Human Capital Theory in Education
This entry is a critical exploration of the rise and limitations of Human Capital Theory (HCT) within the field of education. In recent times, HCT has become one of the most powerful underpinnings of education policy discourse worldwide. At both supranational level, within such bodies as the OECD and the EU, and within national education systems, the influence of HCT is considerable. Promoting education as an “investment” which yields returns in due course to the individual in terms of pay and to the State in terms of employment and economic growth, HCT provides a captivating model for neoliberal governance of State education. The theory thus promotes State education systems as subservient to the vaunted knowledge economy, as instrumental for economic growth. In this entry, the nature and development of HCT are outlined, its current influence indicated, and its effects highlighted. The entry concludes by pointing to some of the weaknesses of the theory as applied to the field of education, as well as some of the problematic issues around conceptions of schooling and of young people which the theory produces.
Since its formulation in the early 1960s, Human Capital Theory has developed into one of the most powerful theories in modern economics. The growth of the concept of the “knowledge economy” in the last 20 years has also afforded it a further degree of importance because of the strong connections it sees between education and training and economic growth. Where economic activity becomes focused on knowledge, on intellectual rather than physical labor, then the importance of education to that economy seems all the more crucial. Human Capital Theory thus lays considerable stress on the education of individuals as the key means by which both the individual accrues material advantage and by which the economy as a whole progresses. In a simple equation, the more and better education individuals possess, the better their returns in financial rewards and the better the national economy flourishes.
Human Capital Theory has thus promoted education to a key instrumental role in boosting economic growth. The better the investment made by individuals in education, the better they and the economy will do. This elevated status, however, is not without its problematic aspects. There is a risk of education being narrowed to economic goals, of the broader aims and purposes of education being submerged, and of the person being reduced merely to “human capital,” not as a life to be lived, but as mere economic potential to be exploited (Gillies 2011).
The modern roots of Human Capital Theory are usually traced to the work of two key theorists, Theodore Schultz (1902–1998) and Gary Becker (b. 1930), both associated with the “Chicago School” of neoliberal thought, although Jacob Mincer (1922–2006) had made earlier reference to the concept. There are, essentially, two elements to the theory. The first relates to theorizing that wage differentials or income distribution can be causally connected to education (in this case understanding the term as including schooling, tertiary education, training, and professional development). Much of the early research within Human Capital Theory looked at how earnings could be linked to educational experience: in its simplest form, longitudinal studies compared the earnings of high school graduates as opposed to college graduates in the USA. Schultz (1960, p. 571), noting that college graduates earned more, argued that in this sense the costs of a college education could be viewed as an investment, embodied education becoming “human capital,” which offered later returns in the form of relatively higher wages. Research showed that there was a financial return for the time and resources dedicated to education and training and so families and individuals could be interpreted as undertaking these as a form of investment which would pay dividends later in the form of higher earnings. Education, therefore, was no longer to be viewed as “consumption” but as investment.
The second core element in early Human Capital Theory is related to this finding. Whereas classical economics had tended to view the workforce in purely quantitative terms, Human Capital Theory introduced a qualitative aspect. Education and training were seen as the most important ways in which the quality of the workforce could be enhanced. College graduates did not earn more by chance: it was because of the quality of their work that they earned more. Thus, education and training yielded broader economic returns than individual earning power. There were generic economic benefits for society which accrued from a well-educated and well-trained workforce. Just as individual choices about education and training could be understood in relation to judgments about likely returns on such investment, so at a national level, the education system could be justified in the light of likely returns in the form of economic growth.
It was this second aspect of Human Capital Theory that had the greatest political effect. Schultz (1962) suggested that the rapid recoveries of both Japan and Germany after World War II could be more easily explained if one took note of the preexisting high levels of human capital in these well-educated countries. Developing human capital was therefore an important way in which economies could grow and, indeed, survive or recover from setbacks. Becker (1992) argued that, outside of the Eastern Bloc, human capital investment in the form of educational opportunities was central to those countries experiencing faster economic growth from 1960. In its appropriated form, the theory was thus held to be able to account for economic growth per se.
Becker (1975, 1993) also sought to develop Human Capital Theory in a particular way. Concentrating primarily on individual decision making in relation to personal educational investments, Becker fused the theory with rational choice theory and began to explore its explanatory potential in a whole range of social activities previously untouched by economics such as family and marriage. Becker’s analysis, therefore, shifted paradigmatically from economics in terms of a relational mechanism between things and processes within a social structure to the analysis of an activity – the internal rationality governing an individual’s choices and behavior.
In recent times, the definition of human capital has widened somewhat so that it is not simply knowledge or skills but also “competencies,” “attributes,” and “attitudes” such as “reliability, honesty, self-reliance, and individual responsibility” (Becker 2002, p. 6). Education remains center stage, however, as the key factor in forming such human capital, which itself remains crucial for “economic success.”
It is clear from even a cursory glance at government policy across the world that education has a highly elevated status, constructed in one particular sense – as instrumental to the economy – and so conceptualized quite differently from how it has been widely understood in the past and, perhaps, in the vernacular. While Human Capital Theory has thrust education into the political limelight, it is education in one particular role only, and its continued central importance relies almost entirely on its capacity to continue to be seen as economically vital.
Human Capital Theory and Education
From its very earliest days, however, Human Capital Theory has been controversial. There is concern at seeing education viewed in such narrow economic terms, omitting broader and richer purposes and practices. Whole areas of the curriculum such as the expressive arts, and the humanities in general, struggle for perceived relevance when bald economic purposes are given exclusive attention. Similarly, conceptualizing humans as mere capital goods seems excessively reductivist, omitting much of what it means to be a person. The notion of humanity becomes narrowed to that of economic agency, risking constructing people as mechanical objects as opposed to living persons. Even when relationships and shared values are taken into account, HCT tends to view these as crudely instrumental to providing the stability for economic activity rather than of intrinsic worth. These represent two significant challenges for Human Capital Theory: that it diminishes the concept of education and that it diminishes the concept of the human. The development of Human Capital Theory in relation to rational choice theory also fails to take account of motivation in human behavior, other than for personal advantage. The idea of an altruistic motive, or being motivated by the public good, or concern for others, is essentially denied by its adherents. Even in relation to career development, issues around job satisfaction, challenge, enjoyment, status, and so on are all absent from the account. The model also assumes that all further education is geared for the labor market and so cannot account for the expansion of educational activities within the retired population for whom there cannot be any hope of financial benefit accruing nor of employment advantage.
Human Capital Theory does not, of itself, necessarily involve such a narrow view of education, but there is a tendency within the theory for a very pared-down model of education to be presented. Education – and so prosperity – becomes entirely focused on the human as an individual unit and on education as solely a matter of individual choices, leaving as unproblematic the nature of the system, and the nature of the socioeconomic, cultural, and political context which has shaped and continues to shape educational provision and experience. Inequalities of outcome can be attributed to the shortcomings of individuals in respect of their choices or capital returns. The overarching economic, social, and political system is essentially absent from any analysis.
Human Capital Theory does present a central role for teachers as those who help create and develop human capital. Far from being minor public servants cocooned from the harsh realities of tooth and claw capitalism, teachers now become repositioned as key figures in developing the human capital necessary for the goal of economic growth. A major focus for the OECD and others, therefore, has been “teacher quality.” Children will not develop as desirable human capital unless they have been educated effectively, and that requires a high-performing teacher workforce. Human Capital Theory does also position education as both an individual and a public good. The theory holds that the returns on education investment are both personal and social. The individual is rewarded financially, and the economy as a whole is boosted by individuals with advanced human capital. The education system and its quality becomes an extremely important focus for State investment, whether that is public money or in some partnership with private finance.
Human Capital Theory and Economic Debate
Beyond education, however, there is a long-established debate within economics which addresses a whole range of contested issues around Human Capital Theory and its variants. One is that without a preexisting successful economy, it is not obvious that human capital development has positive national economic impacts. A weak economy typically sees the flight of human capital to more rewarding economies and so local investment in education may have no local return whatsoever. Well-qualified young people emerging into a weak economy will not find the expected rewards which HCT would promise; instead, it may only be through migration to stronger economies that such people will find financial gain. In times of severe economic downturn, the best that educational qualifications may provide is the chance of securing any job rather than growth-enhancing employment. They serve as a security net against the worst which an economic crisis may threaten. Overall, it may be not so much that educational qualifications derive benefit but that lack of qualifications derives loss.
Critics also question the simplicity of the model of education-economy causality which some HCT theorists offer. Schultz himself (1971) has sought to clarify that because of the “long gestation period” between educational investment and economic return, it was “absurd” to think that sudden crises in relation to inflation or deflation could be tackled by turning on and off the education tap. Nevertheless, this pared-down model persists particularly in political discourse.
A further economic argument centers around the idea that educational qualifications do not themselves endow the individual with relevant human capital but that they merely act as a “signal” to employers. Indeed, it is now recognized that while educational qualifications may signal evidence of human capital, they say nothing explicitly about work ethic, for example. Thus, later conceptions of human capital have broadened out to encapsulate issues around attitude and other attributes (Becker 2002), which are also seen as key factors.
There is also a rich seam of criticism directed at Human Capital Theory from a Marxist perspective, which typically argues against the absence of the notion of social class within the theory, the failure to recognize value and surplus value within the Human Capital Theory model, the elision of the labor/labor-power distinction, and the failure to recognize labor relations within the workplace nexus.
The view that economic woes can be tackled through the refocusing of the education system leads to a number of challenges for the education sector. In austere times, reduced resources will tend to be concentrated in areas seen as most closely linked to the economy. This can be seen most starkly in relation to higher and further education where considerable pressure has been exerted on the arts, humanities, and social sciences. Such disciplines which have no simple correlation to economic activity or growth become viewed as an expensive indulgence, and their continued existence becomes dependent on attempts to demonstrate their economic importance rather than on the promotion of any fuller conception of education.
In the schools sector, pressure on the curriculum tends to be more in relation to its focus as opposed to structure. The emphasis shifts from knowledge and disciplinary depth to transferable skills, and especially those seen as conducive to market profitability. As pressure to reduce costs in the private sector grows, industry increasingly looks to shift the costs of training to the education sector itself. A key focus becomes the quality of school leavers and college and university graduates in relation to employability. When allied to the view that national economies need to compete in a global knowledge economy, it is easy to see how the demands to increase the quality of employability in young people become increasingly critical. There is a clear risk of narrowing the curriculum to “skills for work,” and the concept of personal growth, or of development as “whole” individuals, is lost.
Schultz (1967) pointed out decades ago that the poor and disadvantaged represented the “best unexhausted investment opportunities” compared to the rich and the middle class. In other words, the State had failed to exploit their potential sufficiently, and, given their lowly status, the opportunity for high returns was considerable. However, the public investment required to counteract systemic inequality has proved to be much higher than the willingness of politicians to act, and the result has been that very little has been done to address this aspect of Human Capital Theory. Because it has been fused with rational choice theory, the focus in Human Capital Theory since has been on individuals and equality of opportunity rather than on equalizing starting points through socioeconomic adjustment. In times of economic difficulties, governments will cut back even more on the sort of additional support required for less advantaged communities and individuals to improve their educational and vocational prospects. Crude credit balance approaches may override issues around equity, fairness, and access, and it is not surprising to see funding challenges around inclusion, special education, and related issues. Here, the human capital/investment approach can be seen to clash with a children’s rights approach. Education for all, when founded on rights, is in a much more secure position when compared to one merely conditional on notional investment returns. Because Human Capital Theory views those experiencing socioeconomic disadvantage, or those with learning difficulties, as wasted investment opportunities rather than in terms of justice, equality, or morality, then only a very obvious financial return can justify the costs incurred in the educational provision for such groups. This would seem to leave the theory in a very questionable ethical place. Many young people, because of the physical or cognitive difficulties they face, will never be able to generate for themselves or for the economy, the sort of financial returns expected of HCT, far less to “repay” the costs of their care and education. It is this cold calculation bereft of compassion or empathy that renders HCT repugnant to many.
Despite these reservations – economic, political, and moral – Human Capital Theory remains central to current global economic policy. At national and supranational levels, it remains the dominant discourse. It offers a simple model for politicians and governments to understand and a manageable way of seeking to boost economic growth. As such, it affords a prominent place to education, but it positions education in a subordinate, instrumental role which many find narrow, dispiriting, and inadequate.
- Becker, G. (1975). Human capital: A theoretical and empirical analysis (2nd ed.). New York: Columbia University Press.Google Scholar
- Becker, G. (1992). Human capital and the economy. Proceedings of the American Philosophical Society, 136(1), 85–92.Google Scholar
- Becker, G. (2002). Human capital. Paper given at the University of Montevideo. Retrieved from http://www.um.edu.uy/docs/revistafcee/2002/humancapitalBecker.pdf
- Schultz, T. (1967). Investment in poor people. Washington, DC: US Department of Labor.Google Scholar
- Schultz, T. (1971). Education and productivity. Washington, DC: National Commission on Productivity.Google Scholar