Investment In Children, When and How?

When the term “human capital” was brought to the economic literature in early 1960s, it also brought a big debate about how we should see the human capabilities and treat them. The early objection was not theoretical, but more philosophical: claiming human if treated as owning inherent or gained skills which potentially are in the same category with the physical capital (that was the first impression when the term “capital” was used), we should treat human as a version of capital. This is in principle perfectly fine theoretically, whereas it opens a new avenue in our understanding which affects the way we see the human development.

Today, the term “human capital” has a well-accepted definition in economics (and possibly in many other fields) that roughly states “stock of competencies, knowledge, social and personality attributes, including creativity, cognitive abilities, embodied in the ability to perform labor so as to produce economic value”. Its role in economic development is so vital that the modern growth theory sees human capital as an (the) important growth factor. Due to its important role in economics, it is not surprising that many researchers study what boosts the human capital. Obviously there are many dimensions of this question and one important dimension is that in different time periods in the lifecycle, human capital evolves differently. Take for instance, the childhood, it may be expected that the human capital increases rapider than any other period in our lifecycle. Or is it so?

One good thing about science is that most of the time, it approves the conventional wisdom. However, without the required research, the common sense does not mean a lot, especially when it comes to direct/ change policies. Cunha from University of Pennsylvania and Heckman from university of Chicago have spent some time on the issue of human capital, especially the human capital investments during the early childhood. Their research basically states that there are critical periods in the human life where the impact of investment in human capital varies. As the common sense predicted, children learn faster and in economic terms, the benefit of investment in the early childhood is far above the benefit in the following adolescence years. Why is this important to know this scientifically? Due to several reasons, but the most important among all is the chance to direct/change the policies accordingly.

Think about the case of government programs for the children from disadvantaged backgrounds. When it comes to the question of should we allocate funds to spend on improving life outcomes of those children? I believe (hope) the answer is an absolute “yes”. Then the next important question is: what is the “best” way of doing it? Luckily, most of the time, “best” has a direct correspondence in economics: do it with the maximum impact (in terms of improving outcomes for children) given the fixed certain budget. From a variety of intervention studies, it is well known now that ability differences in children from different socioeconomic backgrounds can be reduced if corrective action is taken at early ages. One example is the Perry Preschool Program of United States which provides investment at early ages to the disadvantaged children. Results show that there can be substantial improvements in cognitive and noncognitive skills of the participants in the program. In turn those skills are what matters in many different aspects of life; like having better education, successful marriages, low probability of committing crime, better labor market outcomes, etc.

Moreover, Heckman and Cunha conduct a simulation study to address the cost of investments in different periods of the children’s life. Consider three different policies. The first one is like the Perry Preschool program mentioned above which provides funds at early stages that moves children from the lower end of the skill distribution to a higher level.  This gain can be achieved by moving parental investment from the bottom decile (1/10 of the population) to around seventh decile of the family investment distribution. Suppose in this policy, there is no follow-up investment. They also consider another policy for the same target population that postpones the investment until adolescence. It is designed to compensate early shortfalls by investing larger amounts in the adolescence years to achieve the same high-school graduation rates observed in the Perry program. Real life examples of this policy are college tuition programs, adolescence literacy programs, and mentoring programs. The simulation exercise shows that the cost of investment in the adolescence targeted program is more than 35 percent larger than in the Perry Preschool program. Late remediation is possible, but it is costly. Moreover the researchers conduct a final third policy that optimally distributes resources spent in the second policy over the full life cycle of the child. Result: A balanced investment strategy is the most efficient.

Early childhood investment is extremely important but follow-up investments should complement it. Such a policy will produce the best outcome for the children. This is in fact in line with the common wisdom again and more than often we try to implement some sort of it for our own children. However when it comes to design a government policy to promote the children from disadvantaged backgrounds, the resources available for investment are not that flexible most of the time and generally investments are targeted to for certain periods. The current research on human capital tells us a better way to increase the life outcomes of those children through a continuous investment starting from childhood. Of course, there remain many other interesting questions unanswered here such as what should be the content of the family investment? Are we referring to monetary investments like buying books, toys, sending the child to a chess class, or parental time spent with the kids are of equal importance? This is an active research topic which my co-authors and I spent some time on. Hopefully I will write about this issue on the new blog post.

For your comments and ideas, please contact Dr. Mehmet Ali Soytaş at

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