Higher Education and The Economy: The Effects of Human Capital Theory

Following the enlightenment period, education took new shape. With public education for all introduced in many Western countries, a higher amount of people began passing through education systems. More and more higher education institutions began to be built, and overtime as education and economics evolved the two became intertwined. Education became inevitably tied to the economy through the creation of human capital theory, which was given its terminology and first description in T.W. Schultz’s 1961 article Investment in Human Capital. Schulz argued that skills and knowledge should be regarded as forms of capital (Gilead, 2009: 557). Then, in 1964 Gary Becker urged people to recognize, “the economic effects [of education] are important and have been relatively neglected at least until recently” (Gilead, 2009: 555). Throughout the 1960’s and 1970’s human capital theory was established and quickly gained prominence, leading to the establishment of the economics of education (Gilead, 2009: 555).

Human capital theory, quite simply, essentially includes humans as capital in the economy. Interestingly, Adam Smith is often credited with laying the intellectual foundations of human capital theory (Gilead, 2013: 625). In Volume One of An Inquiry into the Nature and Causes of the Wealth of Nations, Smith wrote, “a man educated at the expense of much labour and time to any of those employments which require extraordinary dexterity and skill,…it must be expected,…will replace…the whole expense of his education, with at least the ordinary profits of an equally valuable capital” (Smith, 1776/1999: 204). The ideas in this passage lead to the development of two pillars of human capital theory:

1. Skills and knowledge acquired through education can lead to improved productivity.

2. Education can be regarded as an economic investment, which yields economic returns.

Human capital theorists argue that education should strive to enhance production skills, for the sake of economic benefits to both society and the individual. Smith however had very different conclusions. He did not argue that a more productive workforce should be trained through education, nor did he argue that education should serve to increase national prosperity. He believed education could have a positive affect on the economy and overall society by creating a more stable society, which saw as being indirectly economically beneficial (Gilead, 2013: 625). As astutely put by contemporary thinker, Tal Gilead, “What prevented Smith from proceeding down the same path taken by present human capital theorists was his insightful view of economic growth and its consequences” (Gilead, 2013: 625). He was concerned not only with the causes of economic progress, but also with its costs. He believed that education was key for creating and maintaining a stable society, and to balance the costs and benefits of economic progress. “Smith, it follows, perceived education as a tool to counter the detrimental influence of economic progress rather than as an instrument for generating it” (Gilead, 2013: 626). While he set the stage for the development of human capital theory, the “founder of modern economics”, did not envision or argue for the development of economics of education. He saw education as extremely important, however, he did not believe in the role created for it through human capital theory.

Regardless of Smiths views on the matter, human capital theory quickly gained traction after its advent in the 1960’s, and became a major focus in setting government and economic policy, which quickly trickled into the education system. Economic progress is now considered a central aim of education. “…Today’s economic language for education has been successful in replacing the older languages of the philosophy of education because it took the lead in defining what ‘modern education’ is and what it is not” (Oelkers, 2002: 689). While there is undeniable truth in the fact that an educated population will help stimulate the economy, the way in which human capital theory turns education into production rather than cultivation of students is enormously detrimental — to students and to society. Human capital theory approached education with an industrial model — meant to “produce” individuals with particular skill sets and specified knowledge. “The truth is, ever since the end of the age of enlightenment and the onset of industrialization we have built a system that reinforces no role for humanity beyond the provision of labour…This dependence on a system with human capital at its core has created an unfounded fear that an alteration to the centre of this system would lead to the failure of the economic structure all together. Thus, advances in education, politics and governance, and environment trail far behind their scientific potential” (Saab, 2016).


Works Cited

Gilead, T. 2009. ‘Human Capital, Education and the Promotion of Social Cooperation: A Philosophical Critique’. Studies in Philosophy and Education, vol. 28, no. 5, pp. 555–567.

Gilead, T. 2013. ‘Educational Insights of the Economist: Tibor Scitovsky on Education, Production and Creative Consumption’. Studies in Philosophy and Education, vol. 32, no. 6, pp. 623–639.

Oelkers, J. 2002. ‘Rousseau and the image of ‘modern education’. Journal of Curriculum Studies, vol. 34, no. 6, pp. 679–698.

Saab, Jade. 2016. Waiting for the Death of the ‘Human Capital’ Driven Economy. Renegade Inc.: April, 2016.

Smith, Adam. 1999. An Inquiry into the Nature and Cause of the Wealth of Nations (Volume 1). London: Penguin Books (original work published 1776).

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