Education – it’s not for the economy, stupid!

Those who believe that education drives economic growth need some lessons in reality.

Phil Mullan

Topics Politics

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Over the past decade it has became an article of faith that education and skills make a vital contribution to economic performance (1). Deficiencies in national labour productivity and economic growth are increasingly attributed not to inadequacies in productive investment, but to educational shortfalls and weak labour skills (2).

Meanwhile, educational initiatives in Britain and internationally are increasingly posed in terms of their contribution to economic growth and the needs of the labour market. UK education secretary Charles Clarke has justified the drive towards a more vocational school curriculum in terms of economic benefits for the country and for individuals.

The problem with this conventional thinking is that it has no empirical substance. In fact, many studies have highlighted the absence of a positive association between the extension of education, and the growth of productivity, of output per worker, or of national economic wealth.

The evidence doesn’t fit

Challenging the conventional view, there is actually a striking global correspondence between the world economic slowdown since 1973 and ever-increasing levels of educational spending. Comparisons between countries also confound the idea that more education translates into more growth. For example, South Korea is often given as an example of a country that made education a priority since the 1960s and saw significant economic growth. But as Professor Alison Wolf from King’s College London points out, Egypt has also prioritised investing in education, but its growth record has been poor (4). Between 1970 and 1998 Egypt’s primary enrolment rates grew to more than 90 per cent, secondary schooling levels went from 32 per cent to 75 per cent, and university education doubled – yet over the same period Egypt moved from being the world’s forty-seventh poorest country to being the forty-eighth.

A retort might be that education isn’t the sole determinant of growth – other factors may offset its positive economic role – but it remains a necessary one. But this argument doesn’t stand up either. The rapid growth of Hong Kong, another of the East Asian tigers, wasn’t accompanied by substantial investment in education. Its expansion of secondary and university education came later, as more prosperous Hong Kong parents used some of their newfound wealth to give their children a better education than they had had.

A study for the World Bank came to similar conclusions. In a paper called ‘Where has all the education gone?’, public policy academic Lant Pritchett couldn’t find the positive correlation between education and productivity that underpins so much current international development thinking (5). Economist William Easterly summarised the study:

‘African countries with rapid growth in human capital [the fashionable term for people’s work abilities, especially levels of education] over the 1960 to 1987 period – countries like Angola, Mozambique, Ghana, Zambia, Madagascar, Sudan, and Senegal – were nevertheless growth disasters. Countries like Japan, with modest growth in human capital, were growth miracles. Other East Asian miracles like Singapore, Korea, China, and Indonesia did have rapid growth in human capital, but equal to or less than that of the African growth disasters. To take one comparison, Zambia had slightly faster expansion in human capital than Korea, but Zambia’s growth rate was seven percentage points lower.

‘…Eastern Europe and the former Soviet Union compare favourably with Western Europe and North America in years of schooling attained. Yet we now know that [gross domestic product] per worker was only a small fraction of Western European and North American levels. For example, the 97 per cent secondary enrolment ratio of the United States is only slightly higher than Ukraine’s 92 per cent, but the United States has nine times the per capita income of Ukraine’ (6).

Alison Wolf emphasises that such examples aren’t peculiar to the less-developed world, noting that the OECD country with the lowest university attendance and graduation rate is Switzerland, one of the richest. Meanwhile, Mary O’Mahony and Willem De Boer show that Britain’s educational achievements don’t appear to have any decisive bearing on relative economic performance. On their measure of differentials in labour force qualifications they estimate that ‘by 1999, the UK and the US had similar levels of human capital’, with Britain gaining on the USA since 1995. But over that same period the labour productivity differential between the two countries widened, with Britain falling further behind again. In comparison with Germany, where Britain appears to lag in educational attainment (especially at the intermediate level between finishing secondary school and attaining higher university level qualifications), their figures attribute only one fifth of the productivity gap to ‘human capital’ issues (7).

While these examples are pretty damming for the education-for-growth argument, its proponents continue to rest their case on the frequent positive correlation between levels of education and economic growth. However, correlation does not itself establish causation, nor the direction of any causation. In general, developed countries that expanded their higher education more rapidly since 1960 have experienced faster growth than the countries that did not, but this doesn’t mean that education causes growth. It is more credible that richer countries are able to devote more resources to education, just as they can to health and other welfare services (8). More prosperous countries can afford to provide better and more years of education for their populations. In conventional economic jargon, education is more a consumption good, than one for investment.

Looking to the theory underpinning today’s thinking on education and growth provides it with no greater substance, but it does reveal a little more about its distorted reasoning. The idea that education policy can create growth rests on the New Growth Theories that developed from the mid-1980s, and are most often associated with economists Paul Romer and Robert Lucas (9). But these ideas in turn owe much to the human capital theory that originated some 20 years earlier with the 1963 publication of Theodore Schultz’s The Economic Value of Education and Gary Becker’s Human Capital: A theoretical and empirical analysis, with special reference to education in 1964. These were the first systematic attempts to attribute economic productivity to amounts of education.

The theory’s logical flaws

There are two key problems with these theories: one relates to their understanding of the dynamic of economic growth; the other to their distortion of the content and purpose of education.

Human capital theory arose as a postulate to answer a perennial mystery of ‘growth accounting’ by which economists sought to understand the causes of economic growth. Growth accounting took off after the Second World War, with the memory of the 1930s economic depression still strong and concerns widespread about further economic instability. The growth model relied on disaggregating the various inputs into productivity growth – mainly physical capital and labour – in order to identify which were the most important.

The bane of most growth accounting models is that they are usually left with a large amount of growth that does not seem to be accounted for by the physical inputs, which is known as a ‘residual’. This ‘residual’ then itself needs to be explained, and this has spawned most ‘new’ economic thinking of the past half century: including the catch-all of ‘technological progress’, a greater role for ‘intangibles’, and more recently, the ‘new economy’ based on information technology. And, of course, human capital theory, which proposes that the missing ingredient is education.

But the underlying problem with growth accounting, and therefore with all the attempted solutions to account for the residual, is the idea that growth can be broken up into discrete components. In fact, economic growth is not an arithmetical sum of various inputs, but is the measure of a process by which society develops its productive capabilities. This process is certainly driven by technological change, but this cannot be separated from its physical constituents: labour effort and fixed capital in the form of equipment and plant and structures. Breaking growth down into quantitative physical components, therefore, tends to mean that the crucial role of capital investment as the embodiment of technological advance is underestimated.

Indeed, this partly explains the popularity of these theories. They find resonance and credibility in a world that increasingly sees capital investment as fraught with problems – for example, previous economic difficulties in Japan and East Asia and now in China have often been attributed to too much investment, and there is widespread suspicion about the consequences of much capital-led innovation and new technology. Growth models that de-emphasise the dynamic impact of capital are welcomed in an age of technophobia and of ubiquitous anxieties about the social and environmental costs of growth.

However, if technological progress were understood in a more holistic way, there would not be a ‘residual’ requiring a new explanation. Of course workers and their skill levels – a component of the usual definition of human capital – are part of the mix that combined with other factors such as adequate levels of research and development and of innovation, the effective use of technology and sufficient capital investment, produce economic wealth. But it is misleading to single out any of them as a standalone factor of growth. Increasing workforce skills are useless economically in the absence of the capital investment and technology to use them. For example, what’s the point in training up British genetic plant scientists if every leading biotechnology company abandons Britain because of the regulatory and other barriers to operating here? (10)

Given this methodological problem intrinsic to growth accounting that creates the need for education to fill the residual, the dearth of empirical support for the thesis should not be surprising. Libby Aston and Bahram Bekhradnia (11) from the Higher Education Policy Institute summarise this crucial deficiency of the assumptions underlying human capital theory, as that ‘the empirical basis for these assumptions is essentially unknown’ (12) or ‘inconclusive’ (13).

One of the reasons that human capital theory remains attractive is that it seems to ‘work’ at the individual level – in that educated people tend to have a higher income, which is seen as evidence of their greater productivity as individuals. But again a correlation between two variables – in this case education and personal income – does not establish causation. You could just as well relate lifetime earnings to the costs of childcare. No doubt there is a positive correlation between the amount of time and money parents spend on a child with their subsequent lifetime earnings – but few would argue that this is proof of causation, either of higher earnings or of stronger economic growth. Middle-class parents spend more money on their children, encourage them to go to university and their children are probably more likely to aspire to and enter the same middle-class occupations with higher incomes.

The higher incomes of more educated people could be due to differences in ability, motivation or socioeconomic backgrounds, which themselves happen to correlate with years of education completed. This reasoning underpins the screening or signalling thesis, that although schooling has no direct effect on productivity it does give employers a guide to applicants’ qualities (14). This approach is also consistent with the labour market’s obsession with credentials.

Pay will tend to be correlated to educational attainments because of the role that qualifications can play as a proxy for other qualities, or even just as a sifting mechanism in the recruitment process. It is well known that, at least prior to the mass extension of higher education, a university degree was the simplest sifting-out mechanism by employers for wide swathes of job recruitment. In an earlier spiked article, Alex Standish quoted Jerry Wellington’s belief that ‘qualifications in academic subjects, not vocational subjects, are more strongly correlated with success in gaining employment’, and Anthony Edwards’ suggestion that this is because qualifications such as A-levels are a proxy measure of ‘promising applicants’ ambition, self-reliance, capacity for hard work and capacity for learning’ (15).

The subject of the degree is usually of little significance; the degree itself is simply recognised as a badge of a certain level of ability, motivation and application. Given the substantial growth in the number of graduates and the decline in the rigour of degree requirements, this approach is becoming less useful for employers. Employers now increasingly prefer degrees with a higher analytical content such as science or maths – again not really because of the subject matter covered, but because of the perceived additional rigour required.

Schooling is more than skilling

This brings us to the second key problem with human capital theory, which is the conflation of education with training, and schooling with skilling. Or as Gary Becker put it back in the 1960s: a school is ‘an institution specialising in the production of training.’ (16) But it is not – a school is an institution for education, which is not the same thing as giving people workplace skills.

A school is a place where pupils’ minds are developed, where knowledge is imparted and where pupils are taught to understand the world. A school may prepare children for work, but that is not ‘what education is for’, except in the broadest sense that education is about preparing young people for the challenges and demands of adulthood. And schooling does, or should, impart an ability to read and write and speak, to take and give instructions, to use numbers, which are all necessary for work and for adult life in general. But that that isn’t what education is for either. Mathematics – even at secondary school level – should be about understanding logical relationships, rather than just ‘numeracy’. Secondary school English classes should be about comprehending language, communicating ideas and discussing literature, not just ‘literacy’.

Education and training represent heterogeneous processes. ‘Education’ covers a broad range of learning and levels of knowledge, from basic literacy and numeracy to the highest levels of abstract thought as promoted in some university humanities departments. The term ‘skills’ also covers a multitude of abilities, some specific and technical, others general and generic (17). But it is the differences between education and training that are even more important. Education is about opening people’s minds, and developing thought processes – which is the serious point behind Einstein’s quip that ‘education is what remains after one has forgotten everything he learned in school’. Training, on the other hand, is about giving people general or specific abilities that are most usefully developed and consolidated through working experience.

Therefore, while the results of your education should stay with you forever, skills that are not practised are usually soon lost. Whatever the productivity benefits of training and skills they should not be confused with schools and education. Education does impart what are now called ‘core skills’ – communication, numeracy, problem solving, making use of information technology – but it should do this through the teaching of science, maths, English and other subjects. That is, through the development of children’s minds, rather than as an isolated technical task.

Moreover, there is no basis for moving from the recognition that a workforce without any basic education would have difficulty partaking in a reasonably well-developed economy, to the notion that more ‘investment’ in education generates higher economic productivity. Without water you wouldn’t be able to do a week’s work, but this doesn’t mean that the more water one drinks the more productive you will be during that week.

The government asserts the link between education and productivity to justify its expansion of the higher education sector. Behind this is a facile logic: ‘Graduates tend to earn more than non-graduates; this is a symptom of their higher productivity; hence increase the number of graduates and aggregate earnings will rise expressing a concomitant rise in national wealth creation.’ This makes the assumption that more high-productivity jobs will be quickly created to employ these extra graduates, which is not something that anyone has been able to show happening so far in Britain with the existing expansion in graduate numbers. This is hardly surprising, given the problem of how all the new productive investment needed to provide such employment would suddenly materialise.

Treating the educational system as training for work degrades the intellectual content of education. It is probably also counterproductive in economic terms, in that it tends to produce a less capable workforce. This is not because of school leavers entering the labour market without basic literacy and numeracy skills – Alison Wolf has shown that the often quoted 7-8 million figure of illiterate and innumerate workers in Britain is exaggerated. The real problem is that young people are leaving formal education without having benefited from the attainment of knowledge that gives them an all-rounded preparation for adult life, including the demands of work.

If schools continue to refocus on providing low-level basic ‘skills’ training, school education loses its central and valuable purpose of pushing young people, at least to the age of 16, to learn to think abstractly. Young people could be less prepared for employment, not because of a lack of occupational skills, but because they haven’t benefited from having their minds stretched by real education. Without the ability to analyse and study, later work-skills training can be much less effective. Schooling that deprioritises learning in favour of more vocational skills training is likely to diminish the value of on-the-job training later in life.

Phil Mullan is the author of The Imaginary Time Bomb: Why an Ageing Population Is Not a Social Problem, IB Tauris, 2000 (buy this book from Amazon (UK) or Amazon (USA)).

(1) See, for example, Growth effects of education and social capital in the OECD countries, by Jonathan Temple, Economic Department Working Paper 263, OECD, October 2000; Does human capital matter for growth in OECD countries?, by Andrea Bassanini and Stefano Scarpetta, Economics Department Working Paper 282, OECD, January 2001

(2) Britain’s relative productivity performance: Updates to 1999, by Mary O’Mahony and Willem De Boer, National Institute of Economic and Social Research, 2002, pp9-11; 21st Century Skills: Realising Our Potential, UK government, July 2003

(4) Does Education Matter? Myths about Education and Economic Growth, by Alison Wolf, Penguin, 2002

(5) Where has all the education gone?, by Lant Pritchett, World Bank Country Economic Department, Paper 1581, 1996

(6) The Elusive Quest for Growth, William Easterly, MIT, 2002, p. 74

(7) Britain’s relative productivity performance: Updates to 1999, by Mary O’Mahony and Willem De Boer, National Institute of Economic and Social Research, 2002, pp9-11

(8) Education at a Glance: OECD indicators 2002

(9) On the mechanics of economic development, Robert Lucas, Journal of Monetary Economics, 22, 1988; Endogenous technological change, by Paul Romer, Journal of Political Economy, 98(5), 1990

(10) Syngenta shuts GM labs in UK, Financial Times, 1 July 2004

(11) Demand for Graduates: a review of the economic evidence, by Libby Aston and Bahram Bekhradnia, The Higher Education Policy Institute, September 2003

(12) Externalities to higher education: a review of the new growth literature, by N Gemmell, Report 8 of the National Committee of Inquiry into Higher Education, 1997

(13) The returns to education: a review of the empirical macro-economic literature, by B Sianesi and J Van Reenen, The Institute of Fiscal Studies, 2002

(14) Job Market Signalling, by Michael Spence, Quarterly Journal of Economics, 87, 1973; Higher Education as a Filter, by Kenneth Arrow, Journal of Political Economy, 2(3), 1973

(15) The key to skills, by Alex Standish; Separate But Equal? A Levels and GNVQs, by Anthony Edwards, et al, Routledge, 1997; The Work Related Curriculum, by Jerry Wellington, Kogan Page, 1993

(16) Human Capital: A Theoretical and Empirical Analysis, with Special Reference to Education, by Gary Becker, NBER, 1964, p. 37

(17) The term skill is used in many different ways, not least by employers. Skill requirements at work: rhetoric v reality, by C Darrah, Work and Occupations, February 1994; Is there a shortage of skilled labour?, by J Oliver and J Turton, British Journal of Industrial Relations, 20(2), 1982

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Topics Politics


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