It is also defined as the gradual advancement or growth through a series of progressive changes. Development is a process, not a level. It is a path to achieve certain goals. Development is a normative concept referring to a multidimensional process. Some people argue that development must be relative to time, place, and circumstance, and dismiss any universal formula.
In modern development thinking and economics, the core meaning of development was economic growth, as in growth theory and Big Push theory. In the course of time mechanization and industrialization became part of this, as in Rostow’s Stages of Economic Growth (1960).
When development thinking broadened to encompass modernization, economic growth was combined with political modernization, that is, nation building, and social modernization such as fostering entrepreneurship and ‘achievement orientation’.
In dependency theory, the core meaning of development likewise was economic growth or capital accumulation. Its distorted form was dependent accumulation which led to the ‘development of underdevelopment’, and an intermediate form was ‘associated dependent development’. The positive goal was national accumulation or auto-centric development. Alternative development thinking introduced new understandings of development focused on social and community development and ‘human flourishing. ’ The propounding of development ideas in the economics can be dated back to the time of ancient Greek and Indian scholars.
However, the meaning of development in economics has evolved over time during last three centuries as follows: Period Perspectives Meanings of development 1800s Classical political economy Remedy for progress; catching up 1870 > Latecomers Industrialization, catching-up 1850 > Colonial economics Resource management, trusteeship 1940 > Development economics Economic growth – industrialization 1950 > Modernization theory Growth, political and social modernization 1960 > Dependency theory Accumulation – national, autocentric 1970 > Alternative development Human flourishing 980 > Human development Capacitation, enlargement of people’s choices 1980 > Neoliberalism Economic growth – structural reform, deregulation, liberalization, privatization 1990 >Post-development Authoritarian engineering, disaster 2000 Millennium Development Goals Structural reforms In the immediate post-war period, development economics, a branch of economics, arose out of previous studies in colonial economics. By the 1960s, an increasing number of development economists felt that economics alone could not fully address issues such as political effectiveness and educational provision.
Development studies arose as a result of this, initially aiming to integrate ideas of politics and economics. Since then, it has become an increasingly inter- and multi-disciplinary subject, encompassing a variety of social scientific fields. In this study, we shall focus on the development ideas propounded by the economic thinkers and the dominant development theories in economics. We shall first introduce the economic thoughts and ideas on development in perspective of the thinker chronologically dated back from ancient age.
Then we shall also discuss about the dominant development theories in economics sorted on the basis of chronology of publishing of the ideas. Early Economic Thoughts The earliest discussions of economics date back to ancient times (e. g. Chanakya’s Arthashastra or Xenophon’s Oeconomicus).
Back then, and until the industrial revolution, economics was not a separate discipline but part of philosophy. In Ancient Athens, a slave based society but also one developing an embryonic model of democracy, Plato’s book The Republic contained references to specialization of labor and production.
But it was his pupil Aristotle that made some of the most familiar arguments, still in economic discourse today. Plato and his pupil, Aristotle, have had an enduring effect on Western philosophy. Aristotle’s Politics (c. a. 350 BC) was mainly concerned to analyze different forms of a state (monarchy, aristocracy, constitutional government, tyranny, oligarchy, democracy) as a critique of Plato’s advocacy of a ruling class of “philosopher-kings”. In particular for economists, Plato had drawn a blueprint of society on the basis of common ownership of resources.
But Aristotle viewed this model as an oligarchical anathema. Though Aristotle certainly advocated there be many things held in common, he argued that not everything could be, simply because of the “wickedness of human nature”. “It is clearly better that property should be private”, wrote Aristotle, “but the use of it common; and the special business of the legislator is to create in men this benevolent disposition. ” In Politics Book I, Aristotle discusses the general nature of households and market exchanges.
For him there is a certain “art of acquisition” or “wealth-getting”. Money itself has the sole purpose of being a medium of exchange, which means on its own “it is worthless… not useful as a means to any of the necessities of life”. Nevertheless, points out Aristotle, because the “instrument” of money is the same many people are obsessed with the simple accumulation of money. “Wealth-getting” for one’s household is “necessary and honorable”, while exchange on the retail trade for simple accumulation is “justly censured, for it is dishonorable”.
Of the people he stated they as a whole thought acquisition of wealth (chrematistike) as being either the same as, or a principle of oikonomia (household management – oikonomos), with oikos as house and nomos in fact translated as custom or law. Aristotle himself was highly disapproving of usury and cast scorn on making money through means of a monopoly. Middle Ages Thomas Aquinas (1225–1274) was an Italian theologian and writer on economic issues. He taught in both Cologne and Paris, and was part of a group of Catholic scholars known as the Schoolmen, who moved their enquiries beyond theology to philosophical and scientific debates.
In the treatise Summa Theologica Aquinas dealt with the concept of a just price, which he considered necessary for the reproduction of the social order. Bearing many similarities with the modern concept of long run equilibrium a just price was supposed to be one just sufficient to cover the costs of production, including the maintenance of a worker and his family. He argued it was immoral for sellers to raise their prices simply because buyers were in pressing need for a product. Aquinas discusses a number of topics in the format of questions and replies, substantial tracts dealing with Aristotle’s theory.
Questions 77 and 78 concern economic issues, mainly relate to what a just price is, and to the fairness of a seller dispensing faulty goods. Aquinas argued against any form of cheating and recommended compensation always be paid in lieu of good service. Whilst human laws might not impose sanctions for unfair dealing, divine law did, in his opinion. One of Aquinas’ main critics was Duns Scotus (1265–1308) in his work Sententiae (1295).
Originally from Duns Scotland, he taught in Oxford, Cologne and Paris.
Scotus thought it possible to be more precise than Aquinas in calculating a just price, emphasising the costs of labor and expenses – though he recognised that the latter might be inflated by exaggeration, because buyer and seller usually have different ideas of what a just price comprises. If people did not benefit from a transaction, in Scotus’ view, they would not trade. Scotus defended merchants as performing a necessary and useful social role, transporting goods and making them available to the public. Mercantilists and Nationalism
From the localism of the Middle Ages, the waning feudal lords, new national economic frameworks began to be strengthened. From 1492 and explorations like Christopher Columbus’ voyages, new opportunities for trade with the New World and Asia were opening. New powerful monarchies wanted a powerful state to boost their status. Mercantilism was a political movement and an economic theory that advocated the use of the state’s military power to ensure local markets and supply sources were protected. Mercantile theorists thought international trade could not benefit all countries at the same time.
Because money and gold were the only source of riches, there was a limited quantity of resources to be shared between countries. Therefore, tariffs could be used to encourage exports (meaning more money comes into the country) and discourage imports (sending wealth abroad).
In other words a positive balance of trade ought to be maintained, with a surplus of exports. The term mercantilism was not in fact coined until the late 1763 by Victor de Riqueti, marquis de Mirabeau and popularised by Adam Smith, who vigorously opposed its ideas.
English businessman Thomas Mun (1571–1641) represents early mercantile policy in his book England’s Treasure by Foreign Trade. Although it was not published until 1664 it was widely circulated as a manuscript before then. He was a member of the East India Company and also wrote about his experiences there in A Discourse of Trade from England unto the East Indies (1621).
According to Mun, trade was the only way to increase England’s treasure (i. e. , national wealth) and in pursuit of this end he suggested several courses of action.
Important were frugal consumption to increase the amount of goods available for export, increased utilization of land and other domestic natural resources to reduce import requirements, lowering of export duties on goods produced domestically from foreign materials, and the export of goods with inelastic demand because more money could be made from higher prices. Philipp von Hornigk (1640–1712), sometimes spelt Hornick or Horneck was born in Frankfurt am Main and became an Austrian civil servant writing in a time when his country was constantly threatened by Ottoman invasion.
In Osterreich Uber Alles, Wann es Nur Will (1684, Austria Over All, If She Only Will) he laid out one of the clearest statements of mercantile policy. He listed nine principal rules of national economy. To inspect the country’s soil with the greatest care, and not to leave the agricultural possibilities of a single corner or clod of earth unconsidered… All commodities found in a country, which cannot be used in their natural state, should be worked up within the country… Attention should be given to the population, that it may be as large as the country can support… old and silver once in the country are under no circumstances to be taken out for any purpose… The inhabitants should make every effort to get along with their domestic products… [Foreign commodities] should be obtained not for gold or silver, but in exchange for other domestic wares… and should be imported in unfinished form, and worked up within the country… Opportunities should be sought night and day for selling the country’s superfluous goods to these foreigners in manufactured form… No importation should be allowed under any circumstances of which there is a sufficient supply of suitable quality at home.
Jean-Baptiste Colbert (1619–1683) was Minister of Finance under King Louis XIV of France. He set up national guilds to regulate major industries. Silk, linen, tapestry, furniture manufacture and wine were examples of the crafts in which France specialized, all of which came to require membership of a guild to operate in. These remained until the French revolution. According to Colbert, “It is simply, and solely, the abundance of money within a state [which] makes the difference in its grandeur and power. ” British Enlightenment Period
Britain had gone through some of its most troubling times through the 17th century, enduring not only political and religious division in the English Civil War, King Charles I’s execution and the Cromwellian dictatorship, but also the plagues and fires. The monarchy was restored under Charles II, who had catholic sympathies, but his successor King James II was swiftly ousted. Invited in his place were Protestant William of Orange and Mary, who assented to the Bill of Rights 1689 ensuring that the Parliament was dominant in what became known as the Glorious revolution.
The upheaval had seen a number of huge scientific advances, including Robert Boyle’s discovery of the gas pressure constant (1660) and Sir Isaac Newton’s publication of Philosophiae Naturalis Principia Mathematica (1687), which described the three laws of motion and his law of universal gravitation. All these factors spurred the advancement of economic thought. For instance, Richard Cantillon (1680–1734) consciously imitated Newton’s forces of inertia and gravity in the natural world with human reason and market competition in the economic world.
In his Essay on the Nature of Commerce in General, he argued rational self-interest in a system of freely adjusting markets would lead to order and mutually compatible prices. Unlike the mercantilist thinkers however, wealth was found not in trade but in human labor. The first person to tie these ideas into a political framework was John Locke. John Locke (1632–1704) was born near Bristol and educated in London and Oxford. John Locke combined philosophy, politics and economics into one coherent framework.
He is considered one of the most significant philosophers of his era mainly for his critique of Thomas Hobbes’ defense of absolutism in Leviathan (1651) and the development of social contract theory. Locke believed that people contracted into society which was bound to protect their rights of property. He defined property broadly to include people’s lives and liberties, as well as their wealth. When people combined their labor with their surroundings, then that created property rights. In his words from his Second Treatise on Civil Government (1689), God hath given the world to men in common…
Yet every man has a property in his own person. The labor of his body and the work of his hands we may say are properly his. Whatsoever, then, he removes out of the state that nature hath provided and left it in, he hath mixed his labor with, and joined to it something that is his own, and thereby makes it his property. Locke was arguing that not only should the government cease interference with people’s property (or their “lives, liberties and estates”) but also that it should positively work to ensure their protection.
His views on price and money were laid out in a letter to a Member of Parliament in 1691 entitled Some Considerations on the Consequences of the Lowering of Interest and the Raising of the Value of Money (1691).
Here Locke argued that the “price of any commodity rises or falls, by the proportion of the number of buyers and sellers”, a rule which “holds universally in all things that are to be bought and sold. ” Dudley North (1641–1691) was a wealthy merchant and landowner. Dudley North argued that the results of mercantile policy would be undesirable. He worked as an official for the Treasury and was opposed to most mercantile policy.
In his Discourses upon trade (1691), which he published anonymously, he argued that the assumption of needing a favorable trade balance was wrong. Trade, he argued, benefits both sides, it promotes specialization, the division of labor and produces an increase in wealth for everyone. Regulation of trade interfered with these benefits by reducing the flow of wealth. David Hume (1711–1776) agreed with North’s philosophy and denounced mercantile assumptions. His contributions were set down in Political Discourses (1752), later consolidated in his Essays, Moral, Political, Literary (1777).
Added to the fact that it was undesirable to strive for a favorable balance of trade it is, said Hume, in any case impossible. Hume held that any surplus of exports that might be achieved would be paid for by imports of gold and silver. This would increase the money supply, causing prices to rise. That in turn would cause a decline in exports until the balance with imports is restored. Francis Hutcheson (1694–1746) was teacher to Adam Smith during 1737-1740, and is considered to be at the end of a long tradition of thought on economics as “household or family management”, stemming from Xenophon’s work Oeconomicus.
The Circular Flow Pierre Samuel du Pont de Nemours, a prominent Physiocrat, emigrated to the US and his son founded DuPont, the world’s second biggest chemicals company. Similarly disenchanted with regulation on trademarks inspired by mercantilism, a Frenchman name Vincent de Gournay (1712–1759) is reputed to have asked why it was so hard to laissez faire, laissez passer (free enterprise, free trade).
He was one of the early physiocrats, a word from Greek meaning “government of nature”, who held that agriculture was the source of wealth. As historian David B.
Danbom wrote, the Physiocrats “damned cities for their artificiality and praised more natural styles of living. They celebrated farmers. ” Over the end of the seventeenth and beginning of the eighteenth century big advances in natural science and anatomy were being made, including the discovery of blood circulation through the human body. This concept was mirrored in the physiocrats’ economic theory, with the notion of a circular flow of income throughout the economy. Francois Quesnay (1694–1774) was the court physician to King Louis XV of France.
He believed that trade and industry were not sources of wealth, and instead in his book, Tableau economique (1758, Economic Table) argued that agricultural surpluses, by flowing through the economy in the form of rent, wages and purchases were the real economic movers. Firstly, said Quesnay, regulation impedes the flow of income throughout all social classes and therefore economic development. Secondly, taxes on the productive classes, such as farmers, should be reduced in favour of rises for unproductive classes, such as landowners, since their luxurious way of life distorts the income flow.
Jacques Turgot (1727–1781) was born in Paris and from an old Norman family. His best known work, Reflexions sur la formation et la distribution des richesses (1766, Reflections on the Formation and Distribution of Wealth) developed Quesnay’s theory that land is the only source of wealth. Turgot viewed society in terms of three classes: the productive agricultural class, the salaried artisan class (classe stipendice) and the landowning class (classe disponible).
He argued that only the net product of land should be taxed and advocated the complete freedom of commerce and industry.
In August 1774, Turgot was appointed to be Minister of Finance and in the space of two years introduced many anti-mercantile and anti-feudal measures supported by the King. A statement of his guiding principles, given to the King were “no bankruptcy, no tax increases, no borrowing. ” Turgot’s ultimate wish was to have a single tax on land and abolish all other indirect taxes, but measures he introduced before that were met with overwhelming opposition from landed interests. Two edicts in particular, one suppressing corvees (charges from farmers to aristocrats) and another renouncing privileges given to guilds inflamed influential opinion.
He was forced from office in 1776. Adam Smith and The Wealth of Nations Adam Smith (1723–1790) is popularly seen as the father of modern political economy. His publication of the An Inquiry Into the Nature and Causes of the Wealth of Nations in 1776 happened to coincide not only with the American Revolution, shortly before the Europe wide upheavals of the French Revolution, but also the dawn of a new industrial revolution that allowed more wealth to be created on a larger scale than ever before. Smith was a Scottish moral philosopher, whose first book was The Theory of Moral Sentiments (1759).
He argued in it that people’s ethical systems develop through personal relations with other individuals, that right and wrong are sensed through others’ reactions to one’s behavior. This gained Smith more popularity than his next work, The Wealth of Nations, which the general public initially ignored. Yet Smith’s political economic magnum opus was successful in circles that mattered. Adam Smith’s famous statement on self-interest is “It is not from the benevolence of the butcher, the brewer or the baker, that we expect our dinner, but from their regard to their own self-interest.
We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages. ” Smith argued for a “system of natural liberty” where individual effort was the producer of social good. Smith believed even the selfish within society were kept under restraint and worked for the good of all when acting in a competitive market. Prices are often unrepresentative of the true value of goods and services. Following John Locke, Smith thought true value of things derived from the amount of labor invested in them.
Every man is rich or poor according to the degree in which he can afford to enjoy the necessaries, conveniencies, and amusements of human life. But after the division of labor has once thoroughly taken place, it is but a very small part of these with which a man’s own labor can supply him. The far greater part of them he must derive from the labor of other people, and he must be rich or poor according to the quantity of that labor which he can command, or which he can afford to purchase.
The value of any commodity, therefore, to the person who possesses it, and who means not to use or consume it himself, but to exchange it for other commodities, is equal to the quantity of labor which it enables him to purchase or command. Labor, therefore, is the real measure of the exchangeable value of all commodities. The real price of everything, what everything really costs to the man who wants to acquire it, is the toil and trouble of acquiring it.
When the butchers, the brewers and the bakers acted under the restraint of an open market economy, their pursuit of self-interest, thought Smith, paradoxically drives the process to correct real life prices to their just values. His classic statement on competition goes as follows. When the quantity of any commodity which is brought to market falls short of the effectual demand, all those who are willing to pay… cannot be supplied with the quantity which they want… Some of them will be willing to give more. A competition will begin among them, and the market price will rise…
When the quantity brought to market exceeds the effectual demand, it cannot be all sold to those who are willing to pay the whole value of the rent, wages and profit, which must be paid to bring it thither… The market price will sink… Smith believed that a market produced what he dubbed the “progress of opulence”. This involved a chain of concepts, that the division of labor is the driver of economic efficiency, yet it is limited to the widening process of markets. Both labor division and market widening requires more intensive accumulation of capital by the entrepreneurs and leaders of business and industry.
The whole system is underpinned by maintaining the security of property rights. Smith’s vision of a free market economy, based on secure property, capital accumulation, widening markets and a division of labor contrasted with the mercantilist tendency to attempt to “regulate all evil human actions. ” Smith believed there were precisely three legitimate functions of government. The third function was, “… erecting and maintaining certain public works and certain public institutions, which it can never be for the interest of any individual or small number of individuals, to erect and maintain…
Every system which endeavors… to draw towards a particular species of industry a greater share of the capital of the society than what would naturally go to it… retards, instead of accelerating, the progress of the society toward real wealth and greatness. ” In addition to the necessity of public leadership in certain sectors Smith argued, secondly, that cartels were undesirable because of their potential to limit production and quality of goods and services. Thirdly, Smith criticized government support of any kind of monopoly which always charges the highest price “which can be squeezed out of the buyers”.
The existence of monopoly and the potential for cartels, which would later form the core of competition law policy, could distort the benefits of free markets to the advantage of businesses at the expense of consumer sovereignty. Classical Political Economists The classical economists were referred to as a group for the first time by Karl Marx. One unifying part of their theories was the labor theory of value, contrasting to value deriving from a general equilibrium of supply and demand.
These economists had seen the first economic and social transformation brought by the Industrial Revolution: rural depopulation, precariousness, poverty, apparition of a working class. They wondered about the population growth, because the demographic transition had begun in Great Britain at that time. They also asked many fundamental questions, about the source of value, the causes of economic growth and the role of money in the economy. They supported a free-market economy, arguing it was a natural system based upon freedom and property.
However, these economists were divided and did not make up a unified current of thought. A notable current within classical economics was under consumption theory, as advanced by the Birmingham School and Malthus in the early 19th century. These argued for government action to mitigate unemployment and economic downturns, and was an intellectual predecessor of what later became Keynesian economics in the 1930s. Another notable school was Manchester capitalism, which advocated free trade, against the previous policy of mercantilism.
Thomas Malthus (1766–1834) was a Tory minister in the United Kingdom Parliament who believed in strict government abstention from social ills. Malthus cautioned law makers on the effects of poverty reduction policies. He devoted the last chapter of his book Principles of Political Economy (1820) to rebutting Say’s law, and argued that the economy could stagnate with a lack of “effectual demand”. In other words, wages if less than the total costs of production cannot purchase the total output of industry and that this would cause prices to fall.
Price falls decrease incentives to invest, and the spiral could continue indefinitely. Malthus is more notorious however for his earlier work, An Essay on the Principle of Population. This argued that intervention was impossible because of two factors. “Food is necessary to the existence of man”, wrote Malthus. “The passion between the sexes is necessary and will remain nearly in its present state”, he added, meaning that the “power of the population is infinitely greater than the power in the Earth to produce subsistence for man. ” Nevertheless growth in population is checked by “misery and vice”.
Any increase in wages for the masses would cause only a temporary growth in population, which given the constraints in the supply of the Earth’s produce would lead to misery, vice and a corresponding readjustment to the original population. However more labor could mean more economic growth, either one of which was able to be produced by an accumulation of capital. David Ricardo (1772–1823) was born in London. He is renowned for his law of comparative advantage. By the age of 26, he had become a wealthy stock market trader and bought himself a constituency seat in Ireland to gain a platform in the British parliament’s House of Commons.
Ricardo’s best known work is his Principles of Political Economy and Taxation, which contains his critique of barriers to international trade and a description of the manner the income is distributed in the population. Ricardo made a distinction between the workers, who received a wage fixed to a level at which they can survive, the landowners, who earn a rent, and capitalists, who own capital and receive a profit, a residual part of the income. If population grows, it becomes necessary to cultivate additional land, whose fertility is lower than that of already cultivated fields, because of the law of decreasing productivity.
Therefore, the cost of the production of the wheat increases, as well as the price of the wheat: The rents increase also, the wages, indexed to inflation (because they must allow workers to survive) too. Profits decrease, until the capitalists can no longer invest. The economy, Ricardo concluded, is bound to tend towards a steady state. To postpone the steady state, Ricardo advocates to promote international trade to import wheat at a low price to fight landowners. The Corn Laws of the UK had been passed in 1815, setting a fluctuating system of tariffs to stabilize the price of wheat in the domestic market.
Ricardo argued that raising tariffs, despite being intended to benefit the incomes of farmers, would merely produce a rise in the prices of rents that went into the pockets of landowners. Furthermore, extra labor would be employed leading to an increase in the cost of wages across the board, and therefore reducing exports and profits coming from overseas business. Economics for Ricardo was all about the relationship between the three “factors of production”: land, labor and capital. Ricardo demonstrated athematically that the gains from trade could outweigh the perceived advantages of protectionist policy. The idea of comparative advantage suggests that even if one country is inferior at producing all of its goods than another, it may still benefit from opening its borders since the inflow of goods produced more cheaply than at home, produces a gain for domestic consumers. According then to Ricardo, this concept would lead to a shift in prices, so that eventually England would be producing goods in which its comparative advantages were the highest.
John Stuart Mill (1806–1873) was the dominant figure of political economic thought of his time, as well as being a Member of Parliament for the seat of Westminster, and a leading political philosopher. Weaned on the philosophy of Jeremy Bentham, he wrote the most authoritative economics text of his time. Mill was a child prodigy, reading Ancient Greek from the age of 3, and being vigorously schooled by his father James Mill. Jeremy Bentham was a close mentor and family friend, and Mill was heavily influenced by David Ricardo.
Mill’s textbook, first published in 1848 and titled Principles of Political Economy was essentially a summary of the economic wisdom of the mid nineteenth century. Principles of Political Economy was used as the standard texts by most universities well into the beginning of the twentieth century. On the question of economic growth Mill tried to find a middle ground between Adam Smith’s view of ever expanding opportunities for trade and technological innovation and Thomas Malthus’ view of the inherent limits of population.
In his fourth book Mill set out a number of possible future outcomes, rather than predicting one in particular. The first followed the Malthusian line that population grew quicker than supplies, leading to falling wages and rising profits. The second, per Smith, said if capital accumulated faster than population grew then real wages would rise. Third, echoing David Ricardo, should capital accumulate and population increase at the same rate, yet technology stay stable, there would be no change in real wages because supply and demand for labor would be the same.
However growing populations would require more land use, increasing food production costs and therefore decreasing profits. The fourth alternative was that technology advanced faster than population and capital stock increased. The result would be a prospering economy. Mill felt the third scenario most likely, and he assumed technology advanced would have to end at some point. But on the prospect of continuing economic growth, Mill was more ambivalent.
I confess I am not charmed with the ideal of life held out by those who think that the normal state of human beings is that of struggling to get on; that the trampling, crushing, elbowing, and treading on each other’s heels, which form the existing type of social life, are the most desirable lot of human kind, or anything but the disagreeable symptoms of one of the phases of industrial progress. Mill is also credited with being the first person to speak of supply and demand as a relationship rather than mere quantities of goods on markets, the concept of opportunity cost and the rejection of the wage fund doctrine.
Capitalism and Marx Karl Marx (1818–1883) was, and in many ways still remains the pre-eminent socialist economist. Just as the term “mercantilism” had been coined and popularized by its critics, like Adam Smith, so was the term “capitalism” or Kapitalismus used by its dissidents, primarily Karl Marx. His combination of political theory represented in the Communist Manifesto and the dialectic theory of history inspired by Friedrich Hegel provided a revolutionary critique of capitalism as he saw it in the nineteenth century.
The socialist movement that he joined had emerged in response to the conditions of people in the new industrial era and the classical economics which accompanied it. He wrote his magnum opus Das Kapital at the British Museum’s library. With Marx, Friedrich Engels coauthored the Communist Manifesto, and the second volume of Das Kapital. Friedrich Engels released a book titled The Condition of the Working Class in England in 1844 describing people’s positions as “the most unconcealed pinnacle of social misery in our day. After Marx died, it was Engels that completed the second volume of Das Kapital from Marx’s notes. Karl Marx begins Das Kapital with the concept of commodities. Before capitalist societies, says Marx, the mode of production was based on slavery (e. g. in ancient Rome) before moving to feudal serfdom (e. g. in mediaeval Europe).
As society has advanced, economic bondage has become looser, but the current nexus of labor exchange has produced an equally erratic and unstable situation allowing the conditions for revolution. People buy and sell their labor in the same way as people buy and sell goods and services.
People themselves are disposable commodities. As he wrote in the Communist Manifesto, The history of all hitherto existing society is the history of class struggles. Freeman and slave, patrician and plebeian, lord and serf, guildmaster and journeyman, in a word, oppressor and oppressed, stood in constant opposition to one another… The modern bourgeois society that has sprouted from the ruins of feudal society has not done away with class antagonisms. It has but established new classes, new conditions of oppression, new forms of struggle in place of the old ones.
The wealth of those societies in which the capitalist mode of production prevails, presents itself as an immense accumulation of commodities, its unit being a single commodity. Our investigation must therefore begin with the analysis of a commodity. An oppressive power relation, says Marx applying the use/exchange distinction to labor itself, in work-wage bargains derives from the fact that employers pay their workers less in “exchange value” than the workers produce in “use value”. The difference makes up the capitalist’s profit, or in Marx’s terminology, “surplus value”. Therefore, says Marx, capitalism is a system of exploitation.
Ultimately, led by the Communist party, Marx envisaged a revolution and the creation of a classless society. How this may work, Marx never suggested. His primary contribution was not in a blue print for how society would be, but a criticism of what he saw it was. Neoclassical Thoughts In the 1860s, a revolution took place in development ideas in economics. The new ideas were that of the Marginalist school. Writing simultaneously and independently, a Frenchman (Leon Walras), an Austrian (Carl Menger) and an Englishman (Stanley Jevons) were developing the theory, which had some antecedents.
Instead of the price of a good or service reflecting the labor that has produced it, it reflects the marginal usefulness (utility) of the last purchase. This meant that in equilibrium, people’s preferences determined prices, including, indirectly the price of labor. This current of thought was not united, and there were three main schools working independently. The Lausanne school, whose two main representants were Walras and Vilfredo Pareto, developed the theories of general equilibrium and optimality. The main written work of this school was Walras’ Elements of Pure Economics.
The Cambridge school appeared with Jevons’ Theory of Political Economy in 1871. This English school has developed the theories of the partial equilibrium and has insisted on markets’ failures. The main representatives were Alfred Marshall, Stanley Jevons and Arthur Pigou. The Vienna school was made up of Austrian economists Menger, Eugen von Bohm-Bawerk and Friedrich von Wieser. They developed the theory of capital and has tried to explain the presence of economic crises. It appeared in 1871 with Menger’s Principles of Economics. William Stanley Jevons helped popularize marginal utility theory.
This stimulates producers to shift production, increasing mushrooming investment, which would increase market supply and a new price equilibrium between the products – e. g. lowering the price of mushrooms to a level between the two first levels. For many products across the economy the same would go, if one assumes markets are competitive, people choose on self-interest and no cost in shifting production. Mathematical Analysis Alfred Marshall wrote the main alternative textbook to John Stuart Mill of the day, Principles of Economics (1882).
Vilfredo Pareto (1848–1923) was an Italidan economist, best known for developing the concept of an economy that would permit maximizing the utility level of each individual, given the feasible utility level of others from production and exchange. Such a result came to be called “Pareto efficient”. Pareto devised mathematical representations for such a resource allocation, notable in abstracting from institutional arrangements and monetary measures of wealth or income distribution. Alfred Marshall is also credited with an attempt to put economics on a more mathematical footing.
He was the first Professor of Economics at the University of Cambridge and his work, Principles of Economics coincided with the transition of the subject from “political economy” to his favoured term, “economics”. He viewed maths as a way to simplify economic reasoning, though had reservations, revealed in a letter to his student Arthur Cecil Pigou. (1) Use mathematics as shorthand language, rather than as an engine of inquiry. (2) Keep to them till you have done. (3) Translate into English. (4) Then illustrate by examples that are important in real life. (5) Burn the mathematics. (6) If you can’t succeed in 4, burn 3. This I do often.
Coming after the marginal revolution, Marshall concentrated on reconciling the classical labor theory of value, which had concentrated on the supply side of the market, with the new marginalist theory that concentrated on the consumer demand side. Marshalls graphical representation is the famous supply and demand graph, the “Marshallian cross”. He insisted it is the intersection of both supply and demand that produce an equilibrium of price in a competitive market. Over the long run, argued Marshall, the costs of production and the price of goods and services tend towards the lowest point consistent with continued production.
Arthur Cecil Pigou in Wealth and Welfare (1920), insisted on the existence of market failures. Markets are inefficient in case of economic externalities, and the State must interfere. However, Pigou retained free-market beliefs, and in 1933, in the face of the economic crisis, he explained in The Theory of Unemployment that the excessive intervention of the state in the labor market was the real cause of massive unemployment, because the governments had established a minimal wage, which prevented the wages from adjusting automatically.
This was to be the focus of attack from Keynes. Austrian School While the end of the nineteenth century and the beginning of the twentieth were dominated increasingly by mathematical analysis, the followers of Carl Menger, in the tradition of Eugen von Bohm-Bawerk, followed a different route, advocating the use of deductive logic instead. This group became known as the Austrian School, reflecting the Austrian origin of many of the early adherents.
Thorstein Veblen in 1900, in his Preconceptions of Economic Science, contrasted neoclassical marginalists in the tradition of Alfred Marshall from the philosophies of the Austrian school. Joseph Alois Schumpeter (1883–1950) was an Austrian economist and political scientist most known for his works on business cycles and innovation. He insisted on the role of the entrepreneurs in an economy. In Business Cycles: A theoretical, historical and statistical analysis of the Capitalist process(1939), Schumpeter made a synthesis of the theories about business cycles.
He suggested that those cycles could explain the economic situations. According to Schumpeter, capitalism necessarily goes through long-term cycles, because it is entirely based upon scientific inventions and innovations. A phase of expansion is made possible by innovations, because they bring productivity gains and encourage entrepreneurs to invest. However, when investors have no more opportunities to invest, the economy goes into recession, several firms collapse, closures and bankruptcy occur. This phase lasts until new innovations bring a creative destruction process, i. . they destroy old products, reduce the employment, but they allow the economy to start a new phase of growth, based upon new products and new factors of production. Ludwig von Mises (1881–1973) was an Austrian economist who contributed the idea of praxeology, “The science of human action”. Praxeology views economics as a series of voluntary trades that increase the satisfaction of the involved parties. Mises also argued that socialism suffers from an unsolvable economic calculation problem, which according to him, could only be solved through free market price mechanisms.
Mises’ outspoken criticisms of socialism had a large influence on the economic thinking of Friedrich von Hayek (1899–1992), who, while initially sympathetic to socialism, became one of the leading academic critics of collectivism in the 20th century. In echoes of Smith’s “system of natural liberty”, Hayek argued that the market is a “spontaneous order” and actively disparaged the concept of “social justice”. Hayek believed that all forms of collectivism (even those theoretically based on voluntary cooperation) could only be maintained by a central authority.
In his book, The Road to Serfdom (1944) and in subsequent works, Hayek claimed that socialism required central economic planning and that such planning in turn would lead towards totalitarianism. Hayek attributed the birth of civilization to private property in his book The Fatal Conceit (1988).
According to him, price signals are the only means of enabling each economic decision maker to communicate tacit knowledge or dispersed knowledge to each other, to solve the economic calculation problem. Along with his contemporary Gunnar Myrdal, Hayek was awarded the Nobel Prize in 1974.
Depression and Reconstruction Alfred Marshall was still working on his last revisions of his Principles of Economics at the outbreak of the First World War (1914–1918).
The new twentieth century’s climate of optimism was soon violently dismembered in the trenches of the Western front, as the civilized world tore itself apart. For four years the production of Britain, Germany and France was geared entirely towards the war economy’s industry of death. In 1917 Russia crumbled into revolution led by Vladimir Lenin’s Bolshevik party.
They carried Marxist theory as their savior, and promised a broken country “peace, bread and land” by collectivizing the means of production. Also in 1917, the United States of America entered the war on the side of France and Britain, President Woodrow Wilson carrying the slogan of “making the world safe for democracy”. He devised a peace plan of Fourteen Points. In 1918 Germany launched a spring offensive which failed, and as the allies counter-attacked and more millions were slaughtered, Germany slid into revolution, its interim government suing for peace on the basis of Wilson’s Fourteen Points.
Europe lay in ruins, financially, physically, psychologically, and its future with the arrangements of the Versailles conference in 1919. John Maynard Keynes was the representative of Her Majesty’s Treasury at the conference and the most vocal critic of its outcome. John Maynard Keynes John Maynard Keynes (1883–1946) was born in Cambridge, educated at Eton and supervised by both A. C. Pigou and Alfred Marshall at Cambridge University. He began his career as a lecturer, before working in the British government during the Great War, and rose to be the British government’s financial representative at the Versailles conference.
His observations were laid out in his book The Economic Consequences of the Peace (1919) where he documented his outrage at the collapse of the Americans’ adherence to the Fourteen Points and the mood of vindictiveness that prevailed towards Germany. Keynes quit from the conference and using extensive economic data provided by the conference records, Keynes argued that if the victors forced war reparations to be paid by the defeated Axis, then a world financial crisis would ensue, leading to a second world war.
Keynes finished his treatise by advocating, first, a reduction in reparation payments by Germany to a realistically manageable level, increased intra-governmental management of continental coal production and a free trade union through the League of Nations; second, an arrangement to set off debt repayments between the Allied countries; third, complete reform of international currency exchange and an international loan fund; and fourth, a reconciliation of trade relations with Russia and Eastern Europe.
The book was an enormous success, and though it was criticised for false predictions by a number of people, without the changes he advocated, Keynes’ dark forecasts matched the world’s experience through the Great Depression which ensued in 1929, and the descent into a new outbreak of war in 1939. World War I had been the “war to end all wars”, and the absolute failure of the peace settlement generated an even greater determination to not repeat the same mistakes. With the defeat of fascism, the Bretton Woods conference was held to establish a new economic order.
Keynes was again to play a leading role. During the Great Depression, Keynes had published his most important work, The General Theory of Employment, Interest, and Money (1936).
The depression had been sparked by the Wall Street Crash of 1929, leading to massive rises in unemployment in the United States, leading to debts being recalled from European borrowers, and an economic domino effect across the world. Orthodox economics called for a tightening of spending, until business confidence and profit levels could be restored.
Keynes by contrast, had argued in A Tract on Monetary Reform (1923) that a variety of factors determined economic activity, and that it was not enough to wait for the long run market equilibrium to restore itself. As Keynes famously remarked, … this long run is a misleading guide to current affairs. In the long run we are all dead. Economists set themselves too easy, too useless a task if in tempestuous seasons they can only tell us that when the storm is long past the ocean is flat again.
On top of the supply of money, Keynes identified the propensity to consume, inducement to invest, the marginal efficiency of capital, liquidity preference and the multiplier effect as variables which determine the level of the economy’s output, employment and level of prices. Much of this esoteric terminology was invented by Keynes especially for his General Theory, though some simple ideas lay behind. Keynes argued that if savings were being kept away from investment through financial markets, total spending falls.
Falling spending leads to reduced incomes and unemployment, which reduces savings again. This continues until the desire to save becomes equal to the desire to invest, which means a new “equilibrium” is reached and the spending decline halts. This new “equilibrium” is a depression, where people are investing less, have less to save and less to spend. Keynes argued that employment depends on total spending, which is composed of consumer spending and business investment in the private sector. Consumers only spend “passively”, or according to their income fluctuations.
Businesses, on the other hand, are induced to invest by the expected rate of return on new investments (the benefit) and the rate of interest paid (the cost).
So, said Keynes, if business expectations remained the same, and government reduces interest rates (the costs of borrowing), investment would increase, and would have a multiplied effect on total spending. Interest rates, in turn, depend on the quantity of money and the desire to hold money in bank accounts (as opposed to investing).
If not enough money is available to match how much people want to hold, interest rates rise until enough people are put off.
So if the quantity of money were increased, while the desire to hold money remained stable, interest rates would fall, leading to increased investment, output and employment. For both these reasons, Keynes therefore advocated low interest rates and easy credit, to combat unemployment. But Keynes believed in the 1930s, conditions necessitated public sector action. Deficit spending, said Keynes, would kick-start economic activity. This he had advocated in an open letter to U. S. President Franklin D. Roosevelt in the New York Times (1933).
The New Deal programme in the U. S. had been well underway by the publication of the General Theory. It provided conceptual reinforcement for policies already pursued. Keynes also believed in a more egalitarian distribution of income, and taxation on unearned income arguing that high rates of savings (to which richer folk are prone) are not desirable in a developed economy. Keynes therefore advocated both monetary management and an active fiscal policy. The “American Way” After World War II, the United States had become the pre-eminent global economic power.
Europe and the Soviet Union lay in ruins and the British Empire was at its end. Until then, American economists had played a minor role. The institutional economists had been largely critical of the “American Way” of life, especially regarding conspicuous consumption of the Roaring Twenties before the Wall Street Crash of 1929. After the war, however, a more orthodox body of thought took root, reacting against the lucid debating style of Keynes, and re-mathematizing the profession. The orthodox centre was also challenged by a more radical group of scholars based at the University of Chicago.
They advocated “liberty” and “freedom”, looking back to 19th century-style non-interventionist governments. John R. Commons (1862–1945) also came from mid-Western America. Underlying his ideas, consolidated in Institutional Economics (1934) was the concept that the economy is a web of relationships between people with diverging interests. There are monopolies, large corporations, labor disputes and fluctuating business cycles. They do however have an interest in resolving these disputes. Government, thought Commons, ought to be the mediator between the conflicting groups.
Commons himself devoted much of his time to advisory and mediation work on government boards and industrial commissions. Adolf Augustus Berle, Jr. with Gardiner Means was a foundational figure of modern corporate governance. The Great Depression was a time of significant upheaval in the States. One of the most original contributions to understanding what had gone wrong came from a Harvard University lawyer, named Adolf Berle (1895–1971), who like John Maynard Keynes had resigned from his diplomatic job at the Paris Peace Conference, 1919 and was deeply disillusioned by the Versailles Treaty.
In his book with Gardiner C. Means, The Modern Corporation and Private Property (1932), he detailed the evolution in the contemporary economy of big business, and argued that those who controlled big firms should be better held to account. Directors of companies are held to account to the shareholders of companies, or not, by the rules found in company law statutes. This might include rights to elect and fire the management, require for regular general meetings, accounting standards, and so on. In 1930s America, the typical company laws (e. g. in Delaware) did not clearly mandate such rights.
Berle argued that the unaccountable directors of companies were therefore apt to funnel the fruits of enterprise profits into their own pockets, as well as manage in their own interests. The ability to do this was supported by the fact that the majority of shareholders in big public companies were single individuals, with scant means of communication, in short, divided and conquered. Berle served in President Franklin Delano Roosevelt’s administration through the depression, and was a key member of the so-called “Brain trust” developing many of the New Deal policies.
In 1967, Berle and Means issued a revised edition of their work, in which the preface added a new dimension. It was not only the separation of controllers of companies from the owners as shareholders at stake. They posed the question of what the corporate structure was really meant to achieve. John K. Galbraith (1908–2006) began his career as a high flying “new dealer”, in the administration of Franklin Delano Roosevelt during the Great Depression. An interview from the early 1990s is here.
After the war, John Kenneth Galbraith became one of the standard bearers for pro-active government and liberal-democrat politics. In The Affluent Society (1958), Galbraith argued voters reaching a certain material wealth begin to vote against the common good. He argued that the “conventional wisdom” of the conservative consensus was not enough to solve the problems of social inequality. In an age of big business, he argued, it is unrealistic to think of markets of the classical kind.
They set prices and use advertising to create artificial demand for their own products, distorting people’s real preferences. Consumer preferences actually come to reflect those of corporations—a “dependence effect”—and the economy as a whole is geared to irrational goals. In The New Industrial State Galbraith argued that economic decisions are planned by a private-bureaucracy, a technostructure of experts who manipulate marketing and public relations channels. This hierarchy is self-serving, profits are no longer the prime motivator, and even managers are not in control.
Because they are the new planners, corporations detest risk, require steady economic and stable markets. They recruit governments to serve their interests with fiscal and monetary policy, for instance adhering to monetarist policies which enrich money-lenders in the City through increases in interest rates. While the goals of an affluent society and complicit government serve the irrational technostructure, public space is simultaneously impoverished. Galbraith paints the picture of stepping from penthouse villas onto unpaved streets, from landscaped gardens to unkempt public parks.
In Economics and the Public Purpose (1973) Galbraith advocates a “new socialism” as the solution, nationalising military production and public services such as health care, introducing disciplined salary and price controls to reduce inequality. In contrast to Galbraith’s linguistic style, the post-war economics profession began to synthesise much of Keynes’ work with mathematical representations. Introductory university economics courses began to present economic theory as a unified whole in what is referred to as the neoclassical synthesis. Positive economics” became the term created to describe certain trends and “laws” of economics that could be objectively observed and described in a value-free way, separate from “normative economic” evaluations and judgments. The best selling textbook writer of this generation was Paul Samuelson (1915–2009).
His Ph. D. dissertation was an attempt to show that mathematical methods could represent a core of testable economic theory. It was published as Foundations of Economic Analysis in 1947. Samuelson started with two assumptions. First, people and firms will act to maximise their self-interested goals.
Second, markets tend towards an equilibrium of prices, where demand matches supply. He extended the mathematics to describe equilibrating behaviour of economic systems, including that of the then new macroeconomic theory of John Maynard Keynes. Whilst Richard Cantillon had imitated Isaac Newton’s mechanical physics of inertia and gravity in competition and the market, the physiocrats had copied the body’s blood system into circular flow of income models, William Jevons had found growth cycles to match the periodicity of sunspots, Samuelson adapted thermodynamics formulae to economic theory.
Reasserting economics as a hard science was being done in the United Kingdom also, and one celebrated “discovery”, of A. W. Phillips, was of a correlative relationship between inflation and unemployment. The workable policy conclusion was that securing full employment could be traded-off against higher inflation. Samuelson incorporated the idea of the Phillips curve into his work. His introductory textbook Economics was influential and widely adopted. It became the most successful economics text ever. Paul Samuelson was awarded the new Nobel Prize in Economics in 1970 for his merging of mathematics and political economy.
Monetarism and the Chicago School The interventionist monetary and fiscal policies that the orthodox post-war economics recommended came under attack in particular by a group of theorists working at the University of Chicago, which came to be known as the Chicago School. This more conservative strand of thought reasserted a “libertarian” view of market activity, that people are best left to themselves, free to choose how to conduct their own affairs. Ronald Coase (born 1910) is the most prominent economic analyst of law and the 1991 Nobel Prize winner.
His first major article, The Nature of the Firm (1937), argued that the reason for the existence of firms (companies, partnerships, etc. ) is the existence of transaction costs. Rational individuals trade through bilateral contracts on open markets until the costs of transactions mean that using corporations to produce things is more cost-effective. His second major article, The Problem of Social Cost (1960), argued that if we lived in a world without transaction costs, people would bargain with one another to create the same allocation of resources, regardless of the way a court might rule in property disputes.
Coase used the example of an old legal case about nuisance named Sturges v Bridgman, where a noisy sweetmaker and a quiet doctor were neighbors and went to court to see who should have to move. Coase said that regardless of whether the judge ruled that the sweet maker had to stop using his machinery, or that the doctor had to put up with it, they could strike a mutually beneficial bargain about who moves house that reaches the same outcome of resource distribution. Only the existence of transaction costs may prevent this. So the law ought to pre-empt what would happen, and be guided by the most efficient solution.
The idea is that law and regulation are not as important or effective at helping people as lawyers and government planners believe. Coase and others like him wanted a change of approach, to put the burden of proof for positive effects on a government that was intervening in the market, by analysing the costs of action. Milton Friedman (1912–2006) stands as one of the most influential economists of the late twentieth century. He won the Nobel Prize in Economics in 1976, among other things, for A Monetary History of the United States (1963).
Friedman argued that the Great Depression had been caused by the Federal Reserve’s policies through the 1920s, and worsened in the 1930s. Friedman argues that laissez-faire government policy is more desirable than government intervention in the economy. Governments should aim for a neutral monetary policy oriented toward long-run economic growth, by gradual expansion of the money supply. He advocates the quantity theory of money, that general prices are determined by money. Therefore active monetary (e. g. easy credit) or fiscal (e. g. tax and spend) policy can have unintended negative effects.
In Capitalism and Freedom (1967) Friedman wrote: There is likely to be a lag between the need for action and government recognition of the need; a further lag between recognition of the need for action and the taking of action; and a still further lag between the action and its effects. Friedman was also known for his work on the consumption function, the permanent income hypothesis (1957), which Friedman himself referred to as his best scientific work. This work contended that rational consumers would spend a proportional amount of what they perceived to be their permanent income. Windfall gains would mostly be saved.
Tax reductions likewise, as rational consumers would predict that taxes would have to rise later to balance public finances. Other important contributions include his critique of the Phillips curve and the concept of the natural rate of unemployment (1968).
This critique associated his name with the insight that a government that brings about higher inflation cannot permanently reduce unemployment by doing so. Unemployment may be temporarily lower, if the inflation is a surprise, but in the long run unemployment will be determined by the frictions and imperfections in the labor market. Global Times
Amartya Sen (born 1933) is a leading development and welfare economist and has expressed considerable skepticism on the validity of neo-classical assumptions. He was highly critical of rational expectations theory, and devoted his work to development and human rights. He won the Nobel Prize in Economics in 1998. Joseph Stiglitz (born 1943) Received the Nobel Prize in 2001 for his work in information economics. He has served as chairman of President Clinton’s Council of Economic Advisors and as chief economist for the World Bank. Stiglitz has taught at many universities, including Columbia, Stanford, Oxford, Manchester, Yale, and MIT.
In recent years he has become an outspoken critic of global economic institutions. He is a popular and academic author. In Making Globalization Work (2007), he offers an account of his perspectives on issues of international economics. The fundamental problem with the neoclassical model and the corresponding model under market socialism is that they fail to take into account a variety of problems that arise from the absence of perfect information and the costs of acquiring information, as well as the absence or imperfections in certain key risk and capital markets.
The absence or imperfection can, in turn, to a large extent be explained by problems of information. Paul Krugman (born 1953) is a contemporary economist. His textbook International Economics (2007) appears on many undergraduate reading lists. Well known as a representative of progressivism, he writes a biweekly column on economics, American economic policy, and American politics more generally in the New York Times. He was awarded the Nobel Prize in Economics in 2008 for his work on New Trade Theory and economic geography.
Prominent Theories of Development Economics Mercantilism The earliest Western theory of development economics was mercantilism, which developed in the 17th century, paralleling the rise of the nation state. Earlier theories had given little attention to development. For example, Scholasticism the dominant school of thought during medieval feudalism, emphasized reconciliation with Christian theology and ethics, rather than development.
The 16th- and 17th-century School of Salamanca, credited as the earliest modern school of economics, likewise did not address development specifically. Major European nations in the 17th and 18th century all adopted mercantilist ideals to varying degrees, the influence only ebbing with the 18th-century development of physiocrats in France and classical economics in Britain. Mercantilism held that a nation’s prosperity depended on its supply of capital, represented by bullion (gold, silver, and trade value) held by the state.
It emphasised the maintenance of a high positive trade balance (maximising exports and minimising imports) as a means of accumulating this bullion. To achieve a positive trade balance, protectionist measures such as tariffs and subsidies to home industries were advocated. Mercantilist development theory also advocated colonialism. Theorists most associated with mercantilism include Philipp Wilhelm von Hornick, who in his Austria Over All, If She Only Will of 1684 gave the only comprehensive statement of mercantilist theory, emphasizing production and an export-led economy. 7] In France, mercantilist policy is most associated with 17th-century finance minister Jean-Baptiste Colbert, whose policies proved influential in later American development. Mercantilist ideas continue in the theories of economic nationalism and neomercantilism. Economic Nationalism Following mercantilism was the related theory of economic nationalism, promulgated in the 19th century related to the development and industrialization of the United States and Germany, notably in the policies of the American System in America and the Zollverein (customs union) in Germany.
A significant difference from mercantilism was the de-emphasis on colonies, in favor of a focus on domestic production. The names most associated with 19th-century economic nationalism are the American Alexander Hamilton, the German-American Friedrich List, and the American Henry Clay. Hamilton’s 1791 Report on Manufactures, his magnum opus, is the founding text of the American System, and drew from the mercantilist economies of Britain under Elizabeth I and France under Colbert.
List’s 1841 Das Nationale System der Politischen Okonomie (translated into English as The National System of Political Economy), which emphasized stages of growth, proved influential in the US and Germany, and nationalist policies were pursued by politician Henry Clay, and later by Abraham Lincoln, under the influence of economist Henry Charles Carey. Forms of economic nationalism and neomercantilism have also been key in Japan’s development in the 19th and 20th centuries, and the more recent development of the Four Asian Tigers (Hong Kong, South Korea, Taiwan, and Singapore), and, most significantly, China.
Post-WWII Theories The origins of modern development economics are often traced to the need for, and likely problems with the industrialization of eastern Europe in the aftermath of World War II. The key authors are Paul Rosenstein-Rodan, Kurt Mandelbaum, Ragnar Nurkse, and Sir Hans Wolfgang Singer. Only after the war did economists turn their concerns towards Asia, Africa and Latin America. At the heart of these studies, by authors such as Simon Kuznets and W. Arthur Lewis was an analysis of not only economic growth but also structural transformation. Modernization theory
Modernization theory is used to analyze in which way modernization processes in societies take place. The theory looks at which aspects of countries are beneficial and which constitute obstacles for economic development. The idea is that development assistance targeted at those particular aspects can lead to modernization of ‘traditional’ or ‘backward’ societies. Scientists from various research disciplines have contributed to modernization theory. The earliest principles of modernization theory can be derived from the idea of progress, which stated that people can develop and change their society themselves.
Marquis de Condorcet was involved in the origins of this theory. This theory also states that technological advancements and economic changes can lead to changes in moral and cultural values. The French sociologist Emile Durkheim stressed the interdependence of institutions in a society and the way in which they interact with cultural and social unity. His work ‘The Division of Labor in Society’ was very influential. It described how social order is maintained in society and ways in which primitive societies can make the transition to more advanced societies.
Other scientists who have contributed to the development of modernization theory are: David Apter, who did research on the political system and history of democracy; Seymour Martin Lipset, who argued that economic development leads to social changes which tend to lead to democracy; David McClelland, who approached modernization from the psychological side with his motivations theory; and Talcott Parsons who used his pattern variables to compare backwardness to modernity. Linear-Stages-of-Growth Model An early theory of development economics, the linear-stages-of-growth model was first formulated in the 1950s by W.
W. Rostow in The Stages of Growth: A Non-Communist Manifesto, following work of Marx and List. This theory modifies Marx’s stages theory of development and focuses on the accelerated accumulation of capital, through the utilization of both domestic and international savings as a means of spurring investment, as the primary means of promoting economic growth and, thus, development. The linear-stages-of-growth model posits that there are a series of five consecutive stages of development which all countries must go through during the process of development.
These stages are “the traditional society, the pre-conditions for take-off, the take-off, the drive to maturity, and the age of high mass-consumption” Simple versions of the Harrod–Domar model provide a mathematical illustration of the argument that improved capital investment leads to greater economic growth. Such theories have been criticized for not recognizing that, while necessary, capital accumulation is not a sufficient condition for development. That is to say that this early and simplistic theory failed to account for political, social and institutional obstacles to development.
Furthermore, this theory was developed in the early years of the Cold War and was largely derived from the successes of the Marshall Plan. This has led to the major criticism that the theory assumes that the conditions found in developing countries are the same as those found in post-WWII Europe. Structural-Change Theory Structural-change theory deals with policies focused on changing the economic structures of developing countries from being composed primarily of subsistence agricultural practices to being a “more modern, more urbanized, and more industrially diverse manufacturing and service economy. There are two major forms of structural-change theory; W. Lewis’ two-sector surplus model, which views agrarian societies as consisting of large amounts of surplus labor which can be utilized to spur the development of an urbanized industrial sector, and Hollis Chenery’s patterns of development approach, which holds that different countries become wealthy via different trajectories. The pattern that a particular country will follow, in this framework, depends on its size and resources, and potentially other factors including its current income level and comparative advantages relative to other nations.
Empirical analysis in this framework studies the “sequential process through which the economic, industrial and institutional structure of an underdeveloped economy is transformed over time to permit new industries to replace traditional agriculture as the engine of economic growth. ” Structural-change approaches to development economics have faced criticism for their emphasis on urban development at the expense of rural development which can lead to a substantial rise in inequality between internal regions of a country.
The two-sector surplus model, which was developed in the 1950s, has been further criticized for its underlying assumption that predominantly agrarian societies suffer from a surplus of labor. Actual empirical studies have shown that such labor surpluses are only seasonal and drawing such labor to urban areas can result in a collapse of the agricultural sector. The patterns of development approach has been criticized for lacking a theoretical framework. International Dependence Theory
International dependence theories gained prominence in the 1970s as a reaction to the failure of earlier theories to lead to widespread successes in international development. Unlike earlier theories, international dependence theories have their origins in developing countries and view obstacles to development as being primarily external in nature, rather than internal. These theories view developing countries as being economically and politically dependent on more powerful, developed countries which have an interest in maintaining their dominant position.
There are three different, major formulations of international dependence theory: neocolonial dependence theory, the false-paradigm model, and the dualistic-dependence model. The first formulation of international dependence theory, neocolonial dependence theory, has its origins in Marxism and views the failure of many developing nations to undergo successful development as being the result of the historical development of the international capitalist system.
Neoclassical Theory First gaining prominence with the rise of several conservative governments in the developed world during the 1980s, neoclassical theories represent a radical shift away from International Dependence Theories. Neoclassical theories argue that governments should not intervene in the economy; in other words, these theories are claiming that an unobstructed free market is the best means of inducing rapid and successful development.
Competitive free markets unrestrained by excessive government regulation are seen as being able to naturally ensure that the allocation of resources occurs with the greatest efficiency possible and the economic growth is raised and stabilized. It is important to note that there are several different approaches within the realm of neoclassical theory, each with subtle, but important, differences in their views regarding the extent to which the market should be left unregulated. These different takes on neoclassical theory are the free market approach, public-choice theory, and the market-friendly approach.
Of the three, both the free-market approach and public-choice theory contend that the market should be totally free, meaning that any intervention by the government is necessarily bad. Public-choice theory is arguably the more radical of the two with its view, closely associated with libertarianism, that governments themselves are rarely good and therefore should be as minimal as possible. Academic economists have given varied policy advice to governments of developing countries. See for example, Economy of Chile (Arnold Harberger), Economic history of Taiwan (Sho-Chieh Tsiang).
Anne Krueger noted in 1996 that success and failure of policy recommendations worldwide had not consistently been incorporated into prevailing academic writings on trade and development. The market-friendly approach, unlike the other two, is a more recent development and is often associated with the World Bank. This approach still advocates free markets but recognizes that there are many imperfections in the markets of many developing nations and thus argues that some government intervention is an effective means of fixing such imperfections Structural Adjustment
One of the implications of the neoclassical development theory for developing countries were the Structural Adjustment Programmes (SAPs) which the World Bank and the International Monetary Fund wanted them to adapt. Important aspects of those SAPs include: ? Fiscal austerity (reduction in government spending) ?Privatization (which should both raise money for governments and improve efficiency and financial performance of the firms involved) ? Trade liberalization, currency devaluation and the abolition of marketing boards (to maximize the static comparative advantage the developing country has on the global market) ?
Retrenchment of the government and deregulation (in order to stimulate the free market) These measures are more or less reflected by the themes which were identified by the Institute of International Economics which were believed to be necessary for the recovery of Latin America from the economic and financial crises of the 1980s. These themes are known as the Washington consensus, a termed coined in 1989 by the economist John Williamson. Post-development Theory Post-development theory is a school of thought which questions the idea of national economic development altogether.
According to postdevelopment scholars, the goal of improving living standards leans on arbitrary claims as to the desirability and possibility of that goal. Postdevelopment theory arose in the 1980s and 1990s. According to postdevelopment theorists, the idea of development is just a ‘mental structure’ (Wolfgang Sachs) which has resulted in an hierarchy of developed and underdeveloped nations, of which the underdeveloped nations desire to be like developed nations. Development thinking has been dominated by the West and is very ethnocentric, according to Sachs.
The Western lifestyle may neither be a realistic nor a desirable goal for the world’s population, postdevelopment theorists argue. Development is being seen as a loss of a country’s own culture, people’s perception of themselves and modes of life. According to Majid Rahnema, another leading postdevelopment scholar, things like notions of poverty are very culturally embedded and can differ a lot among cultures. The institutes which voice the concern over underdevelopment are very Western-oriented, and postdevelopment calls for a broader cultural involvement in development thinking.
Postdevelopment proposes a vision of society which removes itself from the ideas which currently dominate it. According to Arturo Escobar, postdevelopment is interested instead in local culture and knowledge, a critical view against established sciences and the promotion of local grassroots movements. Also, postdevelopment argues for structural change in order to reach solidarity, reciprocity, and a larger involvement of traditional knowledge. Sustainable Development
Sustainable development is economic development in such a way that it meets the needs of the present without compromising the ability of future generations to meet their own needs. (Brundtland Commission) There exist more definitions of sustainable development, but they have in common that they all have to do with the carrying capacity of the earth and its natural systems and the challenges faced by humanity. Sustainable development can be broken up into environmental sustainability, economic sustainability and sociopolitical sustainability.
The book ‘Limits to Growth’, commissioned by the Club of Rome, gave huge momentum to the thinking about sustainability. Global warming issues are also problems which are emphasized by the sustainable development movement. This led to the 1997 Kyoto Accord, with the plan to cap greenhouse-gas emissions. Opponents of the implications of sustainable development often point to the environmental Kuznets curve. The idea behind this curve is that, as an economy grows, it shifts towards more capital and knowledge-intensive production.
This means that as an economy grows, its pollution output increases, but only until it reaches a particular threshold where production becomes less resource-intensive and more sustainable. This means that a pro-growth, not an anti-growth policy is needed to solve the environmental problem. But the evidence for the environmental Kuznets curve is quite weak. Also, empirically spoken, people tend to consume more products when their income increases. Maybe those products have been produced in a more environmentally friendly way, but on the whole the higher consumption negates this effect.
There are people like Julian Simon however who argue that future technological developments will resolve future problems. Human Development Theory Human development theory is a theory which uses ideas from different origins, such as ecology, sustainable development, feminism and welfare economics. It wants to avoid normative politics and is focused on how social capital and instructional capital can be deployed to optimize the overall value of human capital in an economy. Amartya Sen and Mahbub ul Haq are the most well-known human development theorists. The work of Sen is focused on capabilities: what people can do, and be.
It is these capabilities, rather than the income or goods that they receive (as in the Basic Needs approach), that determine their well being. This core idea also underlies the construction of the Human Development Index, a human-focused measure of development pioneered by the UNDP in its Human Development Reports. The economic side of Sen’s work can best be categorized under welfare economics, which evaluates the effects of economic policies on the well-being of peoples. Sen wrote the influential book ‘Development as freedom’ which added an important ethical side to development economics
Recent Developments Recent theories revolve around questions about what variables or inputs correlate or affect economic growth the most: elementary, secondary, or higher education, government policy stability, tariffs and subsidies, fair court systems, available infrastructure, availability of medical care, prenatal care and clean water, ease of entry and exit into trade, and equality of income distribution (for example, as indicated by the Gini coefficient), and how to advise governments about macroeconomic policies, which include all policies that affect the economy.
Education enables countries to adapt the latest technology and creates an environment for new innovations. The cause of limited growth and divergence in economic growth lies in the high rate of acceleration of technological change by a small number of developed countries. These countries’ acceleration of technology was due to increased incentive structures for mass education which in turn created a framework for the population to create and adapt new innovations and methods.
Furthermore, the content of their education was composed of secular schooling that resulted in higher productivity levels and modern economic growth. Researchers at the Overseas Development Institute also highlight the importance of using economic growth to improve the human condition, raising people out of poverty and achieving the Millennium Development Goals. Despite research showing almost no relation between growth and the achievement of the goals 2 to 7 and statistics showing that during periods of growth poverty levels in some cases have actually risen (e. . Uganda grew by 2. 5% annually between 2000–2003, yet poverty levels rose by 3. 8%), researchers at the ODI suggest growth is necessary, but that it must be equitable. This concept of inclusive growth is shared even by key world leaders such as Secretary General Ban Ki-Moon, who emphasizes that: “Sustained and equitable growth based on dynamic structural economic change is necessary for making substantial progress in reducing poverty. It also enables faster progress towards the other Millennium Development Goals.
While economic growth is necessary, it is not sufficient for progress on reducing poverty. ” Researchers at the ODI thus emphasize the need to ensure social protection is extended to allow universal access and that active policy measures are introduced to encourage the private sector to create new jobs as the economy grows (as opposed to jobless growth) and seek to employ people from disadvantaged groups. Conclusion: Dated back from the age of Plato-Aristotle to recent era of human development theory, the idea of development in economics has been evolved substantially.
Narrowly economic definitions of development, based on indicators such as per capita GNP, production, consumption, and investment have been criticized. Many scholars believe that true development includes improvements in social justice; for example, in a more equitable distribution of income, or in an improvement in women’s and minority rights. Commonly, development is defined to the means by which a traditional, low-technology society is changed into a modern, high-technology society, with a corresponding increase in incomes.
This may be achieved through mechanization, improvements in infrastructure and financial systems, and the intensification of agriculture. This definition is based on the more obvious distinctions in living standards between developed and less developed countries. Development indicators as used by the World Bank include details of birth and death rates, fertility, life expectancy, health, urbanization, industrialization, production, consumption, investment, capital, income, education, energy consumption, and trade.
These indices of development are simply concerned with statistics and do not indicate social structures and patterns of behavior; there is no definitive definition of what development should be for each society, and no blue-print for how to achieve it. As such, a combination of economic and social development is necessary for development of a country. The argument is supported by most recent development ideas of contemporary prominent economists.