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Study Notes

Economic Growth - Human Capital

AQA, Edexcel, OCR, IB

Last updated 22 Mar 2021

The basis of human capital lies in the theories of the Theodore Schultz, an economist from the University of Chicago who was awarded the Nobel Prize for Economics in 1979

Graphic on the importance of human capital

Schultz demonstrated that the social rate of return on investment in human capital in the US economy was larger than that based on physical capital such as new plant and machinery.

Professor Gary Becker(pictured on the right) - the 1992 Nobel Prize winner for economics who died in 2014 - built on the ideas put forward by Schultz, explaining that expenditure on education, training and medical care could all be considered as investment in human capital.

Professor Becker wrote, “people cannot be separated from their knowledge, skills, health or values in the way they can be separated from their financial and physical assets."

According to Michael Milken, “The macro view sees the 21st century defined by global competition for the world's most valuable asset, human capital. Nations build this by strengthening education, healthcare, and access to scientific knowledge, opportunities for women and incentives that attract skilled immigrants."

Human capital is the quality of labour: one of four factors of production. It is not a question of the quantity of labour, but rather the skills that a worker can bring, and is thus another way of saying productivity (although an important part of human capital may the flexibility to adapt to new jobs - so the two are not quite so similar).

Continually improving human capital is vital for economic growth and Milken points out that China's continuing and projected prosperity is derived, in large part, by an evolving middle class driven by a “continuous focus on education".

He goes on to demonstrate the importance of education by comparing Singapore and Jamaica: both former British colonies, with populations of 1.6m and a similar GDP/capita ($2,200, roughly).

Whilst Jamaica chose invest its resources in the agricultural and mining industries (along with tourism)

Singapore chose a different route. It focused on the importance of education and developed advanced technology. The two outcomes, in terms of prosperity and standard of living, show which route was best.

Today Singapore's GDP per capita is over seven times the level of Jamaica's

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