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 todays 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 Carnoys 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 childs 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 its 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 its 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