Another new point introduced by Schumpeter in this analysis of economic development is the important role that credit plays in economic development. It is not the saving out of current income which supplies funds for investment, but the credit creation by the banking system. The classical and the neoclassical economists thought in terms of given supply of money or the supply coming forth to match the increased supply of goods and services, so that the price level is not affected. To them “money is a mere veil which tends to hide the behaviour of the basic forces at work”.
But Schumpeter makes credit creation an integral part of the development, process. In this analysis the entrepreneurs expand their business merely by borrowing from banks who will lend not because some persons have made savings and deposited in the banks. But the banks just create credit themselves to accommodate the business borrowers. This pushes up the prices. “Thus credit- creating facilities tend to free investors from the voluntary abstinence routine of the savers. Forced savings become an important means of capital accumulation.”
Two points are worth mentioning in regard to Schumpeter’s analysis of development process in a capitalist society. In the first place, the dominance of the entrepreneur or the producer limits and reduces correspondingly the sovereignty of the consumer. The producer does not passively produce the goods as dictated by consumers’ tastes and preferences. By his dynamic role, through high pressure of salesmanship, he attempts and succeeds fairly in changing even the tastes of consumers or in creating in them new wants and desires.
This again emphasises the crucial role of the entrepreneur in giving new directions and dimensions to the development process. Secondly, unlike the neoclassical economists who believed that the process of economic development was gradual and harmonious, Schumpeterian analysis brings out the uneven and disharmonious nature of economic growth. It proceeds by spurts and leaps and bounds. “The essence of development is a discontinuous disturbance of the circular flow.” This disturbance appears in the form of innovations. This arises from the fact that the world is dynamic and not static. In the static world rational calculations are possible and reasonable forecasting is feasible, but the dynamic world is full of risk and uncertainty mainly arising from the ‘innovational activity of the entrepreneur who is able to exploit new investment horizons.
The classical economists were depressed by the inexorable law of diminishing returns and the irresistible growth of population. Schumpeter does not share their pessimism. He also does not believe in the inherent tendency towards a mal distribution of incomes resulting in ever-recurring severe crises as Marx did. Nor does he agree with the stagnationists that there is persistent lack of investment opportunities together with institutional rigidities making for an equilibrium at less than full employment. Schumpeter, on the other hand, has faith in the capacity of the capitalist system in attaining ever increasing levels of national output and income. He is prepared to admit, however, that there might be temporary setbacks.
Although Schumpeter has infinite faith in the potentialities of capitalism, but he also believes in a Marxian fashion that the very success of capitalism will breed the germs of its ultimate degeneration which will pave the way for socialism. In Schumpeter’s view, it is not failure of capitalism which will spell its doom, but its very success that would result in killing the goose that lays the golden egg. He thus says – “The actual and prospective performance of the capitalist system is such as to negative the idea of its break-down under the weight of economic failure, but its very success undermines the social institutions which protect it, and inevitably create conditions in which it will not be able to live and which strongly point to socialism as the heir apparent.” In other words, it is not the economic barriers but social factors which will undermine capitalism.
According to Schumpeter, the economic and social foundations of capitalism will crumble on account of:
(a) The decay of the entrepreneurial function,
(b) The destruction of the institutional framework, and
(c) The disintegration of the protecting political framework.
The entrepreneurs make their business grow so big that innovation itself becomes a routine and is in the charge of salaried persons and technological progress now becomes the province of specialists; marketing and administration become automatic. “Innovation thus degenerates into a depersonalised routine activity carried on in big business through a bureaucracy of highly trained managers.”
This is how the entrepreneurial function is rendered obsolete. The concentration of business and the growth of monopolies destroy the institution of private property and freedom of contract. Whereas ‘bigness’ contributes to more rapid economic progress, it also weakens the concepts of private property and freedom of contract. In a big business corporation, the proprietary interest is replaced by shareholders, big and small, none of whom is particularly interested in the business. The part that the proprietor used to play is now played by professional salaried managers.
The social class that used to protect capitalism also loses its political power which is captured by a new group of politicians who are ill-equipped to rule and unwilling to support the established trade and industry. They adopt policies inimical to capitalists’ interest. This is what we are witnessing in India. The common people and many politicians are now positively hostile to big business like the Birlas, Tatas and Ambanis. The intellectuals who derived freedom and power from capitalism now lead the anti-capitalist groups. The educated unemployed is another group of ‘have-nots’ against the capitalist class of ‘haves’. Labour also organises itself for fight against capital and the intellectuals supply the leadership. All these new forces lead to the gradual degeneration of capitalism and strengthen the movement towards socialism. Capitalism cannot function in this new atmosphere.
Evaluation of Schumpeter’s Theory of Development:
Schumpeter has been a great ‘theorist’ whose writings contain brilliant thoughts and a deep insight into the working of an economy. However, his analysis of the entrepreneurial innovations is not applicable to modern conditions in which the act of invention and innovation is carried on not by individual entrepreneurs but by large corporations as a routine affair. It is not possible to identify entrepreneurs who introduced many actual innovations. He himself recognises the tendency towards obsolescence of the entrepreneur.
It has been pointed out by critics that what Schumpeter gives is the theory of business cycles and not an analysis of economic development. Even Schumpeter’s analysis of business cycles can be accepted only with some modifications to suit modern economic conditions. According to Shumpeter, crisis in capitalism is brought about by maladjustment caused by waves of innovations. But big businesses in modern times can absorb these waves and produce steadier and larger expansion of the total output. Further, the main cause of business cycles is fluctuations in aggregate demand as pointed out by J.M. Keynes.
The assumption that innovations are financed by borrowing from credit creation by the banks is also not very realistic. It is a well-known fact that most of the bank loans are short-term loans whereas the implementation of innovations requires long-term finances. The long-term projects are financed by retained profits or by the issue of shares and debentures by the companies concerned.
Schumpeter’s socio-economic analysis of the capitalist process is also not fully convincing. He seems to overemphasise the influence of economic factors on social culture. It is not one-way link between rationalism in economic matters and rationalism in other fields, social and political. Not many would agree that capitalism was about to crumble and socialism was round the corner.
Capitalism in countries like the U.K. and the U.S.A. which were its traditional homes too strongly established themselves to yield place to socialism. Only, we can say with him that the nature of capitalism has changed. There is no doubt that the political strata protecting the old type capitalism are weakening and the traditional entrepreneurship too is becoming obsolete, as Schumpeter said. But it does not mean that capitalism is about to collapse and socialism is coming.
On the contrary, it is socialism that collapsed in eighties of the 20th century. In both Soviet Russia and Republic of China socialism came to end and in its place free-market economy came into existence. Meier and Baldwin rightly write- “Although Schumpeter’s analysis is provocative, it seems one-sided and overemphasised. To recognise that history involves perpetual change is quite different from concluding that a socialist form of society will emerge from an equally inevitable decomposition of capitalist society.”
Relevance of Schumpeter’s Theory for Developing Countries:
The conditions obtaining in Western Europe and America after the First World War presented a capitalist system in full swing, wherein the innovator acted as the initiator and controller of economic development. Schumpeter’s observant eye got the clue to formulate a theory of development presenting a unified view of the whole economic process. Schumpeter viewed “development” as a distinct phenomenon which, he says, “is spontaneous and discontinuous change in the channels of flow, disturbance of equilibrium, which forever alters and displaces the equilibrium state previously existing.”
This springs from changes in the economic life due to endogenous factors (initiated from within) and not exogenous factors which are forced upon it. Explaining his contention further, he holds that “Should it turn out that there are no such changes arising in the economic system itself, and that the phenomenon that we call economic development is in practice simply founded upon the fact that the data change and the economy continuously adapts itself to them, then we should say that there is no economic development.” This concept wherein endogenous changes in the economy act as the sole prime mobile of development restricts the relevance of Schumpeter’s theory to the growth problems of developing economies.
Rigid and outmoded socio-economic institutions, low saving potential and laggard technology are completely incapable to generate developmental impulses from “within” in the underdeveloped countries. They have to take recourse to imported capital, technology and skill to initiate and propel their developmental wheels. For instance, India made a big stride forward in growth and it has sought foreign capital to help in its economic development. It has also gone for foreign collaboration in terms of loan, equipment, skill and technical know-how. Since factors from ‘without’ are responsible for initiating and operating development projects, they cannot, according to Schumpeter, be regarded as embodiments of India’s genuine process of economic development. This contention of Schumpeter is unsustainable and unconvincing.
It cannot be gainsaid that every such plant has generated a developmental wave in the Indian Economy. Thus, Alfred Bonne remarks, “Exclusion from Schumpeter’s definition would not make the new plant cease to be a case of development, having in view precisely those goods which are the essential objectives of development activities in economically backward countries.” In this view, therefore, Schumpeter’s theory of development is incongruent with the conditions prevailing in the developing world.
Further, Schumpeter’s preoccupation with only the endogenous factors and his insistence on development as embodying only the spontaneous and discontinuous changes makes him oblivious of the role of population growth as an economic force in the developmental process. He regarded population as exogenously determined and held that there does not exist any deterministic a priori relationship between population growth and variations in the flow of goods and services. But it is precisely the excessive population pressure that is responsible for revolutionising the methods and techniques of agricultural production in the presently overpopulated developing countries.
In fact, some of the post-Keynesian theories regard population growth as a stimulant for autonomous investment. By failing to take proper cognisance of one of the most vital phenomena operating in the presently underdeveloped economies, Schumpeter rendered his theory almost ineffectual to such countries.
Further, the existence of a business elite, i.e., the entrepreneurial class, is fundamental to Schumpeter’s theory of economic development. The carrying out of innovations and using new production functions is the prerogative of this elite group of private entrepreneurs. However, there are serious doubts about the effectiveness of this social group in the development of the developing countries. The contemporary history of economic development of these countries provides ample evidence to reveal that it is not only the private entrepreneurial class, but also the national governments that are responsible for preparing and launching programmes of industrialisation.
With the development process of these countries being rapidly imbued with the socialistic hues, their governments have increasingly assumed the role of a national entrepreneur. Not the innovations of the private entrepreneur but the “government action and mass impulses today seem to be the most characteristic motive forces of economic development.” So much so that even in the private sector of these economies the entrepreneurs cannot fulfill their functions without the active and substantial assistance from the government and semi-public bodies. Moved by such a un-Schumpeterian economic landscape in the developing countries, Prof. Gunnar Myrdal remarks that “it represents, indeed, an attempt at a complete reversal of what once happened in the now developed countries as described by the Schumpeterian model.”
In developing economies, a number of factors such as the outmoded socio-economic institutional framework, tradition-ridden investment horizon and unreliable attitude for undertaking of new ventures, have all contributed in denigrating the pivotal role assigned to the Schumpeterian entrepreneur in his functional aspects. The governments of these countries under such conditions cannot afford to remain an idle and passive spectator. It is incumbent for them to come forward and become the herald of industrialization by playing the role of a unified national entrepreneur.
Furthermore, the governments of the developing countries are committed to the rapid creation of ‘social overheads’ or what is now called infrastructure in order to fulfill the popular demand for higher standards of living. The private capital fails to come forward because of the lumpy nature of such investments and the long gestation periods involved. On the other hand, an agency like the government has sufficient means to mobilize the capital resources of the economy through various fiscal and monetary measures and by borrowing from abroad.
The very exigency of the situation in the developing economies compels their governments to shoulder the responsibility of initiating and steering the gigantic task of economic development. Thus, the Schumpeterian model of development which assigns the primary and central role to the private entrepreneur and only a secondary and passive function for the government is a misfit to the conditions obtaining in the developing countries.
Besides, the entrepreneurial innovation so pivotal to the working of Schumpeter’s model has no significance to the process of development in the developing countries. Henry C. Wallich and H.W. Singer have held that due to the demonstration effect on an international plane, the businessmen in the developing countries are prone to import and assimilate the already known technology and methods of production from the developed countries rather than undergo the risks of innovating anew (some of which in any case may prove to be abortive). Hence the development process in the developing countries is increasingly becoming a process of derived development, being based on assimilation of existing innovations made elsewhere rather than on the Schumpeterian type of indigenous innovations.
In the Schumpeterian model, by its very nature and approach, inflationary pressures are bound to operate as the development process gathers momentum. The entrepreneurs’ innovational activity being financed by the credit-creating banking system, credit-creation assumes a vital role in his model. The creation of credit leads to a rise in purchasing power of the community without a corresponding increase in production. Increased purchasing power results in an increased demand for production services and consumer goods. The increased demand coupled with the increased volume of money in circulation results in a general price rise.
But in the consumption-oriented development process of a developing economy, the inflationary tendencies are very powerful, persistent and cumulative in nature. “It is not only development and associated investment that are responsible for inflationary tendencies, but the entire social climate of demand-oriented economy.” They become a serious drag on the development process itself. Thus, the production-oriented Schumpeterian vision of development process fails to realise the hurdles like secular inflation that characterise the consumption-oriented development of the developing economies. What in fact is needed is a totally different framework of analysis and theory that is realistic to the circumstances of these economies.
However, certain aspects of Schumpeter’s model retain universality of application. Irrespective of the type of economy and its stage of development, the importance of innovations as one of the major factors in economic development remains unassailable. ‘Technological possibilities are an uncharted sea’, and in this Apollo age, we can safely assume that the developing countries can hardly afford to remain mere imitators and assimilators.
Even if mere transfer of ready-made and proven techniques of production is sought, there remains the problem of adaptation of foreign technology in the domestic economy. It calls for a certain amount of pioneering spirit and entrepreneurial skill in so far it is new to the country in which it is to be adapted. Further, the risks of transplanting such technology in underdeveloped economics would be considerable. Hence the entrepreneurs in these countries should possess at least some of the basic qualities of the Schumpeterian entrepreneur.
From the point of view of successful development in developing countries Schumpeter’s theory highlights the urgency of bringing about drastic transformation of the tradition-ridden socioeconomic institutions and reshaping of the inimical attitudes to develop a favourable climate for the growth of entrepreneurship. Adequate entrepreneurship is one of the prerequisites for sparking off a take-off stage in these countries.
Further, once the process of industrialisation sets apace in the developing countries, Schumpeter’s theory can undoubtedly throw considerable light on the problems associated with the long-run increase in productivity. It shall also provide clues to the problem of absorption of ‘surplus labour’ in gainful employment as a result of innovations. In this way Schumpeter’s theory of development can provide some valuable lessons to the countries for avoiding waste and extra hardships that are liable to attend an unplanned and uncoordinated development.
Rostow’s Theory of Growth |
At the end of the Second World War (1939-45) there was a renewal of interest in the subject of development economics and the stages of growth once again preoccupied many scholars. As a non-communist manifesto, W. W. Rostow’s stages of economic growth (1960, 1971) is a foray into positioning the sweep of modern economic history under capitalism into neat and hopeful epochs.
Rostow’s version is an outstanding examples of continuity and evolution. Moreover, if Marx’s theory is regarded as the banner of capitalism doomed, Rostow’s version may be referred to as a capitalism viable.
Stages of Growth:
Rostow has conceived five universal stages; viz:
(i) The traditional society,
(ii) The preparation for the take-off—a stage in which communities build up their propensities in such a way as would be conducive to the take-off,
(iii) The period of takeoff in which the productive capacity of the community registers a distinct upward rise,
(iv) The stage of drive to maturity, the period of self-sustained growth in which the economy keeps on moving, and
(v) The stage of high mass consumption.
Let us analyse each stage in detail:
(i) The Traditional Society:
A traditional society is one of the simplest and primitive forms of social organisation. It is one whose structure is developed within limited production function, based on Pre-Newtonian science and technology and old Pre-Newtonian attitude to the physical world.
The characteristics are:
(a) Per Capita:
Within a limited range of available technology there is a low ceiling per capita output.
(b) Employment in Agriculture:
A high proportion of workforce (75% or more) are devoted in the production of agricultural goods. High proportion of resources are also devoted in the agricultural section.
(c) Social Mobility:
A hierarchical, hereditary, status-oriented social structure held down the mobility of society at that time
(d) Political Power:
The centre of gravity of political power was localistic, region-bound and primarily based on land ownership.
(ii) Pre-Conditions for Take-Off:
It is that stage of economic growth in which the progressive elements creep into the otherwise barbaric and primitive psyches of the members of the society. People try to break free from the rigidities of the traditional society and a scientific attitude—a quest for knowledge in short—a questioning mid-set is very much visible in the changing face of the society.
The features are:
(a) Economic Progress:
Economic progress became an accepted social value. At this time the change of human mind took place and they were able to think about their respective countries.
(b) New Enterprises:
New types of enterprising people emerged on the society. Their objective was to establish a firm or industry and produce output for a long time.
(c) Investment:
As the new enterprising persons emerged in the society, the gross investment raised from 5% to 10%, so that the rate of growth of output outstrips the rate of population growth.
(d) Infrastructure:
As different industries were established in different parts of the country, automatically transportation, more mobilised communication, roads, railways, ports were required. So infrastructure was built all over the country.
(e) Credit Institutions:
At that time necessary credit institutions were developed in order to mobilise savings for investment.
(f) Mobilisation of Work Force:
Due to industrialisation a large portion of workforce was shifted from agricultural section to the manufacturing sector. This was experienced in Great Britain in the time of “Industrialisation (1760 onwards)”.
(g) Decline of Birth rate:
that time medical science was slowly developing. The citizens understood the essence of control of birth rate and death rates. At first the death rate was controlled and then the birth rate was controlled. This was the second stage of Demographic Transition experienced by the developed countries.
(h) Political Power:
Centralised political power based on nationalism replaced the land- based localistic or colonial power.
(iii) The Take-Off Stage:
The take-off stage marks the transition of the society from a backward one to one that is on the verge of freeing itself from the elements that retard growth. In fact, it is one stage in which there is a dynamic change in the society and there is a meteoric rise in the standards set by the members of society in all walks of life like industry, agriculture, science and technology, medicine, etc.
There is a marked discontinuity between the first two stages as mentioned earlier and the stage of take-off. The winds of change are triggered by some important political event that revolutionizes the political structure or a sudden infuse of new techniques and methods of production attributed to formidable advances in science and technology.
The former type of events took place in nations, like erstwhile USSR, East and West Germany, Japan, China and India. The latter category may be observed in nations like UK, USA and the OPEC countries. Events like the “Industrial Revolution” that was the brainchild of technological innovations in Britain since 1760s or say, the “Manhattan Project (1940s)” that signaled the arrival of USA on the world political scenario with a that are living examples of take-off stage as mentioned by Rostow.
The characteristics of this stage are:
(a) The Rate of Investment:
The first property of the stage of take-off is nothing but the rate of investment. At the time of “Industrial Revolution” the rate of investment was from 5% or less to over 10% of the national income. At this time, agricultural lands were acquired for industrialisation.
This led to a depression in the further period. For this purpose colonialism was required for Britain. As a result they came to India and other colonies for business purpose at the first time and gradually took the political power of this country.
(b) Development of One Leading Sector:
At the time of Industrial Revolution (1760 on) we saw the development of particular secondary section of each country in Europe. In Britain we saw a large development in textile and iron and steel industry. As iron and steel industry is essential for development of every country each country experienced growth in iron and steel industry in Europe. Nowadays the development of a country is measured by per capita consumption of iron and steel.
(c) Existence of Different Frameworks in the Society:
There was the existence of political, social and institutional framework which exploited impulses to expansion in the modern sector and the potential external economies affected the take-off and gave the process of growth a sustained and cumulative character.
(iv) The Drive to Maturity:
Maturity in the context of Rostow’s theory refers to that state of economy and the society as a whole, when winning on all fronts becomes a habit or an addiction. Each and every effort to stimulate the economy meets with success and the time period when the society tastes success is a rather long one and the progress made on all fronts is there to stay.
It is a period when a society effectively applies the range of available modern technology to the bulk of its resources; and growth becomes the normal mode of existence. Industries like heavy engineering, iron and steel, chemicals, machine tools, agricultural implements, automobiles etc. take the driver’s seat.
Electric power generations as well as consumption are high due to sudden acceleration of industrial activities. Admittedly, it is difficult to date this period precisely in view of indistinct or hazy demarcations between the end of take-off and the beginning of maturity. Rostow would date it as about 60 years after beginning of take-off.
The economic characters of this stage are:
(a) Shift in the Occupational Distribution:
As due to Industrial Revolution many industries were established in Britain and the countries of. Western Europe, the work force was shifted from agricultural sector to the manufacturing sector. The proportion of the working force engaged in the agricultural sector went down to 20% or less.
(b) Shift in the Consumption Pattern:
A new type of workforce was created which was termed white-collar workers. They were mainly officials or managing officials of a factory’s governing body. Due to high income their preferences were shifted to luxury goods. As a result the consumption pattern of non-agricultural goods increased. This led to development of the existing industries and also variation in tastes and preferences took place more rapidly in this period.
(c) Shift in the Consumption of Leading Sector:
The change in composition was observed to vary from country to country. The Swedish take-off was initiated by timber exports, wood pulp and pasteboard products followed by the emergence of railways, hydropower, steel, and animal husbandry and dairy products. The Russian take-off started with grain exports, followed by railways, iron and steel, coal and engineering.
The non-economic factors of “The Drive to Maturity” are:
(a) Entrepreneurial Leadership:
In the stage of drive to maturity the change in the entrepreneurial leadership took place. Cotton-steel-railway-oil barons gave way to the managerial bureaucracy.
(b) Boredom:
Certain boredom with industrialisation gave rise to social protest against the costs of industrialisation.
(v) The Age of High Mass Consumption:
From maturity the economy moves with growth to high mass consumption, the stage at which durable consumer goods like radios, TV sets, automobiles, refrigerators, etc., life in the suburbs, college education for one-third to one half the population came within reach. In addition the economy, through its political process, expresses willingness to allocate increased resources to social welfare and security. This stage was defined in terms of shift in emphasis from problems of production to that of consumption.
Necessarily, therefore, attention veers towards problems of allocation of resources which, according to Rostow, came to be governed by the following considerations:
(i) Pursuit of national power and world influence,
(ii) Welfare state redistributing income to correct the aberrations of the market process,
(iii) Extension of consumer demand on durable consumer goods and high grade foods.
Critical Review of Rostow’s Theory:
(i) Reduction of Growth:
Rostow’s theory reduces the economic growth to a single pattern. He only highlighted the growth of one or more sectors of the economy. He did not highlight the overall condition of the economy.
(ii) Mechanism of Evolution:
Rostow’s stages of growth failed to specify the mechanism of evolution which links different stages of growth. He explained the stages without any interrelationship.
(iii) Economic Variables:
By the stage theory Rostow described how the existing economic variables reduce the growth rate of the country. But he did not say anything about the solution of these problems. He did not explain how the variables interact and generate economic growth.
(iv) Lack of Symmetry:
Rostow’s stage theory was not based on a systematic scheme of causation,
(v) Predictive Value:
Paul Baran opined that Rostow’s theory had no predictive value and was without any operational significance for underdeveloped countries attempting to break through the barriers of underdevelopment.
(vi) Hoffman Thesis:
Although Rostow seemed to have been inspired by the Hoffman thesis, his conclusions were inconsistent with those of his mentor Rostow’s thoughts as regards the rate of investment were tied to the assumption of a constant marginal capital-output ratio.
Hoffman’s analysis stressed on an increasing ratio of the net output of capital goods to that of consumer goods in the manufacturing sector. This implied an increasing capital-output ratio over the various stages of industrialisation.
(vii) Habits of Saving:
It lacked originality as a piece of academic research. It had heavily borrowed from Max Weber’s and Tawney’s pioneering work in the field of sociology. Rostow’s reference to changing habits of saving, the increasing pursuit of economic motives in everyday life, etc. share the same passions as those of Weber and Tawney.
Conclusion:
Rostow had advocated his theory as an alternative to Marx’s theory. While Marx’s vision of the stages of growth was embodied in The Communist Manifesto (1848), Rostow described his own works as the Non-Communist Manifesto. In fact the bottom-line was that Rostow based his theory on the flows of the Marxian theory. He criticised Marx’s theory on the ground that if suffers from “economic determinism”.
The great merit of Rostow’s doctrine was that its main facts was on continuity and evolution of society and did not treat each stage as being mutually exclusive from the other stages. Moreover, instead of limiting human behaviour to simple act of maximisation, Rostow interpreted human behaviour as an act of balancing alternatives and often conflicting human objectives.
Karl Marx Theory of Economic Development
Karl Marx, the father of scientific socialism, is considered a great thinker of history.
He is held in high esteem and is respected as a real prophet by the millions of people.
He is regarded as the father of history who prophesied the decline of capitalism and the advent of socialism.
The Marxian analysis is the greatest and the most penetrating examination of the process of economic development. He expected capitalistic change to break down because of sociological reasons and not due to economic stagnation and only after a very high degree of development is attained. His famous book ‘Das Kapital’ is known as the Bible of socialism (1867). He presented the process of growth and collapse of the capital economy.
Assumptions of the Theory:
Marxian economic theory of growth is based on certain assumptions:
1. There are two principal classes in the society. (1) Bourgeoisie and (2) Proletatiat.
2. Wages of the workers are determined at subsistence level of living.
3. Labour theory of value holds good. Thus labour is the main source of value generation.
4. Factors of production are owned by the capitalists.
. Capital is of two types: constant capital and variable capital.
6. Capitalists exploit the workers.
7. Labour is homogenous and perfectly mobile.
8. Perfect competition in the economy.
. National income is distributed in terms of wages and profits.
Marxian Concept of Economic Development:
In Marxian theory, production means the generation of value. Thus economic development is the process of more value generating, labour generates value. But high level of production is possible through more and more capital accumulation and technological improvement.
At the start, growth under capitalism, generation of value and accumulation of capital underwent at a high rate. After reaching its peak, there is a concentration of capital associated with falling rate of profit. In turn, it reduces the rate of investment and as such rate of economic growth. Unemployment increases. Class conflicts increase. Labour conflicts start and there is class revolts. Ultimately, there is a downfall of capitalism and rise of socialism.
Balanced Vs. Unbalanced Growth for Economic Development
Both the theories are based on the theory of Big Push which advocates investment to break the vicious circle of poverty. The balanced growth aims at the development of all sectors simultaneously but unbalanced growth recommends that the investment should be made only in leading sectors of the economy.
Underdeveloped countries have insufficient resources in men, material and money for simultaneous investment in number of complementary industries. The investment made in selected sectors leads to new investment opportunities. The aim is to keep alive rather than to eliminate the disequilibrium by maintaining tensions and disproportions.
Balanced growth aims at harmony, consistency and equilibrium whereas unbalanced growth suggests the creation of disharmony, inconsistency and disequilibrium. The implementation of balanced growth requires huge amount of capital.
On the other hand, unbalanced growth requires less amount of capital, making investment in only leading sectors. Balanced growth is long term strategy because the development of all the sectors of economy is possible only in long run period. But the unbalanced growth is a short term strategy as the development of few leading sectors is possible in short span of period.
The doctrine of balanced growth and unbalanced growth have two common problems on relating to role of state and the role of supply limitations and supply inelasticity’s. The private enterprise is only incapable of taking investment decisions in underdeveloped countries. Therefore, balanced growth presupposes planning. In unbalanced growth strategy, the states play a pioneer role in encouraging SOC investments, there by creating disequilibrium.
If the development starts via Investment in DPA, political pressures force the state to undertake investment in SOC. The theory of balanced growth is mainly concerned with the lack of demand and neglects the role of supply limitations.
This is not true as underdeveloped country lacks in supply of capital, skills, infrastructures and other resources which are- inelastic in supply. Similarly, unbalanced growth doctrine also neglects the role of supply limitations and supply in elasticity’s. Under such situations, a judicious compromise has to be made between the benefits from balanced growth and unbalanced growth.
There is no second opinion that the developing countries are wedded to democracy who should try to control the twin evils of inflation and adverse balance of payments during the course of pursuing any strategy of economic development. The need of the hour is that it should be done to make the doctrine effective as a vehicle of economic development with added strength and vigour.
In this context, Prof. Meier has rightly observed that, “From the discussion we may also now recognize that the phrases balanced growth and unbalanced growth initially caught on too readily, and that each approach has been overdrawn. After much reconsideration, each approach has become so highly qualified that the controversy is essentially barren.
Instead of seeking to generalize either approach we should more appropriately look to the conditions under which each can claim some validity. It may be concluded that while a newly developing country should aim at balance in an investment criterion, this objective will be attained only by initially following, in most case, a policy of unbalanced investment
BIG PUSH THEORY
The theory of ‘big push’ first put forward by P.N. Rosenstein-Rodan is actually a stringent variant of the theory of ‘balanced growth’. The crux of this theory is that the obstacles of development are formidable and pervasive. The development process by its very nature is not a smooth and uninterrupted process. It involves a series of discontinuous ‘jumps’. The factors affecting economic growth, though functionally related with each other, are marked by a number of “discontinuities” and “hump.”
Therefore, any strategy of economic development that relies basically upon the philosophy of economic “gradualism” is bound to be frustrated. What is needed is a “big push” to undo the initial inertia of the stagnant economy. It is only then that a smooth journey of the economy towards higher levels of productivity and income can be ensured.
Unless big initial momentum is imparted to the economy, it would fail to achieve a self- generating and cumulative growth. A certain minimum of initial speed is essential if at all the race is to be run. A big thrust of a certain minimum size is needed in order to overcome the various discontinuities and indivisibilities in the economy and offset the diseconomies of scale that may arise once development begins According to Rosenstein-Rodan, marginal increments in investment in unrelated individual spots of the economy would be like sprinkling here and there a few drops of water in a desert. Sizable lump of investment injected all at once can alone make a difference.
Rationale for the Big Push:
The basic rationale of the ‘Big Push’ like the ‘Balanced Growth’ theory is based upon the idea of ‘external economies’. In the theory of welfare economics, external economies are defined as those unpaid benefits which go to third parties. The private costs and prices of products fail to reflect these. And the market prices have to be corrected if an account of these external economies is to be taken. However, the concept of external economies has a different connotation in growth theory. Here, they are pecuniary in nature and get transmitted through the price system.
To explain the emergence of such external economies and their transmission, let us consider two industries A and B. If the industry A expands in order to overcome the technical indivisibilities, it shall derive certain internal economies. This may result in the lowering of the price for the product of the industry A. Now if the industry B uses A’s output as an input, the benefits of A’s internal economies shall then be passed on to the industry B in the form of pecuniary external economies. Thus, “the profits of industry B created by the lower prices of product. A call for investment and expansion in industry B, one result of which will be an increase in industry B’s demand for industry A’s product. This in turn will give rise to profits and call for further investment and expansion of industry A.”
Following such a line of argument, Prof. Rosenstein-Rodan contends that the importance of external economies is one of the chief points of difference between the static theory and a theory of growth. “In the static allocative theory there is no such importance of the external economies. In the theory of growth however,” remarks Prof. Rodan, “external economies abound because given the inherent imperfection of the investment market, imperfect knowledge and risks, pecuniary and technological external economies have a similarly disturbing effect on the path towards equilibrium.”Now, the basic contention of the “big push” theory is that such a mutually beneficial way of output expansions is not likely to occur unless the initial obstacles are overcome. There are “non- appropriabilities” or “indivisibilities” of different kinds which if not removed through a “big push” will not permit the emergence and transmission of ‘external economies’ – which lie at the back of a self-generating development process.
Associated with the removal of each set of indivisibilities is a stream of external economies. A ‘bit by bit’ approach to development would not enable the economy to cross over certain indivisible economic obstacles to development. What is required is a vigorous effort to jump over these obstacles. As such, for the economy to be successfully launched on the path of self-generating growth a “big push” in the form of a minimum size of investment programme is necessary. In essence, therefore, an all-or-nothing approach to development is stressed in big-push approach to development.
Requirements for Big Push:
The hallmark of the ‘big-push’ approach lies in the reaping of external economies through the simultaneous installation of a host of technically interdependent industries. But before that could become possible, we have to overcome the economic indivisibilities by moving forward by a certain “minimum indivisible step”. This can be realised through the injection of an initial big dose of a certain size of investment.
Prof. Rodan distinguishes three kinds of indivisibilities and externalities with a view to specify the areas where big push needs to be applied They are:
(i) Indivisibilities in the production function, i.e., lumpiness of capital, especially in the creation of social overhead capital.
(ii) Indivisibility of demand, i.e., complementarity of demand.
(iii) Indivisibility of savings, i.e., kink in the supply of savings.
1v) Let us study each of these individually so as to bring out their importance in providing a self- generating stimulus to the development process.
(i) Indivisibilities in the Production Function:
Prof. Rodan argues that it is possible to generate enormous pecuniary external economies by overcoming the ‘indivisibilities of inputs, processes and outputs.’ The emergence of such externalities would bring about a wide range of increasing returns. To corroborate his contention he cites the case of United States. He feels that the fall in the capital-output ratio in U.S.A. from 4:1 to 3:1 over the last eighty years was chiefly due to the increasing returns made possible by the levelling down of production indivisibilities.
The most important case of indivisibilities and external economies on the supply side resides in the social overhead capital which is now called infrastructure. The most important effect of jumping over this indivisibility is the “investment opportunities created in other industries”. Social overhead capital consists of all the basic industries such as transport, power, communications, and such other public utilities.
The construction of these infrastructures involves ‘lumpy’ capital investments. And the capital- output ratio in the social overheads is considerably higher than in other industries. Moreover, these services are only indirectly productive and involve long gestation periods. Besides, their “minimum feasible size” is large enough. As such it is well-nigh difficult to avoid excess capacity in these, at least in the initial periods. Above all, there is a “minimum industry mix of public utilities” that must be required to divert at least 30 to 40 per cent of their total investment in the creation of social overhead capital.
In this view, therefore, it is possible to distinguish four types of indivisibilities of creating social overhead capital.
They are:
(a) Indivisibility of Time:
The creation of social overhead capital must precede other directly productive industries so that it is irreversible or indivisible in time.
(b) Indivisibility of Durability:
The infrastructures generally last long. The overhead capital with lesser durability is either technically not feasible or is very poor in efficiency.
(c) Indivisibility of Long Gestation Periods:
The investments in social overhead capital, by all counts, involve a highly protracted period of time for their fruition as compared with investments in other directly productive channels.
(d) Indivisibility of an Irreducible Industry Mix of Public Utilities:
Social overhead capital must grow collectively. There is an irreducibly minimum industry mix of different public utilities that have to be created all at one stroke.
As it is impossible to import the infrastructures, they have got to be produced domestically. And because of the existence of above explained indivisibilities, it is necessary to make ‘lumpy’ investments in them. And their creation is a precondition to the investments in directly productive and other quick-yielding productive activities. Only then the way for a self-generating economy can be paved. Thus the absence of adequate social overhead capital constitutes the most important bottleneck in the development of developing countries.
(ii) Indivisibility of Demand:
This refers to the complementarity of demand arising from the diversity of human wants. The very fact that there is an indivisibility of complementarity of demand requires simultaneous setting up of interrelated industries in countries to initiate and accelerate the process of development.
Indivisibility of demand generates interdependencies in investment decisions. As such, if each investment project was undertaken independently, it is in most cases likely to flop down. This is because individual investment projects generally have “high risks because of uncertainty as to whether their products will find a market,” This point can be clarified with the help of the following well known example given by Rosenstein-Rodan for a closed economy.
To start with, let us suppose that 100 disguisedly unemployed workers in an underdeveloped country were withdrawn and employed in a shoe factory. The wages of the newly employed workers would provide an additional income to them. Now, if they spend all their newly received purchasing power on the shoes, an adequate market for the shoe industry would be ensured. As a result, the industry would succeed and survive.
But the fact is that human beings having diversity of wants cannot simply afford to survive simply by the consumption of shoes and nothing else. As such, they will not spend all their earnings on the purchase of shoes. The market for the shoe industry will, therefore, remain limited as before. Therefore, the incentives to invest will be adversely affected. As a result, the shoe factory investment project might end in a fiasco.
Now let us make a somewhat different assumption to see how an atmosphere congenial to the undertaking of investments can occur. Suppose that instead of only 100 workers being engaged in the shoe factory, 10,000 workers are put to work in 100 different factories producing a variety of consumer goods. These new factories provide larger employment and thus purchasing power to their workers. There is an increase in the total volume of purchasing power and the total size of the market. This is because the “new producers would be each other’s customers”.
In a way, what has happened is that due to the complementarity of demand, the risk of limitedness of market is greatly reduced. The result is that the incentives to invest are increased. “Thus provided that the total volume of employment and purchasing power is increased by a minimum indivisible step, each factory Will have enough market to reach full capacity production and the point of minimum cost per unit.”
We, therefore, find that the indivisibility of demand requires the simultaneous production of a “bundle” of large number of wage goods on which the newly employed workers could spend their income. That alone would ensure adequate market for the product of each producer. In terms of investment the implication is that “unless there is assurance that the necessary complementary investments will occur, any single investment project may be considered too risky to be undertaken at all.”
This, as Prof. Higgins remarks, results into indivisibility in the decision-making process. A large-scale investment programme based on complementarity of demand undertaken as a unit may bring forth large increases in national income. But each of the individual investment projects undertaken singly may not fructify at all.
The essence of the whole analysis is that a high minimum quantum of investment in interdependent industries is needed to overcome the indivisibility of demand and hence that of decision-making. That, according to the big push theory, is the only reliable way of overcoming the smallness of the market size and low inducement to invest in the developing economies.
(iii) Indivisibility in the Supply of Savings:
A high minimum package of investment cannot be undertaken without an adequate supply of savings. But it is not possible to have such high volume of savings in underdeveloped countries due to an extremely low price and high income elasticities of the supply of savings. The savings are low primarily because incomes are low. This, thus, constitutes the third indivisibility. “The way out of the vicious circle,” remarks Rosenstein-Rodan, “is to have first an increase in income and to provide mechanisms which assure that in every second stage the marginal rate of savings will be very much higher than the average rate of savings.” The Smithian advice that ‘frugality is a virtue and prodigality a vice’ has to be adapted to a situation of growing income.” But in the ultimate analysis the initial big increase in income has got to be provided through an initial big increase in investment.
The existence of the three indivisibilities outlined above make it abundantly clear that the solution to all these lies in a high minimum quantum of investment. Thus, a big push through a minimum indivisible step forward in the form of a high minimum quantity of investment could alone make it possible to jump over the economic obstacles to development in the underdeveloped countries.
Lastly, Resenstein-Rodan considers the role of international trade vis-a-vis the strategy of big push in generating a self-sustaining process of development. In this regard he is of the view that international trade cannot be a substitute for “big push.” The provision of some of the needed wage goods through imports can at best help in narrowing down the range of fields which call for a ‘big push’. The historical experience provided by the nineteenth century corroborates Rosenstein- Rodan’s conclusion that international trade cannot by itself obviate the need for ‘big push’ altogether.
Once the process of development by an initial application of ‘big push’ is underway, its sequel course would tend to follow simultaneously three sets of balanced growth relations.
They are:
(i) A balance between the social overhead capital and the directly productive activities (in both the consumer and capital goods sectors).
(ii) A vertical balance between capital goods and consumer goods (including the intermediate goods).
(iii) Lastly, there should be the horizontal balance between various consumer goods industries due to complementary nature of expanding consumer demand.
The Need for Balanced Growth of Centralised Planning:
The mutual benefits arising from the external economies for industrialisation cannot be included in the cost calculations of entrepreneurs to the fullest possible extent without recourse to some sort of centralized ‘balanced growth’ planning. This is because of a number of reasons. First, due to the imperfections in the market, the free market price system does not adequately give proper signal to the private investors for the future possibilities of expansion in complementary industries.
Second, in developing countries due to the imperfections of knowledge and risks, the response of the private entrepreneurs to any given price signal is quite imperfect and unsatisfactory. Thus, due to the failure to take advantage of the external economies to the fullest extent, investments which may be profitable in terms of ‘social marginal net product’ remain unprofitable in terms of ‘private marginal net product’. In this view, therefore, there is a need for an integrated investment scheme to be carried out in complementary industries. The best way to do that would be to carry out the investment programme under the direction of some centralised planning authority. An individual entrepreneur in a developing country cannot hope to have all the necessary data which the central planning authority can draw upon.
The crash programme of investment envisaged by the ‘big-push’ theory cannot by its very nature be made just at random. It has to take into consideration the various balances – horizontal as well as vertical. Only then could the achievement of self-generating, cumulative and harmonious growth of the economy is possible. For this what is necessary is a unified decision-making process. “Allocation of capital,” remarks Prof. Higgins, “on the basis of individual estimates of short-run returns on various marginal investment projects is the very process by which the underdeveloped countries got where they are.
The basic reason for government action to promote development is that each of a set of individual private investment decisions may seem unattractive in itself, whereas a large scale investment program undertaken as a unit may yield substantial increase in national income.” Prof. Rosenstein-Rodan’s theory is essentially a theory of development and thus helps us to examine the path towards development rather than restricting itself simply to the study of conditions at the point of equilibrium. The theory highlights the inefficiency of price system of signalling the desirable directions for investment. It is big-push investment through a centralised planning that could put the developing countries on a self-generating development process.
Evaluation of Rosenstein’s Big Push Strategy:
However, Prof. Rosenstein-Rodan’s all-or-nothing approach is not perfect in itself in all respects. It suffers from a number of lacunae.
First, the main implication of the ‘big-push’ theory is State intervention and centralised planning. It is argued that due to imperfections of market the free price system fails to register and thus communicate properly the economic events, much less their future course. But the pertinent question involved here is – will the prevailing circumstances of the developing countries warrant a conclusion to the contrary? The actual fact of the matter is that the current institutional and administrative set-up of the government machinery of the poor developing countries is too weak to cope with the dictates of the ‘big push’ theory. It is, therefore, quite doubtful whether the government sponsored brand of communication system about the future events would at all be more effective than the free price mechanism.
The governments of developing countries may somehow manage to draw up their initial integrated economic plans. But they are bound to be faced with tremendous difficulties in the execution of these plans. In any comprehensive programme comprising a complex set of related projects, delays and continued revision of the original time-bound schedules are inevitable. “The greater the interdependence”, remarks Prof. Myint, “between the different components of the plan, the greater the repercussions of an unexpected or an unavoidable change in one part of the plan on the rest and the greater the need to keep the different parts of the plans continually revised in the light of the latest information available.” These are indeed formidable hurdles for the developing countries to cross.
Besides, on account of the poor and incompetent institutional set-ups of the developing countries, there is bound to be insufficient knowledge about the local conditions and an “inefficient feedback of this vital local knowledge from different parts of the country to the central planning machinery.” Mere improvement in the standard type of statistical information would not remedy all this.
Above all, the process of unified decision-making and coordination becomes all the more difficult in mixed economies like India. This is so because not often, the public and private sectors rather than being complementary are in fact competitive with each other. Thus, it may so happen that the “private enterprise is inhibited by uncertainties not only about the general economic situation but also about the future intention of the government regulations.”
Thus, it is quite clear that the application of a ‘big push’ programme in the developing countries with their weak and incompetent institutional and administrative machinery is likely to die its own death. In fact, as Prof. Myint remarks, it can be compared to “an attempt to impose a complete and brand new ‘second floor’ on the weak and imperfectly developed one floor economy of these countries.”
Secondly, the chief plank on which the ‘big push’ theory is founded is the emergence of a wide range of external economies. Prof. Viner has shown that international trade can provide much more external economies than does the domestic investments. However, the developing countries being primarily primary producing countries, engage a large part of their total investment for their exports and marginal import substitutes, the field where the external economies are found to be very- negligible.
Thirdly, the ‘big push’ theory concentrates mainly on the industrial sector – viz., capital goods, consumer goods and social overhead capital. The manufacturing sector is considered inherently to be a better vehicle of economic growth. But in the developing countries, the most dominant sector is composed of agricultural and primary production. For a balanced growth of the economy, agriculture also requires a corresponding ‘big push’. Any neglect of the agricultural sector in these countries is bound to jeopardise the ‘big push’ effort.
Fourthly, the major part of the ‘lumpy’ investments involved in the ‘all-or-nothing’ approach is called for by the ‘technical indivisibilities’ embodied in the creation of social overhead capital. Not only is the quantum of investment enormously ‘lumpy’ but also the capital-output ratio high in the provision of social overhead services than in other directions. Thus, due to the inherent capital scarcity in the developing countries, it is really a matter of dubious wisdom to require these countries to overstrain their meagre resources in the provision of a complete outfit of infrastructures.
The ‘big push’ theory recommends a ‘starting from scratch’ concerted action in the creation of social overheads. This is on the implicit assumption that these services are totally non-existent in these economies. However, for most of these countries, remarks Prof. Myint, “the practical question is not whether to have a completely new outfit of these services starting from scratch but how to extend and improve the existing facilities.”
Further, the ‘big push’ theory by its very nature requires the ‘lumpy’ investments in different social overheads to be made simultaneously and once for all. With the very long gestation periods usually associated with such investments, there are bound to be inflationary pressures in the economy due to the shortage of consumption goods. In an inflationary atmosphere, the process of construction of the social overheads is bound to be a protracted one. In this light it would be better to spread the infrastructure-building activity over a period of time through phasing and changing the time dimension of the projects. This requires selection of a suitable economic size of the social overhead investments.
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