0.6 Investment in human capital: education and health  (Page 6/16)

The empirical studies cited do not fully include the positive effects of the effects of Human Capital formation on the introduction of new technologies : the more educated is the labor force, the more is the labor force able to implement technological advances. This has proven very important both for small wealthy economies such as Australia and for all LDCs .

We may better understand the concept of Human Capital through some insights from that subdivision of economics called Public Sector Economics.

A high degree of accessibility to education is good for any economy , now and over the longer haul. Investments in education, whether public or private, share many commonalities with investments in Physical Capital; but there are major differences as well. A business that invests in a machine gets the exclusive benefits from the device. But when a taxpayer, or a donor, and or a student invest in education (including higher education), the returns accrue not just to the students, but to society as a whole: new knowledge and new ideas can be used by millions of people simultaneously.

Second, investments in education depreciate much more slowly than investment in Physical Capital. This is largely because investments in Human Capital have a far longer useful life than investments in virtually all physical assets. The useful life of a vehicle used in a business is rarely more than eight years, that of a computer less than four. Therefore these physical assets depreciate over a period of ten and four years respectively. Physical assets such as plant and equipment also tend to wear out at an increasing rate while in service and require increasing levels of maintenance. Because investments in education have far longer useful lives (65-75 years) they depreciate at exceptionally low rates. And, the rates of depreciation do not rise notably over the years. With some exceptions, such as pure mathematics, skills and talents acquired by education deteriorate at very low rate, and vanish entirely only with the onset of advanced disease, or death. Over a century ago, the poet Oliver Wendell Holmes provided a near-perfect analogy for such an asset: “The Wonderful One-Hoss Shay.”

Greatly truncated, his poem goes as follows:

Have you heard of the wonderful one-hoss shay,
That was built in such a logical way,
It ran a hundred years to a day,
And then, of a sudden it…
Went to pieces all at once,
End of the wonderful one-hoss shay,
Logic is logic. That’s all I say.

Example: consider the gifted Physicist Richard Feynman (among other distinctions, the father of NanoScience). He made contributions to physics right up to the moment of death in 1988. But like his fellow physicists Albert Einstein and Edward Dirac, Feynman shared the same fate as the “One-Hoss Shay”.

Investment in education is very much like that in the mythical “One Hoss Shay.” It keeps paying, and paying, and paying, until death. The payout period for a machine is relatively short. The payout period for investment in education stretches over a working lifetime, now nearly six decades in rich nations and about five in emerging nations. With useful lives so long , and depreciation rates so low , it is no wonder that recent research has confirmed that returns to educational investment are so high . This claim is no less applicable to investment in research as in schooling. For example, the noted analyst Edwin Mansfield once estimated that, the annual rate of return worldwide from academic research generally is on the order of 28 percent. Returns from investments in biomedical research are still higher.

See Charles I. Jones&John C. Williams (1998), “Measuring the Social Rate of Return to R&P “, The Quarterly Journal of Economics, 113(4):1119-1135, doi: 10.1162/003355398555856.