature Human capital is the accumulation of skill and knowledge
is such as would normally yield some stream of benefits, by imbedded in labor performance in order to produce economic
enhancing the possessor’s performance in one or more socially value.
valued activities.
The acquired and useful abilities of all the inhabitants or
members of the society
Human Capital Theory
Components Of Human Capital
Longevity
Tangible Health
Physiological condition
Human Capital
(strength, eyesight etc.)
Psycho-motor skills
Creativeness
Intangible Cognitivie abilities
Problemsolving
Procedural capabilities
Social capabilities
Flexibility, multitasking
The Spence view: observable measures of human capital are more a signal of ability than characteristics independently useful in the
production process.
The Schultz/Nelson-Phelps view: human capital is viewed mostly as the capacity to adapt. According to this approach, human capital is
especially useful in dealing with “disequilibrium” situations, or more generally, with situations in which there is a changing environment,
and workers have to adapt to this.
The Becker view: human capital is directly useful in the production process. It increases a worker’s productivity in all tasks, though
possibly differentially in different tasks, organizations, and situations. In this view, although the role of human capital in the production
process may be quite complex, there is a sense in which we can think of it as represented (representable) by a unidimensional object, such
as the stock of knowledge or skills, and this stock is directly part of the production function.
The Gardener view: according to this view, we should not think of human capital as unidimensional, since there are many many
dimensions or types of skills. A simple version of this approach would emphasize mental vs. physical abilities as different skills. Let us dub
this the Gardener view after the work by the social psychologist Howard Gardener, who contributed to the development of multiple-
intelligences theory, in particular emphasizing how many geniuses/famous personalities were very “unskilled” in some other dimensions.
Human Capital Theory
The Bowles-Gintis view: “human capital” is the capacity to work in organizations, obey orders, in short, adapt to life in a
hierarchical/capitalist society. According to this view, the main role of schools is to instill in individuals the “correct” ideology and approach
towards life.
Sources of human capital
Quality of
Innate ability Schooling
schooling
Training Up-brining Health
Migration
Human capital model
Once education is treated as an investment, the immediate natural
question is: what is the profitability of this investment in order to
compare it to alternatives? Such comparison can provide priorities
for the allocation of public funds to different levels of education, or
can explain individual behaviour regarding the demand, or lack of
demand, for particular levels or types of schooling.
For establishing education investment priorities at the margin the
human capital model is the main theoretical foundation
The Human Capital Model
C
(3)
Decision to invest in Incremental earnings
college education. H
From purely economic
Annual earnings
standpoint, a rational
decision will involve a (2)
comparison of costs and H Opportunity
benefits. cost
18 (1) 22 65
Direct
cost Age
C
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Age-Earnings Profiles with and without college education
Age-earnings Profiles by Level of Education (Venezuela, 1989) 12
