PAPER II ECONOMICS OF GROWTH AND DEVELOPMENT BLOCK 2 THEORIES AND APPROACHES TO DEVELOPMENT
CONTENTS Page number
Unit 1 Classical theories of Development 4
Unit 2 Propositions to Capitalistic Economy 22
Unit 3 Partial theories of Growth and Development 47
BLOCK 2 theories and approaches to development In previous block you have recalled some basic concepts of growth of the nations. The aim of this is to present certain theories and approaches to development which is an important area of concern for decision makers in the area of economics.
First unit deals the classical theories of development including Adam Smith on wealth of nations; Ricardo’s theory of value; Robert Malthus contributions to economic development; approaches of James mill and theory of social change.
Unit 2 discusses propositions to capitalistic economy. It focuses on Karl Marx and development of capitalistic economy along with surplus value and the rate of profit. Other areas of discussion were immutable laws of capitalistic development; crisis in capitalism; Schumpeter and capitalistic development; the role of credit, profit and degeneration and structural analysis of development.
Unit 3 presents to you the partial theories of growth and development. Vicious circle of poverty was discussed followed by Circular causation and unlimited supply of labor. Balanced and unbalanced growth has been explained and critical minimum effort thesis was discussed in detail along with low income equilibrium trap. Finally the concept of dualism has been presented along with its different forms.
CLASSICAL THEORIES OF DEVELOPMENT
After studying this unit you should be able to:
Define the approach to classical theories of development
Understand Adam Smith theory of wealth of nations
Know the Ricardian theory of value
Explain the contributions of Robert Malthus to development.
Analyze the approach of James Mill.
Have the knowledge of theory of social change
Structure 1.1 Introduction
1.2 Adam Smith on wealth of nations
1.3 Ricardo’s theory of value
1.4 Robert Malthus contributions to economic development
1.5 Approaches of James mill
1.6 Theory of social change
1.8 Further readings
Classical theories of development are widely regarded as the first modern school of economic thought. It is associated with the idea that free markets can regulate themselves.Its major developers include Adam Smith, David Ricardo, Thomas Malthus and John Stuart Mill. Sometimes the definition of classical economics is expanded to include William Petty, Johann Heinrich von Thünen.
Adam Smith's The Wealth of Nations in 1776 is usually considered to mark the beginning of classical economics. The school was active into the mid 19th century and was followed by neoclassical economics in Britain beginning around 1870.
They produced their "magnificent dynamics" during a period in which capitalism was emerging from a past feudal society and in which the industrial revolution was leading to vast changes in society. These changes also raised the question of how a society could be organized around a system in which every individual sought his or her own (monetary) gain.
Classical economists and their immediate predecessor reoriented economics away from an analysis of the ruler's personal interests to broader national interests. Physiocrat Francois Quesnay and Adam Smith, for example, identified the wealth of a nation with the yearly national income, instead of the king's treasury. Smith saw this income as produced by labor, land, and capital equipment. With property rights to land and capital by individuals, the national income is divided up between laborers, landlords, and capitalists in the form of wages, rent, and interest or profits.In this unit we will discuss the important classical theories of development.
1.2 adam smith on wealth of nations
An Inquiry into the Nature and Causes of the Wealth of Nations is the magnum opus of the Scottish economist Adam Smith. It is a clearly written account of economics at the dawn of the Industrial Revolution, as well as a rhetorical piece written for the generally educated individual of the 18th century - advocating a free market economy as more productive and more beneficial to society. He was Professor of Moral Philosophy at the University of Glasgow. There is an ethical tone to his arguments that is not always shared by those who seemingly subscribe to his free market philosophy.
The work is credited as a watershed in history and economics due to its comprehensive, largely accurate characterization of economic mechanisms that survive in modern economics; and also for its effective use of rhetorical technique, including structuring the work to contrast real world examples of free and fettered markets.
In 1759 Adam Smith, then a thirty-six year old Professor of Moral Philosophy at lasgow University, published his Theory of Moral Sentiments. This work attracted the attention of the guardians of the immensely wealthy Duke of Buccleuch towards retaining its author as a tutor to the youthful Duke whilst on a protracted, and hopefully educational, "Grand Tour" of continental Europe.
Whilst acting as tutor from 1763 Smith found some of the time spent in the French provinces hard to fill and seems to have begun his masterpiece An Inquiry into the Nature and Causes of the Wealth of Nations, as a way of taking up otherwise idle hours in the summer of 1764. Overall however he derived much personal philosophical benefit from these months of journeying on the continent. In Paris he met amongst others, the Physiocrat" economic theorist (and court Physician) Quesnay and the French Ministers, Turgot and Necker.
French economic policy in these times was conducted in accordance with the Mercantilism" that had held sway in the economic thinking of Europe for some three centuries. Mercantilism expected that governmental control would be exercised over industry and trade in accordance with the theory that national strength (i.e. the Royal states treasury) is increased by a preponderance of exports over imports.
By nature, then, as now, France was fitted to be a great agricultural country, a great producer and exporter of corn and wine; but her legislators for several generations had endeavoured to counteract the apparently natural bias of French economic life towards agriculture, and had tried to make her an exporter of manufactured goods.
Like most legislators in those times, they had been prodigiously impressed by the ambitious position which the maritime powers, as they were then called (the comparatively little powers of England and Holland), were able to take in the politics of Europe. They saw that this influence came from wealth, that this wealth was made in trade and manufacture, and therefore they determined that France should not be behindhand, but should have as much trade and manufacture as possible. Accordingly, they imposed prohibitive or deterring duties on the importation of foreign manufacturers; they gave bounties to the corresponding home manufactures.
Smith found that the French Physiocrats delighted in attempting to prove that the whole Mercantilist structure of the French laws upon industry was utterly wrong; that the prohibitions ought not to be imposed on the import of foreign manufacturers; that bounties ought not to be given to native ones; that the exportation of corn ought to be free; that the whole country ought to be a fiscal unit; that there should be no duty between any province; and so on in other cases. Smith found much that he admired in the Physiocrats outlook but he did not share it completely. Amongst other things the Physiocrats saw land as the primary source of wealth (one seed sown might produce twenty at harvest!) rather than manufacturing.
On the completion of his duties as tutor Smith then returned, after some further months spent in London, to Scotland where he stayed quietly with his mother at his native town of Kirkcaldy and occupied himself in study and writing. It was to be in 1776, that Adam Smith finally saw his "Wealth of Nations" through the press.
Adam Smith's "Wealth of Nations" is regarded as having been the first great work of Political Economy. It is in some ways an enhancement of his "Theory of Moral Sentiments" in that it focuses on the problems of how people express their self-interest and their morality. Adam Smith attempted to trace the immediate expression of human activity and to suggest how this would change society.
It opens with a most dramatic recommendation of the adoption of practices which saw work being performed as a number of tasks that were each alloted, as specialisations, to individual workers. Smith suggested that a pin factory that had adopted such a "division of labour" might produce tens of thousands of pins a day whereas a pin factory in which each worker attempted to produce pins, from start to finish, by performing all the tasks associated with pin production would produce very few pins.
In an outline that seems to prefigure Karl Marx' "materialist conception of history" that appears later in his "Wealth of Nations" Smith suggests that society has moved through a number of phases - men once lived by hunting, then developed nomadic systems of agriculture, then settled farming under the sway of local feudal manor houses, and then emerged a system of commercial interdependence. Smith suggested that in each of these phases society had developed institutions appropriate to that phase. This development in society and its institutions being at all times prompted by interplays of self-interest and morality.
According to Smith the institutions most appropriate to a period of commercial interdependence would provide for the governing authority to pursue a laissez faire (let alone) policy in relation to the economy. Smith justified this by arguing that people, through applying their talents and assets where they contributed to the production of the things potential buyers wanted, sought to earn monies. Under laissez faire systems individuals, acting in their own self-interest as economic agents, would tend to dedicate themselves to those economic activities that brought them the greatest reward in terms of income be it in the form wages, rent, or profit. Smith showed that by giving themselves to such highly rewarding economic activities in their own self interest people would also be maximising the economic well-being of society.
Smith saw people as economic agents being as it were guided by an "invisible hand" (a term first used in his Theory of Moral Sentiments). High prices (in terms of a "natural" price related to the costs of production) of any good or service would automatically induce people to engage in its production. Increased production would lead to a greater supply and lower prices. People as buyers would get more of what they wanted more cheaply. People as producers would tend to be earning enhanced wages as a result of producing the formerly high priced good or service. A reversal of the argument would see "low" priced items falling away in terms of their production.
Smith saw in the division of labor and the extension of markets almost limitless possibilities for society to expand its wealth through manufacture and trade. Wealth consists of the goods which all the people of society consume; note all - this is a democratic, and hence radical, philosophy of wealth. Gone is the notion of gold, treasures, kingly hoards; gone the prerogatives of merchants or farmers or working guilds. We are in the modern world where the flow of goods and services consumed by everyone constitutes the ultimate aim and end of economic life.
Although Economics has moved on in many was from the outlook and policies endorsed in the Wealth of Nations that epoch-making publication remains as perhaps the most famous economics book of all time. Governments in search of a strengthening of their states through economic policy, and many individuals in search of personal gain, have all drawn lessons from its pages. Powerful movements that led to the emergence of Modern Capitalism were substantially based on Smith's work and hence he deserves to be regarded as one of the most dramatically influential philosophers or philosophic writers of modern times.
The invisible hand
“By preferring the support of domestic to that of foreign industry, he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention.”
A phrase often quoted and alluded to, it conveys the unintentional consequences stemming from individuals' pursuit of their own wants and needs. As author Douglas Rushkoff points out, "Smith assumes people would be biased against international trade, naturally preferring the security offered by sourcing goods locally-and that his readers would agree with him on this point. Like the founders of America, who would've differed on almost everything else but this, Smith saw economics as characterized by small, scaled, local economies working in interaction with one another and guided by the enlightened self-interest of individuals. This was not a reaction to "leftist" regulations on corporate power, but against the unfair practices of early transnational corporations, which were operating on a level completely removed from the real affairs of people and the proper stewardship of resources." Rushkoff further argues that, "While celebrated today by corporate libertarians as philosophical justification for free-trade policies, the book was meant as an attack on the scale and effects of chartered monopoly. By arguing - now famously - that "self-interest" might promote a more just society, he was speaking in the context of an economy already heavily tilted against individual human agency." (Life inc., 34)
The Wealth of Nations was first published on March 9, 1776, during the Age of Enlightenment. It influenced not only authors and economists, but governments and organizations. For example, Alexander Hamilton was influenced in part by The Wealth of Nations to write his Report on Manufactures, in which he argued against many of Smith's policies. Interestingly, Hamilton based much of this report on the ideas of Jean-Baptiste Colbert, and it was, in part, to Colbert's ideas that Smith wished to respond with The Wealth of Nations.
Many other authors were influenced by the book and used it as a starting point in their own work, including Jean-Baptiste Say, David Ricardo, Thomas Malthus and, later, Karl Marx and Ludwig von Mises. The Russian national poet Aleksandr Pushkin refers to The Wealth of Nations in his 1833 verse-novel Eugene Onegin.
Irrespective of historical influence, however, The Wealth of Nations represented a clear leap forward in the field of economics, similar to Sir Isaac Newton's Principia Mathematica for physics or Antoine Lavoisier's Traité Élémentaire de Chimie for chemistry.
1.3 ricardo’s theory of value
Modern discussion of the validity of the economic system of David Ricardo has centred about the theory of value. On the one hand, Jevons's classic attack has been maintained with undiminished vigor by a group of critics among whom the Austrian representatives loom up most conspicuously. On the other hand, Professor Marshall has broken a mighty lance for the essential correctness of the Ricardian theory, and has inspired, in this as in other directions, a distinct reappreciation.
There are three clearly defined phases in Ricardo's treatment of value, corresponding here as throughout to the influences which shaped his mental history as an economist. The first began with his acquaintance with systematic economic writing and extended through the bullion controversy, and might be described as a consistent exposition of Adam Smith's original concept of value. The second phase was incident to the corn-law discussions and to the debated policies associated therewith, and found expression in the chapter on value in the first edition of the Principles of Political Economy and Taxation. Its keynote was theoretical warrant for the propositions that higher wages did not necessarily mean higher prices, and that a fall in wages was compatible with a rise in prices. The third phase consisted, in the main, of spirited controversy with friends and critics as to the adequacy of labor as a measure of value, and was still in progress at the time of Ricardo's death.
In inception, Ricardo's theory of value probably dated back to early critical reading of the Wealth of Nations. It took definite shape in correction of Adam Smith's exposition, and further analyses proceeded for a decade strictly within these lines. An acute student of the Ricardian economics has said that "we are indebted to the Bullion controversy for the Ricardian theory of value.” But this can be true only in the most general sense. The subject had become fairly clear in Ricardo's mind long before 1809; and the effect of subsequent currency controversies -- such as that growing out of Bosanquet's assertion that years of scarcity and high taxation, and not excessive circulation, were responsible for the rise in prices-was,. at most, clearer definition and further application of a theory of value and price then already well in mind rather than independent formulation of a new theory.
Ricardo's concept of value, in its first or Smithian phase, was on the verge of change in 1815. Moreover, in An Essay on the Influence of a Low Price of Corn on the Profits of Stock, published in that year, the theory of value figured far less as a novel or basic doctrine, requiring explicit assertion or detailed exposition, than as a restatement of a familiar principle cited merely to establish the proposition that with the progress of wealth the landlord might be expected to benefit not only "by obtaining an increased quantity of the produce of the land, but also by the increased exchangeable value of that quantity."
But even from this more or less indirect and partial exposition it is not difficult to reconstruct the theory of value which we may conceive as attained by Ricardo in critical study of the Wealth of Nations, and as asserted by him thereafter in argument and correspondence until the economic controversies of 1813-17 gave an effective impulse in another direction.
The second phase of Ricardo's treatment of value is directly traceable to the corn-law controversies of 1813-17 and to active discussions thereafter with Malthus, McCulloch, Say, and Torrens as to correlated economic policies. The initial chapter "On Value" in the first edition (1817) of the Principles was thus designed less as an independent exposition than as theoretical warrant for certain practical propositions advanced and defended by Ricardo from about 1813 on. Thus (a) Ricardo believed, in opposition to Malthus, that lower profits could only result, in the long run, from higher wages; (b) he asserted that McCulloch's proposal to scale down the interest on the national debt was neither just nor equitable; and (c) he refused all credence to the popular fear that the free importation of corn would be followed by a further disastrous fall in general prices.
It was to give re-enforcement to such definite propositions that Ricardo developed and extended his original concept of value. The prime features of his modified exposition were disagreement with the doctrine that every rise in wages must necessarily be transferred to the price of commodities, and, second, demonstration of the converse dictum, that higher wages were actually compatible with lower prices.
Ricardo's Principles of Political Economy and Taxation was published in the spring of 1817. We have seen that the treatment of value therein contained was designed less as an independent exposition than as a warrant for the proposition that higher wages do not necessarily mean higher prices. But just as in the case of Malthus's first statement “the principle of population," it was less the conclusion than the argument which was assailed. Ricardo found himself called upon not to establish any such novel proposition as that prices sometimes fell as wages rose, :but more fundamentally to vindicate "embodied labour" as the soundest theoretical and the best practical measure of value.
This controversy, which constitutes the third phase of Ricardo's theory of value, appears to have begun with the appearance of McCulloch's highly laudatory notice of Ricardo's book in the Edinburgh Review for June, 1818. Six months earlier McCulloch, writing in the Scotsman, had defended certain of Ricardo's doctrines from a violent attack in the British Review. But the ampler space of the quarterly first enabled him to present "an accurate exposition of the nature, as well of those general principles which Mr. Ricardo has been the first to ascertain, as of those which he has adopted from late writers, and combined with the others into one harmonious, consistent, and beautiful system."
Disproportionate in plan, marred by occasional inaccuracy and artificial simplicity, the review was nevertheless characterized by all of the intelligibleness and definiteness of McCulloch's expository writing. It is still to be read with profit by the troubled student of the Ricardian economics, while for the period in which and the circles for whom it was written it was nothing short of a boon. Ricardo's gratification was pronounced. "My own doctrines" -- he wrote in acknowledgment to McCulloch -- "appear doubly convincing as explained by your able pen, and I have already heard in this retreat [Gatcomb Park] that those who could not understand me, most clearly comprehended you."Even James Mill regarded it as "a masterly essay on the science, [and one that] will very much assist to disseminate correct views on a very intricate part of it."
It is thus possible to speak with propriety of the "development" of Ricardo's theory of value. Far from being the rigid and definitive exposition which his critics have represented, the concept was distinctly a doctrinal growth, reflecting in its course the characteristic phases of Ricardo's mental history. It is true that the central feature of the theory underwent evolution rather than radical change; but in point of approach, in relative emphasis, and in manner of statement the differences are so conspicuous that, taken in themselves, they perplex and bewilder even the most earnest student, and only when interpreted in the light of the successive conditions and influences which affected Ricardo's scientific life do they become clear and intelligible.
1.4 Robert malthus contributions to economic development
The Reverend Thomas Robert Malthus FRS (13 February 1766 – 23 December 1834), was a British scholar, influential in political economy and demography. Malthus popularised the economic theory of rent.
Malthus has become widely known for his analysis whereby societal improvements result in population growth which, he states, sooner or later gets checked by famine and widespread mortality. He wrote in the context of the popular view, in 18th century Europe that saw society as improving and in principle as perfectible. William Godwin and the Marquis de Condorcet, for example, believed in the possibility of almost limitless improvement of society. So, in a more complex way, did Jean-Jacques Rousseau, whose notions centered on the goodness of man and the liberty of citizens bound only by the social contract, a form of popular sovereignty.
Malthus saw such ideas of endless progress towards a utopian society as vitiated because of the dangers of population growth: "The power of population is indefinitely greater than the power in the earth to produce subsistence for man". As an Anglican clergyman, Malthus saw this situation as divinely imposed to teach virtuous behaviour. Believing that one could not change human nature, and that egalitarian societies were prone to over-population. Malthus wrote in dramatic terms: "epidemics, pestilence and plague advance in terrific array, and sweep off their thousands and ten thousands. Should success be still incomplete, gigantic famine stalks in the rear, and with one mighty blow, levels the population with the food of the world".
Malthus placed the longer-term stability of the economy above short-term expediency. He criticised the Poor Laws, and (alone among important contemporary economists) supported the Corn Laws, which introduced a system of taxes on British imports of wheat. He thought these measures would encourage domestic production, and so promote long-term benefit.
Malthus became hugely influential, and controversial, in economic, political, social and scientific thought. Many of those whom subsequent centuries sometimes term "evolutionary biologists" also read him, notably Charles Darwin and Alfred Russel Wallace, for each of whom Malthusianism became an intellectual stepping-stone to the idea of natural selection. Malthus remains a writer of great significance, and debate continues as to whether his direst expectations will come about.