Title: Modern Human Capital Formation

Submitted by: Anonymous
Alternate Names: Human Capital Framework, Economics of Education, Social Benefits of Education, Social Rates of Return

Educational institutions do not produce students, or even graduates, they produce human capital which is the new knowledge and skills embodied in students during the educational process. This human capital yields returns over the life cycle, 45 or so after graduation, not just during hours in the labor market, but also non-market benefits during hours in the home (better health, better child health and education, etc.) and hours spent in the community (on community boards, etc.) contributing to the building of democratic institutions, lower crime rates, etc. These can be estimated, and related back to the costs (education institution costs plus forgone earnings costs) to calculate a social rate of return.
This is a key criterion for estimating the contribution of education to economic growth and to various other development goals, and hence fundamental to education policy. True social rates of return reflect not just the level of internal efficiency, but also the external efficiency, and hence the net contribution of education to total social welfare. (These efficiency contributions are separate to the contributions to equity, although in the case of education the two can frequently overlap.)

Theory references:

Becker, G. (1976). The Economic Approach to Human Behavior. Chicago: University of Chicago Press

McMahon, W. (2006). Higher Education, Greater Good: The Private and Social Benefits of Higher Education. Baltimore: MD.

McMahon, W. (2009). Education finance policy: Financing the non-market and social benefits. Journal of Education Finance, 32(2).

References applying the framework:

McMahon, W. (2002). Education and Development: Measuring the Social Benefits. Oxford: Oxford University Press

McMahon, W. (2007). Analysis of education externalities with applications to development in the US deep south, Contemporary Economic Policy.

McMahon, W. (2009). Higher Learning, Greater Good: The Private and Social Benefits of Higher Education. Baltimore: Johns Hopkins University Press.