In practice, therefore, investment under the plan would still be somewhat too small and would not be distributed in the optimum manner
A governmental body could offer to finance or help finance the training of any individual who could meet minimum quality standards by making available not more than a limited sum per year for not more than a specified number of years, provided it was spent on securing training at a recognized institution. The individual would agree in return to pay to the government in each future year x percent of his earnings in excess of y dollars for each $1,000 that he gets in this way. This payment could easily be combined with payment of income tax and so involve a minimum of additional administrative expense. The base sum, $y, should be set equal to estimated average — or perhaps modal — earnings without the specialized training; the fraction of earnings paid, x , should be calculated so as to make the whole project self-financing. In this way the individuals who received the training would in effect bear the whole cost. Provided this was the only way in which government financed vocational or professional training, and provided the calculated earnings reflected all relevant returns and costs, the free choice of individuals would tend to produce the optimum amount of investment. The second proviso is unfortunately not likely to be fully satisfied. To illustrate the point at issue, suppose that a particular skill acquired by education can be used in two different ways; for example, medical skill in research or in private practice. Suppose that, if money earnings were the same, individuals would generally prefer research. The non-pecuniary https://1stamericanloan.com/payday-loans-ca/ advantages of research would then tend to be offset by higher money earnings in private practice. These higher earnings would be included in the sum to which the fraction x was applied whereas the monetary equivalent of the non-pecuniary advantages of research would not be. This result would be produced by a larger than optimum fraction of individuals going into research necessitating a higher value of x to make the scheme self-financing than if the value of the non-pecuniary advantages could be included in calculated earnings. The inappropriate use of human capital financed under the plan would in this way lead to a less than optimum incentive to invest and so to a less than optimum amount of investment. 12
In consequence, the earnings differential would have to be higher under the plan than if individuals could finance themselves, since it is the net monetary differential, not the gross, that individuals would balance against the non-pecuniary advantages of research in deciding how to use their skill
Estimation of the values of x and y clearly offers considerable difficulties, especially in the early years of operation of the plan, and the danger would always be present that they would become political footballs. Information on existing earnings in various occupations is relevant but would hardly permit anything more than a rough approximation to the values that would render the project self-financing. In addition, the values should in principle vary from individual to individual in accordance with any differences in expected earning capacity that can be predicted in advance — the problem is similar to that of varying life insurance premia among groups that have different life expectancy. For such reasons as these it would be preferable if similar arrangements could be developed on a private basis by financial institutions in search of outlets for investing their funds, non-profit institutions such as private foundations, or individual universities and colleges.