Objectives today

Discuss how potential

sources of growth are
used in theories of
economic
development

Economic Growth and

Development Theories
Classical model
Growth stage theories
Dual economy models
Dependency theories
Exogenous growth theories
Endogenous growth theories
Transactions costs/collective action

Classical Model (late 1700s & early 1800s)

(Malthus)

Wages are at subsistence level

Favorable event leads to capital accumulation
Increased demand for labor
Wages in short run
Population growth
Demand for food
Land fixed so food prices , real wages
population

This (Classical) Model failed to

consider the following factors and
therefore did not predict correctly:
Factors which lower birth rates
Technological progress

Therefore, in Classical model, law of

diminishing returns constrains
growth in the long run

Growth stage theories

Fred List (mid 1800s) stages based on

shifts in occupational distribution
Savage
Pastoralism
Agriculture
Agriculture

and manufacturing
Agr., manufacturing, and commerce

He called for import substitution

Growth stage theories (continued)

Karl Marx (late 1800s) stages based on changes in

technology, property rights, and ideology

Primitive communism
Ancient slavery
Medieval feudalism
Industrial capitalism
Socialism and communism

He felt class struggles drive classes through these stages.

One class has land and capital. Other class has labor.

Growth stage theories (continued)

W. W. Rostow (1950s)
Traditional society
Precondition for takeoff
Takeoff
Drive to technological maturity
Age of high mass consumption
*Sectors decline due to declining income and
price elasticities of demand
*Capital accumulation and technological change
will lead to emergence of leading sectors

Growth stage theories (continued)

Colin Clark (1930s)

Agriculture
Manufacturing
Tertiary

or services

Growth results from:

Increased

output per worker in any sector

Workers moving from sectors with low
output per worker to high output per worker

Technological change important

Harrod-Domar model (1950)

Savings leads to economic growth
Output per unit of capital up leads to
economic growth
Led policymakers to focus on capital-led
industrial growth

The H-D model: g=s/k where:

g = rate of growth in national income
s = savings rate
k = ratio of capital to output

Main features of labor-surplus

dual-economy model
2 sectors agriculture & industry
Marginal product of labor in agriculture
Wage rate in agriculture equals average
product of labor in agriculture
Land fixed
Wage rate higher in industrial sector
Marginal product of labor in industry equals
the wage rate

(features continued)

Labor moves from agriculture to industry

Profits reinvested in capital items resulting in
greater M P & demand for labor
Shifts in M P of labor creates more profits, etc.
This happens as long as marginal cost of labor
is constant
If marginal cost of labor (wage rate) goes up,
profits stop increasing as fast and eventually
the process stops.

Traditional (Ag.) Sector

Agricultural
Total
Product

Modern (Ind.) Sector

Industrial
Total Product

Redundant labor

Labor

Agricultural
Marginal
Product

Labor

Industrial
Marginal
Product
Marginal
product
curve

P1

P0

P2

P3

Profit
P
W

Wages
0

N3N2N1N0Labor

L0

L1

L2

L4

Labor

Why might the marginal cost(supply)

curve of labor turn up?
Surplus labor used up so industry must
offer higher wages
Supply of food does not keep up with the
demand for food so wages must rise

What does this say about the need for

technological progress in agriculture?

Weaknesses in the model

Says nothing about the cost of moving people

and food
May not have excess labor in some countries
Says nothing about cost of and how to
develop the agricultural sector
Assumes profits reinvested in labor-intensive
industries (what if not invested or invested in
capital-intensive industries due to subsidies)?
Ignores international trade

Can extend model to open

economy
If natural resources are poor: can export
labor-intensive industrial goods (examples:
Taiwan & Korea) and import food
If natural resources rich: can export
agricultural products and use foreign
exchange to develop industry (examples:
Thailand
& Malaysia)

Dependency theories (1950s, 60s,

70s
Center developed countries and elites
within developing countries
Periphery poor in developing countries

Center develops at the expense of the

periphery

Why dependency?

Center has monopoly power

Low price and income elasticities for goods
produced by the periphery
High price elasticity of demand for goods
imported by the periphery from the center
Result: periphery receives less and less for
exports and pays more and more for imports

Dependency theory
suggests that countries
become self-sufficient

What do you think?

Lessons from each theory

Classical theory savings & capital investment important

Growth stage theories structural change with

development

Class struggles over distribution

Dual economy theories food is important wage good

Diminishing returns to labor

Surplus labor may facilitate capital formation

Technological change in agriculture important

Dependency theories interdependent world

History important
Political and social power important

More Recent Development

Thinking
Role of Human capital
Importance of Institutional differences

Rule

of law
Enforceable property rights
Need to minimize policy distortions

Importance of freely flowing information

Transactions costs, Collective

Action, and Institutions
Costs of transacting are key obstacles holding
countries back from developing.
Transactions costs include the costs of
adjustment, information, measuring attributes,
and negotiating, monitoring, and enforcing
contracts
Because of these costs, people take
advantage of others

Transactions costs, Collective

Action, and Institutions (continued)
People often act collectively to influence
public decisions in ways that help them but
hurt society at large
Therefore with transactions costs and
collective action, institutions and asset
distribution matter
Need institutions to control behavior through
property rights, laws, and policies

Conclusions

Agriculture can provide labor, food, and capital

for overall economic development
Rising food prices relative to industrial prices is a
symptom of the need to invest in new
technologies for agriculture
In light of transactions costs and collective
action, and societies that become less personal
as development occurs, institutions are needed
that establish and enforce the rules of the
game