Theoretical Concepts in the Economics of Education

Over the past two decades, the economics of education has grown rapidly as a field. Previously, scholars and policymakers tended to view education and economics as separate realms, with economics applied to the study of private goods and education as a public good. Economics has been characterized as cold and impersonal due to its focus on firms, rational self-interested individuals, and cost–benefit decision making. On the surface, all of these appear to be unrelated to the social and moral values associated with educating children. As school systems in developed countries have come under pressure to improve quality and scale, the distance between the two realms has narrowed. It is well documented that better educated workers have more favorable labor-market outcomes than those with less schooling. Moreover, a well-educated labor force is critical for a nation to compete in an increasingly global economy that rewards knowledge and skills. Given concerns with the productivity of educational institutions and the fact that the study of incentives, choice, and competition lie at the heart of economics, economists have become more relevant to education-reform debates. They bring increased attention to resource allocation and decision making at the school level; and they take the view of educational organizations as potentially competitive enterprises, with those running them as entrepreneurs. The study of incentives lies at the heart of economics, and an understanding of how actors in large complex systems respond to incentives, and changes in incentives, helps shed light on how teachers might react to merit pay incentives or schools might react to increased competition from choice programs and charter schools.

This article briefly reviews several of the most important theoretical concepts in the economics of education. First, it defines economics, and then it reviews three of the most commonly used ideas—human capital, markets, and education production. The focus here is on explicating the major underlying theories (in a nontechnical manner), rather than their application. All three have been utilized in numerous empirical studies.

This article was originally published in the International Encyclopedia of Education by Elsevier and ScienceDirect.