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Rethinking the role of human Capital in Growth Models

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Abstract

What role does education play in economic growth? Conventional wisdom and macroeconomic theories posit that as a nation becomes more educated, they become wealthier. The basic argument says a more educated populace is more productive (i.e. the quality of human capital increases) thereby increasing economic output. However, the majority of empirical work done on this topic has not found a strong relationship between education and economic growth. The purpose of this paper will be to identify where this body of research went wrong and offer theoretical insights ignored by this literature based in market-process theory tradition. It will draw upon an existing body of research (both empirical and theoretical) that fits within this theoretical paradigm as well as suggest a path forward for researchers in this field.

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Notes

  1. The characteristics of the aggregate approach are borrowed from Wagner’s (2010) characterizations of the “neo-Walrasian research program” and Wagner's (2020) “mechanical systems.” The elements listed here are not intended to be an identical match, but rather a subset of the elements Wagner focuses on.

  2. Though he did include a brief exposition on the social returns to education (Becker,1964; p. 208–212).

  3. See White (2007) introduction to (Hayek, 1941; p. xxviii) for a comprehensive list of references of the debate during this time.

  4. A more comprehensive summary of the two positions can be found in Hayek (1941; p. 69-70)

  5. This primarily applies to “general” (as opposed to “specific”) investments in human capital (Becker, 1964; Lewin, 1999).

  6. The conclusion Becker (1964) and Lewin (1999) come to is that from the perspective of the firm, it is more profitable to invest in specific human capital skills for their employees than general skills otherwise employees could use the general skills at a competing firm.

  7. Boettke (2018; p.159-195) highlights the primary contributions.

  8. He calls them “spider” and “starfish” systems because for spiders, any information that comes in contact with the web they weave (for instance, a fly) must first pass through the spider’s brain. It is then up to the spider how it wants to react. Starfish, by contrast have no brain at all. Starfish process information and react to it through a decentralized nervous system that does not pass through a centralized brain (Pritchett, 2013; p. 5).

  9. These two systems are very closely related to what Hayek (1978) would call “cosmos versus taxis” or what Ostrom (Ostrom, 2010) would call “polycentric versus monocentric” systems.

  10. We will address entrepreneurship and human capital more thoroughly in the following sub-section.

  11. Scholars in the Austrian tradition make very similar points as well. See Hayek (1978) for a discussion on spontaneous rule formation and Boettke et al. (2008) discuss the difficulty in institutional change.

  12. For this part, we are discussing institutions beyond those that exclusively apply to school systems.

  13. Roger Koppl constructs a very similar model with his theory of “big players” who act in similar fashion as political entrepreneurs because they are less restrained by market signals and can induce significant change in a given economic system (2002; p. 120–138).

  14. For those interested, Murphy, Shleifer, and Vishny (1991; 1993) offer a rather peculiar test of this theory. They found that countries with a higher ratio of engineering majors grow faster than countries with a higher ratio of law students.

  15. Bils and Klenow (2000) provide one of the more widely cited studies to answer this question and find evidence for reverse causation.

  16. Some of the scholars cited in this paper who have recognized the possibility of reverse causation include Becker (1964), Krueger and Lindahl (2001), Easterly (2002), Pritchett (2006), Hanushek and Woessmann (2008), Coyne (2013), Caplan (2018).

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Acknowledgements

I thank Don Boudreaux, Richard Wagner, Chris Coyne, two anonymous reviewers, and the participants of the 2020 SEA Annual Conference for their helpful comments. Any errors are my own.

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    Stephen G. Zimmer

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Zimmer, S.G. Rethinking the role of human Capital in Growth Models. Rev Austrian Econ 36, 567–588 (2023). https://doi.org/10.1007/s11138-021-00561-w

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