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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Development theory has not as yet explained the nature of third world capital inefficiency or its relationship to poverty and divergence. All the theories referred to have provided useful insights. Few has been developed outside of the property assumptions of two-factor economic models, none has led to legislation capable of permanently effective implementation, thus none has adequately addressed the problems of low growth, poverty and divergence. The suspicion that these may be connected with patterns of land ownership locally, and articulated with external modes of production such as foreign direct investment (FDI), may be incapable of resolution within theories based on two-factor models of production and distribution.

Astonishingly, failure has not, apparently, led to a critical analysis of these two-factor development models, particularly with respect to the classification of property. For example, private ownership of industrial "property" (capital) in the West appears to have improved both the efficient production and equitable distribution of wealth, whereas private ownership of agrarian "property" (land) in the third world appears to have inhibited both greatly. Marxist theory cannot explain the first, neoclassical theory cannot explain the second.

It is possible that the failure of development theory derives from the accumulated effect of 100 years of emphasis on capital, relatively inappropriate to the third world, the merging of capital and land into property and of interest and rent into profit. For example, in item one of the Communist Manifesto land is clearly differentiated from capital in a three-factor economic model and rent is earmarked for public use. Though the subsequent collapse of the remainder of the manifesto into a two-factor (capital and labor) model has been extensively analyzed, the exclusion of item one has not. Similarly, after J. B. Clark, neo-classical economic theory also adopted a two-factor model, merging land into capital and rent into profit, though not without criticism: "For approximately 100 years Western neoclassical economic thought has developed within the premise that economists could take the social framework, the institutional order, for granted, as something which it was the professional responsibility of someone else to understand" (Parsons 1984: 24).

In conclusion, it appears that no development theory has achieved consensus and none has been clearly vindicated in practice. The classical economists, or political economists, Adam Smith, J. S. Mill, David Ricardo, and Henry George in various ways subscribed to a three-factor development model with concepts and definitions some of which may have become unfamiliar to us. In their model land, labor and capital combine to produce goods and services called wealth and receive in return rent, wages and interest. For them, property in capital was different from property in land. For them, capital was man-made improvements, buildings, factories, inventory, but not land or money. For them, and for the third world now, property in land was important. Their definitions were simple, but appropriate to the third world. They will also serve as appropriate to the construction of rudimentary computer models.