The Hidden Value of Education

Why Learning Benefits Everyone, Not Just Students

Introduction

This LL discusses research forthcoming in the Journal of Economic Surveys (2024) by Paul Auerbach and Francis Green.

Part 1: How We Got Here

For sixty years, one theory has dominated how economists think about education. Known as Human Capital Theory, it emerged in the 1960s through the work of economists like Gary Becker. The theory seemed elegant and logical: just as businesses invest in machines to become more productive, people invest in education to increase their earning power.

This view led to some clear predictions. People with more education should earn higher wages because they're more productive. The spread of earnings in society should reflect differences in educational investment. Countries with more educated populations should grow faster economically.

The theory gained tremendous influence because it explained patterns economists observed: how earnings typically increase with education, how wages rise with experience (but at a decreasing rate), and why earnings differ across occupations and industries.

Part 2: The Problem with Focussing Only on Individuals

Imagine a neighbourhood where one person goes back to school and gets a degree. Traditional economics would focus on how this helps that individual - maybe they'll earn more money or get a better job. But something bigger happens: their children start reading more, their friends become inspired to learn new skills, and their workplace benefits from their fresh ideas. This ripple effect of education is what economists have been overlooking for too long.

A new paper by economists Paul Auerbach and Francis Green challenges this long-standing view. They identify two fundamental problems with Human Capital Theory.

First, whilst the theory acknowledges that education creates benefits beyond the individual (what economists call "external effects"), it tends to ignore these in practice and policy recommendations. When someone becomes educated, it helps society in ways they're never paid for: they might read better bedtime stories to their children, share knowledge with co-workers, make more informed voting decisions, and contribute to richer cultural activities in their community.

Second, the theory assumes people make educational choices as isolated individuals carefully calculating costs and benefits. In reality, our decisions are deeply influenced by our friends and family's expectations, the neighbourhood we grow up in, the schools available to us, our cultural background, and what we see as "normal" for people like us.

Part 3: A New Vision for Understanding Education

Auerbach and Green argue we need a fresh approach that recognises education as both personal and social. They suggest three key improvements to how we think about education.

The first is to properly study and measure how education's benefits spread through society. This includes immediate effects like better communication and knowledge sharing, but also long-term impacts across generations. When we look at education this way, we begin to see how one person's learning creates waves of positive change throughout their community and beyond.

The second is to embrace what philosophers call the "capability approach," developed by thinkers like Amartya Sen and Martha Nussbaum. This approach looks at how education develops human potential in ways that go far beyond job training. It considers how education enables people to participate fully in society, engage with culture, and shape their own futures.

The third is to incorporate insights from behavioural economics about how people actually make educational decisions, rather than assuming perfectly rational calculations. This means understanding that choices about education are deeply influenced by social context, cultural expectations, and complex human psychology.

Part 4: Why This Matters for Everyone

This isn't just academic debate - it has real consequences for how we approach education as a society. Current policies, shaped by Human Capital Theory, tend to treat education primarily as a private investment. This has led to increasing student debt and a narrow focus on immediate job relevance.

If we recognise that education benefits everyone, not just the student, we might need to fundamentally rethink how we fund and structure education. We might create policies that consider social background, value subjects beyond their immediate job relevance, and support learning throughout life, not just in youth.

The Bigger Picture

Education isn't just about investing in yourself for future earnings. It's about investing in our shared future as a society. When we treat it only as a personal investment, we miss its true value and potentially underinvest in one of our most powerful tools for social progress.

Consider how education shapes our collective future: better-educated citizens make more informed democratic decisions, contribute more to cultural life, and help create more innovative and adaptable economies. Parents with more education tend to raise children who are better prepared for their own educational journeys. Workplaces become more productive when colleagues share knowledge and skills.

Next time you hear someone ask "Is university worth it?" remember: the true value of education goes far beyond what shows up in any individual's pay check. It's an investment in the kind of society we want to build together.