Human Capital Formation and the Decision Makers
The chief source of economic growth in the country has been human capital and its increase: the greater education, higher skills, potential productivity, and inventiveness of workers whose effort, combined with capital, yields current output. Technological change itself represents a return on human capital since people, including scientists as well as developers, discover new knowledge and devise new products or processes. Most economic analysis of human capital deals with measuring the amount of investment during various periods or in various groups of people, and with estimating the return on the resources invested. The institutional aspects of human capital formation have been neglected, except for cursory discussion of the availability of financial arrangements enabling a potential beneficiary from, say, higher education to borrow funds. In particular, the actual process of decision making about investing in human capital has been neglected, presumably on the assumption that it follows the same course as deciding to invest in physical or financial capital. This, however, is not the case, as this article will show. Conventional capital theory assumes the decision maker to be a potential investor considering various alternatives, each with a future payoff and a present cost. The investor must estimate the amount of future payoff, either in income or in cost reduction, after estimating probabilities of