Tan HumanCapitalTheory 2014

Human Capital Theory: A Holistic Criticism
Author(s): Emrullah Tan

Source: Review of Educational Research , September 2014, Vol. 84, No. 3 (September
2014), pp. 411-445
Published by: American Educational Research Association
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Review of Educational Research
September 2014, Vol. 84, No. 3, pp. 411-445
DOI: 10.3102/0034654314532696
© 2014 AERA, http://rer.aera.net
Human Capital Theory: A Holistic Criticism
Emrullah Tan
University of Exeter Business School
Human capital theory has had a profound impact on a range of disciplines

from economics to education and sociology. The theory has always been the
subject of bitter criticisms from the very beginning, but it has comfortably
survived and expanded its influence over other research disciplines. Not sur
prisingly, a considerable number of criticisms have been made as a reaction
to this expansion. However, it seems that these criticisms are rather frag
mented and disorganized. To bridge this gap and organize them in a system
atic way, the present article takes a holistic approach and reviews human
capital theoryfrom four comprehensive perspectives focusing on the method
ological, empirical, practical, and moral aspects of the theory.
Keywords: human capital, neoclassical economics, rational choice theory
Human capital theory (HCT) is not a mere theory in economics. It is a compre

hensive approach to analyze a wide spectrum of human affairs in light of a par
ticular mindset and propose policies accordingly. Education, in this approach, is
placed at the center and considered the source of economic development. For this
reason, it has been sharply criticized by educators, economists, sociologists, and
philosophers. There is a great deal of criticisms about it; however, they are rather
dispersed and disorganized. To organize these diverse criticisms systematically
will enable us to see the bigger picture as well as the impact of HCT on education
and politics. Therefore, the article reviews the major criticisms of HCT from four
different perspectives. To our best knowledge, this is the first attempt to unify a
variety of criticisms of the theory in a single article. It is also worth noting that
half a century has passed from the first publication of the book Human Capital by
Gary Becker in 1964. In that sense, it would also be timely to review HCT and its
outcomes in this long period.
The aims of this article are twofold. The first aim is to provide a clear under
standing of HCT and its roots. To achieve this, we will go back to the philosophi
cal origin of the theory and discuss the school of thought from which HCT takes
its intellectual nutrition. To understand the roles of education in HCT, it is neces
sary to trace back the basic assumptions of this intellectual tradition on human
beings. The second aim is to provide a comprehensive and accessible road map to
those who wish to have a broad understanding of the theory and its impacts. With
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this article, it is hoped that the readers will have the opportunity to review the
major criticisms and different dimensions of the theory in a single article.
In accordance with these goals, the article is divided into six parts. First, HCT
is briefly outlined. Second, the methodological criticism of this school of thought
will be made in reference to its core paradigms. Third, the theory is examined in
the lights of empirical studies and competing theories to explore whether the the
ory and empirical data are in tune with each other. Fourth, the practical conse
quences of this theory regarding education policies will be evaluated. Fifth, the
moral criticism of the theory will be made. Finally, a number of conclusions will
be drawn based on these critiques.
The Theory Outlined

Human capital is defined as "productive wealth embodied in labor, skills and
knowledge" (OECD, 2001) and it refers to any stock of knowledge or the innate/
acquired characteristics a person has that contributes to his or her economic pro
ductivity (Garibaldi, 2006). In essence, HCT suggests that education increases the
productivity and earnings of individuals; therefore, education is an investment. In
fact, this investment is not only crucial for individuals but it is also the key to the
economic growth of a country. As Alfred Marshall (1920) put it, "The most valu
able of all capital is that invested in human beings" (p. 564).
The term human capital has a long but discontinuous history (Kiker, 1966). It,
however, was formally introduced in the 1950s and its analytical framework was
developed mostly by academicians at Chicago School of Economics such as
Theodore Schultz and Gary Becker. At that time, the term human capital was
severely criticized by some liberal academicians due to its negative connotations
with slavery. In fact, even before the 20th century, the liberal philosopher J. S Mill
(1806-1873) criticized it and noted that "the human being himself. ... I do not
class as wealth. He is the purpose for which wealth exists" (Mill, 1909, p. 47). The
human capital theorist Schultz (1959) referred to these liberals as sentimentalists:
those who argued that treating human beings as if they were a commodity or
machinery could lead to the justification for slavery. At that period of time, this
issue was so sensitive in the United States that even Becker (1993a) himself later
acknowledged that he was rather hesitant for the title of his book, Human Capital,
when he was about to publish it because he was afraid of the potential severe criti
cisms by the liberals. To his surprise, the once bitterly criticized concept has
become one of the most popular topics in economics and even led him to the
Nobel Prize in 1992. Furthermore, the concept has been widely used as an instru
ment to shape educational policies in many countries. It should be noted that
human capital is not only limited to education and training, it is an extensive
concept and covers many areas from health to migration. But the scope of this
article is confined to education.
HCT derives from the neoclassical school of thought in economics. Therefore,
to have a clear and complete picture of it, we need to understand the neoclassical
economic model and its basic assumptions about human behaviors. In this model,
individuals are assumed to seek to maximize their own economic interests.
Accordingly, HCT postulates that individuals invest in education and training in
the hope of getting a higher income in the future. These investments, as Blaug
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Human Capital Theory
(1992) put it, are not only "for the sake of present enjoyments but for the sake of
pecuniary and non-pecuniary returns in the future" (p. 207). This approach is
closely associated with methodological individualism. It is the doctrine that the
roots of all social phenomena could be found in the individual's behaviors. This
conforms to the assumption that human capital formation is typically undertaken
primarily by those individuals who seek to maximize their interests (Blaug, 1992).
Having said that, the human capital economists do not necessarily disregard the
nonmonetary contributions of education to the individual and society. They also
acknowledge the social, cultural, intellectual, and aesthetic benefits of education
but these are called positive externalities.
As Marginson (1989, 1993) described, the line of assumptions in HCT goes as
follows: the individual acquires knowledge and skills through education and
training, that is, human capital. These knowledge and skills will increase his or
her productivity in the workplace. This increased productivity will bring a higher
salary to the individual since the wage of a person, in the ideal labor market, is
determined by the person's productivity. Therefore, people would invest in educa
tion up to the point where the private benefits from education are equal to the
private costs. In light of this set of assumptions, the logic of HCT becomes clear
that education and training increase human capital and this leads to a higher pro
ductivity rate, which in turn brings a higher wage for the individual. Based on this
train of reasoning, it can be claimed that education and earnings are positively
correlated and thus education/training should be promoted. In the subsequent sec
tions, the origin and accuracy of this line of reasoning will be investigated.
Methodological Criticisms
The neoclassical economic model focuses on two core paradigms by which it
attempts to explain social/economic phenomena: methodological individualism
and rational choice theory. These paradigms are going to be reviewed respectively
in this section.
Methodological Individualism
Methodological individualism (MI) is a doctrine that takes the individual as a
point of departure. It places the individual at the center and emphasizes the human
agent over social structures (Hodgson, 2004). This approach maintains that to
comprehend social phenomena, we need to comprehend individuals and their
motives. In Bentham's (1789) words,
The community is a fictitious body, composed of the individual persons. . . . The

interest of the community [is] the sum of the interests of the several members who
compose it. It is in vain to talk of the interest of the community, without understanding
what the interest of the individual is. (p. 2)
Similarly, the German economist Carl Menger (1985) suggests that to under
stand a national economy, it is essential to understand "the singular economies in
the nation" (p. 93). To this view, a collective action is a product of individual
desires that aim to promote individual interests. After all, the members of
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associations or unions believe that their individual interests are more effectively
protected and promoted if they act together (Scott, 2000). The establishments
such as trade unions are just instruments or mechanisms that enable individuals to
reach their goals effectively (Buchanan & Tullock, 1962).
To avoid any possible confusion, it is important to remind that political indi
vidualism (PI) has almost nothing to do with MI. Schumpeter (1980) underlines
that the former (PI) starts from the general assumption that freedom, more than
anything else, contributes to the development of individuals and the well-being of
society, whereas the latter suggests that the individual is the basic unit of a social/
economic analysis. Therefore, to the methodological individualists, a scientific
inquiry in social studies should start from individuals, their beliefs, and desires to
account for social phenomena. Hence, it is perfectly possible that a person can be
collectivist in politics and methodological individualist in his or her scientific
approach because MI is not incompatible with the statement that individuals often
desire and promote the welfare of other individuals (Elster, 1982).
MI attempts to make sense of the whole through the knowledge of the most
basic unit in the whole. This reductionist view is in sharp contrast with method
ological collectivism/holism, which suggests that to make sense of a phenomenon
we need to understand the context in which it takes place. To this school of
thought, a profound understanding of the society and its dynamics are the key to
explain social phenomena. A social phenomenon is not a product of individual
behaviors; on the contrary, individual behaviors are the products of social, cul
tural, and environmental factors. That is, there is a set of ideas and values that are
above our individual consciousness (Szelényi, 2011). They affect and shape our
consciousness and create a new set of ideas and values that are different from our
own. Methodological collectivists conclude that social phenomena cannot be
reducible to the individual alone as the whole is different from the sum of the
individual constituents.
In response to it, the methodological individualists (Arrow, 1994) argue that
social interactions are, after all, the products of countless interactions among indi
viduals. It is true that individuals do not act on their own, they reciprocate each
other but each individual acts in a certain range limited by their individual con
straints such as their ability, wealth, and time. Furthermore, the social and institu
tional rules themselves change as a result of individuals' actions. Social institutions
like the family, state, and law emerged from dynamic relationships between the
members of the society. In the process of the emergence of these social institu
tions, each step was often intentional and rational, but the ultimate outcomes were
typically the unintended consequences of a series of rational actions. To clarify
this point, Menger (1985) refers to the origin of money and how it came into exis
tence over a long period of time by replacing barter. This replacement was not
intended at the beginning but gradually took place. In each step, people tried to
find a better way to replace barter and finally, it was recognized that money was
the most convenient medium of exchange. Hence, the institution of money is an
outcome of a sequence of rational individual actions (Udehn, 2002). That is to say,
money came about as the unintended result of individual human efforts without a
common will directed toward its establishment (Menger, 1985). Likewise, in
social studies, whoever wants to investigate a phenomenon theoretically needs to
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go back its true elements, the individuals (Menger, 1985). That is, before we
attempt to examine the functions of an institution such as the money, family, or
state, we need to analyze what were the primary motives of individuals when they
formed these establishments.
What are the implications of MI in the neoclassical economic model? First, in
order to understand an action or a social/economic phenomenon, it is necessary to
assume the existence of individual preference orderings and individual choices as
the basic theoretical building blocks of a scientific inquiry. Second, social out
comes are the by-products of choices made by individuals who rationally pursue to
maximize their own interests. Hence, rational choice explanations are formulated
along these lines by reference to individuals' intentions and motivations (Green &
Shapiro, 1994). The importance of MI may not be adequately appreciated at first
glance but MI is the very foundation that rational choice theory built on.
Rational Choice Theory

The second paradigm which HCT rests on is rational choice theory (RCT). In
this section, the origin, principles, and limitations of RCT will be discussed. It
will be argued that RCT itself is not immune from imperfections; therefore, HCT,
which is rooted from RCT, is bound to be imperfect as well.
The Origin of the Theory

Rational choice theory provides a model to understand and predict human
behaviors.1 Simply, it seeks an answer to the question of what is the most efficient
way to reach a goal in a given condition. It is a normative theory and tells us what
we ought to do in order to reach our goals. It does not tell us, however, what our
goals ought to be. It implies that RCT is interested in the means rather than the
ends. That is, unlike moral theory, RCT proposes conditional imperatives, what an
agent ought to do in order to achieve his or her aims in a given set of constrains
(Elster, 1986).
Rational choice theory suggests that individuals seek to maximize their own
interests by making optimal decisions in the entire domains of their lives. The
word entire should be highlighted because the adamant proponent of this approach
Gary Becker (1976) states,
Subsequently, I applied the economic approach to fertility, education, the uses of

time, crime, marriage, social interactions, and other sociological, legal, and political
problems. Only after long reflection.... I conclude that the economic approach was
applicable to all human behavior, (p. 8)
In fact, this economic approach or economization of human behaviors goes

back as early as the 18th century. It was largely developed by the utilitarian econo
mists who advocated the measurability and interpersonal comparability of utility.
The utilitarians believed that the maximization of utility is an ethically desirable
social goal (Buchanan, 1959). Jeremy Bentham (1748-1832), the founder of utili
tarianism, reduced the ultimate motives of all human actions into two: pleasure and
pain. To Bentham (1789), pleasure and pain are two sovereign masters of our
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conducts that govern us in all we do, in all we say, and in all we think. Bentham
frequently cited the concept of efficacy and he devised the hedonistic calculus
system to measure the likely pleasure/pain of a specific act. This was a type of cost/
benefit analysis of an act to determine whether the act in question would be desir
able or not. In this system, a hedon = a standard unit of pleasure and a dolor = a
standard unit of pain. However vague it may seem, based on this quantification, if
the pleasure exceeds the pain, it is possible to say that the act is ethical (Hinman,
2008). It is also worth noting that Bentham (1789) was so passionate about the
power of numbers and mathematics that he thought mathematics could guide
humanity even in moral and political affairs let alone in positive sciences.2
This scientificization or mathematization later on became the dominant feature
of the neoclassical economic school. In this way, the rhetoric of successful science
was linked to the neoclassical theory. Whether this linkage was planned before
hand or not, for once the neoclassical economics was associated with scientific
economics, to challenge the neoclassical model was to seem to challenge science,
progress, and modernity (Weintraub, 1993). However, for some, the idea of math
ematization was seriously flawed. For instance, Paul Krugman (2009), a Nobel
laureate, regretfully noted that "the economics profession went astray because
economists, as a group, mistook beauty, clad in impressive-looking mathematics,
for truth" (para. 4).
The Basic Principles of RCT

The most elementary principle of RCT is that individuals do their best to maxi
mize their utility under prevailing circumstances. As Green (2002) put it, "The
choices made by persons are the choices that best help them achieve their objec
tives, given all relevant [constraints]" (p. 5). Despite some disagreements among
the RCT scholars, the widely recognized axioms of RCT are transitivity, invari
ance, and continuity.3
Transitivity: If A is preferred to B, and Β to C, then A must be preferred to C. The

choices should be internally consistent and capable of being ordered.
Invariance: The different representations of the same problem should generate the
same result even when shown separately.
Continuity : If A is preferred to B, then the option suitably close to A needs to be

preferred to Β as well. (Ayton, 2012, p. 339; Sue, 2004, p. 6)
Human behaviors are considered rational if they are in coherence with these
axioms, which were supposed to be the assumptions that no rational person could
violate (Anand, 1993, cited in Sue, 2004). Although it is still controversial even
within the supporters of this theory, RCT is known to be a universalist theory and
its proponents believe that the model applies equally to all persons (for a detailed
discussion, see Green & Shapiro, 1994). To the RCT scholars, "Rules and tastes are
stable over time and similar among people" (Becker & Stigler, 1977, p. 76). This
homogeneity assumption provides both theoretical parsimony and tractability
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while eliminating a frustrating number of interpersonal variations that otherwise

would need to be taken into consideration (Green & Shapiro, 1994).
Stigler (1987) clarifies it further and says that there are three characteristics of
rational consumers (a) their tastes are consistent, (b) their cost calculations are
correct, and (c) they maximize their utility. A rational individual behaves in accor
dance with these assumptions while he or she makes decision. This rational agent
is called homo economicus, who is purposeful, labor-averse, self-interested, and
a utility-maximizer. Homo economicus is the representative figure by which the
mainstream economists try to explain human behaviors. The rationale behind this
representative figure is twofold: first to form a framework which enables to sim
plify the complexity of the real world in which the amount of information is
ample; second, to create an artificial world in order to compensate the absence of
laboratory experiments to apply the theory to the real world. In this way, it
becomes easy to find a representative agent through which human behaviors in
the market can be evaluated and predicted. However, does such a person, who is
obsessed with a specific rule (utility maximization) really exist in a supposedly
determinist environment (Bentata, 2009)?
Is it possible to say that average individuals in the street know the meanings of
optimal decision, price equilibrium, marginal utility curve, and so on? If the
answer can hardly be yes, how can the fully rational homo economicus be an ideal
representative of laypersons while they have almost no clue about economics and
its basic terms? Does this make them less homo economicus?
Milton Friedman (1953) provides an example to clarify it. Let us think of an
expert billiard player. Although the player is not familiar with mathematical or
physical formulas, the player hits the ball in a way that
as if he knew the complicated mathematical formulas that would give the optimum
directions of travel . . . could make lightning calculations from the formulas, and
could then make the balls travel in the direction indicated by the formulas. Our
confidence in this hypothesis is not based on the belief that billiard players, even
expert ones, can or do go through the process described; it derives rather from the
belief that, unless in some way or other they were capable of reaching essentially the
same result, they would not in fact be expert billiard players, (p. 12)
The expert players have no knowledge about physics, but when they play they act
as if they compute the Newtonian physics of ball movement on the table surface
(Glimcher, 2011). But if the expert players are asked that how is it possible to hit
the ball with that perfect speed and precision, the reply is simply that I just figure
it out (Friedman, 1953). Thus, having no information about physics does not
impede the players from executing physical laws. Similarly, individuals act in the
market as if they know the relevant demand functions, price equilibrium, marginal
utility curve, and so on. As such, under a wide range of circumstances individuals
rationally seek to maximize their profits although they may fail to express it ver
bally in the language of economics (Glimcher, 2011).
Friedman's example may seemingly lead to the conclusion that homo eco
nomicus is a fair representation of laypersons. For the sake of argument, let us
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accept that the regular individuals know how to maximize their own interests in
the way described by Friedman. Their decisions are meticulously calculated and
finely consistent with their past and future decisions. But do these rational indi
viduals have any weakness at all?
The Limitations of RCT

Jolis, Sunstein, and Thaler (1998) point out three limitations in RCT, thus with
homo economicus. These are bounded rationality, bounded willpower, and
bounded self-interest. Each will be explained in turn.
Bounded rationality, coined by Herbert Simon (1956), indicates the obvious fact
that human cognitive abilities are not infinite. Human beings have limited computa
tional skills and weak memories. To overcome this, when we face a problem with a
huge quantity of information, we tend to satisfice on options rather than optimizing
them. The word satisfice is a portmanteau: satisfy and suffice. Accordingly, if you
are a satisficer, you are happy with something that is good enough and once you find
it, you stop searching rather than pursuing the best (optimal) alternative (Manktelow,
2000). In addition to that, we make list and use mental shortcuts and rules of thumbs
to avoid dealing with an ample quantity of information again and again. These
shortcuts themselves may turn into obstacles and produce various human behaviors
that systematically differ from those predicted by RCT.
Numerous empirical works in behavioral economics show that the actual
behaviors of people may not be coherent with the RCT axioms. Kahneman (2003)
illustrated that our decisions can be constrained by many factors such as intuition,
perception, and optical illusions. Moreover, marketing and presentation tech
niques may distract our attention and we may focus on one part while ignoring
another. Even the different wording of the same statements may lead to different
conclusions. For instance, people may give an affirmative answer to a question.
However, if the same question is asked in the negative form, their answers may
completely differ from their initial responses. This is called the framing effect:
different reactions to the same problem depending on the way the problem is
framed and presented. Kahneman and Tversky (1981) provided a solid example
for this phenomenon. In their study, a group of respondents were asked to evaluate
a disease which could kill 600 people in a town and they had to choose one of the
two options in two separate evaluations as shown in Table 1.
In the first evaluation the majority of respondents preferred A to B. However,
in the second evaluation, the majority of the same respondents favored B' over A'.
What is striking is that there is hardly any difference between Program A and
Program A', and Program Β and Program B'. After all, 200 people will be saved
means 400 people will die. Similarly, a one-third probability that 600 people will
be saved means a two-third probability that everybody will die. But participants
changed their responses diametrically in the different presentations of the same
problem. The reason is the certainty of saving people seemed more attractive,
whereas accepting the certain death of people was considered disproportionately
aversive. It can be attributed to the fact that the different presentations of the same
problem may highlight one point and mask another (Kahneman, 2003). This
clearly violates the invariance axiom, the different representations of the same
problem should lead to the same conclusion, and the transitivity axiom,
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TABLE 1
The Framing Effect
First
First evaluation
evaluation Second evaluation
If Program
If Program A
A is
is adopted,
adopted, 200
200people
peoplewill
willIf
IfP
be saved. die.
If Program Β
B is adopted,
one-third probability tha
will be saved and a two-th
ity that no people will be saved. people will die.
Source. Adapted from Kahneman and Tversky (1981, p. 453).
preferences should be internally consistent. That is, human decisions can be too
sensitive to manipulations including to the irrelevant ones, unlike homo eco
nomicus who always behaves and decides consistently.
It should be noted that the behavioral economics literature provides an abun
dant number of empirical cases in which respondents behave rather inconsistently.
These cases pose a serious challenge to RCT (for notable examples, see Hsee,
Lowenstein, Blount, & Bazerman, 1999; Kahneman, 2012; Tversky, Slovic, &
Kahneman, 1990).
The second concept that Jolis et al. (1998) introduce is bounded willpower. It
refers to the fact that individuals may display a set of behaviors that are inconsistent
with their long-term interests, even though they are acutely aware of the adverse
impacts of these behaviors. Simple examples would be that most smokers say that
they would prefer not to smoke. Drug users as well as alcoholics fail to resist the
temptations of these addictive materials. More interestingly, senior figures like pres
idents and top intelligence officials may succumb to their momentary desires and
destroy their own careers to which they have dedicated almost their entire life.
Furthermore, people may not work hard although they are required to do so, they
may not show sufficient patience, and they tend to gratify their immediate desires
while renouncing their long-term interests. In these circumstances, individuals sig
nificantly deviate from the standard economic model and act in discord with RCT.
The third concept that Jolis et al. (1998) propose is bounded self-interest. It
suggests that most people care or act as if they care about others. In many market
settings, people care about being treated fairly and want to treat others fairly.
Individuals can be both nicer and more spiteful (if they are not treated fairly) than
the agent postulated by RCT. Of course, bounded self-interest does never imply
that people are not motivated by their own self-interests, but rather it reminds that
the goal of individuals is not solely to promote their own interests. As humans, we
are pluralistic, navigating between our own interests and the interests of others
(Brown, Brown, & Preston, 2011).
Reconsidering Friedman's Billiard Player Example

In light of these criticisms, it is worth reexamining the example given by
Friedman. Kahneman and Tversky (2000) ask that the mathematical model of RCT
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can be a good predictor to estimate the behaviors of an expert player, but is this
model also sufficient to predict the behavior of nonexperts, such as a novice or
intermediate player? Obviously, there will be a noticeable disparity between the
billiard performances of the expert player and nonexpert ones. However, RCT
takes the expert player as a normative figure and he or she consistently makes the
best shot out of all the shots available. But, the novice and intermediate players do
not have the same degree of competency in the play. Thus, they perform poorly,
make inconsistent shots and as a result violate the normative model. Clearly, homo
economicus is not an accurate representation for the novice and intermediate play
ers. Kahneman and Tversky (2000) conclude that the orthodox model of consumer
behavior is based on a model of robot-like experts. For this reason, it makes poor
predictions of the behaviors of the average consumers. It is not because the average
consumers are irrational or dumb. But rather they are not robot-like beings who
consistently make the best shots in a given set of condition. Moreover, even they
do not always seek the best and are content with the reasonably good ones.
The Relevance
After delving into RCT, the reader may not see any straightforward connection
between the limitations of RCT and HCT. The simple connection is that the neo
classical approach places homo economicus at the center and it attempts to make
sense of social and economic phenomena through the lenses of this rational per
son. However, a considerable number of experimental studies demonstrate that
this hypothetical rational and utility-maximizing person does not fully correspond
to real human beings in actual life. Thus, homo economicus is not a good model
to explain a variety of social and economic phenomena. But HCT is built on this
weak model. Therefore, HCT will have the same defects and limitations when it
attempts to explain educational phenomena because its basic assumptions on
human motives, goals, and decisions are not well-grounded. For instance, HCT
assumes that individuals are rational and they will invest in education so long as
the marginal benefits exceed or equal the marginal costs. That is to say, like an
entrepreneur, individuals will estimate the future benefits of education and the
costs of it. If the rate of return to education is positive, the benefits outweigh the
costs, then individuals will make that investment. If it is not positive, they will not
continue their education (Johnes, 1993). This presumption is in full conformity
with the homo economicus model. However, it has been illustrated that human
decisions and preferences are affected and limited by many other factors such as
individuals' cognitive abilities, perceptions, and habits. Consequently, individu
als' decisions about their education careers are also affected and limited by social,
cultural, and other factors whereas homo economicus in the neoclassical approach
seems to be immune from these limitations.
It is also well documented by empirical studies that individuals undertake an
educational program for a variety of reasons including peer pressure, parents'
expectations, even the desire to leave home (Jenkins, Jones, & Ward, 2001), and
the social class of parents can also be a decisive factor (Bowles & Gintis, 2002).
That means every individual is influenced by a unique set of factors and motiva
tions when they plan their education careers (Marks, Turner, & Osborne, 2003).
It is particularly the case in post-compulsory education since it has the
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characteristics of positional goods, which provide relative advantage in the

competition for the job, social status, and so on (Hirsch, 1976). For instance,
Purcell and Pitcher (1996) highlighted three broad categories for the reasons to
go to university: hedonistic (enjoyment), pragmatic (employment), and fatalis
tic (passive reasons such as parental pressure). This indicates that unlike HCT
proposes, decisions about giving up or carrying on education is not a completely
rational process based on a painstakingly calculated cost-benefit analysis.
Therefore, the main paradigm of the neoclassical model is seriously flawed.
That is why HCT, established on these flawed premises, is bound to fail to
explain a significant number of cases taking place in real life.
Why Is RCT So Popular?

It calls into question that if RCT suffers from serious limitations, why it is still
so popular and why the mainstream economists do not abandon this theory. First of
all, rational choice theorists are also well aware of these limitations. Even Becker
himself describes his attitude as "an irrational passion for dispassionate rational
ity" (cited in Herfeld 2012, p. 77). Nevertheless, the proponents of this theory
argue that a theory should be evaluated on the basis of its ability to predict human
behaviors rather than its descriptive accuracy (Friedman, 1953). In plain English,
this means that RCT may not always work but it will usually work in many
instances since its predictive power to explain human behaviors is sufficiently
strong. For this reason, despite a substantial number of the contrary examples, RCT
is considered to be the best approximation of human behavior, based on the reason
ably simple assumptions that generate fairly accurate predictions (Arley, 1998,
cited in Luth, 2010). More important, RCT provided a model which is easy to chal
lenge but difficult to replace. Amartya Sen (1990) highlighted this point:
Even though the inadequacies of the [RCT]... have become hard to deny. It will not
be an easy task to find replacements for the standard assumptions of rational
behavior . .. both because the identified deficiencies have been seen as calling for
rather divergent remedies, and also because there is little hope of finding an
alternative assumption structure that will be as simple and usable as the traditional
assumptions of self-interest maximization, or of consistency of choice, (p. 206)
The next section will focus on the areas that HCT does not make good
predictions.
Empirical Criticisms
In the previous section, the theoretical premises of HCT have been examined.
In this part, the empirical consistency of HCT will be questioned in light of the
competing theories and empirical studies. The article will start with a rival thesis:
signaling theory.
Signaling
Human capital theorists claim that education enhances a person's skills and it
leads to a higher productivity level in the workplace, which in turn will bring a
higher wage to the person. The signaling theory, coined by Spence in 1973,
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provided another explanation for this higher wage. The theory suggests that the
education levels of individuals indicate their certain innate characters such as
their propensity to be intelligent, their dedication, time management skills, and
ability to follow instructions. Signaling theorists argue that what the school does
is to classify students according to their intelligence and commitment through the
processes of admission requirements and grading (Soldatos, 1999). By doing that,
it establishes a supposed hierarchy of students based on their academic successes,
by which the potential productivity level of an individual, more or less, can be
predicted. In practice, it enables employers to sort out and reassess job applicants
once more before their recruitments. In this assessment and selection process, the
applicants signal their desirable, but unobservable skills via their academic cre
dentials whereas the firms screen and identify them by the help of the same aca
demic credentials (Brown & Sessions, 2005). Therefore, the firms require a
minimum level of schooling from the applicants to screen them out (Weiss, 1995).
In this connection, signaling theorists emphasize two points. The first is that
schooling may reflect higher productivity without causing it, because education is
not the source but the signal of higher productivity of educated people since
schools identify the able and committed individuals and eliminates the less able
ones in the process. The second is that due to imperfect information in the labor
market, the education level of a person is simply taken as a proof of his or her
higher ability to produce whereas in fact there is not necessarily a correlation
between education and productivity (Mankiw, Gans, King, & Stonecash, 2012). It
follows the conclusion that education may increase a person's wage without
increasing his or her productivity per se (Blaug, 1976).
Psacharopoulos (1979) aptly distinguished two forms of signaling: strong sig
naling hypothesis (SSH) and weak signaling hypothesis (WSH). The difference
between the two is that SSH suggests that education has little or no impact on
productivity, but it just reveals individuals' innate ability to work, whereas WSH
suggests that education has two functions: to foster productivity and to signal indi
viduals' innate abilities. SSH has been empirically refuted to a great extent whereas
WSH has some empirical supports (see Clark, 2000; Jaeger & Page, 1996).
Regarding the signaling effect, three points need to be highlighted. In these
particular cases, the impact of sorting mechanisms can be more salient and thus
the signaling hypothesis can obtain some empirical support from them, whereas
HCT fails to explain these instances plausibly.
First of all, since signaling theory stems from the theory of decision making
under uncertainty, the primary example of the signaling effect can be found in
initial hiring, for the obvious reason that the firm does not have sufficient infor
mation about the productivity of the applicant apart from his or her educational
qualifications. There are a substantial number of studies that confirm that initial
wages can be higher for educated persons because of imperfect information on the
expected productivity level of the applicants (Soldatos, 1999). However, once this
initial period is over, the wage is primarily determined by productivity rather than
by academic qualifications. Namely, the employer no longer pays to the individ
ual on the basis of his or her academic credentials once his or her work perfor
mance has become clear. As a result, the worker's wage may not follow the
expected return pattern predicted by HCT when his or her tenure increases. This
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is called the tenure effect, which also substantiates signaling hypothesis (Liu &
Wong, 1982). Fang (2001) reminded of these formal and informal signaling pro
cedures in initial hiring:
If workers' productivities are in fact not perfectly observed (which is particularly

tme for newly hired workers), then the firms would have to infer the productivities
from noisy signals such as interviews, tryouts, and reference letters together with
their education levels, (p. 3)
Second, to test the signaling hypothesis empirically, the difference between

self-employed and salaried employees is thought to be a good measure to contrast.
Since the self-employed are assumed to be the unscreened group, they do not have
to signal their innate abilities to the employer, although some self-employed may
want to attract customers with their academic qualifications (Castagnetti, Chelli,
& Rosti, 2005). Moreover, there is a more visible relationship between productiv
ity of a person and his or her wage when he or she is self-employed. If signaling
hypothesis is true, there should be a noticeable difference between paid employ
ees and self-employed. That is to say, self-employed persons should have lower
monetary returns to education.
The overwhelming majority of the empirical studies reject the strong version
of signaling in terms of self-employment and they found positive returns to educa
tion for self-employed workers with middle- or high-level education (see Brown
& Sessions, 1999; Garcia-Mainar & Montuenga-Gomez, 2005; van der Sluis &
van Praag, 2004). However, even the strong version of signaling enjoyed some
empirical supports. For instance, Castagnetti et al. (2005) found that there is a
significant positive return to education for salaried employees whereas an insig
nificant return to education for self-employed in Italy. This result is in congruence
with the strong signaling hypothesis which states that education does not increase
productivity. Similarly, Heywood and Wei (2004) found a significant signaling
effect in Hong Kong where competition is rather tense in the labor market.
Heywood and Wei discovered considerably smaller returns to education for self
employed persons comparing with those of salaried employees, which strength
ens the validity of signaling theory.
Third, the degree of signaling may substantially vary from one country to
another. For example, supporting empirical evidence for the screening effect has
been found in Israel, Japan, Australia, Hong Kong, and Singapore but not in
Greece, Malaysia, Netherlands, Sweden, and Egypt. Mixed results have been
found in the United Kingdom and the United States (Brown & Sessions, 1999).
This can be attributed to the distinct nature of each country's education system
and labor market. Institutional factors, trade unions, and general perceptions
about the quality and the quantity of educated workforce can also be pivotal in
determining the magnitude of the signaling effect.
Signaling theory appears to propose more plausible explanations than HCT
does regarding a number of particular instances. These cases provide an empirical
support for signaling theory. It is also well documented that meritocracy is not
always the case in the labor market (see Cawley et al., 2001). Titles, degrees, and
university reputation can sometimes be more valued than their actual values in the
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labor market. Having said that, despite all the counterarguments to HCT, the
recent literature tend to see the signaling theory as an extension of HCT rather
than competitive to it (Weiss, 1995). As Machlup (1984) noted that the discussion
on screening is not whether education has a sorting function—as it must have—
but rather whether it serves merely and solely as a screening device (cited in Cohn,
Kiker, & De Oliveira, 1987).
Some may not find this debate interesting and ask that as long as an educated
person finds a good job, does it really matter whether education enhances produc
tivity or it just sorts out job applicants? According to the human capital theorist
Gary Becker (1993a) no, it does not because "even if schooling also works in this
way [as a sorting device], the significance of private rates of return to education is
not affected at all" (p. 8). Here is the focal point of the discussion. HCT postulates
that education increases a person's productivity in the workplace and it, in turn,
leads to a higher wage for the person. It means that all sides, the individual, firm,
and country, will benefit from this higher productivity stemming from education.
However, signaling theory suggests that education may bring a higher income to
the individual without bringing any higher productivity to the firm and the coun
try. Hence, there is no direct correlation between education and the productivity
level of a country. That is, more investment in education does not mean more
economic growth for the country or mass education does not lead to mass produc
tion. This conclusion runs against HCT, which assumes that more education will
bring more economic growth to the country. However, this is not always the case.
The reason is that education may have a high private rate of return but low, even
negative, social returns (will be discussed in next section). In this connection,
Spence (1973) argues that "private and social returns to education diverge.
Sometimes everyone loses as a result of the existence of signaling. In other situa
tions some gain, while others lose" (p. 368). This simply means that the overin
vestment in education by the government is economically inefficient and this kind
of investment is a typical example of Pareto inefficiency, scarce resources are not
exploited in the best way and no one can be made better off without making at
least one individual worse off. Put it another way, it means that society is squan
dering its resources in the production of education. The signaling theorist Spence
points out that this is a possibility (Bonanno, 2012) and there is some empirical
data in congruence with it.
Education and Growth
Another tenet of HCT is related to the impact of education on national eco

nomic growth. To the theory, education will not only increase the wages of edu
cated employees but also it will generate higher productivity, lower unemployment,
and greater social mobility, what are called positive externalities: the impact of
education on aggregate output is greater than the aggregation of the individual
impacts. In other words, the average incomes of educated persons will rise, how
ever, if there are positive externalities to education, national average incomes
should rise even more than the sum of individual incomes (Pritchett, 2001).
However, contrary to this assumption, it is well documented that education can
increase private returns but not social returns. Therefore, the impacts of education
may differ at the individual level and the national level, what is called the
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6.5
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2.5 GDP per capita (Constant

price 1996 PPP)
1960 1965 1970 1975 1980 1985 1990 1995 2000
FIGURE 1. Schooling and GDP per person in Venezuela

Source. Ortega, D., & Pritchett, L. (2014). Much higher
wages: Human capital and economic collapse in Venezue
Chavez: Anatomy of an Economic Collapse, edited by Ri
Francisco Rodriguez, p. 189, Copyright © 2014 by The Pe
Press. Reprinted by permission of The Pennsylvania Stat
micro-macro paradox (Pritchett, 2001). There is no sho

paradox. In that regard, Caselli, Esquivel, and Lefort
and Weil (1992) do not find a strong evidence for th
human capital necessarily produces economic growth.
Benhabib and Spiegel (1994) discovered that "human c
to enter significantly in the determination of econom
with a negative point estimate" (p. 166). Nazrul Islam
correlation between schooling and growth in some co
though schooling rates substantially increased in sever
El Salvador, Bolivia, Jamaica, Peru, and Jordan from
improvement or even negative growth took place in t
els of these countries (Pritchett, 2009).
As a striking example, Venezuela presents a shar
higher schooling and much lower wages between
Pritchett, 2014). Unlike HCT predicts, an unprecedent
not generate a rapid increase in production at the m
proportionately high return at the individual level. On
relation was observed between schooling and the n
Venezuela. Figure 1 illustrates this contradiction.
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Tan
As shown, despite a rising schooling rate, the GDP per capita has decreased
between 1960 and 2000. In fact, there should have been more than a 50% increase
in wages instead almost a 40% decrease has taken place in this period. Now, it
prompts the question that what can be the source of this contradiction? Pritchett
(2001) proposed possible explanations for it. First, the education system in
Venezuela appears to have failed. Massive enrolments in schools have been detri
mental to the quality of education and resulted in unequal distribution of educa
tional services (Dessus, 1999). Furthermore, this massive enrollment created a
gap between the supply and demand in the Venezuelan labor market. Since human
capital supply grew faster than human capital demand, the labor market failed to
absorb the sharply increased number of educated individuals (Gonzalez &
Oyelere, 2011; Patrinos & Sakellariou, 2006). The second possible explanation is
that political and social establishments did not provide the educated Venezuelans
with the environment in which they can make use of their skills in the best way.
In that regard, one of the much debated issues in Venezuela has been rent seeking
jobs; making money without creating wealth such as political lobbying, govern
ment bureaucracy, lawyering, policing, and army (Ffammond, 2011; Karl, 1997;
Rodriguez, Morales, & Monaldi,). These rent-seeking activities can be individu
ally remunerative although socially unproductive (Di John, 2009; Tullock, 1967).
As Torvik (2002) noted that the use of human capital is adversely affected by
rent-seeking activities. The reason is that if the payoff is high in unproductive but
lucrative jobs, human capital skills are diverted away from entrepreneurial jobs
and put into rent-seeking ones since individuals are not necessarily driven by
productivity but rather by profit (Acemoglu, 1995). Consequently, the micro
macro paradox occurs due to the fact that potential entrepreneurs with significant
human capital endowments become rent-seekers rather than wealth creators
(Mehlum, Moene, & Torvik, 2006). Thus, the social and private rates of return to
education diverge as a result of distortions in the economy. Surely a slow or nega
tive growth, despite a considerable schooling in a country, is not sufficient to
dismiss the claim that human capital accumulation has a positive impact on eco
nomic growth. But this rather suggests that social, political, institutional, and cul
tural factors need to be considered when the impacts of education is predicted
(Pritchett, 2001). For that reason, in some countries, the linear relationship
between education and economic growth does not seem to exist unlike HCT
postulates.
There is also a sizable disparity regarding the impacts of education between
poor and rich countries. It leads to the question that why education has not paid
off at aggregate level in these poor countries? Jones ( 1996) argued that the increase
in schooling was in relative rather than in absolute terms. Several poor countries
with very low levels of education have increased their average educational attain
ments by a high percentage: for example, from 1 year to 2 years, a 100% increase.
On the other hand, developed countries have increased their average levels by 1
or 2 years as well, but starting from a higher initial base. This relative increase in
developing countries may highlight a part of the contradiction between a high
increase in schooling and little growth in national economy. It is clear that each
country has its own unique historical background, not only in politics but also in
education. Thus, when the impacts of education and the future economic growth
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rate of a country is predicted, historical factors need to be considered as well

because the institutions like the education system or labor market in a country
cannot be isolated from their past. Therefore, the same year of schooling in differ
ent countries may lead to different economic outcomes due to the historical
factors.
Finally, a question needs to be asked. If there are a significant number of coun
ter examples, why international organizations such as World Bank or OECD pas
sionately support the concept of human capital? First of all, they also acknowledge
that just education is not enough for economic growth. Rampant corruption, rent
seeking, nepotism, and so on are also major obstacles to economic development.
Therefore, countries with corrupt government officials, ponderous bureaucracy,
poor law enforcement, and unequal opportunities poorly perform in terms of
human capital formation and outcomes (see the OECD report by Mejia & Pierre,
2008; Pissarides, 2000). That is, what is called social infrastructure, the institu
tions and government policies that determine the economic environment, plays a
key role in the effective use of potential human capital (Hall & Jones, 1999). As a
result, state establishments and bureaucratic regulations should create the habitat
in which human capital accumulation is encouraged and rewarded. Second, some
OECD researchers suggest that "data quality and econometrics do matter in
explaining the often disappointing results on the link between human capital and
growth" (Bassanini & Scarpetta, 2001, p. 24). They contend that if improved data
set and different econometric methodologies are used, there will be more coherent
results between schooling outcomes and the predictions of HCT. Since the data
collection and its analyses are quite sophisticated, different measurement tech
niques may yield a different set of outcomes in favor of HCT. Third, for instance,
the World Bank report for Africa (2010) blamed teachers and civil servants in
Africa and accused some of the teachers of quiet corruption: various types of
malpractices of frontline providers (teachers and inspectors) that do not involve
monetary exchange. For example, there is a high level of absenteeism and low
performance on the job among teachers in some African countries. This leads to
lower human capital and lower productivity in the labor market, resulting in the
noninvestment in the human capital of children because of beliefs about the low
quality of education. Thus, institutional factors and individuals' commitments to
their own professions need to be taken into account since these elements affect the
overall quality of human capital and may lead to a high or low economic growth.
To conclude, there are empirical results both at individual and aggregate levels
that are incoherent with the predictions of HCT. Now we turn to another dimen
sion of HCT: its impact on education and politics.
Practical Criticisms
In this section, the impacts of HCT on other academic disciplines will be dis
cussed and the consequences of the neoclassical approach in practice, particularly
in the fields of education and politics will be examined.
The first criticism against HCT is related to the scope of the discipline of
economics. Namely, what are the boundaries of economics and what should its
boundaries be? It is true that there are some multidisciplinary aspects in any
subject. For instance, historians may need a chemist to pin down the date of a
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skull. In that sense, the exchange of information and experiences at a cross-dis

ciplinary level are not only possible but also desirable. In this case, however, the
complexion of the story is different because it is not a symbiotic relationship
based on mutual benefits in which both disciplines have something to offer. But
rather it is becoming a top-down relationship, and economics is gradually domi
nating other disciplines hoping to compose a hierarchy based on the superiority
of economics.
In this relationship, economics has gained new fronts with the help of the neo
classical school in general and HCT in particular. The intrusion of economics into
the realms of sociology, education, law, and political sciences has several names
such as economic imperialism, neoliberal hegemony, economic rationalism, and
new managerialism. The desire to influence and dominate other academic disci
plines goes to the extent to reshape and redesign other disciplines according to its
own needs. Surely, the idea of economic imperialism is not new. For instance, in
the 1930s Ralph Souter suggested that
the salvation of economic science in the twentieth century lies in an enlightened and
democratic economic imperialism, which invades the territories of its neighbors, not
to enslave them or swallow them up but to aid and enrich them and promote their
autonomous growth in the very process of aiding and enriching itself. (Cited in
Swedberg 1990, p. 14)
Although the trace of this understanding can be found in the early literature,
the idea of economic imperialism has gained momentum in a new form at an
unprecedented speed after the introduction of HCT around the 1950s. Interestingly
enough, Becker does not deny economic imperialism and maintains that econo
mists can talk not only about demand and supply but also about family, crime,
prejudice, guilt, and love. Becker (1993b) says that "it is true. I am an economic
imperialist. I believe good techniques have a wide application" (para. 1).
Economic imperialism has solidified its position by the help of HCT. The hall
mark of this understanding can be seen on many disciplines, but particularly on
the political discourse. It has so profoundly permeated in politics that education is
being perceived by politicians as a survival tool to cope with economic uncertain
ties (Stuart, 2005). To some politicians, education is the engine of economic
growth. For instance, Tony Blair said that "education is the best economic policy
that we have" (Department for Education & Employment, 1998). This under
standing has led to the criticisms that education/training is regarded by policy
makers as an economic instrument for social control and as a stick to move benefit
claimants into the labor market (Coffield, 1999; Darmon, Frade, & Hadjivassiliou,
1999). The British PM David Cameron provided an example to justify that criti
cism. In his speech on the earn or learn programs for unemployed people,
Cameron (BBC, 2013) said that the government would "nag and push and guide"
benefit claimants away from a life on the dole. This attitude is called responsibili
zation by the Foucauldian school, which is an adaptive strategy in which individu
als and communities are urged to play their own part (Rose, 1999). The language
in the quote below is a clear example of the responsibilization phenomenon:
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All people, young and old, are firstly and naturally responsible for themselves. You
have to learn how to take care of yourself, and therefore you must want to acquire
the knowledge and skills to do that. Those who do not take part will be reminded of
their responsibilities. (Netherland Ministry of Culture, Education and Science,
1998, cited in Coffield, 1999, p. 9)
Second, though inextricably linked to the first point, it is argued that education
has been relegated to a mere supplementary component of business and industry.
Education is no longer conceived as an integrated strategy to promote freedom,
self-enrichment, and human development, but rather it is a business activity
driven by profit (Nussbaum, 2010) or a commodity in the market (Ball, 2010).
Thus, students and parents are consumers, teachers are producers, and education
administrators become entrepreneurs and managers whose goal is to meet the
rapidly changing needs of industry (Marginson, 1997). The trace of this approach
can be seen in some official papers:
We expect new courses to offer increased value for money, as they will be delivered
by a range of providers with different business model. . . . Higher education
institution and representatives of an industry sector can [collaborate and] set
standards for course content.... Graduates are more likely to be equipped with the
skills that employers want if there is genuine collaboration between institutions and
employers in the design and delivery of courses. (Department for Business
Innovation and Skills, 2011, pp. 7, 39)
It is true that, at least in theory, education will increase the skills, adaptability,
and mobility of individuals, which in turn will reduce unemployment. This will
eventually contribute to the well-being of individuals and society. However, to the
critics (Coffield, 1999; Field, 2000), unlike welfare state policy goals, the main
objective of the economy-driven education policies is to put the burden on peo
ple's shoulders and expect them to take action for themselves, by themselves.
Namely, the ultimate objective is to reduce the government's financial burden
(Field, 2000). This approach stems from the neoliberal understanding which tends
to see individuals as economic actors and focuses on enabling citizens to contrib
ute to production rather than relying on social welfare state. To that end, the neo
liberal approach moves resources away from social welfare functions toward
production functions (Slaughter & Rhoades, 2004).
One of the ways to positively intervene production functions is to increase
labor quality. This brings the question as to what is the most efficient way to
increase labor quality and productivity. Education is the most appealing answer to
this question for many. This answer is vehemently supported by human capital
theorists and readily accepted by policy makers. In his speech, while talking about
unemployment and the needs of the 21th century, Blair (1999) said that "so today
I set a target of 50 per cent of young adults going into higher education in the next
century." This target was not met by the specified time, which was 2010. However,
what is obvious is that now there are a considerable number of university gradu
ates with overeducation or employed in a low job (Groot & Maassen van den
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Brink, 2000). The inflation in the academic degrees has not brought the predicted
economic outcomes while churning out overeducated but underskilled or over
educated but underutilized individuals who can barely find a job. This 50% target
has "driven down standards and devalued the currency of a degree and damaged
the quality of the university experience" according to the Association of Graduate
Recruiters report (BBC, 2010). Consequently, the abundance of educated work
force has led to an increase in the number of graduates getting nongraduate jobs
(Walker & Zhu, 2005).
Not only in United Kingdom but also in many other countries including the
United States, Germany, Holland, Spain, and Hong Kong, a considerable number
of studies provided strong evidence for the overeducation phenomenon (see
McGuinness, 2006, for a concise literature review of 33 studies).
However, HCT economists insisted that educational attainments may not pro
duce expected outcomes in the short-run but a convergence between academic
qualification and the predicted wage will gradually take place. In other words,
overeducation is a temporary phenomenon and education will pay off in the long
term once the transition period is over. But this argument is not substantiated by
empirical studies. For instance, Battu, Belfield, and Sloane (2000) examined
whether overeducation is a transitional occurrence or not and their findings did
not support the argument that overeducated graduates can upgrade themselves in
the long run. On the contrary, overeducation appears to be a substantive and dura
ble phenomenon. In addition to that, there are empirical studies which discovered
that overeducation is associated with low productivity and high propensity to quit
due to dissatisfaction with the job. A number of studies (Quintini, 2011; Tsang,
1987; Verhofstadt, De Witte, & Omey, 2007) found that there is a significantly
negative correlation between overeducated employees and their productivity
since unused academic skills affect the outputs adversely. Therefore, overeduca
tion is a matter of concern not only for the individual and the firm but also for the
government itself in terms of effective allocation of public money.
It calls into question that why is the human capital approach so popular among
politicians and bureaucrats if it has not yielded the predicted outcomes in many
examples. Coffield (1999) contended that the anticipations are so high that educa
tion is expected to function in multiple ways. For example, education is viewed as
an instrument which will bring a real transformation to individuals and society
(European Parliament, 2000). It is seen as a means of innovation which will
increase economic competitiveness and will lead to a knowledge-based economy.
Education is a social policy designed to terminate social exclusion. It is expected
to make individuals more flexible and adaptable to the needs of ever-changing
world of work. But what is the source of these high anticipations from education?
Coffield (1999) provides four reasons for that. First, it deflects attention from the
need for economic and social reform. As Schuller and Burns (1999) reminded that
"investment in human capital by an employer or by society requires the appropri
ate social context in order to be realised effectively" (cited in Coffield, 1999,
p. 483). Second, it provides politicians with the pretext for action so that they can
justify their education and social policies with this appealing pretext. Third, it
legitimizes increased expenditure on education. Karabel and Halsey (1997) note
that positioning education at the root of economic and social problems justifies for
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the necessity of a substantial amount of public expenditure on education. This

enables education ministers to secure resources from treasuries. Last, it offers the
comforting illusion that for every complex social and economic problem there is
one simple solution (Hodkinson, Sparkes, & Hodkinson, 1996).
In conclusion, HCT has been criticized on the grounds of economic imperial
ism since it has penetrated into the territory of other disciplines and attempted to
lead them. Another criticism is that it has centered education around the needs of
business and viewed education as a survival tool to cope with economic uncer
tainties. Furthermore, it has created the illusion that education can solve any kind
of problems on its own.
What is the role of HCT in creating this illusion? It is worth remembering that
the basic assumption of HCT is that education is good. However, the practical
question that needs to be asked is not whether education is good or not. The real
question is that is more education always good (Wolf, 2002)? Or it is just self
evidently true that knowledge is preferable to ignorance in the same way health is
preferable to illness, freedom to slavery, and peace to war. HCT has strongly
given the impression that governmental expenditures directed toward the realiza
tion of these preferences have a linear relationship to their economic profitability
(Shaffer, 1961). It has been shown that this linear relationship in theory does not
always exist in practice. Second, another important question to ask is "not that
education contributes to growth, but that more education would contribute more
to growth at the margin than more health, more housing, more roads, etc" (Blaug,
1987, p. 231). Finally, HCT has provided rather accessible and palatable intellec
tual ammunitions to politicians by which policy makers can form an educational
policy placing economic concerns at the very center of it.
The neoclassical approach, economy-driven education or more interestingly
economy-driven life, has also raised some moral questions that will be discussed
in the next part.
Moral Criticisms
The moral aspect of HCT is rather controversial and the controversy comes
from the meaning that the neoclassical school of thought attributes to human
beings and the referential framework by which this intellectual tradition analyzes
human actions and goals. In that regard, the idea of human capital has been bit
terly criticized and sometimes sarcastically referred as human cattle. This section
will look into the moral criticisms of HCT and is organized mostly around
Foucault's account of human capital.
First of all, it would be appropriate to dissect HCT into its basic components.
Foucault (1979) argues that human capital represents two interrelated processes:
"one that we could call the extension of economic analysis into a previously unex
plored domain, and second, on the basis of this, the possibility of giving a strictly
economic interpretation of a whole domain previously thought to be non-eco
nomic" (p. 219). Traditionally, the inputs of production, in the classical analysis,
were land, capital, and labor referring to the number of workers and hours. A
laborer was simply seen as a person of exchange who sells his or her labor power
and renounces a specified amount of his or her time in exchange of a wage deter
mined by the market at a given time. However, in HCT, the individual is
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Tan
considered an enterprise who allocates his or her scarce means (time, labor) to the
maximization of utility. Thus, HCT views human beings as active economic sub
jects as opposed to the traditional view that saw human beings as objects—the
objects of supply and demand in the form of labor power (Foucault, 1979). This
is the first novelty that HCT introduced: a shift from labor power to an active
enterprise. The second of the two processes is that no domain of human life is
exempt from economics unlike the traditional views whose sole interests were
confined to the spheres of business. In fact, this was the difference between the
approaches of M. Friedman and Becker. Friedman used economic rationality and
self-interest just in business or market settings whereas Becker thought that not
only economic activities but also any kind of human behavior could be analyzed
within the framework of the utility maximization calculus (McKenzie, 2010).
That is, to Becker, the whole human life was a market setting including the affec
tion a mother displays to her kids. Becker (1960) wrote that
children are a source of psychic income or satisfaction, and, in the economist's

terminology, children would be considered consumption good. ... As consumer
durables, children are assumed to provide utility. ... I will call more expensive
children higher quality children, just as Cadillacs are called higher quality cars than
Chevrolets. To avoid any misunderstanding, let me hasten to add that higher quality
does not mean morally better. If more is voluntarily spent on one child than on
another, it is because the parents obtain additional utility from the additional
expenditure, (pp. 210-211)
This understanding is so deeply ingrained in the neoclassical approach that

religious affairs are also not immune from this utility calculus. For instance, Azzi
and Ehrenberg (1975) studied religiosity and they treated religious behaviors as
afterlife investments. In this study, religious conducts were considered production
activities to generate expected returns for afterlife consumption. Moreover, they
attempted to quantify religious activities based on a model called the afterlife
benefit-production function. Furthermore, lannaccone (1998) contended that the
motive behind switching a religion is the same as switching a job and "it will tend
to occur early in the life cycle as people search for the best match between their
skills . . . Over time, the gains from further switching diminish . . . whereas the
costs of switching increase" (p. 1481).
It can be said that homo economicus is a non-moral person, if not immoral.
This person always desires to maximize his or her own utility in a given set of
constraints. In terms of morality, the key word here is constraints. What are these
constraints? Are they moral, ethical, social, or political constraints? The answer is
no. When the neoclassical economists use the word constraints, they simply mean
time, money, and information. Namely, homo economicus is a person who does
not have any limitations and concerns apart from economic ones.
What is the language of homo economicus? It is the language of economics:
benefit, costs, investment, risk, and so on. For example, if this economic person
does not kill someone, it is not because he or she is moral, but rather the cost of
homicide is too big and the risk is not worth it on many occasions. That is to say,
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homicide is not something detestable in the moral sense, but rather it is a too risky
investment in the economic sense. In this connection, the human capital theorist
Becker notes that "some persons become 'criminals' therefore, not because their
basic motivation differs from that of other persons, but because their benefits and
costs differ" (Becker & Landes, 1974, p. 9).
Foucault (1979) points out this calculative mentality and argues that in HCT,
human beings are purely identified with homo economicus. To this mindset, each
human being is considered "an entrepreneur of himself, being for himself his own
capital, being for himself his own producer, being for himself the source of earn
ings" (p. 226). To Foucault, HCT views human beings as a machine for the pro
duction of an income (Dilts, 2011). Any activity that increases the capacity to earn
more, from the acquisition of knowledge to having their teeth whitened, is an
investment in human capital (Read, 2009). Migration, for example, is an invest
ment in human capital because it has elements of investment and costs in it. These
elements are that the immigrants will not be earning anything while they move
from one country to another and a loss of earning till they find a job, and psycho
logical costs. These negative elements indicate that migration is a cost. However,
the function of this cost is that a higher remuneration, a stable job, good medical
and educational services in the migrated state, and so on. For this reason, as
Foucault (1979) put it "migration is an investment; the migrant is an investor. He
is an entrepreneur of himself who incurs expenses by investing to obtain some
kind of improvement" (p. 230). As a result, once the mobility of a population for
an income is studied within the framework of an investment, it, the phenomenon
of migration, is automatically brought back into economic analysis. Consequently,
immigrants are seen as individual enterprises who embark on a journey to explore
possible ways to maximize their utilities by crossing one country to another.
This mode of thought mainly rests on the all-encompassing dichotomy, con
sumption-production, and any human action is placed in either of these catego
ries. All kind of individual conducts are evaluated under human capital formation.
Even consumption itself is seen as an entrepreneurial activity which will yield
further benefit in the future (Brôckling, 2011). To this economic approach, con
sumption is not a simple process of exchange in which a product is obtained and
money is given in return. But rather, consumption itself is a process of production
and the consumer is a producer at the same time. "What does he produce? Well,
quite simply, he produces his own satisfaction" (Foucault, 1979, p. 226).
The root of this understanding can be traced back to the definition of human
being in neoclassical economics. As noted earlier, in this approach, "man is
always a utility maximizer" (Stigler, 1982, cited in Bentata, 2009). That is to say,
when human beings take a course of action, it can only be explained by utility.
Whether individuals are aware or not, verbally express it or not, they want to
increase their utility. It is not surprising that this understanding will ultimately
lead to the conclusion that utility is not a means but the very end itself. To this
utility-driven view, freedom is tantamount to choice and subsequently freedom is
no more than an experience of choice between alternative baskets of goods and
services, differing only in the returns they generate (Dilts, 2011; Read, 2009).
This view has attracted severe criticisms since the individual, in this economic
approach, is considered a machine whose sole aim is to produce (or rather obtain)
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Tan
as many utilities as he or she can. Namely, the individual is no more than a thing
that produces an instrumental rather than a teleological end (Dilts, 2011). To the
critics (Hyslop-Margison & Sears, 2006), this instrumental understanding based
on the optimal allocation of scarce resources to alternative ends is rather dehu
manizing. It is dehumanizing because, in this mindset, human conducts are purely
utility-driven and human beings are downgraded to robot-like creatures dissoci
ated from their spirits. Although it is true that HCT very much emphasizes the
importance of human being and places the individual at the center, but it does it
with a different motive, namely with completely instrumental concerns, paying no
attention to teleological ends.
Second, Foucault (1979) maintained that the neoclassical economic model is
problematic, not only in its description of the human being as homo economicus,
but also in its prescriptive approach that aim to make human beings more govern
able. In his account, the human being that HCT envisages is someone "who
responds systematically to modifications in the variable of the environment,
appears precisely someone who manageable . . . Homo economicus is someone
who is eminently governable" (p. 270). However, this governmentality no longer
lies in the rights and laws but in interests, investments, and competition (Read,
2009). Foucault sees it as a shift from homo juridicus, the legal subject of the
state, to homo economicus, the economic subject of the state who is structured by
different motivations and governed by different principles. As it is postulated by
the RCT (transitivity: consistency), the heart of this economic model is that indi
viduals react to reality in a nonrandom way and therefore any conduct which
systematically responds to modifications must be the subject of an economic
analysis. In this analysis, a rational act is any act which is sensitive to modifica
tions in the variables and the rational person is someone who responds to these
modifications in a non-random fashion, namely, in a systematic way. This means
that homo economicus is someone who accepts reality and reacts to it consis
tently. Therefore, says Foucault (1979) economics can be defined as the science
of the systematic nature of responses to environmental variables. These responses
can be examined through behavioral techniques and these techniques
do not consist in analyzing the meaning of different kinds of conduct, but simply in
seeing how, through mechanisms of reinforcement, a given play of stimuli entail
responses whose systematic nature can be observed and on the basis of which other
variables of behavior can be introduced. (Foucault, 1979, p. 272)
From this, it could be deducted that homo economicus is not only a rational
utility-maximizer but also a malleable person (Burchell, Gordon, & Miller, 1991 ).
As a result, homo economicus is someone whose conducts are shapeable in a
desirable way (Rose, 1999).
In line with this argument, it is claimed that, in the neoclassical approach, indi
viduals are seen as the stimulus-response robots and the task of economics is not
only to analyze the internal rationality of individuals' conducts but also to make
strategic programming of their activities (Foucault, 1979) and manipulate them
so that they can react to stimulus in a predictable way. This, in turn, will increase
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the governmentality of the subjects (Read, 2009). Thus, the representation of

human being in HCT converges to that of the behaviorist approach: all behaviors
are acquired through conditioning and behaviors can be observed, measured, and
changed by modifying the environment. This understanding (stimuli-response
puppets) consequently will lead to "the objectification of the man" (Ewald, 2012,
in a conversation with Becker).
However, the advocates of the theory had diametrically opposite views. For
instance, Becker (2012) argue that economics is the science of efficiency and the
very problem that HCT highlights is an underinvestment in humans. It is obvious
that it is the poor and disadvantaged people who are most severely affected by
this underinvestment. What HCT stresses is that the neglect of this part of the
population is not only inequitable but also economically inefficient. HCT under
lines the consequences of these insufficient investment policies and attempts to
provide a solution to it. In doing that, says Becker (2012), HCT places the indi
viduals at the center of its analysis. However, it also reminds them that "if you
drop out of high school, it is very likely that you are destined to be unemployed,
to have low earnings, to be in poor health" (p. 18). HCT demonstrates various
ways to overcome these problems, and individuals are not alone in this process
but they are encouraged by human capital-oriented policies. For this reason, in
HCT, individuals are "at the center, rather than as the instruments of what others
are doing" (p.18). Becker (2012) further contend that it is an uplifting point of
view rather than a degrading or demeaning one. In parallel to Becker's opinion,
Goodwin (2003) also points out that although this economic approach is accused
of having dehumanizing effects, the term human capital has been a potent force
in alleviating even more dehumanizing effects by investing in individuals and
their skills.
Similar arguments were developed by the early human capital theorists as well.
As noted before, in the 1950s, the argument on slavery was still ongoing in the
United States. It was alleged that the term human capital evoked the idea that
human beings were like slaves or machinery. One of the founders of HCT, Schultz
(1961) responded that the term human capital neither degrades nor impairs human
dignity, but failure to understand the term in its true context may have rather
severe implications. These implications can be particularly pernicious in wars,
quoting from Thunen, Schultz (1961) maintained that
one will sacrifice in a battle a hundred human beings in the prime of their lives
without a thought in order to save a gun . . . [because] the purchase of a cannon
causes an outlay of public funds, whereas human beings are to be had for nothing
but a mere conscription decree, (pp. 2-3)
This argument even now may sound convincing for many. But if the historical
context is considered, namely after the World War II and the threat of Soviet
Union, one can better appreciate that these words were probably more appealing
and plausible then.
On the other hand, HCT is also criticized for the new terminology that it has
brought to the labor-capital relationship. As noted before, in this analysis,
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Tan
individuals are considered enterprise-like beings whose aim is to obtain maximum

outputs for minimum costs. As it is pointed out by Read (2009), workers themselves
are entrepreneurs and labor is no longer limited to specific sites of the factory but
rather it is any conduct that promotes the desirable ends (utility). In this process of
economization of the individual's conducts, the terms like investments, risk, utility,
and optimal decision are taken from the realm of economics and applied to the
labor. As a result, the labor is treated in the same way with the capital. Traditionally,
however, labor and capital were two distinct components of the production factors.
This terminological shift and the representation of labor as a capital enable to oblit
erate the historical difference between the labor and the capital. In practice what it
does is that "the terms 'labor' and 'human capital' intersect, overcoming in termi
nology their longstanding opposition; the former becomes the activity and the latter
becomes the effects of the activity, its history" (Read, 2009, p. 31). Consequently,
the labor turns into the capital and the laborer turns into a capitalist enterprise. The
difference between labor and capital is effaced through the theory of human capital
due to this terminological shift (Read, 2009).
To recapitulate in a nutshell, the neoclassical economic model in general and
HCT in particular are criticized due to its definition of human being (utility-driven
animal); the description of human being (self-interested and rational homo eco
nomicus); its prescriptive nature (governable and stimuli-response puppets who
alter their behavior in response to the modification in environmental variables);
and lastly due to the terminological shift that it has brought (the labor itself is a
form of a capitalist enterprise).
Conclusion
In this article, HCT has been discussed from different point of views; method
ological, empirical, practical, and moral perspectives. First, it should be noted that
RCT, inevitably HCT as well, has serious limitations in its analytic framework by
which the neoclassical model attempt to explain social and economic phenomena.
Second, there are some empirical studies whose results are in discord with HCT
and it is clear that HCT fails to explain those cases. So, what are the implications
of these limitations or should we abandon HCT as a whole? According to Blaug
(1992), these limitations are no sufficient reasons to renounce HCT because to
believe that scientific research programs are abandoned the moment a refutation
is encountered is to fall victim to naive falsificationism. What is needed to discard
a scientific research program is that, first, repeated refutations; second, an embar
rassing proliferation of ad hoc adjustments to avoid these refutations; and finally,
a rival theory that explains the same problem/phenomenon by a different but
equally robust theoretical framework. The opponents of HCT are far from devel
oping a new rival theory that can replace it. As Becker reminded that "there is an
old saying that you need a theory to beat a theory" (cited in Herfeld, 2012, p. 78).
Therefore, the existing HCT seems to be here to stay because despite its short
comings and imperfections, it would be fair to say that it is still a strong theory.
Moreover, it is not only strong in rhetoric, but also parsimonious and insightful in
theory.
Second, regarding self-interested homo economicus, governmentality, the
question asked by Green (2002) needs to be reiterated with a slight change. Does
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the rational choice approach, which rests on material self-interest, actually encour
age people to make choices based on material self-interest? Moreover, "if the
rational choice approach is amended to allow for non-selfish preferences, will the
typical person in society gradually become less selfish" (p. 64). By the same
token, had there been no HCT nor the neoclassical approach, would policy makers
have been less interested in governmentality and creating governable citizens? It
is rather difficult to give an affirmative answer to this question given the fact that
history is full of governments which have used education as a means to make their
citizens more governable. Therefore, this attitude does not exclusively belong to
the neoclassical school.
It should be noted that there are some attempts to challenge HCT in academia.
For instance, Cunningham (2004) stresses the social aspect of education and
claims that learning is dialectic between the personal and the social dimensions.
Namely, people are framed by their social structures, and social structures are
constructed and shaped by people. Therefore, an individual cannot be understood
or conceptualized outside of his or her social and political context. Similarly,
Fevre, Rees, and Gorard (1999) assert that HCT is ahistorical and based solely on
instrumental rationality. What Fevre et al. propose is the sociological theory of
participation that takes into account historical, geographical, social, and cultural
factors which influence individuals' motivations of postcompulsory education.
The theory points out the social construction of these motivations and contends
that individuals are not driven by utility-maximization when they invest in educa
tion. But, this claim and the theory in general are not well supported by empirical
data. This does not mean that the social, historical, and geographical dimensions
do not influence individuals' educational decisions but a full-fledged theory
should empirically account for a substantial number of cases, at least better than
HCT does. Otherwise, a theory without a sound empirical support can hardly
compete with HCT, however true it may seem intuitively.
It is also worth noting that the majority of criticisms directed at HCT are rather
tantalizing. These critiques give the impression that they have a better alternative
model for education policies. But sometimes it is quite noticeable that these criti
cisms are mostly driven by an ideological zeal with full of resentment just to attack
the dominant school of thought with no present alternative at hand. It is true that
each criticism is valuable on its own, no matter where it comes from but the ambi
tious goal, replacing HCT, requires much more than that. There have been huge
criticisms but little systematic efforts to understand the origin and impact of HCT.
A systematic and comprehensive approach is needed to better analyze and criticize
it. It is hoped that this article will be stimulating for that comprehensive approach.
Notes
I would like to thank Joanne Connell for her invaluable comments on previous
drafts of this manuscript.
'As the terms rationality and utility will be frequently used in this article, it is
important to note the difference between the classical and neoclassical accounts of
rationality. A distinction is made between thick rationality and thin rationality. In
thick rationality, adapted by the classical approach, there is a defined goal such as
happiness, wealth, or power. The purpose of a rational act is to increase these defined
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Tan
goals. On the other hand, in thin rationality, adapted by the neoclassical approach,
there is no predefined concept as the ultimate end. Rationality, in this account, is to
make the optimal decision whatever you want to obtain. There is no specified utility
and utility is a matter of personal taste rather than a predefined concept (Hechter &
Kanazawa, 1997).
2It would be utterly wrong to suggest that the current neoclassical understanding
is based on Bentham's utilitarianism. There are fundamental differences between the
two. One significant example is that whether utility is cardinal or ordinal. This distinc
tion (cardinal or ordinal) has extremely significant implications in economics, but it
is not relevant to mention them here. The point rather is that Bentham was objectivist
and strictly believed in science, measurability, and quantification. The same thing can
be said for the neoclassical approach.
3There are some other RCT axioms such as dominance and completeness, but for
the purpose of this article it does not make any difference to include them. It should
also be noted that there are different views about the importance of the RCT axi
oms such as that each axiom in the theory is not equally important. Transitivity, for
instance, may not be an essential requirement of the theory while invariance is (Ayton,
2012).
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Author
EMRULLAH TAN is a PhD candidate at Exeter Business School, 7 Cowley Bridge Road,
Exeter EX4 5AD, UK; e-mail: et286@exeter.ac.uk. The areas that he is interested in are
human capital, adult training programs, employability, and lifelong learning.
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Human Capital Theory: A Holistic Criticism

Author(s): Emrullah Tan

Stable URL: https://www.jstor.org/stable/24434243

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Human Capital Theory: A Holistic Criticism

Human capital theory has had a profound impact on a range of disciplines

Keywords: human capital, neoclassical economics, rational choice theory

Human capital theory (HCT) is not a mere theory in economics. It is a compre

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The Theory Outlined

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The community is a fictitious body, composed of the individual persons. . . . The

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Rational Choice Theory

The Origin of the Theory

Subsequently, I applied the economic approach to fertility, education, the uses of

In fact, this economic approach or economization of human behaviors goes

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The Basic Principles of RCT

Transitivity: If A is preferred to B, and Β to C, then A must be preferred to C. The

Continuity : If A is preferred to B, then the option suitably close to A needs to be

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while eliminating a frustrating number of interpersonal variations that otherwise

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The Limitations of RCT

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The Framing Effect

Reconsidering Friedman's Billiard Player Example

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characteristics of positional goods, which provide relative advantage in the

Why Is RCT So Popular?

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If workers' productivities are in fact not perfectly observed (which is particularly

Second, to test the signaling hypothesis empirically, the difference between

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Education and Growth

Another tenet of HCT is related to the impact of education on national eco

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2.5 GDP per capita (Constant

1960 1965 1970 1975 1980 1985 1990 1995 2000

FIGURE 1. Schooling and GDP per person in Venezuela

micro-macro paradox (Pritchett, 2001). There is no sho

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rate of a country is predicted, historical factors need to be considered as well

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skull. In that sense, the exchange of information and experiences at a cross-dis

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the necessity of a substantial amount of public expenditure on education. This

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children are a source of psychic income or satisfaction, and, in the economist's

This understanding is so deeply ingrained in the neoclassical approach that

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the governmentality of the subjects (Read, 2009). Thus, the representation of

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individuals are considered enterprise-like beings whose aim is to obtain maximum