Education as a Catalyst for Economic Growth: Revisiting Economic Growth Theories

Abstract

This study offers a theoretical examination of the connection between government investment in education and economic growth. It unites the major theories of public finance with classical and modern expansion theories. It adopts the comprehensive review methods to examine the relation between education and economic growth from a theoretical perspective. Therefore, it reviews general expenditure models, such as the Law of Wagner and the Peacock-Wiseman Hypothesis of structural and crisis-related patterns in education expenditure, as well as fiscal sustainability models such as the Critical Limit Hypothesis and the Cost Disease proposed by Baumol. Normative models of fair distribution exist in pure theories like the Ability-to-Pay principle and the Benefit Principle of Pigou. These theories of spending are connected to the concepts of economic growth (classical and neoclassical models, endogenous growth, and human capital theory) in the discussion. Moreover, it also takes into account other concepts such as signalling theory and the capability approach. In this synthesis, government investment in education is directly productive and innovative and indirectly a source of social stability, equity, and good governance. The review notes that inclusive and resilient economic growth requires sustained long-term, carefully planned, public investment in education. The policy implications underscore the need to match investments in education to innovation systems, labour markets, and equal access to achieve the potential and sustainable economic growth.