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dence that the rate of return on investment in training is very much higher than the rate of return on investment in physical capital. This difference suggests the existence of underinvestment in human capital8
This underinvestment in human capital presumably reflects an imperfection in the capital market. Investment in human beings cannot be financed on the same terms or with the same ease as investment in physical capital. It is easy to see why. If a fixed money loan is made to finance investment in physical capital, the lender can get some security for his loan in the form of a mortgage or residual claim to the physical asset itself, and he can count on realizing at least part of his investment in case of default by selling the physical asset. If he makes a comparable loan to increase the earning power of a human being, he clearly cannot get any comparable security. In a non-slave state, the individual embodying the investment cannot be bought and sold. Even if he could, the security would not be comparable. The productivity of the physical capital does not in general depend on the co-operativeness of the original borrower. The productivity of the human capital quite obviously does. A loan to finance the training of an individual who has no security to offer other than his future earnings is therefore a much less attractive proposition than a loan to finance the erection of a building: the security is less, and the cost of subsequent collection of interest and principal is very much greater.
A further complication is introduced by the inappropriateness of fixed money loans to finance investment in training. Such an investment necessarily involves much risk. The average expected return may be high, but there is wide variation about the average. Death or physical incapacity is one obvious source of variation but this is probably much less important than differences in ability, energy, and good fortune. Consequently if fixed money loans were made, and were secured only by expected future earnings, a considerable fraction would never be repaid. In order to make such loans attractive to lenders, the nominal interest rate charged on all loans would
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8 See G. S. Becker, "Underinvestment in College Education?" American Economic Review, Proceedings L (1960), 35664; T. W. Schultz, "Investment in human Capital," American Economic Review, LXI (1961), 117.

 
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