La Herencia Teorica

8/16/2019 La Herencia Teorica

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2 • THE THEORETICAL HERITAGEIn the 1940s and early 1950s some economists began to focus on a body of data and of associated problems that were

sufficiently distinctive, and of sufficient importance, to justify, in the opinión of many who turned to them, the searchfor a new analytical perspective with which to confront them !he focus of their attention was twofold" firstly thecauses of the relative poverty of underdeveloped countries, and secondly the potential way forward for theseeconomies, the specification of the route to economic progress in these largely pre#industrial regions

$owever, development economies emerged not as a totally new discipline, but as a sub#division of an e%isting one !heeconomists who tumed to these issues conse&uently brought with them a certain stoc' of intellectual bag# gage (hilethe problems that they set out to invest)gate were distinct from those that constituted the contemporary subject matter of mainstream eco# nomics, it was inevitable that they should bring to bear on these problems, wherever it seemedappropriate, elements of the intellectual capital of the cdsting discipline *urthermore, in so far as there were conflictinganalytical agiproaches associated with the e%isting discipline, there was also the pos# ty that these might be reflected inany debate about fundament+is within e new sub#discipline

lmtially the main preoccupations of this emerging group of economists largely with a dynamic macro#economics" thespecification of those viables and relationships which could provide the 'ey to future economic ion, and the analysis of

possible long#term growth paths and strat# $owever, the focus of the bul' of mainstream economic theory for the psenous seventy years or so had been on a different set of issues" those awaiatrd with the ma%imisation of short#runefficiency in resource allo# supplemented, since the 19-0s, by a preoccupation with short#run oomic management !heanalytical method used to confront these was in both cases comparative statics (e shall see later that these

same issues have also become a growing focus of attention in develop# ment economics, but they were certainly not the prime

concern at the outset(ithin the corpus of mainstream economic theory there were, however, important e%ceptions to the general rule"

instances in which theoreticians had, in the more or less recent past, tumed their attention to dynamic issues .ostnotable amongst such contributions in the first half of the twentieth century had been, firstly, /chumpeters seminalwor' The Theory of Economic Development first published in 2erm+n in 19113 and, secondly, the wor' of $arrod andomar on the conditions needed to sustain long#run economic growth in the industrially advanced countries, publishedrespect# ively in the late 19-0s and 1940s#wor' which, to paraphrase $arrod, attempted to give a dynamic perspectiveto eynesian theory

*urthermore, for anyone who chose to go bac' in time, the corpus of literature produced by the classicaleconomists from the late eighteenth to the mid#nineteenth century was concerned to a notable degree with the analysisof long#run economic growth" with its causes, with its impact on other macro#economic variables, and with the

prospects for sustaining growth in the long tem) !here was also a further reason for retuming to this literature It had been generated in a conte%t in which the economies subject to analysis were in certain respects structurally more

similar to the underdeveloped economies of the mid#twentieth century than to the industrialised, techno# logicallyadvanced economies that they themselves had become1

!hen, there was also the body of literature that represented .ar%ist political economy !his was of relatively littleinfluence in the (est in the 1940s $owever, within that literature there was a dynamic theory in .ar%s own wor', asubse&uent body of analysis of economic imperialism and its implications for colonial development, and another bodyof analysis debat# ing the route to growth for an independent but initially largely agricultural socialist economy" the/oviet 6nion

!he core of this chapter provides a brief overview of the main elements of dynamic theory concerned with thecauses of, and constraints to, long#run economic growth that had accumulated in the corpus of economic literature bythe mid#twentieth century !he summary will be largely chronological, but will also employ an element of thematicgrouping *inally, at the end of the chapter the neo#classical paradigm is reviewed because, although it is not primarilydynamic in orientation, it is also part of the intellectual heritage that, as already noted, has had a considerable influenceon development economies.


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The primary purpose of this review is not to identify the dominant paradigms of the past, so there will be no attemptto e%plore systematically the oera! intellectual framewor's of which the theories reviewed formed •pan. Therea"er in teres te" in a fuller review of these framewor's may find e#csr$hore %see e.&. 7arber, 198: eane, 19;3t thetime /mith was writing he also observed that producers in parts of Aurope had been, and were, e%periencing ane%tensión of both domestic and foreign mar'ets !wo factors, improvements in law and order along actual and

potential trade routes, and the e%pansión of low#cost water# borne transport, were resulting in greater e%change over longer distances *or /mith, the primum mobile of e%panding national output and labour productivity is this samee%tensión of the mar'et It is this which both ma'es growth possible and simultaneously provides tfie necessaryinducement not only to e%pand production, but to do so in a manner which increases labour productivity A%tensiónof the mar'et provides opportunities for an increase in the división of labour, and, observes /mith, the división of labour#or specialisation # raises labour productivity for three reasons"

1. (or'ers become more efficient in the performance of particular tas's2. Cob specialisation reduces time spent switching tas's

3. Cob specialisation also increases the scope for designing improved tools and machines to raise labour productivity$owever, while mar'et e%pansión provides the opportunity and inducement for growth in output and

productivity, the latter will only occur if firms respond to new opportunities by committing increased resources to production It is noteworthy that of /miths three routes to increased labour productivity only the third is necessarily predicated upon investment in capital e&uipment >ll three, however, re&uire that firms mobilise additional wor'ingcapital in order to ta'e on e%tra labour If this happens on a scale that e%ceeds the rate of growth of the labour forc@,it will result, at the 'ational level, in a movement of labour away from what /mith classed as Dnproductiveactivities such as /ervices towards greater engagement in pro"uctie activities ie those which generate a materialoutput3

$owever, be#ore an e%panded outlay on production can occur there must be a prior increase in savings Increased savingscan only be achieved by &roups in society whoE have sufficient income /mith identified three i &roups( landlords,merchants and manufacturers $owever, /mith, as i typica" o# the dassical economists, did not e%pect the landlordclass to ) a ma*or source of productive investment Fandlords derive their i the o$nership of property, for the right


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to e%ploit which others n& remoe" from the sphere of production, and generally


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m "v perceiving little incentive to enter it, the traditional landlord class spends its income on consumption ofcommodities and on the hiring of unproductive labour retainers, entertainers, etc3

In contrast to the landlords, manufacturers and farmers employ labour for productive purposes, while merchants, through their trading activities, may also come to realise the potential profitability of investment in production /mith did not,however, identify farmers as an important potential source of increased savings $e too' the view that most smalltenant farmers were left with insufficient income after paying rent to underta'e significant savings


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In Koungs view, /mith was correct to emphasise the importance of the e%tensión of the mar'et for economic growth$owever, the mar'et does not 0 just e%pand through an increase in area or population, but because per capita incomegrows !his increase in per capita income is in turn due to the increasing +ivision of labour and the associated increasein labour pro# ductivity, and this latter comes not so much from increases in de%terity and time#saving#the two factorsmost emphasised by /mith#but from increasing mechanisation It is mainly the increasing capitalisation of the produc#tion process, together with the associated rise in labour productivity, that leads to growth in per capita incomes !heconse&uent increase in demand induces anothcr round of the virtuous spiral of e%pansión, with an increase in demandfor capital goods to raise labour productivity still more Koung was writing some 40 years after the e%panding 7ritish

economy had begun to encounter shortages of labour3t reach the ity would mplement "mational siate by the he anal yse in that a as Hhina,Koung identified three possible impediments to this virtuous spiral, but he did not e%pect them to be

overwhelming !hey were as follows"1. Inelastic demand for certain produc)s2. /upply inelasticities due to shortages of raw materials3. !he high investment costs of e%ploiting new technologies!hese potential constraints could be overeóme in two ways *irstly, even if for certain branches of production

demand is inelastic, it is still possible to raise per capita output and income in these branches through technicalinnovations that cut costs and raise labour productivity Fi'ewise Koung thought that advances in /cience andtechnology would ma'e it possible to brea' raw material supply inelasticities through reducing e%traction costs or development of substitutes3 and that similar advances would help to lower the investment costs of e%ploiting newtechnologies

Classical &ro$th theory continue"( the problems impose" by a&riculture Got all the classical economists, however, were as sanguine as /mith or Koung conceming the prospeets for prolongedeconomic growth and an associated rise in real wages In the first half of the nineteenth century first .althus and then


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.althus asserted that any rise in mass living standards could only be temporary because the increase in populationwould rapidly outstrip thecapacity of the agricultural sector to meet the growing demand for food, for additionalland brought into cultivation is generally less fertile than that already cultivated It is in this conte%t that .althusmade his famous, but unsubstantiated, assertion that while population grows in a geometric pro# gression ie by aconstant proportion each time period3, agricultural output can only grow in arithmetic progression ie by a constantabsolute amount per given time period3

.althus too' the view that a rise in wages and mass living standards, followed by a period of population

e%pansión, could only be succeeded by one of growing food shortages and mass misery !his would in turn result ina decline both in the birth rate and in infant survival until, as a result of the decline in population growth, labour shortages re#emerge, and the cycle repeats itself !he only acceptable way out of this impasse was for the wor'ingclasses to e%ert greater restraint on family siLe, but .althus did not antic)pate this happening $e concluded thatonly in a society with an une&ual distribution of wealth and income could some people#the wealthy minority#

persistently enjoy high living standards In a society with e&ual income and wealth distribution all would e%perience periods of fluctuating well#being and misery

.althus does not provide any sound justification for his proposition concerning the respective growth rates of population and agriculture Indeed in later editions of the Essay the progressions were no longer insisted on,although the basic thesis is sustained and buttressed with historical material see


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*or mongthe changes that he wanted to see were increased voluntary restraints on population growth amongst wor'ing people,which, unli'e .althus, he was confident could be achieved, combined with a more e&uitable distribution of thefruits of economic growth1;

Comment on classical &ro$th theoryHlassical growth theory was not a completely monolithic whole !here were P disagreements and contradictions within it

!here is no such thing as a single classical growth paradigm


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4. .eanwhile enormous brea'throughs in agricultural research and productivity in the industrially advancedcountries, already partly trans# mitted to some developing countries through the Egreen revolution, may beinterpreted as an indication of what the !hird (orld has in prospect, while simultaneously increasing the supplyof agricultural e%ports to it

J


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Mnly in poor semi#arid countries with low irrigation potential do diminishing mums appear to constitute a seriousthreat to growth!$A HF>//IH>F .>ppropriation is legitimated through the rights of slave ownership, land ownership, ownership of other means of production by non#wor'ers and through ta%ation and other forced levies


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In the pre#capitalist modes of production the object of production is to produce use valTes" part of the output isretained for direct use by the producers and the surplus appropriators, and part is e%changed in the mar'et either bythe producers or the surplus appropriators3 for other use valTes !his e%change relationship can be summarised bytheformula $-%&-%$. commodities H3 are produced, some of which are e%changed for money >=3, which is thentransformed by the seller into other commodities11. In the pre#capitalist modes, the dominant class after meeting its subsistence needs uses the surplus for lu%ury

consumption, support of the /tate apparatus and public wor's of an unproductive nature eg the monuments of

ancient Agypt and ancient


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tends to be associated with enlargement of plant siLe, combined with increasing specialisation of labourB9

.eanwhile, the anarchy of capitalist competition, in which individual firms e%pand oXtffut without any central co#ordination,leads to periodic crises of overproductigrY and underconsumption -0 Hrises may also be caused 1by a declinein therate of profit due to capital intensification and=or to increasing labour scarcity and rising wages -1 uring these

periods of crisis wea'er firms collapse and=or are bought out by the stronger ones


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uring each crisis of capitalism, labour is laid off and wages tend to fall Honse&uently, in the stronger firms whichsurvive the initial rise in costs and=or drop in demand, the rate of profit tends to rise again Amployers may also tryto raise the rate of surplus per wor'er by forcing labour to wor' longer hours for the same wage-B !he processesoutlined in BB and B- lead jointly to the replacement competitive capitalism by monopoly capitalism.eanwhile, thedevelopment of the productive forces under capi# talism, the enlargement of plant siLe and increasing specialisationof labour lead in turn to increased awareness on the part of the wor'ers of their mutual interdependence in

production $owever, these devel# opments also lead to increased monotony of wor' and to increasing alienation ofthe wor' forc@ from the wor' process and from the capitalist class which imposes this process--

27. 6ltimately a fresh and particularly deep crisis, with an associated widespread loss of employment, will move

the proletariat to rise up and seiLe both the means of product!oh +nd /tate power from the capitalist class,establishing in their stead a socialist wor'ers /tate In this the groundwor' will be laid for the transition to acommunist society

28. Got only does the capitalist mode of production prepare the way for this transition through raising the socialawareness, and alienation, of the wor'ing class, but it also does so in another very practical sense !hedevelopment of technology and the increasing concentration of production which capitalism generates, create aconte%t in which the centralised co#ordination of production in the social interest becomes a more practicable

proposition-4

29. .ar% wrote little on the colonial world, but what he did write suggests that he thought capitalism in the colonieswould play the same roles, destructive, Hreative and e%ploitative, that were already manifest in moreindustrially advanced economies (ith the penetration of capitalism into >sia and >frica, o)d, stagnant modesof production would be undercut and destroyed, and in their place would be established a new capitalist mode,generating a steady development of the productive forces, but tending in precisely the same directions that we

have just reviewed-5

!he study of political economy is, in the .ar%ist perspective, geared to the need to unfold this 'nowledge tothose who may ultimately use it" the wor'ing class Aconomists studying the !hird (orld who wor' within this

perspective hold, unli'e the neo#.ar%ists, that it applies to underdeveloped economies as well as to industriallyadvanced ones

/everal decades after .ar%s death in 1;;-, Fenin published, in 191, a long pamphlet entitled )mperialism* the +atest ta!eof $apitalism, the aim of which was to e%plain the *irst (orld (ar in terms of inter#imperialist rivalries In it, Feninsought to ta'e account of certain developments in the capitalist mode of production which had become increasinglyapparent after .ar%s deathchumpeter B-

!he essence of Fenins thesis was that monopoly capitalism had reached a new Eover#ripe phase Hapital had accumulatedfaster than the outlets for profitable new investment Honse&uently large industrial combines, sup# ported by thefinancial power of the major ban's, were using imperialism as a basis for sustaining the rate of profit: the colonieswere being used as outlets for surplus finance capital as well as captive mar'ets for the produc)s of industrial capitaland as sources of cheap raw materials

Fenins analysis contains a significant modification of .ar%s sanguine attitude towards capitalist development prospects inthe colonies Mn the one hand, imperialism was a spur to the development of capitalism in the periphery" Ecapitalismis growing with the greatest rapidity in the colonies and in the overseas countries Fenin, op.cit 913-e Mn the other hand, however, this rapidly developing capitalism was imperialist not indigenous, and its development was activelysuppressing any scope for the latter to emerge !he undercutting of local producers by cheap manufactured importsfrom the more advanced centres of industrial capitalism, and foreign rather than local3 investment of e&uity andloan capital in mines, plantations and infrastructure, with the associated outflow of profits and interest, were stiflingindigenous capitalist development substantial part of the inspiration for the neo# .ar%ist paradigm of underdevelopment is to be found in Fenins wor'-

/H$6.?A!A< MG 2G AG!


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*irstly, /chumpeter draws a clear distinction between economic growth and development !he former consists of agradual process of e%pansión of production#producing more of the same, and using the same methods in order to doso Aconomic development, in contrast, is a more dramatic anddisruptive process It consists, in /chumpetersterminology, of the carrying out of Enew combinations of productive means, such that either the condi# tions of

production of e%isting goods are transformed, and=or new goods are introduced, or new sources of supply or newmar'ets are opened up, or an industry is reorganised eg the creation of a monopoly position or the brea'ing up of amonopoly position3-; In each case innovation is entailed" in production methods, products, mar'ets or industrialorganisation

/chumpeter characterises these five aspects of economic development as giving rise to Eproductive revolutions,

a phrase that emphasises both the transforming aspect of development, and the fact that changes of this type tend tocluster together, so that development, rather than being a smooth, continuous process, occurs in fits and starts

> central aspect of /chumpeters analysis is his specification of the three common features which, in his view,are inherent in most instances of economic development, and without which that development cannot gen# erallyoccur Aach of these /chumpeter places in opposition to another element which, in his view, has, in earlier theorisation of economic advance, been assigned a misplaced importance !hese three essential features are asfollows"1. !he mobilisation of e%isting factors of production and their combina# tion in new ways2. A%tensión of credit, which is generally essential in order to provide the necessary command over these factors in

the mar'et3. !he presence of an economic entrepreneur, which is a sine ua non for the )nitiation of this process of resource

mobilisation and for carrying it through to completion*or /chumpeter the essential feature of economic development is not the incremental accumulation of new

capital, but the mobilisation of e%isting factors for new uses>s a rule the new combinations must draw the necessary means of productionfrom some o)d combinations ierent methods of employment and notsaving and increases in the available &uantity of labour, have changed the faceof the economic world in the last fifty years,

/chumpeter, 1981"8;3If new combinations of factors of production are carried out by e%isting firms, or by individu+is with substantial

wealth, then a problem of finance may not arise !he initiators of the new combinations may either already have thenecessary factors, or be able to buy them $owever, /chumpeter argXes, the situation is usually dierent *irstly,Enew combinations are, as a rule, embodied, as it were, in new firms in general it is not the owner of stage#coaches who builds railways-9 /econdly, even large firms usually need e%tra finance to implement this type of innovation /ome finance comes from other investors, but most is provided by ban's, and most of it is generated by

ban' credit creation !he onlending of savings deposits is, /chumpeter the carrying QD the condi# Nw goods are cd up, or an Ztion or the n is entailed" sation lopment as ses both the [ of this type )g

a smooth,;n of the three t instances of tt cannot gen# an to another omic advance, features are as

their combi nato provide the

a sirte ua non for and for carrying itiment is not the tion o# eistin&

ns of production oyment and not changed the face peter, 1981"8;3

ecanie" out by eistin& ■EB a problem o# #inance


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capitalists to finance the accumulation of more productive capital, but the actions of entrepreneurs in mobilisingcredit to finance the procurement of e%isting factors of production in order to combine them in new waysInnovation lies at the heart of development, and the innovator is the entrepreneur In emphasising that by thetwentieth century the activities of entrepreneur and capitalist, previously conjoined, ha" become separated,/chumpeter may be interpreted as simply updating element in classical theory $owever, by distinguishing betweengrowth aa" development, and emphasising the importance of credit creation, as oppose" to savings, in financingdevelopment, he distanced himself from the ciassical economists

/chumpeters emphasis on the importance of entrepreneurship has a itial relevance in the !hird (orld whichhas been noted by a number of Cevdopment economists from (alt G


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!S,Y+Zflyp),ernational economic recession witnessed what is widely 'nown >/ tac Qeynesian revolution ineconomic theory uring the 19-0s, first and then eynes Ndentified the role of efiective demand in thedeterminationof aggregate output and employment4B !he suggestions that attempts to increase savings during a recession maye%ac@rbate the down# ward spiral of output and employment, and that increased public sector spending during arecession might be a virtue not a vice, were indeed largely innovatory4- alec'is papers on these issues were notwidely read in the (est un til the 190s, but eynesian macro#economic theory &uic'ly achiev# ed a wide influence

eynesian theory, incorporating the assumption of downward rigidity in money wages, entailed a clean brea'

with the orthodo% view that under competitive conditions each resource will be fully employed, as did his argumentthat economists need two economic models, one for analysing economies operating at full employment, and one for those operating below full employment !he analytical method of eynesianism, on the other hand, remained basedon the comparative statics employed by the neo#classical school !he focus is still on the determinants of e&uilibrium in this case the e&uilibrium levels of aggregate output and employment3, and of the determinants of change therein#but now e&uilibrium may occur at below full employment

eynes major contribution to economic thought#the so#called Eeynesian revolution # was his theorisation of the causes of, and policy /olutions to, unemployment eynes, 19-83 $owever, a subse&uent major contributioncarne in his proposals for the reform of international economic institutions which were partially implemented in the1940s see /inger in !hirlwall ed3, 19;3

Siews on the relevance of eynesian economies to development economies have varied In the 1950s and1980s none of the leading early development economists ac'nowledged the direct inspiration of eynes in their theoretical wor' Indeed >rthur Fewis 19543 e%plicitly rejeets the relevance of eynes wor' for developmenteconomies, emphasising the irrelevance of eynes assumption that in economies below full employment not onlylabour but also land and capital are in unlimited supply, and also of eynes view that long#run economic e%pansiónis embarrassed not by a shortage but by a superfluity of saving Fewis, 1954, reprinted in >garwala and /ingh,198-" w@ shall see, most early development economists also rejected the very notion of tendeney towardse&uilibrium and the analytical method of comparative statics which emphasises this


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Mn the other hand, some economists today detect the influence of eynesianism in varying aspeets of developmenteconomies, although views vary on whether this influence has been positive or negative /uggested areas ofinfluence inelude the adaptation to analysis of developing economies of the $arrod#omar growth model itself

based on the eynesian perspective#see the ne%t section3, the structuralist concern with the role of aggregate demandas the engine of growth44 see Hhapters - and 53, and the propensity of early development economists to thin' inmacro#economic terms see eg Fal, 19;-" ;3The /eynesian revolution B

!he views that have been e%pressed concerning both the relevance and influence of eynes wor' in development economicsmay be classified in three groups#those that identify an active but negative influence, those that regard eynesianismas irrelevant, and those that detect a positive influence Assentially, those that hold the first and third view argXe thatalthough certain economists eg Fewis, .yrdal and the Fat)n >merican structur# alists3 may have insisted upon theirrelevance of eynesian theory to development economics, in fact eynesianism influenced, albeit subcon#sciously, the attitude of mind with which they approached the latter

!he negative influence of eynesianism has been emphasised most forcibly by neoclassical economists such as $arryCohnson and eepa' Fal !he main features of this influence are, they suggest, as follows"

1. jFac' of confidence in the ability of the pr)vate sector to achieve full utilisation of productive resourcesCohnson, 1913

2. $enee, emphasis upon /tate interventionism Cohnson, op.cit.1 Fal, 19;-33. Mveremphasis on the role of investment in the determination of aggreg# ate output and employment

Cohnson and Cohnson, 19;34. > focus on macro#economic policy to the e%clusión of micro#economic efficiency issues Fal, op.cit.2.

It is noteworthy, however, that points - and 4 are also features of classical economic theory, whose influence somedevelopment economists eg >rthur Fewis3 e%plicitly ac'nowledged

In contrast, amongst the defenders of the eynesian influence is $ans /inger /inger lists a number of instances of suchinfluence, each of which he regards as on balance meritorious !hey inelude the following"

>n attitude of mind which recognises a3 the need for more than one economic model to analyse different types of economic/ystem: b3 the need for macro#economic policy

!he inspiration which eynes gave to the development of national income accounting and henee also the systematiccollection of macro# economic data

$is recognition of the potential of economic protectionism as a meas# ure for the maintenance of national output andemployment albeit in the 6nited ingdom in the 19-0s3

eynes proposals on institutional reforms with respect to international trade and financeHlearly there is a lac' of consensus on both the e%tent and merit of the eynesian influence on development economics

which derives from the varying points of view of the evaluators Mn two points, however, there does appear to beagreement *irst, it is an accepted fact that eynes himseJf had no particular interest in less developed economies:any relevance that his wor' has had has been incidental /econdly, that influence has been, again in

/ingers words, largely upon the Eattitude of mind of various development economists rather than in terms of specificelements of theory

$>< MG !$A HMGI!IMG/ *M< 2


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$arrod begins his analysis by introducing the concept of the 3arrante rate of !ro3th 4w3 !his is the rate of growthwhich is sanctioned by the valTes of two other crucial variables#the planned national rate of savings, and the averagevalu@ of the capitahoutput ratio as planned by producers ?lanned savings represents the sum of the spending powerwhich individu+is and firms plan to withhold from consumption in a given period, and which, if the plans arefulfilled, can be made available to finance new capital formation !he capitahoutput ratio represents the valu@ of thecapital needed to produce a given output divided by the valu@ of that output It is a stoc' "flow ratio, whose valu@depends partly on the time period over which the output flow is measured !he period conventionally chosen is ayear3 If planned savings are represented as a proportion of national income, then this proportion divided by the

planned capita'output ratio c p3 gives the warranted rate of growth of outputdimensión to omar 1943 I also

revives it, and it isagain a &uestion an economy can (& at the same ne e%pansión, t to theorise the at a much = years later by the $hich reachedthe

5arro an Domar 67*or most of his analysis $arrod assumes that savings plans as a propor# tion of national income are fulfilled $e

then focuses his attention on c#its determinants and the conse&uences of failure by producers to achieve plan# ned c$arrod observes that c p is essentially technically determined It represents the valu@ of all capital fi%ed andrevolving3 re&uired to produce one unit of output in a given time period, when machines are wor'# ing the optimumtime allowing for maintenance and repair3, and when there are no additions to, or reductions from, the stoc' of wor'ing capital: c p is a weighted average of the individual c p s for all the differ# ent sectors of the economy !hisaverage is assumed to be constant" the marginal capita'output ratio e&uals the average !he amount of investment that

producers plan to underta'e in any given period is given by the valu@ of the e%tra output that they wish to produce,multiplied by the relevant capital "output ratio

$arrod ne%t ma'es an arbitrary, and much criticised, assumption as to the basis on which producers plan toe%pand production" if the rate of growth of output that occurred in the previous period was that which producers had

planned that it should be, then they will plan to repeat this growth rate in the ne%t period Hritics have as'ed why producers should plan to implement the same growth rate of output rather than to achieve the same absolute increasein output, and, e&ually important, whether they would really adopt such a short time perspective, basing their plansonly on the outcome of the previous period $arrod indicates that he is aware of these difficulties, but assumes themaway for the purposes of his analysis

In $arrods model output plans may not be fulfilled because aggregate demand may not behave as e%pected 7ythe assumption noted above, this is not because savings plans, e%pressed as a proportion of national income, are either changed or unfulfilled ?resumably therefore, although he is not e%plicit about this, $arrod is assuming either thatforeign demand changes, or that there is a change in the money supply, either of which would permit aggregatedemand to rise or fall, without necessarily violating the savings assumption

?roducers adjust immediately to unanticipated changes in demand >t first they do so by wor'ing their plantovertime ie at above planned capacity3 in the case of an output increase, or by accumulating unsold stoc's in the

case of a demand decrease In either event the actual capita'output ratio diverges from that which had been planned,and the actual rate of growth of output therefore diverges from the warranted rate !he actual growth rate, is given bythe actual savings rate which is assumed unaltered3 divided by the actual capita'output ratio (here output growth isabove the planned rate. c will be forced below its desired level, and vice versa


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Important conse&uences flow from this divergence If producers #in" that demand in a given period has been higherthan anticipated, so that to meet it machines have been wor'ed longer than planned and stoc's run "o$n, thenin thene%t period they will increase their investment $owever, the rise in investment will, through the multiplier, generatea further increase in de# mand Mnce again capacity will prove inade&uate and ca will again be forced below c p !heeconomy, in other words, having once diverged from the /tate of steady growth, now moves further and furtheraway from that /tate, along an e%plosive growth path In circumstances in which the initial divergence is due to adecline in the rate of growth of demand, e%actly the opposite will occur, with net investment falling and eventually

becoming negative as wom#out capital is not replaced3(e are not re&uired to conceive what would happen if these centrifugal forces were to op@rate indefinitely,

because $arrod identifies certain buffers that not only bring both spiralling growth and decline to a halt, but, indeed,reverse each process In the former case this occurs when the economy reaches full employment $arrod assumesnot only a constant c p , but also a constant capital"labour ratio, and, given this assumption, the economy cannot, atfull employment, grow faster than the rate of growth of the labour forc@ 48. 4n , which $arrod terms the Enaturalrate of growth, is the m+%imum rate of growth allowed by population growth and labour#saving technicalinnovation combined If either current 4a and=or 43 e%ceed 48, then at full employment either or both will nolonger be realised If 4a is lowered, then in the ne%t period investment plans will be revised downwards !hroughthe multiplier the slowing down in investment will lead to a decline in the rate of growth of demand Investment

plans in the ne%t round will be further contracted, and the economy will move into recession


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!here is, however, one other body of theory to consider /ome development economists have preferred to adhere tothe predominantly short#run, efliciency#oriented perspective of the neo#classical paradigm, applying to Xeve)opingcountries both the efficiency#ma%imising tenets of partial and general e&uilibrium theory and the lin'ed preceptsoYthelaw of eomparative advantagg /ince the neo#classical paradigm constituyes part of the analytical heritagewhich was available to development economists in the 1940s, it is appropriate to summarise its core here > laterchapter will e%amine its actualuse by development economists Mnce again, since the paradigm is actively applied indevelopment economics, a numbered point#by#point summary is used for purposes of easier comparison with the

paradigm summaries in Hhapter - *ollowing that summary, a brief indication is given of the direction ta'en by later attempts to use neo#classical theory to analyse economic growth7y the end of the nineteenth century most economists in (estern Aurope had ceased to focus their attention

upon the analysis of long#run growth !his was now widely ta'en for granted, and from the last dec+des of thecentury attention was increasingly focused instead upon issues of allocative efficiency # how resources come to beallocated to different uses, and the criteria which need to be fulfilled if the valu@ of the output generated from agiven stoc' of resources is to be ma%imised Aconomic analysis focused, in other words, largely upon decision#ta'ing by firms and consumers and upon the role of mar'et forces in resource allocation Aarly preoccupation withthe issues that are the main focus of the neo#classical perspective may be traced bac' to the wor' of .ili and Cevons$owever, the core of the neo#classical paradigm was first clearly articulated in .arshalls Principies of Economics,which was published in 1;90, and soon began to replace .ills Principies as the standard te%t of mainstreameconomics !he paradigm, which is today spelled out in all mainstream te%ts on micro#economic theory, may besummarised as follows"

1. It is "esirable to maimise a&&re&ate economic $el#are.2. ?el#are maimisation can only be achiee" $hen the mar4et alu0 o# &oo"s an" +erices pro"uce" at any

&ien point in time is maimise".3. Geo#classical theory is designed to show how these ends can be achieved through the operation of the free

mar'et4. In order to demónstrate this, it is necessary to ma'e a number of e%plicit assumptions about the nature of the

economic system !hese assumptions inelude"(a) profit ma%imisation by firms, which face cost structures character# ised by the 6#shaped cost curve:(b) utility ma%imisation by consumers, who e%perience diminishing marginal utility in the consumption of different

)tems:(c) an infinite range of production technologies all of which e%perience diminishing returns to scale at some

point3:(d) perfectly competitive mar'ets

2iven these assumptions, neo#classical theorists have generated the following propositions"

@The prices #or &oo"s an" +erices $hich are &enerate" by the un> impe"e" operation o# the mar4et %i.e. bythe #orces o# supply an" "eman"5 are normally the correct prices #or the purposes o# &ui"in& resource allocation bypro"ucers an" consumers. This is because #ree mar4et e7uilibrium prices $ill simultaneously re#lect mar&inal con>sumer preferences and marginal supply costs $owever, where a particular form of resource use generates e%temalcosts or benefits, pnces should be adjusted accordingly 2enerators of e%temal benefits should be rewarded and viceversa6. *actor pnces should also be determined through the operation of the free mar'et In this way producers will be

faced with correct informa# tion conceming the relative opportunity costs of different factors of production7. 2iven consumer preferences, firms production costs, the total valu@ of monetary demand and free mar'ets,

there will be one set of e&uilib# rium pnces for all factors of production, intermed)ate produc)s and final goodsand /ervices, at which all mar'ets are cleared and the valu@ of output ma%imised

8. 2iven infinite technical choice and factor price fle%ibility, the m+%imum valu@ of output and, henee, m+%imumsocial welfare, will always be achieved by the full employment of all factors of production !here will be noinvoluntary unemployment9.


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(b) output per wor'er will grow if the rate of savings and investment e%ceeds that which is re&uired both for capitalreplacement and to e&uip any increase in the wor'#force:

(c) investment will occur at a rate determined by the interaction of the social rate of time preference, which willdetermine the supply of savings for any given rate of interest, and the marginal produc# tivity of capital, whichwill determine the amount of investment that producers are prepared to underta'e at that rate of interest

12. !he main corollary of neo#classical theory is that, in any mar'et, price distortion will lead to a distorted pattemof resource allocation with a conse&uent reduction in efficiency and welfare

13. $enee the 'ey policy recommendation of the neo#classical paradigm is to remove all mar'et distortionsIn the 1950s and 1980s the neo#classical perspective generated a distinctive body of highly abstract growththeory 6sing the standard neo#classical assumptions, and assuming also no distinction between savers and investorsand henee no need for an investment function3 it was shown that an increase in savings can be e%pected to have a

positive, but only temporary, effect on the growth rate it will be associated with a relative lowering of the price of capital, and conse&uent increase in capital intensity per wor'er3 !he main source of long#run per capita incomegrowth in these models is technical progress

Geo#classical growth theory is not reviewed here, partly because it did not form part of the intellectual heritageof development economists in the 1940s and early 1950s, since it was developed later, but also because it has had noappreciable influence on development economics !he interested reader is re# ferred to the e%cellent summary andthe bibliography in $ywel 2 Cones 1943

/6..>G HMGHF6/IMG!he purpose of these concluding remarles is firstly to recapitTlate the main points to emerge from those dynamic theories that

were available to development economists in the 1940s and early 1950s, and secondly to ind)cate some of the mainfactors that could be e%pected to preoccupy development economists loo'ing to these theories as a potential sourceof insights into economic change in less developed countries Fater, the whole of Hhapter 10 is devoted to the neo#classical paradigm and its use in development economics3

>mongst the most notable features of classical growth theories #ie those given greatest emphasis by theclassical theorists themselves # are the following"1. !he importance of mar'et e%pansión as a stimulus both to e%pansión of total output and to raising labour

productivity2. !he importance of profits as the source of finance for new investment, in contrast to the unproductive use of

land rents and the Lero or minimal savings capability of wage#earners3. !he potential of an agricultural sector dominated by rentier land owners to impose a bra'e on overall economic

growth dam /miths emphasis on the e%tensión of the mar'et a step

further, arguing that technical innova# tion can itself generate an e%tensión of the mar'et through raising labour productivity and, henee, incomes and demand

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