Human capital: A revolution?

If we want to build competitive economies, we need a human capital revolution. But what does that actually mean? A new book from the OECD explores this question and the human side of economic man and woman. Here, the author offers some personal reflections on the need to understand the bigger picture of how human capital is formed and the role that education can play.
OECD Public Affairs and Communications Directorate
“Our values and beliefs inhibit us from looking upon human beings as capital goods, except in slavery, and this we abhor.” So wrote American economist Theodore Schultz in 1961 in his pioneering analysis of the role of human capital in economic growth.
Schultz did not share that inhibition. In the same article he rejected the idea that there is anything demeaning in the notion of people consciously investing in themselves–through education and training, for instance–to create a “capital” that brings long-term returns. “By investing in themselves, people can enlarge the range of choices available to them,” he declared. “It is one way free men can enhance their welfare.”Schultz, and many economists who followed him, helped reshape our social and political attitudes. Today, it is hard to imagine any politician or business leader arguing against investment in human capital. “In the economy of the 21st [century], knowledge, human capital, is the future …”, the British prime minister, Tony Blair, declares. On the other side of the world, Australian opposition leader Kevin Rudd announces, “it is now time for a third wave of economic reform–a human capital revolution, an education revolution, a skills revolution.”There is a problem with revolutions: they rarely run to plan. A course is settled amid the shadowy light of blazing ruins when it might better be left for the cold light of day. Mistakes are made and then multiply, unleashing forces that no one could have foreseen. In the human capital revolution there’s plenty of potential for mistakes–beginning with a question of definition: what do we mean by “human capital revolution”? The reality is that what many of today’s sans culottes are really talking about is an upheaval in education.Why do the human capital and education revolutions get mixed up? For one thing, formal education is an important factor in human capital formation, albeit not the only one. Social background is significant too: being born to well-off parents generally raises an individual’s levels of human capital, both by producing better school results and stronger health, itself an aspect of human capital. But the sort of social engineering that might iron out these differences would be unacceptable in most countries. Regrettably, even far more modest changes that might mitigate the impact of social background in forming human capital–such as public investment in childcare and pre-school education, especially for children from immigrant and underprivileged backgrounds–seem to be hard, too.So, the reality is that when governments attempt to develop their countries’ human capital, it is formal education–both in the compulsory and tertiary phases–that tends to be seen as offering the widest and most visible range of policy levers. Which levers are pulled needs to be given very careful consideration: bad decisions will affect the people–children and teenagers mainly–who are the future of our societies. (Ironically, it is these same young people who have the least say in making these decisions.)Decisions need to be guided by more than just the aim of boosting growth. Education and human capital are too complex, both in their individual composition and their relationship, to be seen purely in terms of serving a single goal. This point was given welcome recognition in the Human Capital Index developed by Peer Ederer for the Lisbon Council, a Brussels-based think tank that examines the challenges facing Europe. His index naturally includes formal education, but it also tries to factor in things like the role of parenting and on-the-job training, which are simply ignored by traditional measures of human capital, such as the number of years adults have spent in education.Equally, while education is important to developing human capital, it also has a much wider role in instilling social values. If we become slaves to the logic that “more education leads to more human capital leads to more growth”, we risk losing sight of this wider picture. We will also risk creating education systems that are configured so closely to meeting the needs of specific industries that they have less and less space for unconventional students–the creative eccentrics, the emotionally gifted, or kids who are just not academically inclined.So, before we launch a human capital revolution–and particularly when it comes to how we can fight the battle on the education front–we need to pause for thought. Rushing in boldly, especially in education, can be risky.Take the New Math revolution, which swept through OECD countries in the 1960s and 1970s in response to the apparently enormous technical strengths of the Soviet Union, as exemplified by the Sputnik launch in 1957. Worried by the success of their Cold War enemy, the West moved to raise standards in science and maths through a series of reforms to curricula and teaching methods. The OECD played a role in helping to formulate these changes.New Math was part of this. It encouraged students–and this writer was one of them–to think about mathematical structures and processes, rather than simply trying to solve problems. Or, as the American satirist Tom Lehrer sang–not inaccurately–“the important thing is to understand what you’re doing rather than to get the right answer.” The problem was that very few people did know what they were doing. Parents–and surely many teachers–were bewildered by the new concepts, while secondary schools didn’t always take account of the fact that students coming up from primary schools had been exposed to a whole new way of thinking about mathematics. So while today many children of my generation can still talk knowledgeably about “set theory”, we may be hard pressed to multiply one double-digit number by another.Are we better equipped today to avoid repeating the errors of the New Math era? For one thing, we have access to far more high-quality statistical data, such as from the OECD’s PISA programme, to give us insights into what works in education and what doesn’t. Unfortunately, policymakers don’t always take the time to go behind the numbers to consider the different social, economic and educational contexts of performance that PISA highlights.For an example, look at Finland. Youngsters there regularly come first in world surveys of student ability, and even weaker students and those from disadvantaged backgrounds do well by international standards. As a result, Finland is now a “poster child” for how to run schools. But what is sometimes overlooked is that Finland’s scores are virtually matched by some other school systems, such as that of Hong Kong, China. Yet the systems are quite different.In Finland, teachers hold Master’s degrees; in Hong Kong, China, only about half of primary teachers have degrees. In Finland, private tuition outside school hours is rare; in Hong Kong, China, the faces of “superstar” teachers from extra tutorial schools grin out from billboards across the city; in Finland, classes are small and teachers are given autonomy to develop their own programmes; in Hong Kong, China, classes are large, and teachers are told what to do by principals, schools inspectors and the education department. None of these crucial differences, however, are apparent in the headline performance scores of students from these two places.Context is crucial in other ways. While countries should borrow ideas from each other, they must remember that education systems are not merely the products of the latest thinking, but reflect the deeply embedded cultures of very different societies. For instance, Finland leans towards social egalitarianism while Hong Kong, China is influenced by the traditions of hierarchical Confucianism; the former doesn’t stream students, the latter does. Without wanting to be overly reductionist, it is not hard to believe that all this might be connected.If the links between societies and cultures and education are complex, the same is true for the relationship between education and human capital formation. Take those attractive targets that politicians like to trot out at election time: Doubling the number of places in universities will certainly win votes, but its ability to raise economic growth will be compromised if all those new graduates find themselves locked out of labour markets by rigid practices or are prevented from starting up their own businesses by the unavailability of capital, red tape or tight controls on business start-ups. Without the right economic and social policies, these bright graduates will contribute to growth all right, but in the countries they emigrate to.Equally, we need to ensure that everybody–and not just those working in the high-human-capital, high-value-added end of the economy–gets a chance to develop their human capital. This is especially true for those who effectively stopped forming their economically useful human capital sometime in their teens. In our new knowledge-based economies, more and more people are at risk of finding themselves thrown to the margins both of economic and social life because they lack training and retraining and, because of this, the ability and confidence to handle new realities. Unless we find ways to develop the abilities of all our fellow citizens, our societies may find themselves facing more than just a human capital revolution.References
  • Ederer, Peer (2006), “Innovation at Work: The European Human Capital Index,” available at
  • Forestier, Katherine (2005), “Can East Meet West?”, the Times Educational Supplement, July.
  • Keeley, Brian (2007), Human Capital, OECD.
  • Schultz, Theodore W. (1961), “Investment in Human Capital,” the American Economic Review, March.
  • Wolf, Alison (2004), “Education and Economic Performance: Simplistic Theories and their Policy Consequences”, Oxford Review of Economic Policy, Vol. 20, Issue 2.
OECD Observer N°261 May 2007  

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