1. Economics of Education
Economists analyse the production of education in this world where resources such as the capital
invested in buildings or technology and the labour of the teacher workforce are necessarily
scarce. This scarcity of resources means that policymakers must decide:
1. How much to spend on each stage of education (i.e. what to produce);
2. How to provide educational services in a way that maximises its benefits to society (i.e.
how to produce education); and
3. Who should have access to each stage of education (i.e. for whom is education provided).
Economic theory is able to help policy makers by providing both facts about the education
system and values to inform decision-making. The part of economics that is concerned with
establishing facts about the world is called positive economics. It asks questions such as ‘can we
improve the quality of teachers by increasing pay’ or ‘will smaller class sizes raise pupil
attainment’? Normative economics asks questions that require value judgments such as ‘is it fair
to charge higher education students tuition fees’?
A social welfare framework underpins the dominant approach in the economics of education.
According to this framework, society should strive to arrange educational services to be
produced and distributed in manner that is both efficient and equitable. Efficiency means that
educational outputs are maximised, given a set of constrained resources. Equity means that
services are distributed according to some principle of social justice or fairness.
Individuals and governments often face hard choices because of the scarce resources they
possess. For example, expanding higher education and increasing provision of early years care
might both appear to be policies that have the potential to improve the well-being of society
overall, but which should a government prioritise? Economists describe the costs of taking a
particular action as opportunity costs, because the greatest cost of expanding higher education
might be the lost benefits of not undertaking the next best alternative policy, such as increased
provision of early years care.
Short history of the economics of education
Economists are normally associated with ensuring that profit-making companies and the overall
economy functions well, but they have slowly expanded their interests to new spheres of society.
The origin of the economics of education as a significant field within economics dates back to
the theoretical and empirical developments made by American economists such as Gary Becker
and Jacob Mincer in the 1960s. Their work introduced the idea of education as human capital
and they attempted to calculate the economic returns to acquiring education.
Over the past decade there has been an enormous growth of interest by economists in education
policy, both in the UK and across the world. This has been accompanied by a growing political
interest in market-based reforms across the public sector. These types of reforms include
devolvement of financial planning to front-line institutions such as hospitals and schools and
giving consumers of public services choice about which provider to use. Economists from other
2. fields such as labour economics have been attracted by the growing availability of large-scale
datasets that facilitate complex statistical analysis to analyse the impact of particular policy
initiatives. Examples of these data include the National Pupil Database in England, which has
collected annual information on the background characteristics and Key Stage attainment data of
all pupils in state-maintained schools since 2002, and the PISA, an international survey of the
skills of 15 year olds across many industrialised countries.
What is the economic paradigm?
Economic theory makes certain assumptions about human behaviour in order to make
predictions about the effects of policy changes. The starting point of economic analysis is that
individuals and institutions are rational agents (often given the name homo-economicus),
operating with self-interested intent as they make decisions about providing or participating in
education. Individuals are assumed to set themselves a goal of maximising their own well-being
(or utility), given fixed preferences or tastes for education and a well-defined money constraint.
Many economic theories assume that human brains possess perfect computational powers to
process all the information needed to make optimal choices at all times!
These economic models of individuals and institutions present a simplified version of reality and
for this reason they have been criticised by many sociologists and psychologists who claim they
bear little resemblance to the real world. However, economists would argue that these
simplifying assumptions are necessary to make precise predictions about the likely impact of
policies in this complex world we live in. To put it another way, economists do not really believe
that humans are so selfish and simple in their motivations; they just believe that this
simplification is a useful analytical tool to help us understand the world better.
