Barend Vlaardingerbroek: Looking at education as an investment rather than a social welfare expenditure

Education pays off: mean incomes rise with educational level.

‘Education is the greatest investment we can make in our future’, says the National Party on its website.

What, exactly, is an investment? The Oxford on-line dictionary isn’t much use on this score for the word ‘investment’ other than to say it involves people investing (gasp). But then look up ‘invest’ and we see the words “in the hope of making a profit”. Now we’re in business literally as well as figuratively.

The difference between the publicly-funded education sector and other sectors such as healthcare is that we should be able to realise a profit on moneys we spend on the former. How?

There is nothing new about spending money on education with a view to making a profit at the private level. Families bend over backwards to get their younger members through programmes such as medicine and engineering with a view to lucrative returns once the graduates have entered the labour market.

Education creates human capital. This moniker is often used rather loosely as a synonym for human resources but it is in fact a very precise economic concept that originated in the 1950s. Human capital is the ‘value added’ contribution that knowledge, skills and attitudes acquired through education make to worker productivity. This is measured through the premium that the labour market attaches to given knowledge and skill levels (easier to quantify than attitudes). So when we plot earnings (a proxy measure of human capital) against age by educational level, we tend to get a graph that looks like the one above taken from Indian data.

It is obvious how the individual benefits – more rupees/dollars/yen/whatever in the pocket and a higher standard of living. But society too benefits. Highly educated/skilled people provide specialist services – medical, legal, architectural, etc etc – that improve quality of life indicators. They create employment while doing so, and pay more tax than most people.

All this seems obvious enough when dealing with a surgeon or an electronics engineer, but what about the lower levels? In Western societies, everyone completes primary schooling and so the contribution to human capital made by education at that level does not appear in the graph. It does, however, in countries where not everyone finished primary school. Numerous studies by agencies such as the World Bank show that the literacy equivalent of about Year 4 improves rural worker productivity. Subsistence farmers who can read instructions on a can of fertiliser or pesticide make more effective use of the substance, leading to higher incomes. Factory workers who can read and write are more productive than those who can’t, and research in emerging industrial economies suggests that the completion of lower secondary schooling (in NZ terms, Year 10) makes factory workers more receptive to technological innovations and change.

At the higher levels of schooling, we tend to leave the ‘general education’ model behind in favour of programmes that track students into tertiary education and training leading to specific career pathways. We tend to find the most able 16- to 18-year-olds in science-intensive tracks at upper secondary school aiming for admission to competitive-entry biomedical degree programmes. Just as specialised and just as important as an indicator of an education system’s effectiveness are vocational and technical upper high school tracks leading to associated programmes in techs and/or through apprenticeships.

Teenagers who appear to be drifting aimlessly in the school system represent a loss of potential human capital formation with adverse effects for both them (lower incomes, lower living standards) and for society as public money that should be being spent on building up the human capital base is frittered away on the babysitting of teenagers.

Some people are put off by the human capital approach to education as it emanates from the hard-nosed economic rationalist mindset to public financing. But we want to see everyone benefiting in material terms from educational expenditure so we don’t go in for penny-pinching when moneys being sunk into education are likely to pay us a dividend a few years later. The human capital approach is welfarist in its ultimate aim.

How close do the educational policies of the two main NZ political parties get to a human capital mindset?

National uses the term ‘investment’ (as noted above) but it is not clear whether they use the term in an expectation of a fiscal return from expenditure in schooling. They have made a big issue of basic education, particularly primary schooling and the associated basics of literacy and numeracy (https://www.national.org.nz/teaching_the_basics_brilliantly). This sits well with a human capital approach but we need to see more emphasis on the upper levels where the big decisions about young people’s future livelihoods are made.

Labour’s educational policy does just that through a focus on the transition from school to post-school education and training to work (https://www.labour.org.nz/education). Strip the policy of all the PC bullshit and race politics and you have the beginnings of a very sound educational policy. Not a word about human capital, of course – that sounds awfully ‘capitalistic’ so is best avoided. But National take note of the emphasis particularly on vocational and technical education.

Education will not be the main policy issue this coming election, but it will be in voters’ minds. What an irony that the two main parties’ policies actually complement one another rather well. We need a bipartisan approach to education, not a party-political one. The human capital paradigm provides such an approach.

Barend Vlaardingerbroek is a retired academic who spent many years at universities in PNG, Botswana and Lebanon. He wrote his doctoral thesis on applications of human capital theory to science education in developing countries. One of his favourite published works is a paper on human capital in the manufacturing sector of Gaborone (capital of Botswana). Feedback welcome at  bv_54@hotmail.com