Problems with development economics - Can labor-capital models predict the responses of agrarian societies to development?, part I

American Journal of Economics and Sociology, The,  Oct, 1995  by David H. Smiley

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Part I: Problems With Development Economics

I

Introduction

One hundred years ago George's Progress and Poverty was probably more widely read than any other work on economics, including Marx's Capital. Both men proposed radical solutions to the general problem of achieving economic growth with social equity. Marxism conquered half the world and left a heavy imprint upon the other half. Georgism exists today mainly in the history of economic thought and to a limited degree still affects local government revenue practices.

Economists such as Smith, Mill, Ricardo and George regarded land rent as ethically and economically quite different from profit and interest in that rent was socially, not privately created. George argued that land monopoly was the main cause of poverty, but his remedy, the collection of land rent by government as revenue, was unique in that it left private property rights intact. However, for the past 100 years both neoclassical and neo-Marxist practice have, to a large extent, departed from the classical political economy three-factor model of land, labor and capital, and used two-factor models which aggregate land with capital and rent with profit.

By the end of the second world war, neoclassical economics related economic progress principally to population, savings and capital efficiency. The Harrod-Domar model was its engine, and the Marshall plan its vindication. There was no radical analysis of poverty, and it was assumed that benefits from economic growth would trickle down to the poor. For the past 50 years these neoclassical development models have been applied to the third world, but with far less success than that of Marshall plan. But there is a telling exception to this poor outcome in those economies which removed, or never had, the institutional constraints of concentrated land ownership. They prospered.

The appropriateness of neoclassical labor-capital models to those economies where land, not capital is dominant has not gone unchallenged, though not as yet, explicitly in terms of rent. Recently, there have been attempts to rebuild neoclassical economics to accommodate institutional behavior, and these initiatives are now travelling far back into the root systems of social science, but again without defining property rights in any way immediately useful to third world development.

Development literature suggests that in agrarian societies unearned land rents typically cluster around 50 percent of produce, and that development practice produce a stumbling kind of progress in the midst of increasing poverty. Thus, since development theory contains no radical analysis of rent, it is appropriate to revisit Henry George and to attempt to assess the applicability of his peculiar remedy to the problems of achieving third world growth with equity.

In development economics, progress is regarded as being synonymous with growth, with emphasis upon the accumulation of capital and the efficiency of its use. Poverty is defined absolutely (the International Poverty Line), and relatively (the Gini coefficient). In agrarian economies it is characterized by debt and subsistence living, urban shanty-towns, and migration to them. The prescription for slow growth is capital injection, and the remedies for poverty, arbitrary schemas for meeting basic needs upon which particular capital injections are designed. These often have conflicting objectives and, nearly always, unintended consequences.

This paper redefines growth and poverty as a basis for evaluating development theory and practice, then restates George's remedy in a third world context, and finally describes a computer simulation of responses of the actors involved in alternative development strategies.

II

Development Practice

Development has been defined as the process of improving the quality of all human lives (Todaro 1989:620). After World War II, Bretton Woods and the Marshall Plan removed extreme poverty from war-torn Europe and successfully drove its economic growth for the next 25 years.

These successes resulted in a Western, neoclassical plan, entirely conceived in industrialized, capital-intensive economies being transplanted into agrarian, labor-intensive economies as the West and East initiated massive development programs for the less developed countries (LDCs) later designated as "the third world."

For five decades third world development has consumed far larger resources with far less result than those of the Marshall Plan. Progress, that is to say, per capita economic growth has failed to meet the return on investment expected. Poverty has not been removed. Poverty is actually increasing instead of decreasing (World Bank Development Report, 1988, cited by Todaro 1989: Preface). Inequality has increased.

In the West, growth was doubly convergent - internal incomes became more equal and so did the wealth of nations. But in the third world, growth was doubly divergent. Gaps between rich and poor people widened, and gaps between rich and poor nations widened. Sen (1983: 747,757) confirms divergence and introduces a convergent concept of "entitlements", but without saying much about how they are to be gathered from the rich or delivered to the poor. Ingham (1993: 1805), addressing the puzzle Of divergent growth, sees that "One explanation, consistent with an institutional approach, . . . points to a contrast in the distribution of ownership of land."