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Several earlier chapters have mentioned the important role of human capital in economic growth and development. We now focus more directly on Investment in Human Capital, including any and all investments in improving human capabilities. Chief among these are:

  • Primary Education, Secondary Education, University Education and Research,
  • Business Training and Research Programs, including “on-the-job” training,
  • Vocational Education, and
  • Learning by Doing.

Without doubt, the first category of human capital investment is the most consequential. We will devote most attention to it.

But the role of the other categories should not be ignored. The category “learning by doing” is interesting in and of itself. In Nobel Laureate Kenneth Arrow’s study of airframe manufacturing in World War II, increased amounts of labor and capital did not fully explain the tremendous productivity of U.S. aircraft plants: the U.S. made more B-24 bombers than all the aircraft produced by Japan. Why?

The effects of learning by doing.

Aristotle defined “learning by doing” 2000 years ago.

To quote:

"For the things we have to learn before we can do them we learn by doing them."

At this point, it is helpful to note that throughout this Chapter, numerous examples of human capital investment and its implications are given. One of the sources cited most often is a long series of studies from the National Bureau of Economic Research (NBER), a nationwide network of economic researchers with headquarters in Cambridge, Massachusetts. The NBER traces its origins back to the late 1920s.

Human capital: theory and applications

Economic thinks from David Ricardo and Karl Marx and J.M. Keynes viewed capital merely as physical assets owned by capitalistic firms. This view prevailed in economics until well into the 1950s. Then, the work of, first, Theodore Schultz and then the 1964 publication of the book Human Capital by Gary Becker

For a good retrospective on Gary Becker, see “Gary Becker (1930-2014)”, Science, June 13, 2014, 344(6189):1233.

changed forever how economists and policymakers view capital. Both were Nobel Laureates in Economics; both spent most of their careers at the University of Chicago.

This revolution in economic thinking began with an article by the father of the Human Capital Concept: Theodore Schultz of Chicago. His 1961 contribution “Investment in Human Capital” was a true landmark in the Annals in Economics. He asserted that the definition of capital need to be further expanded to include forms of human improvement. To quote:

"Although it is obvious that people acquire useful skills and knowledge, it is not obvious that these skills and knowledge are a form of capital, that this capital is in substantial part a product of deliberate investment, that it has grown in Western societies at a much faster rate than conventional (nonhuman) capital, and that its growth may well be the most distinctive feature of the economic system."

Schultz was led to think of the idea of Human Capital from his experiences in post-war Germany (1946-48) where he examined the effects of allied carpet-bombing of Nazi-Germany.

c.f. Kurt Vonnegut’s novel, Slaughterhouse Five, which depicts in striking terms the effects of Allied bombing on the City of Dresden in Germany.

The Allies had believed that carpet-bombing of Dresden, Frankfurt and other German cities would bring the German war machine to its knees quickly. But that did not happen. Large land forces from the U.S. and U.S.S.R. were needed in 1944-45 to defeat the Nazi.

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Source:  OpenStax, Economic development for the 21st century. OpenStax CNX. Jun 05, 2015 Download for free at http://legacy.cnx.org/content/col11747/1.12
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