IDS 150- Week 1 (M)-History of Development
Economics 8/18/2013 9:23:00 PM
Adam Smith and The Wealth of Nations 1776
Origins of development economics
History (Overview of Class)
Increased intellectual visibility and impact on policy choices made
by developing countries during three decade period (post WWII)
o Sub-Saharan Africa, South and southeast Asia, Latin America.
Mid to late 1970s, economics as a profession began to question
development economics for one reason:
o Many of the policy choices influenced by development
economics turned out to not be working.
Led to negative rates of economic growth, industrial
o Questioning came from orthodox economics- rooted in ideas
of Adam Smith and David Ricardo.
1980s-1990s: Development economics got put aside and fell into
(Heterodox) Now: Question some of the outcomes of orthodox
economic prescriptions. Doubts whether second wave has done
much better for people of developing countries.
o Ex. Difference between economic growth and economic
o Mixed approach combining best of old and new.
Timeline: Development economics rejection of development
economics renaissance of Development economics (rediscover).
One of the biggest questions of Development Economics is
“Why did the Industrial Revolution take place in the Western World
and not somewhere else?”
Refer to Marx reading of Week 2.
Two schools of economic thought:
Orthodox- Smith and Ricardo
John Maynard Keynes
“Low Level Trap” (chain) – vicious cycle of underdevelopment
Low earnings = low demand Low demand = low incentive for investment in production
Low production = low earnings.
Economic situation that different kinds of countries face. Three
examples of low level trap environments.
o 1) Europe or other regions of the world during medieval times
Small-scale agriculture- family-sized.
Not even animal-drawn cultivation. Use of very
Subsistence farming- family producing much of
what it consumes.
80%-90% of population engages in agriculture as an
Limited cash income
No incentive to invest in factories.
o 2) U.S. and western world economy during Depression of
Cash-income fell dramatically
No incentive to invest in industrial rehabilitation.
No improvement in real wages.
Need of external stimulus?
o 3) Much of the developing world at the very beginning of its
Overwhelmingly agrarian population
80% or more pursued agriculture as an economic
pursuit in beginning
Large percentage was small-scale farming
No reason to assume that breaking out of the low level trap would
happen in the short-term.
Low level trap can repeat itself and there was no guarantee of
o Could be repetitious or continuous
The problem of Social Cost
What is it going to cost us to get something that we want?
A lot of applicability in applied work in developing countries. Ex. Cleaning up environment
o What will the cost be?
o How cheaply can we achieve goal?
o Is it worth it?
How to get from A to B? Developing to Developed? What will be the
This will always come into play because the world’s resources are
Definition: A dialogue about how to escape the low level trap.
Are markets self-correcting?
Is government intervention necessary?
Is the solution a hybrid?
It is usually about getting governments to pursue better policy
solutions instead of following policies that continue to do harm to
Smith and Moral Virtue
No discipline of economics when Smith wrote.
Smith was concerned with whether the unfolding industrial
revolution would promote moral virtues.
o He wrote to demonstrate that it would do so.
He argued that the Industrial Revolution was consistent with moral
values and virtues.
Industrial Revolution 1680-1780 (according to England)
o 1680-1830: marked invention of the steam locomotive.
Two inventions that made global trade possible and helped launch
the industrial revolution
o Invention and perfection of the steam engine (1780)
Made deep mining of coal and iron ore possible.
Allowed for mining industry.
Decreased transportation costs.
o Harrison Clock - Accurate and pocket-sized time piece
Needed for ship navigation
First country that developed an accurate time piece
under all conditions would have a huge advantage
because its naval ships would dominate trade. Made it possible for naval and cargo ships to navigate
ocean. (W) 8/18/2013 9:23:00 PM
The Theory of Moral Sentiments (1759)
Smith wanted to prove that the marketplace would reward the
virtues of hard work, personal discipline, restraint from indulgence,
self-reliance vs. dependence on others.
“The Invisible Hand.”
o It is the Hand of God and the Hand of the marketplace.
Hand of the marketplace and the pricing system.
o Tried to justify market economy on grounds of virtue and
Values in market economy are god-given values (Thrift,
o Theory of social cost.
Shows up in Coase Theorem
o Metaphor used to illustrate Social Cost
o We should not interfere in the operation of the Invisible Hand
because this would interfere with betterment of human
o The least expensive way to do anything is to allow the market
to carry out that pursuit.
o What is good about the marketplace is that it is the least
costly way to achieve a goal.
o Operates because it appeals to our self-interest.
o Make a profit, respond to market incentives, meet a demand.
o Each person producing goods up to the point where their cost
exceeds their benefit.
o Invisible Hand is not mentioned in Wealth of Nations.
Appears On the Theory of Moral Sentiments.
Smith contaminated discipline of economics with morality.
Tried to show that the Industrial Revolution was consistent with
virtues that God wanted us to have.
Economic dialogue with moral scolding.
Smith had deeply Presbyterian values.
Metaphor of the Pin F