What They Tell You

Education is the key to prosperity. More educated workers are more productive. Countries that invest in education grow faster. Individuals who get more education earn more. The knowledge economy requires ever-higher skills. Governments should focus on education rather than industrial policy.

What They Don’t Tell You

The link between education and prosperity is much weaker than claimed. Many highly educated countries are poor, while some less educated ones are rich. Much of what we learn in school isn’t used at work. Education often serves as a signal or credential rather than building skills. Economic growth creates demand for education, not just the other way around. Overemphasis on education distracts from more important policies.

The Human Capital Theory

Human capital theory, developed by economists like Gary Becker, argues that education is an investment in productivity. Like investing in machines, investing in people’s skills makes them more productive and therefore earns higher returns.

The policy implication seems clear: governments should invest heavily in education, and individuals should acquire as much schooling as possible.

The Puzzle

But there are puzzles:

Cross-country comparisons: Some highly educated countries (like the Philippines or Sri Lanka) are poor, while some less educated ones (like Italy in the 1960s or South Korea in the 1970s) have been rich or grown rapidly.

Wage patterns: If education makes workers more productive, why do similarly educated workers earn vastly different wages in different countries? A software engineer in India earns a fraction of what one earns in the US, despite similar education.

Credential inflation: If education builds skills, why do jobs that used to require a high school diploma now require a degree, even though the job hasn’t changed?

What Education Actually Does

Signaling: Much of education’s value is in signaling ability and conformity to employers, not in building skills. A degree shows you can follow rules, meet deadlines, and pass tests—qualities employers value regardless of what you learned.

Sorting: Education sorts people into hierarchies. The most “able” (often just the most privileged) get into the best schools, which gives them access to the best jobs.

Socialization: Education teaches people to accept authority, follow schedules, and work in hierarchical organizations—useful for employers but not necessarily for productivity.

Networking: Elite schools provide access to networks that lead to opportunities, regardless of skills acquired.

The Limits of Education for Development

For developing countries, the human capital argument has been used to argue against industrial policy: just educate your people and growth will follow.

But this ignores:

Demand for skills: Education is supply-side. Without industries that need skilled workers, educated people emigrate or work in jobs below their qualifications.

Type of skills: General education is less useful than specific industrial skills, which are often learned on the job.

Quality matters: More years of education doesn’t mean better education. Many developing countries have expanded enrollment without improving quality.

Switzerland vs. Korea: Switzerland has one of the lowest university enrollment rates in the rich world but one of the highest incomes. South Korea’s rapid growth came before its education expansion.

Education and Inequality

The education argument has been used to explain inequality: if some earn more, it’s because they’re more educated. The solution is more education.

But:

Structural limits: Not everyone can be a surgeon or engineer. Expanding education doesn’t change the occupational structure.

Credential inflation: As more people get degrees, degrees become worth less, requiring ever-higher qualifications for the same jobs.

The real problem: Wage inequality has increased even as education has expanded. The problem is power and institutions, not education.

What Matters More

For economic development:

  • Industrial policy: Creating industries that need skilled workers

  • Technology transfer: Learning from more advanced economies

  • Investment: In infrastructure and productive capacity

  • Institutions: Property rights, contract enforcement, bureaucratic quality

For reducing inequality:

  • Minimum wages: Raising the floor

  • Unions: Giving workers bargaining power

  • Progressive taxation: Redistributing income

  • Full employment: Tight labor markets raise wages

Education is important, but it’s not a magic solution. Countries become rich through industrialization and then invest in education, not the other way around.