Popular Economic Growth Theories

Presented byAnmol kumar sharma

Marx Growth model

Marx contributed to the theory of economic development in three ways

• Providing an economic interpretation of history and his stages of growth

• Motivating forces of capitalist growth• Suggesting an alternative path of economic

development via planning

Marx five stages

Marx has analyzed the main stages which have taken place in human history. According to him, all historical events are the result of a continuous economic struggle between different classes in society. According to Marx historically society has passed through five stages

1.Primitive2.Slave3.Fedual4.Capitalist5.Socialist

The theory of surplus value• The ides of surplus value which is related to capitalism is important

in Marxian theory of economic development• According to Marx, workers get only a part of the total value of

output and the remaining part of the value goes to the capitalist. It is this that Marx’s calls,” exploitation of labor”.

• The aim of capitalist is always to increase the surplus value (profit). The capitalist adopt three methods to increase the surplus value. First of all, they may increase the working hours of the laborers, secondly, they may reduce the wages below subsistence level. However, this is only a temporary measure because lowering of wages below the subsistence level will adversely affect the labor force in due course. Improving the productivity of the working class through improvement in the state of technology is the third method

Criticism

This theory has been criticized because 1) Surplus value is difficult to understand and

unrealistic concept2) Marx belief that in final stage capitalism will

end has not come true. Capitalism has shown flexibility to survive and still in democratic set-up wages have increased and working condition improved of workers

Ricardo theory

• David Ricardo presented his views on economic development in his book the principles of economy and taxation In an unsystematic manner in 1921. He did not give any proper theory of development but theory of distribution. It is based on marginal and surplus principle the marginal principle explains share of rent in total output while rest is divided between wages and profit on basis of surplus principle

Assumptions

• Land is scarce and fixed in supply• It is used to produce only corn• Demand for corn is perfectly elastic• Perfect competition• Capital accumulation results from profits• Technical knowledge is given• Workers are paid subsistence wage

• In the Ricardian system whole economy is assumed to be a big farm fixed in supply used to produce one output corn and output is distributed between landlords, capitalist and workers in form of rent , wages and profit .

• First rent is given its shares and residual is distributed between profit and wages while interest is included in profits.

• Process of capital accumulation- capital accumulation is outcome of profits because profits lead to saving which leads to capital. So long as rate of profit is positive capital accumulation will continue. Capital accumulation depends on capacity to save or will to save .As Ricardo said if I have one two loaves I will save one and if four loaves I will save three. In reality profits depends on wages on price of corn and price on productivity of marginal land. If there is more corn prices will fall and so does the wage and profits will rise and more capital accumulates.

Dual sector model of Lewis• The dual-sector model is a model of growth theory. It is commonly known as the Lewis

model after its inventor Sir William Arthur Lewis, winner of the Nobel Memorial Prize in Economics in 1979. It explains the growth of a developing economy in terms of a labour transition between two sectors, the capitalist sector and the subsistence sector.

• Lewis proposed his dual sector development model in 1954.professor Lewis has developed a very systematic theory of economic development with unlimited supplies of Labour like the classical economist he believes that in many underdeveloped an unlimited supply of labour is available at subsistence wage. Economic development takes place when capital accumulates as a result of the withdrawal of surplus labour from the subsistence sector to the capitalist sector. It was based on the assumption that many LDCs had dual economies with both a traditional agricultural sector and a modern industrial sector. The traditional agricultural sector was assumed to be of a subsistence nature characterised by low productivity, low incomes, low savings and considerable underemployment. The industrial sector was assumed to be technologically advanced with high levels of investment operating in an urban environment

Assumptions• The model assumes that a developing economy has a surplus of

unproductive labor in the agricultural sector.• These workers are attracted to the growing manufacturing sector where

higher wages are offered.• It also assumes that the wages in the manufacturing sector are more or less

fixed.• Entrepreneurs in the manufacturing sector make profit because they charge

a price above the fixed wage rate.• The model assumes that these profits will be reinvested in the business in

the form of fixed capital.• An advanced manufacturing sector means an economy has moved from a

traditional to an industrialized one.• the model assumes that there are two sectors the economy• 1)traditional or agricultural sector 2)modern or industrial sector

Criticism

• Assumption of constant wage rate is wrong as wages rise in both subsistence and capital sector during the growth process

• Mobility of labor is not so easy due to attachment to native place and other reasons

• Idea of Marginal productivity being zero in subsistence sector is also rejected by several economists.

Leibenstein critical Minimum effort

• Harvey leibenstein says that in LDC there is vicious circle of poverty and to break it a critical minimum effort which is stimulus to growth in form of investment.

• There are shocks and stimulants. Shocks reduce growth while stimulants increase it so critical minimum stimulus should be more than shocks.

Big push theory

• Rosenstein Rodan gave this theory stating that a big push or large comprehensive programme is needed to overcome obstacles to growth.

• Launching a country into self sustaining growth is a little like an airplane off the ground. There is critical ground speed which must be passed before the craft can become airborne.

• Bit by bit moving is not successful there is need of a one big push otherwise small programmes will lose their effect.

criticism

• Rise in costs due to huge investment is beyond capabilities of LDC

• Does not explain the whole process of growth just gives an Idea

• Neglects investment in Agriculture sector• Huge investment at one go might cause

inflationary tendencies difficult to control

Balanced growth theory

• The doctrine of balanced development has several authors who interpret in different ways. For some it is investment in laggard sector to keep it abreast of other sectors and for some it is simultaneously investing in all sectors of the economy and for some it means balancing between agriculture and industrial sector.

• In fine it means simultaneous and harmonious growth of all sectors of economy so that all sectors grow in unison

• It means growth of economic and social overheads, agriculture and Industrial sector, capital goods and consumer goods industry and in all consumer goods industry within.

criticism

• Rise in costs• Beyond the capacity of LDC• Shortage of resources to invest in all sectors• Ignores planned economy where some sectors

are given priority.• Capital lumpiness not essential as small projects

could be taken • Scarcities and bottlenecks encourage growth

not balanced growth.

Unbalanced growth theory

• Propounded by Hirchman it says that deliberately unbalancing the economy according to a pre-designed strategy is best way to achieve economic growth

• Investment should be made in selected sectors rather than simultaneously in all the sectors. No UDC possesses capital and other resources to invest in all sectors at a time.

• Growth from leading to other sectors of economy one by one.

SOC or DPA

• Unbalancing the economy with SOC ( social overhead capital) where first investment is first made in SOC and it encourages private investment.

• Unbalancing the economy with DPA( Directly productive activities) where Govt. can directly or indirectly invest in DPA and with time shortage of SOC will hamper its growth leading to political pressure to provide infrastructure and other social overheads.

Critical appraisal

• However this theory doesn’t explain what kind of imbalance is to be created and how it is to be managed by overcoming bottlenecks still it is best theory for underdeveloped countries and many countries Like Russia and India have followed this method by Planning and have succeeded. It is realistic and various incentives, obstacles and resistances to development are studied in proper perspective.

Rostow stages of Growth

Professor W.W Rostow has given five stages of growth.

1. The traditional society2. Pre condtions for take off3. The take off4. The drive to maturity5. Age of mass consumtion

Explanation

• According to this theory first there is a traditional society with limited means and then some development takes place and conditions develop for take off. In take off stage three conditons are needed

1. Rate of investment over 10% of National income2. Development of leading sectors. Every country has some

sectors where it has some advantage and it leads to their rise.

3. Cultural framework to exploit Expansion. It is ability to mobilize large savings out of expanding income for further investment and utilizing leading sectors to their maximum level and take most advantage of such growth.

Drive to maturity

• It is period where a society has effectively applied the range of technology to bulk of its resources.

• It is period of long sustained growth extending well over four decades.

• New sectors replace old one and the economy is able to withstand unexpected shocks.

High mass consumption

• The balance of society shifts from supply to demand. From problems of production to consumption and welfare in the widest sense.

• Historically U.S was the first to reach the age of High mass consumption in the 1920’s followed by Britain in 30’s and Japan in 1950’s and soviet Union after the death of stalin

Myrdal’s Theory of circular causation

• Professor Gunnar Myrdal maintains that economic development results in a circular causation process whereby the rich are awarded more favours and the efforts those who lag behind are thwarted.

• In UDC a circular and cumulative process known as vicious circle of poverty operates downwards and being unregulated increases inequalities

• The profit motive results in the development of those regions where expectations of profit are high while others remain underdeveloped.

Backwash and spread effects

• IN simple terms backwash effects are adverse effect of economic expansion in one country on other country or region

• Spread effects are positive effect flowing from one country or region to another

• The cause of backwardness of developing countries is strong backwash effect and poor spread effects

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