Does education matter? Why governments have overestimated the economic returns of higher education

Words by Ali Amin

One of the most cherished ideas of economic policymakers all over the world is the idea that more education is the key to economic success, yet does education really matter?

For an individual, education has a range of benefits. For example, it builds helpful credentials for one’s own career and stabilises the income of families across generations. Let us consider an investment banker. He makes money, his children go to university, say the University of Adelaide, they become doctors and lawyers, and thus the family retains their wealth. University degrees allow members to remain in the upper class long after their ancestral wealth is depleted. According to British economist Alison Wolf, so far as individuals are concerned, education — “having the right qualifications, in the right subjects, from the right institutions” — matters. Indeed, it matters more than ever before. Those who leave school early or without qualifications are tagged, as it were, for low incomes, with a probability that is high and rising. Increasingly, those who fail to get a degree, or in some cases a degree from a good university, are sorted in a similarly brutal way. In other words, the private returns to education are high. But another question also needs to be answered, especially in countries with university education systems that are financed by the state: namely, what are the returns for society as a whole?

Serious empirical investigation largely carried out by American development economist Lant Pritchet shows no evidence that raising the general level of education raises income at the level of a country. Although the opposite could be true, that wealth leads to the rise of education.

Now let us figure out the direction of the arrow:

Education -> Wealth & Economic Growth


Wealth & Economic Growth -> Education

The evidence can be obtained by looking at countries that are both wealthy and have some level of education and then considering which condition preceded the other. In 1960, Taiwan had a much lower literacy rate than the Philippines and half the income per person; today Taiwan has ten times the income. At the same time, Korea had a much lower literacy rate than Argentina (which had one of the highest in the world) and about one-fifth the income per person; today it has three times as much. Furthermore, over the same period, sub-Saharan Africa saw markedly increasing literacy rates, accompanied with a decrease in their standard of living. There are myriad examples which we could cite over and over. This can be explained by what risk analyst and top-selling author Nassim Taleb has termed “the fooled by randomness effect” — mistaking the merely associative for the causal. That is, since rich countries are educated, immediately inferring that education makes a country rich, without really checking.

This is an epiphenomenon, a secondary phenomenon that occurs alongside or in parallel to a primary phenomenon. The word has two senses, one that connotes known causation and one that connotes absence of causation or reservation of judgment about it. The error in reasoning is partially from wishful thinking because education is considered to be “good”. I wonder why people don’t make the epiphenomenal association between the wealth of a country and something “bad”, say high suicide rates, and likewise infer that it also generates wealth.

British economist Alison Wolf argues “the simple one-way relationship which so entrances our politicians and commentators — education spending in, economic growth out — simply doesn’t exist. Moreover, the larger and more complex the education sector, the less obvious links to productivity become.” She looks at countries such as Egypt which underwent enormous increases in education yet did not undergo the “highly cherished golden GDP growth, that makes countries important or unimportant in the ranking tables.”

It should be noted that the higher education sector is not insignificant or of little interest. The provision of further and adult education was once a great industry that provided training courses with rigorously certified private qualifications. This system has been bureaucratised and destroyed. Non-university education beyond the age of eighteen should have great value and, if suitably reformed, could do so again.

Perhaps we should move away from the model that values education merely to increase GDP growth and towards a model with noble aims that puts people first and strives to reduce inequality through allowing the poor access to education.