The Economics of Education in Adam Smith’s “Wealth of Nations”

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Journal of World Economic Research
2014; 3(5): 60-64
Published online November 20, 2014 (http://www.sciencepublishinggroup.com/j/jwer)
doi: 10.11648/j.jwer.20140305.12
ISSN: 2328-773X (Print); ISSN: 2328-7748 (Online)
The economics of education in Adam Smith’s
“Wealth of nations”
Stefano Spalletti
Dept. SPOCRI, University of Macerata, Macerata, Italy
Email address:
stefano.spalletti@unimc.it
To cite this article:
Stefano Spalletti. The Economics of Education in Adam Smith’s “Wealth of Nations”.
Journal of World Economic Research.
Vol. 3, No. 5, 2014, pp. 60-64. doi: 10.11648/j.jwer.20140305.12
Abstract:
In “intellectual history” perspective, Adam Smith was able to find out the idea of human capital especially from
microeconomic point of view. The result originates thanks to a rudimentary use of the category of the human capital. However,
on the basis of other premises this essay attempts also to bring to the fore that the results of Smith’s reflection change
according to a macro point of view. Paying attention to the increasing of the social product, the importance of knowledge and
human resources gains a crucial role in explaining the growth. From this second perspective, human capital realizes the
incorporation of the technological element not into the labour but into the capital factor. Under this light Smith is more strictly
linked to an approach familiar with the neoclassic theories of growth.
Keywords:
Adam Smith, Education, Human Capital
1. Introduction
In Adam Smith’s An Inquiry into the Nature and Causes of
the Wealth of Nations (1776), is easy to encounter many
parallels with 1960s discussion on economic value of
education (Spengler, 1977; Schultz 1992).
Friedrich List underlines the carelessness of Adam Smith
in defining the productivity of human resources, because «he
illustrates solely by exchange, augmentation of material
capital, and extension of market» (List, [1841] 1903, p. 111).
However, putting in order the fragmentary nature of the
Scottish economist’s thought on this topic, the consistency of
a series of reflections stands out. Smith’s human capital
theory, in fact, constitutes a methodological platform for
modern economics of education because of its direct
influence on the other Classics and because of the presence
of a substantial internal coherence.
The “technique” of the human capital evaluation is not
adequately developed in the “Wealth of Nations”. Mark
Blaug (1975) states that Smith was able to mark the way but
all the classical economy, with few exceptions, was unable to
say anything more on the investment in know-how. All this
can be shared from a microeconomic point of view and this
essay attempts to demonstrate it in the first paragraph by
using the approach to the economics of education. However,
on the basis of other premises this essay tries also to bring to
the fore that the results of Smith’s reflection change
according to a macro point of view. Paying attention to the
increasing of the social product, the importance of
knowledge and human resources gains a crucial role in
explaining the growth. In Smith’s case it is possible to define
the emerging of a “classical” result of the economics of
education which explains the contribution of education by
incorporating it into the idea of residual productive factor.
This attempt will be the object of the second paragraph of
this essay.
Adam Smith’s treatment of economics of education is
examined under the point of view of “the nature” of human
capital, of its sources and of its cost-utility criteria in
assessing educational choices. The methodology used in this
article is not a “rational reconstruction”, i.e. an history of
economic analysis that dresses up past ideas in modern garb.
It belongs, instead, to Mark Blaug’s approach in “historical
reconstructions” where «all texts of the past need to be
reconstructed» in a modern view and language (Blaug, 2001,
p. 151). Furthermore, the attempt is not far from the
conception of “intellectual history” used by Schumpeter in
the analysis of the past economic ideas (Schumpeter, 1954).

Journal of World Economic Research 2014; 3(5): 60-64 61
2. The Individual Functions of Income
The consistency of the Smith’s interpretation – with a
taxonomy related to the categories of the economics of
education – originates from the difference in the earnings of
jobs and from a rudimentary use of the category of the human
capital. Smith starts from explanations that mean the
investment in human resources as a refined evolution of the
classical theories of the productive consumption. The
assumption that leads to differentiate human capital from
consumption – i.e. education from luxury goods – originates
from a series of reflections which demonstrate how Smith’s
human capital represents the whole of the productive skills
and knowledge incorporated into the economic agents (able to
produce income within a system). The qualified human
resources are conceived at the disposal of the society
productive section. Then the way to the “revolution of the
human capital” is opened by Smith because education is
exactly placed in the panorama of the economic activities and
becomes a particular form of investment distinguished from
consumption.
Generally speaking, Gary Becker ’s analysis (1964) is the
first economic contribution to the individual choice to invest
in education as far as the theory of price is concerned. The
notion of human capital concerns both sides of the market,
because the specialization that an individual asks in education
is that same one that will be offered in the specialized labour
force market. Education therefore is the outcome of an
investment of time and money, foreseeing future retributions.
At the beginning of every period the individual (or whoever
else on his behalf) finds himself face to face with the choice
between the closing down of his own working capacity on the
market and the acquisition of abilities and specializations in
the professions, investing in human capital. The earnings rise
according to the investment. The total costs of education are
represented by the earnings lost, while the benefits depend on
wage and temporal horizon of the investment. The individual
will maximize his wealth if, in the specific unit considered, the
marginal cost of education and its marginal benefit are the
same.
Even if the finding of a central nucleus of the theory
remains problematical enough, the consistency of a productive
use of human resources pervades Smith’s entire work. Starting
from the classical locus of the tenth chapter of the first book of
the “Wealth of Nations”, a precise sequence of quotations
taken from the 1776 work consolidates a
production-definition of human capital:
1. «When any expensive machine is erected, the
extraordinary work to be performed by it before it is worn out,
it must be expected, will replace the capital laid out upon it,
with at least the ordinary profits. A man educated at the
expense of much labour and time to any of those employments
which require extraordinary dexterity and skill, may be
compared to one of those expensive machines. The work
which he learns to perform, it must be expected, over and
above the usual wages of common labour, will replace to him
the whole expense of his education, with at least the ordinary
profits of an equally valuable capital. It must do this, too, in a
reasonable time, regard being had to the very uncertain
duration of human life, in the same manner as to the more
certain duration of the machine. The difference between the
wages of skilled labour and those of common labour is
founded upon this principle». In this passage Smith states that
the dexterity and the labour skills of a man are comparable to a
specialized machine which is included in the evaluation of the
fixed capital. Therefore the fixed capital consists also:
2. «Fourthly, of the acquired and useful abilities of all the
inhabitants or members of the society. The acquisition of such
talents, by the maintenance of the acquirer during his
education, study, or apprenticeship, always costs a real
expense, which is a capital fixed and realized, as it were, in his
person. Those talents, as they make a part of his fortune, so do
they likewise of that of the society to which he belongs. The
improved dexterity of a workman may be considered in the
same light as a machine or instrument of trade which
facilitates and abridges labour, and which, though it costs a
certain expense, repays that expense with a profit». In this
further passage Smith explains that the acquisition of a
personal (human) capital costs like a fixed capital, e.g. a
machine or instrument of trade. Finally, in order to underline
that the function of the fixed capital is to increase the labour
productivity, Smith writes:
3. «The intention of the fixed capital is to increase the
productive power of labour, or to enable the same number of
labourers to perform a much greater quantity of work». So the
aim of training and specialization in human resources
becomes productive and it is linked to the idea of investment.
Nevertheless, Smith belongs to that group of classical
economists who elaborate the definition of skill for labour as
capital, but do not go beyond this. He does not proceed with a
measure of the amount of wealth that originates from the
human being and he avoids economic calculations in any
concrete activity. Smith’s insufficiency, from this point of
view, may be explained with a simple consideration regarding
the great attention reserved both to the real goods and to the
physical accumulation of capital: in these concerns he is not
able to overcome the dichotomy between productive and
non-productive labour and he is more interested in the
productive sphere of economics.
The unsuccessful solution of the human capital within a
coherent classic (or neoclassic) systematization has two
explanations. Firstly, if we accept the illuminist character of
the Scottish economist, his trust in the human resources
improperly approaches the interpretation of a human capital
that reduces the nature of the thinking being to a mere material
component. It is exactly this idea, together with the most
inclined macroeconomic theorization of the division of labour
and social product, to lead Smith’s energies far away from the
formulation of a complete theory of the human capital,
especially if it is developed from the differentials in individual
incomes.
Secondly, Smith’s analysis develops from the existence of a
free-market competition and from the hypothesis of a full trust
in its producing social well-being. Hence, the notion of labour

62 Stefano Spalletti: The Economics of Education in Adam Smith’s “Wealth of Nations”
we find in Smith’s theory – both that we study its genetic
causal aspects in the sense of worth-labour-content or if we
want to interpret its allocation and distributive dynamics
underlining its aspect of measurement in terms of commanded
labour – explains the existence of a positive cost for a labourer
that is homogeneous in its unitary measurement across the
market. Which in Smith is of worth to the single labourer, de
facto is extended to all the labour of the system to which we
refer. In neoclassical terms we would say that the Scottish
author introduces a strong hypothesis to his representative
model, for which there are several functions of disutility for
labour among the individuals of the capitalist society. Having
undergone a sort of normalizing rule, consequentially an equal
quantity of labour encloses a fraction of disutility felt with the
same intensity by all the labourers of a social class. The case
of professional education may be faced making use of a new
and different normalizing rule which foresees an additional
disutility represented by the pain requested for the training in
labour. We should interpret the further strain in terms of
investment in human capital. It is the costs of the length of
time spent in acquiring labour skills and specializations.
If a theoretical representation of the benefits does not exist,
nevertheless the costs are described with a certain amount of
care. During apprenticeship, for example, Smith is aware that
the entire labour of the apprentice belongs to his master. In
many cases the apprentice must be maintained in the
meanwhile by parents or relatives who, almost always, must
provide him with his subsistence. The training costs are
grouped into four typologies and originate from:
1. the directly requested list of rates by the master;
2. the costs supported by the family of the apprentice for his
upkeep;
3. not having at his disposal the products of his labour that
nevertheless belong to the master;
4. the opportunity cost not being used in another labour which
allows income without specialization.
Figure 1. Rates of return by comparing the flows of benefits over a
specializated and not specializated working life.
Recalling André Page’s model (1971) and hypothesizing
that the individual has, at least, the faculty to preside over
decisions to undertake or continue his studies, we see Smith
sustaining the possibility for the labourer – by his own choice
or on the push of other subjects, such as the family, next of kin
etc. – to invest in himself. Fig. 1 represents the flows of
income expected with and without specialization (Rs and Rn
respectively). In Rn economic agent start his working age in A;
in Rs, in A he begins the training period, starting labour only
in B. Direct costs (area ABC) constitute the training costs paid
from the “person in specialization”; opportunity costs (area
ADC) are the non-attained income within the training period.
The reason that leads to invest in labour skills is the
expectation of a flow of higher income or, as Smith writes, of a
supplement compared to the usual wage of the current labour,
«over and above the usual wages of common labour» (Smith,
[1776] 1904, vol. 1, p. 103).
The reason that justifies the distance between the two
curves of expected income can be found in the tenth chapter of
the first book where Smith establishes that «the wages of
labour vary with the easiness and cheapness, or the difficulty
and expense of learning the business» (ibidem). The amount of
the differences between specialized and non-specialized
income, however, does not seem to be particularly appreciable,
or that the investment in human capital does not result to be
very productive. Indeed, we should also consider Smith’s
following remarks: «It is reasonable, therefore, that in Europe
the wages of mechanics, artificers, and manufacturers, should
be somewhat higher than those of common labourers. They
are so accordingly, and their superior gains make them in most
places be considered as a superior rank of people. This
superiority, however, is generally very small; the daily or
weekly earnings of journeymen in the more common sorts of
manufactures, such as those of plain linen or woollen cloth,
computed at an average, are, in most places, very little more
than the day wages of common labourers. Their employment,
indeed, is more steady and uniform, and the superiority of
their earnings, taking the whole year together, may be
somewhat greater. It seems evidently, however, to be no
greater than what is sufficient to compensate the superior
expense of their education» (Smith, [1776] 1904, vol. 1, p.
104).
With this result the thesis that sustains the assimilation of
the investment in human resources to that in capital goods
would be contradicted. However, the “Wealth of Nation” is
not interested to adopt a coherent explanation, from an
analytical point of view, of the definition of the benefits
coming from micro investment in human capital. Smith’s
economic value of education better lends itself as element able
to explain the growth of the system. This happens in relation
to other factors of production and after having distinguish an
aggregate “residue” that we will see in the next paragraph.
3. The Aggregate and the Residual Factor
Education and training show an indirect relationship with
the advancement of wealth. Such a relationship is linked to a
macroeconomic nature of the analysis and explains the logical
consistency of an educational policy (widely recognizable in
Smith). Labour as social source of production is important as
qualitative aspect with which, also in the aggregate, it is

Journal of World Economic Research 2014; 3(5): 60-64 63
carried out. The quality of labour interacts together with its
quantity in making the final product. This means introducing
the technical progress into the explanation of the growth, or
that part of the growth which is the result of any educational
process (institutionalized or simply derived from the learning
by doing ).
Before presenting the most adequate framework to
introduce the technological progress, it is necessary to cast an
eye over the most convincing results in the studies upon
Smith’s theory of economic exchange. Goods – and also skills
and talents – are the results of the market exchange, a process
coming from the human inclination to barter and to exchange
one thing for another. The original endowment of the market
agents consists more in the persuasion than in the disposal of
goods. However, introducing the social division of labour a
new human skills and resources differentiation takes place.
According to Elmslie (1994), nature gives men few or none
starting endowments and distributes them almost in equal way.
It is therefore the associate life, structured in a system which
institutionalizes the free trade system, to define the
consequences. According to the “Wealth of Nation”, there are
no difference in nature between the most dissimilar characters,
e.g. between a philosopher and a common street porter. The
difference of “talents” between them only reveals itself after
they come to be employed in different occupations of the
economic life (production and exchange). So the philosopher
(scientist) is such because society defines his role thanks to the
social division of labour. When the social separation pervades
society, differences in skills seem more and more innate in
individuals while really they originate from the market
process.
Smith, nevertheless, identifies a more complex relationship
between man, knowledge and economic growth. If the
division of labour solves the social distinction between
intellectual and common worker, education influences the
progress making great changes in the technique thanks to the
inventions of the scientists. Technological change provides an
exogenous shock in nature and it is transferred into the
economic process only in a following temporal phase, through
the endogenous contribution of the labourers with low human
capital. They turn the inventions into innovations and
facilitate the technical evolution within the productive process.
According to Smith, this happens because «a great part of the
machines made use of in those manufactures in which labour
is most subdivided, were originally the inventions of common
workmen, who, being each of them employed in some very
simple operation, naturally turned their thoughts towards
finding out easier and readier methods of performing it»
(Smith [1776] 1904, vol. 1, p. 11).
The connection of inventions with technological
development joints together Smith’s vision of progress with
the typical categories of economic growth. Hence, the
ingenious function assigned to the consequence of the division
of labour on human resources can be investigated by the
economics of education?
The keystone to find a common taxonomy between Smith’s
vision and the economic educational epistemology is the
inclusion of the technological evolution in a neoclassic
production function, as Robert Solow demonstrates. Solow
(1957), in fact, puts the technological factor – traditionally
intended as a product of the education – in contact with the
other factors of production. In his article Solow discusses the
hypothesis for discussing the technical progress in an
autonomous way with respect to the other factors of
production, conceiving it as an element of an aggregate
function of production, influenced by time’s variables. In that
approach, technical change or education constitute a residue
and do not influence the other factors in fulfilling the function
of producing wealth. However, it explains the social product
variations not due to the traditional factors.
This conclusion, which has the merit of respecting the
aggregate vision of Smith in his concerns about economic
development, is useful to enhance human resources in a
balanced or breaking trajectories in the theories of growth
(Reid, 1989). Nevertheless, it respects Smith’s opinion to
conceive the primum movens of the technical progress in a
separate and wholly specific place, i.e. the intellectual skills of
scientists: «Many improvements have been made by […]
those who are called philosophers or men of speculation,
whose trade it is not to do anything, but to observe everything;
and who, upon that account, are often capable of combining
together the powers of the most distant and dissimilar objects»
(Smith, [1776] 1904, vol. 1, p. 12).
Knowledge is source of innovation and result of the
economic growth. Then human capital can constitute the first
or the last contribution to a trajectory of growth. A further
Solow’s improvement in research (1962) is coherent with
Smith’s case because allows incorporating the technological
element into the capital one. Solow’s contribute hypothesizes
that technical progress requires being incorporated into
recently produced capital goods before being able to show a
growth effect on the output. A feature of this model is the
consideration of the capital as annual consecutive generations
of goods. As Page notes, this approach has the limit of not
incorporating the technical progress into the labour factor and
of not keeping in mind, consequently, that education is a
variable which influences the improvement also in the
productivity of labour. Nevertheless Smith develops the idea
that education and human capital are related to the
introduction of the technological element in the capital factor.
He considers the knowledge in the same light as a machine i.e.
a fixed capital. That knowledge, which Solow finds no more in
the quality of labour, but only in capital goods, allows to prove
the existence of producing capabilities in Smith’s «great
number of machines which facilitate and abridge labour, and
enable one man to do the work of many» (Smith, [1776] 1904,
vol. 1, p. 9).
4. Conclusions
The great attention placed by Smith on technical progress is
pointed out by the division of labour. Thus, we can conclude
that in 1776 the idea of incorporating technical progress into
the material capital was crucial in importance for investments

64 Stefano Spalletti: The Economics of Education in Adam Smith’s “Wealth of Nations”
decisions. According to the interpretation suggested in this
article, Smith prefers to incorporate education and human
capital in fixed capital goods, as 1962’s Solow approach
discusses for neoclassic theory of growth. The preference for a
such analytical view depends upon the respect for the
macroeconomic nature of Smith’s analysis in economic
development. Nevertheless an alternative microeconomic
lecture is present in the “Wealth of nation”. It brings forward
several important results developed by the economics of
education in the 1960s. Under this light, Smith’s early
research on this topic not only tends to place emphasis on the
benefits of education but could lead governments to an
increased emphasis on research into the quality of education
and on efficiency in the allocation of resources to education.
It is not always easy to remark conclusions for policy
implications from an historical reconstruction. From the
perspective of a recent history of economic ideas, however,
the impact on the economic policy in the 1960s and in the
early 1970s can be characterized by a rapid absorption of the
main arguments of the human capital theory into policy
discussions, providing some universal theoretical basis for
increased public expenditures on higher education (Teixeira,
2000, p. 281). Then, even if Smithian roots of the human
capital theory show us – after 1776 – that many things
remained to be learned about education, productivity and
returns from the analytical point of view, on the other hand, as
Zvi Griliches (2001) remarks in his conclusion, in the pursuit
of the knowledge we can now see farther than our
predecessors because we stand on their shoulders. In this light,
Smith’s shoulders seem very steady.
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