In this paper, I examine the transitional dynamics of a model economy populated by individuals who split their time between acquiring a formal education, producing final goods, and innovating. The paper has two objectives: (i) to uncover the macroeconomic circumstances that triggered the onset and rise of formal education; (ii) to reconcile the remarkable growth of the education sector with the constancy of other key macroeconomic variables, such as the interest rate, the consumption-output ratio and the growth rate of per capita income (Kaldor facts). The transitional dynamics of human capital growth models, such as Lucas (1988), would attribute the arrival of education to the diminishing marginal productivity of physical capital. Conversely, the model proposed here suggests that it is the rate of learning that catches up with the rate of return on physical capital. The learning rate increases with the stock of public knowledge - the primary input used by the education sector. The conjecture is that when public knowledge hits a critical threshold, the rate of return on education becomes large enough to induce individuals to spend time in school. The stock of public knowledge grows as the number of technologies available increases. In accordance with the development trajectories of modern economies, the model generates a development sequence in which an innovation-only economy is followed by an innovation-education economy. The model's transitional paths are matched with about three centuries of U.S. economic data.
