Popular economic growth theories
some popular growth theories which are part of Economic growth and development.
Published on: Mar 4, 2016
Transcripts - Popular economic growth theories
Popular Economic Growth
Anmol kumar sharma
Marx Growth model
Marx contributed to the theory of economic
development in three ways
• Providing an economic interpretation of
history and his stages of growth
• Motivating forces of capitalist growth
• Suggesting an alternative path of economic
development via planning
Marx five stages
Marx has analyzed the main stages which have taken place in
human history. According to him, all historical events are
the result of a continuous economic struggle between
different classes in society. According to Marx historically
society has passed through five stages
The theory of surplus value
• The ides of surplus value which is related to capitalism is important
in Marxian theory of economic development
• According to Marx, workers get only a part of the total value of
output and the remaining part of the value goes to the capitalist. It
is this that Marx’s calls,” exploitation of labor”.
• The aim of capitalist is always to increase the surplus value (profit).
The capitalist adopt three methods to increase the surplus value.
First of all, they may increase the working hours of the laborers,
secondly, they may reduce the wages below subsistence level.
However, this is only a temporary measure because lowering of
wages below the subsistence level will adversely affect the labor
force in due course. Improving the productivity of the working class
through improvement in the state of technology is the third method
This theory has been criticized because
1) Surplus value is difficult to understand and
2) Marx belief that in final stage capitalism will
end has not come true. Capitalism has shown
flexibility to survive and still in democratic
set-up wages have increased and working
condition improved of workers
• David Ricardo presented his views on
economic development in his book the
principles of economy and taxation In an
unsystematic manner in 1921. He did not give
any proper theory of development but theory
of distribution. It is based on marginal and
surplus principle the marginal principle
explains share of rent in total output while
rest is divided between wages and profit on
basis of surplus principle
• Land is scarce and fixed in supply
• It is used to produce only corn
• Demand for corn is perfectly elastic
• Perfect competition
• Capital accumulation results from profits
• Technical knowledge is given
• Workers are paid subsistence wage
• In the Ricardian system whole economy is assumed to be a big farm
fixed in supply used to produce one output corn and output is
distributed between landlords, capitalist and workers in form of
rent , wages and profit .
• First rent is given its shares and residual is distributed between
profit and wages while interest is included in profits.
• Process of capital accumulation- capital accumulation is outcome of
profits because profits lead to saving which leads to capital. So long
as rate of profit is positive capital accumulation will continue.
Capital accumulation depends on capacity to save or will to save .As
Ricardo said if I have one two loaves I will save one and if four
loaves I will save three. In reality profits depends on wages on price
of corn and price on productivity of marginal land. If there is more
corn prices will fall and so does the wage and profits will rise and
more capital accumulates.
Dual sector model of Lewis
• The dual-sector model is a model of growth theory. It is commonly known as
the Lewis model after its inventor Sir William Arthur Lewis, winner of the Nobel
Memorial Prize in Economics in 1979. It explains the growth of a developing
economy in terms of a labour transition between two sectors, the capitalist sector
and the subsistence sector.
• Lewis proposed his dual sector development model in 1954.professor Lewis has
developed a very systematic theory of economic development with unlimited
supplies of Labour like the classical economist he believes that in many
underdeveloped an unlimited supply of labour is available at subsistence wage.
Economic development takes place when capital accumulates as a result of the
withdrawal of surplus labour from the subsistence sector to the capitalist sector. It
was based on the assumption that many LDCs had dual economies with both a
traditional agricultural sector and a modern industrial sector. The traditional
agricultural sector was assumed to be of a subsistence nature characterised by low
productivity, low incomes, low savings and considerable underemployment. The
industrial sector was assumed to be technologically advanced with high levels of
investment operating in an urban environment
• The model assumes that a developing economy has a surplus of
unproductive labor in the agricultural sector.
• These workers are attracted to the growing manufacturing sector
where higher wages are offered.
• It also assumes that the wages in the manufacturing sector are
more or less fixed.
• Entrepreneurs in the manufacturing sector make profit because
they charge a price above the fixed wage rate.
• The model assumes that these profits will be reinvested in the
business in the form of fixed capital.
• An advanced manufacturing sector means an economy has moved
from a traditional to an industrialized one.
• the model assumes that there are two sectors the economy
• 1)traditional or agricultural sector 2)modern or industrial sector
• Assumption of constant wage rate is wrong as
wages rise in both subsistence and capital
sector during the growth process
• Mobility of labor is not so easy due to
attachment to native place and other reasons
• Idea of Marginal productivity being zero in
subsistence sector is also rejected by several
Leibenstein critical Minimum effort
• Harvey leibenstein says that in LDC there is
vicious circle of poverty and to break it a
critical minimum effort which is stimulus to
growth in form of investment.
• There are shocks and stimulants. Shocks
reduce growth while stimulants increase it so
critical minimum stimulus should be more
Big push theory
• Rosenstein Rodan gave this theory stating that a
big push or large comprehensive programme is
needed to overcome obstacles to growth.
• Launching a country into self sustaining growth is
a little like an airplane off the ground. There is
critical ground speed which must be passed
before the craft can become airborne.
• Bit by bit moving is not successful there is need of
a one big push otherwise small programmes will
lose their effect.
• Rise in costs due to huge investment is beyond
capabilities of LDC
• Does not explain the whole process of growth
just gives an Idea
• Neglects investment in Agriculture sector
• Huge investment at one go might cause
inflationary tendencies difficult to control
Balanced growth theory
• The doctrine of balanced development has several authors
who interpret in different ways. For some it is investment in
laggard sector to keep it abreast of other sectors and for
some it is simultaneously investing in all sectors of the
economy and for some it means balancing between
agriculture and industrial sector.
• In fine it means simultaneous and harmonious growth of all
sectors of economy so that all sectors grow in unison
• It means growth of economic and social overheads,
agriculture and Industrial sector, capital goods and
consumer goods industry and in all consumer goods
• Rise in costs
• Beyond the capacity of LDC
• Shortage of resources to invest in all sectors
• Ignores planned economy where some sectors
are given priority.
• Capital lumpiness not essential as small projects
could be taken
• Scarcities and bottlenecks encourage growth not
Unbalanced growth theory
• Propounded by Hirchman it says that deliberately
unbalancing the economy according to a pre-
designed strategy is best way to achieve
• Investment should be made in selected sectors
rather than simultaneously in all the sectors. No
UDC possesses capital and other resources to
invest in all sectors at a time.
• Growth from leading to other sectors of economy
one by one.
SOC or DPA
• Unbalancing the economy with SOC ( social
overhead capital) where first investment is first
made in SOC and it encourages private
• Unbalancing the economy with DPA( Directly
productive activities) where Govt. can directly or
indirectly invest in DPA and with time shortage of
SOC will hamper its growth leading to political
pressure to provide infrastructure and other
• However this theory doesn’t explain what kind
of imbalance is to be created and how it is to
be managed by overcoming bottlenecks still it
is best theory for underdeveloped countries
and many countries Like Russia and India have
followed this method by Planning and have
succeeded. It is realistic and various
incentives, obstacles and resistances to
development are studied in proper
Rostow stages of Growth
Professor W.W Rostow has given five stages of
1. The traditional society
2. Pre condtions for take off
3. The take off
4. The drive to maturity
5. Age of mass consumtion
• According to this theory first there is a traditional society
with limited means and then some development takes
place and conditions develop for take off. In take off stage
three conditons are needed
1. Rate of investment over 10% of National income
2. Development of leading sectors. Every country has some
sectors where it has some advantage and it leads to their
3. Cultural framework to exploit Expansion. It is ability to
mobilize large savings out of expanding income for further
investment and utilizing leading sectors to their maximum
level and take most advantage of such growth.
Drive to maturity
• It is period where a society has effectively
applied the range of technology to bulk of its
• It is period of long sustained growth extending
well over four decades.
• New sectors replace old one and the economy
is able to withstand unexpected shocks.
High mass consumption
• The balance of society shifts from supply to
demand. From problems of production to
consumption and welfare in the widest sense.
• Historically U.S was the first to reach the age
of High mass consumption in the 1920’s
followed by Britain in 30’s and Japan in 1950’s
and soviet Union after the death of stalin
Myrdal’s Theory of circular causation
• Professor Gunnar Myrdal maintains that
economic development results in a circular
causation process whereby the rich are awarded
more favours and the efforts those who lag
behind are thwarted.
• In UDC a circular and cumulative process known
as vicious circle of poverty operates downwards
and being unregulated increases inequalities
• The profit motive results in the development of
those regions where expectations of profit are
high while others remain underdeveloped.
Backwash and spread effects
• IN simple terms backwash effects are adverse
effect of economic expansion in one country
on other country or region
• Spread effects are positive effect flowing from
one country or region to another
• The cause of backwardness of developing
countries is strong backwash effect and poor