The causal relationship between economic growth and education

International organizations, such as the UN, the EU, the World Bank, and the IMF, often emphasize how important education is for economic growth. This is a thesis with which I generally agree. Education is important, and it is good for people to be educated.

However, the logic of prominent organizations, as well as various private individuals who also have donation campaigns for the development of education in poor countries, is: "We need to pour a lot of resources into public schools (presumably aid is poured into public institutions; that's just the regulation) in the least developed economic parts of the world (Nigeria, rural India, Ghana, Chad, Vidin, etc.) => economic growth."

While the intentions behind such an action are undoubtedly good, it is a complete misconception and completely reverses the causal relationship that is observed in the natural evolution of economic well-being and educational institutions in a given territory. If it were true that educated people create economic growth, then why not simply send a division of scientists and professors to each economically underdeveloped region? They would bring the necessary know-how, which in turn would significantly increase the productivity of the local population and make it materially prosperous. On a macro level, such a move would be significantly cheaper than pouring colossal sums of money into it, even when we include the costs of transportation, accommodation, and salaries of the scientists involved. [1] Besides, we certainly have enough scientists to send.

But such a move is completely refuted by both the historical development of education and the economy. Historically, production, trade, and capital were developed first, and only then, as a result of this enrichment, did education become more widespread. If we did not have capital, then we would hardly have schools, because:

• people could not afford to send their children to school. First, a child out of the labor force would lead to hunger for the whole family. This was the reason why children throughout most of human history worked, not because their parents were “evil” or “hard-hearted.” And it was precisely because societies became richer that children began to leave the labor force, not because of laws prohibiting them from going to work (this is a topic I have discussed in more detail here ). Second, even if we assume that in an extremely poor society (for example, that of England in the 16th century) people wanted to send their children to school, they still would not be able to do so, simply because, again, they could not afford it – the more pressing need was to ensure their livelihood, i.e. physical survival. Only when people are secure about tomorrow can they look to satisfying higher needs, such as education. This is exactly what happened in Great Britain - first the productivity of the population and its capital stock increased, and only then did children start attending school, and this became a massive and natural process in the free market by the 19th century. A wonderful study on the topic can be read here.
• taxes and state intervention will not help solve the problem at all (they will even create others) – if the monarch were to decide that he should subsidize the provision of education and start taxing the population, this would again doom the second group to starvation for the same reasons as in subparagraph 1). It is no coincidence that this did not happen (almost) anywhere until the middle-end of the 19th century and the idea of state intervention – in the form of regulations and subsidies – in the Anglo-Saxon world arose extremely late.

From what has been said, we can draw the following conclusions: without economic development, education is impossible (and not the other way around), and when individuals begin to become wealthy, they spontaneously withdraw their children from the workforce and send them to school, a process that has been repeated in every free society throughout history.

Let us imagine that the strategy “scientists/educated => economic development and a stable civil society” is somewhat sustainable and we continue to spend money on local public schools. Let us even assume that the latter are effective and really create many educated young people. What would happen then? The answer is very simple – due to the relatively smaller capital stock in poor countries (in the form of funds that can be invested, as well as finished or developed capital goods), there will be a “mismatch” between the qualification of labor and the actual production capabilities of the economy. If I were to bring the example to its logical conclusion, it would look like this: the “mismatch” would be equivalent to a professor with a doctorate in physics working with a Tesla, simply because the material base, such as a laboratory and precise measuring instruments, is unavailable. Thus, higher education does not mean higher productivity, because labor productivity is limited by the available capital goods. In this line of thought, the means of achieving a higher level of education can even be seen as wasted through the prism of the economy, because the fruit of them (the educated individual) has no way to practically realize his skills and knowledge. Therefore, it would be significantly more useful for poorer countries not to waste resources and time on something that will hardly materialize or increase their well-being given the existing low capital stock, but to allow the local population to work and exchange freely, thus accumulating the necessary funds for their education.

The idea of investing in economically weak areas through education is commendable. I also do not want to see malnourished people in Africa or a group of individuals as poor as exists in many parts of India, who cannot afford basic sanitation and health services. [2] But the way to achieve a better future in which the population of today's poor areas lives a normal [3] life is not by taking funds from relatively richer countries and then pouring these resources into dysfunctional state educational institutions (and in fact into the pockets of local politicians who receive the orders for renovations and construction of schools, construction of infrastructure around them, etc.).

This effort is always doomed to failure, no matter how much money is poured into these institutions. The right moves towards both economic growth and higher education of the local population are to allow them to produce, accumulate capital and trade freely. This is the only way in which it is possible to generate wealth. This is how Europe and the USA get rich – no one has helped them with funds from the outside. Otherwise, we condemn ourselves to relative impoverishment (since a large part of the funds come from the pockets of taxpayers) and the preservation of the status quo – i.e. poverty – precisely in the areas we wish to help.

[1] At the Sofia Science Festival, which took place on May 14-17, there were so many smart kids that we could even implement a more diverse move – in addition to scientists, we will also bring in students. In this way, local children will grow up in a highly erudite environment (and there is no irony here at all – I was amazed by the adequate scientific questions of children who were slightly taller than my knees), which will further help their education and increase their “human capital”.

[2] In India, the plague has not been eradicated, as have a number of other diseases that for us in Europe are terrifying shadows of the past.

[3] "Normal" in the sense that local people enjoy clearly defined property rights (and are not subject to state arbitrariness, as is the case in many places in poor countries), do not wonder whether they will be able to put any food in, have constant access to clean water, infrastructure, access to modern medicine, computers, the Internet, etc.

The original text was published on Daniel Vassilev's blog. You can read it here.

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