Capital Theory

Human Capital Theory: Implications for Educational Development\nD.A. Olaniyan and T. Okwu\nDepartment of Educational Management, University of Ibadan, Ibadan, Nigeria\n\nAbstract: The belief that education is an engine of growth rests on the quality and quantity of education in any country. The study posits that formal education is highly instrumental and even necessary to improve the production capacity of a nation and discusses the rationality behind investment in human capital. Empirical evidence of human capital model were identified and findings reveal that investment in education correlates with economic growth and development. Criteria for the applicability and problems associated with the theory were identified and implications for educational development highlighted. Conclusively, the study recommends that for education to contribute significantly to economic growth and development, it must be of high quality to meet the skill-demand needs of the economy.\n\nKey words: Human capital, educational development, production, economic growth, Nigeria\n\nINTRODUCTION\nEducation is an economic good because it is easily obtainable and thus needs to be apportioned. Economists regard education as both consumer and capital good because it offers utility to a consumer and also serves as an input into the production of other goods and services. As a capital good, education can be used to develop the human resources necessary for economic and social transformation. The focus on education is a special factor in relation to the development of human capital, which emphasizes the production of human capital, with attention on production activities. It is widely accepted that education creates improved citizens and helps to upgrade the general standard of living in a society. Therefore, positive social change is likely to be associated with the production of qualitative citizenry. This increasing faith in education as an agent of change in many developing countries, including Nigeria, has led to a heavy investment in it. The pressure for higher education in many developing countries has undoubtedly been helped by public perception of financial reward from pursuing such education. Generally, this goes with the belief that expanding education promotes economic growth.\n\nHowever, the paradox accompanying this belief is that, despite the huge investment on education, there is little evidence of growth-promoting externalities of education in Nigeria.\n\nCONCEPT OF HUMAN CAPITAL THEORY\nThe economic prosperity and functioning of a nation depend on its physical and human capital stock. Whereas\nthe former has traditionally been the focus of economic research, factors affecting the enhancement of human skills and talent are increasingly figuring in the research of social and behavioural sciences. In general terms, human capital represents the investment people make in themselves that enhance their economic productivity.\n\nThe theoretical framework most responsible for the wholesome adoption of education and development policies has come to be known as human capital theory. Based upon the work of Schultz (1971), Sakkarov and Powers (1995) and Psacharopoulos and Woodhall (1997), human capital theory rests on the assumption that formal education is highly instrumental and even necessary to improve the production capacity of a population. In short, the human capital theorists argue that an educated population is a productive population.\n\nHuman capital theory emphasizes how education increases the productivity and efficiency of workers by increasing the level of cognitive stock of economically productive human capability which is a product of innate abilities and investment in human beings. The provision of formal education is seen as a productive investment in human capital, which the proponents of the theory have considered as equally or even more equally worthwhile than that of physical capital.\n\nAccording to Babalola (2003), the rationality behind investment in human capital is based on 3 arguments that:\n\n* The new generation must be given the appropriate parts of the knowledge which has already been accumulated by previous generations. According to Fagerlid and Saha (1997), human capital theory provides a basis justification for large public expenditure on education both in developing and developed nations. The theory was consistent with the ideologies of democracy and liberal progress found in most Western societies. Its appeal was based upon the presumed economic return of investment in education both at the macro and micro levels. Efforts to promote private investment in human capital were seen to result in rapid economic growth for society. For individuals, such investment was seen to provide returns in the form of individual economic success and achievement.\n\nMost economists agree that it is human resources of nation, not its capital or material resources, that ultimately determine the character and pace of its economic and social development. Psacharopoulos and Woodhall (1997) asserts that:\n\nHuman resources constitute the ultimate basis of wealth for nation. Capital and natural resources are passive factors of production, human beings are the active agents who accumulate capital, exploit resources, build organizations and carry forward national development.\n\nEMPIRICAL EVIDENCE OF HUMAN CAPITAL MODEL\nThe importance of education and human capital has been brought out in many studies of economic growth and development. Robert (1991) developed a human capital model which shows that education and the creation of human capital was responsible for both the differences in labour productivity and the differences in overall levels of technology that we observe in the world. More than anything else, it has been the spectacular growth in East Asia that has given education and human capital their current popularity in the field of economic growth and development. Countries such as Hong Kong, Korea, Singapore and Taiwan have achieved unprecedented rates of economic growth while making large investments in education. In the statistical analysis that accompanied his study, the World Bank (1993) found that improvement in education is a very significant explanatory variable for East Asian economic growth. There are several ways of modeling how the huge expansion of education accelerated economic growth and development. The first is to view education as an investment in human capital. A different view of the role of education in the economic success is that education has positive externalities. Educated part of the community and the whole of benefits.\n\nThe idea that education generates positive externalities is by no means new. Many of the classical economists argued strongly for government’s active support of education on the grounds of the positive externalities that society would gain from a more educated labour force and populace (Van-Den-Burg, 2001). Smith (1976) reflects such progressive contemporary thought when he wrote that by educating its people, a society:\n\nDerives no recommendable advantage from their instruction. The more they are instructed, the less liable they are to the delusions of enthusiasm and superstition, which, among ignorant nations, frequently occasion the most dreadful disorders. An instructed and intelligent people, are always more decent and orderly than an ignorant and stupid one.\n\nAnother way of modeling the role of education in the growth and development process is to view education as a strategic factor within the economy that forms new technologies and new products. From this perspective, education is seen as an intentional effort to increase the resources needed for creating new ideas and thus, in many instances, education will directly accelerate technological progress. This modeling approach usually adopts the Schumpeter (1975) assumptions of imperfectly competitive product markets and competitive innovation, which permit the process of generating technological progress. Education is seen as an input into the intentional and entrepreneurial efforts to create new technology and new products. Proponents of this view of education point out the close correlation between new product development and levels of education. Those countries that are at the forefront of technology also have the most educated population (Van-Den-Burg, 2001).\n\nThe review of empirical tests of the theory by Garba (2002) shows that cross-country regressions have shown positive correlation between educational attainment and economic growth and development. Okwudire (2001) affirms that investment in human capital has positive effects on the supply of entrepreneurial activity and technological innovation. Ayeni (2003) asserts that education as an investment has future benefits of creation of status, job security and other benefits in cash and kind.\n\nHowever, Ayeni (2002) reports that education has not had the expected positive growth impact on economic growth in Nigeria. Hence, he proposes three possibilities that could account for such results, which are:\n\n* Educational capital has gone into privately remunerative but socially unproductive activities.\n* There has been slow growth in the demand for educated labor.\n* The education system has failed, such that schooling provides few or no skills.\n\nAPPLICATION OF HUMAN CAPITAL THEORY TO EDUCATIONAL SYSTEM\nBabalola (2003) asserts that the contribution of education to economic growth and development occurs through its ability to increase the productivity of an economic agent. This may establish the importance of education as an investment, hence the reference to it as a fundamental form of investment. This argument highlights the direct impact of education on the well-being of individuals and society at large. According to Psacharopoulos and Woodhall (1997), the investment in education constitutes an essential core of the relationship between education and social output. It plays a great and significant role in the economy of a nation, thus educational expenditures are found to constitute a form of investment. This arguments individual’s human capital and leads to greater output for society and enhanced earnings for the individual worker. It increases their chances of employment in the labour market and allows them to reap pecuniary and non-pecuniary returns and gives them opportunities for job mobility.\n\nEducation is a source of economic growth and development only if it is anti-traditional to the extent that it liberates, stimulates and informs the individual and teaches him how and why to make demands upon himself. Accordingly, a proper educational strategy would Pak. J. Soc. Sci., 5 (3): 479-483, 2008\n\nIMPLICATIONS OF HUMAN CAPITAL THEORY FOR EDUCATIONAL DEVELOPMENT\n\nThe central difference in the policy implications of the human capital model and the alternative models relates to the desirable level of public expenditure on education. The basic implication of the human capital model is that allocation of resources on education should be expanded to the point where the present value of the streams of human capital investment is equal or greater than the marginal costs.\n\nMany of the developing nations have realized that the principal mechanism for developing human knowledge is the education system. Thus, they have begun to invest money on education not only as an attempt to impart knowledge and skills to individuals but also to impart values, ideas, attitudes and aspirations which may benefit the nation’s best developmental interests.\n\nIn addition to improving the labor force, nations strongly feel that in an era of scarce skilled manpower, the better the education of their citizens, the better the chances of getting well-paid jobs. The push for parents to look at their children’s education as the best means of securing prosperity. The concept of human resources has provided a useful bridge between the theoretical concerns of students of the developmental process and the practical requirements of assistance to planners.\n\nIrrespective of the explanation given for global educational expansion, the consequences of expansion for social systems can be problematic. The tensions and strains of educational expansion can impede economic, social and political development. For example, the accelerated costs of expanding educational system compete with other sectors of the respective societies for finite resources. As mass primary education is attained, expansion shifts to the secondary and tertiary levels as the costs are gradually transformed into mass systems. At the same time, the increase in costs is not arithmetic but geometric. These pressure ultimately create dilemma for government that must realistically assess and determine spending priorities for scarce economic resources.\n\nAdopting a position based on the assumptions of the human capital and modernization theorists, Fagerlind and Saha (1997) argue that in developing countries at least, educational demand must be tempered in order to bring costs and benefits to more realistic levels.\n\nAmong the suggestions they made are that:\n\n- The costs of education should be borne by the beneficiary or recipient by means of family assistance or self-help schemes rather than solely the state.\n- The income differential between the traditional and modern sectors should be reduced, which in effect lowers the benefits according to the educational attainments.\n- The educational requirements for particular jobs should not be exaggerated.\n- The wage structure should be tied to occupational and requirements rather than educational attainments.\n\nIt is also worth noting that the causal relationship between education and human capital has important implications for public policy.\n\n\nCONCLUSION AND RECOMMENDATIONS\n\nNigeria is confronted by most of the problems that could limit the capacity of expansion in education to stimulate growth and development such as underemployment, low absorptive capacity, shortage of professionals, regional imbalances and brain-drain. The persistence of many of the problems in spite of the various policy formulation and responses points to the need for a more focused, responsive, functional and qualitative educational system. To contribute significantly to economic growth and development, education must be of high quality and also meet the skill-demand needs of the economy.\n\nIt is not a noble achievement for any sector of the economy to exist for years only to make a negligible contribution to economic growth, which is not commensurate with its life span and mandate. In this case, there is the need for more commitment by the authorities not to interfere with decisions such as curriculum or teachers’ responsibilities. Parents should. Pak. J. Soc. Sci., 5 (3): 479-483, 2008\n\nREFERENCES\n\nAyara, N.N., 2002. The Paradox of Education and Economic Growth in Nigeria: An Empirical Evidence. Selected Papers for the 2002 Annual Conference. Nigerian Economic Society (NES) Ibadan. 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