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THEFALLANDRISEOFDEVELOPMENTECONOMICS

ThisisnotexactlyapaperaboutAlbertHirschman.
Inthefirstplace,Iamunqualifiedtowritesuchapaper.MyacquaintancewithHirschman'sworksisverylimited.Inessence,theHirschmanIknowistheauthorofTheStrategyofEconomicDevelopmentandlittleelse.SoI
aminnopositiontowriteabouthislargervision.
Furthermore,whileIamagreatadmirerofTheStrategyofEconomicDevelopment,Idonotthinkthatitwashelpfultodevelopmenteconomics.Thatmaysoundparadoxical,butI'lltrytoexplainwhatImeanasIgoalong.
Toputitbriefly,however,IregardtheintellectualstrategythatHirschmanadoptedinwritingthatbookasanunderstandablebutwrongresponsetowhathadbecomeacrisisinthefieldofeconomicdevelopment.Perversely,
theverybrillianceandpersuasivenessofthebookmadeitallthemoredestructive.
IfthispaperisnotaboutHirschman,whatisitabout?Itissomereflectionsontwointertwinedthemes.Oneisthestrangehistoryofdevelopmenteconomics,ormorespecificallythelinkedsetofideasthatIhaveelsewhere
(Krugman1993)called"highdevelopmenttheory".Thissetofideaswasandishighlypersuasiveasatleastapartialexplanationofwhatdevelopmentisabout,andforastretchofabout15yearsinthe1940sand1950sitwas
deeplyinfluentialamongbotheconomistsandpolicymakers.Yetinthelate1950shighdevelopmenttheoryrapidlyunravelled,tothepointwherebythetimeIstudiedeconomicsinthe1970sitseemednotsomuchwrongas
incomprehensible.Onlyinthe1980sand1990swereeconomistsabletolookathighdevelopmenttheorywithafresheyeandseethatitreallydoesmakealotofsense,afterall.
Thesecondthemeistheproblemofmethodinthesocialsciences.AsIwillargue,thecrisisofhighdevelopmenttheoryinthelate1950swasneitherempiricalnorideological:itwasmethodological.Highdevelopment
theoristswerehavingahardtimeexpressingtheirideasinthekindoftightlyspecifiedmodelsthatwereincreasinglybecomingtheuniquelanguageofdiscourseofeconomicanalysis.Theywerefacedwiththechoiceof
eitheradoptingthatincreasinglydominantintellectualstyle,orfindingthemselvespushedintotheintellectualperiphery.Theydidn'tmakethetransition,andasaresulthighdevelopmenttheorywaslargelypurgedfrom
economics,evendevelopmenteconomics.
Hirschman'sStrategyappearedatacriticalpointinthismethodologicalcrisis.Itisarichbook,fullofstimulatingideas.Itsmostimportantmessageatthattime,however,wasarejectionofthedrivetowardrigor.Ineffect,
Hirschmansaidthatboththetheoristandthepracticalpolicymakercouldandshouldignorethepressurestoproducebuttoneddown,mathematicallyconsistentanalyses,andadoptinsteadasortofmuscularpragmatismin
grapplingwiththeproblemofdevelopment.Alongwithsomeothers,notablyMyrdal,Hirschmandidn'twaitforintellectualexile:heproudlygathereduphisfollowersandledthemintothewildernesshimself.Unfortunately,
theyperishedthere.
Theironyisthatwecannowseethathighdevelopmenttheorymadeperfectlygoodsenseafterall.Butinordertoseethat,weneedtoadoptexactlytheintellectualattitudeHirschmanrejected:awillingnesstodoviolenceto
therichnessandcomplexityoftherealworldinordertoproducecontrolled,sillymodelsthatillustratekeyconcepts.
Thispaper,then,isameditationoneconomicmethodology,inspiredbythehistoryofdevelopmenteconomics,inwhichAlbertHirschmanappearsasamajorcharacter.IhopethatitisclearhowmuchIadmirehisworkheis
notavillaininthisstorysomuchasatragichero.

THEFALLANDRISEOFDEVELOPMENTECONOMICS

Theglorydaysof"highdevelopmenttheory"spannedabout15years,fromtheseminalpaperofRosensteinRodan(1943)tothepublicationofHirschman'sStrategy(1958).
Loosely,highdevelopmenttheorycanbedescribedastheviewthatdevelopmentisavirtuouscircledrivenbyexternaleconomiesthatis,thatmodernizationbreedsmodernization.Somecountries,accordingtothisview,
remainunderdevelopedbecausetheyhavefailedtogetthisvirtuouscirclegoing,andthusremainstuckinalowleveltrap.Suchaviewimpliesapowerfulcaseforgovernmentactivismasawayofbreakingoutofthistrap.
It'snotthateasy,ofcoursejustassertingthattherearevirtuousandviciouscirclesdoesnotqualifyasatheory.(AlthoughMyrdal(1957)isessentiallyatractthatemphasizestheimportanceof"circularandcumulative
causation"withoutunlikeHirschman(1958),whichisoftentreatedasacounterpartworkprovidingmuchinthewayofconcreteexamplesofhowitmightarise).Thedistinctivefeaturesofhighdevelopmenttheorycame
outofitsexplanationofthenatureofthepositivefeedbackthatcanleadtoselfreinforcinggrowthorstagnation.
Inmostversionsofhighdevelopmenttheory,theselfreinforcementcamefromaninteractionbetweeneconomiesofscaleattheleveloftheindividualproducerandthesizeofthemarket.Crucialtothisinteractionwassome
formofeconomicdualism,inwhich"traditional"productionpaidlowerwagesand/orparticipatedinthemarketlessthanthemodernsector.Thestorythenwentsomethinglikethis:modernmethodsofproductionare
potentiallymoreproductivethantraditionalones,buttheirproductivityedgeislargeenoughtocompensateforthenecessityofpayinghigherwagesonlyifthemarketislargeenough.Butthesizeofthemarketdependson
theextenttowhichmoderntechniquesareadopted,becauseworkersinthemodernsectorearnhigherwagesand/orparticipateinthemarketeconomymorethantraditionalworkers.Soifmodernizationcanbegottenstarted
onasufficientlylargescale,itwillbeselfsustaining,butitispossibleforaneconomytogetcaughtinatrapinwhichtheprocessnevergetsgoing.
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TheclearestandsimplestversionofthisstoryisintheoriginalpaperbyRosensteinRodan(1943)himself.Inthatseminalpaper,heillustratedhisargumentforcoordinatedinvestmentbyimaginingacountryinwhich20,000
(!)"unemployedworkers...aretakenfromthelandandputintoalargenewshoefactory.Theyreceivewagessubstantiallyhigherthantheirpreviousincomeinnatura."RosensteinRodanthenwentontoarguethatthis
investmentislikelytobeunprofitableinisolation,butprofitableifaccompaniedbysimilarinvestmentsinmanyotherindustries.Bothkeyassumptionsareclearlypresent:theassumptionofeconomiesofscale,embodiedin
theassertionthatthefactorymustbeestablishedatsuchalargescale,andtheassumptionofdualism,embeddedintheideathattheseworkerscanbedrawnfromunemploymentorlowpayingagriculturalemployment.
IregardRosensteinRodan'sBigPushstoryastheessentialhighdevelopmentmodel.Admittedly,someoftheclassicsofhighdevelopmenttheorydifferedintheiremphasisfromthiscentralvision.Ononeside,Arthur
Lewis'sfamous"Economicdevelopmentwithunlimitedsuppliesoflabor"emphasizeddualismwhileignoringtheroleofeconomiesofscaleandcircularcausation.Ontheotherside,someauthors,notablyFleming(1954),
arguedthatowingtotheroleofintermediategoodsinproductionwhatHirschmanwouldlatermemorablydubforwardandbackwardlinkagesselfreinforcingdevelopmentcouldconceivablyoccurevenwithoutdualism.
Therewerealsodisputesoverthenatureofthepoliciesthatmightberequiredtobreakacountryoutofalowleveltrap.RosensteinRodanandothersappearedtoimplythatacoordinated,broadlybasedinvestmentprogram
theBigPushwouldberequired.Hirschmandisagreed,arguingthatapolicyofpromotingafewkeysectorswithstronglinkages,thenmovingontoothersectorstocorrectthedisequilibriumgeneratedbytheseinvestments,
andsoon,wasactuallytherightapproach.Indeed,Hirschmanstructuredhisbookasanargumentwithwhathecalledthe"balancedgrowth"school.HedidnotacknowledgethathehadfarmoreincommonwithRosenstein
Rodanandother"balancedgrowth"advocateslikeNurkse(1953)thananyofthemhadwiththewaythatmainstreameconomicswasgoing.
Formainstreameconomicswas,bythelate1950s,becomingincreasinglyhostiletothekindsofideasinvolvedinhighdevelopmenttheory.Aboveall,economicswasgoingthroughanextendedperiodinwhichincreasing
returnstoscale,socentraltothattheory,tendedtodisappearfromdiscourse.
Itmaynotbeobviousjusthowcrucialeconomiesofscaleweretohighdevelopmenttheory.Oneofthecharacteristicsofthewritingofmanyofitsexpositorswasacertainvaguenessthatmakesithardtoknowexactlywhat
theessenceoftheirargumentswereavaguenessthat,aswewillsoonsee,wasnoaccident.Still,ifreadscarefully,onefindsthatincreasingreturnsareinvariablycrucialtotheargument.
Consider,forexample,whatmayhavebeenHirschman'smostcitedconcept,thatof"linkages."SomecrudefollowersofHirschmanhaveidentifiedthesedirectlywithhavingalotofentriesintheinputoutputtable.(1)But
Hirschman'sowndiscussionmakesitclearthattheideainvolvedtheinteractionbetweenmarketsizeandeconomiesofscale.
InHirschman'sdefinitionofbackwardlinkagestheroleofmarketsizeexternalitieslinkedtoeconomiesofscaleisquiteexplicit:anindustrycreatesabackwardlinkagewhenitsdemandenablesanupstreamindustrytobe
establishedatatleastminimumeconomicscale.Thestrengthofanindustry'sbackwardlinkagesistobemeasuredbytheprobabilitythatitwillinfactpushotherindustriesoverthethreshhold.
ForwardlinkagesarealsodefinedbyHirschmanasinvolvinganinteractionbetweenscaleandmarketsizeinthiscasethedefinitionisvaguer,butseemstoinvolvetheabilityofanindustrytoreducethecostsofpotential
downstreamusersofitsproductsandthus,again,pushthemoverthethreshholdofprofitability.
Soeconomiesofscalewerecrucialtohighdevelopmenttheory.Whydidthatpresentaproblem?Becauseeconomiesofscalewereverydifficulttointroduceintotheincreasinglyformalmodelsofmainstreameconomic
theory.

THEEVOLUTIONOFIGNORANCE

AfriendofminewhocombinesaprofessionalinterestinAfricawithahobbyofcollectingantiquemapshaswrittenafascinatingpapercalled"TheevolutionofEuropeanignoranceaboutAfrica."Thepaperdescribeshow
EuropeanmapsoftheAfricancontinentevolvedfromthe15thtothe19thcenturies.
Youmighthavesupposedthattheprocesswouldhavebeenmoreorlesslinear:asEuropeanknowledgeofthecontinentadvanced,themapswouldhaveshownbothincreasingaccuracyandincreasinglevelsofdetail.But
that'snotwhathappened.Inthe15thcentury,mapsofAfricawere,ofcourse,quiteinaccurateaboutdistances,coastlines,andsoon.Theydid,however,containquitealotofinformationabouttheinterior,basedessentially
onsecondorthirdhandtravellers'reports.ThusthemapsshowedTimbuktu,theRiverNiger,andsoforth.Admittedly,theyalsocontainedquitealotofuntrueinformation,likeregionsinhabitedbymenwiththeirmouthsin
theirstomachs.Still,intheearly15thcenturyAfricaonmapswasafilledspace.
Overtime,theartofmapmakingandthequalityofinformationusedtomakemapsgotsteadilybetter.ThecoastlineofAfricawasfirstexplored,thenplottedwithgrowingaccuracy,andbythe18thcenturythatcoastlinewas
showninamanneressentiallyindistinguishablefromthatofmodernmaps.Citiesandpeoplesalongthecoastwerealsoshownwithgreatfidelity.
Ontheotherhand,theinterioremptiedout.Theweirdmythicalcreaturesweregone,butsoweretherealcitiesandrivers.Inaway,EuropeanshadbecomemoreignorantaboutAfricathantheyhadbeenbefore.
Itshouldbeobviouswhathappened:theimprovementintheartofmapmakingraisedthestandardforwhatwasconsideredvaliddata.Secondhandreportsoftheform"sixdayssouthoftheendofthedesertyouencountera
vastriverflowingfromeasttowest"werenolongersomethingyouwouldusetodrawyourmap.Onlyfeaturesofthelandscapethathadbeenvisitedbyreliableinformantsequippedwithsextantsandcompassesnow
qualified.Andsothecrowdedifconfusedcontinentalinterioroftheoldmapsbecame"darkestAfrica",anemptyspace.
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Ofcourse,bytheendofthe19thcenturydarkestAfricahadbeenexplored,andmappedaccurately.Intheend,therigorofmoderncartographyledtoinfinitelybettermaps.Buttherewasanextendedperiodinwhich
improvedtechniqueactuallyledtosomelossinknowledge.
Betweenthe1940sandthe1970ssomethingsimilarhappenedtoeconomics.Ariseinthestandardsofrigorandlogicledtoamuchimprovedlevelofunderstandingofsomethings,butalsoledforatimetoanunwillingness
toconfrontthoseareasthenewtechnicalrigorcouldnotyetreach.Areasofinquirythathadbeenfilledin,howeverimperfectly,becameblanks.Onlygradually,overanextendedperiod,didthesedarkregionsgetre
explored.
Economicshasalwaysbeenuniqueamongthesocialsciencesforitsrelianceonnumericalexamplesandmathematicalmodels.DavidRicardo'stheoriesofcomparativeadvantageandlandrentareastightlyspecifiedasany
moderneconomistcouldwant.Nonetheless,intheearly20thcenturyeconomicanalysiswas,bymodernstandards,markedbyagooddealoffuzziness.InthecaseofAlfredMarshall,whoseinfluencedominatedeconomics
untilthe1930s,thisfuzzinesswasdeliberate:anablemathematician,Marshallactuallyworkedoutmanyofhisideasthroughformalmodelsinprivate,thentuckedthemawayinappendicesorevensuppressedthemwhenit
cametopublishinghisbooks.TjallingKoopmans,oneofthefoundersofeconometrics,waslatertorefercausticallytoMarshall'sstyleas"diplomatic":analyticaldifficultiesandfinepointsweresmoothedoverwithparables
andmetaphors,ratherthantackledinfullviewofthereader.(Bytheway,IpersonallyregardMarshallasoneofthegreatestofalleconomists.Hisworksremainremarkableintheirrangeofinsightoneonlywishesthatthey
weremorewidelyread).
HighdevelopmenttheoristsfollowedMarshall'sexample.Fromthepointofviewofamoderneconomist,themoststrikingfeatureoftheworksofhighdevelopmenttheoryistheiradherencetoadiscursive,nonmathematical
style.Economicshas,ofcourse,becomevastlymoremathematicalovertime.Nonetheless,developmenteconomicswasarchaicinstyleevenforitsowntime.Ofthefourmostfamoushighdevelopmentworks,Rosenstein
Rodan'swasapproximatelycontemporarywithSamuelson'sformulationoftheHeckscherOhlinmodel,whileLewis,Myrdal,andHirschmanwereallroughlycontemporarywithRobertSolow'sinitialstatementofgrowth
theory.
AsinMarshall'scase,thiswasnotbecausedevelopmenteconomistswerepeculiarlymathematicallyincapable.Hirschmanmadeasignificantcontributiontotheformaltheoryofdevaluationinthe1940s,whileFleming
helpedcreatethestillinfluentialMundellFlemingmodeloffloatingexchangerates.Moreover,thedevelopmentfielditselfwasatthesametimegeneratingmathematicalplanningmodelsfirstHarrodDomartypegrowth
models,thenlinearprogrammingapproachesthatwereactuallyquitetechnicallyadvancedfortheirtime.
Sowhydidn'thighdevelopmenttheorygetexpressedinformalmodels?Almostcertainlyforonebasicreason:highdevelopmenttheoryrestedcriticallyontheassumptionofeconomiesofscale,butnobodyknewhowtoput
thesescaleeconomiesintoformalmodels.
Theessentialproblemisthatofmarketstructure.FromRicardountilabout1975,whateconomistsknewhowtomodelformallywasaperfectlycompetitiveeconomy,oneinwhichfirmstakepricesasgivenratherthan
activelytryingtoaffectthem.Thereisastandardtheoryofthebehaviorofanindividualmonopolistwhofacesnocomparablysizedcompetitors,butthereisnogeneraltheoryofhowoligopolists,firmswhohavesubstantial
marketpowerbutalsofacelargerivals,willsetpricesandoutput.Stilllessisthereanygeneralapproachtomodelingtheaggregatebehaviorofawholeeconomylargelypeopledbyoligopolisticratherthanperfectly
competitiveindustries.
Sincethemid1970seconomistshavebrokenthroughthisbarrierinanumberoffields:internationaltrade,economicgrowth,and,finally,development.Thewaytheyhavedonethisisessentiallybymakingsomepeculiar
assumptionsthatallowthemtoexploitthebagoftricksthatindustrialorganizationtheoristsdevelopedforthinkingaboutsuchissuesinthe1970s.(We'llseeanexampleofthepowerandlimitationsofthiskindofintellectual
trickerybelow,whenIpresentaquickformalversionoftheBigPushstory).Inthe1950s,althoughthetechnicalleveloftheleadingdevelopmenteconomistswasactuallyquitehighenoughtohaveallowedthemtodothe
samething,thebagoftrickswasn'tthere.Sodevelopmenttheoristswereplacedinanawkwardbind,withbasicallysensibleideasthattheycouldnotquiteexpressinfullyworkedoutmodels.Andthedriftoftheeconomics
professionmadethesituationworse.Inthe1940sandeveninthe1950sitwasstillpossibleforaneconomisttopublishapaperthatmadepersuasivepointsverbally,withouttyingupallthelooseends.After1960,however,
anattempttopublishapaperlikeRosensteinRodan'swouldhaveimmediatelygottenagrilling:"Whynotbuildasmallerfactory(forwhichthemarketisadequate)?Oh,you'reassumingeconomiesofscale?Butthatmeans
imperfectcompetition,andnobodyknowshowtomodelthat,sothispaperdoesn'tmakeanysense."Itseemssafetosaythatsuchapaperwouldhavebeenunpublishableanytimeafter1970,ifnotearlier.
Somedevelopmenttheoristsrespondedbygettingasclosetoaformalmodelastheycould.ThisistosomeextenttrueofRosensteinRodan,andcertainlythecaseforFleming(1954),whichgetspainfullyclosetobeingafull
model.Butothersatleastprofessedtoseealessformal,lessdisciplinedapproachasavirtueratherthananawkwardnecessity.ItisinthislightthatoneneedstoseeHirschmanandMyrdal.Theseauthorsareoftencitedtoday
(bymeamongothers)asforerunnersoftherecentemphasisinseveralfieldsonstrategiccomplementarity.Infact,however,theirbooksmarkedtheend,notthebeginningofhighdevelopmenttheory.Myrdal'scentralthesis
wastheideaof"circularcausation."ButtheideaofcircularcausationisessentiallyalreadythereinAllynYoung(1928),nottomentionRosensteinRodan,andNurksein1952referredrepeatedlytothecircularnatureofthe
problemofgettinggrowthgoinginpoorcountries.SoMyrdalwasineffectprovidingacapsulizationofanalreadyextensiveandfamiliarsetofideasratherthananewdeparture.Similarly,Hirschman'sdistinctiveideaof
linkageswasmoredistinctivefortheeffectivenessofthetermandthepolicyadvicethathederivedlooselyfromitthanforitsintellectualnoveltyineffectRosensteinRodanwasalreadytalkingaboutlinkages,andFleming
veryexplicitlyhadbothforwardandbackwardlinkagesinhisdiscussion.
WhatmarkedMyrdalandHirschmanwasnotsomuchthenoveltyoftheirideasbuttheirstylisticandmethodologicalstance.Untiltheirbooks,economistsdoinghighdevelopmenttheoryweretryingtobegoodmainstream
economists.Theycouldnotdevelopfullformalmodels,buttheygotascloseastheycould,tryingtokeepclosetotheincreasinglymodelorientedmainstream.MyrdalandHirschmanabandonedthiseffort,andeventuallyin
effecttookstandsonprincipleagainstanyefforttoformalizetheirideas.
Oneimaginesthatthiswasinitiallyveryliberatingforthemandtheirfollowers.Yetintheenditwasavainstance.Economictheoryisessentiallyacollectionofmodels.Broadinsightsthatarenotexpressedinmodelform
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maytemporarilyattractattentionandevenwinconverts,buttheydonotendureunlesscodifiedinareproducibleandteachableform.Youmaynotlikethistendencycertainlyeconomiststendtobetooquicktodismiss
whathasnotbeenformalized(althoughIbelievethatthefocusonmodelsisbasicallyright).Likeitornot,however,theinfluenceofideasthathavenotbeenembalmedinmodelssoondecays.Andthiswasthefateofhigh
developmenttheory.Myrdal'seffectivepresentationoftheideaofcircularandcumulativecausation,orHirschman'sevocationoflinkages,werestimulatingandimmenselyinfluentialinthe1950sandearly1960s.Bythe
1970s(whenIwasmyselfastudentofeconomics),theyhadcometoseemnotsomuchwrongasmeaningless.Whatweretheseguystalkingabout?Wherewerethemodels?Andsohighdevelopmenttheorywasnotsomuch
rejectedassimplybypassed.
Theexceptionprovestherule.Lewis'ssurpluslaborconceptwasthemodelthatlaunchedathousandpapers,eventhoughsurpluslaborassumptionswerealreadystandardamongdevelopmenttheorists,theempiricalbasisfor
assumingsurpluslaborwasweak,andtheideaofexternaleconomies/strategiccomplementarityissurelymoreinteresting.Thepointwas,ofcourse,thatpreciselybecausehedidnotmixeconomiesofscaleintohis
framework,Lewisofferedtheoristssomethingtheycouldmodelusingavailabletools.

METAPHORSANDMODELS

IhavejustacknowledgedthatthetendencyofeconomiststoemphaiszewhattheyknowhowtomodelformallycancreateblindspotsyetIhavealsoclaimedthattheinsistenceonmodelingisbasicallyright.WhatIwantto
donowiscallatimeoutanddiscussmorebroadlytheroleofmodelsinsocialscience.
Itissaidthatthosewhocan,do,whilethosewhocannot,discussmethodology.SotheveryfactthatIraisetheissueofmethodologyinthispapertellsyousomethingaboutthestateofeconomics.Yetinsomewaysthe
problemsofeconomicsandofsocialscienceingeneralarepartofabroadermethodologicalproblemthatafflictsmanyfields:howtodealwithcomplexsystems.
Itisinawayunfortunatethatformanyofustheimageofasuccessfulfieldofscientificendeavorisbasicphysics.Theobjectiveofthemostbasicphysicsisacompletedescriptionofwhathappens.Inprincipleand
apparentlyinpractice,quantummechanicsgivesacompleteaccountofwhatgoesoninside,say,ahydrogenatom.Butmostthingswewanttoanalyze,eveninphysicalscience,cannotbedealtwithatthatlevelof
completeness.Theonlyexactmodeloftheglobalweathersystemisthatsystemitself.Anymodelofthatsystemisthereforetosomedegreeafalsification:itleavesoutsome(many)aspectsofreality.
How,then,doesthemeteorologicalresearcherdecidewhattoputintohismodel?Andhowdoeshedecidewhetherhismodelisagoodone?Theanswertothefirstquestionisthatthechoiceofmodelrepresentsamixtureof
judgementandcompromise.Themodelmustbesomethingyouknowhowtomakethatis,youareconstrainedbyyourmodelingtechniques.Andthemodelmustbesomethingyoucanconstructgivenyourresources
time,money,andpatiencearenotunlimited.Theremaybeawidevarietyofmodelspossiblegiventhoseconstraintswhichoneoronesyouchooseactuallytobuilddependsoneducatedguessing.
Andhowdoyouknowthatthemodelisgood?Itwillneverberightinthewaythatquantumelectrodynamicsisright.Atacertainpointyoumaybegoodenoughatpredictingthatyourresultscanbeputtorepeatedpractical
use,likethegiantweatherforecastingmodelsthatrunontoday'ssupercomputersinthatcasepredictivesuccesscanbemeasuredintermsofdollarsandcents,andtheimprovementofmodelsbecomesaquantifiablematter.
Intheearlystagesofacomplexscience,however,thecriterionforagoodmodelismoresubjective:itisagoodmodelifitsucceedsinexplainingorrationalizingsomeofwhatyouseeintheworldinawaythatyoumight
nothaveexpected.
NoticethatIhavenotspecifiedexactlywhatImeanbyamodel.YoumaythinkthatImustmeanamathematicalmodel,perhapsacomputersimulation.Andindeedthat'smostlywhatwehavetoworkwithineconomics.But
amodelcanequallywellbeaphysicalone,andI'dliketodescribebrieflyanexamplefromtheprecomputereraofmeteorologicalresearch:Fultz'sdishpan.
DaveFultzwasameteorologicaltheoristattheUniversityofChicago,whoaskedthefollowingquestion:whatfactorsareessentialtogeneratingthecomplexityofactualweather?Isitaprocessthatdependsonthefull
complexityoftheworldtheinteractionofoceancurrentsandtheatmosphere,thelocationsofmountainranges,thealternationoftheseasons,andsoonordoesthebasicpatternofweather,forallitscomplexity,have
simpleroots?
Hewasabletoshowtheessentialsimplicityoftheweather'scauseswitha"model"thatconsistedofadishpanfilledwithwater,placedonaslowlyrotatingturntable,withanelectricheatingelementbentaroundtheoutside
ofthepan.Aluminumflakesweresuspendedinthewater,sothatacameraperchedoverheadandrotatingwiththepancouldtakepicturesofthepatternofflow.
Thesetupwasdesignedtoreproducetwofeaturesoftheglobalweatherpattern:thetemperaturedifferentialbetweenthepolesandtheequator,andtheCoriolisforcethatresultsfromtheEarth'sspin.Everythingelseallthe
richdetailoftheactualplanetwassuppressed.Andyetthedishpanexhibitedanunmistakableresemblancetoactualweatherpatterns:asteadyflowneartherimevidentlycorrespondingtothetradewinds,constantly
shiftingeddiesreminiscentoftemperatezonestormsystems,evenarapidlymovingribbonofwaterthatlookedliketherecentlydiscoveredjetstream.
Whatdidonelearnfromthedishpan?Itwasnottellinganentirelytruestory:theEarthisnotflat,airisnotwater,therealworldhasoceansandmountainrangesandforthatmattertwohemispheres.TheunrealismofFultz's
modelworldwasdictatedbywhathewasabletoorcouldbebotheredtobuildineffect,bythelimitationsofhismodelingtechnique.Nonetheless,themodeldidconveyapowerfulinsightintowhytheweathersystem
behavesthewayitdoes.
Theimportantpointisthatanykindofmodelofacomplexsystemaphysicalmodel,acomputersimulation,orapencilandpapermathematicalrepresentationamountstoprettymuchthesamekindofprocedure.You
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makeasetofclearlyuntruesimplificationstogetthesystemdowntosomethingyoucanhandlethosesimplificationsaredictatedpartlybyguessesaboutwhatisimportant,partlybythemodelingtechniquesavailable.And
theendresult,ifthemodelisagoodone,isanimprovedinsightintowhythevastlymorecomplexrealsystembehavesthewayitdoes.
Whenitcomestophysicalscience,fewpeoplehaveproblemswiththisidea.Whenweturntosocialscience,however,thewholeissueofmodelingbeginstoraisepeople'shackles.Suddenlytheideaofrepresentingthe
relevantsystemthroughasetofsimplificationsthataredictatedatleastinpartbytheavailabletechniquesbecomeshighlyobjectionable.EveryoneacceptsthatitwasreasonableforFultztorepresenttheEarth,atleastfora
firstpass,withaflatdish,becausethatwaswhatwaspractical.Butwhatdoyouthinkaboutthedecisionofmosteconomistsbetween1820and1970torepresenttheeconomyasasetofperfectlycompetitivemarkets,
becauseamodelofperfectcompetitionwaswhattheyknewhowtobuild?It'sessentiallythesamething,butitraiseshowlsofindignation.
Whyisourattitudesodifferentwhenwecometosocialscience?Therearesomediscreditablereasons:likeVictoriansoffendedbythesuggestionthattheyweredescendedfromapes,somehumanistsimaginethattheir
dignityisthreatenedwhenhumansocietyisrepresentedasthemoralequivalentofadishonaturntable.Also,themostvociferouscriticsofeconomicmodelsareoftenpoliticallymotivated.Theyhaveverystrongideasabout
whattheywanttobelievetheirconvictionsareessentiallydrivenbyvaluesratherthananalysis,butwhenananalysisthreatensthosebeliefstheyprefertoattackitsassumptionsratherthanexaminethebasisfortheirown
beliefs.
Still,therearehighlyintelligentandobjectivethinkerswhoarerepelledbysimplisticmodelsforamuchbetterreason:theyareveryawarethattheactofbuildingamodelinvolveslossaswellasgain.Africaisn'tempty,but
theactofmakingaccuratemapscangetyouintothehabitofimaginingthatitis.Modelbuilding,especiallyinitsearlystages,involvestheevolutionofignoranceaswellasknowledgeandsomeonewithpowerfulintuition,
withadeepsenseofthecomplexitiesofreality,maywellfeelthatfromhispointofviewmoreislostthanisgained.ItisinthishonorablecampthatIwouldputAlbertHirschmanandhisrejectionofmainstreameconomics.
Thecycleofknowledgelostbeforeitcanberegainedseemstobeaninevitablepartofformalmodelbuilding.Here'sanotherstoryfrommeteorology.Folkwisdomhasalwayssaidthatyoucanpredictfutureweatherfromthe
aspectofthesky,andhadclaimedthatcertainkindsofcloudspresagedstorms.Asmeteorologydevelopedinthe19thandearly20thcenturies,howeverasitmadesuchfundamentaldiscoveries,completelyunknownto
folkwisdom,asthefactthatthewindsinastormblowinacircularpathitbasicallystoppedpayingattentiontohowtheskylooked.Seriousstudentsoftheweatherstudiedwinddirectionandbarometricpressure,notthe
prettypatternsmadebycondensingwatervapor.
Itwasnotuntil1919thatagroupofNorwegianscientistsrealizedthatthefolkwisdomhadbeenrightallalongthatonecouldidentifytheonsetanddevelopmentofacyclonicstormquiteaccuratelybylookingatthe
shapesandaltitudeofthecloudcover.
Thepointisnotthatacenturyofresearchintotheweatherhadonlyreaffirmedwhateveryoneknewfromthebeginning.Themeteorologyof1919hadlearnedmanythingsofwhichfolklorewasunaware,anddispelledmany
myths.Noristhepointthatmeteorologistssomehowsinnedbynotlookingatcloudsforsolong.Whathappenedwassimplyinevitable:duringtheprocessofmodelbuilding,thereisanarrowingofvisionimposedbythe
limitationsofone'sframeworkandtools,anarrowingthatcanonlybeendeddefinitivelybymakingthosetoolsgoodenoughtotranscendthoselimitations.
Butthatinitialnarrowingisveryhardforbroadmindstoaccept.Andsotheylookforanalternative.
Theproblemisthatthereisnoalternativetomodels.Weallthinkinsimplifiedmodels,allthetime.Thesophisticatedthingtodoisnottopretendtostop,buttobeselfconscioustobeawarethatyourmodelsaremaps
ratherthanreality.
Therearemanyintelligentwritersoneconomicswhoareabletoconvincethemselvesandsometimeslargenumbersofotherpeopleaswellthattheyhavefoundawaytotranscendthenarrowingeffectofmodelbuilding.
Invariablytheyarefoolingthemselves.Ifyoulookatthewritingofanyonewhoclaimstobeabletowriteaboutsocialissueswithoutstoopingtorestrictivemodeling,youwillfindthathisinsightsarebasedessentiallyonthe
useofmetaphor.Andmetaphoris,ofcourse,akindofheuristicmodelingtechnique.
Infact,weareallbuildersandpurveyorsofunrealisticsimplifications.Someofusareselfaware:weuseourmodelsasmetaphors.Others,includingpeoplewhoareindisputablybrilliantandseeminglysophisticated,are
sleepwalkers:theyunconsciouslyusemetaphorsasmodels.

THEBIGPUSH

Wecannowreturntothestoryofdevelopmenteconomics.Bythelate1950s,asIhaveargued,highdevelopmenttheorywasinadifficultposition.Mainstreameconomicswasmovinginthedirectionofincreasinglyformal
andcarefulmodeling.Whilethistrendwasclearlyoverdoneinmanyinstances,itwasanunstoppableandultimatelyanappropriatedirectionofchange.Butitwasdifficulttomodelhighdevelopmenttheorymoreformally,
becauseoftheproblemofdealingwithmarketstructure.
Theresponseofsomeofthemostbrillianthighdevelopmenttheorists,aboveallAlbertHirschman,wassimplytooptoutofthemainstream.Theywouldbuildanewdevelopmentschoolonsuggestivemetaphors,institutional
realism,interdisciplinaryreasoning,andarelaxedattitudetowardinternalconsistency.Theresultwassomewonderfulwriting,someinspiringinsights,and(inmyview)anintellectualdeadend.Highdevelopmenttheory
simplyfadedout.Aconstantreturns,perfectcompetitionviewofrealitytookoverthedevelopmentliterature,andeventuallyviatheWorldBankandotherinstitutionsmuchofrealworlddevelopmentpolicyaswell.
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Andyetintheenditturnedoutthatmainstreameconomicseventuallydidfindaplaceforhighdevelopmenttheory.LiketheNorwegianswhodiscoveredthattheshapesofcloudsdomeansomething,mainstreameconomics
discoveredthatasitsmodelingtechniquesbecamemoresophisticatedsomeneglectedinsightscouldbebroughtbackin.
Sincethissoundsratherabstract,itwillbebestifIexplicitlypresentanexampleofhowonecannowdoaformaltreatmentoftheclassicmodelofhighdevelopmenttheory:RosensteinRodan'sBigPush.Thetreatmentisa
streamlinedversionoftheexpositioninMurphy,Shleifer,andVishny(1989),andreproducesmypresentationinKrugman(1993).
Ourpaperandpencildishpanourmodeleconomyconsistsofasetofassumptionsaboutthesupplyofresourcestechnologydemandandmarketstructure.
Resources.Theonlyresourceintheeconomyislaborthatis,weneglecttheroleofcapital,physicalorhuman.LaborisinfixedtotalsupplyL.Itcan,however,beemployedineitheroftwosectors:a"traditional"sector,
characterizedbyconstantreturns,ora"modern"sector,characterizedbyincreasingreturns.Althoughthesamequalityoflaborisusedinthetraditionalandmodernsectors,itisnotpaidthesamewage.Workersmustbepaid
apremiumtomovefromtraditionaltomodernemployment.Weletw>1betheratioofthewageratethatmustbepaidinthemodernsectortothatinthetraditionalsector.
Technology.ItisassumedthattheeconomyproducesNgoods,whereNisalargenumber.Wechooseunitssothattheproductivityoflaborinthetraditionalsectorisunityineachofthegoods.Inthemodernsector,average
laborcostisdecreasinginthescaleofproduction.Forsimplicity,decreasingcoststakealinearform.LetQibetheproductionofgoodiinthemodernsector.Thenifthemodernsectorproducesthegoodatall,thelabor
requirementwillbeassumedtotaketheform
Li=F+cQi

wherec<1isthemarginallaborrequirement.NotethatforthisexampleitisassumedthattherelationshipbetweeninputandoutputisthesameforallNgoods.
Demand.EachgoodreceivesaconstantshareNofexpenditure.Themodelwillbestatic,withnoassetaccumulationordecumulationsoexpenditureequalsincome.
Marketstructure.Thetraditionalsectorisassumedtobecharacterizedbyperfectcompetition.Thusforeachgoodthereisaperfectlyelasticsupplyfromthetraditionalsectoratthemarginalcostofproductiongivenour
choiceofunits,thissupplypriceisunityintermsoftraditionalsectorlabor.Bycontrast,asingleentrepreneurisassumedtohavetheuniqueabilitytoproduceeachgoodinthemodernsector.
Howwillsuchaproducerprice?Shecannotraiseherpriceasmuchasshewouldlike.Thereasonisthatpotentialcompetitionfromthetraditionalsectorputsalimitontheprice:shecannotgoaboveapriceof1(intermsof
traditionallabor)withoutbeingundercutbytraditionalproducers.Soeachproducerinthemodernsectorwillsetthesameprice,unity,aswouldhavebeenchargedinthetraditionalsector.

Wecannowaskthequestion,willproductionactuallytakeplaceinthetraditionalorthemodernsector?
Toanswerthis,itisusefultodrawasimplediagram(Figure1).Onthehorizontalaxisisthelaborinput,Li,usedtoproduceatypicalgood.Ontheverticalaxisisthatsector'soutputQi.Thetwosolidlinesrepresentthe
technologiesofproductioninthetwosectors:a45degreelineforthetraditionalsector,alinewithaslopeof1/cforthemodernsector.
Fromthisfigureitisimmediatelypossibletoreadoffwhattheeconomywouldproduceifalllaborwereallocatedeithertothemodernorthetraditionalsector.IneithercaseL/Nworkerswouldbeemployedintheproduction
ofeachgood.Ifallgoodsareproducedtraditionally,eachgoodwouldhaveanoutputQ1.Iftheyareallproducedusingmoderntechniques,theoutputisQ2.Asdrawn,Q2>Q1thiswillbethecaseprovidedthat
[(L/N)F]/c>L/N
i.e.,aslongasthemarginalcostadvantageofmodernproductionissufficientlylargeand/orfixedcostsarenottoolarge.Sincethisistheinterestingcase,wefocusonit.
Buteveniftheeconomycouldproducemoreusingmodernmethods,thisdoesnotmeanthatitwill.Itmustbeprofitableforeachindividualentrepreneurinthemodernsectortoproduce,takingintoaccountthenecessityof
payingthepremiumwagewandalsothedecisionsofalltheotherentrepreneurs.
Supposethatanindividualfirmstartsmodernproductionwhileallothergoodsareproducedusingtraditionaltechniques.Thefirmwillchargethesamepriceasthatonothergoods,andhencesellthesameamountsincethere
aremanygoods,wemayneglectanyincomeeffectsandsupposethateachgoodcontinuestosellQ1.ThusthisfirmwouldhavetheproductionandemploymentillustratedbypointA.
Isthisaprofitablemove?Thefirmuseslesslaborthanwouldberequiredfortraditionalproduction,butmustpaythatlabormore.DrawinarayfromtheoriginwhoseslopeisthemodernrelativewagewOWinthefigureis
anexample.ThenmodernproductionisprofitablegiventraditionalproductionelsewhereifandonlyifOWpassesbelowA.Asdrawn,thistestisofcoursefailed:itisnotprofitableforanindividualfirmtostartmodern
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production.
Ontheotherhand,supposethatallmodernfirmsstartsimultaneously.TheneachfirmwillproduceQ2,leadingtoproductionandemploymentatpointB.Again,thiswillbeprofitableifthewagelineOWpassesbelowB.As
drawn,thistestissatisfied.
Obviously,therearethreepossibleoutcomes(2).Ifthewagepremiumw1islow,theeconomyalways"industrializes"ifitishigh,itneverindustrializesandifittakesonanintermediatevalue,therearebothlowandhigh
levelequilibria.
Onewouldhardlyconcludefromthismodelthatthehighdevelopmentideathatcountriescanbecaughtinlowincometraps,butthatselfreinforcinggrowthisalsopossible,isnecessarilyright.Evenwithinthismodel,that
storyistrueonlyforsomeparametervalues.Andthespecificassumptionsareobviouslyunrealistic.Yetthemodelillustratesseveralkeypointsabouttherealtionshipbetweenmainstreameconomicsandhighdevelopment
theory.
First,itshowsthatitispossibletotellhighdevelopmentstylestoriesintheformofarigorousmodel.Themethodsofmainstreameconomicsmayhavecreatedapredispositiontoconstantreturns,perfectcompetitionmodels,
buttheyneednotberestrictedtosuchmodels.
Second,thisexample,likeFultz'sdishpan,showsthattheessentiallogicofhighdevelopmentstoriesemergeseveninahighlysimplifiedsetting.Itiscommonforthosewhohaven'ttriedtheexerciseofmakingamodelto
assertthatunderdevelopmenttrapsmustnecessarilyresultfromsomecomplicatedsetoffactorsirrationalityorshortsightednessonthepartofinvestors,culturalbarrierstochange,inadequatecapitalmarkets,problemsof
informationandlearning,andsoon.Perhapsthesefactorsplayarole,perhapstheydon't:whatwehavejustseenthatalowleveltrapcanarisewithrationalentrpreneurs,withoutsomuchasawhiffofculturalinfluences,ina
modelwithoutcapital,andwitheveryonefullyinformed.
Third,themodel,unlikeapurelyverbalexposition,revealsthesensitivityoftheconclusionstotheassumptions.Inparticular,verbalexpositionsoftheBigPushstorymakeitseemlikesomethingthatmustbetrue.Inthis
modelweseethatitissomethingthatmightbetrue.Amodellikethismakesonewanttogooutandstartmeasuring,toseewhetheritlooksatalllikelyinpractice,whereasamerelyrhetoricalpresentationgivesoneafalse
feelingofsecurityinone'sunderstanding.
Finally,themodeltellsussomethingaboutwhatattitudeisrequiredtodealwithcomplexissuesineconomics.Thismodelmayseemchildishlysimple,butIcanreportfromobservationthatuntilMurphyetal.publishedtheir
formalizationofRosensteinRodanitsconclusionswerenotobvioustomanypeople,eventhosewhohavespecializedindevelopment.EconomiststendedtoregardtheBigPushstoryasessentiallynonsensicalifmodern
technologyisbetter,thenrationalfirmswouldsimplyadoptit!(Theymissedtheinteractionbetweeneconomiesofscaleandmarketsize).NoneconomiststendedtothinkthatBigPushstoriesnecessarilyinvolvedsomerich
interdisciplinarystewofeffects,missingthesimplecore.Inotherwords,economistswerelockedintheirtraditionalmodels,noneconomistswerelostinthefogthatresultswhenyouhavenoexplicitmodelsatall.
HowdidMurphyetalbreakthroughthiswallofconfusion?Notbytryingtocapturetherichnessofreality,eitherwithahighlycomplexmodelorwiththekindoflovelymetaphorsthatseemtoevadetheneedforamodel.
Theydiditinsteadbydaringtobesilly:byrepresentingtheworldinadishpan,togetatanessentialpoint.

CONCLUDINGTHOUGHTS

WhenIlookattheMurphyetalrepresentationoftheBigPushidea,Ifindmyselfwonderingwhetherthelongslumpindevelopmenttheorywasreallynecessary.Themodelissosimple:threepages,twoequations,andone
diagram.Itcould,itseems,havebeenwrittenaseasilyin1955asin1989.Whatwouldhavehappenedtodevelopmenteconomics,eventoeconomicsingeneral,ifsomeonehadlegitimizedtheroleofincreasingreturnsand
circularcausationwithaneatmodel35yearsago?
Butitdidn'thappen,andperhapscouldn't.Thoseeconomistswhowereattractedtotheideaofpowerfulsimplificationswerestillabsorbedinthepossibilitiesofperfectcompetitionandconstantreturnsthosewhoweredrawn
toaricherview,likeHirschman,becameimpatientwiththenarrownessandseemingsillinessoftheeconomicsenterprise.
Thatthestorymayhavebeenpreordaineddoesnotkeepitfrombeingasadone.Goodideaswerelefttogatherdustintheeconomicsatticformorethanagenerationgreatmindsretreatedtotheintellectualperiphery.Itis
hardtoknowwhethereconomicpolicyintherealworldwouldhavebeenmuchbetterifhighdevelopmenttheoryhadnotdecayedsobadly,sincetherelationshipbetweengoodeconomicanalysisandsuccessfulpolicyisfar
weakerthanweliketoimagine.Still,onewishesthingshadplayedoutdifferently.
Onewouldliketodrawsomemoralsfromthisstory.Itiseasytogivefacileadvice.Forthosewhoareimpatientwithmodelingandprefertostrikeoutontheirownintotherichnessthatanuninhibiteduseofmetaphorseems
toopenup,theadviceistostopandthink.Areyousurethatyoureallyhavesuchdeepinsightsthatyouarebetteroffturningyourbackonthecumulativediscourseamonggenerallyintelligentpeoplethatismodern
economics?Butofcourseyouare.
Andforthose,likeme,whobasicallytrytounderstandtheworldthroughthemetaphorsprovidedbymodels,theadviceisnottoletimportantideasslipbyjustbecausetheyhaven'tbeenformulatedyourway.Lookforthe
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folkwisdomoncloudsideasthatcomefrompeoplewhodonotwriteformalmodelsbutmayhaverichinsights.Theremaybesomeveryinterestingthingsoutthere.Strangely,though,Ican'tthinkofany.
Thetruthis,Ifear,thatthere'snotmuchthatcanbedoneaboutthekindofapparentintellectualwastethattookplaceduringthefallandriseofdevelopmenteconomics.Atemporaryevolutionofignorancemaybethepriceof
progress,aninevitablepartofwhathappenswhenwetrytomakesenseoftheworld'scomplexity.

REFERENCES

Fleming,J.M.1955."ExternalEconomiesandtheDoctrineofBalancedGrowth."EconomicJournal.June.

Hirschman,A.1958.TheStrategyofEconomicDevelopment.NewHaven,Conn.:YaleUniversitypress.

Leibenstein,H.1957.EconomicBackwardnessandEconomicGrowth.NewYork:Wiley.

Lewis,W.A.1954."EconomicDevelopmentwithUnlimitedSuppliesofLabor."TheManchesterSchool.May.

.1955.TheTheoryofEconomicGrowth.London:AllenandUnwin.

Little,I.M.D.1982.EconomicDevelopment.NewYork:20thCenturyFund.

Little,I.,T.Scitovsky,andM.Scott.1970.IndustryandTradeinSomeDevelopingCountries.Oxford:OxfordUniversityPress.

Murphy,R.,A.Shleifer,andR.Vishny.1989."IndustrializationandtheBigPush."JournalofPoliticalEconomy.

Myrdal,G.1957.EconomicTheoryandUnderdevelopedRegions.London:Duckworth.

Nelson,R.1956."ATheoryoftheLowLevelEquilibriumTrapinUnderdevelopedEconomies."AmericanEconomicReview.May.

RosensteinRodan,P.1943."ProblemsofIndustrializationofEasternandSouthEasternEurope."EconomicJournal.JuneSeptember.

Scitovsky,T.1954."TwoConceptsofExternalEconomies."JournalofPoliticalEconomy.April.

Young,A.1928."IncreasingReturnsandEconomicProgress."EconomicJournal.December.
1.OneUSindustrialpolicyadvocatesuggestedthatwetargetindustriesthateither"provideinputstooruseinputsfromalargenumberofotherindustries."Ihaveoftenwonderedwhatindustrydoesnotmeetthiscriterion
handthrownpottery?
2.Actuallyfour,ifonecountsthecasewhere(2)isnotsatisfied,sothattheeconomyactuallyproduceslessusingmoderntechniques.Inthiscaseitclearlystayswiththetraditionalmethods.
Figure1
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