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AD CURVE: The aggregate demand curve, which is a graphical representation of the relation between aggregate expenditures on real production and the price level, holding all ceteris paribus aggregate demand determinants constant. The aggregate demand, or AD, curve is one side of the graphical presentation of the aggregate market. The other side is occupied by the aggregate supply curve (which is actually two curves, the long-run aggregate supply curve and the short-run aggregate supply curve). The negative slope of the aggregate demand curve captures the inverse relation between aggregate expenditures on real production and the price level. This negative slope is attributable to the interest-rate effect, real-balance effect, and net-export effect.

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Learning All About EDUCATION

It's a bright spring morning, the sort of day that makes poets and pedestrians pontificate profusely about our wondrous world. But, wait... IT'S TEST DAY! You're late for an exam! You hurriedly roam the school halls, opening door after endless door along an infinite hallway, in search of your exam. All you discover, though, is Maurice Finklestein who smirks knowingly while ridiculing your tardiness. Why do we do it? Why do we put ourselves through 12 to 20 years of oppression in the halls of academia, learning stuff of questionable value? Why? Why? WHY?

An Unquenchable Thirst?

For some, education is a means of seeking answers to the great questions of life, such as those that deal with our existence, the creation of the universe, and what happens to socks lost in the dryer. This view of education places it in the same category as eating, drinking, and sleeping, all of which fulfill a few of our unlimited wants and needs.

There's something to be said about this view. Most of us have a "need to know" that motivates us to buy newspapers, watch the news, read books, dismantle a perfectly good clock, or ask about the latest gossip on family and friends. When education aligns itself with this "need to know", we can best think of it as a consumption good. Like you might buy a sardine pizza, a pair of bikini underwear, or a spiffy OmniMotors XL GT 9000 sports coupe just for the satisfaction, so too might you spend four months in a college course learning about insects indigenous to the mountains of Northwest Queoldiola. Ahh, the pleasure of it all!

But, of course, there's more to education. With the exception of a few bespectacled scholars, most people voluntarily pursue an education because it improves their job prospects and ultimately their incomes. "To get a good job, get a good education." This falls under the favorite topic of many pointy-headed economists -- human capital.

The Steel and Bricks of Human Capital

Human capital includes the skills and knowledge which make labor more productive. We've used the term capital in many places throughout this Guide when concerned with factories, buildings, equipment, machinery and the like. The really nifty thing about capital is that it makes labor more productive. While a carpenter might be able to build a house with nothing but a pair of bare, albeit really strong, hands, it's a heck of a lot easier with a hammer, table saw, electric drill, and a truck or two to deliver materials. Likewise, a carpenter's job is a heck of a lot easier if the carpenter knows how to build a house.

As regular capital makes workers more productive, so to does human capital. While there are a bunch of different ways that you and I can get the knowledge and skills of human capital, there are three that really stand out:

  • Experience. Just doing stuff on your own as you learn by trial and error, repetition, and practice is a pretty good way to increase your stockpile of human capital. For example, a good carpenter might know that nailing a 2-by-4 in a certain way works best because walls, roofs, ceilings, and floors keep falling apart if done differently. Experience is a good teacher.

  • Training. On some occasions it helps to be guided through the maze of learning by someone who's already been through it. Training is where someone who knows the ropes shows you the best ways to do stuff, like a wise and woolly master carpenter who instructs an eager young apprentice how best to nail together two pieces of walnut.

  • Education. The last of these three can best be thought of as a formal, classroom education, including elementary school, high school, and college. The key here is that you usually learn more than just the "how to" of something. There's also a lot of the "why" and "so what."
The Big Payoff

The reason for human capital -- especially for those who have been subjected to 12 years of public school and extra years of college -- is extra work productivity. And (here's a really important "and") with extra productivity comes extra income. We seek human capital for the same reason that businesses invest in physical capital -- the return, the big bucks, the burgeoning bank accounts.

Here are a few numbers to ponder. A high school diploma will give you $6,000 to $7,000 more than an eighth-grade education. Salaries for college graduates are an average of $3,000 to $5,000 more a year than with a high school degree. The icing on the cake is that advanced degrees (masters and doctorates) tend to give you $10,000 to $15,000 more than a bachelors degree.

These numbers, of course, are only averages. Actual differences depend on the sort of human capital acquired with the differing education levels. Your bachelors degree in a high-paid occupation like accounting might give you more income than someone with a doctorate in Medieval Philosophy. Likewise, a skilled entrepreneur who dropped out of school in the third grade, like Waldo Millbottom (of the noted Waldo's TexMex Taco World), may earn more than an entire roomful of MBAs.

Overall, though, the evidence is pretty darn compelling. Workers with more education, earn more income. The exceptions are few.

Just Another Investment

Here's another point to ponder. The money spent on a college education is about the best investment that you can make. If you have, let's say $100,000 primed and ready to invest, you might consider the stock market, mutual funds, starting your own business, or plopping it down on an assortment of government securities, corporate bonds, or other such investments. The best return, however, is likely to be a college education.

Make no mistake, education and what it does for human capital is an investment. It has all of the features we look for in an investment.

  • First, you give up some current consumption. If we're talking about college, there are the obvious out-of-pocket expenses for tuition and books that you can't use to spend on other stuff, but there's also a mess of other nonmonetary costs like giving up work, leisure, and the better part of your life for four years.

  • Second, like other investments, you expect a return for your efforts. That's where the extra income and productivity comes in. Like a business that expects profits to rise when a new factory is finished, a college graduate expects more income.

  • Third, there's a significant risk when investing in education. Okay, so you thought there would be a big demand for doctorates in Medieval Philosophy when you started college. Maybe there was -- when you started. Maybe you were just misinformed. But, you took a chance, and it didn't pay off. Then again, Waldo Millbottom seldom admits that he was also the entrepreneur behind the failed Waldo's Fancy French Pedicure Shop and Sock Warehouse.
Let's Not Be Selfish

As good as education and human capital are for you on a personal level, they're even better for the economy. They're a really big part of economic growth. Two reasons stand out:

  • Human capital is a key part of the quality dimension of labor. In fact, human capital IS the quality dimension of labor. When we talk about improving the quality of labor we're talking about human capital.

  • Education is also a direct route to improving technology. The more people know, the more they're likely to come up with better ways of doing stuff -- and that's what technology is all about.

    Over the years, a significant part of economic growth in the good old U. S. of A. can be traced directly to improvements in technology and human capital. It's a good investment for our country.

    There are, however, other benefits from education. In particular, education has a big public good dimension. You might recall that a public good is something the government produces, like national defense, because you can't keep people away (no excludability) and there's really no reason to keep them away (no rival consumption).

    Here are some "public" goods that we all enjoy because of education:

    • Less crime. While education doesn't prevent crime, as a generally rule, the more educated we are, the fewer crimes we commit.

    • Better citizens. Education also tends to make us better citizens. In addition to obeying the laws, we tend to be better informed voters and elected better leaders, if we're more educated.

    • Better products. Education and human capital, also improve the quality of output produced, over and above all of the stuff we talked about with economic growth. For example, a carpenter who is better educated in the fine are of construction will build a better house.
    Enter the First Estate

    Economic growth alone would probably justify a lot of what the government does to promote, fund, and subsidize education. But when you throw in the public good dimension, you have a clear cut need role for the first estate. Keep this in mind when you hear some of the wealthy members of the second-estate, who educate their offspring at the finest private schools in the world, criticize government-funded education for the common folk. Perhaps they would like to keep the third estate groveling in ignorant peasant bliss.

    Tipping the Scales on Education

    • It's hard to say too many good things about education. It has been a source of an extended increase in our standard of living for two centuries.

    • Like any government-sponsored good, education is prone toward really bone-headed policies. Many of these are caused by special interest groups that have their fingers in the government's education pie. While it would be nice to think that every dollar spent on education provides benefits, such is not the case. Some dollars are siphoned off into inefficient and unproductive uses. Who's pockets are being lined in your city? Keep informed to see if your education tax dollars are invested wisely.

    • On a personal level, you should see that your own education dollars are invested wisely. If you get a lot of satisfaction from studying Medieval Philosophy (and want little income), then by all means go for it. However, other human-capital investments will likely add more to your bank account.

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