My favorite books about the returns of higher education

Theodore Schultz, a personal friend, was President of the American Economics Association, and Head of the Economics Department at the University of Chicago.

He is generally regarded as the father of Human Capital theory and analysis, is the one who hired Gary Becker from Columbia University, and his Presidential Address to the American Economics Association in 1960 is widely cited as the beginning of the human capital revolution in economics.

It transformed the fields of economic growth where modern endogenous growth models are currently the mainstream, the fields of labor economics, home economics, the economics of education, and is in the process of revolutionizing the field of economic development (with ‘endogenous development’).

This highly readable and interesting book will give the reader a basic understanding of human capital analysis. Its roots are in Becker’s Economic Journal article on “the economics of the allocation of human time”.

This makes the non-monetary returns to education a part of economics, and hence not ‘non-economic effects’, based on Lionel Robbins classic definition of economics as “the study of the allocation of limited resources among unlimited ends”.

This book is a classic. Gary Becker received the Nobel Prize in Economics in 1992 for his work on Human Capital, (as had TW Schultz).

This book was near the beginning of Gary Becker’s very productive life and launched a well-known wave of research and innovation that has by now had major impacts on many branches of economics such labor economics, international trade, economic growth, home economics, and now economic development.

He received the Medal of Freedom from George W. Bush at the White House in 2007 where President Bush said “Professor Becker has shown that economic principles do not just exist in theory.” Gary Becker died in 2014. He was 83.

This is a ‘must read’ for any person seriously interested in Human Capital, Labor Economics, the Economics of Education, or other fields that have been or are being revolutionized by human capital theory and empirical research. For others it is an historical building block. The reader will gain real insight, for example, into what investments businesses will make in on-the-job training of workers, and which they will not.

In this case, Becker originates the classical distinction between ‘firm specific training’ (which employers have an incentive to pay for since they can capture the benefits) and training that is not ‘firm specific’ which they will not pay for because the worker can leave the firm and benefit from the knowledge gained elsewhere.

In the latter category are basic education in mathematics and English for example the costs of which must be supported by households and governments, and/or by unions and community colleges, to the extent that the latter are supported by taxes.

In the middle ages education in trade skills of the type that workers can take to other jobs were supported by the medieval guilds, and now are often supported by unions but also by community college education.

I recommend this collection of articles because it gives a readable and clear view of the connection of the benefits of education to education finance and brings in for the first time the distribution of both the benefits and the costs of education.

Kern Alexander is well known as the father of equity as it relates to education and education finance. His article on the “Concept of Equity in School Finance” which is Chapter 10 in his book sets the stage for 9 additional articles that follow on essentially all of the key aspects of distribution of the benefits among children and families and of costs among families and taxpayers. 

This follows the nine Chapters on economic efficiency in education, which explore in greater depth many of the aspects already introduced above. These include the “Human Capital Approach” by Theodore W. Schultz, “The Social and Economic Externalities of Education”, “The Value of Investment in Education by George Psacharopoulos, and so forth.

But these are all aspects of economic efficiency do not address equity in distribution, which also is important especially in the US where inequality in funding per child among school districts is large because it depends on the valuation of real estate between rich and poor districts. This largely determines the inequality among the education that children get and the wide inequality in their incomes and well-being later.

The concepts of equity that Kern Alexander introduces also offer great insight into the political process and why people do what they do. Motivations range from “Commutative Equity” which means ‘let the market prevail’, no matter how unjust or how unequal it is when it comes to distribution, because of their deep seated belief that people who have earned it should be able to keep and enjoy their wealth, even though they may have inherited it, or lost it due to poor health or an accident.

This view opposes all redistribution, views larger government as “bad”, and is very influential because with wealth comes power. A more widely held view that considers the innocence of children and the desirability of attempting to give them a more equal start is the goal of seeking to achieve ‘equality of educational opportunity’. Surveys of the US population show that more equal distribution of incomes later tends to be preferred by more in the population.

Final incomes are not equal because there are differences in innate ability and in motivation. But they would be more equal than that what currently exists in the US. Farther to the left  is the ethical desire to ‘right the wrongs of society’ based on ethical ‘positivism’ drawing on John Rawls philosophy. It involves more redistribution than most people will accept.

I personally recommend this book because I think US children should not be forced to bear so massively the results of the ‘sins of their fathers’. Producing an educated population is different than producing steel ingots; equity doesn’t matter in producing steel ingots, so equity is not at issue, and let “the results of the market prevail” is fine. But in educating children it does matter, and matters a great deal.

I believe capitalism and markets work far better than centrally planned economies. But it also produces far greater inequality in the results than most people are willing to accept. The mechanisms by which it does this include, but are not limited to, instances of market failure, such as monopoly, poor information among buyers and sellers in markets, externalities, and inequalities in education finance. These situations require some government intervention or taxes and subsidies to make markets work better.

Markets fail when markets without rules break down. It is a bit like trying to play baseball without an umpire. Those who deeply believe as a religion in the sanctity of markets, oddly, often ignore or strongly oppose efforts to correct the bad effects of market failure when it occurs. This helps explain the opposition to policies related to vertical equity in the funding of schools which has a major effect on the distribution of income and well-being later.

This belief also affects positions on the adequate funding of the Internal Revenue Service, the funding of social security, Medicare, and Medicaid, the size of government, and the achievement of greater equality of educational opportunity.

Equity is not a simple subject. But getting into the many aspects of adequacy, and of horizontal and vertical equity in the funding of education at all levels, including higher education in Africa and Pakistan, will be introduced by Kern Alexander’s book. They offer insights to the reader as to why things are as they are, and to practical remedies to many of the world’s most troublesome distribution problems.

I strongly recommend this book because it is clearly written, explains the methods of estimation, and provides an excellent overview of the extensive worldwide research on the returns to education based on earnings.

It certainly influenced me. It had a massive impact on World Bank lending policies in support of economic development in developing countries. It replaced the kinds of Bank physical capital investment policies such as those supporting dam construction, projects that included educating only for a few people on how to operate dams, with education sector-wide loans that support primary and junior secondary education of the labor force.

Some of these dams later washed out, and forests were destroyed in support of development. The book shows how the returns to investment in primary and secondary education are higher in developing countries where the labor force is often nearly illiterate than they are to investing in other higher levels of education if the latter are expanded too rapidly too early. Independently I have found this to be very true in Pakistan, and in Indonesia, and in other developing countries.

This builds the kind of human capital base that allows the country to sustain a successful export-oriented growth strategy. And retains those who are highly educated rather than supporting their emigration. It certainly has worked for Indonesia where I worked often and returned for successive 5-year plans that were within the 25-year plan framework.

George Psacharopoulos with Harry Patrinos as his co-author have published a number of updates reporting rates of return estimated by others using more recent data and for many countries that substantiate these earlier findings.

For the US and some other advanced OECD Countries that have already achieved universal primary and secondary education, I find that the data do not reflect the same shortage of people with this lower levels of skill in the workforce with the result that rates of return to 2 and 4 year higher education are relatively higher. This pattern has sustained itself in the US, South Korea, and other more advanced countries for a considerable period of time.

The World Bank recently held a very significant symposium at its headquarters in Washington honoring George Psacharopoulis and marking this significant shift in its lending policy. The people at this conference in positions of senior leadership at the Bank in their talks all expressed interest in the returns to education beyond earnings as they affect development.

These returns affect fertility rates and hence net population growth, climate change, inequality, democratization, and other development indicators that have all been studied but are impacts not yet measured as comprehensively as are the impacts on earnings by George Psacharopoulos and Harry Patrinos. This is with the possible exception of the steps toward more comprehensive estimation and valuation consistent with the models of endogenous development that explain the logic of the impacts of the external social benefits in the books and articles cited on my website.