Education and Economic Growth

Fritz Machlup’s Education and Economic Growth is a compact scholarly study, expanded from a 1969 public lecture, that examines education as both a possible cause and a consequence of economic growth. Its central method is conceptual separation: Machlup asks when education raises productivity, when prosperity raises the demand for education, and why economic growth itself tends to make schooling more costly. He resists any simple formula in which more schooling automatically produces more national income.

Whatever measures or indices there are of educational growth and of economic growth, they regularly move together.

That observed association, for Machlup, is only the starting point. Rising income can increase school attendance, lengthen schooling, and raise expectations about quality; at the same time, some forms of education may improve labor quality, adaptability, invention, and allocation. The relation is reciprocal, delayed, and difficult to measure. Machlup therefore treats education neither as pure consumption nor as pure investment, but as an activity whose effects depend on content, level, setting, and labor-market fit.

Educational efforts may be regarded as consumption, investment, waste, or drag.

The first part of the work assesses education’s productive contribution. Machlup links schooling to several sources of growth: increases in labor supply, capital formation, labor quality, technological advance, and more efficient allocation of resources. Its most plausible contribution lies in improving workers’ capacities and helping societies absorb change. Yet he is skeptical of confident measurement. Residual-growth accounting and human-capital estimates may suggest large educational effects, but they rely on uncertain data, assumptions about innate ability, and difficult distinctions between private earnings and social product.

The theory of the productive contribution of education remains plausible even if the attempts to measure the contribution have not had convincing results.

This balanced position shapes the whole essay. Machlup accepts that education can be economically powerful, but he challenges exaggerated claims that treat all schooling as automatically productive. In developing economies, he warns, education may even create aspirations mismatched to available work, especially where schooling alienates students from agriculture without equipping them for modern employment. Primary, secondary, vocational, adult, and on-the-job education may have very different returns, and the best policy depends on institutions, capital scarcity, demography, and the structure of demand for labor.

The second part turns from education as input to education as demanded service. Machlup argues that education is widely treated as a superior good: as incomes rise, households and governments seek more of it and often better forms of it. But enrollment, expenditures, teacher numbers, school years, and student-teacher ratios are imperfect indicators. Spending especially cannot be read as a simple measure of demand, since it reflects both quantity and cost.

Outlays are a combined result of cost and demand, and only if the supply of educational services were infinitely elastic (that is, if the cost per student were constant) would increased outlays measure increased demand.

The final part gives the essay its most durable economic insight. Education is labor-intensive, and if teaching methods do not become much more productive, its relative cost rises as productivity and wages rise elsewhere in the economy. Growth therefore makes traditional education more expensive not merely because of inflation or administrative waste, but because teachers’ salaries must compete with wages in sectors where output per worker grows faster.

Moreover, increases in income per head usually mean higher wages and salaries, and this causes the cost of education to rise relative to the cost of goods that are produced with increasing productivity.

Machlup’s conclusion is sober rather than anti-educational. He values education’s cultural, civic, and private satisfactions, but insists that economic policy must ask which education is being expanded, for whom, at what cost, and with what realistic social return. The essay’s lasting contribution is its refusal of both romantic faith in schooling and narrow fiscal suspicion: education is indispensable, but its benefits are uneven, its measurement uncertain, and its costs structurally prone to rise.