Scholars have often used the term ‘capital’ in different contexts and fields to imply a number of related meanings that may not necessarily agree in both scope and depth. In finance, accounting and management, for instance, the term is used to make reference to financial wealth, particularly the wealth used to start or sustain a business entity.
In classical economics, however, capital is used to imply one of the three factors of production, and differs from the other two factors – land and labor – because it can be used in the production of other goods, it is human-made and, lastly, it cannot be exhausted immediately in the process of production (Perlman & McCain, 2000).
From this broad definition, capital can be further narrowed down to mean the goods produced or supplied by the production system that are utilized as primary inputs in the production and sustenance of other goods and services in the future.
Education can be considered as a form of human capital because it is not only used to produce other goods such as knowledge, wealth, and careers, but it cannot be exhausted in the process of production once an individual goes through a school system, not mentioning that it is human-made.
Skills, education and training have been used by individuals, groups, societies and states as a form of human capital that is mostly used to stimulate economic growth and reduce poverty levels. Without education as one of the primary factors of production, many organizations would not have the human capital required to drive their agenda forward.
According to Investopedia (2011), return on investment (ROI) is “…a performance measure used to evaluate the efficiency of an investment or to compare the efficiency of a number of different investments” (para. 1).
As already mentioned, the returns on an investment in education are many, and include the knowledge and capabilities that an individual uses in the production of other goods and services within the economic system; the wealth accumulated over time and which can also be used in the production of other goods; career development; social prestige; improvement of the level, quantity and quality of human capital; economic growth; better income distribution; and reduced poverty (Economic Returns, n.d.).
It is imperative to note that these returns are interrelated to the extent that one economic or social return affects the other. Accumulation of wealth, for instance, will curtail poverty levels and enhance social prestige as well as economic growth.
In finance and economics, an investment is beneficial to the shareholder if it is worth the return. When an individual uses financial and time resources to get an education then end up with neither of the returns described above, it can be effectively argued that the investment in education was not worth the return. To measure the return on investment in education, therefore, one needs to subtract the cost of the investment (both in terms of time and money) from the gains attainable as a result of this investment (Investopedia, 2011).
To express the results as a ratio and know the worthiness of the investment made, the total amount of returns achieved from the education investment is further divided by the total cost of the investment. You can still multiply the outcome by 100 to get a percentage. It should be always be noted that negative ratios and percentages implies that investment is not worth the return, while positive ratios and percentages mean the investment made in education is worth the returns achieved.
Economic returns to investment in education. (n.d.). Retrieved May 5 2011
Investopedia. (2011). Return on Investment – ROI. Retrieved May 5 2011
Perlman, M., & McCain, C.R. (2000). The pillars of economic understanding: Factors and markets. Michigan: University of Michigan Press