Education and Economic Development Essay #1 – by Vic Vuchic

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Education and Economic Development Essay #1 – by Vic Vuchic

The definition of educational “value” in the economics of education.

The term educational “value” means that someone or something gains value from the act of going through an educational process. This value can be in the form of increasing earnings, human capital or social capital, but it must have a positive financial yield in order to be worth investing in. While this may seem obvious in today’s world of the information age this was not always the case. Defining and clearly quantifying the value of education is a very difficult task.

In the early 1900s education was viewed strictly as a consumer durable. That is, people gained an education for their own enjoyment and intellectual pursuits over their lifetime. There was not necessarily a strict correlation between gaining more education and higher earning potential due to increased productivity, or higher social value due to improving society as a whole. It was not until the 1950s that a more industrial view was developed to help understand the phenomenon of investing in citizens through education and therefore improving the economic performance of a nation. This was a critical concept in the competition between the USSR and the US.

In 1950 the US began investing heavily in education. This included the GI Bill and a huge expansion of the pubic secondary education system. Due to the increased spending they had to justify the new policies and there was a necessity for defining human capital in an attempt to formally assess the true value of what the ROI in educational investments could be. As investment in education has grown to over 6% of GNP in many countries, defining and understanding the economic value of education has only become more important over the last 50 years.

In order for education to have any value outside of being simply a consumer durable it must return some sort of financial gains. The theory of human capital states that if you invest in human capital you will get value back in the form of increased productivity. We will consider this increased productivity in three domains: the individual, business, and society.

On an individual level, does a person gain value from an education? That is, does that person increase their financial income by increasing their level of education. It is clearly shown in statistics that people that complete higher levels of education such as the university or graduate levels tend to earn higher salaries than people that have only completed secondary school. While it is debatable whether the investment in higher degrees for individuals is worth the total costs (income forgone, tuition), it is not debatable that a person has increased their individual financial productivity. That is, a person with a higher salary due to their increased level of education needs to spend less time to make more money than someone who has only completed a lower level of education. By definition this is increased productivity on an individual level. While this theory seems very clear on a macro scale of Primary vs. Secondary vs. University vs. Graduate degrees, it may have less consistent dynamics at more micro levels. For example, by academic standards, someone who gets an MBA has a lower level of academic achievement than someone who has completed a PhD. Yet, it could be very conceivable that MBAs have higher earnings than a majority of individuals who have completed PhDs.

From the perspective of a business, we must consider whether businesses gain value from having more educated workers. Productivity studies have been done on workers producing simple goods such as wheat, and it was shown that literate workers were more productive than illiterate workers even though literacy was not critical to complete the tasks. Explanations for this trend include that going through the process of learning to read and write improves ones problem solving abilities, their ability to communicate better and more efficiently, and that they can help educate and train other workers to be more efficient. Businesses also show that they value more educated workers simply because over a long period of time, they have been willing to pay them higher wages than less educated workers.

The last category we will look at is the societal value of educating citizens. Does educating citizens increase societal productivity? One area where this clearly holds true is that democracies require an educated citizen base in order to function properly. The more people are educated, the better they can understand issues and discern which leaders to elect in order to be able to lead their society with the greatest likelihood of success. In many ways education is required in democratic countries for self-preservation and advancement as a whole.

In addition to the value of Human Capital, the theory of social capital plays a significant role in maximizing the value of education. As stated in professor Carnoy’s module, “the formation of human capital may depend greatly on social relations in the family, community and the nation as a whole”. One example of this is that a child whose parents have high human capital (i.e. highly educated) will not benefit much from schooling unless the parents invest their social capital to help push the child through school and in turn increase the child’s human capital. Social capital can be in the form of the individual and their family unit, the individual and their external network, and society and it’s ability to support its citizens. Social capital must complement investment in human capital in order to achieve the full potential value and ROI of any investment in education.

While it may be challenging to specifically quantify the direct impact and value of many investments in education due to many factors including it’s long incubation period, I think it is clear that an educated public generates significant value on many levels. Individuals benefit by increased earnings and standards of living, businesses gain by being able to increase productivity, and society gains by having a stronger level of civil involvement and contribution.

Well done essay. 17.5/20
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