Global Development Issues Series: Classic Theories on Growth and Stagnation
Foreword
International development remains a central topic in academic dialogues, particularly when explored through the lenses of Public Administration and International Relations. This field delves into the delicate equilibrium between a country’s internal growth objectives and its external diplomatic engagements. The focus is on how nations aim to enhance their economic position and the quality of life for their residents, a reflection of their global stature and internal prosperity.
From an academic perspective, development is defined by the myriad ways nations navigate their economic and societal progress. Even though the importance of development is universally accepted, the outcomes are diverse across countries, and shaped by varying factors. This variance in outcomes underscores the multifaceted nature of the factors that underlie developmental stagnation for certain countries, while others grow and thrive.
To comprehensively apprehend the essence of development, an exhaustive exploration of its historical antecedents is essential. Additionally, a meticulous examination of classical developmental theories holds paramount importance. Furthermore, an acute cognizance of the strategies employed to address global challenges becomes indispensable in the context of mitigating issues such as poverty and inequality.
This 11 series consists of seven articles, each dedicated to exploring the concept of development, its various components, and its potential prospects for the future:
3. Global Development Issues Series: Classical Theories on Growth and Development
Global Development Issues Series: Classical Theories on Growth and Stagnation
The previous chapter of Global Development Issues Series provided a comprehensive examination of the intricate web of factors contributing to growth, development, and stagnation in countries worldwide. This analysis was grounded in the well-regarded framework proposed by Szirmai, which categorized the sources of growth into proximate, intermediate, and ultimate factors, ultimately shaping a nation's social and economic outcomes. Each of these elements, encompassing immediate determinants and more foundational contributors, played a significant role in influencing a country's progress or stagnation. Their combined impact shaped the trajectory of nations. In the preceding chapter, we meticulously explored these multifaceted factors, scrutinizing their interplay and impact on the trajectory of nations. However, the subsequent chapter promises to provide a fresh perspective. It will pivot towards classical theories on growth and stagnation, inviting us to journey through the historical narratives crafted by eminent scholars and thinkers. This leg of our exploration will seek to understand how economies not only germinate but also sustain their industrial growth over time.
This upcoming chapter will be thoughtfully divided into two distinct eras: theories that existed before World War II and those that emerged in its aftermath. The reason for this division is the pivotal transformation in market dynamics and growth paradigms that World War II ushered in. This momentous global event brought about profound economic, political, and social changes. These transformations, in turn, had a substantial impact on the course of a country's progress or its entrapment in a cycle of economic stagnation. In sum, the journey in this chapter will be guided by the wisdom of classical authors who have pondered the fundamental question: how do countries chart a course toward progress or, conversely, why do they sometimes remain entrenched in a state of industrial stagnation? Through their insights and theories, we will gain a deeper appreciation of the intricate dance between nations and their industries on the path to development.
Classic Theories before WWII
As previously presented, there are different theories that suggest how growth and stagnation occurs. While Szirmai’s framework portrays the sources of growth, it is important to consider that it is a framework for analysis, not a theory (Szirmai, 2015). A theory, instead, is a supported and thorough explanation of a phenomenon that relies on observable evidence and is frequently employed to predict or comprehend connected phenomena. As such, there have been several theorists before WWII attempting to explain how a country can move forward.
A. Adam Smith
The Scottish economist and philosopher Adam Smith, widely recognized for his pioneering theories in economics, occupies a prominent place in the annals of economic thought. Smith's contributions to the field are underpinned by two seminal concepts: the division of labor and the invisible hand. Smith's proposition of the division of labor constitutes a pillar in the field of economic theory (Bishop, 1995; Rothschild, 1994). He contended that the division of labor is an imperative facet of economic progress, primarily because it compels specialization within the marketplace (Rosenberg, 1965). This specialization, Smith argued, elicits enhanced productivity as workers become proficient in specific tasks. Such specialization encourages individuals to strive for excellence in their designated roles, ultimately culminating in economic growth and increased monetary gains. However, it is essential to note that the division of labor is not solely a product of workers' initiatives. It can also be influenced and manipulated by individuals in higher positions, thereby significantly impacting the economic landscape.
Yet, Smith recognized that there were other, more subtle forces at play within the economic system—forces that operated behind the scenes, beyond the immediate purview of individuals. This is where the concept of the "invisible hand" enters the narrative (Rothschild, 1994). The invisible hand symbolizes the hidden, unobservable dynamics that drive a free-market economy forward. It hinges on the interplay of individual interests and the liberty to produce and consume as one sees fit, with these elements exerting a reciprocal influence on each other. The outcome is the natural ebb and flow of market supply and demand, a fluctuation of prices, and the smooth progression of trade. These effects are often obscured and beyond the direct control of individuals, representing an intricate web of interactions (Bishop, 1995). Adam Smith's invisible hand, therefore, is a vital element in explaining how a free-market economy incentivizes individuals to act in their own self-interest. It underscores the idea that, even in a system where individual motivations predominate, there exists an underlying mechanism that propels economic activity and promotes collective well-being (Bishop, 1995; Rothschild, 1994). In essence, the invisible hand embodies the principle that individual pursuits, when allowed to flourish within the framework of a free market, can drive economic prosperity. It also contributes to societal progress.
B. Thomas Robert Malthus and David Ricardo
Following in the footsteps of Adam Smith, two notable economists, Thomas Robert Malthus and David Ricardo, emerged as integral figures on the economic stage. They engaged in a nuanced debate regarding the path to achieving economic growth (Cremaschi & Dascal, 1996; Lambin, 2012). Despite sharing a commitment to the principles of a free-market system, their views diverged, with a distinct emphasis on accumulation and trade. Ricardo, for instance, advocated for an economic approach grounded in the concept of comparative advantage. He contended that markets should prioritize the exploitation of their strengths and specializations. This theory postulates that a nation should focus its efforts on producing goods and services in which it holds a comparative advantage. These are products it can manufacture more efficiently and with a lower opportunity cost than its trading partners. Ricardo's perspective, therefore, championed the efficient allocation of resources and trade as the engines of economic growth.
In stark contrast, Malthus offered a less optimistic outlook, famously known for the Neo-Malthusian viewpoint. His argument revolved around the idea that the human population faced some limits (Cremaschi & Dascal, 1996; Lambin, 2012). Malthus cautioned that the capacity of the planet for growth could not indefinitely accommodate the constant and irregular expansion of the population. He foresaw a mismatch between the surging demand for food, driven by population growth, and the capacity of agricultural productivity to keep pace. Malthus believed that food demand would outstrip the ability of the planet to supply it (Fernandez-Villaverde, 2001). As a result, Malthus's perspective compelled the economy to redirect its focus towards expanding agricultural capacity and monitoring population growth. These measures were viewed as essential for maintaining productivity and economic growth. Simultaneously, they aimed to mitigate the potential consequences of unchecked population expansion. Malthus's theory added a dimension of prudence to the conversation. It emphasized the necessity of a balanced approach to economic development that considers the intricate relationship between population dynamics, agricultural production, and overall economic well-being.
C. Friedrich List
In the continuum of economic thought, the German economist Friedrich List emerged with an approach that offered alternative perspectives on a nation's path to progress. List's theories departed from the classical free-market ideals. Instead, they championed a more protectionist stance, an approach that gained favor in various countries striving to safeguard their economic interests. One of List's key contributions was the formulation of the infant-industry theory, a cornerstone of his economic philosophy (List, 1856). This theory contended that industries in developing countries required protection from the competitive pressures of more advanced economies until they reached full maturity. List's rationale behind this proposition was rooted in the recognition that fledgling industries lacked the same resources and economies of scale as their older counterparts in more developed nations. This imbalance formed the basis of his argument for protectionism.
According to List, trade policies should be strategically oriented towards shielding these nascent industries during their formative stages (List, 1856). Although such protective measures might entail initial costs and limited free-market dynamics, they promised long-term advantages. By providing a buffer against international competition, these policies allowed emerging industries to grow and develop. In the end, the aim was to equip them with the necessary strength and capabilities to eventually compete with larger, more established counterparts. However, it is vital to underscore that for List's theory to be effective, a proactive and discerning role for governments is essential (Levi-Faur, 1997). Governments must continually evaluate and adapt their policies to identify which industries merit protection and for how long. Without this vigilance, the protectionist strategy could falter. In essence, Friedrich List's theory represents a pathway that permits infant industries to thrive and expand, surmounting the obstacles that might otherwise stifle their growth. It underscores the idea that protectionism can serve as a strategic catalyst for economic development. This approach ultimately positions a nation on the path to prosperity.
D. Karl Marx
Another influential German theorist and economist, Karl Marx, occupied a significant place in the landscape of economic thought, particularly for his critical examination of capitalism (Mandel, 2002, 2015). Capitalism, an economic system characterized by the control of markets by private owners seeking profit maximization, was the target of Marx's critique. While capitalism undeniably contributed to economic growth, Marx contended that it came at a steep cost, particularly for the welfare of the working class. In Marx's view, capitalism was a system that alienated the masses. He argued that workers produced goods and services for the market, yet it was ultimately the forces of the market that held sway over the entire system (Mandel, 2002). Consequently, individuals found themselves toiling for capitalism. Control in this system was consolidated in the hands of the capitalist class, which owned the means of production.
Marxism, the socio-economic and political theory derived from Marx's ideas, emphasizes the existence of a profound and inherent struggle in capitalist economies. This struggle leads to a stark division between social classes (Mandel, 2002). The economic relations inherent to capitalism, Marx argued, would inevitably foment a class conflict that could culminate in a communist revolution. This revolution, according to Marxist theory, would aim to protect the rights and well-being of the working class. At its core, the Marxist perspective advocated for the collective ownership of the means of production by the workers. This vision entailed that people would have a shared stake in and control over the production and distribution of goods and services, promoting a more equitable and just distribution of resources and benefits. In essence, Marx's theories underscore the call for a shift away from the prevailing capitalist structure. This shift aims to establish a system where ownership and control of economic resources are more broadly shared, fostering a fairer and more inclusive society.
E. Imperialism
Expanding upon the Marxist paradigm, the theory of imperialism presents a set of conceptual tools to grapple with the expansion of capitalism and its intricate outcomes (Callinicos, 2009). A central focal point of this theory is the examination of the unequal progress of nations, wherein certain countries accumulate more power and influence than others. Imperialism, within this framework, seeks to elucidate why revolutions and demands for rights often emerge on the periphery of the global economic stage, primarily within developing nations (Patnaik & Patnaik, 2021). The core thesis revolves around the premise that most developed countries possess the capability to extend their reach into these peripheral regions. This action allows them to sidestep potential dissent within their own populations. Concurrently, they leverage the disparities in legal and economic structures across various nations to their advantage.
Furthermore, imperialism sheds light on how developed nations capitalize on investment opportunities within these peripheral regions. They do so with the dual objectives of creating new markets and securing access to vital raw materials. This intricate dynamic elucidates a global power imbalance where some countries bear the consequences of the market expansion orchestrated by their more developed counterparts. Conversely, other nations thrive economically by harnessing these opportunities to bolster their national economic growth as well as achieve a form of political domination (Callinicos, 2009; Patnaik & Patnaik, 2021). In essence, imperialism functions as a perceptual framework to discern the complex power dynamics at play in the global arena. It elucidates how different nations navigate the implications of market expansion. It underscores the pronounced disparity in outcomes, with certain nations shouldering the burdens of economic expansion. Meanwhile, others flourish economically by adroitly exploiting these opportunities to their advantage.
F. Max Weber
In the context of the relentless expansion of capitalism and enduring global power imbalances, Max Weber, a prominent sociologist and economist, stands as a pivotal figure (Weber, 2023). His work emerges as a seminal contribution, enriching our comprehension of the development of modern Western society. Weber's insights, however, diverge from a macroeconomic focus or a broad perspective on a nation's industrial landscape. His work, instead, delves into the intricate dynamics within large organizations (Weber, 2017). It presents a framework that underscores the vital role of employees and their interactions within the structure of these organizations. Weber's influential theory of bureaucracy stands as a cornerstone of his body of work. According to his theory, bureaucracy is an indispensable system in large organizations, playing a pivotal role in enhancing productivity and operational efficiency (Andreski, 2013; Weber, 2023). Central to this concept is the idea that every worker within these organizations must assume specific roles and responsibilities. This resonates with the earlier notions of the division of labor put forward by Adam Smith. When the division of labor is combined with the implementation of a bureaucratic system, it establishes a framework where each individual's responsibilities are well-defined and systematically organized. This synergy fosters enhanced organizational efficiency and effectiveness.
Within this construct, bureaucracy is synonymous with rationality (Andreski, 2013; Weber, 2023). Weber emphasizes the profound significance of rationality within the organizational context. He stresses that individuals must thoughtfully consider their objectives and then discern the most effective and efficient means to achieve them, thus promoting systematic decision-making. This systematic and analytical approach to decision-making, driven by rationality, leads to improved time management and heightened levels of production. Furthermore, Weber underscores that a bureaucratic system thrives when there is a prevailing sense of law and order. Strict adherence to established protocols is crucial to avoid disruptions in the workflow. The meticulous adherence to established rules and regulations serves as a safeguard to ensure the organization operates smoothly and efficiently. This commitment minimizes the potential for chaos or inefficiency, thereby promoting order and effectiveness. Despite the perception of rigidity often associated with bureaucratic systems, they are intentionally structured to prioritize the attainment of concrete results. The emphasis on efficiency, adherence to processes, and clear delineation of roles allows large organizations to operate in a structured and systematic manner. In Weber's view, this rigid, yet highly organized, approach is pivotal for ensuring the achievement of an organization's objectives and the promotion of efficiency and productivity on a grand scale.
G. Joseph Schumpeter
Joseph Schumpeter's innovation theory of profit, a crucial element in the realm of economic development, introduces a dynamic perspective on how economies evolve (Hospers, 2005). Schumpeter believed that the very essence of capitalism is innovation, and this innovation, according to him, is best harnessed through a process he termed "creative destruction" (Caballero, 2010). This process involves the deliberate dismantling of established norms and practices to make way for revolutionary changes. It is not about incremental improvements but rather the disruptive introduction of new ideas, technologies, and business models. Schumpeter's concept of creative destruction is deeply rooted in the belief that in a capitalist system, progress and growth are driven by the ceaseless pursuit of innovation. Entrepreneurs, in his view, play a pivotal role in this process (Hagedoorn, 1996; Hospers, 2005). They are the vanguards of change, the visionaries who identify opportunities to create new products, services, and markets. By doing so, they not only challenge existing businesses and paradigms but also stimulate a more efficient allocation of resources.
In this framework, competition takes on a new dimension. It is not merely about competing for market share but rather about competing to innovate (Hospers, 2005). Schumpeter argued that genuine competition results from the introduction of disruptive innovations, which inherently displace older, less efficient methods and practices. This competitive process serves as a driving force for industries to continuously adapt and develop new strategies (Hagedoorn, 1996). Furthermore, Schumpeter's theory goes beyond the realm of economics. He believed that creative destruction has far-reaching implications for society as a whole. By encouraging the pursuit of innovation and progress, it fosters societal advancement. It is not just about improving economic outcomes but also about enhancing the quality of life for the population. As industries and technologies evolve, they often bring about improvements in living standards, job opportunities, and overall well-being. As such, Schumpeter's innovation theory of profit, encapsulated in the concept of creative destruction, underscores the pivotal role of innovation in economic development. It challenges the status quo, drives competition, and ultimately leads to progress, benefitting both industries and society as a whole. In a capitalist economy, embracing change and nurturing innovation are not only vital for economic growth but also imperative for enhancing the well-being of the population.
Classic Theories after WWII: Internal and External explanations
After WWII, many things changed regarding how countries managed their economies. Committed to changing their dynamics, the explanations for development economic growth, and stagnation change to more internal and external explanations. There is a major focus on the processes a country goes through to achieve change and become more successful.
A. Walt Rostow
Rostow's theory of stages of growth provides an internal perspective on economic development, suggesting that these stages are somewhat automatic but contingent on substantial investment. Rostow posits that countries must navigate through five distinct phases to achieve development (Rostow, 2013). First, they commence as traditional societies characterized by basic, agrarian economies with intensive labor, limited scientific knowledge, and technological advancements. The second phase marks the preconditions for take-off, where societies begin to develop manufacturing capabilities, facilitating the transition to an extensive growth period characterized by industrialization. Subsequently, technology advances, leading to maturity, and the national economy diversifies, ultimately culminating in the age of high mass consumption. It is essential to note that Rostow's model was significantly influenced by Western capitalist nations during the Cold War era, as he aimed to aid lower-income countries in their development endeavors.
B. Simon Kuznets
Simon Kuznets' groundbreaking contribution to economic theory revolves around the Kuznets curve hypothesis, which delves into the complex relationship between economic development, income inequality, and environmental degradation (Borghesi, 2006). According to this hypothesis, as an economy undergoes various stages of development, income inequality follows a specific trajectory. In the early stages of industrialization and economic growth, Kuznets posited that income inequality tends to increase (Dinda, 2004). This phenomenon occurs as rural labor moves to urban areas, leading to a surge in competition for jobs and, consequently, wage suppression. However, Kuznets did not stop at this observation. He emphasized that as the economy advances and reaches a specific level of income and industrialization, income inequality would eventually decline.
Kuznets attributed this decline in income inequality to several factors. One crucial factor is the emergence of a "welfare state" in advanced industrialized nations (Borghesi, 2026). The welfare state entails various social and economic policies designed to ensure a safety net for citizens, including unemployment benefits, healthcare, and other forms of social support. These policies contribute to reducing income inequality and enhancing social mobility. So, understanding the dynamics of the Kuznets curve can be a powerful tool for countries seeking to foster economic development and reduce income inequality (Dinda, 2004). Recognizing that the initial increase in income inequality during the early stages of industrialization is not a permanent condition is crucial. This awareness empowers policymakers to implement measures that promote social mobility and mitigate inequality. The Kuznets curve, often depicted graphically as a "U," encapsulates this narrative, serving as a visual representation of the shifting relationship between income inequality and economic development. In sum, Kuznets' work offers valuable insights into the nuanced interplay between economic growth, inequality, and the role of public policy in shaping the distribution of wealth in society.
C. Gunder Frank
Gunder Frank, another prominent German sociologist and economic historian, gained significance through his center-periphery model theory (Frank, 1979). This neo-Marxist perspective highlights the substantial divergence between the world's center, characterized by developed nations, and the periphery, encompassing developing countries. Frank's argument centers on the idea that elites in developing nations tend to exploit the rest of their population. These elites frequently share aligned interests with affluent nations, with a primary focus on maximizing profits. In the context of this theory, developing countries often find themselves with an economic structure that places considerable emphasis on traditional sectors, particularly agriculture. This emphasis on agriculture is often a result of the historical penetration and influence of Western powers in the affairs of these nations (Frank, 1979). Consequently, the economic and social development of these developing countries is intricately tied to the interests of their elites, who are influenced and motivated by the developed nations. In summary, Gunder Frank's center-periphery model illuminates the intricate dynamics of the global economic landscape. It highlights how the exploitation of resources, profit-seeking, and the historical legacy of colonialism continue to shape the trajectory of developing nations and their relationships with the developed world.
D. Alexander Gerschenkron
The concluding figure in this series of theorists is Alexander Gerschenkron, whose perspective challenges conventional views on industrialization. He argues that countries embarking on the industrialization journey at a later stage can make more rapid progress compared to their early-industrializing counterparts (Gerschenkron, 2005). In Gerschenkron's view, the critical factor that propels industrialization isn't merely the timing of the process but rather the benefits derived from the modern era. This modern era harnesses advanced technology and innovations, which serve as powerful accelerators for industrial development. Gerschenkron's theory emphasizes that adopting modern technology and leveraging contemporary opportunities can greatly empower a nation to facilitate transformative changes, expedite industrialization, and promote economic growth (Gerschenkron, 2005). In essence, it underscores the pivotal role of technology and timing in a country's development trajectory. In this way, he highlights the dynamic and ever-evolving nature of industrialization processes in the context of changing technological landscapes.
Conclusion
In conclusion, this exploration of global development issues has provided a comprehensive analysis of the intricate factors influencing growth, development, and stagnation in nations worldwide. The examination encompassed the framework proposed by Szirmai, categorizing sources of growth into proximate, intermediate, and ultimate factors. Moreover, the article introduced a discerning categorization of classical theories, distinguishing those existing before World War II from those that emerged thereafter. This categorization is instrumental in highlighting the profound transformations in market dynamics and growth paradigms instigated by the cataclysmic events of the war. The classical theories discussed in this article offer valuable insights into the complex interplay between nations and their industries as they navigate the path to development. This knowledge equips individuals to better comprehend the dynamic landscape of global development and its multifaceted factors at play, both historically and in the post-war era. Furthermore, the article delves into theories concerning the factors influencing economic growth and stagnation, elucidating the stages that nations undergo to reach their present economic circumstances and suggesting measures for improvement. Moreover, it underscores the interdependence between global markets and national demands. This highlights the advantages for countries that concentrate on specific products or services to meet local demand, leading to enhanced efficiency and productivity.
Additionally, it posits that specialization of labor is advantageous for industries, although it emphasizes the significance of innovation and the potential need for government policies to shield nascent industries from competition. In light of the ever-evolving market dynamics, the article underscores the necessity for industries and economies to remain adaptable in the face of constant change. Nevertheless, capitalism and ongoing economic development come at a cost. It leads to increasing inequality and impacts the well-being of workers, creating a stronger division of classes as posed by Marxism and demanding changes in who owns the means of production. Inevitably, economic growth under capitalism benefits the owners of the means of production who seek higher profits and often come from developed countries, relying on the periphery to extend their industries. Economic growth and development, therefore, demand a delicate balance to achieve growth while protecting the rights of the population. Yet these classical theories demonstrate that economic development and growth can be analyzed from different perspectives based on the specific problem at hand.
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