It is a form of investment in human capital precisely analogous to investment in machinery, buildings, or other forms of nonhuman capital. Its function is to raise the economic productivity of the human being. If it does so, the individual is rewarded in a free enterprise society by receiving a higher return for his services than he would otherwise be able to command. 5 This difference is the economic incentive to acquire the specialized training, just as the extra return that can be obtained with an extra machine is the economic incentive to invest capital in the machine. In both cases, extra returns must be balanced against the costs of acquiring them. For vocational education, the major costs are the income foregone during the period of training, interest lost by postponing the beginning of the earning period, and special expenses of acquiring the training such as tuition fees and expenditures on books and equipment. For physical capital, the major costs are the expenses of constructing the capital equipment and the interest during construction.
In fact, however, there is considerable empirical evidence that the rate of return on investment in training is very much higher than the rate of return on investment in physical capital
In both cases, an individual presumably regards the investment as desirable if the extra returns, as he views them, exceed the extra costs, as he views them. 6 In both cases, if the individual undertakes the investment and if the state neither subsidizes the investment nor taxes the return, the individual (or his parent, sponsor, or benefactor) in general bears all the extra cost and receives all the extra returns: there are no obvious unborne costs or unappropriable returns that tend to make private incentives diverge systematically from those that are socially appropriate. If capital were as readily available for investment in human beings as for investment in physical assets, whether through the market or through direct investment by the individuals concerned or their parents or benefactors, the rate of return on capital would tend to be roughly equal in the two fields: if it were higher on non-human capital, parents would have an incentive to buy such capital for their children instead of investing a corresponding sum in vocational training, and conversely.
According to estimates that Simon Kuznets and I have made elsewhere, professionally trained workers in the United States would have had to earn during the 1930s at most 70 percent more than other workers to cover the extra costs of their training, including interest at roughly the market rate on non-human capital. In fact, they earned on the average between two and three times as much. 7
Kuznets and I concluded, however, that such differences in ability could not explain anything like the whole of the extra return of the professional workers. 8 Apparently, there was sizable underinvestment in human beings. The postwar period has doubtless brought changes in the relative earnings in different occupations.
Some part of this difference may well be attributable to greater natural ability on the part of those who entered the professions: it may be that they would have earned more than the average non-professional worker if they had not gone into the professions
It seems extremely doubtful, however, that they have been sufficiently great to reverse this conclusion. It is not certain at what level this underinvestment sets in. It clearly applies to professions requiring a long period of training, such as medicine, law, dentistry, and the like and probably to all occupations requiring a college training. At one time, it almost certainly extended to many occupations requiring much less training but probably no longer does payday loans in TX, although the opposite has sometimes been maintained. 9