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ECON414 (4)

Classical and Neoclassical Developmental Theories Brief Summary (Ch 4)

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University of Alberta
Neil Hepburn

Ch 4 Summary Classical and Neoclassical Theories Where classical and neoclassical theories do overlap and share characteristics, they are distinct, as shown in chapter 4. Classical theory was concerned not only with the production of income, but also with how that income was distributed. A classical theorist, Adam Smith believed the ‘invisible hand’ of supply and demand would push economies toward equilibrium if and only if competition, upheld by governments, prevented monopolies. Smith also put forward the idea that division of labor and the accumulation of capital would increase output, which would benefit the whole economy. David Ricardo’s law of diminishing return and theory of comparative advantage showed some of the same principles; namely, that economies would benefit from specialization and the accumulation of capital. However, Thomas Malthus’ population theory proposed that as economic growth rate rose, low income families would have more children, which would raise the population; per capita income would then fall below subsistence levels and people would die. The population would decline, per capita income would rise and the cycle would repeat, trapping the poorest in the economy. Karl Marx also found fault with Ricardo and Smith’s theories. Though he acknowledged the power of the market system to generate output and increase economic growth, he felt that income was received by the wrong people, being fortunate resource owners and not the actual workers. Malthus and Marx didn’t believe accumulation of capital would benefit everyone. Neoclassical economic developmental theories focussed less on the effects of economy on the people, and more on a structured and linear approach to increasing output. Robert Solow created a model that showed less developed economies growing faster than developed economies, up to a ceiling of per capita income, when all growth would eventually stop for every economy. The Harrod-Dumar model proclaimed an unstable growth rate that would throw growing economies into high unemployment or Ch 4 Summary high inflation. Both models, as with all neoclassical theorist models, focussed on markets and production as the most efficient ways developing economies could expand. In contrast to the classical and neoclassical theories and theorists presented in chapter four, chapter five focussed on developmentalist theories. Ronstein-Rodan cemented the idea of the “Big Push” to uncover the hidden potential of developing economies through widespread government planned and financed investments in several major sectors of industry, having developed social overhead capital in place beforehand. Nurske presented a similar model in that it would require large investments in many areas at once, but he also advocated progressive taxation so that investments for development would be available. He was similarly in favor of imposing tariffs on imported products that were also produced
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