Using American history as an example, Isaac Ehrlich highlighted the role of human capital in fostering economic growth. He noted that economic growth – a policy goal of almost every country today – is a relatively new phenomenon witnessed only in the last two hundred years or so. It was only after the industrial revolution that a gradual increase in real GDP became possible in Europe; until then, the dominant concept had been Adam Smith's theory of wealth accumulation, and a country's success relied on its effective specialization in the international division of labour.
The neoclassical growth model which emerged in the late eighteenth century has identified other factors contributing to economic growth, such as capital and labour, both of which have diminishing marginal returns. GDP in the neoclassical theory is directly proportional to the level of capital per worker, while the long-run output growth rate is zero and corresponds to the equilibrium capital to labor ratio (the 'golden rule’).
Technology is a factor that can boost long-term GDP growth. Technology is an endogenous factor directly proportional to human capital, says Ehrlich. Using his definition, human capital has two inherent dimensions: 'embodied' and 'disembodied'. The former is the sum total of knowledge and skills embodied in a particular individual; it is subject to diminishing returns, since one's ability to acquire new skills has biological limits.
In contrast, 'disembodied' human capital is creative knowledge flowing from the minds of individuals to benefit the community; this type of human capital evolves over time and has increasing marginal returns.
Thus, a country's ability to achieve fast human capital accumulation leads to high rates of economic growth. The U.S. serves as a striking example of a nation which has successfully implemented this strategy throughout its history.
Having gained independence in 1776, the U.S. had by 1870 overtaken the U.K. in terms of per-capita GDP and has shown considerably higher growth rates versus the U.K. over 162 years (1850-2012), when GDP growth rates were 3.36% versus 1.92% per annum while the corresponding per-capita GDP growth rates were 1.8% versus 1.5%. According to Ehrlich, the differences stem primarily from different rates of growth of human capital.
Measuring human capital is a challenge. The concept of human capital includes education, research and development, job training, etc. Since historical evidence is limited, Ehrlich measures human capital by educational attainment.
In 1913, the U.S. ranked sixths among the world's developed nations in terms of percentage of the population 25 to 64 years old with primary to higher education and first in terms of higher educational attainment. In 2011, the U.S. was still among the top five countries (ranking fourth) in terms of the proportion of the population with higher education.
Ehrlich described four major sources and trends that have contributed to human capital accumulation in the U.S.
The first is secondary schooling advantage. As the U.S. was expanding its territory, workers migrated in search of a better life, and their schooling – ie literacy, numeracy, and grammatical speech – determined their chances of success in a new place; therefore traditionally, the mobile labour force in the U.S has always had at least some basic schooling.
Second, the reforms of 1862 and 1890 launched a system of public higher education contributing to accelerated human capital formation among talented middle-class youth.
Third, the GI Billof 1944 mandated the federal government to subsidize higher education for WWII veterans and thus contributed to human capital formation across several generations, including veterans and, subsequently, their children by raising them to a higher level of social mobility where they could afford higher education.
And fourth, the U.S. has imported human capital through policies favouring the immigration of skilled and highly educated labour.
Formerly, when the U.S. pursued open-door immigration policies, immigrants were self-selected and included individuals with high risk appetites, confident of their ability to make it in the new environment, or intellectuals driven from the Old World by various crises. Later, the U.S. toughened its immigration laws and focused on the careful selection of a skilled workforce.
According to Ehrlich, the U.S. has throughout its history implemented a policy of human capital accumulation, which has stimulated its economic growth. However, in addition to human capital, other factors must be in place allowing human capital to be translated into technological advancement, such as a a favourable institutional environment, the rule of law, a free economy, as well as many others.
Public policy, Ehrlich concludes, should focus on human capital formation to ensure high rates of economic growth and innovation.