Before you see the economics, you need the person making the decision.
THE CHOICE IN FRONT OF HIM
RIGHT NOWDunc has completed post-16 education. University means buying another stage of education.
IF HE SAYS NOHe can enter full-time work now and begin earning immediately.
IF HE SAYS YESHe delays full-time earnings and takes on additional private study and living costs.
THE BETWill the future return from another education investment compensate him for what he gives up now?
WHAT DUNC DOESN'T KNOW
FUTURE GRADUATE EARNINGSExpected, not guaranteed.
FUTURE NON-GRADUATE EARNINGSThese determine what he gives up by studying.
THE REAL DECISIONIs one more education investment worth more than what Dunc sacrifices to make it?
YOU'RE ADVISING DUNC. HE HAS TO CHOOSE BEFORE HE KNOWS HOW HIS CAREER TURNS OUT.
GO TO UNIVERSITY
Accept the cost now for the expected future return.
START WORK
Take earnings now rather than buy more education.
THE ECONOMIST CHECKS YOUR DECISION
What does the human-capital model say?
THE DIAGRAM'S ANSWER
STOP AT POST-16.
The red curve shows expected marginal return. The dashed line shows private opportunity cost. At the intersection they are equal.
LEFT: RETURN > COST → INVEST
INTERSECTION: RETURN = COST → STOP
RIGHT: RETURN < COST → DON'T ADD MORE
RATES OF RETURN TO HUMAN CAPITAL INVESTMENT
DECISION 2 · POLICY
Can you get Dunc to university without ordering him to go?
Government wants more higher-education investment. Your lever is an education grant. Change Dunc's private cost and watch the same decision change.
YOUR POLICY LEVER
GRANT £0
Increase the grant. Each step reduces Dunc's private opportunity cost further. The cost line falls continuously and the optimum is recalculated at its exact intersection with marginal return.
Private optimum: POST-16
GRANT ↑ → PRIVATE COST ↓ → INTERSECTION MOVES RIGHT
POLICY CHANGES THE PRIVATE OPPORTUNITY-COST LINE
TARGET: MOVE THE PRIVATE OPTIMUM INTO UNDERGRAD.
DECISION 3 · THE MODEL HAS SPOKEN. NOW YOU HAVE TO.
The generous grant makes university optimal. Would you actually tell Dunc to go?
The cost line has fallen far enough for the human-capital model to favour undergraduate education. But the calculation still depends on a future nobody has observed yet.
NO HINDSIGHT. NO “IT DEPENDS”. PICK ONE.
Dunc wants an answer now. The future arrives only after you commit.
YES — GO TO UNIVERSITY
Follow the model. The grant has made the extra investment worthwhile.
I TRUST THE CURRENT CALCULATION
NO — TAKE THE JOB
The model says university, but Dunc may still be cautious about costs he cannot know in advance.
I DON'T TRUST FUTURE UNIVERSITY COSTS
TOO LATE. YOU ALREADY CHOSE.
UNCERTAINTY · YOUR DECISION MEETS NEW INFORMATION
WHAT CHANGED?
WHAT DUNC EXPECTED → WHAT ACTUALLY HAPPENED
SEDUCTION · STRONGEST CASE
THE STORY SURVIVES
HUMAN CAPITAL THEORY HAS DONE QUITE WELL.
It explained Dunc's education choice. It showed how policy could change the private calculation. And it showed why uncertainty about future costs and returns can change the decision again.