The Knowledge Capital of Nations: Education and the Economics of Growth

Eric A. Hanushek
Ludger Woessmann
Published Date
Cambridge, MA: MIT Press
262 pages
This book advances the simple argument that long-run economic growth is overwhelmingly a function of the cognitive skills of the population, or the “knowledge capital” of a nation. This hypothesis is subjected to rigorous economic and empirical analysis including extensive consideration of causal interpretations. The main results are remarkably robust, and equally applicable to developing and developed countries. Past empirical analysis and policy development based on school attainment of a nation’s population prove fragile, misleading, and rightfully questionable. For example, two largely unsolved historical mysteries – the “Latin American growth puzzle” and the “East Asian miracle” – are completely explained by consideration of knowledge capital. The central importance of cognitive skills allows one to calculate the economic benefits of improved skills for individual countries of the world. The historical consequences of increased knowledge capital prove to be huge – multiples of GDP for achievable improvements in schools. Turning to the policy implications, the natural focus of attention is improving a country’s schools. Existing research evidence suggests the value of an education system that develops effective accountability, promotes choice and competition, and provides direct rewards for good performance. While many school reforms are politically difficult, this analysis underscores the substantial costs of the status quo. While numerous studies have considered the determinants of economic growth, they have failed to provide a clear and robust explanation of the wide differences in long-run economic growth across nations. This book generalizes from the experiences of nations over the past half century and provides quantitative implications of school improvement for individual countries. The unique aspect is the development of a coherent explanation of economic growth that withstands common criticisms of empirical growth analysis. The intent is to provide students, professionals, and policy makers with an understandable description of the potential impacts of alternative policy outcomes.