according to proponents of human capital theory, education:
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Human capital theory is concerned with knowledge and experiences of small-scale business owners. The general assumption is that the human capital of the founder improves small firms’ chances of survival (Bruederl et al. 1992 ). Human capital acts as a resource. However, human capital theory studies usually assume that experiences are translated into knowledge and skills. This assumption is problematic, however, because length of experience is not necessarily a good predictor of expertise (Sonnentag 1995 ). Therefore, it is not surprising that human capital factors, such as length of managerial or industry experiences or education, are not strong predictors of success, although in large-scale studies they usually are significant (Bruederl et al. 1992 , Rauch and Frese 2000 ).
It has been proven that the human capital theory and educational systems work beautifully for the development of individuals and nations, especially developing nations. However, there are implications involved, especially in relation to the differences in policies and expenditures in education. The human capital theory emphasizes the need for policy makers to allocate significant resources to the expansion of educational systems. While some governments may be reluctant to invest in education, the positive returns from this investment will significantly outweigh the costs. Many of the developing nations have thus realized that the principal mechanism for developing human knowledge is the education system. Thus, they invest huge sums of money on education, not only as an attempt to impact knowledge and skills to individuals, but also to impart values, ideas, attitudes and aspirations which may be in the nation�s best developmental interest.
According to Psacharopoulos and Woodhall (1997):
- Direct economic returns to investment, in terms of the balance between the opportunity costs of resources and the expected future benefits;
- Indirect economic returns, in terms of external benefits affecting other members of society;
- The private demand for education and other factors determining individual demand for education;
- The geographical and social distribution of educational opportunities;
- The distribution of financial benefits and burdens of education.
Howard Gardener – different types of human capital. Gardener emphasised the different types of human capital. One could increase education, but be a poor manager. A successful entrepreneur may have no education. Human capital is not unidimensional.
The tertiary/service sector has a greater variety of jobs, which require different skills. These skills and qualities are often more difficult to measure regarding output. For example, the human capital of a teacher, cannot be measured by university degree and A-Levels. The best academics may lack some teaching skills – like empathy, the ability to inspire and command a class.
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* This is an extended version of the keynote address to the annual conference of the Society for Research into Higher Education, Newport, Wales, UK, 9 December 2015. Thank you to Helen Perkins.
Human capital theory assumes that education determines the marginal productivity of labour and this determines earnings. Since the 1960s, it has dominated the economics, and policy and public understanding, of relations between education and work. It has become widely assumed that intellectual formation constitutes a mode of economic capital, higher education is preparation for work, and primarily education (not social background) determines graduate outcomes. However, human capital theory fails the test of realism, due to weaknesses of method: use of a single theoretical lens and closed system modelling, inappropriate application of mathematical tools, and multi-variate analysis of interdependent variables. Human capital theory imposes a single linear pathway on the complex passage between heterogeneous education and work. It cannot explain how education augments productivity, or why salaries have become more unequal, or the role of status. These limitations are discussed with reference to research on social stratification, work, earnings and education.