Development Economics

I

Introduction

Development Economics, branch of economics dealing with the development of economies. Development economics attempts to answer how economies change from simple forms of organization and production to complex modern ones. Originally men and women lived in small, self-sufficient communities, dependent on things they found in their environment. If food, fuel, or materials ran out, they would simply move on. One of the first significant social and technological developments was the transition from this nomadic way of life to agricultural cultivation in settled communities, from which began societies as we know them today.

Economists distinguish between growth, by which they basically mean more of the same—more goods and services—and development, by which they mean growth with structural and technological change. Typically, in the early stages of development economies have most of their production and labor force in agriculture. Later, the manufacturing and service sectors become larger. The service sector includes government, defense, construction, transport, finance, insurance, banking, and the like, as well as the work of people who do not produce physical objects such as cars or radios. Thus, accountants, lawyers, teachers, and hairdressers are considered part of the service sector.

An important feature of development is when goods and services enter into markets. For example, we know that people have always eaten, but as they have meals away from home and pay for restaurant services, a restaurant sector grows up. This sector, in turn, is measured as part of the gross domestic product (GDP, the total of all goods and services produced within a country). The process of development includes this kind of specialization, also known as the “division of labor.” As people take on specialized economic functions, the scale of production increases and the output of each person rises. This type of organizational change is as important a part of development and technological progress as mechanical invention or scientific discovery.

Another key feature of development is poverty. Entire economies can be poor, or they can grow but still leave large sections of their people in poverty. In the second half of the 20th century, economists became acutely aware of the difficulties of a large number of countries in the developing world, most of them former colonies of the industrialized nations. Development economics became more or less synonymous with the study of how these countries could progress out of poverty. Likewise, economic historians, who had long examined how the industrialized countries achieved their material advances, appreciated that these countries too were once “underdeveloped.” As a result, much of economic history became the study of economic development.

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II

Accumulation and Industrialization

Theories of growth and development abound. The most basic ones stress the accumulation of the principal factors of production, which are labor, capital, and land. Capital is accumulated by savings. The theory of capital accumulation rests on the idea that the more capital there is, the more will be invested to increase productivity. For example, someone with little capital to invest will dig with bare hands, someone with more capital will buy a spade and dig more, while someone with still more capital will invest in a mechanical digger and dig the most of all. Obviously it is not just a question of how much capital, but what kind of capital and how effective it is—hence the importance of technology. Today theory also pays a great deal of attention to “human capital”—not just what is invested in machines and infrastructure (facilities for economic activity such as roads and power stations), but what is invested in people. For example, the education and health of a population has a lot to do with the productivity of their labor.

Theories of accumulation were closely allied to those of industrialization. For many development economists, particularly those in the developing world, industrialization was almost synonymous with economic development. In the 1960s and 1970s as developing countries were achieving independence from colonialism, the industrial countries appeared to have all the advantages in the world economy. It was they who had colonized the developing world, and they appeared to have kept the developing world in an inferior position by pressuring them to produce the raw materials the industrial world wanted, thus hindering their attempts to become manufacturing economies. The development debate divided between radical views, which stressed the difficulties faced by developing countries in the world economy, and more orthodox views, which stressed the potential for development from within, helped if necessary by the industrialized countries.

III

Radical Views of Development

Radical views of development generally fall into two camps: Marxist theorists and dependency theorists. Both are critical of free-market capitalism.

A

Marxism

The German political economist and philosopher Karl Marx wrote little that touched directly on development, but he was certainly an influence on thinking about it—although only through some of what he wrote. Marx held that capitalism would help development by breaking down the obstructive precapitalist “modes of production,” which he believed prevailed in the colonies. This was part of his stage theory, in which economies inevitably progressed from capitalism to socialism to communism. More influential in development thinking were his views on class relations and exploitation, particularly the “extraction of surplus value,” or profits, from the labor of workers and the importance of this surplus value to the accumulation of capital.

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