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International Development Studies

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 failures. 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 disrepute.  (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 development. 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 o Neo-liberal o Neo-conservative  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 basic tools.  Subsistence farming- family producing much of what it consumes.   80%-90% of population engages in agriculture as an economic pursuit.  Limited cash income  No incentive to invest in factories. o 2) U.S. and western world economy during Depression of 1930s  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 development process.  Overwhelmingly agrarian population  80% or more pursued agriculture as an economic pursuit in beginning  Large percentage was small-scale farming  Subsistence 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 upward trajectory. 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 cost?  This will always come into play because the world’s resources are finite. Development Economics  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 the economy. 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 morality.  Values in market economy are god-given values (Thrift, Propriety, Saving) 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 welfare. 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.  Rejects altruism. 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
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