Human Capital Theory

LECTURE TWO: THEORIES OF EDUCATION AND DEVELOPMENT
HUMAN CAPITAL THEORY
The economic prosperity and functioning of a nation depend on its physical

and human capital stock. Physical capital has traditionally been the focus of
economic research, factors affecting the enhancement of human skills and
talent are increasingly figured in the research of social and behavioural
sciences. In general terms, human capital represents the investment in people
make in themselves that enhance their economic productivity. The theoretical
framework most responsible for the wholesome adoption of education and
development policies has come to be known as human capital theory .
Human capital theory rests on the assumption that formal education is highly
instrumental and necessary to improve the productive capacity of a population. In
short, human capital theorists argue that an educated population is a productive
population. Human capital theory emphasizes how education increases the
productivity and efficiency of workers by increasing the level of cognitive stock of
economically productive human capability, which is a product of innate abilities
and investment in human beings. The provision of formal education is seen as an
investment in human capital, which proponents of the theory have considered as
equally or even more worthwhile than that of physical capital (Woodhall, 1997).
Human Capital Theory (HCT) concludes that investment in human capital will lead
to greater economic outputs however the validity of the theory is sometimes hard
to prove and contradictory. In the past, economic strength was largely dependent
on tangible physical assets such as land, factories and equipment. Labor was a
necessary component, but increases in the value of the business came from
investment in capital equipment. Modern economists seem to concur that
education and health care are the key to improving human capital and ultimately
increasing the economic outputs of the nation.
Throughout western countries, education has recently been re-theorized under

human capital theory as primarily an economic device. Human capital theory is
the most influential economic theory of western education, setting the
framework of government policies since the early 1960s. It is increasingly seen as
a key determinant of economic performance. A key strategy in determining
economic performance has been to employ a conception of individuals as human
capital and various economic metaphors such as; technological change, research,
innovation, productivity, education, and competiveness.
Noted economist, Adam Smith, in the The Wealth of Nations (1976) formulated
the basis of what was later to become the science of human capital. Over the next
two centuries, two schools of thought were distinguished. The first school of
thought distinguished between acquired capacities that were classified as capital
and human beings themselves, who were not. The second school of thought
claimed that human beings themselves were capital. In modern human capital
theory all human behaviour is based on the economic self-interest of individuals
operating within freely competitive markets.
Human capital theory stresses the significance of education and training as the
key to participation in the new global economy. In one of its recent reports, the
Organization of Economic Cooperation and Development (OECD), for example,
claims that the radical changes to the public and private sectors of the economy
introduced over recent years in response to globalization will be severe and
disturbing to many established values and procedures. In another report it
explains internationalism in higher education as a component of globalization.
The OECD believes that internationalism should be seen as an imperative in 21st
Century capitalism. This form of capitalism is based on investment in financial
markets rather than in manufacturing of commodities, thus requiring dependence
on electronic technology.
The success of any nation in terms of human development is largely dependent

upon the physical and human capital stock. Thus, recent social research focuses
on the behavioral sciences of humanity in relation to economic productivity.
Generally, human capital represents the assets each individual develops to
enhance economic productivity. Further, human capital is concerned with the
wholesome adoption of the policies of education and development. In short, the
human capital theorists argue that an educated population is a productive
population. Human capital theory emphasizes how education increases the
productivity and efficiency of workers by increasing the level of cognitive stock of
economically productive human capability, which is a product of innate abilities
and investment in human beings. The provision of formal education is seen as a
productive investment in human capital, which the proponents of the theory have
considered as equally or even more equally worthwhile than that of physical
capital.
According to Babalola (2003), the rationality behind investment in human capital

is based on three arguments:
1. The new generation must be given the appropriate parts of the knowledge
which has already been accumulated by previous generations.
2. The new generation should be taught how existing knowledge should be
used to develop new products, to introduce new processes and production
methods and social services;
3. People must be encouraged to develop entirely new ideas, products,
processes, and methods through creative approaches.
Fagerlind and Saha (1997) posit that human capital theory provides a basic
justification for large public expenditure on education both in developing and
developed nations. The theory is consistent with the ideologies of democracy and
liberal progression found in most western societies. Its appeal was based upon
the presumed economic return of investment in education at both the macro and
micro levels. Efforts to promote investment in human capital were seen to result
in rapid economic growth for society. For individuals, such investment was seen
to provide returns in the form of individual economic success and achievement.
Most economists agree that it is human resources of nation, not its capital nor its
material resources, which ultimately determine the character and pace of its
economic and social development. Human resources constitute the ultimate basis
of the wealth of nations. Capital and natural resources are passive factors of
production, human beings are the active agencies who accumulate capital, exploit
natural resources, build social, economic, and political organizations, and carry
forward national development.
Application of Human Capital Theory to Educational System
Education plays a great and significant role in the economy of a nation; thus,
educational expenditures are found to constitute a form of investment. This
augments individual human capital and leads to greater output for society and
enhanced earnings for the individual worker. It increases their chances of
employment in the labor market, and allows them to reap pecuniary and non-
pecuniary returns and gives them opportunities for job mobility. Education is a
source of economic growth and development only if it is anti-traditional to the
extent that it liberates, stimulates, and informs the individual and teaches him
how and why to make demands

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LECTURE TWO: THEORIES OF EDUCATION AND DEVELOPMENT

HUMAN CAPITAL THEORY

The economic prosperity and functioning of a nation depend on its physical

Throughout western countries, education has recently been re-theorized under

The success of any nation in terms of human development is largely dependent

According to Babalola (2003), the rationality behind investment in human capital

Application of Human Capital Theory to Educational System

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