169- studies in econ

orthodox economics

Post WW2 branch of econ in which industrial socities are doing well (good econ conditions)

• Intellectual origins are works of Adam Smith and David Ricardo. The Present-day expression is Ronald Coase and the Theory of Social Cost. Most modern academic economics is this and traces its roots to Smith.

• Relevant to advanced industrial societies with good economic performance: high growth rates and low unemployment.

• Key observation: government intervention makes things worse. Did the liberal programs of the New Deal delay an economic recovery?

keynesian economics

Post WW2 branch of econ in which industrial socities are doing poorly (bad econ conditions)

• The legitimacy of Keynes’ ideas in the ‘50s and ‘60s helped to boost development economics; Cambridge School and Joan Robinson.

• Keynes's ideas were influential from the 1930s to 1970s. In the 1970s, the unification of economics as a discipline; made orthodox ideas paramount.

• Much of contemporary economics is an effort to discredit Keynes.

• fixing the broken, short-term mechanics of advanced, industrialized economies during the Great Depression which helped lead to structural transformation in developing econ arena.

• standard neoclassical economics claimed that free markets always naturally gravitate toward full employment and perfect balance. If a country was poor, the standard advice was simply to step back, balance the budget, and let the market sort it out. Although Keynes proved that an economy can get trapped in a permanent state of underemployment.

• By proving that markets can fail fundamentally and that the state must intervene to manage aggregate demand, Keynes effectively legitimized government planning, industrial policy, and state-led investment. (Relevant to economies performing poorly)

• Government intervention can enable a society to escape the

  low-level trap. vital role of government is to regulate the business cycle and

  break out of the low-level trap.

• Fiscal policy: budget surpluses & deficits.

• Monetary policy: money supply & interest rates.

• Trade Policy: should protect, preserve, and grow the industrial sector. “Infant Industries.”

• This provided intellectual respectability for developmenteconomics

agricultural economics

Post WW2 branch of econ in which socities are optimizing food production, distribution, and consumption.

developmental economics

Post WW2 branch of econ for developing nations (focused on improving fiscal/economics conditions for low to middle income countries)

• Development economists concluded that governmental intervention was necessary for the Global South to industrialize

• Development economics shares the core assumptions of Keynesian Economics.

• “Market failure” and the “low-level trap” is not self-curing, government-planned allocation of

resources is essential.

• Balanced growth advocates like Lewis

Ronald Reagan 1987 speech on tariffs and trading

“High tariffs inevitably lead to retaliation by foreign countries and the triggering of fierce trade wars. Then the worst happens. Markets [music] shrink and collapse. Businesses and industries shut down and millions of people lose their jobs. Promoting fair and free competition. America's jobs and growth are at stake.”

Infant Industry Approach

Popularized in the 19th century by Alexander Hamilton and Friedrich List, the premise is that a developing nation's new industries are like "infants." They cannot compete against the mature, hyper-efficient "adult" industries of rich nations. If left entirely to the free market, they will be crushed. Therefore, the government must protect them (using tariffs or subsidies) until they grow competitive.

(using state power to shift an economy from raw agriculture/mining to high-value manufacturing.)

Import-Substituting Industrialization/ ISI

The Mid-20th Century Execution: After World War II, developing countries (especially in Latin America and parts of Africa/Asia) turned this theory into a concrete macroeconomic strategy called ___. The goal was to stop importing foreign manufactured goods and instead produce them domestically. If a country used to import cars or radios, it slapped massive tariffs on those foreign imports to force local factories to build them instead.

Industrial Policy

(Modern-day): Today, "_____" carries a lot of historical baggage because many early attempts resulted in inefficient, state-coddled monopolies. The modern, more sophisticated iteration of this concept is called ______. Rather than completely blocking foreign goods to serve just the local market, modern industrial policy uses state coordination, targeted subsidies, and infrastructure investments to build industries capable of competing globally (e.g., how South Korea built its tech sector, or how countries today subsidize green energy and microchips).

Map of Africa

In The Fall and Rise of Development Economics, Paul Krugman used the historical mapping of Africa to explain a strange phenomenon: How brilliant economic ideas can be completely forgotten by the academic establishment. Krugman noted that in 15-century maps, Africa was full of detail about the interior with rivers, kingdoms such as Timbuktu and more drawn. This changed in the 18th century when cartographers only wanted precise data from sextants (tool measuring horizon and angles) and compasses. Because nobody had yet traveled to the interior with these new mathematical tools, cartographers erased the old descriptions. The interior became a literal blank slate—"Darkest Africa." By demanding higher standards of precision, mapmakers temporarily became more ignorant, erasing valuable qualitative knowledge because it couldn't be mathematically proven yet.

The Birth, Life and Death of Development Economics by Dudley Seers

In a 1964 conference at Manchester, there was general agreement that differences in circumstances may often call for significant departures from some of the factual assumptions habitually made in Anglo-Saxon economic theories, changing results of analysis and in its application in diagnosis and policy formation.

EX- "The Limitations of the Special Case"

Seers argued that standard "Anglo-Saxon" economic theory was based entirely on rich, industrialized, western nations. Economists then mistakenly tried to apply those exact same rules to the rest of the world.

Institutional Gaps (Missing Markets)

• The Anglo-Saxon Assumption: If there is a demand for a product, an entrepreneur will get a bank loan, build a factory, and supply it. Financial markets, legal systems, and supply chains are assumed to exist.

• The Developing Circumstance: Developing nations face massive institutional voids. There might be no long-term credit market or domestic suppliers for raw materials.

The Structural Trap (Primary Commodity Dependence)

• The Anglo-Saxon Assumption: According to the theory of Comparative Advantage, countries should just produce what they are best at. If Colombia is good at growing coffee and the US is good at making computers, they should just trade forever and both get rich.

• The Developing Circumstance: Developing countries quickly realize that the price of manufactured goods (computers) rises much faster than the price of primary commodities (coffee). If you stick to your "comparative advantage," you actually get poorer relative to rich nations.

• The Departure: Forces departure from free-trade theory. Developing nations realized need Infant Industry Approach. They used tariffs to block rich-country imports so their own people would be forced to learn how to build complex, high-value goods. This circumstance forces a departure toward Import-Substituting Industrialization (ISI) or heavy Industrial Policy. The government has to step in to act as the investor, the builder, and the guarantor, because the basic market ecosystem doesn't exist yet.

Stale

Hirschman felt the field was growing "___" when Lewis won the Nobel Prize, due to their polar opposite approach of how they thought a poor country could successfully industrialize.

Polly Hill “Development Economics on Trial”

Hill demonstrates in the first, polemical part of her book, how unreliable

and western-biased assumptions most development economists base

their theoretical work…

The longer, second part of the book illustrates the enormous relevance

and potential of economic anthropology for economists by looking in

turn at the true complexity of farming households, labour and

inheritance; at debt, social stratification and economic inequality, and

at problems connected with the sale of land, the role of women and

migration.

Balanced Growth

Lewis viewed developing nations as "dual economies"—a traditional agricultural sector and a modern industrial sector. Because a new factory needs workers who have money to buy its products, you can’t just build one factory. You have to build a shoe factory, a clothing factory, and a food processing plant all at the same time.

• The workers from the shoe factory buy the clothes; the clothing workers buy the food. This requires a massive, coordinated, state-led "Big Push" to move the entire economy forward in a balanced, synchronized wave.

Disequilibrium (Unbalanced Growth)

He argued that if a developing country actually had the financial capital, the administrative capacity, and the massive technical expertise to build an entire modern economy simultaneously, it wouldn't be a developing country in the first place. Instead of trying to build everything at once, a country should deliberately invest heavily in one strategic industry that creates a shortage or an intense demand elsewhere, forcing the rest of the economy to respond.

Forward and Backward Linkages: Hirschman pioneered the idea of economic "linkages." triggering waves of development

• If a government invests heavily in a steel mill, it creates a forward linkage (now there is cheap steel, which practically begs entrepreneurs to start building shipyards or car factories to use it).

• It also creates a backward linkage (the steel mill desperately needs coal and iron ore, forcing the domestic mining sector to rapidly expand).

theory of social cost

the total cost to society generated by economic activity. it is the sum of private costs (paid directly by the producer or consumer) and external costs (uncompensated impacts imposed on third parties, such as pollution or public health issues)

• externalities- hidden or unintended consequences of an economic action. For example, when a factory pollutes a local river to make a product, the lost revenue to local fisheries is an external cost.

Coase Theorem

if transaction costs are low and property rights are clearly defined, private parties can negotiate to resolve negative social costs (such as pollution) and reach an efficient outcome, regardless of who is initially assigned the legal right.

• Reciprocal Nature of Harm: Coase argued that externalities are not just one party hurting another; conflicts involve both parties. For example, a factory polluting a river hurts the downstream fishermen, but forcing the factory to shut down hurts the factory owners

• The Role of Transaction Costs- which are the expenses of negotiating, monitoring, and enforcing agreements. When costs are low: Parties will bargain. For example, a factory might pay nearby residents for the right to pollute, or the residents might pay the factory to install pollution scrubbers. When costs are high: Bargaining becomes impossible or too expensive. In these cases, the initial assignment of rights and legal liability becomes crucial for achieving economic efficiency.

Low level trap vicious cycle

1. Peasant incomes are low- little income in cash, most goods produced themselves and consumed at home

2. Low demand for consumer goods- low cash availability

3. No incentive to create industries to satisfy demands

4. No growth of a higher paid industrial workforce

5. Persistence of low demand

6. Back to one

Marx saw peasant production – smallholder farming – as a sphere of low productivity. In development economics, this idea became “the low-level trap.”

Western vs Global South experiece

Gerschenkron: Key Observations

• 1. Developing countries would not have the luxury of a century or more of gradual technological evolution. Because the costs of capitalization are huge, the role of the banking system is critical.

• 2. Late arrivals enter global markets at a moment when these markets are already crowded with large multi-national corporations that possess advanced technology. Through the global patent rights system, these companies own the technology necessary to enter the industrial era.

• 3. It makes a great deal of difference whether you enter the industrial era before or after the introduction of popular democracy. Would the enclosure movements have been possible if Britain had a democratic form of government.

• 4. “Crowding Out Effect.” It makes a great deal of difference whether you are entering the industrial era during the era of the welfare state. (Britain after WW II, social medicine and social housing.) Western Experience Elimination of the Peasantry. Small farming was eliminated in

Britain before the franchise (right to vote) was extended to the lower classes. 

• The advent of the Welfare State. Generally, the industrial transition preceded the creation of the welfare state. [Britain, however: did the welfare state come too

soon after WWII?] 

Global South Experience Smallholder farming remains the dominant economic livelihood in much of the Global South. However, the right to vote has been extended universally. The Welfare State. Generally, universal social services come into being while these economies are predominantly agricultural, e.g., universal primary and secondary education, health clinics, etc.