1 Introduction
Should countries or regions (generically, "states") invest more in education to
promote economic growth? Policy makers often assert that if their state spends
more on educating its population, incomes will grow sufficiently to more than
recover the investment. Economists and others have proposed many channels
through which education may affect growth--not merely the private returns to
individuals' greater human capital but also a variety of externalities. For
highly developed countries, the most frequently discussed externality is
education investments' fostering technological innovation, thereby making
Despite the enormous interest in the relationship between education and
growth, the evidence is fragile at best. This is for several reasons. First, a
state's education investments are non-random. States that are richer, faster
growing, or have better institutions probably find it easier to increase their
education spending. Thus, there is a distinct possibility that correlations
between education investments and growth are due to reverse causality (Bils
and Klenow, 2000). Second, owing to the poor availability of direct on
education investments, researchers are often forced to use crude proxies, such
as average years of educational attainment in a state. Average years of
education is an outcome that people chose, given their state's investments in
education. It depends on returns to education and is, thus, far more prone to
endogeneity than is the investment policy. Furthermore, because the average
year of education counts an extra year of primary school just the same as a
year in a doctoral (Ph.D.) program, average years of education cannot inform
us much about the mechanisms that link education investments to growth. It
is implausible that making one additional child attend first grade generates
technological innovation, and it is equally implausible that adding another
physics Ph.D. affects basic social institutions, fertility, or agricultural
adaptation (all mechanisms that might link education
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