Human capital outweighs education

Published April 19, 2022



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By Lipton Matthews.
An article from the Mises Institute

In the debate over economic growth, people often confuse education with human capital. There is, however, an obvious difference, because the latter refers to know-how rather than mere theoretical knowledge. Education suggests that one is being educated, while human capital indicates the application of theory. An engineering graduate is trained, but demonstrates human capital when filing a patent or starting a business.

Schools should have a dual function of providing education and human capital, but research shows that many institutions fail to deliver the latter. Students graduate knowing how to perform complex equations, but without knowing how to apply them to the real world.

For example, computer science is presented as a lucrative investment, but a graduate in history or international relations who knows how to make human capital an asset will be more competitive in the knowledge economy than a computer science graduate who does not understand the potential.

Take advantage of your human capital

Leveraging human capital is a daunting task without being aware of one’s own abilities. A fellow in international relations got a job in finance when many of his fellow graduates in finance struggled to find work because he knew how to use his human capital. International relations students study obscure theories, but they also have to take electives such as economics and statistics, and these courses are useful in finance.

Also, as an international affairs analyst, the undergraduate program encourages international relations students to look at the effects of conflicts in global markets and domestic politics, and it’s no surprise that my colleague got an analyst labor investment. Unlike his peers, this graduate has a competitive advantage because he can identify all of his skills.

The average international relations graduate is not looking for a job in finance because they do not understand how the skills he learned as a student can create value in the financial industry.

The importance of human capital in the economy

In addition, at the national level, human capital is an even more important predictor of economic performance than education measured by the percentage of graduates.

In a 2013 article, researchers looked at regional disparities in economic performance across 110 countries. They concluded that the level of human capital was a more reliable indicator of development than the number of people who had obtained a diploma.

Similarly, strong human capital is needed to create high-growth companies that drive economic growth and improve living standards. Economic growth is encouraged by opportunity-driven businesses, started by highly skilled entrepreneurs who can apply their experience to solve new challenges, rather than by people who are engaged in entrepreneurship as a job or to escape poverty. In addition, research shows that companies with access to key management skills are more likely to grow and survive.

Growth depends on the ability to use human capital. Countries that increase education levels without proportional gains in human capital acquisition are unlikely to experience Schumpeterian growth.

As Joel Mokyr points out in an article on the Industrial Revolution in England:

There is no doubt that Britain, on the eve of the Industrial Revolution, could rely on a larger and better cadre of highly skilled craftsmen and engineers than anywhere else, and whether other nations have questioned its advantage for make innovative original inventions (particularly France), it seems clear that British developers and engineers were far superior to all others in operating new devices, debugging and adapting them, adding small but significant ones accumulated improvements and the ability to install, operate, maintain and repair them. Between 1750 and 1850, English and Scottish engineers swarmed across the European continent, bringing their technical and industrial experience to nations whose human capital production systems were not as efficient as the British. “.

To join the ranks of the developed world, developing countries must acquire the appropriate knowledge. When Singapore embarked on its industrial development phase, the Lee Kuan Yew administration sent students to North America and Europe to gain access to the experience of major universities and corporations. Without experience, developing countries will never be able to achieve parity with their rich counterparts.

A scenario that illustrates the importance of human capital is the contrasting case of Germany and Jamaica. Jamaica is the star child of cannabis, but Germans are revered for their productivity, manufacturing and institutional knowledge, so research predicts that by 2023, Germany will become the world’s largest cannabis market. .

The reputation of Jamaican cannabis is truly phenomenal, but it will take more than a brand name to compete globally. An interesting fact is that Jamaica is among the top five countries in the world for its level of unproductive entrepreneurship. It’s because he doesn’t have the business knowledge to exploit cannabis that he has failed to become a global player.

It should also be noted that regulations can improve or degrade the quality of industries. Business tycoon Bruce Linton praised the Jamaican cannabis industry for being well-regulated. And that is precisely the problem. To participate in the industry, Jamaican business people have to comply with very onerous regulations. For example, an entrepreneur needs about $ 10,000 to acquire a Level 2 license to grow the plant. This regulation hinders the growth of the sector by limiting the possibilities of entrepreneurship. If the government had encouraged a free market instead of over-regulating the industry, it would have attracted more entrepreneurs to Jamaica, increasing the likelihood of access to foreign knowledge.

And contrary to popular belief, complying with international regulations does not benefit developing countries. Many regulations adapt to the realities of the developed world and are therefore inapplicable in a developing context. Developing countries will only join the league of rich nations by acquiring knowledge of the developed and innovative world. Simply following the laws of the developed world or increasing higher education enrollment will not give them a seat at the table of rich nations.

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