Running head: ESSAY: INVESTMENT IN HUMAN CAPITAL 1

Essay – Investment in Human Capital by Theodore W. Schultz

Cathy Miller

OMDE 606 – Costs and Economics of Distance Education and E-Learning

Section: 9040

February 20, 2017

University of Maryland University College

Professor Thomas Hülsmann
ESSAY – INVESTMENT IN HUMAN CAPITAL 2

Traditional and distance education have evolved considerably since the 1960s along with

the global economy, resulting in an increase in student attendance and an influx of college

graduates. This increase of college educated individuals entering the job market created the

emergence of a new category of economics or “the economics of education” to emerge

(Hülsmann, 2011, p. 3). The advent of this new branch of economics caused economists and

scholars to examine the educational process, employment trends, and the job market. In 1961,

economist Theodore Schultz postulated the reason for the growth was attributed to businesses

utilizing and investing in the knowledge and skills of its educated employees or their “human

capital” (Schultz, 1961, p. 1). This paper will provide a summary of Schultz’s Investment in

Human Capital, discuss the paper’s strengths and weaknesses, and offer a value stance of

Shultz’s Human Capital Theory.

Summary

Schultz’s 1961 piece, Investment in Human Capital, discusses a progressive

rationale as to why Western societies achieved substantial growth over a relatively short period.

Schultz (1961) attributes this growth to the knowledge and skills of people or human capital.

Schultz acknowledges the fact that classifying people as capital may be offensive to some, which

is most likely the reason fellow economists refrain from the usage of the term and further

analyzation of the concept.

Schultz (1961) introduces the concept of “laborers as capitalists” since the knowledge

and skills of laborers have “economic value” (p. 3). Schultz defends this theory by discussing the

wage differentials between educated and non-educated groups of workers performing the same

job, and backs up his theory by challenging the explanation for the of the capital-income ratio

behavior and argues that it does not take human capital into effect. In addition to the “laborers as
ESSAY – INVESTMENT IN HUMAN CAPITAL 3

capitalists”, Schultz (1961) also discusses the concept of “human investments” (p. 7) and the

notion that while they are different than the usual non-human investment (buildings, equipment,

etc.), they still have an effect on the bottom line and on income. For example, employees’

production improves when employers invest in their health, training, and education.

Schultz (1961) concludes with a discussion on policy and its effect on human capital. He

contends that tax laws “discriminate against human capital” (p. 13) by not applying the same

depreciation rules as used for non-human capital. He suggests that when “human capital” is

unemployed, valuable skills and knowledge decrease as a result of not working. He also calls

attention to racial and religious discrimination being cause for a lack of human capital

opportunity. Lastly, he discusses the “underinvestment” in humans, including migrants and

laborers who have the potential to increase their skills and knowledge, which could contribute to

the human capital equation. The theories and philosophies Schultz puts forth in this paper are the

rationale behind his Human Capital Theory (HCT) and the answer for the fast rate of economic

growth.

Strengths and Weaknesses

Schultz’s 1961 Human Capital Theory explained part of the economic puzzle on the how

and why of the fast rate of economic growth; however, as the years progressed, certain traits of

HCT did not seem as applicable as it became obvious that getting an education did not

necessarily equate a higher income in certain countries. However, Olaniyan and Okemakinde

(2008) support HCT based on the economic growth in East Asia, that they attribute to the

positive effect education had on productivity and technological advances. Olaniyan and

Okemakinde (2008) also confirm that education, in addition to benefitting the individual, also

has a positive outcome on the community, technology, and innovation.
ESSAY – INVESTMENT IN HUMAN CAPITAL 4

In addition to lacking a forecasting component, Schultz’s HCT did not consider the laws

of supply and demand pertaining to number of educated individuals versus number of available

jobs. McLean and Kuo (2014) discuss the implications of HCT from a human resource

development (HRD) perspective. Although the authors conclude there is evidence that additional

education and training can contribute to an individual earning a higher income, there is not

always a direct correlation. Examples including the person who earns a degree for a discipline in

a limited job market or the employee who takes training that doesn’t apply to his or her job. In

both cases, the additional education or training does not equate to extra earnings for the

individual, and would most likely cause a decrease in income for the graduate who could not find

a job yet still left with the educational expense.

Becker (1975), as cited in Bouchard (2008) challenges HCT by suggesting that people

with different education levels may also perform at different levels, which is the reason an

increased wage. Bouchard (2008) includes Bourdieu’s (1984) stance that education is often tied

in with a person’s culture and/or status, thereby effecting income.

Value Stance

The word “human capital” creates a negative connotation of people being owned by

others. Schultz (1961) states early in the chapter, “economists have shied away from the explicit

analysis of investment in human capital” (p. 1) It’s important to note that Schultz was referring to

humans using their own capital for their own benefit, which would benefit the businesses who

invest in the human capital. Schultz (1961) suggests that laborers are capitalists who strategically

offer their knowledge, skills, and expertise to people or businesses who place a value on these

items, thereby, paying the laborers/capitalists accordingly. It may be argued that Schultz’s

philosophy is dated; however, Bouchard, (2008) applies Schultz’s human capital theory to a
ESSAY – INVESTMENT IN HUMAN CAPITAL 5

component of the ‘knowledge economy’ (p. 2). Schultz (1961) attributes the success of advanced

countries to the laborers’ knowledge and skillset which is part of the entire product produced by

the business, which Bouchard (2008) considers sole property of the employee. Semantics aside,

it cannot be disputed that a person’s knowledge and skills add value when they are applied to

personal or professional endeavors.

Conclusion

Schultz’s HCT introduced an economic concept that caused economists and

scholars to take a closer look at the benefits and effects of attaining an education as well as the

ramifications of not pursuing advanced schooling or training. The economic growth of 1960s and

1970s in America validated HCT, regardless of those who were offended by the term “human

capital” or debated its relevance. As time continued and the laws of economics ensued, HCT did

not correlate with an individual’s income growth as it had decades earlier. However, while that

became the case in the United States, other countries such as East Asia, which developed at a

slower rate, are now experiencing the HCT “effect”. Regardless of the current state of

economics in any given country, investment of human capital will always have a positive return

on both employee and employer.
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References

Bouchard, P. (2008, August 31). Human Capital Theory: Intersecting Educational and Economic

Theories. Paper presented at the Adult Education Research Conference. Paper 6.

http://newprairiepress.org/cgi/viewcontent.cgi?article=2890&context=aerc Hulsmann

Hülsmann, T. (2011). Distance education: From access to accumulation. Paper presented at the

Fourteenth Cambridge International Conference on Open: Distance and e-Learning

Internationalisation and Social Justice: the role of Open, Distance and E-learning,

Cambridge, UK

McLean, G. N., & Kuo, M. C. (2014). A Critique of Human Capital Theory from an HRD

perspective. HRD Journal, 5(1), 1-11. Retrieved February 15, 2017, from

digital_collect.lib.buu.ac.th/ojs/index.php/hrd/article/download/3072/500

Olaniyan, D. A., & Okemakinde, T. (2008). Human capital theory: implications for educational

development. Pakistan journal of social sciences, 5(5), 479-483. Retrieved February 15,

2017, from http://docsdrive.com/pdfs/medwelljournals/pjssci/2008/479-483.pdf

Schultz, T. W. (1961). Investment in Human Capital. American Economic Review, 51, 1-17