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International Development Studies

(M) 8/19/2013 10:21:00 AM Adam Smith  Tried to illustrate the change from the Guild system of production to Factory system of production (Industrial Revolution) o The Pin Factory metaphor gave Smith the opportunity to hone in on that huge macro transformation. Dealing out a very specific example to then apply to broader contexts.  Arrival of factory system in the national economy and taking over of guild system.  The Wealth of Nations was written to show that the factory system was a) more efficient, and b) more moral.  Not necessarily agreeing with Smith, but he has had a huge influence in the way economists approach the developing world.  Reference to Social Cost hints at an economist in the Adam Smith tradition. o Main Idea: Market-based solutions are superior to government-based solutions. o Main Question: What are the costs of a certain action? And who will bear the cost?  Tax on consumers? Tax on Producers?  If you can devise a market-based solution, you want to complete the action at minimal cost to society, so extra resources can be diverted to addressing another need.  Coase Theorem o The market-based solution: Assigning property rights  Gets rid of need to create vast bureaucracy  The more bureaucracy, the more you leave a society available to economic corruption. o Final outcome would be the same despite who had to bear the cost of an action.  Market-based approaches come at less of a cost to society than any other approach. Superiority of market-based approaches to guild system or any other system.  A. Krueger o Hidden cost of corruption is that it incentivizes families not to invest savings in improvement of production, but in the acquisition of bureaucratic jobs.  Reversal of cost and effect  Corruption arises as a means to address a certain regulation of economic performance.  Sometimes arises because regulation of economic performance confers corruption. Keynesian School  Accepted the notion of market failure and it happened all the time.  Much of his writing had the Great Depression as its background: General Theory of Employment, Interest and Money was published in 1936  The Depression was a low-level trap in an industrial economy.  Views: o Markets are not self-correcting/self-improving. o Government intervention is not a “social cost”; i.e. deadweight loss. o Low level trap in developing countries especially requires government intervention, but not permanent involvement.  Examples of Market Failures: o Full Employment, Education, Healthcare, Environment, Infrastructure, Business Cycle (including depressions).  Business Cycle – Keynes was aware of the dangers of inflation as depression. o Prophetically warned that requirements of German reparations following WWII might cause level of inflation that would wipe out Germany‟s middle class and set the stage for instability. o Called for a lowering of reparation requirements. o Favored orderly sustainable growth. 1950s and 60s  World divided into four different schools of public thought th o Orthodox (18 C.): Based in Adam Smith and David Ricardo. Assumes that low-level trap will come to an end.  Relevant to advanced industrial societies with good economic performance; i.e. high rates of growth and low unemployment.  Principal emphasis that government intervention makes things worse. o Keynesian (1930s): Dealt with industrial societies in the low- level trap. Shares basic supposition of market failure with Development Economics.  Relevant to industrial societies performing poorly (prolonged depression).  Principal emphasis: vital role of government in economy:  That government can stabilize the business cycle and achieve a “high level trap.” o Development Economics: About countries in the third-world doing poorly. Shares basic supposition of market failure with Keynesian Economics. One reason it thrived is because it had the intellectual legitimization of the Keynesian School.  Development means changing over from an agricultural economy to an industrial Economy  „The Great Transformation‟  Agriculture as a percent of GDP is going down.  Involved shrinking of the agricultural sector, not about shrinking the amount of agricultural products being produced.  Development Economics is about enabling societies to reach a time when they can go through „The Great Transformation.  Taking a society which is overwhelmingly agricultural and moving them into an industrial situation.  Best way to attain „The Great Transformation‟ is to invest in industrialization.  Efficiency of capital is greater if it is invested in the industrial sector. o Agricultural Economics: 80% of the population is involved in agriculture. The biggest obstacle to small-holder farmers is climate. The impact of policy on well-being is much smaller than the impact of climate on well-being.  Use of “production functions” to demonstrate marginal productivity. Government Policy Instruments- to apply shock therapy to stagnant economy.  Fiscal Policy o Budget surpluses o Budget deficits  Monetary Policy o Money supply o Interest rates  Deflation occurs when interest rates go too low. o Exchange rates Built-in Stabilizers  Period of rapid economic growth: danger of inflation that might wipe out the middle class. o 1. Fiscal Policy  Tax revenues would rise and a government should run budget surpluses; i.e. not spend the additional revenues.  This would lower aggregate demand and reduce risk of inflation. o 2. Monetary Policy  Raise short-term interest rates: this would choke off borrowing and lower demand.  Contract the money supply: this would lower demand and counter the tendency to rising prices.  Raise the reserve requirements on banks; i.e. lower the amount of money banks can lend out.  The Low-Level Trap o 1. Budget Deficits  When an economy is in recession, government revenues drop; government should continue to spend at constant levels, thereby injecting a demand stimulus o 2. Government Programs  Unemployment Compensation; people continue to have some earnings when they lose their jobs so they can in turn spend on material consumption.  Welfare programs; people continue to have income. Takeaway  Boost economy in such a way that it favors the industrial sector. (W)- Review 8/19/2013 10:21:00 AM Why did the Industrial Revolution take place in Western Europ
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