Unit 1

CONCEPTUAL ISSUES IN ECONOMICS OF EDUCATION

1. Meaning, definition, scope and importance of Economics of Education.

2. The relationship between education and the economic system. The role of the economic
system in (i) financing of education, and (ii0 absorbing the educated manpower.
3. Education as an industry
4. Education as consumption and Education as individual, social and national investment.
5. Spill-over and inter-generational effects of education.

1. MEANING, DEFINITION, SCOPE AND IMPORTANCE OF ECONOMICS OF

EDUCATION
Economics is a social science that studies how society chooses to allocate its scarce resources,
which have alternative uses, to provide goods and services for present and future consumption.
Economics as a social science subject concerns itself with making choices and finding
alternatives. It studies how society decides what, how and for whom to produce goods and
services. Robbins defined Economics as a social science subject that studies human behaviour as
a relationship between ends and scarce means which have alternative uses.
Meaning and Scope of Economics of Education : Economics of Education as an area of study
cannot be said to be a separate field of inquiry that is totally different from the ordinary
economics. Economics of Education is the application of Economic principles, concepts, laws to
the process of Education. Economics of education studies human behaviour (in terms of human
decisions), action(s) and reaction(s)) about schooling (Babalola, 2003).It further looks into how
human behaviour affects economic development. Economics of education is one of the branches
of ordinary economics, though, it is the study of how educational managers make official or
approved choices from scarce available resources which is meant for the realisation of the best
possible educational outcomes. Economics of Education employs the use of some elementary
concepts commonly used in labour economics, public sector economics, welfare economics,
growth theory and development economics. World known classical economists like Adam
Smith, Alfred Marshall, John Stuart Mill had discussed education and development extensively,
advocating for public investment in education. So, by the 1950s, economists gave attention to
issues such as the relationship between education and economic growth; relationship between
education and income distribution and also the financing of education.
Economists analyse the production of education in this world where resources such as the capital
invested in buildings or technology and the labour of the teacher workforce are necessarily
scarce. This scarcity of resources means that policymakers must decide:
 How much to spend on each stage of education (i.e. what to produce);
  How to provide educational services in a way that maximises its benefits to society (i.e.
how to produce education); and
 Who should have access to each stage of education (i.e. for whom is education provided).
There are three decision makers or stakeholders in the educational system. These are (1) The
society (2) The institutions or providers (suppliers) of education and (3) Individual or households
(purchasers of educational services). The twin problem of scarcity and choice face these major
stakeholders.
The fundamental problem of economics of education is how the society, institution and the
households make use of the limited human and material resources they have, to best satisfy their
unlimited wants for education. The solution to the fundamental problem requires the application
of certain economic concepts.
The study of economics of education includes private and social rates of returns to education,
human capital and signalling theories of education, non-pecuniary benefits of education,
education and economic development, contribution of education to the economy, measuring
educational expenditure, manpower planning, educational planning and human resource
development, educational cost, cost analysis, educational production, educational effectiveness
and efficiency, costs-efficiency and cost-effectiveness, cost-benefit analysis and economics of
teacher supply, educational and equity.
Activity :
1. Define economics of education.
2. Differentiate between ordinary economics and the economics of education.

2 THE RELATIONSHIP BETWEEN EDUCATION AND THE ECONOMIC SYSTEM.

THE ROLE OF THE ECONOMIC SYSTEM IN (I) FINANCING OF EDUCATION, AND
(II) ABSORBING THE EDUCATED MANPOWER
Economic System : An economic system is the structure of production, allocation of economic
inputs, distribution of economic outputs, and consumption of goods and services in an economy.
It is a set of institutions and their social relations. Alternatively, it is the set of principles by
which problems of economics are addressed, such as the economic problem of scarcity through
allocation of finite productive resources. An economic system is composed of people and
institutions including their relationships to productive resources, such as through the convention
of property. Examples of contemporary economic systems include capitalist system, communist
system, socialist system and mixed economy.
Capitalist Economic System : A free market is a market without economic intervention and
regulation by government except to enforce ownership and contracts. It is the opposite of a
controlled market, where the government regulates how the means of production, goods, and
services are used, priced, or distributed. This is the contemporary use of the term "free market"
by economists and in popular culture; the term has had other uses historically. A free-market
economy is an economy where all markets within it are free. This requires protection of property
rights, but no coercive regulation, no coercive subsidization, no coercive government-imposed
monopolistic monetary system, and no coercive governmental monopolies. Capitalism is a way
of organising economic relations based on private control over the means of production,
including farms, factories and knowledge. The 'private control' here usually refers to control at
the level of an enterprise. The key to capitalist control used to be ownership, but now control
usually rests in the hands of top management, who run large corporations which are structured in
the form of bureaucracy. Capitalism as a system involves some form of economic competition
between enterprises in a market. What drives the capitalist system is the struggle for corporate
survival and profit. Individual capitalists have little choice in their behaviour if they are to
prosper. Capitalism influences staffing, research, teaching and academic knowledge. The
capitalist cause in relation to higher education advocates making education and academic work
relevant to 'practical problems' and 'the national interest. In the capitalist economy, education is
governed by market forces.
Communist Economic System : Planned economy (or command economy) is an economic
system in which the state or workers' councils manage the economy. It is an economic system in
which the central government makes all decisions on the production and consumption of goods
and services. Its most extensive form is referred to as a command economy, centrally planned
economy, or command and control economy. In such economies, central economic planning by
the state or government controls all major sectors of the economy and formulates all decisions
about the use of resources and the distribution of output. Planners decide what should be
produced and direct lower-level enterprises to produce those goods in accordance with national
and social objectives. Planned economies are in contrast to unplanned economies, such as a
market economy, where production, distribution, pricing, and investment decisions are made by
the private owners of the factors of production based upon their individual interests rather than
upon a macroeconomic plan.
2. Communism is distinguished from socialism primarily by the maturity or degree of
development of the economic base of the new socio-economic formation—that is, the productive
forces and productive relations. It is “socialist society in its developed form,” “the highest stage
of socialism”. When the new formation has reached full maturity, socialism is transformed into
complete communism. It emphasises common ownership of the means of production and a
planned, or command economy.
3. Socialist Economic System : A socialist economy is based upon the principle of welfare of
the people. As opposed to capitalism, a socialist economic system is based upon the principle
that economic activities should be undertaken so that people would be able to use goods
produced there of, instead of employing the production for profit. Many economic philosophers
had previously refused to believe in this system as a legitimate one, but countries with socialist
economic system, have proved the importance and success of the element of socialism in the
governance of any economy. This has eventually led to the evolution of mixed economies.
4.Mixed Economic System : A mixed economy is an economic system that includes a variety of
private and government control, or a mixture of capitalism and socialism. There is not one single
definition for a mixed economy, but relevant aspects include: a degree of private economic
freedom (including privately owned industry) intermingled with centralized economic planning
and government regulation (which may include regulation of the market for environmental
concerns, social welfare or efficiency, or state ownership and management of some of the means
of production for national or social objectives).
Relationship between Economic Systems and Education : There is a very close relationship
between education and the economic system. For instance, in a socialist economy, the aims of
education, curricula and methods of teaching are determined keeping in mind welfare of the
society at large with a focus on democratic ideals, secularism, modernization, social reforms and
national development. The control of education is exercised by the central and/or the state
governments. On the other hand, in a capitalist society, these decisions are taken by the state
government whereas in a capitalist economy, these factors are decided by market forces, i.e. by
demand and supply.
Role of Economic System in (a) financing of Education and (b) absorbing the educated
manpower : The dominant role played by the state in the financing, regulation and provision of
primary and secondary education reflects the widely-held belief that
education is necessary for personal and societal well-being. The economic organisation of
education depends on political as well as market mechanisms to resolve issues that arise because
of contrasting views on such matters as income inequality, social mobility and diversity. Today,
some capitalists have been owning or directly controlling institutions of higher education. Many
corporations do provide funding to higher education. Besides, capitalist also influence higher
education in indirect manner. The most important influence of capitalism on higher education is
the existence of the capitalist system itself. Because it is a major system of power in society,
people and social structures adapt to capitalism. On the other hand, in a communist society,
financing of education is done by the State. In the mixed economy, financing of education is
shared both by individuals and the State. Similarly, in a capitalist society, educated manpower is
absorbed by the economy depending on demand for and supply of the skills and abilities of the
individuals i.e. the market forces. On the other hand, in a communist society, the State decides
what type of manpower is required and accordingly, education is provided to individuals and
thereafter, they are absorbed by the economy. In a mixed economy, the individual depends on
market forces for gaining employment.
3. EDUCATION AS AN INDUSTRY
Education as an Industry: Education presumably produces educated individuals who, are
expected to have enhanced productivity. Thus, the process by which education transforms
(relatively) unproductive individuals into (relatively) productive ones is not to be understood. In
other words, it is essential to understand the educational production function. Considering
education as an industry also involves the issue of standards and provides a reason to evaluate
educational performance using means other than examination results. The transition into the
labour market provides a natural alternative indicator of educational success. There are many
pathways that individuals can take through education into work, including further education,
higher education, apprenticeship schemes and so on. Individuals with different characteristics
have different likelihoods of passing through any one of these pathways, and economists have
had considerable success in recent years in modelling this transition. The labour market for
teachers is distinct from many occupation-specific labour markets, for a number of reasons. First,
teacher training is a lengthy process and thus adjustments in the market take time. Secondly, for
various reasons, feminisation of the teaching profession has taken place that has left the market
with a large pool of latent supply. Thirdly, government often has an important part to play in
both the demand and supply sides of the market. All these features make the market for
educators substantially different from other labour markets, and require careful analysis. Thus,
education is termed as an industry as it produces economically productive individuals, it requires
human and non-human resources for carrying out this human production function and in today’s
context, market forces play an important role in the demand and supply of education.
4. EDUCATION AS CONSUMPTION AND EDUCATION AS INDIVIDUAL, SOCIAL
AND NATIONAL INVESTMENT
Education as an Investment : The economic view of education traditionally has employed the
human capital framework developed by Becker (1964). In this framework, education is viewed
primarily as an investment wherein individuals forgo current labour market earnings and incur
direct costs in return for higher future wages. The original theoretical work by Becker (1964),
Ben Porath (1967) and others spurred a tremendous amount of empirical work, which has
generally supported the implications of the human capital model (Freeman 1986). As individuals
and nations increasingly recognise that high levels of knowledge and skills are essential to their
future success, spending on education is increasingly considered an investment into a collective
future, rather than simply as individual consumption. However, investment in education
competes for limited public and private resources. The challenge of expanding educational
opportunities while maintaining their quality and ensuring their equitable distribution is linked to
questions of education finance. Education is seen as an investment because it entails costs in the
present and because it increases productive capacity and income (of the educated individual to be
sure but also of society in general) in the future. Private returns accrue to individuals, while
social returns accrue to the whole society (including the individuals). In most cases, private
returns are greater than social returns because governments give more in subsidies than they take
away in taxes.
Developed nations around the world invest an average of 6% of their gross domestic product
(GDP) in systems of public schooling. The national importance of education is based on the
significant positive influence it has on individual lives and on the welfare of communities.
Education is primarily a way to train children in the skills they will need as adults to find good
jobs and live well. But education also has broader social and economic benefits for individuals,
families, and society at large. These benefits are received even by people whose relationship to
the public school system does not extend beyond “taxpayer.” The widespread improvement of
social and economic conditions is a direct outcome of an educated population that is able to use
information to make good decisions in a better manner and which is collectively trained for work
better. A great deal of recent research demonstrates how the benefits of supporting public
education extend far beyond each child’s individual academic gains. A population that is better
educated has less unemployment, reduced dependence on public assistance programs, and
greater tax revenue. Education also plays a key role in the reduction of crime, improved public
health, and greater political and civic engagement. Investment in public education results in
billions of rupees of social and economic benefits for society at large.
Education as Consumption : At the same time, the human capital framework does not rule out
that education may also provide immediate consumption. Indeed, many economists have
discussed the consumption value of education. For example, Schultz (1963) identifies current
consumption as one of three benefits of education, along with investment and future
consumption. For the most part, however, consumption aspects of education have received
relatively little attention in the literature. Several trends suggest that consumption may be
becoming an increasingly important part of the choice of whether, where, and how to attend
college.
5. SPILL-OVER AND INTER-GENERATIONAL EFFECTS OF EDUCATION
There are “spillover” effects from education that transform individual gains into social gains.
The personal, individual benefits of a good education have broad benefits for society when
improved “human capital” capacity – personal knowledge, skills, and judgment – is taken by the
individual into the workplace, the public square, and the home. For example, the entire society
benefits when more people are able to find adequate and stable employment. A better educated
work force not only leads to more research and innovation, but the benefits of this economic
innovation are then spread more widely and powerfully throughout a better educated public.
Everyone also benefits when fewer citizens experience alienation or general distrust of others
and government. Besides, the children of well-educated parents are less likely to seek public
assistance, even when eligible. Each of these examples is directly related to receiving a quality
education. In short, effective education improves decision-making abilities that then help
individuals stay out of trouble and live better, healthier, and longer lives. As economist Milton
Friedman wrote, “the education of my child contributes to other people’s welfare by promoting a
stable and democratic society”. This is known as the spill-over effects of education. Several
Governments in the world have adopted this approach and invested heavily in education as an
institution with significant responsibility both for individual child development and broader
social and economic welfare. Despite the many challenges that public education faces, it is an
effective way to prepare large numbers of youth for their own future and for the overall welfare
of society. Given the overall efficacy of education, it is also important to determine the level of
resources needed to maximize student achievement and the quality of teaching and learning that
takes place in any given school. Research has consistently shown that student achievement
benefits from small class sizes, qualified teachers, safe school environments, and up-to-date
instructional materials and technology. These things cost money, as do the additional
programmes and services needed for students with disabilities, and those with socio-economic
disadvantages. We often observe university students to have parents who went to university
themselves; the same type of observations seems to hold for school drop outs and their parents.
This simple observation could be interpreted as a spill-over of schooling attainment from one
generation to the next. In order to avoid future generations to drop out of school, it would be
enough to ensure that today's generation stays in school. This line of reasoning assumes that the
education a parent receives will directly influence the educational achievement of his off-spring.
This mechanism works via different channels, ranging from parent imitation to the direct
influence of the parents who gear their children towards higher educational careers. We refer to
this line of reasoning as the 'nurture' argument.
However, this is not the sole explanation provided for the similarity of educational careers over
generations. One might also argue that highly educated parents have highly educated offspring
because the parents have passed on their genetically determined innate ability to their children,
which enables both generations to attain high levels of schooling. This however would imply that
increasing the educational attainment of one generation would in this case not spill over into the
following ones - the "nature" explanation. Finally, credit constraints can aspect the education of
parents and their children whether we assume that "nature" or "nurture" matters. Low
educational attainment is transferred over generations due to low wages that will be earned with
low education, constraining the investment into human capital for the next generation and thus
creating negative spill-overs between generations and persistence of inequality over generations.
Estimating the contribution of the different effects to inter-generational transmission of
education is however not straightforward. We can perceive educational attainment of parents and
children and the income of parents, but we cannot observe and measure innate ability. If we
disregard parental ability however as an influence by running a simple regression of parental
education and income on a child's education we cannot interpret the estimates since parental
education and income can both be influenced by ability as well.
Present and Future Consumption : Choice also imposes opportunity cost over time. The use of
resources now means that those resources will not be available for future use. A decision must be
made, an opportunity cost encountered, as to whether to allocate for present needs or future
needs. Today versus tomorrow. Some goods will be consumed today and some in the future. By
reducing consumption today, future consumption may be increased. Isn’t that one reason you are
in school? If you are not working full time, you are not consuming all you could. You are
postponing consumption. Why? Because you believe you could get a better job (and one with
more pay) if you have more training and education. So you can consume even more later. Thus
you postpone current consumption while building up your skills so as to increase consumption
later. Again, a barrel of oil pumped from the ground now is a barrel of oil that will not be
available for consumption any day in the future. So to use the oil today imposes forgone
opportunities in the future.
Activity :
1. Which are the different economic systems?
2. Differentiate between education as consumption and as an investment.

*******