Human Capital: The Economics of Education


1.0 Introduction: The economics of education

“Skills and capabilities are the most important asset in an advanced modern economy” NESC

In this paper it will be argued that unless there are benefits to society (social returns) over and above private returns there is little argument that the taxpayer should finance higher education. To defend state financing of higher education it is essential that there is a social optimal return to a majority of citizens. However, the paper will attempt to move beyond the dichotomy of individual versus social returns to education by proposing a concept of human capital that incorporates both. This concept is quality labour. Thus, the question whether the state should finance higher education should revolve around the concept of ‘social investment’ rather than ‘equality of opportunity’. In this paper an alternative conceptualisation of how to ‘measure the rate of return’ is proposed:

Individual Human Capital Labour Value Economy Social returns = Positive

If one uses this model of conceptualising the ‘rate of return’ then the question of ‘who funds’ becomes more complex. Human capital should be re-conceptualised as social economy capital. The traditional model of human capital in economics only measures the income return to the individual. It is my argument that this should be ‘socialised’ beyond the individual. The state should ask itself whether it should make a social investment in its most valuable asset: human resources.

Thus, the paper will assess whether the state should finance higher education on the basis of creating a strategic long term investment in the skills & capabilities of it’s labour force. It will be argued that Ireland as a small open liberal market economy needs to invest heavily in its most valuable resource: people. The argument here is that the state should conceive itself as an organisation competing in an international arena of ideas, skills and capabilities. The question it ought to ask itself is whether it should invest or not invest. The paper will conclude by examining this ‘financial dilemma’ by proposing two alternatives: complete state funding of higher education by the taxpayer or partial state funding of higher education coupled with an income contingency loan.

The remainder of this paper is under the ‘socio-economic’ section above

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