Education, National Debts, and Development Traps

This chapter introduces education and human capital accumulation into the basic model. Adam Smith argues that improvement in the productivity of labor has their origins in the large part of the skill, dexterity, and judgment. Human capital is a consequence of the division of labor. But the opportunities and incentives to which workers respond in their investment in human capital are not fully considered by classical economists such as Smith, Ricardo, and Marx. When they were constructing theories, endogenous human capital accumulation via formal higher education was not very important. This chapter introduces Arrow’s learning by doing, Uzawa’s an education, my learning through creative leisure and learning through consuming as sources of human capital improvement. The chapter shows possible multiple equilibria when the economic system is composed of increasing returns to and decreasing returns to scale sectors. The chapter then introduces education sector and human capital into the Diamond model with debt. The chapter also provides insights into complexity of poverty traps in a human capital-based economy.