Precursors of Development Economics
As noted above, the study of economic development has a very long history, with economists analysing the development process and problems of countries which are now economically developed and occasionally writing about countries which are still economically underdeveloped.
We may provide a sampling of these past contributions by examining three themes in the history of economic thought which are of particular relevance to modern development economics (see also Vaggi 2008 for further discussion and references).The first concerns the general issues of growth, stagnation and income distribution. Pre-classical French economists, such as the Physiocrats and Turgot, examined issues such as agrarian structure and the relationship between agriculture and industry. Around the middle of the eighteenth century Quesnay, for instance, examined the interaction between the industrial and agricultural sectors in his analysis of how the two sectors created markets for each other’s products, emphasizing the productive role of the agricultural sector. This focus on growth in the pre-classical economists was taken further by the classical economists. There were some common features to their approach. Smith, Ricardo and Marx focused on the importance of saving and capital accumulation in the growth process and took the view that labour supply was not a constraint on economic growth; since they assumed that saving arose mainly out of profits, they emphasized the positive relation between the inequality of income distribution (as measured by the profit share) and accumulation. However, individual classical economists emphasized some specific ideas and differences from the general approach. Smith emphasized productivity growth owing to the increasing division of labour. Smith, and more explicitly McCulloch, examined the role education played in increasing the skills and productivity of workers thereby contributing to economic growth.
Ricardo examined the interaction between agricultural and industrial sectors, and analysed the tendency of diminishing returns in agriculture to squeeze industrial profits and bring about the stationary state. While Ricardo believed that this state was in the distant future and could be pushed by technological changes, he thought its effects were pernicious; John Stuart Mill, however, was more favourably disposed towards it, in part because of the environmental damage done by endless economic growth. In explaining the absence of labour supply constraints on growth, the earlier classical writers invoked the Malthusian endogeneity of population, according to which, when capital accumulation and employment growth makes the wage rise above the subsistence level (usually broadly defined), population and labour supply expand and drive the wage back towards subsistence. Marx argued against this Malthusian approach, and instead viewed the wage as being kept down by the existence of the reserved army of the unemployed, which was replenished by those who lost their jobs in the pre-capitalist sectors owing to competition from the growing capitalist sector and by labour-saving technological change in the capitalist sector. Although the classical writers generally emphasized the role of saving in the process of capital accumulation, some of them recognized the possibility of aggregate demand problems which reduce investment incentives. Thus, Malthus discussed the problem of a general glut due to excessive saving, and Marx analysed the possibility of a realization crisis which could reduce production and growth because producers could not find markets for all their products. From the last quarter of the nineteenth century, the marginalist economists, such as Walras, Jevons and Menger, turned their attention to the problems of resource allocation and the full employment of resources, including labour, and away from the dynamics of growth and distribution. However, an interest in the questions of growth, stagnation and development continued in the writings of Schumpeter, the followers of Marx, and Keynes and his followers, who stressed the role of aggregate demand.A second theme concerns international issues. The mercantilist writers who flourished during the period from the sixteenth century to the late eighteenth century emphasized the importance of having foreign trade surpluses to make precious metals flow into their country, to attain the twin related goals of power (by increasing the availability of precious metals to finance the military) and plenty (by increasing the demand for their products and hence production and employment). The classical economists, however, departed from this position by emphasizing the benefits of trade owing to specialization and increasing both exports and imports according to absolute and comparative advantage, rather than by increasing the trade surplus. Ricardo’s theory of comparative advantage showed - using the England and Portugal example with clothing and wine - how both countries gained from trade. His dynamic theory of trade and growth also showed how imports of food prevented the price of wage goods from rising due to capital accumulation, and, by counteracting the tendency of the rate of profit to fall because of this, postponed the stationary state for food-importing countries such as England. However, it is interesting to note that if the country in question exports, rather than imports, food, the tendency of the price of food to increase and the profit rate to fall is exacerbated, bringing closer the onset of the stationary state. Marx took a more ambiguous view of international economic relations. On the one hand, the spread of capitalism around the globe in search of higher profits played a positive role not only for rich countries by obtaining cheaper inputs and higher profits abroad, but also for poor countries by fostering capitalist development. On the other hand, the incorporation of backward countries into the world economy also had a destructive effect by exposing their industries to foreign competition and by siphoning off their economic surplus, themes which were stressed by later Marx-inspired scholars of imperialism and dependency.
Nationalist writers in colonies and elsewhere stressed the problems of surplus transfers from colonies and other backward countries to rich countries - for instance, the “drain theory” of Indian nationalist writers such as Dadabhai Naoroji (1901) - and the dangers of foreign competition for their nascent industries.A third theme concerns the role of the state in economic development. Since, as noted above, the mercantilist writers were concerned with increasing employment and foreign trade surpluses with a view to increasing the economic and political power of nations, they were in favour of trade policies which promoted exports and provided protection against imports. They therefore wrote extensively about themes which are relevant for the LDCs of today, including foreign exchange constraints, state intervention and planning and protection. The classical writers such as Smith and Ricardo, who favoured free trade, were generally in favour of laissez-faire policies and argued against state involvement in the economy because of the monopolies it created and the impediments it imposed on the free exchange of goods. Malthus even argued against efforts to help the poor because such measures simply increased population growth and failed to help the lot of the poor. However, they were not entirely against government intervention either. Smith, for instance, was concerned about the deleterious effects of the division of labour on the conditions of workers, and supported government provision of primary education. Economists concerned with the development problems of relatively backward countries envisioned a much more active role for the state. When writers of colonial theory and policy studied the economic problems of their colonies and discussed the problems resulting from cultural attitudes and climate, some with concern for the wellbeing of the subjected people, they recommended government action to address these problems. Alexander Hamilton in the United States and, following his lead, Friedrich List in Germany argued for active government support, including protection for domestic industry to allow them to withstand foreign competition from producers in more technologically advanced countries.
List was in favour of national systems which, with the help of government intervention and protectionism, would improve technology especially in the manufacturing industry, and allow countries with nascent industrial sectors to develop and compete in world markets. List was critical of the attitude of advanced countries which had used such interventionist policies for their own development and then tried to “kick away the ladder”, promoting free trade and laissez-faire, forcing such policies on relatively backward countries when they were able to do so, for instance, through colonization (Chang 2002).Despite such early beginnings, however, this early history can be called a prehistory because the systematic and specialized study of the entire range of problems of LDCs did not begin until after World War II. The rise of the study of economic development as a separate field of enquiry around this time was caused by the conjunction of several powerful influences (see Hirschman 1981). At one level the rise of Keynesianism paved the way for state intervention, for the development of analytical concepts such as unemployment, for the focus on macroeconomic aggregates, and generally for departures from neoclassical orthodoxy; the consequent development of growth theory by Keynesians and neoclassicals, input-output analysis, and optimal programming also helped the growth of the subject. At other levels, the wartime experiences with active state intervention and planning, the experience of planning in the Soviet Union, the political independence of several LDCs and the consequent desire of - and pressures on - new nationalist governments to prove their capabilities, the advent of international agencies fostering development, and the spectre of communism all strengthened the need for development with active state intervention (see also Meier 1984). The combination of these factors helped to create a tremendous enthusiasm for, and interest in, the development of LDCs. The subsequent history of development economics will now be considered by examining four phases.