# 1. Introduction

Analysis of the economic effects of education has usually focused on an assessment of the rate of return. A comparison of the incomes of the educated with those of the uneducated allows a rate of return to education to be calculated. In addition to this private return to the individual, a social rate of return can also be estimated, taking into account the cost of education to society rather than on individual's incomes. To the individual, education incurs a direct cost in terms of fees and an additional opportunity cost in terms of earnings foregone. The social cost of education is likely to differ from the private cost because many countries have a policy of providing at least basic education free or at a heavily-subsidized price. The social return also differs from private return because individuals receive their incomes net of taxes, while the contribution to national income is made gross of tax. E timates of the private and social return to education are presented in section 2.1 There are a number of reasons for being unhappy with an approach based on the rate of return as it is usually calculated. These are also discussed in section 2.1. First of all, in the nature of things, one cannot identify all the factors which influence earning power. Individuals with a favorable family background may be more likely to receive education, and the effects of family background may be mistaken for the effects of education. Secondly, the specific inclusion of variables reflecting the quality of education may influence assessments of the rate of return. Thirdly, education may confer a relative advantage as much as an absolute advantage. It may allow the educated to gain at the expense of the uneducated. On the other hand, analyses based on macroeconomic data, such as those of section 2.2, should not be susceptible to this problem.

These macroeconomic studies typically explain economic growth over a period of twenty years or more by means of investment in physical capital, variables representing education level, or, in one study, expenditure on education, and variables summarizing political instability. They provide a basis for assessing the argument that education may have effects on economic performance over and above those identified by the usual rate of return analysis. Education may facilitate technical progress. This will benefit both the educated and the uneducated alike. This, if true, creates an externality which is likely to be reflected in any analysis based on macroeconomic data but will obviously not be visible in any cross-section study. This part of the paper looks at the evidence for an external effect of education on growth.

There may be other benefits of education. There is good evidence, presented in section 2.3, to suggest that education reduces fertility rates. If one is persuaded that high fertility poses a major long-term threat to living standards, then this externality may be of very great importance, particularly since the evidence for this extemality is stronger than for an externality linking education to economic growth. On the other hand, it is not obvious what economic value should be placed on the fertility rate; in this paper, no valuation is attempted in the assessment of this effect.