Content and summary of findings

My doctoral research emanated from the interest in education externalities. It was the original goal to empirically quantify the latter - specifically growth externalities - in order to contribute to the debate on public education subsidies. Thorough contemplation, however, led to the insight of the research question being obsolete altogether. Chapter 2 of the thesis summarizes the relevant literature on education externalities, discusses why the prevailing notion of education externalities is misleading and why empirical quantification attempts are inadequate. Distinguishing between the concepts 'education' and 'teaching' is key to understand the main conclusion of this chapter, according to which growth externalities of education according to Lucas (1988) are likely to be internalized on the labor market.

Education is argued to be a private good with well-defined property rights. Individuals may exploit those to receive compensation for their investment in education. Further, distinguishing between 'education' and 'knowledge' leads to the conclusion that growth externalities according to Romer (1990) are not directly related to education, but arise from the knowledge generation process.

These conclusions from chapter 2 are the starting point for chapter 3: If growth externalities of education do not exist and quantification efforts must fail because of this, what do governments use as a guideline to determine the extent of public educational spending? Chapter 3 is specifically interested in ideological aspects of different regime types.

Introduction 5

Are democracies ideologically more dedicated to education finance than autocracies?

Previous studies have ignored this aspect of regime type influence on public education subsidies. An analysis of worldwide government spending during the interwar period, which controls for the influence of other political drivers of government scope, reveals that in the long run democracies do not seem to put a higher priority on public education. Rather, there are hints that the opposite is the case, possibly because the educational system is a channel through which an autocratic regime may transmit its ideology. On the other hand, the more advanced private systems of education in democracies may simply crowd out the public educational effort in the long run.

Also, chapter 4 is motivated by the outcome of chapter 2: If the education process does not yield growth externalities, but the knowledge generation process does, can those externalities be captured on the national level or does knowledge spill over internationally?

Also, what is the exact nature of the knowledge generation process? What are the determinants of innovation? Can anything be done at all to influence knowledge generation and thereby technological process? These questions have been addressed theoretically by many authors. An empirical foundation of the theoretical efforts remains to be delivered, however. Chapter 4 contributes to the exploration of the innovation process on the macro-level. Exploiting a literature-based measure of national innovative success, it finds that actual national economic growth depends less on a country's innovativeness, and more on its ability to adopt technologies, which is in turn given by average human capital and the institutional conditions. The potential for growth, however, is determined by the international technological frontier. Hence, growth externalities according to Romer (1990) precipitate only on an international level. The size of a country's contribution to frontier shifts depends primarily on population size. Also, institutions as measured by constraints on the executive make a significant difference. More constraints on the executive are better for the innovation

climate. The human capital stock as measured by average years of schooling, however, does not seem to be relevant for the generation of new knowledge. This finding is at odds with many economist's central tenets. Hence, it makes sense to validate it based on micro-evidence.

Chapter 5 approaches this task by scrutinizing the biographies of historical inventors and testing quantitatively whether their formal level of schooling enhanced their contribution to technological development. Indeed, the results are in line with the findings of chapter 4.

Formal schooling is found to be beneficial for innovative success only in very narrow biographical settings. Specifically, it may act as a substitute for financial security and job security. But there is no evidence that it actually enhances an individual’s innovative potential. To explain this finding, it makes sense to think about innovative individuals as characters who strive for creative self-realization and acquire the needed skills informally, if they are deprived of formal schooling.

2 (Mis-)Understanding Education Externalities

This article reviews the current state of research on education externalities. It finds that much of the confusion regarding their magnitude results from conceptual misunderstandings about their nature. The concepts of 'education', 'teaching', and 'knowledge' need to be distinguished for a better understanding. Whereas the consumption of teaching services yields stability externalities on the primary and secondary level, only the production of knowledge may generate growth externalities. There is no reason to believe, however, that the pure accumulation of education has such an effect, too. Education is argued to be a private good with well defined property rights. Individuals should be able to exploit those and provide the production sector with the efficient quantity of human capital. Following this rationale, it is demonstrated that empirical studies, contrasting estimates of private and social returns to education, are unsuitable to substantiate the existence of growth externalities. As a consequence, full subsidization of tertiary programs is called into question.

4 An earlier version of this chapter has been submitted to the Journal of Economic Surveys. When this footnote was written, it was still being reviewed.