The concept of “economics of education” was born in 1960 with Theodore Schultz. The economics of education is linked with the labour (welfare, household, and finance) economics of a nation. The interest is in understanding the economics of education from four dominant aspects: (i) cost and benefits; (ii) planning (rate of return, manpower and social demand); (iii) effectiveness and efficiency; and (iv) sources of revenue.
Public or social goods are non-rivalrous (enjoyed in common; consumption by one does not subtract from another’s consumption of that good) and non-excludable (meant and accessible for all). It includes clean air, water, a public park, national defense, etc. However, there is the concept of free riding. For instance, by non-excludability, it means that people who do not pay taxes also get to enjoy or consume (free-ride) the common or public goods in society
Merit goods (originated by Richard Musgrave around 1957-59) are goods that an individual or society should have access to based on a concept of merit or benefit (instead of just willingness or ability to pay). It includes delivery of health services (like in the case of vaccinations, wherein appropriate criteria for prioritisation is needed to regulate the distribution of benefits, like those who are exposed to diseases or harm, would need to be delivered on a priority basis than others) or subsidised housing, etc. Education (depending upon its type) could also belong to this (merit) category of economic goods.
Education is inherently non-rivalrous in nature. Having by one does not diminish another’s consumption of it. Private goods, on the contrary, are exclusive and rivalrous in nature. They belong to their respective owners or buyers, who have the right to consume them (and exclude others from their consumption). For example., toys, clothes, food, cars etc.
Education is also a private good, i.e., like food for consumption, i.e., it is sold and excludes others who have not bought it to benefit from its consumption. Similarly, education is both an investment (benefits accrue to society or people beyond those who consume or acquire it, supports further production of goods, called capital goods) and a consumption (the acquirer, an individual or community, directly or exclusively reaps the benefits, and once it is consumed, it can not be transferred or transformed further).
Capital goods are man-made objects like plants, machines, tools, and equipment that support further production of goods. Education is an economic good for consumption as well as an investment for both individuals and societies. There is no single approach to ascertain the proportion in which education contributes as an investment and as consumption (for the individual or society).
In primary education, the consumption component is much higher than the investment component. In secondary education, the consumption component is on par with the investment component. In higher education, the investment component is much higher than the investment component. Whether education serves the purpose of consumption or investment, it needs to be analysed and analysed both at an individual and societal level.
Goods in economics can be described based on the purpose they serve : consumption and/or investment. Education falls under both these categories. It is an investment activity as it increases the productivity of labour and the lifetime earning potential (wages and wealth) of individuals by way of imparting knowledge and skills. It builds human capital that can innovate and deliver new goods and services. However, unlike physical capital (plants or machines), human capital is built when individuals also invest their own time and resources into it, as well. In the case of an employer-employee relationship aimed at building human capital, the employer would like to invest in those training or learning competencies that are “specific” to the firm. While employees need to invest in education to build “general” training or competencies (applicable across the firms or employers).
