Schools Before Tools? The Role of Human Capital in a Market Economy

This paper tests the hypothesis that in a market economy investment in physical capital follows investment in schooling. It presents empirical evidence that in periods since the 19th century when global financial capital was widely available, increases in each nation’s physical capital stock and in its average income/capita have been determined almost entirely by increases in the average schooling attainment of the population of working age. Since elementary schooling cannot be privately financed and is a prerequisite for more advanced schooling, each country’s commitment of public funding for mass schooling largely determined its economic growth over the 1910-2000 period.