One perspective associated with the consideration of returns on investment in education is human capital theory (Becker, 1975). In this work, human capital and education are defined as synonymous terms in relation to each other. In some cases the term chosen is dependent only upon its source in the literature.
Human capital theory stresses the potential of the individual, through the investment in education, to solve the problem of low wages and unemployment through behavioural factors such as the acquisition of skills (Becker, 1975), yet dual labour market theorists are an example of theorists that contest this and stress the structural factors that exist whereby individuals are not able to improve wages, skills and status (Cassim, 1982) within certain contexts. Implied here from the latter perspective is that in certain contexts there is no return on learning factors: that choices made to increase productivity through education and training, for example, would have no impact on their earnings.
However, in the same manner as the initial effect of initial investment can become insignificant over time due to the potential to save, even on a low level over time (Parker, 2000), levels of educational endowments may also be increased after entry into the informal sector. For Becker (1975: 9), investments in human capital include:
schooling, on-the-job training, medical care, migration, and searching for information about prices and outcomes. They differ in their effects on earnings and consumption, in the amounts typically invested, in the size of returns, and in the extent to which the connection between investment and return is
perceived. But all these investments improve skills, knowledge, or health, and thereby raise money or psychic incomes.
According to this, migration, training and education might contribute to earnings and satisfaction levels: the components of entrepreneurial performance. Measures were included for testing in this work such as schooling, training and migrant status in order to test the contribution of these contextual factors to an entrepreneurial orientation and to entrepreneurial performance. In terms of the above conception of Becker (1975), schooling, work related training courses, health, migration and better access to information would be factors expected to be related to increased earnings and continuance satisfaction.
Bates (1990: 553) stressed the importance of small business exposure within a person’s family as a human capital factor contributing to entrepreneurial capabilities. According to Bates (1990: 553) the development of entrepreneurial values in the individual and familiarisation with the “small business milieu” contribute to entrepreneurial capabilities.
Lynskey (2004) states that endowed abilities, experience, trained skills, attitudes and behaviour are some recurring elements in many definitions of what is understood to be human capital. Various studies have shown a positive relationship between an entrepreneur’s level of human capital as measured along the dimensions of age, education, work experience and other variables, and new firm performance (Lynskey, 2004). Human capital can be differentiated into general human capital and specific human capital according to Becker (1975). General and specific human capital are considered as follows.
According to Becker (1975) general human capital refers to the human capital that is transferable to other contexts. The human capital investment in training, for example, that can be transferred across from one field of work to another would be general human capital. Training that was specific to one field of work and that would entail no benefit in another field would be an example of specific human capital (Becker, 1975), whereby no return on this capital would be found in a different context.
Gimento et al. (1997: 774) tested the conception that higher endowments of general human capital in entrepreneurs might be associated with higher requirements, or a higher threshold of continuance that they might have for their enterprise, which if not met might lead to entrepreneurial non continuance. Gimento et al. (1997) found this to be “only partially supported” by their results.
Gimento et al. (1997: 774) found that general management experience (related to managing managers) was related to an increased entrepreneurial survival threshold. Gimento et al. (1997) argue that this suggests at the least a degree of comparability between the value of certain forms of general human capital in entrepreneurship and employment. Gimento et al. (1997) also argue that the higher entrepreneurial threshold associated with entrepreneurs with higher levels of general human capital possibly reflects a situation where general human capital is more valued in more complex organisations such as those associated with employment.
Gimento et al. (1997: 775) conclude that “[a]pparently, specific human capital influences survival by increasing the gap between performance and threshold (i.e. increasing performance without raising the threshold”. If specific human capital increased performance but did not increase the threshold, then entrepreneurs with increasing levels of specific human capital might not be more inclined to leave an entrepreneurial venture due to this increase in specific human capital.
In terms of the informal sector street trading context this would indicate that specific human capital increases would not be expected to specifically enable the informal sector street trader to exit the sector for formal employment. Increases in general human capital, however, might be expected to enable an informal sector street trader to leave the sector for formal employment, because general human capital might offer skills that are general, or transferable to the formal working context.
Increased levels of specific human capital, however, would be expected to be associated with increased levels of earnings, because this increase in specific human capital might be associated with increased productivity specific to the enterprise. Increased levels of general human capital would also be expected to contribute to higher levels of earnings should these enterprises remain within the specific context.
In the street trading context, respondents surveyed might have been exposed to general and specific human capital increases, but the type of human capital would not be expected to necessarily have a different effect on the measured level of earnings. A founding firm’s levels of financial resources, human or personnel resources, systems resources and business resources can have a significant impact on the firm’s survival (Churchill and Lewis, 1983). In terms of human resources in the informal street trading context this would apply to the education or human capital of the entrepreneur. The informal sector trader can be considered to have entered the sector with a certain endowment of financial and human capital.
Gimento et al. (1997:775) found that education and supervisory experience were not related to the threshold, or the minimum total extrinsic and intrinsic rewards needed to continue in entrepreneurship, and therefore concluded that “returns to education and supervisory experience may be somewhat better in self-employment” for their researched sample of entrepreneurs.
A significant factor in terms of earnings is the transmission mechanism whereby increases in human capital in the form of education and training might be associated with increased productivity (Becker, 1975), which might then be associated with higher levels of earnings. According to Michaud and Vencatachellum (2003), human capital increases productivity through different effects.
For Becker (1975: 39), real income can be raised by schooling and by on-the-job training, yet also “primarily by increasing the knowledge at a person’s command”; for example, information “about the prices charged by different sellers would enable a person to buy from the cheapest, thereby raising his command over resources”. According to Becker (1975) real income can be increased through knowledge of the labour market whereby individuals might be enabled to sell their labour to the highest paying enterprise. Becker (1975: 39) states that information “about the political or social system─the effect of different parties or social arrangements─could also significantly raise real incomes”.
Access to information may be enabled though through the diversity of media available to populations, facilitating entrepreneurial activity through the knowledge of opportunities (Aldrich, 1990). O’Farrell and Hitchins (1998) suggest that policy makers take into account the ignorance of firm owners with regard to external resources potentially made available to them, as aids, incentives and advisory services may not reach certain entrepreneurs, particularly in peripheral areas.
However, certain positive conceptualisations related to education and human capital have been contested. It is argued that a review of education and human capital relationships with regard to entrepreneurship would not be balanced unless an attempt is made to consider diverse voices with regard to the effect of human capital as it relates to human agency. In this regard the contribution of Bowles and Gintis (1975) is reviewed, in order not to exclude the theoretical context from which human capital theory has faced criticism over time. Bowles and Gintis’ (1975) arguments are reviewed as an example of the type of theory that contests fundamental assumptions associated with human capital theory.
Bowles and Gintis (1975: 78) criticise the idea of choice and upliftment potential being ascribed to individuals by human capital theorists, and argue that “the process of individual choice aggregation, even if it is relevant to educational change, works within economic constraints determined almost entirely outside both the consumer’s and citizen’s arena of choice”. Cassim (1982: 364) uses the above quote from Bowles and Gintis in support of the argument that economic inequality is a “structural aspect of existing society”, and that individuals have no choice regarding race, social class, sex and age. According to Cassim (1982: 364), race, social class, sex and age are the determinants of economic choice due to the perpetuation of inequality by reproduction of the status quo: the contribution of the education system.
Human capital theory, by not recognising “that the education structure reproduces the status quo by maintaining existing privileges”, cannot claim to hold the solution to poverty and inequality or offer choices to the economically disadvantaged that are in fact structurally constrained (Cassim, 1982:364). From this perspective agency is absent, and the individual is trapped within structural constraints; the informal street
trader is considered, then, to be subject to structural constraints, and to be trapped within a condition of impoverishment.
It is an argument of this work, however, that knowledge of the specific effects of entrepreneurial orientation, educational and other contextual factors in the informal sector might hold the key to overcoming structural constraints. Therefore, the conception of education as maintaining a status quo is fundamentally incorrect, if education is related to higher potential productivity for street traders. It is argued that education and learning related factors are associated with entrepreneurial orientation and increased earnings even if the informal street trading context is an example of one of the most impoverished contexts in which entrepreneurs might exist.
Notwithstanding this, it is recognised that the effect of structural constraint does exist. Structural constraint might exist through unequal and discriminatory contextual factors. These unequal and discriminatory contextual factors may have a more powerful effect for certain street traders than do the individual’s inherent factors that might otherwise facilitate upliftment. It is argued that conceiving of the informal sector as homogenous and structurally impaired is not helpful in terms of accessing information that can enable the upliftment of these individuals. The true nature of the informal sector is not clear if homogenous conceptions are accepted.
Research into this is regarded as critically important, it is argued, because the positive effects of education related factors do have an effect in this context, and the potential for upliftment therefore does exist. This upliftment is considered to be dependent upon the reduction in the problem space around the knowledge of entrepreneurial informal sector street trading and enterprise as a learned vehicle for informal upliftment. The contributions of theorists such as Bowles and Gintis (1975) are considered to enrich the theoretical context around the legitimacy of entrepreneurship and the legitimacy of assumptions made about the value of human capital as a productivity enhancing conception.
Bowles and Gintis (1975: 74) state that
[h]uman capital theory is the most recent and perhaps ultimate, step in the elimination of class as a central economic concept. Beginning with the decline
of Ricardian economics in England in the 1830’s, non-Marxian economic theory has moved steadily away from attributing control of factors of production to identifiable groups and toward a theory of factor payments which self-consciously abstracts from the specific nature of the productive factors involved. In modern general equilibrium theory one can hardly tell the inputs from the outputs, much less distinguish among any specific inputs. Human capital theory is an expression of this tendency: every worker, the human capital theorists are fond of observing, is now a capitalist.
According to Bowles and Gintis (1975: 75), by restricting analysis “to the interaction of exogenously given individual preferences, raw materials (individual abilities) and alternative production technologies, human capital theory formally excludes the relevance of class and class conflict to the explication of labour market phenomena.” Bowles and Gintis (1975: 76) state that “worker attributes, which are valued by employers and which therefore constitute “human capital”, are not limited to technical skills and “abstract productive capacities” and include race, sex, age, ethnicity and credentials that are used as criteria by capitalists to “fragment the work force and reduce the potential formation of coalitions” within enterprises.
Bowles and Gintis (1975: 77) state that “we have elsewhere sought to document the proposition that schools produce “better” workers primarily through the structural correspondence of the social relations of education with those of capitalist production, rather than through the content of the academic curriculum”. For Bowles and Gintis (1975: 77), the “allocation of workers to job slots, the structure of jobs available, and the definition of ‘productive’ worker attributes simply cannot be derived, as the human capital theorists would have it, from a market-mediated matching of technically defined skills with technically defined production requirements”.
“Issues of power, and ultimately of class, enter on a rather fundamental level”, which human capital theorists fail to take into account, argue Bowles and Gintis (1975: 77). According to Bowles and Gintis (1975: 80), “because of the essential role of education in reproducing the capitalist order as a whole, the capitalist class has an interest in schooling which transcends any narrow calculation of marginal revenue products at the enterprise level”, and no equality “in rates of return, either among
different types of schooling or between schooling and other forms of investment” should be expected.
According to Bowles and Gintis (1975: 81), the “relationship between schooling and the distribution of income cannot be understood with a model which lacks a theory of reproduction, for a central aspect of this relationship is the role played by the school system in legitimising economic inequality”. It is “illogical to suppose that the reduction in inequalities in the distribution of schooling might lead to changes in income inequality in any particular direction”, although this might occur by undermining the legitimacy of the capitalist class control of the education system, according to Bowles and Gintis (1975: 81).
The “education system is a prime example of an institution geared toward the alteration of preferences themselves” and so using individual preferences is a shortcoming of cost benefit analysis, argue Bowles and Gintis (1975: 81). It is the stance of this study, however, that increases in human capital and education related contextual factors do contribute to increases in productivity even at this most elemental level of enterprise. It is also argued that entrepreneurs do exist within the population of informal sector street traders, but within an unfair, unequal and potentially discriminatory context.
The exact investigation of relationships offered by Bowles and Gintis (1975) was, however, beyond the scope of this investigation. This theory was, however, included due to its fundamental criticism of human capital theory at a higher level of abstraction. This inclusion provides a more comprehensive insight into the theoretical criticism that human capital theory has faced.
In this context it is argued that human capital, as tested and measured in terms of education related contextual factors, represents the potential for human agency to influence earnings and satisfaction. It is also argued that human capital shapes entrepreneurial orientation.
An entrepreneur’s education and financial capital may be positively related to the survival of firms (Bates, 1990), and the education level of the entrepreneur may
contribute to the ability to access financial capital in the form of financing. Chow (2006) investigated associations between entrepreneurial orientation, as composed of proactiveness, innovativeness and risk taking propensity, and levels of education in the Chinese enterprise context. Chow (2006) found a positive and highly significant correlation between higher levels of education and entrepreneurial orientation. The relationship between human capital and entrepreneurship is dynamic, with each affecting the other over time according to Zahra and Dess (2001).
Van Praag et al. (2005) found, in terms of their research within a specific context of Dutch enterprises, that the effect of capital constraints on profit drop up to 59 percent when controlling for human capital effects. Van Praag et al. (2005) found the effect of this capital constraint to remain significant after controlling for human capital effects, which indicates that human capital is positively associated with performance, whilst simultaneously reducing the capital constraint on the enterprise.
Higher levels of human capital may be associated with higher levels of innovation (Aldrich, 1990), and educational linkages may contribute to the creation of social networks and social capital: the potential achievement of outcomes and resources derived from social networks (Coleman, 1988). It is argued that the benefits of social networks are potentially available to informal sector participants. A brief review of networks and social capital is considered below in terms of predicted relationships.