Human Capital Theory: Definition, Applications, and Implications

Theodore W. Schultz, widely known as Ted Schultz, was an American economist born on April 30, 1902, and passed away on Feb. 26, 1998. Renowned for his groundbreaking work in economic theory, Schultz held the esteemed position of chair of Economics at the University of Chicago. His most notable contribution lies in the development of the Human Capital Theory, which revolutionized traditional economic thought by emphasizing the importance of investing in human resources for long-term economic growth.

Born on a farm in South Dakota, Schultz’s upbringing provided him with firsthand experience of rural economies. His decision to leave school at the eighth grade to assist on his family’s farm during World War I labor shortages was indicative of the economic challenges prevalent in agricultural communities. Motivated by a desire to address these challenges, Schultz pursued studies in agriculture and economics, culminating in the attainment of his degree in 1928. In 1930, he married Esther Werth, who played a significant role in editing his works until her passing in 1991.

Schultz’s academic journey led him to Iowa State University, where he served as a professor until 1943. However, a dispute over economic policies related to oleomargarine prompted him to seek new horizons at the University of Chicago. Here, he assumed the role of chair of the Economics Department in 1946, where he remained until 1961. Alongside his colleague David Gale Johnson, Schultz made significant strides in economic theory, garnering support from influential donors and organizations like the Rockefeller Foundation. His tenure saw him preside over the American Economic Association in 1960 and culminated in the Nobel Prize for Economics in 1979 for his seminal work on human capital.

Throughout his distinguished career, Schultz made substantial contributions to the field of economics, particularly in agricultural economics and global economic development.

Schultz’s early work in agricultural economics evolved into a comprehensive examination of agricultural development in impoverished nations. He identified government policies favoring urban areas over rural communities as a major impediment to economic growth. These policies included price restraints on food and agricultural commodities, disproportionate taxation of crops and agricultural land, and inadequate support for research and extension services. Schultz advocated for policy reforms aimed at fostering rural entrepreneurship and innovation, thereby unleashing the agricultural potential of developing nations.

Schultz’s observations of post-war economic recoveries in Japan and West Germany led to the formulation of his influential Human Capital Theory. He noted the rapid rebound of these nations’ economies, attributing their success to investments in education and health. Contrasting with the sluggish recovery in the United Kingdom, Schultz emphasized the pivotal role of a skilled and healthy workforce in driving economic growth. This insight prompted a paradigm shift in international development strategies, with a greater focus on investing in human capital as a catalyst for long-term economic development.

Human Capital Theory, developed by Theodore W. Schultz, posits that investments in education and health are essential for economic development, as they enhance the productivity and innovation capacity of a workforce.

Growing up on a farm in South Dakota provided Schultz with firsthand experience of rural economies, shaping his research focus and advocacy for policies benefiting agricultural communities.

Schultz’s major achievements include his Nobel Prize-winning research on human capital, his contributions to agricultural economics, and his leadership in shaping economic policies at the University of Chicago.