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International Handbook on the Economics of Education

Edited by Geraint Johnes and Jill Johnes

This major Handbook comprehensively surveys the rapidly growing field of the economics of education. It is unique in that it comprises original contributions on an exceptional range of topics from a review of human capital, signalling and screening models, to consideration of issues such as educational externalities and economic growth, funding models, determinants of educational success, the educational production function, educational standards and efficiency measurement. Labour market issues such as the market for teachers and the transition of students from school to work are also explored.
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Chapter 1: Human Capital and Rates of Return

George Psacharopoulos and Harry Anthony Patrinos


George Psacharopoulos and Harry Anthony Patrinos 1 Introduction As with many other underpinnings in economics, the seeds of the theoretical link between education and productivity is in the writings of classical economists, but for reasons explained by Schultz (1971, p. 27), Adam Smith’s insight was left dormant until the late 1950s, the time when the modern human capital school was born. Among the most important historical landmarks in the field is Adam Smith’s [1776] (1991) classic statement that ‘a man educated at the expense of much labour and time to any of those employments which require extraordinary dexterity and skill, may be compared to one of those expensive machines. The work which he learns to perform, it must be expected, over and above the usual wages of common labour, will replace to him the whole expense of his education.’ Alfred Marshall [1890] (1991) referred to industrial training as a national investment in his Principles of Economics. Soon after the Russian revolution a Soviet economist made estimates of the benefits to the nation from investment in universal primary and secondary education, based on his cost–benefit analysis of training in a Leningrad (St. Petersburg) factory (Strumilin, 1924). Walsh (1935) estimated the stock of human capital in the United States and the returns to formal schooling of college graduates. Friedman and Kuznets (1946) used the discounted value of future earnings to explain the incomes of doctors and dentists. Such scattered work was formally modelled by the University of Chicago–Columbia...

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