Theorists of Economic Growth from David Hume to the Present: With a Perspective on the Next Century

Theorists o f Economi c Growt h from Davi d Hum e t o the Presen t

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Theorists of Economic Growt h from Davi d Hum e t o the Presen t With a Perspective on the Next Century

W. W . ROSTO W Including a Mathematical Appendix by MICHAEL KENNED Y AN D THE AUTHO R

New Yor k Oxfor d OXFORD UNIVERSIT Y PRESS

Oxford Universit y Pres s Oxford Ne w York Toront o Delhi Bomba y Calcutt a Madra s Karach i Kuala Lumpu r Singapor e Hon g Kon g Toky o Nairobi Da r es Salaam Cap e Tow n Melbourne Aucklan d and associate d companie s i n Berlin Ibada n

Copyright © 199 0 b y Oxford Universit y Press, Inc . First publishe d in 199 0 by Oxford Universit y Press, Inc. , 200 Madison Avenue , New York, New York 1001 6 First issue d a s an Oxfor d Universit y Press paperback , 199 2 Oxford i s a registered trademar k o f Oxford Universit y Pres s All right s reserved. N o par t o f this publication ma y b e reproduced , stored i n a retrieval system , o r transmitted , in any form or b y any means , electronic, mechanical , photocopying , recording , o r otherwise, without the prio r permission of Oxford Universit y Press. Library o f Congress Cataloging-in-Publicatio n Data Rostow, W . W. (Walt Whitman) , 1916- Theorists o f economic growt h fro m Davi d Hum e t o the present : with a perspective o n the next centur y / W. W. Rosto w ; including a mathematical appendi x b y Michae l Kenned y and th e author , p. cm . Bibliography : p. Include s index . ISBN 0-19-505837- 2 ISBN 0-19-508043-2 (PBK ) 1. Economists—History . 2 . Economi c development—History . I. Kennedy , Michael. II . Title . HB75.R6724 199 0 338.9'009—dc20 89-3256 0

2 4 6 8 9 7 5 3 1 Printed i n the Unite d State s o f Americ a on acid-fre e pape r

To th e Economist s o f the Nex t Generation : in the hop e that , withou t abandoning modern tool s of analysis , the y ma y bridg e th e chas m o f 187 0 an d reestablis h continuity wit h th e humane, spacious , principle d traditio n of classica l politica l economy .

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Preface

This i s a book abou t theories o f economi c growt h and the me n an d women wh o formu lated them . I t is also about the vicissitudes of the world economy over the past two and a half centurie s a s they helped shap e those theories. An d it has something t o say about the future—the futur e o f th e worl d economy , o f politica l economy , an d o f publi c policy . Thus, i t begins in the middle of the eighteenth centur y with David Hume and ends with a look int o th e nex t century . The first three parts discuss chronologically the contributions of the major thinkers who have shaped the evolution of theories o f economic growth . The fourth part assesses some unresolved question s i n growt h theor y an d set s ou t a polic y agend a tha t wil l no t onl y determine th e course of the world economy but also will influence profoundly the issue of war o r peace i n the severa l generation s ahead . A n introductory chapte r provide s a more detailed overvie w of the book and an exposition of the analytic approach brough t to bear. This boo k wa s writte n with a n acut e sens e o f th e dange r of th e undertaking . Fo r a n economist, a revie w o f th e wor k o f som e o f hi s mos t distinguishe d predecessors an d contemporaries i s an engaging exercise . Th e tas k proved s o seductive t o Joseph Schum peter that he never got around to the synthesis of dynamic economics he had in mind when he began what proved t o be nine years of labor on his History o f Economic Analysis. Eve n at that, th e historical sectio n of the book wa s uncompleted whe n he died. My purpose i n entering thi s beguilin g bu t somewha t treacherou s terrai n is , a t once , narrowe r tha n Schumpeter's an d wider. It deals with fewer economists, but more economic history, an d with som e majo r presen t an d foreseeabl e issue s o f public policy, a s well . I had long been plannin g a final, substantia l work on economic growth , but the proximate impetu s to begin an d the ultimate structure of the book wer e affected b y an experience that may be worth recording. I t runs counter to a view held by many in the academic world tha t undergraduat e teachin g an d researc h ar e competin g rathe r tha n mutuall y reinforcing. During th e academi c yea r 1983-8 4 I wa s invite d to teac h a n upper-leve l semina r i n Plan I I a t th e Universit y o f Texas . Pla n I I i s a vita l libera l art s enclave—som e 60 0 extremely talente d undergraduat e students in a university of more tha n 45,000—granted great flexibility bu t held to rigorous standards. I was asked to teach on a topic of my own choice. I n a lighthearted mood , I created a course entitle d "Historica l Insight s int o the Present Stat e o f th e Worl d Economy. " I buil t th e cours e aroun d th e followin g fiv e questions: 1. Ar e w e i n the second , third , fourth, o r fift h Industria l Revolution? 2. Ar e w e i n th e Fift h Kondratief f Upswing or Fourt h Kondratieff Downswing ? 3. Wil l the ga p between th e ric h and the poo r nation s narrow or widen?

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4. Wil l tha t ol d devi l Diminishin g Returns get u s i n the end ? 5. Th e quantit y theory o f money : philosopher' s ston e o r misleadin g tautology ? Each questio n wa s deal t wit h o n a triangular basis: relevan t economic theory , historica l background, an d the current scene . Wit h respec t t o the quantity theory, fo r example, th e students rea d som e Ricard o an d Tooke , Friedma n an d Rostow ; examine d th e swee p o f historical price , interes t rate , an d monetary trends; and then looked a t the curious going s on i n th e worl d econom y sinc e Bretto n Wood s wa s abandone d i n 1971 . The course turned out to be a lively, cheerful exercise . Th e experience als o drove hom e certain proposition s tha t helped t o shap e thi s book. First , th e extent t o whic h economi c theories ar e relate d t o th e tim e an d plac e wher e the y ar e firs t formulated . Second , th e Faustian Bargain—t o stea l a phras e fro m Davi d Landes—mad e b y mos t mainstrea m economists after 187 0 in which they traded away their capacity to deal endogenously with technological change a s well as with the noneconomic dimension s of economic growth for the illusory elegance o f partial and general equilibrium analysis. Third, th e centrality and the wide-rangin g consequences—economic an d noneconomic—of th e process b y which latecomers t o economic growt h catch up with early comers. Thi s proposition yield s an odd result in the book's final chapter. Davi d Hume is judged to have articulated better than any of hi s successor s th e proble m likel y t o dominat e th e worl d scen e ove r th e nex t severa l generations; tha t is , th e completio n o f the drive to technological maturit y by wha t I call the Fourt h Graduatin g Class . (Se e Figur e 19.1 , p. 446. ) Reflecting on the palpable challenges posed by the world economy over the next several generations, I became increasingl y concerned wit h the poverty and substantial irrelevance of how w e now teach economic s t o the young . On e purpose o f this book i s to suggest t o the next generation o f economists an d economic historian s how rich a heritage lies behind them an d ho w muc h wa s los t whe n mainstrea m economic s abandone d th e spaciou s tradition o f classica l politica l economy . Thu s th e dedication. One furthe r wor d abou t thos e who , fro m Davi d Hum e t o th e present , concerne d themselves wit h growth theory . I n writin g this book I made a list of quotations tha t ha d impressed me in the course of this enterprise. Reviewin g that list at the end, I stopped with this statement o f Davi'' Ricardo's : "[T]h e friends o f humanity cannot but wish that in all countries the labouring classes shoul d have a taste for comforts and enjoyments, and they should be stimulated by all legal means in their exertions to procure them. There cannot be a better security against a superabundant population." By and large, the men and women who mov e acros s thi s stag e wer e drive n less b y Stephen Leacock' s paraphras e o f Ada m Smith* ("[S]elfishness wa s bound to pay, o f all your doctrine that was the pith, wasn'tit, wasn't it , wasn' t it , Smith?" ) tha n b y th e openin g sentenc e o f Th e Theory o f Moral Sentiments: "Ho w selfis h soeve r ma n ma y be supposed , ther e ar e evidently som e prin ciples in his nature, which interest him in the fortune of others, an d render their happines s necessary t o him , thoug h he derive s nothin g fro m it , excep t th e pleasure o f seein g it. " Taken as a whole, theorist s o f economic growt h over these two and a half centuries belong among "th e friend s of humanity. " In writin g this book I incurred many debts to colleagues. I n large ways and small, the y turned fro m thei r ow n wor k t o help : Mose s Abramovitz , Lorin g Allen , Franci s Bator , William J . Baumol , Fran k D . Bean , Woodro w W . Bledsoe , Herber t Block , Arthu r F . Burns, Alexande r Cairncross, Robert L . Causey , Sukhamo y Chakravarty, Hollis Chenery, Coli n Clark , Harr y Cleaver , A . W . Coats , Solomo n Fabricant , C . H . Feinstein , *Hellements o f Hickonomics (Ne w York: Dodd , Mead , 1936) .

Prefacei

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James S . Fishkin , James K . Galbraith , Vincent Geraci, Willia m P. Glade , Sau l Eduard o Gonzalez, Ronal d Haymen, Samue l Hollander, Istva n Hont, F. Tomasson Jannuzi , Nicholas Kaldor, Davi d Kendrick , Michael Kennedy , Sophie Kim , Charles P . Kindleberger , George Kozmetsky, Edit h Kuznets , Douglas Lanat , Davi d Landes, Brac e Larson , Leo n S. Lasdon, W . Arthu r Lewis, Han s Mark, Edward S. Mason, Standis h Meacham, Geral d Meier, Yugandha r Ra j Nallari , Dunca n Newton , Fran z Oppenheimer , Dwigh t Perkins , Nicholas T . Phillipson , Dudle y L . Poston , Joh n M. Robson , Pau l M . Romer , Natha n Rosenberg, Henr y Rosovsky, Elspet h D . Rostow , Eugene V . Rostow , Victori a Rostow , Carl Rubino, Zhang Ruizhaung, Paul A. Samuelson , Thomas K . Seung , Claudia Siegel, David L . Sills , Raymon d W . Srnilor , Rober t Solow , Henr y V . Spiegel , Dougla s S . Tharp, Ste n Thore , Joh n K . Whitaker , Jeffre y G . Williamson , She n Xiaoli , an d Pete r Yelovich. The followin g provide d invaluabl e detailed observation s o n particula r section s o f th e draft text : Messrs . Abramovitz , Baumol , Cairncross , Cleaver , Coats , Hollander , Gal braith, Kendrick , Kennedy , Kindleberger , Robson , Spiegel , an d Whitaker. Loring Allen an d Bruc e Larso n graciousl y mad e availabl e befor e publicatio n manu scripts o f thei r wor k o n Schumpete r an d Bickerdike , respectively . The Swedis h Embass y i n Washington went to extraordinary lengths to track dow n a n obscure, bu t necessary , piec e o f information. Mrs. Micke y Russell typed the various drafts, ra n down innumerable books and journal articles i n the University of Texas library ; but also spotte d relevan t materials o n her ow n that enriche d th e text. Timothy Martin , a s manage r o f Projec t Mulhall— a computerize d economi c histor y data base—produce d a good man y usefu l table s an d charts . Victor Hause r labore d o n th e reader' s behal f wit h extraordinar y devotio n t o correc t minor error s an d inconsistencie s i n the printe d text. Lois Nivens , my assistant in all manner of adventures since January 1961, coordinate d the variou s facet s o f th e projec t and , a s always , serve d a s a meticulous editor . The Administration of the University of Texas made possible the valuable collaboratio n of Michael Kenned y in the appendix. IC 2 Institute—a research institut e of the University, of whic h I am a Fellow—generously supporte d th e stud y with research assistanc e and in other importan t ways . I wish , i n particular , t o than k Gerhar d Fonken , Rober t King , George Kozmetsky , an d Willia m Livingston , a s wel l a s th e authoritie s at RAN D wh o permitted Kenned y t o diver t a part o f hi s tim e fro m othe r responsibilities. My editors a t Oxford University Press—Herbert J . Addiso n and Ann Fishman—were, simply, the ablest and most congenial I have encountered i n publishing some thirty books. Although she no doubt often fel t I was bringing home an endless parade of professional colleagues—starting wit h David Hume—m y wife , Elspet h Davie s Rostow , backe d th e enterprise wit h amuse d enthusias m an d wa s a t onc e m y mos t unsparin g and mos t con structive critic , a s sh e ha s bee n lo r gettin g on t o a half century. Austin, Texas W

. W. R.

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Contents

Figures, xvi i Tables, xi x 1 Introductio n 3 Purpose, 3 Th e Structur e o f th e Book , 3 Th e Analyti c Perspec tive, 4 Th e Lin k t o Economi c History , 7 Personalities : D o The y Matter? 9

PART I SI X CLASSICA L ECONOMISTS : DAVI D HUME T O KAR L MARX 2 Davi d Hum e an d Ada m Smit h 1 3 The Setting , 1 3 Davi d Hum e (1711-1776) , 1 8 Th e Basi c Growt h Equation, 2 1 Populatio n and the Working Force, 2 4 Investmen t and Technology, 2 4 Busines s Cycles , 2 5 Relativ e Prices , 2 5 Th e Stages o f an d Limit s t o Growth , 2 6 Noneconomi c Factors , 3 1 Adam Smit h (1723-1790) , 3 3 Basi c Growt h Equation , 3 5 Pop ulation an d th e Workin g Force , 3 6 Investmen t an d Technology , 3 9 Business Cycles, 4 1 Relativ e Prices, 42 Th e Stages of and Limits to Growth, 4 4 Noneconomi c Factors , 4 7

3 T . R . Malthu s an d Davi d Ricard o 5 1 T. R . Malthu s (1766-1834) , 5 1 Th e Basi c Growt h Equation , 5 5 Population an d th e Workin g Force , 5 6 Investmen t an d Technology , 5 8 Business Cycles, 6 3 Relativ e Prices, 6 5 Th e Stages o f and Limits to Growth, 6 9 Noneconomi c Factors, 71 Davi d Ricardo (1772-1823), 73 Th e Basi c Growt h Equation , 7 7 Populatio n an d th e Workin g Force, 7 9 Investmen t an d Technology , 8 0 Busines s Cycles , 8 4 Relative Prices , 8 6 Th e Stage s o f an d Limit s t o Growth , 8 7 Non economic Factors , 9 0

4 J . S . Mil l an d Kar l Mar x 9 1 John Stuar t Mil l (1806-1873) , 9 1 Th e Basi c Growt h Equation , 9 8 Population an d th e Workin g Force , 10 0 Investmen t an d Technology , 103 Busines s Cycles , 10 8 Relativ e Prices , 11 2 Stage s o f an d Limits t o Growth , 11 3 Noneconomi c Factors , 11 7 Kar l Mar x

xii

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(1818-1883), 12 1 Th e Basic Growth Equation, 12 5 Populatio n an d the Workin g Force, 12 8 Investmen t and Technology , 13 4 Busines s Cycles, 13 8 Relativ e Prices , 14 1 Stage s o f an d Limit s t o Growth , 142 Noneconomi c Factors , 14 6 PART I I GROWT H THEOR Y MOVE S T O TH E PERIPHERY , 1870-193 9

5 Th e Settin g 15 3 6 Alfre d Marshal l (1842-1924 ) 16 0 The Basi c Growt h Equation , 16 4 Populatio n an d th e Workin g Force , 168 Capita l an d Technology , 17 0 Busines s Cycles , 17 3 Rela tive Prices, 18 1 Stage s of and Limits to Growth, 18 4 Noneconomi c Factors, 18 9 7 Population an d th e Workin g Force 19 4 The Statistica l Analysi s o f Population , 19 4 Populatio n an d Growt h Theory: Advance d Industria l Countries , 19 6 1 . A . Marshall , 20 3 2. J. B. Clark, 203 3 . G. Cassel, 20 4 Populatio n and Development , 205 A n Interi m Conclusion, 208 8 Investmen t an d Technology , Par t One : The Emergenc e o f National Income Accountin g 20 9 The Statisticians Blow Their Trumpets—Again, 20 9 Th e British Story: From Willia m Pett y t o Richar d Stone , 21 0 C . K . Hobso n an d Pau l Douglas, 21 5 Th e America n Story : Fro m Georg e Tucke r t o Simo n Kuznets, 21 6

9 Investmen t an d Technology , Par t Two : Growth Theor y 22 3 Defending th e Legitimac y o f Interest : E . Bohm-Bawerk , 22 4 Th e In terest Rat e an d Pric e Trends : Fishe r an d Wicksell , 22 5 Th e Transfe r Problem: William s and Cairncross , 22 9 Technolog y and Growth: J. A . Schumpeter an d the early Simon Kuznets, 233 Tw o Unorthodox Views: Henry Adams and Thorstein Veblen , 246 Forma l Growth Models: Bick erdike (1876-1961 ) and Harrod (1900-1978) , 24 8

10 Busines s Cycle s an d Growth : Fro m Jugla r to Keyne s 25 8 Juglar an d Som e Othe r Continentals , 25 9 Thre e Cambridg e Giants , 263 D . H . Robertson (1890-1963) , 263 A . C. Pigou (1877-1959), 269 11 Busines s Cycle s an d Growth : Keynes an d Afte r 27 2 J. M . Keynes , 27 2 W . C . Mitchell , 28 2 Som e o f Mitchell' s Progeny, 28 8 Alvi n Hansen an d th e Youn g Paul Samuelson , 29 6 Th e Emergence o f Econometrics : Frisc h and Tinbergen , 299 12 Relativ e Price s 30 2 British Anxiet y abou t Unfavorabl e Term s o f Trade : 1903-1919 , 30 2 Keynes an d Robertso n o n th e Interwa r Terms o f Trade : U n Embarras d e

Contents xii

i Richesse, 30 4 Thre e Longe r Perspectives : N . D . Kondratieff , Coli n Clark an d F . Hilgerdt , 30 6 A Conclusion , 31 1

13 Stage s o f an d Limit s t o Growt h 31 2 Colin Clark' s Th e Conditions o f Economic Progress, 313 Anstey , Tawney, and Knowles ,315 Walthe r Hoffmann ,318 Folk e Hilgerdt ,319 Reflections o n th e Limit s t o Growth : Hanse n vs Schumpeter , 32 1 Tw o Perspectives o n 1870-1939 : A Cod a fo r Par t Two , 32 5

PART II I GROWT H ANALYSI S POST-1945 : A THREE-RING CIRCU S 14 Introductio n 32 9 15 Forma l Model s o f Economic Growth: Ris e an d Subsidenc e 33 2 A Half-Serious Statistica l Note, 33 2 Growt h Models i n Three Phase s of the Worl d Economy , 33 3 Growt h Models : Variation s on a Them e b y Harrod-Domar, 33 4 1 . Harrod-Doma r o n th e Edg e o f th e Abyss , 334 2 . Neo-Classica l Growth : Stabilit y vi a Facto r Substitution , 33 5 3. A Cambridge (England ) Response t o Neo-Classical Growt h Models : Sta bility vi a Change s i n Incom e Distributio n an d th e Saving/Consumptio n Ratio, 33 5 4 . Invention , Innovation , Technolog y i n Growth Modeling , 336 N . Kaldor , 33 7 Joa n Robinson , 33 9 Solo w Incorporate s the Demographi c Transition , 34 1 Investmen t an d Technology : Th e Charles Kennedy-Pau l Samuelso n Debat e an d Som e Uneas y Asides , 34 2 Growth an d Busines s Cycles : Fiv e Effort s t o G o Beyon d th e Main stream Consensus , 34 3 1 . I. R . Hicks , 34 3 2 . Alvi n Hansen , 34 6 3. James Duesenberry, 34 6 4 . R. C. O. Matthews, 347 5 . Burns and Mitchell, 34 9 A Conclusion , 35 0

16 Statistica l Analyses o f th e Structur e o f Growth : Fro m Morpholog y to Policy—Almos t 35 2 A. Th e Grea t Enterpris e o f Simon Kuznets , 352 B . Chener y et al., 35 5 C. Th e Sectora l Planners , 35 9 A Conclusion , 36 2 Basi c Growt h Equation, 36 2 Populatio n an d th e Workin g Force , 36 2 Invest ment an d Technology , 36 3 Busines s Cycle s an d Relativ e Prices , 36 5 The Stage s o f an d Limit s t o Growth , 36 5 Noneconomi c Factors , 36 8 Growth Accounting : Edwar d Denison , 36 9 A Reflection , 37 1

17 Developmen t Economics 373 Six Phase s i n Developmen t an d Development Policy , 37 4 (A . Wartim e planning fo r th e postwar , 37 4 B . Th e hing e period , 1948-1949 , 37 5 C. The great debate, 1950-1961 , 377 D . The 1960s: activism, progress , and disappointment , 378 E . Th e 1970s : intellectual and political revolt, 378 F . The 1980s : a time o f troubles, 380) Developmen t Pioneers , 381 P . T . Bauer , 38 5 Coli n Clark , 38 7 Alber t Hirschman , 39 0 W. Arthu r Lewis, 392 Gunna r Myrdal, 399 Rau l Prebisch , 40 3 Pau l

xiv Contents N. Rosenstein-Rodan , 40 8 H . W . Singer , 41 1 Ja n Tinbergen, 41 4 Two Conclusions about Development Policy: Time an d Politics, 41 8 18 Rostow' s Theor y o f Economi c Growt h 428 Presuppositions, 42 8 People , Complexity , an d Process, 42 8 A Dynamic Disaggregated Theor y of Production, 429 Th e Emergence o f The Stages o f Economic Growth, 43 1 Stage s Beyon d Take-off, 43 2 Th e Stages o f Economic Growth a s see n b y th e Author , 43 3 Th e Debate , 434 Application s i n th e 1950s : Developmen t Policy, 43 6 Applica tions in the 1950s : War and Peace, 43 8 Fiv e Applications for the 1980 s and Beyond , 44 0 PART I V PROBLEM S AN D PROSPECT S 19 Tw o Concluding Questions 445

20 Wha t Don't W e Know Abou t Economic Growth? 450 Population an d th e Workin g Force , 45 0 Technolog y an d Investment , 451 Relativ e Prices : Hav e Kondratief f Cycle s Passe d int o History? , 470 Growt h an d Busines s Cycles , 47 7 Th e Stage s o f Economi c Growth, 47 9 Noneconomi c Factors , 48 0 Th e Appropriat e Rol e o f Public Policy , 48 3 Th e Individua l and Society , 48 4 21 Wher e Ar e We ? An Agend a in Mid-Passag e 48 6 The Firs t Tak e Off : The Entranc e int o Moder n Economi c Growth , 48 6 The Fourth Graduating Class: The Central Phenomenon i n the Time Ahead , 487 Ho w Far Through the Transformation Are We?, 490 Fiv e Great Issues of Policy, 495 Th e Short Run and Long Run, 501 A Conclusion: "Al l on a Razor's Edg e It Stands , Eithe r Woeful Rui n or Life, " 504

APPENDIX: MODELS O F ECONOMIC GROWTH. 507 MICHAEL KENNED Y AN D W . W . ROSTO W

Prefatory Not e (WWR), 507 Introduction , 507 PAR T I. A ONE-SECTOR ADA M SMIT H MODE L O F GROWTH , 50 8 A Verba l Account , 50 8 Formal Exposition , 51 1 PAR T II . THRE E MODEL S O F ECONOMI C GROWTH COMPARED , 52 6 Introduction , 52 6 Economi c Frame work of the Models, 528 A . The Neoclassical Model , 532 Assump tions, 53 2 B . Th e Rosto w Model , 54 1 Specia l Characteristics , 541 Investmen t as a Function of Profit, 54 3 Resourc e Cost of Technical Advance , 54 6 Th e Rol e o f Industria l (or Technological ) Revolu tions, 54 8 Th e Demographi c Transition , 55 0 Th e Rosto w Mode l Integrated, 55 2 Th e Kondratieff Cycle Added, 552 C . The A. Smith Model Revisited , 55 2 Th e Multisecto r Framework , 55 2 Method , 554 Labor , 55 4 Capita l Stock , 55 4 Land , 55 5 Technolog ical Progress , 55 5 Manipulatio n o f th e Model , 55 6 Conclusion : Three Necessar y Condition s fo r Sustaine d Growth , 56 1 PAR T III.

Contents x

v A RIC H COUNTRY-POO R COUNTR Y MODEL , 56 2 Th e Framework , 564 A Stati c Solution , 56 6 Thre e Dynami c Solutions, 56 8

Notes, 57 1 Author Index , 68 3 Subject Index , 68 9

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Figures

FIGURE

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PART I 2.1 Th e Numbe r o f Me n i n th e Arme d Forces, 1700-180 0 2 2.2 Ne t Exports o f Wheat (Includin g Flour): Ne t Imports (- ) 2

0 1

3.1 Gazett e Pric e o f Wheat , 1790-185 0 5 3.2 Busines s Cycl e Pattern , Grea t Britain , 1790-185 0 5 3.3 Indexe s o f Agricultura l and Industria l Prices: Grea t Britai n 1790-182 0 (1790=100) 6 4.1 Adul t Mal e Averag e Full-tim e Earnings for Selecte d Group s of Workers, 1755-1851, a t Constan t Prices 13

4 5

4.2 Rea l Wages : Grea t Britain , France , an d th e Unite d States, 1840-188 0 (1850=100) 13 4.3 Compariso n o f Mone y Wages , Cos t o f Living , an d Rea l Wages : London Artisans, 1790-185 0 13

6 2 3 4

PART I I 5.1 Th e Inter-Wa r Discontinuity : British Historical Data , 1870-193 9 15 7.1 Th e Demographi c Transition : Abstract (Th e Modern Cycle ) 20 7.2 Th e Demographi c Transition , A Cross-sectiona l Vie w (1950-1970): Birt h and Death Rate s pe r Thousand ; GN P pe r Capit a 20

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11.1 Relativ e Productio n o f Pi g Iro n i n th e Unite d States , Unite d Kingdom, France , and Germany , 1890-190 9 28

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11.2 Median s o f Trend-Cycle s o f Severa l Group s o f Productio n Serie s 28 11.3 Cycle s o f Dispersio n o f Decad e Rate s o f Productio n Serie s Compare d wit h Standard Trend-Cycl e 29 12.1 Inde x Number s of Commodit y Prices , 1780-1922 : England , United States, and Franc e (1901-191 0 = 100 ) 30 12.2 Relativ e Price s Movement s an d Worl d Trade , 1876-188 0 t o 197 2 30 12.3 Th e Relationshi p Between th e Britis h Terms o f Trade an d th e U.S. Agricultural Parit y Rati o 31 PART III 15.1 Bibliographica l References t o Formal'Growt h Models : 1936-197 3 33 15.2 Incom e pe r Capit a and th e Rat e o f Populatio n Increase 34 15.3 Abstrac t Cycle wit h Constan t Rate o f Growt h o f Autonomou s Investment 34 15.4 Abstrac t Cycle wit h Discontinuou s Autonomous Investmen t 34 18.1 Annua l GNP Growt h Rates ove r Time i n Three System s 43

9 1

9 0 7 9 0 3 1 4 5 5

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Figures

PART I V 19.1 Fou r Graduatin g Classe s int o Takeoff : Stage s o f Economic Growth , Twenty Countries 44 20.1 Demographi c Transition . Scatte r fo r Birt h Rate i n Seventy-Six. Countries, 196 5 45 20.2 Grea t Britain , 1700-1972 : Relativ e Growt h Rates—Major Sector s an d Industrial Productio n (Smoothed ) 46 20.3 Plasti c Patents , Papers , an d U.S. Production (1907-1980 ) 46 20.4 Lif e Cycl e o f Polymer Chemistr y an d th e Numbe r of Polyme r Chemistr y Departments i n th e Japanes e Universitie s 46 20.5 Relativ e Prices , 1951-198 2 47 20.6 Worl d Whea t an d Ric e Prices , 1960-197 3 47 20.7 Pe r Capit a Grai n Productio n i n Africa an d Latin America , 1950-198 6 47

6 2 0 1 2 2 4 5

Tables

TITLE PAG

PARTI When Thei r Vision s Took Shap e 8 1.1 Scottis h Economi c Data , 1750-177 4 2 2.2 Grea t Britain : Trade i n Wheat , 1750-178 9 3 3.1 Inde x Numbe r o f Pric e o f Wheat : 1695-180 5 5 4.1 Selecte d Commodit y Pric e Movements : Grea t Britain , 1823-182 6 11 4.2 Trend s i n Rea l Adult-mal e Full-Tim e Earning s fo r Selecte d Group s o f Workers, 1755-1851(1851 =100) 13 PART I I 5.1 Socia l Servic e Expenditure s 1890-1932 : U.S. , U.K., Germany 15 5.2 Fiv e Majo r School s o f Economist s 15 6.1 Averag e Rea l an d Nomina l Wage s in th e Unite d Kingdom , Franc e an d th e United State s a s percentages o f thos e i n 189 1 18 7.1 Factor s Influencin g the Rea l Nationa l Income pe r Perso n Employe d (Reddaway ) 19 7.2 Ne t Reproductio n Rates , Selecte d Advance d Industria l Countries: 1935-1939 , 1955-1959, an d Latest Figur e 20 7.3 U.S . Population Increase : b y Decade s 20 11.1 Period s o f Rapi d an d Slo w Growth : Unite d States 1875-192 9 28 11.2 Individua l Manufacturing Industries, U.S. 1899-1937 29 11.3 Hansen' s Classificatio n o f Busines s Cycl e Theorie s 29 12.1 Term s o f Trade : Unite d Kingdom , 1913-193 8 30 12.2 Worl d Trade in 1935 , in Old U.S . Gold Dollar s (billions ) 310 PART II I 16.1 Simulatio n of Structura l Change ove r th e Transformatio n 36 16.2 Incom e Level s an d Growt h Rates , 1960-197 0 36 16.3 Annua l Average Growt h Rates Pe r Capita GDP , 1960-1973 36 16.4 Unite d States: Contributio n to 1929-8 2 Growt h Rate s 37 17.1 Averag e Performanc e o f Industria l an d Developin g Countries , 1965-8 5 38 17.2 Growt h o f GD P pe r capita , 1965-8 5 38 17.3 Secondar y an d Highe r Education in Developin g Countries 38 17.4 Chang e i n trad e i n developin g countries, 1965-8 5 38 17.5 Nin e "Pioneer s o f Development " 38

E

8 6 4 0 1 7 7 3 9 0 1 9 5 7 7

0 4 4 0 1 2 2 3 4

xx Tables 17.6 Type s of Developmen t Theorie s (Streeten ) 41 17.7 Outlin e o f Strategy : Sout h Korea , 1960s-1980 s 40 PART I V 19.1 Pe r Capit a Growt h Rates : Take-of f t o 1967 : Fourteen Countrie s 44 20.1 Approximat e Timin g o f Leadin g Sectors : Grea t Britain , 1783-197 2 45 20.2 Change s i n Total Output , Employment , Outpu t Per Head , an d Prices : Unite d Kingdom 1924-5 0 46 20.3 Change s i n Share s o f Branche s o f Manufacturin g i n Outpu t an d Capita l o f Total Manufacturing: U.S. , 1880-1948 46 20.4 Changin g Patter n o f Worl d Grain i n Trad e 47 20.5 Shor t Interval s of Disproportionat e Pric e Increase : Grea t Britain , 1793-191 3 47 20.6 Inde x o f Worl d Foo d Security , 1960-198 6 47 21.1 Proportion s o f GD P i n Industry and Manufacturin g b y Stages : Worl d Bank Categories, 198 5 48 21.2 Numbe r Enrolled i n Schoo l a s Percentag e o f Ag e Group , b y Stages : Worl d Bank Categories 196 5 and 198 4 48 21.3 Estimat e o f Populatio n an d Percentag e Distributio n b y Regio n an d Incom e Group, 1980-210 0 49 21.4 Estimat e o f Annua l Population Increase an d Growt h Rate s b y Regio n an d Income Group , 1980-210 0 49 21.5 Rea l Pe r Capit a Incom e Projected : Rich , Middling , and Poo r Countrie s 49 21.6 Rea l GN P Growt h i n Developin g Countrie s [Averag e annua l percent change ] 50 NOTES N.I Movemen t o f Majo r Variable s U.K. , 1868-1873 61 N.2 Th e Accumulation s per U.S . Inhabitant in Thirt y Years (Mulhall ) 61 N.3 Distributio n of Investmen t i n Underdevelope d (A ) an d Develope d (B ) Countrie s 66 N.4 Standar d Solutio n to Cross-Countr y Model Incom e Leve l 5 66 N.5 Standar d Solutio n t o Cross-Countr y Mode l Incom e Leve l 1 66 N.6 Developin g Countr y Scienc e an d Technolog y Capabilities , 198 4 67 N.7 Retaine d Profi t plu s Depreciation a s Percentag e o f Gross Pla n an d Equipment Expenditure 67 N.8 Annua l Average Growt h Rate s o f Output , Capita l an d Labor : Japan , 1960-197 1 67

8 1 7 9 7 8 1 2 4 8 9 1 2 4 2 0 9 1 2 3 5 6 7

Theorists of Economi c Growt h from Davi d Hum e t o th e Presen t

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1 Introduction

Purpose The purpos e o f this study is to explore ho w a sequence of growth theorists, beginning in the middle o f the eighteenth century and stretching up to the present day, chose to deal (or not deal) wit h an array of variables and problems that are, in my view, inevitably posed by the dynamics of economic growth . The book discusses the ideas of many economists wit h all the sympathetic understandin g I can muster. But I have not tried to hide my own views along th e way. The reader shoul d be aware of some of these views at the outset, and I will have something to say about them later in this chapter an d in Chapter 18 . First, however , it ma y b e usefu l t o provid e a n overvie w o f the book a s a kind o f road map .

The Structure of the Book Parts I , II , an d II I surve y growt h theor y fro m th e mid-eighteent h centur y to the 1980s . Part I V conclude s th e boo k b y takin g stoc k o f wha t I judge t o b e th e majo r unsolve d problems o f growth theory and then looks broadly at the prospects and problems of growth itself ove r th e nex t severa l generation s an d the choices they presen t t o governments an d citizens. Each o f the firs t thre e parts is organized b y a set of questions posed o f growth theorists that I will describe late r in this chapter. Thes e questions provide a n important element o f continuity to the analysis in the three historical sections . But these parts are organized in strikingly differen t ways , an d th e difference s wer e impose d b y th e evolutio n o f growt h theory itself . Part I argues that there i s unmistakable continuity in the century beginning with David Hume an d Ada m Smit h an d endin g wit h J . S . Mil l an d Kar l Marx : continuit y i n th e questions posed , th e concepts an d methods applied , an d a consciousness tha t economist s were working within an evolving tradition. This holds even for Marx, despite his compul sion t o shap e histor y i n anothe r direction . Abov e all , fo r ou r purposes , the y al l placed growth a t th e cente r o f thei r analyses ; and the y al l understoo d that th e performanc e of economies wa s inextricabl y bound u p wit h th e characte r of th e societie s o f whic h they were a part. Ther e wer e a good man y more character s I migh t have brough t on stag e i n both th e eighteent h an d nineteent h centuries, i n Franc e a s well a s Britain ; and th e stor y

4 Introduction might wel l have been pushe d bac k to some of the seventeenth-century founders of politi cal arithmeti c t o who m I onl y briefl y refer . Bu t I conclude d tha t th e essentia l point s 1 wished t o mak e woul d emerg e i f 1 dealt wit h th e si x figure s whos e growt h analyse s constitute th e subjec t of Par t I . The problem fro m 187 0 t o 193 9 impart s a quite different structure to Part II . Ther e is , in th e broa d classica l sense , onl y on e majo r growt h economis t i n thi s period , an d m y designation ma y surprise some: Alfred Marshall. There ar e a few others wh o took growth (or aspects o f growth) seriously : Schumpeter, Coli n Clark, Kuznets , Walther Hoffmann , and, a t the end—an d afte r a curious fashion—Ro y Harrod . Bu t ther e ar e a grea t man y who, a s a byproduct o f othe r concerns , ha d somethin g of interest to sa y abou t economi c growth. T o brin g som e sor t o f order t o a consideration o f thei r obliqu e contributions , I finally fel l bac k o n th e basi c matri x use d t o bin d thi s boo k int o a reasonabl y coheren t structure. Thu s afte r th e lengthy consideration o f Marshall as a growth economist (Chap ter 6), w e move forward under the familiar headings of population and the working force , investment an d technology , busines s cycles , an d s o on . The proble m i n Par t II I (1939-1988 ) is , again , quit e distinctiv e but muc h easie r t o resolve. Ou t of clearl y identifiable pre-1939 origins, thre e virtually independent type s o f growth analysis emerge afte r 1945 : neo-Keynesia n growth modeling derived proximatel y from Ro y Harrod' s work , wit h antecedents , i n turn , trace d ou t i n Par t II ; statistica l analyses o f growt h pattern s i n whic h Coli n Clar k wa s unambiguously the grea t pioneer ; and th e analysi s o f an d prescriptio n fo r developin g countries , wher e ther e i s n o singl e pioneering figur e but antecedents fro m Hum e and Adam Smith through J. S . Mill to Vera Anstey and R. H . Tawney . Thus, th e tripartite structure for Part III was quite natural. The problem wa s that each rin g of the circus was , fo r a time, ver y crowded indeed . Th e task was to try to capture an d assess th e mai n strands o f thought without excessive cluttering. Readers wil l hav e t o judge fo r themselve s ho w wel l th e balanc e wa s struck . In Par t I V th e closin g chapter s ar e addresse d t o certai n unsolve d problem s i n th e analysis of growth (Chapter 20 ) and to the challenges an d opportunities that the processes of growt h i n th e worl d econom y ar e likel y t o plac e o n th e globa l agend a dow n t o th e middle o f th e nex t centur y (Chapte r 21) . Th e mathematica l appendi x wa s develope d jointly wit h Michael Kennedy , bu t th e mathematical expositio n wa s execute d wholl y by him. I t permits ke y proposition s tha t shap e this volume to be examined i n sharp focus — though, a s wit h mos t suc h analyses , a t a hig h cos t i n oversimplification . Despit e th e severe limitation of mathematics as a language in economics, we regard this appendix a s a useful supplemen t t o th e book .

The Analytic Perspective I woul d underlin e thre e limitation s in thi s expositio n tha t distinguis h i t fro m a conven tional history of economic doctrine . First , the economists dealt with are a highly selectiv e group. I n a narrow analyti c effor t o f this kind , there i s clearly n o need t o be exhaustive. Second, th e shar p focu s o n th e proble m o f economi c growt h mean s tha t man y othe r aspects o f the wor k o f the economists discussed are se t aside. Fo r example, of the seven striking contribution s to knowledg e Keynes (wit h Edgeworth' s assistance ) attributed to Marshall, there is hardly reference to five o f his innovations. O n the other hand, Marshall emerges i n Chapter 6 as a major growt h theorist. Finally, even with respec t to theories of

Introduction 5

growth, th e purpose her e i s primarily to indicat e the variable s and problems economist s found mos t relevant , rathe r than to presen t a full expositio n o f their view s o n economi c growth. Fro m th e rather specia l perspectiv e o f this review, I am more intereste d in eac h economist's angle of vision than the substance or provenance of their doctrine, or, indeed , in whether I judge their views to have been, i n some sense , correc t o r flawed; althoug h a certain amoun t of debate with one's intellectual ancestors and contemporaries i s inevitable in a n enterpris e o f thi s kind. Wherever possible , I pose a uniform sequence of questions to these theorists an d their propositions: • Wer e their views framed by or related t o a definable, reasonably explicit philosophic, psychological , moral , o r othe r noneconomi c doctrine ? • Wer e their views shaped significantly by the passages o f economic history that they observed closel y a t th e tim e thei r doctrines took shape ? • Di d the y use , explicitl y o r implicitly , the basi c growt h equation; i f so , wha t was distinctive i n thei r particula r formulations of it ? Here w e pause fo r a moment. A central propositio n tha t runs through this book i s that, from the eighteent h centur y to the present , growt h theorie s hav e bee n base d on one formulation o r anothe r o f a universa l equatio n o r productio n function . Thi s i s ho w I expressed i t i n Th e Process o f Economic Growth (1952): 1 The argumen t hinge s o n on e versio n o f a simple , classica l relationship . Output i s take n a s determine d b y th e scal e an d productivit y of th e working force an d o f capital. Include d within capital, fo r purposes o f this analysis, i s land and other natural resources, a s well as scientific, technical, and organizational knowledge . Th e rat e o f growt h o f a n econom y i s thu s viewe d a s a function o f change s i n tw o enormousl y comple x variables . . . . It i s centra l t o th e perspectiv e o f thi s boo k tha t th e economi c decision s which determine th e rate of growth and productivity of the working force and of capital should not be regarded as governed by the strictly economic motive s of huma n beings . Economi c actio n i s judge d th e outcom e o f a comple x process o f balancin g materia l advanc e against othe r huma n objectives. Fur ther, bot h history and contemporary event s indicat e that actions whic h result in economi c advanc e nee d not be motivate d by economi c goals . . . . The present purpos e . . . may b e define d a s a n effor t t o introduc e int o forma l economic analysi s variable s whic h incorporat e th e huma n respons e t o th e challenges an d materia l opportunities offere d b y th e economi c environment . These variable s ar e designe d t o constitute a lin k betwee n th e domai n of th e conventional economis t o n the one hand, and the sociologist, anthropologist , psychologist, an d historian on the other. . . . The devic e chose n fo r thi s linkag e consist s o f si x propensities: • Th e propensit y t o develop fundamenta l scienc e (physica l and social) • Th e propensity t o apply scienc e t o economic end s • Th e propensit y to accep t innovation s • Th e propensit y to see k materia l advance • Th e propensity to consume • Th e propensity to have children

6 Introduction In he r Theories o f Economic Growth an d Development (1961) 2 Irm a Adelman embrace s the sam e se t o f variable s i n the productio n function : where K t denote s th e services flowin g fro m a n economy's capita l stock; N t, fro m natural resources; L t, th e labo r force ; S t represents th e society's fun d o f applied knowledge ; U t, the sociocultural milie u within which the economy operates . Thi s latter variable , U t, i s a kind o f generalize d se t o f th e propensitie s tha t ar e disaggregate d i n Th e Process o f Economic Growth. Th e purpos e o f that disaggregation wa s to focu s what Adelman call s "the social-cultura l milieu " o n specifi c variable s determinin g the rat e o f growt h o f th e working force, th e rate of investment, and the productivity of investment; for "th e social cultural milieu'' o f different societie s not only differs a t a moment of time or over time but those differences do not have their impact uniformly o n the key specific growth variables . Therefore a single, aggregat e "social-cultura l milieu " variable wil l simpl y not do excep t to remin d u s tha t noneconomi c variable s ar e inescapabl y relevan t t o th e analysi s o f economic growth . Something lik e th e basi c equatio n i s embedded equall y i n Hume's economi c essays, Adam Smith' s Th e Wealth o f Nations, th e latest neoclassical growt h model, an d virtually every formulatio n i n between. Bu t this checklis t o f basi c variable s i s the beginning , no t the end, o f the matrix applied t o the array of growth economists examine d in this book. A set o f furthe r question s ar e pose d t o al l tha t relat e directl y t o th e growt h mode l tha t underlies thi s critique . • Wha t population theor y di d they accept, an d what, if anything, did they have to say about th e qualit y an d productivit y of th e workin g force ? « Wha t di d the y identif y a s th e determinant s o f th e leve l an d productivit y o f investment? Did they trea t investmen t a s an undifferentiated aggregate o r did they disag gregate an d distinguish investment in different directions? I f so, what was the extent of thei r disaggregation ? • Wha t did they have to say about machinery and other forms of new technology? Did they examin e th e force s tendin g to generat e an d diffus e ne w technology ? • How , i f at all, di d they deal with business cycles? Did they relate them to the growth process? Did the y distinguish cycles o f different length? If so, o n the basis o f what criteria? • Di d the y distinguis h th e prospect s fo r productivit y a s betwee n ra w produc e an d manufacturing, t o use the classical terms ? How , i f at all, di d they deal wit h diminishing an d increasing returns , relativ e price movements , an d their consequences fo r other variable s relevan t t o growt h an d th e distributio n of income ? • Di d they distinguish countries o r regions a t different level s of real income pe r capita or stag e o f growth ? I f so , o n th e basi s o f wha t criteria ? • How , i f at all, did they deal with the limits to growth? Did they regard th e economic system a s headed towar d acceleration , deceleration , a steady state , or decline? Wha t variables di d the y believ e woul d determin e th e outcome ? Wha t wer e thei r tim e horizons? • What , i f anything , di d the y hav e to say about the noneconomi c variables ? I f introduced, how wer e the noneconomic variables linked to the economic performance of societies? These question s ar e neithe r rando m no r neutral . The y reflec t a convictio n tha t a n

Introduction 1

economic theor y usefu l fo r either historical or contemporary analysis of the world that has emerged sinc e th e eighteent h centur y must : embrac e endogenousl y th e demographi c transition; treat scienc e an d invention as investment subsectors an d the capacity t o innovate a s a creative tas k distinguishabl e from profi t maximizatio n with fixed or incremen tally changin g productio n functions ; account fo r th e tendenc y o f majo r innovation s t o cluster rathe r tha n sprea d randoml y throug h time; demonstrat e th e intimat e linkage between growth an d cyclical fluctuations of differing periodicit y with major innovations and the generatio n o f the requisite input s of food and raw material s accounted a s endogenou s to the system. Suc h a theory must also cope with the variables that determine when and at what pac e particula r societie s absor b efficientl y th e backlo g o f relevant , then-existin g technologies an d ploug h bac k th e profit s thu s generate d int o furthe r investmen t an d growth. Finally , I woul d hold , thi s dynamic , disaggregate d syste m mus t b e linke d t o conventional macroeconomi c analysis , a tas k o f "organize d complexity " i n Warre n Weaver's phrase. 3 Evidently, ever y on e of these imperative s requires a weaving together of noneconomi c and economi c variables . The system that emerges doe s incorporate the notion of a dynamic, moving equilibrium although, a s shall later emerge, th e system inherently lurches through time, overshootin g and undershooting its optimum sectoral (and , therefore, aggregate ) paths . I t is also a nonlinear (o r chaos) syste m marke d b y irreversible chang e wher e stable equilibrium is ruled out an d disequilibriu m drive s th e sector s towar d equilibriu m paths passe d throug h bu t never sustained . This boo k doe s no t constitut e a forma l expositio n o f thi s system , a tas k undertake n elsewhere. Bu t the underlying perspective tha t informs the system is reflected throughou t and sketche d mathematicall y i n the appendix.

The Link to Economic History Readers ma y fin d mor e economi c histor y her e tha n i n conventiona l studie s o f th e history o f economi c doctrine . A s I worke d forwar d in this story , I found i t increasingly important to relate writers to the particular times i n which their views were formed and , sometimes, t o the particular narrow interval when they set down a line of argument. The various growt h formulation s clearl y bea r th e mark s o f particula r passage s o f economi c history intimatel y observe d b y thei r authors . A s Alfre d Marshal l wrot e t o John Nevill e Keynes i n 1891: 4 " I hol d tha t the 'classical ' economist s kne w their facts—but only put an abstract o f them i n their shop front. Als o I don't think they wer e nearly as abstract a s you do. " Th e post-187 0 economist s wer e no t al l a s knowledgeabl e a s thei r pioneerin g predecessors; but, take n a s a whole, thei r views also constitute a rather strikin g vindication of four similar propositions: 5 Confucius' s identification of the age of 30 as the time a person's wa y o f thinkin g wa s "established" ; Walte r Bagehot' s observatio n (relativ e t o Malthus) that "scarcel y any man who has evolved a striking and original conceptio n o f a subject eve r get s ri d o f it" ; an d the well-know n peroration o f J. M . Keynes' s General Theory: " . . .i n th e field of economic an d political philosophy there ar e not many who are influenced b y new theories afte r the y are twenty-five o r thirty years of age. . . ."W e shall als o fin d tha t Schumpeter , wh o share d thi s perspective, refer s ofte n t o a n econo mist's twentie s a s the "sacre d decade " whe n "th e vision " o f hi s task wa s defined. I a m incline d t o tak e th e Confucius-Bagehot-Keynes-Schumpete r propositio n se riously, but not too seriously, recalling, if necessary, that Francois Quesnay published his

Introduction

8

Table 1 . 1, Whe n Thei r Vision s Took Shap e Year when economist wa s 3 0

Year whe n economist se t dow n his majo r doctrine

David Hum e (1711-1776 ) Adam Smit h (1723-1790) T. R . Malthu s (1766-1834)

1741 1753 1796

David Ricard o (1772-1823 ) J. S. Mil l (1806-1873 )

1802 1836

Karl Mar x (1818-1883 )

1848

1739 ( A Treatise o f Human Nature) 1748-1751 (Edinburg h Lectures ) 1 798 (A n Essay o n th e Principle o f Population [firs t edition] ) 1817 (Principles o f Political Economy) 1829-1830 (Some Unsettled Questions [Not publishe d until 1844] ) 1848 (Communist Manifesto)

Major economi c growt h theorist

first article on an economic proble m whe n he was 62 years old . Nevertheless, her e are the relevant dat a fo r th e leadin g character s o f Part I (Tabl e 1.1) . The only authentic exception amon g the six classical figures of Part I to the Confucius Bagehot-Keynes-Schumpeter theor y ma y b e Ricardo ; althoug h eve n hi s cas e i s no t certain. H e di d no t retir e definitivel y fro m busines s unti l 1819 , bu t h e wa s alread y a central figur e i n th e bullio n controvers y o f 1809-1810 . An d Ricardo certainl y bega n t o formulate hi s views on economics befor e hi s thirtieth year. Startin g in 1797 , a t the age of 25, h e devote d som e o f his leisur e tim e t o mathematics an d the physical sciences ; bu t 2 years later , whil e in Bath with his wife, h e accidentally cam e upon The Wealth o f Nations. From quit e reliable testimony , som e o f his leisure tim e was regularly allocated thereafte r to politica l economy. 6 Adam Smit h is a less clear-cu t exception , and probably not an exception at all. He was teaching a t th e Universit y o f Edinburg h a s earl y a s 1748-175 1 wher e h e bega n hi s association wit h Davi d Hum e (1750 ) an d hi s bridging o f mora l philosoph y an d politica l economy. H e became a professor a t the University of Glasgow i n 1751 . W e have notes on the substanc e o f his lecture s a s delivered i n 1762 ; bu t he was certainly engaged earlie r i n formulating hi s thought s on the economic process , a good man y of which are reflected i n his Theory o f Moral Sentiments (1759) . Th e majo r biographe r o f thi s perio d o f Smith' s life i n fac t date s hi s transitio n t o political econom y i n the perio d 1748-1751 ; tha t is , i n Smith's lat e twenties. 7 The moderatel y seriou s reaso n fo r thi s rathe r playfu l bi t o f biographica l arithmeti c i s that th e perspective o n the economic proces s reflected i n various theories o f growth doe s appear to be influenced strongly by the course o f economic event s observed a t a relativel y early stag e o f eac h economist' s career . W e shal l fin d a n interestin g exampl e o f thi s linkage whe n we examine i n Part II I a sampling o f development economist s wh o mainly came t o tha t fiel d late—a s a kin d o f secon d marriage . Bu t th e mar k o f thei r earlie r commitments ca n generall y b e detected . Circumstance s i n th e oute r worl d change , an d our economists addres s themselve s t o them; but they tend t o do so in continuity with the concepts tha t ha d crystallize d i n earlie r times . T o us e Schumpeter' s phrase , thei r "vi sion" usuall y comes early , and their subsequen t work tend s to be an elaboration of tha t vision. Th e implication s of thi s judgment will emerge recurrentl y as we move forward in time. Even a revie w a s narrowl y focused as thi s deals , perforce , wit h man y factors beyond contemporary economi c event s tha t left—or may have left—their mark o n the doctrine s of th e economist s whos e view s w e examine . Bu t i t i s tru e o f th e histor y o f economi c thought, a s of other dimensions of intellectual history, that the story cannot be told simply

9

Introduction

as an insulated series of theoretical elaborations an d changes by men and women trying to improve i n som e abstract , scientifi c sens e th e formulation s the y inherite d fro m thei r professional predecessors . Ther e i s a powerfu l contrapunta l strand : th e effor t o f eac h generation t o solv e th e problem s o f it s time .

Personalities: Do They Matter? The noneconomi c variable s brought to bear her e include , of course, th e moral a s well as political an d social judgments that these economists brought , consciously or otherwise, to their analyses . Thereb y on e i s led to try, i n degree at least, t o establish i n one's mind an answer t o th e question : Wha t sor t o f human being wa s (o r is ) this? One thoughtfu l observer , Si r Pete r Medawar , ha s counsele d agains t th e effort . An d although Schumpeter' s characterizatio n o f Quesnay ("H e . . . must have been a n awfu l bore") cannot be generalized t o all economists, Medawar' s vie w should not be hastily set aside:8 The lives of scientists, considere d a s Lives, almos t always make dull reading. . . . Academics ca n only seldom lea d lives that ar e spacious or exciting in a worldly sense. They need laboratories o r libraries in the company of other academics. Thei r work is in no way made deeper or more cogent by privation, distress o r worldly buffetings . Thei r privat e live s may be unhappy, strangely mixed u p o r comic , bu t no t i n way s tha t tel l u s anythin g special abou t th e nature o r direction o f their work. Academic s li e outside th e devastation are a of th e literar y convention accordin g t o whic h the live s of artist s an d me n o f letters ar e intrinsically interesting, a source o f cultural insigh t in themselves. If a scientis t wer e t o cu t hi s ea r off , n o on e woul d tak e i t a s evidenc e o f a heightened sensibility ; i f a historian wer e t o fai l (a s Ruskin did) t o consum mate his marriage, w e should not suppose that our understanding of historical scholarship ha d someho w bee n enriched . And i n mos t case s I conclude d eithe r Medawa r wa s right , o r I didn' t hav e enoug h information to decide if he was right or wrong, or the analysis would be distorted by going into th e necessar y detail . Charle s Babbag e an d Joh n Rae , fo r example , were , i n thor oughly differen t ways , quite fascinatin g characters . But , given their ancillar y supporting roles in the story, I suppressed m y impulse to elaborate on the kind of men they were. A t the othe r en d o f th e spectrum , Ada m Smith , fro m wha t w e know , i s a cas e stud y i n Medawar's proposition . Hi s dislik e of Oxfor d does leav e it s mark on his views ; but th e kidnapping a s a child, a n alleged unrequited love, a deep attachment to his mother, an d an extreme cas e o f absentmindednes s do no t greatl y illuminat e hi s writings. Thus I hav e no t trie d t o establis h an d pursu e a unifor m patter n i n thi s matter . Wit h respect t o th e si x classi c politica l economist s o f Par t I , I introduce d persona l materia l when I thought i t relevant and appropriate—as i n the obvious cases of David Hume, J . S . Mill, an d Karl Marx . Th e importance o f the Malthus-Ricardo friendship an d their unre solved intellectua l conflict require s something o f this dimension; and Ricardo's faceless , austere image among neoclassical mainstream economists who think well of him deserves a bit of softening; fo r he was evidentl y a vital, humane person wit h a quality not endemic among economists— a sens e o f humor. In Part I I the stag e is too crowded for much of this kind of thing. Alfre d Marshal l was, on th e surface , almos t a prototyp e Medawa r scientist; but i t i s important , I believe , t o

10 Introduction catch somethin g o f the moral passion tha t led him, against his will , into economics. No t many o f those wh o regarded hi m a s a stuff y Victoria n wandere d th e street s i n workin g class district s lookin g int o the faces of the poor, enjoye d such comfortable relations with workers an d labo r leaders , or , indeed , mad e bolde r proposal s t o mitigat e poverty . Schumpeter come s neare r t o vindicatin g Medawar' s proposition . W e no w kno w through Loring Allen's fin e biograph y a great deal about the recurrent traumatic and even tragic event s that marked hi s life. Bu t it is hard to trace the impact of these incidents an d circumstances on his work as an economist except, perhaps , in the failure t o complete hi s History of Economic Analysis. As fo r Part III , ther e i s some mil d indulgence in personal observations i n dealing with the nine development pioneers, al l of whom, except Coli n Clark, I have known; but thes e strands ar e introduce d onl y whe n relevan t t o thei r approac h t o developmen t problems . Ideas com e firs t i n this book, bu t whe n ideas appear t o have been shape d or tempere d by th e personalities o f thes e growt h theorists I hav e no t hesitate d to le t the m emerg e a s human being s too.

I SIX CLASSICA L ECONOMISTS : DAVID HUM E T O KARL MAR X

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2 David Hume and Ada m Smith

The Setting Classical economics too k it s start in the eighteenth century—with some earlie r anticipa tions—from a muc h large r enteiprise : th e protracte d effor t t o discove r an d instal l th e natural law s tha t shoul d gover n ma n i n society , shiftin g the Heavenl y Cit y "t o earthl y foundations."1 Her e i s Carl Becker's evocation o f the climate o f opinion in the thirteenth century fro m whic h the transitio n begins: 2 ... i t wa s a n unquestione d fac t tha t th e worl d an d ma n i n i t ha d bee n created i n si x day s b y Go d th e Father , a n omniscien t an d benevolen t intel ligence, fo r an ultimate if inscrutable purpose. Althoug h created perfect, man had through disobedienc e falle n from grace int o sin and error, thereb y incurring th e penalt y o f eterna l damnation . Ye t happil y a way o f atonemen t an d salvation ha d bee n provide d throug h the propitiator y sacrific e of God's onl y begotten son . Helpless in themselves to avert the just wrath of God, men were yet to be permitted, throug h hi s mercy, an d by humility and obedience t o his will, to obtain pardon fo r sin and error. Lif e on earth was but a means to this desired end, a temporary probation for the testing of God's children. I n God's appointed time , th e Earthl y Cit y woul d com e t o a n end , th e eart h itsel f b e swallowed u p in flames. O n that last day good an d evil me n would be finally separated. Fo r th e recalcitran t ther e wa s reserve d a plac e o f everlastin g punishment; bu t th e faithfu l woul d b e gathere d wit h Go d i n th e Heavenl y City, ther e i n perfection an d felicit y t o dwell forever . Existence wa s thu s regarde d b y th e medieva l ma n a s a cosmi c drama , composed b y th e maste r dramatis t accordin g t o a centra l them e an d o n a rational plan. . . . The duty of man was to accept th e drama as written, sinc e he could not alter it ; his function, t o play the role assigned . . . . Intelligenc e was essential , sinc e Go d ha d endowe d me n wit h it . Bu t th e functio n o f intelligence wa s strictl y limited. . . . [T] o reconcil e divers e an d pragmati c experience wit h the rationa l pattern of th e worl d a s give n in faith . The transformatio n tha t followe d ove r th e subsequen t fiv e centuries—yielding , in

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effect, th e moder n world—is , a s ever y studen t i n a n undergraduat e cours e i n Wester n Civilization knows , a complex, many-side d story . I t embraces th e reviva l o f Gree k an d Roman learnin g an d th e Renaissance i n the broader sense; th e slow , uneven break-up of feudalism; th e ris e o f town s an d o f livel y urban societies; th e scientifi c revolution fro m Copernicus t o Newton , wit h al l it s oblique , pervasiv e consequences ; th e emergenc e o f Protestantism; th e voyage s o f discover y an d th e commercia l revolution ; the blood y tri umph of nation states an d their struggles fo r power and profit; then the Enlightenment of the eighteent h centur y from which , amon g man y other things , modern economi c theor y and doctrine emerged , substantiall y from Scotland , oddl y enough , at Europe's northwes t periphery. It is inevitable that this extraordinary kaleidoscopic sag a shoul d be viewed, generation after generation , fro m man y perspective s n o on e o f whic h ca n clai m t o b e inclusiv e o r definitive.3 Pete r Gay , fo r example , thu s define s hi s vie w o f th e philosophe s o f th e Enlightenment, a relatively small cadre withi n whic h he includes Adam Smith as well as David Hume , evidentl y on e o f it s trul y majo r figures: 4 There wer e many philosophes in the eighteenth century, but there wa s only one Enlightenment . A loose, informal , wholly unorganized coalition o f cul tural critics , religiou s skeptics , an d politica l reformer s fro m Edinburg h t o Naples, Pari s t o Berlin , Bosto n t o Philadelphia , th e philosophe s mad e u p a clamorous chorus , an d there wer e som e discordan t voices amon g them , bu t what i s strikin g i s thei r genera l harmony , no t thei r occasiona l discord . Th e men of the Enlightenment united on a vastly ambitious program, a program of secularism, humanity , cosmopolitanism, an d freedom, above all , freedo m in its many forms—freedom fro m arbitrar y power, freedo m o f speech, freedo m of trade , freedo m t o realiz e one' s talents , freedo m o f aestheti c response , freedom, i n a word, of moral man to make his own way in the world. In 1784 , when the Enlightenmen t had done most o f its work, Kan t defined it as man' s emergence fro m his self-impose d tutelage , and offere d as its mott o Sapere aude—"Dare t o know" : tak e th e ris k o f discovery , exercis e th e righ t o f unfettered criticism , accep t the loneliness of autonomy.* Like the other philo sophes—for Kan t only articulated what the others had long suggested i n their polemics—Kant saw the Enlightenment as man's claim to be recognized as an adult, responsibl e being . The secularis m o f th e Enlightmen t too k th e form , fo r some , o f a direc t assaul t o n organized Christianity . Ga y ha s thi s t o sa y abou t Hume' s protracte d campaig n agains t religion.5 Despite the difficulty o f his thought . . . despite the profusion of his output and the range of his interests, neithe r critic nor admirer—neither Christia n nor unbeliever—had th e slightes t hesitatio n i n placin g Hum e amon g th e mos t radical o f radical philosophes . . . , [Th e philosophes] admire d Hume' s writ ings, love d hi s person, an d cherished hi m a s a leader i n the common cause . Not without reason: i n his intellectual pedigree, i n his intentions, and in his very worl d view Hume belongs wit h the philosophes, no matter how amiable his disposition , individua l hi s argumentation , an d unexpecte d hi s conclu sions. .. . I t i s tru e tha t Hum e ha d marke d i f grudgin g respect fo r man' s *"Beantwortung de r Frage : Wa s Is t Aufklarung? " Werke, IV , 169 .

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ability t o resist rationa l argumen t and had little confidence that the liberatio n from superstitio n wa s either continuous or inevitable. Bu t if the mischief tha t his writing s did wa s limited , tha t was no t fo r wan t of trying. Hume devote d his bes t energie s t o elaborating hi s critiqu e o f religion i n the hope tha t som e men at least would listen and (I am convinced) to satisfy a n irrepressible nee d of hi s own . There ar e othe r treatment s o f th e protagonist s a t quit e differen t levels : fo r example , Louis Loeb' s highl y technica l stud y o f their perspective s a s professional philosophers. 6 Nearer t o th e majo r concern s o f this boo k i s the fermen t stirre d b y Joh n Pocock. Hi s The Machiavellian Moment gav e impetu s to the re-stud y o f th e Scottis h Enlightenment 7 and, thereby , a fres h loo k a t Hume , Ada m Smith, an d their contemporaries . Pocock's argument , elaborate d wit h lovin g detai l an d sophistication , is , a t it s core , quite simple. Th e Machiavellian proposition, derive d fro m th e Greco-Roman world , wa s that the fate of a political uni t (Fortuna ) depended , i n an inherently uncertain an d treacherous world , o n civic virtue (Virtu). Virtue , i n this context, demande d a body of citizenwarriors, equa l in status, holders of landed property , totall y devoted t o the interests of the state, livin g a n auster e lif e whos e satisfactio n wa s substantiall y defined i n term s o f a n absolute commitmen t t o th e state , transcendin g Christia n morality , as i t confronte d th e succession o f dangers histor y generated a s its Fortuna. O n this sparta n view, wealt h an d the pursui t of wealth , luxury , an d idleness wer e paramoun t corrupting forces:8 "I t wa s possible .. . t o restate th e vision of history as an anakuklosis [cycle], in which republics were transforme d int o empires by their own virtu and then corrupted an d destroyed b y the subsequent luxury. " This wa s a no t quit e satisfactor y doctrin e fo r eighteenth-centur y Scotland . Wit h th e salutary course of British political and economic affairs afte r 1660 , includin g the 170 7 Act of Unio n wit h Scotland, thing s began t o chang e i n Edinburgh a s wel l a s London: 9 With the defeat o f .. . advocac y o f a federal rathe r tha n a n incorporatin g Union, cam e th e realizatio n tha t Scottis h participatio n i n th e Englis h Wirtschaftwunder ha d been bought by the sacrifice o f civic virtue, and that an alternative form of virtue was an ideological an d practical necessity . This was met b y th e massiv e an d rapi d adoptio n o f a n Addisonia n Whig political, o r rather social , culture ; Edinburgh saw a proliferation of Spectatorial club s and societies, practisin g th e virtue s o f polit e conversatio n an d enlightene d tast e while discussin g th e economic , cultura l an d even—give n a n ag e i n whic h manners seemed no unimportant part of morality—the moral improvement of Scottish life . Th e locus o f virtue shifted decisivel y fro m th e civic to the civil, from th e politica l an d militar y t o tha t blen d o f th e economic , cultura l an d moral whic h w e cal l th e socia l fo r short . From on e perspective, thi s was the settin g in which Hume an d Adam Smit h evolved , and their wor k can be regarded a s a fully elaborate d reply to the older conception o f civic virtue. Bu t t o hi s credit , Pococ k i s quit e awar e tha t hi s rathe r stylis h portrai t o f th e transformation o f Florentin e civi c virtu e to th e "immensel y ric h and multi-facete d concept of civil or social humanism" doesn' t quit e cover the ground. 10 He cites respectfully , for example, a quite different sourc e of transformation: the continental elaboration of civil jurisprudence "a s a principal mod e o f organizin g great tradition s of moral , social, an d political philosophy.'''' And, no doubt he would accept, a s a matter of course, the role of

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Newtonian science i n stimulating the search for the natural laws that should govern men in society. H e thu s wisel y leave s muc h ope n fo r futur e scholarshi p an d reflection. But he poses a t the end a question with which this book is much concerned, dow n to the last pag e o f it s text: 12 "Ho w di d th e comple x synthesi s o f 'mora l sentiment ' wit h 'th e wealth of nations' evolve or degenerate int o the science of classical economics; how did it come t o b e denounce d a s cold , mechanica l an d dismal , founde d o n a restrictiv e an d reductionist theor y o f th e huma n personalit y i t ha d sough t t o liberat e fro m classica l restraints?" A s wil l emerge , th e turnin g point come s aroun d 1870 , when , dazzle d b y marginal analysi s an d th e calculus , politica l econom y becomes , fo r mos t professionals, economics. But in the time of Hume and Adam Smith it was a vital part of a great human and socia l enterprise : i n Becker's phrase , shiftin g th e Heavenly City "t o earthl y foundations." Central to that enterprise wer e fundamental mora l values, purposes, an d dilemmas that suffused politica l econom y ove r its first centur y and a quarter and, to a degree, dow n to the present. Th e question is: To what extent were the moral values of the Enlightenment Christianity i n disguise ? Car l Becker' s i s th e mos t straightforwar d an d unambiguou s view:13 ... w e find tha t a t every tur n the Philosophes betra y thei r deb t t o medieval thought without being aware of it. They denounced Christian philosophy, but rather to o much, after th e manner of those who are but half emancipated fro m the "superstitions " the y scorn . The y ha d pu t off th e fea r o f God, bu t maintained a respectful attitud e toward th e Deity. The y ridicule d the idea tha t the universe ha d bee n create d i n six days, bu t still believed i t to be a beautifull y articulated machin e designe d b y th e Suprem e Bein g accordin g t o a rational plan a s a n abidin g place fo r mankind. . . . They renounce d the authorit y of church an d Bible , bu t exhibite d a naiv e fait h i n th e authorit y of natur e an d reason. . . . The y denie d tha t miracle s eve r happene d but believe d in the perfectibility o f the human race. . . . [T]here i s more of Christian philosophy in the writings of the Philosophes tha n has yet been dreamt of in our histories. At firs t sight , Pete r Gay' s interpretatio n o f th e Enlightenment , wit h it s subtitle , Th e Rise o f Modern Paganism, i s a t th e othe r en d o f th e spectrum . Bu t hi s stud y i s sho t through—almost haunted—b y a n effor t t o sor t ou t a credibl e respons e t o th e questio n Becker posed. 14 Hi s conclusio n i s captured i n the following: 15 ... th e philosophes hav e been sarcasticall y commended fo r "merely" secularizing religiou s idea s an d caricature d a s medieva l clerk s i n moder n dress , ungrateful an d forgetfu l heir s o f th e Christia n tradition wh o combate d th e pious wis h fo r salvatio n i n th e nam e o f a secula r salvatio n disguise d a s progress; who denied th e immortality of the soul only to substitute the immortality o f reputation ; wh o laughe d a t religiou s idolatr y bu t ha d thei r ow n saints—Bacon, Newton , an d Locke ; wh o excommunicate d thei r heretics — Rousseau; an d eve n mad e pilgrimages—t o Ferney . Such analogies are seductive an d even telling: they draw attention to origins the philosophe s di d no t lik e to remember. There wa s some point after all , in the derisiv e observatio n tha t the Enlightenment was a derivative, vulgarized restatement o f traditiona l Christian values: the ne w philosophy a secularized faith, optimis m a secularize d hope, humanitaris m a secularize d charity. . . . B u t from th e vantage point of each camp the same set of facts takes on

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two ver y differen t shapes . Wha t Christians saw, with some justice, as an act of imitation, the philosophies saw, with greater justice, as an act of repudiation or, a t best, o f exploitation . . . . Th e origin s of idea s ma y be a clue t o thei r function, the y d o no t determin e it . Christianit y made a substantia l contribution to the philosophes' education , bu t of the definition of the Enlightenment it form s n o part . In less sophisticate d term s a good many intellectual figures of the era hedged their bets. Edmund Halley, in his ode on the title page of Newton's Principia, wa s quite orthodox, a s was appropriat e give n Newton's seriou s commitmen t t o religion . Here ponde r to o th e law s which God , Framing th e universe , se t not asid e But mad e th e fixe d foundation s of Hi s Work . In th e nex t century , however , Alexande r Pope , rathe r successfully , has i t both ways : Nature an d Nature' s law s la y hi d i n night; God said, Let Newton be ! an d all was light . Accepting thi s ambiguity among th e philosophes, Ga y nevertheless isolates clearl y the strand h e regard s a s mos t distinctiv e an d admirabl e i n th e Enlightenmen t an d find s i t crystallized i n Hume. The final section of his text is entitled ' 'David Hume: The Complet e Modern Pagan. " I t conclude s a s follow s wit h a statemen t tha t ma y constitut e a s wel l Gay's ow n creed: 16 For Davi d Hum e wa s bot h courageou s an d modern ; h e understoo d th e implications o f hi s philosoph y an d di d no t shrin k fro m them . H e wa s s o courageous tha t h e di d no t hav e t o insis t o n hi s courage ; h e followe d hi s thinking where it led him, an d he provided throug h his own life (and , Samue l Johnson t o th e contrary , i n th e fac e o f death ) a pagan idea l t o whic h many aspired bu t whic h few realised. H e was willing to live with uncertainty, with no supernatura l justifications, n o complet e explanations , n o promise o f per manent stability , wit h guides o f merely probabl e validity ; and what is more , he lived i n his world without complaining, a cheerful Stoic . Hume , therefore , more decisivel y tha n many o f hi s brethern i n the Enlightment , stand s a t th e threshold o f modernit y an d exhibit s it s risk s an d it s possibilities . Withou t melodrama bu t wit h the sobe r eloquenc e on e woul d expect fro m a n accom plished classicist , Hum e makes plain that since God is silent, ma n is his own master: h e must live in a disenchanted world , submi t everything to criticism, and mak e hi s ow n way. In probing thi s question I also consulted Professo r Nichola s T. Phillipson . I n a letter of October 14 , 1987 , h e responded wit h a somewhat different emphasi s than Gay: "Yo u as k where Hum e an d Smit h go t thei r mora l philosoph y from . S o far a s Hume i s concerned , part o f m y answe r woul d be, fro m Cicero." Hum e reports i n his autobiographical essa y that, as a very young man, it was Virgil and Cicero he was "secretl y devouring" whe n he should have been reading law. Phillipson saw in Cicero the root o f Hume's judgment that people wer e socia l animals: preoccupied wit h justice and socia l approval ; pursuing happiness i n commo n lif e rathe r than in th e lif e hereafter ; defining moralit y i n civi c terms. It i s neithe r necessary no r appropriat e fo r m e t o tr y t o pronounc e definitively o n th e

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links between the Roman world, Christianity , and the moral principle s Hum e and Adam Smith brought to bear in their prescriptions fo r " a grea t society," to use Smith's phrase. What i s essentia l i s that Hum e an d Smit h understoo d quite clearl y that their missio n a s political economist s wa s to try to analyze and solve a set of essentially moral, social, an d political rathe r tha n narrowly economic problems; and whatever their route of derivation might have been, th e values they brought to bear were congruent with much of the longer classical an d Christia n past . In particular, fou r large problems concerned them. First, th e problem o f good an d evil. Clearly, Hum e an d Smit h viewe d ma n a s capabl e o f "si n an d error, " translate d int o avarice an d greed in the lif e o f the economy. The y saw in man's need fo r social approva l and sens e of kinship with others a tempering forc e defined as "sympathy" ; but they did not rely wholly on sympathy to hold avarice within civilized bounds. Nor , except ove r a narrow range—notably , i n guaranteein g th e sanctit y of property—di d the y rel y o n th e state. The y viewe d ope n competitio n a s the mos t effectiv e reconciling force. Second, the y wer e deepl y concerne d wit h the mora l problem s pose d b y simultaneous existence of abject poverty an d unearned affluence—again a concern deeply rooted i n the Christian tradition. A s Hont and Ignatieff hav e reminded us: "th e central commitment of Hume an d Smit h was to justice."17 Th e Wealth of Nations begin s with the paradox tha t British society o f the mid-eighteenth century, relatively affluent b y historical and contemporary standards , wa s marked b y both morally disturbing patterns of income distribution and a higher standard of living for the working poor than had ever been achieve d i n more egalitarian primitiv e societies. I n the continue d expansion of th e wealt h of nation s they saw a solven t fo r th e poo r t o whic h thei r successor s adde d a limitatio n o f famil y siz e sufficient, i n effect , t o rende r labo r rathe r tha n lan d th e scarces t facto r o f production . Third, the y were concerned wit h the impact of the economy o n the social an d political life of their nation. Here the linkage to religous values was real but focused rather sharply on Englis h society , post-1688 , an d o n Scotland , post-1707 . The y sa w affluenc e a s th e friend o f civi l libert y and, on balance , a civilizin g agent over a wide front . Finally, bot h Hume and Smit h were enemies o f the barbarities of mercantilism abroad as well as at home. I n his day it was no small thing for Hume to "pra y for the flourishing commerce o f .. . eve n Franc e itself " (following , p . 30 ) an d fo r Smit h t o oppos e a regime o f colonies. The underlyin g principle, as in domestic life , wa s that the avarice of nations a s wel l a s me n coul d b e tempere d b y ope n an d fre e competitiv e commerce. 18 However rea l Davi d Hume' s atheis m ma y have been , hi s wor k reflects sytematicall y this arra y o f larg e mora l considerations .

David Hume (1711-1776 ) David Hum e ha s a quit e strong—bu t no t exclusive—clai m t o bein g th e firs t moder n economist. But as virtually every commentator notes , hi s work as a philosopher, psychol ogist, an d historia n tends t o overshadow hi s quality as an economist . I t follows directl y from th e vie w developed i n this book, however , tha t Hume's clai m t o distinctio n a s an economist lies, i n good part , i n his insistence on placing economic analysis in this broad human an d societa l settin g and keeping i t there. Hi s views on economic s and economi c policy are suffused, eve n more than those of Adam Smith, by his wider assessment of the human conditio n an d th e dynamic s o f history . An d a s a psychologist , he observed: 19

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"These principle s o f human nature, you'll sa y are contradictory: bu t what is ma n bu t a heap o f contradictions. " Hume's economi c ma n is , then , n o simpl e profi t o r relativ e utilit y maximizer . I n analyzing th e motive s fo r effectiv e economi c actio n ("cause s o f labor") , Hum e did , indeed, includ e avaric e an d the desir e fo r gain, 20 bu t h e als o introduce d th e desir e fo r "pleasure," "action, " and "liveliness." 21 In projecting this multidimensional image of human beings , Hume allowed for differences i n preferences amon g individual s bu t sug gested that , in general , the greates t happines s lay in achievin g a balanc e amon g the contending human impulses governed b y the law of diminishing relative margina l utility; i.e., th e mor e o f an y one for m o f satisfaction a human being enjoye d the less h e value d each additional unit of it relative to other forms of satisfaction. And he applied this notion of diminishing relative marginal utility to real income itself and to income distribution: 22 "Every person, i f possible, ough t to enjoy the fruit s o f his labour, in a full possessio n o f all the necessaries, an d many of the conveniencies o f life. N o one can doubt, but such an equality is most suitable to human nature, and diminishes much less from the happiness of the ric h tha n i t adds t o tha t o f the poor.'' The basic concepts tha t Hume elaborated fro m 173 9 to 177 6 were certainly formed by the earlie r date . H e belongs, therefore , i n the phase of remarkable ferment that followe d the Gloriou s Revolutio n (1688 ) and , fo r a Scot , th e Ac t of Unio n (1707). I t was als o a period whe n people became full y consciou s o f the revolutionary changes brought about in the two centuries sinc e the world economy was extended by the voyages of discovery and the subsequen t commercia l revolution . Ther e wa s sufficien t commo n knowledg e fo r comparative judgment s t o b e forme d an d communicate d abou t contemporar y China , India, and the American colonies as well as about ancient Greece, Rome , and Egypt, fro m an earlie r heritage . In reflecting on the processes se t in motion by the commercial revolution, Hume, lik e a good many of his contemporaries, was contending against the earlier policy doctrines that we group together under the rubric of mercantilism. His tight brief essays in economics , running to some 10 7 pages, ar e all sharply pointed policy pamphlets . ( I exclude Hume' s monograph "O f th e Populousness o f Ancient Nations," o f som e 7 5 pages, althoug h it , too, contain s som e reflection s bearin g o n policy. ) Hi s exposition s ar e shape d b y tha t operational purpos e and are quite different i n their emphasis and balance than if he had set out to write a systematic treatise on economics—which he might have done if his youthfu l Treatise o f Human Nature had not been, i n his view, such a dramatic initial failure. In the end, hi s economic concept s com e through quite clearly. They form a reasonably coheren t and consisten t theor y o f the dynamic s of growth; but issue s not i n policy contention ar e skimped (e.g., investment) wherea s key issues in the running debate o n mercantilism are quite full y expounde d (e.g. , the economi c significanc e of the trad e balance) . Hume's argumen t als o reflect s clearl y th e economi c stat e o f affair s in , roughly , th e second quarte r o f th e eighteent h century . I n broa d terms , th e Britis h econom y i n th e period durin g which Hume's basi c idea s crystallize d (an d Adam Smith's a s well) ca n be characterized a s follows: 23 • Th e perio d 1713-173 8 wa s peaceful , b y eighteent h centur y standards , afte r th e great exertion s o f th e Wa r o f Spanis h Successio n (1701-1713) ; bu t hostilities resumed with the War of Jenkins' Ear (1739) and of the Austrian Succession (1740— 1748), th e latte r never reaching the scal e of the conflict earlie r in the century or of

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Figure 2.1. Th e Number of Men in the Armed Forces, 1700-1800 . [Adapte d fro m T . S . Ashton , Economic Fluctuations i n England 1700-1800 (Oxford : at the Clarendon Press, 1959) , p . 187. ]

the later war s of 1756-1763 , 1775-1783 , an d 1793-181 5 (see Figure 2.1). Hum e accepted as a fact o f life th e need fo r the state to be able to divert resources quickly from peac e t o war ; bu t h e believe d thi s wa s bes t accomplishe d b y buildin g up i n peacetime a surplus above minimum necessaries, t o be taxed awa y in time of war, rather tha n by accumulatin g a bullion hoard. 24 • Excep t fo r th e ba d harves t year s 1728-1729 , Britai n was , throughou t Hume' s formative years , a net exporter o f wheat and flour (see Figur e 2.2) . Phylli s Dean e notes tha t i n 175 0 (th e pea k yea r fo r th e century ) England' s grai n expor t wa s equivalent t o the subsistence requirement s of roughly a quarter of the total population o f England. 25 U p t o mid-centur y the tren d o f grai n price s wa s mildl y down ward. Th e interva l 1720-1750 , i n particular , wa s on e o f chea p food , distinctl y easier than preceding an d following periods. I t is not surprising, then, tha t there is little Malthusia n anxiet y i n Hum e an d tha t h e argue d i n hi s monograph , "O f th e Populousness o f Ancient Nations," tha t an abundant population was the reflection of a prosperous econom y preside d ove r by a "wise , just and mild government." 26 As nearly a s we know, the population of England in the first half of the eighteent h century fluctuate d abou t a relativel y constan t level , wit h a n increas e beginnin g perhaps i n th e 1740s. 27 • Bot h physical output and foreign trade trended slowly but distinctly upward during this period, th e latter a t about twice the pace of the former.28 Th e best measure w e have o f the rat e o f growth o f outpu t per hea d suggest s tha t improvemen t wa s les s than half of 1 % per annum—perhaps higher than that (say, 0.7% per annum) for the

period 1740-1760. 29 O n the othe r hand , British observers of the economi c scen e were consciou s tha t England enjoyed , relativ e to others, a high standar d o f living and tha t th e perio d sinc e th e en d o f th e Wa r o f Spanis h Successio n ha d see n economic progress alon g a broad front . • Dow n to 176 0 technological change was exceedingly slow. Ashton' s dictum holds: "In th e period 1700-6 0 Britain experience d no revolution, either in the technique of production , th e structur e o f industry , o r th e economi c an d social lif e o f th e people."30 A distinc t surg e i n th e 1760 s cam e i n th e pac e o f invention , a s i n th e

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Figure 2.2. Ne t Exports of Wheat (Including Flour): Net Imports (-). [Adapte d fromT. S. Ashton, Economic Fluctuations i n England: 1700-1800 (Oxford: at the Clarendon Press , 1959) , p . 183. ]

now famou s schoolboy' s phrase , a "wav e of gadgets swept over England." 31 The acceleration o f majo r innovation s comes i n the 1780s . It is possible, the n to describe th e English economy during the critical years of Hume' s life a s being well along i n what I call the preconditions fo r takeoff but not yet in the fina l pre-takeoff phase , whic h begins i n the 1760s , o r in the takeoff that clearly begin s i n th e 1780s. The emphasis o n foreign trade in Hume (and Smith) is justified by its role in their time a s the majo r dynami c force a t work on th e British economy . Against this background, we turn to our standard array of questions designed t o expose Hume's vie w of the dynamics of economic growth and to permit easy comparison with the views o f others . The Basic Growth Equation Hume backs int o the growth equation. H e was contending against the view that a favorable balance of trade was of transcendent importance for a nation's political economy; tha t a lo w rat e o f interes t wa s cause d b y th e bullio n surplu s earne d b y a favorabl e trad e balance; an d that both at home and abroad the control over the use of resources shoul d be regarded a s a zero-su m gam e i n whic h wha t on e countr y gaine d anothe r lost . Wit h national interes t thu s at stak e polic y should , evidently , be determine d b y governments . Hume, lik e a goo d man y of hi s contemporaries , wa s i n revolt agains t this doctrine . H e saw trad e a s a transaction o f mutual advantage. I n the domestic societ y h e was i n revol t against the doctrine tha t what the state required for its purposes could only be amassed a t the expens e o f it s citizens. Hi s definitions of the true determinants o f prosperity an d th e resources availabl e t o th e stat e emerge , therefore , a s a by-product of the policy debate . His central assertion wa s that real factors, rather than the acquisition of bullion through a favorable trade balance, determined a nation's prosperity; and that such prosperity, rather than a bullion hoard, was th e onl y sur e foundation fo r th e security of the state . Hume' s real factors emerge, tersel y stated, in his famous peroration to the essay "O f th e Balance of Trade:"32 " . . . a government has great reason to preserve with care its people an d its manufacturers. It s money, it may safel y trus t to the course of human affairs, withou t fea r

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or jealousy. Or if it ever give attention to this latter circumstance, it ought only to be so far as it affect s the former.' ' Bu t ther e wa s more t o his growth equation than ' 'people and manufactures." H e linke d manufactures and agriculture in a rather subtl e way . I t i s the attractions o f manufacture d consume r good s tha t constitut e th e incentiv e fo r thos e i n agriculture "t o increas e their skill and industry:"33 "Whe n a nation abounds in manufactures and mechanic arts , th e proprietors o f land, as well as the farmers, study agriculture as a science, an d redouble thei r industr y and attention." 34 If Hum e regarde d th e availabilit y of manufacture s as th e necessar y incentiv e for th e exertion of proprietor an d farmer alike (and the urban working force as well), what engine drove manufactures ? His answer was: 35 Foreign trade , b y it s imports , furnishe s material s fo r ne w manufactures; and by its exports, i t produces labour in particular commodities, whic h could not b e consume d a t home . .. . I f w e consul t history we shal l find , tha t in most nations , foreig n trad e ha s precede d an y refinemen t in home manufactures, an d give n birth to domesti c luxury. Like al l me n and , especially , wome n o f hi s time , Hum e wa s consciou s o f th e quit e extraordinary and , ultimately , revolutionary impact o n Europe o f the expansion, despit e inhibitions, of India n cotton textil e imports , startin g around 1670 . The memorabl e con temporary descriptio n o f th e impac t o n Frenc h wome n o f India n calicoe s earl y i n th e eighteenth centur y hold s generall y fo r Wester n Europe: 36 "Frui t defendu , le s toile s deviennent l a passio n d e toute s le s fille s d'Ev e francaises. " ("Forbidde n fruit , cotto n cloth becam e th e passio n o f ever y Frenc h daughte r of Eve." ) Abou t half th e peopl e o f France were said to have worn cottons at this time, and the evidence is that the passion did not abat e unti l 1757 , whe n th e Frenc h governmen t finall y abandone d it s rigorou s bu t smuggling-ridden inhibition s o n cotto n imports . Bu t ther e coul d b e n o mor e vivi d o r historically importan t illustration of Hume's doctrine. Foreign trade did yield an attractive luxury; the demonstration effect se t in motion a "fermentation " i n Western Europe (and a profit incentive ) that finally resulte d i n the textile machinery required to manufacture the cotton yar n tha t European hand s wer e to o clums y to produc e b y method s lon g use d i n India. Ther e i s a seriou s sens e i n whic h th e Britis h industria l revolution o f th e lat e eighteenth centur y wa s th e firs t import-substitutio n takeoff. In a more general passage, Hum e describes the central creative function of the merchant in term s tha t embrac e domesti c a s wel l a s foreign trade: 37 But whe n men's industr y encreases, an d their views enlarge, it is found, that the mos t remot e part s o f th e stat e can assis t eac h othe r a s wel l a s th e mor e contiguous, an d that this intercourse of good office s ma y be carried o n to the greatest exten t and intricacy. Henc e the origin of merchants, on e of the most useful race s of men, who serve as agents between those parts of the state, that are wholl y unacquainted , an d ar e ignoran t o f eac h other' s necessities . Her e are i n a city fift y workme n i n silk and linen , an d a thousand customers; an d these two ranks of men, so necessary to each other, can never rightly meet, till one man erects a shop, to which all the workmen and all the customers repair. In this province, gras s rises i n abundance: The inhabitant s abound i n cheese, and butter , an d cattle ; bu t wan t brea d an d corn , which , in a neighbouring province, ar e i n too grea t abundanc e for the us e o f the inhabitants . On e ma n

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discovers this . H e brings corn fro m th e one province an d returns with cattle; and supplyin g the want s of both, h e is , s o far, a common benefactor . The dynamic s of comparative advantage , a t home as well as abroad, thu s plays i n Hume the rol e o f virtuall y identica l concept s i n Adam Smith : the widenin g o f the marke t an d specialization o f function . Output i n Hume' s system , then , i s a functio n o f labor , land , an d manufactures ; the productivity of labor an d land is determined by the scale of manufactures; and the scale of manufactures is determined by the scale of trade, foreign and domestic, an d the productivity increase s provide d b y th e exploitatio n o f comparativ e advantage . But , a s always , Hume suffuse s hi s argument with his particular view of the human motives that drive the economic variables . Th e productivit y increase s reflec t th e increase d huma n effor t in duced, i n th e firs t instance , b y th e availabilit y of a widene d range o f "luxuries" and , then, by the cumulative experience o f merchant, worker, farmer, and manufacturer operating withi n a progressivel y mor e diversifie d economy , offerin g bot h heightene d chal lenges an d reward s that , i n Hume' s view , wer e th e optimu m setting withi n which men stretched thei r capacitie s t o the limi t and came to prefer frugalit y an d gai n to the imme diacy o f pleasure . But wha t about capital i n Hume's versio n of the basic equation? The most systemati c references t o savings and the supply of capital in Hume appear in his essay ' 'Of Interest.'' There he argues tha t it is the general prosperit y of a country, no t the money supply, tha t yields low rates o f interest; that rates of interest are a product of demand and supply; and in generating th e necessary suppl y of savings, once again the merchant emerges a s hero, this tim e a s mise r rathe r than that exploiter o f comparativ e advantage: 38 There i s n o cravin g o r deman d o f th e huma n min d mor e constan t an d insatiable tha n that fo r exercis e an d employment ; an d thi s desir e seem s th e foundation o f most of our passion s an d pursuits. . . . But if the employment you give him be lucrative, especially i f the profit be attached to every particular exertion o f industry , he ha s gai n so often i n his eye , tha t he acquires , b y degrees, a passio n fo r it , an d know s no suc h pleasur e a s tha t o f seein g th e daily encreas e o f hi s fortune. 39 An d thi s i s th e reaso n wh y trad e encrease s frugality, an d why , amon g merchants , ther e i s th e sam e overplu s o f miser s above prodigals , as , amon g the possessors of land , ther e i s the contrary. In his observations on interest, Hume reflects the fac t tha t a good dea l o f borrowing t o be observed i n his time was to sustain the accustomed level s of consumption of prodiga l landlords. Bu t Hume' s writing s als o contai n reference s t o borrowin g fo r productiv e purposes; e.g. , t o build a house. 40 And ther e i s an important observation o n the critica l role of capital (an d long leases) i n rendering British agriculture profitable. 41 Bu t it is fai r to conclud e tha t Hume's polemica l purposes , combine d wit h the essentially premoder n economies tha t concerned him , yielded less concern with the investment process than is to be foun d i n hi s successors . Hume' s active , miserl y merchant s wer e clearl y capabl e o f generating thei r ow n resource s fo r investment ; and i t was plowbac k investmen t by mer chants to exploit comparative advantage that drove Hume's system along its expansionist track. That kind of investment Hume could take for granted, once ' ' fermentation'' was set in motio n by a n expansio n of trad e and th e demonstratio n effect o f "luxuries"—intro -

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duced primaril y b y foreign trad e whos e rapid expansion wa s evidently the most dynamic feature o f th e Englis h (an d Scottish ) econom y i n the formativ e year s o f hi s life . Thus Hume could concentrate o n the contemporary debat e that focused on the determi nants o f th e rat e o f interes t rathe r than on all the determinant s o f th e rate o f investment .

Population and the Working Force As alread y noted , th e comfortabl e population-foo d balanc e o f Britain in the firs t hal f of the century yielded a rather complacen t perspectiv e o n the contemporary stat e of population. Thi s vie w flowe d fro m his centra l propositio n tha t population accommodate d itsel f to the resources availabl e for its support: 42 All ou r late r improvement s an d refinements , hav e the y don e nothin g to wards th e easy subsistenc e o f men, an d consequently toward s thei r propaga tion an d encrease ? Ou r superio r skil l i n mechanics ; th e discover y o f ne w worlds, b y which commerce has been s o much enlarged; th e establishment of posts; an d the use of bills of exchange: These seem al l extremely usefu l t o the encouragement o f art , industry , an d populousness . Wer e w e t o strik e of f these, wha t a check shoul d we give to every kin d of business and labour, an d what multitudes of families would immediately perish fro m wan t and hunger? But, lookin g bac k a t th e populatio n histor y o f othe r societie s i n othe r times , Hum e understood clearl y th e initia l Malthusian insight ; tha t is , th e geometri c potentia l o f th e human specie s (whic h Hum e estimate d could , i f unrestrained , yiel d a doublin g ever y generation) usuall y held i n chec k b y plague , slavery , war , infanticide , an d othe r limit s that "povert y an d necessity" ma y impose.43 As fo r th e qualit y of th e workin g force, Hum e begins b y evoking th e margina l lif e of the landless peasant in "rud e unpolished nations, where th e arts are neglected, all labour is bestowe d o n th e cultivatio n o f th e ground . . . . [Vassal s an d tenants ] ar e necessaril y dependent, an d fitted for slavery an d subjection; especially wher e they possess no riches, and ar e no t value d fo r their knowledge i n agriculture, as must alway s be th e case wher e the arts are neglected."44 As in his general theor y of growth, the low-level trap is broken by the demonstration effec t o f diversified consumers goods. "Bu t wher e luxury nourishes commerce and industry, the peasants, b y a proper cultivation of the land, becom e rich and independent; whil e the tradesmen an d merchants acquir e a share of the property, an d draw authority an d consideratio n t o tha t middlin g rank o f men , wh o ar e th e bes t an d firmes t basis o f public liberty." 45 In short, Hum e envisaged th e emergence o f higher productivity in the working force as a joint outcom e o f th e motivatio n generate d b y th e availabilit y o f "luxuries " an d th e practical experienc e o f production i n the diversified setting of a commercial, manufactur ing, an d sophisticate d agricultura l society .

Investment and Technology If there ar e few reference s t o investment in Hume, there are even fewe r t o machinery or technology. I believe i t to be the case that Hume's only explicit reference t o a particular technology i s the following: 46 "Ca n w e expect, that a government will b e well modelled by a people , wh o kno w no t ho w t o mak e a soinning-wheel , o r t o emplo y a loo m t o advantage?" Th e inde x to Rotwein' s valuabl e editio n o f Hume' s economi c writin g re -

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fleets the matter well. There is no entry for investment; the entry for industry is: "Se e Ar t and Industry ; Commerce. " Th e entr y fo r Ar t an d Industr y is: "See , Commerce , Lux ury." Th e reaso n fo r thi s neglec t is , again , th e particula r issue s o f polic y tha t Hum e addressed i n hi s systemati c attac k o n mercantilis t doctrine . Investmen t wa s certainl y a lower proportio n o f GNP tha n it was to become i n the last two decades o f the eighteent h century; probabl y unde r 5%. 47 Nevertheless , i t i s palpabl e tha t th e kin d o f intensel y commercial, premoder n manufacturing , and reasonabl y hig h productivit y agricultura l society tha t England had achieve d i n the second quarte r of the eighteenth century (and t o which Scotland aspired ) required a good deal of investment: for working capital in a quite rapidly expandin g domestic an d foreign trade; to build ships and docks, houses and shops; to mee t requirement s fo r depreciatio n an d fo r modes t expansio n i n manufacture s and, above all , i n agriculture. Althoug h Britain was to become a n increasingly import-depen dent agricultura l countr y i n the secon d hal f o f th e eighteent h century , th e vitalit y o f it s agricultural, a s wel l a s it s commercia l an d industria l sector s wa s critica l t o it s indus trialization and , indeed , it s victory over Napoleon. Afte r all , somethin g like 5 % of GNP allocated to investment is not a trivial figure. As for Hume all one can usefully sa y is that, having disposed to his satisfaction o f the mercantilist doctrine on the rate of interest, he was conten t t o leav e saving s an d investmen t i n the hands of his passionately acquisitiv e and miserl y merchant s wh o woul d plo w bac k thei r expandin g profits . An d h e coul d assume that , i n stimulatin g diversified manufacture s by th e exploitatio n o f comparativ e advantage, th e "mechani c arts " woul d flouris h an d eve n hi s normall y prodiga l pro prietors of lan d would divert som e o f their surplu s from consumptio n t o investmen t an d "study agricultur e a s a science, an d redouble thei r industr y and attention." One fundamental and abiding proposition relatin g to technology was, however, enunci ated by Hume with clarity: "necessit y . . . is the great spur to industry and invention."48 Business Cycles See pp. 41-42, below .

Relative Prices Hume's histor y o f England devotes a good dea l o f space t o economic matters , includin g observations o n pric e trends. 49 A t severa l point s Hum e introduce s wha t wa s late r t o become a major theme of classical economics , reemergin g for two centuries at times when the relativ e price s o f foo d an d ra w material s wer e high ; tha t is , technica l progres s i n manufactures tend s t o b e mor e rapi d tha n i n agriculture . Therefore , h e concluded , th e prices o f basi c commoditie s relativ e t o manufacture s woul d ris e ove r time . Here , fo r example, ar e tw o o f Hume' s observation s o n th e cours e o f event s sinc e th e sixteent h century.50 Labour an d commoditie s hav e certainl y rise n sinc e th e discover y o f th e West-Indies; bu t no t s o muc h i n ever y particula r a s i s generall y imag ined. . . . [T]h e additiona l art employed i n the fine r manufacture s ha s even made som e o f thes e commoditie s fal l belo w thei r forme r value . . . . Th e commodities whose price has chiefly risen , are butchers meat, fowl, an d fis h (especially th e latter) , whic h canno t be muc h augmente d in quantit y b y th e increase o f ar t an d industry .

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The art s o f manufactur e wer e muc h mor e advance d i n othe r Europea n countries tha n in England ; an d eve n i n Englan d thes e art s ha d mad e greate r progress tha n the knowledge of agriculture; a profession whic h of all mechanical employment s require s th e mos t reflectio n an d experience . The trend o f price an d relative pric e movement s ove r th e period durin g which Hume' s basic concept s forme d u p wer e no t calculate d t o sti r significan t controvers y except , perhaps, th e rol e o f lo w grai n price s i n stimulatin g th e gi n mania , whic h di d no t en d definitively unti l stron g publi c polic y measure s wer e take n i n 1751 . Afte r a perio d o f shortage an d hig h price s towar d th e clos e o f th e Wa r o f Spanis h Succession, th e whea t price fel l an d remaine d i n a lo w rang e dow n t o mid-centur y except fo r occasiona l ba d harvest years (Figur e 2-2) . Bread wa s cheap and spirits as well. The trend in wool prices was also downward. Import prices (e.g. , fo r sugar, tea, bar iron) fluctuated strongly with phases o f wa r an d peac e bu t wer e als o generall y lowe r a t mid-centur y tha n i n th e firs t decade. Hume discusses prices i n his economic essays primarily in short-run terms relate d to his exposition o f the quantity theory of money, includin g his application of it to force s making fo r equilibrium in foreign trade— a them e that still earns Hum e a n honored plac e in elementar y economic s textbooks .

The Stages of and Limits to Growth Early i n the firs t o f Hume's economi c essay s ("O f Commerce" ) ther e i s a brief, rathe r conventional reference to historical stages of economic growth , as well as a faint anticipa tion o f Coli n Clar k e t al. o n th e shif t i n th e distributio n of th e workin g force a s growth proceeds.51 The bul k of every stat e ma y b e divided into husbandmen and manufacturers. . . .A s soo n a s me n qui t thei r savag e state , wher e the y liv e chiefl y b y hunting an d fishing , they mus t fal l int o these tw o classes ; thoug h the art s of agriculture emplo y a t firs t th e mos t numerou s part s o f society . Tim e an d experience improv e s o muc h thes e arts , tha t th e lan d may easil y maintai n a much greater number of men, than those who are immediately employed i n its culture, o r wh o furnis h th e mor e necessar y manufacture s to suc h a s ar e s o employed. But Hume' s interes t wa s not in elaborating historica l stage s o f growth. Hi s interes t lay in a vital contemporary, cross-sectiona l proble m stemmin g fro m differences i n stages o f growth. Indeed , th e most strikin g aspect of Hume's economi c writin g is his treatment o f the "ric h country-poor country" problem; tha t is, the dynamics of countries or regions at different phase s o f growt h i n a n er a befor e th e firs t takeof f ha d occurre d or , t o us e Kuznets's vocabulary , befor e modern economic growt h began in Great Britain. 52 Hume' s treatment o f the rich country-poor country problem, befor e majo r technological innova tion had become a more or less regular flow, led directly to his contemplation of the limits to growth . Three circumstance s made thi s subject a matter of absorbin g interest in the eighteent h century.53 First, th e voyage s o f discovery an d th e foundin g o f colonies i n America and Asia had acquainted thoughtfu l European s with a new, widened array of societie s for comparativ e analysis and posed a fresh set of questions to be addressed to the societies of contemporary

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Europe and , retrospectively , o f the classical world . All of this was intellectually exciting at a time when men were consciously reaching for new ways of looking at the human and social condition . Second, th e wid e spectru m o f societie s availabl e fo r examinatio n pose d a dynami c question a s wel l a s a fiel d fo r comparativ e stati c analysis . Woul d th e riche r countries , applying more sophisticated technologie s and more complex pattern s of specialization an d trade, b e abl e to hold their lead; or would th e poor countries with lowe r mone y wage s catch u p wit h the m i n time ? Th e questio n relate d t o bot h recen t histor y an d critica l contemporary problems : the dramatic economi c decline of Spai n in the seventeenth cen tury an d the equall y dramatic rise o f the Dutc h Republic; th e relative rise o f Britain and France i n the eighteent h centur y vis-d-vis th e Dutc h Republic; th e protracted struggl e in which Britai n an d Franc e wer e locked ; th e dramatic difference s betwee n th e Britis h colonies i n Nort h Americ a an d th e Iberia n colonie s t o th e south . Ho w on e judged th e relative prospects of the currently rich and poor societie s raise d issue s over a wide rang e of domestic as well as foreign economic policy , including policy toward colonies. Abov e all, i t raise d th e issu e o f whethe r i t wa s th e interes t of a richer natio n to frustrate , i f i t could, the rise of poor nations; was it a matter of indifference; o r was it a positive interes t of th e ric h nation s to encourag e th e developmen t o f the poor ? Third, ther e wa s a narrower but even mor e sharpl y focused question: What would b e the fate of Scotland, locked sinc e 170 7 into a common market with an economically more advanced England ? Neither Hum e no r Smit h wa s a parochia l Scotsman . The y wer e bot h me n o f th e essentially internationa l worl d o f ideas , comfortabl e i n Pari s an d Londo n a s wel l a s Glasgow an d Edinburgh. They drew on direct observation a s well as reading ove r a wide front. Bu t they were no doubt also influenced, to a degree, b y the course of the econom y of Scotlan d i n the perio d whe n their majo r concepts took shape . In dealing with this linkage, we are fortunate t o have a recent, directly relevant essay: T. C . Smout' s "Wher e Ha d th e Scottis h Econom y Go t to b y th e Thir d Quarte r o f th e Eighteenth Century?" 54 Table 2. 1 summarize s the statistical data availabl e on the Scot tish econom y fo r five yea r interval s coverin g th e period 1750-175 4 to 1770-1774 . Since I a m suggestin g tha t Hume' s an d Smith's idea s ma y have crystallized by , say , 1750, i t is helpful that Smout also provided a broad sketc h o f how the Scottis h econom y had evolve d sinc e th e Ac t o f Unio n o f 1707 . It is useful t o begin by noting a persistent characteristi c of the Scottish economy i n the early eighteent h centur y that leave s it s mark o n Hume' s and Smith's vie w of the food population problem . Excep t fo r year s o f extremely ba d harvest s when famine was pos ble—which occurre d a s lat e a s th e 1690s—Scotlan d wa s a foo d surplu s regio n wit h difficulty i n finding export markets. Unmarketable agricultural surplus, rather than chronic dearth , wa s par t o f the loca l backgroun d ou t o f which Hume and Smit h emerged. Down to mid-century, three positive elements in Scottish economic development can be observed: progres s in administration, expanded transport facilities, an d modest improve ments i n agricultural productivity converged t o en d the dange r of famin e i n bad harves t years; Glasgow became a vital center for the tobacco trade, which expanded strongly fro m the 1730 s unti l th e America n War o f Independenc e with spreadin g effects i n th e whol e west-central regio n mor e substantia l tha n earlie r analyses had suggested ; and the important rura l handicraft line n industr y entere d a 20-yea r period o f modes t expansion in th e mid-1740s. From tha t time , i n fact , th e pac e of progress quicken s over a wide front. Th e rat e of

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Table 2.1. Scottis h Economi c Data, 1750-177 4 (by quinquennia , inde x number s 1755-175 9 = 100 ) Prices 17501 Eas t Lothian oat s 9 2 Lanar k oatmea l 10 3 Pert h oatmea l 9 4 Kintyr e bullock s 13 5 Kintyr e cow s 13 Wages 6 Midlothia n da y laboure r 8 (money) 7 Midlothia n da y laboure r 9 (oatmeal equivalent ) Taxes 8 Yiel d o f ol d duty' o n 10 beer 9 Yiel d o f ol d duty ' o n 11 malt Industrial production 10 Pape r 7 1 1 Line n (volume ) 8 12 Line n (value ) 10 13 Fla x import s — Trade (official values) 14 Home-produce d export s — 15 Tobacc o imports — 16 Othe r import s — Agricultural change 17 Lan d surveyor s 7

4 17559 10 0 10 3 10 5 10 3 10

9 17600 10 0 10 0 10 0 10 0 10

4 17654 12 1 13 5 12 3 15 0 13

9 17704 13 1 13 7 14 1 14 3 14

4 0 3 3 6 3

8 10

0 12

5

5 10

0 10

1

3 10

0 10

18

17

1

8 10

0 10

39

49

2

1 10 9 10 0 10 10

0 16 0 12 0 13 0 13

3 22 6 13 3 15 1 16

8 27 4 12 8 14 1 16

1 9 0 4

10 10 10

0 11 0 15 0 13

9 12 8 18 3 18

1 14 2 25 5 20

2 3 0

5 10

0 13

4 16

8 23

5

SOURCE: T . C . Smout , Chapter 2 i n Istva n Hon t an d Michae l Ignatieff (eds.) , Wealth an d Virtue, Th e Shaping o f Political Economy i n the Scottish Enlightenment, p. 53 , wher e original sources are given. Smou t also supplies (p . 52 ) the absolute data, rather tha n inde x numbers.

population increase , probabl y negligibl e in the first hal f of the century, averages .5% per annum between 175 5 and 1775 , wit h the population of Scotland's fiv e larg e town s rising by 30% ; cattl e export s t o Englan d increas e by 50 % betwee n 174 0 an d 1770 ; and , i n a remarkable surge , ban k asset s increas e almos t tenfold between 174 4 an d 1772 , th e not e issue, 16-fold . A s Table 2. 1 demonstrates , agricultura l prices rise , th e increase i n industrial productio n an d foreig n trad e accelerates , an d real wage s just abou t hold thei r own . The markedl y increase d activit y of land surveyor s suggest s a phase o f agricultural prosperity validate d b y nonstatistica l evidence . Smout concludes: 55 "B y 180 0 . . . Scotland . . . had . . . reached th e stage o f takeoff. Bu t that position ha d no t been reache d i n Scotland in the quarter-century prior t o the publication o f the Wealth o f Nations." Th e economy o f Scotland, lik e England's, wa s in an active stage of preconditions for takeoff i n the period when Hume's and Smith's idea s were forme d an d elaborated ; bu t no t a s fa r forwar d a s Englan d i n tha t wide-ranging dynamic process . It i s quit e natural , then , tha t Hume , livin g i n a n econom y tha t wa s movin g forwar d

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vigorously from, say, the second hal f of the 1740s, but which was clearly lagging its more advanced an d muc h large r neighbor , shoul d hav e bee n draw n t o speculat e o n ho w th e relations betwee n dynami c richer an d poorer countrie s woul d evolve with the passage of time. But , again , it shoul d be underline d that Hume and Smith wer e in no sens e tightly bound b y th e Scottis h experience . In fact, Hume' s analysi s of the rich country-poor country problem ca n only be understood i n a larger context : a s part of his systematic contention against three doctrines of his time—a contentio n w e hav e alread y observed . I n tha t sens e hi s analysi s o f th e ric h country-poor country problem constitute s a kind of synthesi s o f his theory of economi c growth. The thre e doctrine s tha t Hume challenged wer e these : • Tha t virtu e i n societie s wa s associate d wit h austerity , i f no t poverty ; luxur y and wealth, wit h corruption an d decay. 56 • Tha t an influ x o f bullion, derived fro m a favorable trade balance would assure th e strength an d tradin g advantag e o f a rich country. • Tha t th e economi c ris e o f poo r countrie s coul d onl y b e a t th e expens e o f ric h countries. Hume's response ca n b e summarize d as follows: 1. Wealt h i s the friend o f virtue. The process of developing "luxuries, " requiring the systematic exploitatio n o f comparativ e advantage , i s centra l t o economi c growth ; and economi c growt h an d prosperity are fundamental to the security of the state, a civilized socia l life , politica l liberty , and , abov e all , t o th e creativ e fulfillmen t of individual talent s an d o f othe r legitimat e source s o f human satisfaction. 2. Th e demonstration o f the possibility of economic growth sets in motion both within societies an d among the m a "fermentation " tha t yields simila r efforts t o cultivate commerce, industry , an d refinement s i n the mechanica l arts . 3. I n particular , poo r nation s hav e th e capacit y t o catc h u p wit h th e ric h nation s because the y enjoy , i n thei r perio d o f transition , th e advantag e o f lowe r mone y wages a s wel l a s a backlog o f hithert o unapplie d technology . But wha t of the fat e of rich nations in the face of the rise to riches of the poor? Befor e the debat e wa s finished , Hum e woul d produc e severa l answers , bu t her e i s th e mos t fundamental, buildin g u p t o wha t was , a t a tim e o f chroni c mercantilis t confrontatio n between Britai n an d France, a rather dramati c climax: 57 It ough t .. . t o be considered , that , by the encrease o f industry among th e neighbouring nations , th e consumptio n o f ever y particula r specie s o f com modity i s als o encreased ; an d thoug h foreig n manufacture s interfer e wit h them in the market , the demand for their product ma y still continue, o r even encrease. An d shoul d i t diminish, ought the consequenc e t o be esteeme d s o fatal? If the spirit of industry be preserved, i t may easily be diverted fro m on e branch to another; an d the manufacturers of wool, fo r instance, b e employe d in linen, silk, iron, or any other commodities, for which there appears to be a demand. W e nee d no t apprehend , tha t al l th e object s o f industr y wil l b e exhausted, o r tha t our manufactures , while they remai n on a n equa l footin g with those of our neighbours , will be in danger of wanting employment. The emulation amon g riva l nation s serve s rathe r to kee p industr y aliv e i n al l o f

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x Classical Economists them. And an y people is happier wh o possess a variety of manufactures, than if they enjoyed one single great manufacture , in which they are all employed . Their situatio n is less precarious; an d they will feel less sensibly those revolutions an d uncertanties , t o whic h ever y particula r branc h o f commerc e wil l always b e exposed. .. . I shal l therefore ventur e to acknowledge , that , not only as a man but a s a British subject, I pray for the flourishing commerce o f Germany, Spain , Italy and even France itself . I am at least certain, that Great Britain, an d al l those nations , would flourish more , di d their sovereigns an d ministers adop t suc h enlarged an d benevolent sentiments towards each other .

But Hume' s ful l treatmen t o f th e proble m di d no t conclud e o n s o unambiguousl y confident a note. Hi s furthe r discussio n of the catching-up process include d som e obser vations tha t plunge d hi m int o controversy; fo r h e wa s to o goo d a historia n not t o not e that prosperit y o f countrie s an d region s coul d prov e transitory: 58 "Manufac tures . . . gradually shif t thei r places, leavin g those countrie s an d provinces whic h they have already enriched , an d flyin g t o others, whithe r they are allured by the cheapness o f provisions an d labour ; til l the y have enriche d ther e also , an d ar e agai n banished b y th e same causes. " When challenged o n this apparently gloomy prospect fo r the rich, by two able contemporaries (Jame s Oswald and Josiah Tucker), Hum e argued that what he had in mind was a division o f manufacturin g according t o comparativ e advantage ; tha t is , th e ric h woul d concentrate o n productio n o f capital - an d skill-intensiv e manufactures; up-and-coming countries an d provinces woul d concentrate o n simpler and more labor-intensive manufactures.59 As Tucker perceived , Hume' s clarificatio n lef t danglin g the question of whether this division of effort woul d persist; or whether relative wages and prices woul d move to equality between a rich and formerly poor country when the "fermentation " had yielded a full exploitatio n o f comparativ e advantage . An d i n a phrase i n a lette r o f 175 8 t o Lor d Kames, Hum e does , indeed , indicat e that poorer nation s would be expecte d to move on from "coarser " manufacture s to the "mor e elaborate" wit h the passage o f time. 60 In fact, Hume did not rule out the possibility that the dynamics of the rich country-poor country problem migh t in time yield a decline i n foreign trade:61 " . . . a nation may lose most o f it s foreign trade, an d yet continue a great a powerful people. I f strangers wil l not take any particular commodity of ours, w e must cease to labour in it. The same hands will turn themselves toward s some refinement in other commodities, whic h may be wanted at home." Her e Hum e ha s Chin a explicitl y i n mind ; bu t a n implicatio n o f hi s argumen t might be that ther e coul d be circumstances when tariff protectio n migh t be justified. Th e bulk o f Hume' s analysis , however , envisage s a n expansionist, libera l trad e policy . The debate o n these issues also generated a modification of Hume's well-know n speci e flow-price leve l hypothesis . Hi s central argumen t was that an inflo w o f bullion derived from a favorable trad e balanc e woul d correct itself . I t would raise the price leve l but not output, since the latter was determined b y the real factors at work, and full employmen t of those resource s wa s implicitly assumed ; the rise in prices woul d inhibit exports, encour age imports; an d th e trade balanc e woul d shif t unfavorably . Hume acknowledged, how ever, a kind o f Keynesia n transitiona l exception:62 [S]ome time is required before the mone y circulates through the whole state, and make s it s effec t b e fel t o n al l rank s of people . A t first , n o alteratio n is perceived; b y degrees th e price rises, firs t o f one commodity then another; till the whol e a t leas t reache s a just proportio n with th e ne w quantit y o f speci e

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which is in the kingdom. In my opinion, i t is only in this interval or intermediate situation , betwee n th e acquisitio n o f mone y an d ris e o f prices, tha t th e encreasing quantit y o f gol d an d silve r i s favourabl e t o industry. Hume's vie w appears , then , t o hav e bee n this . Laten t i n a syste m o f primitive , lo w productivity agricultura l economie s ther e la y th e potentialit y fo r muc h higher level s o f real income s fo r all , i f th e potentialitie s o f comparativ e advantag e wer e exploite d b y domestic an d foreign commerce. I n a sense, Hum e came to appreciate that substantial idle capacity existed withi n such a system. Th e process o f bringing this idle capacity into play could b e se t i n motio n b y th e exampl e o f on e o r mor e countrie s tha t ha d bee n stirred , probably b y foreig n trade , int o demonstratin g th e attractiv e product s th e laten t poten tialities o f th e syste m migh t yiel d an d ho w the y coul d b e exploited . Th e engine s o f exploitation wer e the three huma n "cause s of labour" which were strengthene d bot h b y the initia l demonstratio n effec t o f th e "luxuries " introduce d int o th e syste m an d th e stimulus provide d b y th e challenge s an d reward s involve d i n closin g th e ga p itself . Hume's wa s thus a truly dynamic, psychological theor y of economic growth . Productio n under condition s wher e comparativ e advantag e wa s bein g exploite d increase d huma n skills, th e art s o f manufacture, an d the capital stock . A n expansion in the mone y suppl y might hav e a n ancillary , transitiona l real effect . But a flow o f major technological innovation s does not appear in Hume's system ; for it had not yet happened. H e did not, therefore, believ e in unlimited growth. His final dictum on th e limits t o growth, withi n th e technological possibilitie s he coul d perceive , clearl y acknowledged tha t a limit did exist:63 "Th e growt h of everything, both in arts and nature, at last check s itself.'' Bu t one gets the impression tha t Hume was not much interested i n driving this argument about the long-run future o f the various economies o f the world to a dogmatic conclusion . A s a historian an d philosopher, h e understood wel l the complexit y and impenetrabilit y o f the force s tha t woul d determin e th e ultimat e outcome i n a world subject t o endles s change . An d besides, h e wa s conscious tha t on e could project man' s fate onl y o n th e basi s o f a n inadequat e fe w thousan d year s o f recorde d history . Th e opening passag e i n "O f th e Populousnes s o f Ancien t Nations " probabl y reflect s mos t accurately hi s ne t judgment: 64 There is very little ground either from reason or observation to conclude the world eternal o r incorruptible. Th e continual and rapid motio n o f matter, th e violent revolutions with which every part is agitated, th e changes remarked in the heavens, th e plain trace s as well a s tradition of an universal deluge, o r in general confusio n o f th e elements ; al l thes e prov e strongl y th e mortalit y o f this fabric of the world, an d its passage, by corruption or disolution, fro m on e state o r order to another . But this mild, long-run philosophic pessimism about the staying power of greatness i n a single country doe s no t capture Hume' s inherentl y cheerful an d activist temper . H e was primarily concerned to use his qualities of mind and character to move the world and time of whic h h e wa s a part towar d mor e civilize d policies; an d this he did . Noneconomic Factors It is appropriate tha t Part I of this book begins with David Hume and ends with Karl Marx. Of all the classical economists, these two insisted most strongly on embedding economics

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in the study of the dynamics of whole societies a s they moved through history. Moreover , both sa w economi c growt h a s a powerfu l agen t i n social, political , an d cultural change . On th e othe r hand , thei r view s o f huma n beings and thei r motivations, o f th e optimu m organization o f societie s an d thei r economies, diffe r abou t a s radically as i s possible fo r social scientist s o f th e sam e culture . I n part , thos e difference s reflec t th e century' s revolutionary chang e tha t separate s thei r formativ e years . But , at bottom, i t i s Hume' s view o f huma n beings i n societ y tha t mos t sharpl y separate s hi m fro m Marx . From beginnin g t o end , Hume sa w huma n being s a s comple x unit s tryin g t o fin d satisfying balance s amon g contradictor y impulses . Societies—thei r political , social , an d economic organization an d their culture—determined th e choices open to men in express ing thei r impulses ; but , in a dynami c process, societie s wer e themselve s shape d b y th e choices me n mad e earlie r amon g Ji e option s the y then perceive d t o be open . In this way of proceeding t o study the dynamics o f man in society, Hum e was directly in the line from Plat o to Freud.65 Plato analyzed the problem o f balancing the "spirited " side of man, "appetite " and "reason"; and he linked psychology and politics by defining these thre e powerfu l contendin g forces a s "th e state withi n us." Th e roughly analogous human element s for Freu d were , of course , the id, ego , and superego , whic h becom e societal variable s i n his Civilization an d Its Discontents. What wer e the equivalent primal impulse s identifie d by Hume? It will be recalled tha t he defined the "cause s of labour" as "action, pleasure, and indolence." As developed by Hume, the satisfaction s generate d by "action " can be broadly linke d to Plato's spirite d side o f ma n an d Freud' s id . I n Hume' s sense , "action " constitute s th e exercis e o f physical, mental , o r artisti c talen t in a settin g o f challenge, fo r som e practical purpose . Hume's wide-rangin g definitio n o f "pleasure " surel y parallel s Plato' s appetit e an d Freud's ego. "Indolence" emerge s no t as a positive cause o f labor bu t a requirement of respite fro m th e pursui t o f actio n o r pleasure . What, then , of reason an d the superego, th e balance wheels that lead man to disciplin e his energies an d ambitions, passions an d appetites to the requirements of organized social life? Th e neares t equivalen t in Hume i s his concep t o f "sympathy " tha t link s th e indi vidual to his fellow men and women and heightens the virtues required for a good society. This i s how Rotwei n describe s Hume' s linkage: 66 As th e vehicl e fo r th e growt h o f a sens e o f moralit y i t [sympathy ] would appear t o be operative in a twofold fashion. Most generally . . . the evocation of a benevolent respons e t o others depend s in a large measur e on the vivacity of ou r perception o f their emotions . . . . Mos t fundamentally , then,.the encouragement give n to "humanity " by the development o f a more closely knit society may be traced to its influence in a widening basis for the association of "self" wit h others . . . . Also , a s Hume recognizes , w e "sympathis e wit h others i n the sentiments the y entertai n of us." Thus , nourished by a growing concern ove r ou r reputatio n i n society , "thi s constan t habi t o f surveyin g ourselves, a s it were i n reflection, keep s aliv e al l the sentiment s o f right and wrong, and begets, i n noble natures a certain reverence for themselves a s well as others , whic h i s the sures t guardia n of ever y virtue." If w e assume—a s w e should—that , in seekin g t o evok e th e basi c component s o f human motivation, Plato, Hume , and Freud are, at their best, not scientists but evocative philosopher-poets, "sympathy " doc s bea r a family relatio n to the healing and stabilizing

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role o f Plato's "reason " an d Freud's "superego. " I t is meant to capture the process b y which human beings internaliz e the values necessary fo r societies t o operate i n a reasonably civilized way . Hume's view of human nature, however , wa s not simple or mechanical. I n Rotwein's good summation , Hume' s "analysi s conveys a n appreciation o f th e ineffabl e densit y o f human behavior an d an understanding of the opposing force s o n which it rests."67 Mor e vividly than Adam Smith, Hume perceived th e interaction amon g the irreducible element s of human nature he could discern; the complexities embedde d i n the concepts h e defined, and eve n th e wil d car d o f inexplicabl e irrationalit y tha t ofte n characterize d huma n behavior. Nevertheless, fro m thi s matri x o f competing , interacting , ofte n contradictor y huma n impulses, Hum e fashione d a quit e straightforwar d operationa l economi c doctrine . Th e expansion and diversification of manufactures and the increase i n agricultural productivity brought about by the expansion o f commerce and the exploitation o f comparative advan tage no t only enriche s private life, b y expanding the range of choices ope n for the pursuit of actio n an d pleasure , bu t als o ha s wide-ranging , benig n socia l consequence s fo r th e noneconomic dimension s o f society, includin g provision o f the foundation for free demo cratic government. 68 In short, Hume' s analysi s o f the economic proces s an d his prescriptions fo r policy ar e simply part o f his visio n of the goo d lif e fo r individual s and societies ; h e sa w economi c change a s fundamental to social and political change; but he also saw economic chang e as dependent rathe r mor e o n noneconomi c tha n economic huma n motives . A fina l wor d i s appropriat e abou t Hum e th e ma n becaus e ther e wa s a clear linkag e between hi s personality and his view of the human condition. H e was famous in his time, much observed, writte n about then and subsequently. We have his own terse autobiogra phy and Adam Smith's moving account of Hume's final days. 69 In what he called hi s own "funeral oration, " Hume described himsel f as " a ma n of mild dispositions, of command of temper , o f a n open , social , an d cheerfu l humour , capabl e o f attachment , bu t littl e susceptible o f enmity , an d o f grea t moderatio n i n al l o f m y passions. Eve n m y lov e o f literary fame , m y ruling passion, neve r soure d m y temper, notwithstandin g m y frequent disappointments.'' Th e testimony of his contemporaries an d the researches o f biographers do not significantly alter this self-portrait; although there is , no doubt, somethin g stylize d and studie d i n l e bon David whic h emerges.70 This personality—wis e an d balanced, ironic , sceptical , bu t committed t o the cause of humanity—contributed t o th e breadt h o f visio n tha t mad e hi s essay s "Th e Cradl e o f Political Economy " and led one of Adam Smith's biographer s to conclude: " . . . bu t for Hume, Smit h coul d neve r hav e been." 71

Adam Smith (1723-1790 ) Like hi s olde r frien d Davi d Hume , Ada m Smit h spen t hi s professiona l lif e formulatin g and articulatin g th e natura l law s governin g peopl e i n society . Hi s teachin g an d writin g embrace no t onl y psycholog y an d philosophy , politic s an d economics , sociology , law , and history , bu t astronom y an d eve n poetry , th e theater, an d othe r branche s o f culture. Smith's Theory o f Moral Sentiments an d Wealth of Nations were , in Bagehot's words, " a fragment o f the immense design of showing the origin and development of cultivation and

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law; or , a s w e ma y perhap s pu t it , no t inappropriately , o f sayin g how , fro m bein g a savage, ma n ros e t o b e a Scotchman." 72 Th e desig n wa s neve r completed ; bu t th e framework o f Smith' s approac h t o economic s wa s n o les s tha n th e dynamic s o f human beings a s socia l animals . In hi s Theory o f Moral Sentiments (1759 ) Smith , lik e Hume , recognizes tha t human s may be stirre d t o increased economi c effor t b y the attraction of consumers good s beyon d the bare necessities. 73 Hume regarded suc h luxuries tolerantly, no t only as a stimulant but as softening the harshness o f life; but Smith viewed thes e "triflin g conveniences " as "i n the highes t degre e contemptible." 74 Nevertheless , th e willingnes s of human s t o pursu e these illusor y satisfaction s wa s a n essentia l elemen t i n th e working s o f "a n invisibl e hand" that , a s Hollander point s out , appear s firs t i n hi s Theory o f Moral Sentiments, 1 7 years before Th e Wealth o f Nations. 75 And , in general, Ada m Smith's view of the human race, includin g me n o f commerc e an d manufacturing , let alon e profligat e landownin g country gentlemen an d Oxford dons , wa s often no t flattering. There is a strand o f almos t Restoration goo d chee r in Hume's perspectiv e o n the human condition notabl y lacking in the complex , ambivalen t perspectiv e o f hi s dou r younge r friend . Nevertheless , whe n Smith turned to economics, th e individual appeared a s a somewhat simpler characte r than Hume's centra l figur e who found Aristotelia n happiness in the full exercis e of his power s in a setting that combined challeng e wit h potentially usefu l results . Ther e is considerabl e justice i n th e observatio n o f a n anonymou s wi t tha t Smit h though t "ther e wa s a Scotchman insid e every man." 76 For mainstream moder n economists , Smith' s economi c man, unconsciously doing public good b y doggedly pursuing private advantage, is, on the whole, a comfortabl e an d familia r character . But tha t imag e i s too comfortabl e an d too familiar ; for Adam Smith' s vie w o f human motivation wa s muc h mor e comple x tha n i s ofte n credited . Hi s Theory o f Moral Sentiments open s wit h th e followin g no t sufficientl y quote d sentence : "Ho w selfis h soeve r man ma y b e supposed , ther e ar e evidently som e principle s i n his nature , whic h interes t him i n th e fortun e o f others , an d rende r thei r happines s necessar y t o him , thoug h h e derives nothin g from it , excep t th e pleasure o f seein g it. " The Wealth o f Nations i s mor e nearl y a conventiona l treatis e tha n Hume' s selective , brief tract s fo r the times; and it is almost ten times the size of Hume's collected economi c essays. Th e Wealth o f Nations doe s no t marc h forwar d wit h quit e the well-hone d main stream logi c o f a moder n economic s textbook . Ther e ar e man y passage s o f illustratio n from histor y and the contemporary scen e that would now be widely regarded a s diversionary. Bu t it's al l there. Smith' s theory of economic growth , fo r example, lend s itsel f quit e easily t o mathematical formulatio n in the modern style ; an d a good man y have tried thei r hand.77 And, as shall emerge, Smith had something to say about almost every variable on our standar d checklist . Smith was 1 2 years younger than Hume; but Britain's economic settin g in his formative years di d not diffe r significantl y from tha t of his great friend and predecessor. Specifical ly, b y 1753 , whe n Smit h wa s 3 0 year s old , Britai n wa s stil l a ne t grai n exporte r an d operating it s lively commercial an d proto-industrial economy with premodern technology . On the other hand, Smith lived until 1790 , an d the fifth an d final edition of The Wealth of Nations wa s publishe d i n th e previou s year . I t contain s virtuall y nothin g t o sugges t a n awareness o f th e thre e grea t economi c development s since mid-century : th e gatherin g pressure o f population increase o n th e foo d supply , yielding a rise in grain prices an d a n erratic shif t o f Englan d fro m a ne t grai n expor t t o a ne t grai n impor t position ; marked

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acceleration o f inventive activity from 176 0 forward; and the coming on stage in the 1780 s of thre e majo r innovation s that virtuall y define th e firs t Industria l Revolution: machin e and factory manufacture d cotton textiles; Watt's mor e effectiv e steam engine; and Cort's method fo r fabricatin g iro n wit h coke. 78 The Basic Growth Equation In Hume' s versio n o f th e basi c growt h equation , capita l formatio n (saving-investment ) appears virtuall y a s a by-produc t o f th e expansio n o f trad e an d th e plowbac k o f th e creative bu t miserl y merchant' s profits . I n Smith , labor , land , an d capita l ar e unam biguously th e thre e factor s o f production; bu t the system i s driven forward, as in Hume, by th e saving s o f th e frugal , wh o ar e assume d t o invest al l savings , withou t leakage . Leakage, a s we shal l see , occur s whe n the rich an d government indulg e in expenditure s that emplo y "unproductive " labor . I n Hume , capita l mad e possibl e th e exploitatio n of regional o r international relativ e advantage ; in Smith, capital permits th e widening of the market and, thereby , th e division of labor. Capital is mainly envisaged as working capital supplying labo r wit h necessaries, ra w materials , an d simpl e tools . "Machines " appea r somewhat mor e explicitl y i n Smith than in Hume, bu t they come to much the same thing as Hume's "mechani c arts." In explaining how the division of labor increases productivity, Smit h identifie s thre e forces: 79 th e worker' s increas e i n dexterity ; the savin g o f th e worker's tim e a s h e concentrate s o n a singl e tas k rathe r tha n move s fro m on e tas k t o another; an d ' 'the inventio n of a great numbe r of machines whic h facilitate and abridg e labour, an d enabl e on e ma n to d o the wor k o f many." Thes e significan t refinements of familiar technologie s h e distinguishe s fro m occasional , rar e majo r technological break throughs—an importan t distinction to the best of my knowledge not to be found earlier in the literatur e o f economics . Smith's self-reinforcin g growth process—i n whic h increased capita l investmen t per mits th e expansio n o f th e marke t which , i n turn, generates increase d profit s and furthe r investment—does no t proceed indefinitely. A limit is set by a nation's "soi l and climate , and its situation with respect to other countries'' a s well as by its ' 'laws and institutions.' ' This statemen t woul d appea r t o imply diminishing returns to agriculture and to efforts t o expand market s b y geographic extension . We shal l explor e th e component s o f Smith' s versio n of th e basi c equatio n i n greate r detail below . Here , we simpl y note that , in its framework, it is quite familia r and , in a sense, modern , althoug h i t i s applie d t o a societ y wit h premoder n technolog y i n bot h agriculture an d manufacturing . Productivit y increases mainl y via a n incrementa l refinement o f old , familia r technologie s t o exploi t th e potentialitie s o f widene d market s an d specialization rathe r tha n vi a th e successiv e introductio n o f majo r innovation s creatin g new industrie s o r radicall y alterin g method s o f productio n i n ol d industries . Fro m th e 1780s, innovatio n altere d i n both characte r an d scale . Smith' s concep t o f mainl y incre mental technologica l change , brough t abou t b y inventiv e craftsme n i n th e workshop , could n o longer suffice ; althoug h it was so convenient that some economists clung to it for two centuries . Afte r th e 1780 s Smith' s occasiona l majo r invention s became an uneven flow o f changing composition; but this phenomenon, yielding endless disequilibrium, was so inconvenien t fo r post-187 0 mainstrea m economists tha t the y hav e stil l no t foun d a credible wa y t o dea l wit h it.

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Table 2.2. Grea t Britain : Trade i n Wheat, 1750-178 9 Net export s (including flour ) annual average

1750-1759 1760-1769 1770-1779 1780-1789

Net import s ( — ) (in thousan d quarters )

312 136

-43 -23

SOURCE: T . S . Ashton , Economic Fluctuations i n England 1700-1800 (Oxford : a t th e Clarendon Press , 1959) , p . 183 .

Population and the Working Force Like Hume, Smith reflect s no specia l anxiet y about the population-food balance i n Britain; althoug h the trend of the wheat price (Tabl e 3.1) an d net wheat and flour export s and imports (Tabl e 2.2 ) clearl y justified some attentio n in th e 4 decade s befor e his deat h i n 1790.80 The average figure fo r the 1790 s was net imports of 198,00 0 quarters (the British imperial quarter equale d 8 bushels), and the setting was ripe for the first edition , a t least, of Mal thus on population . Smith's population doctrine is more explicit than, if quite consistent with, Hume's; and it exhibit s som e subtl e features. 81 I t ca n b e summarize d a s follows: 1. Populatio n siz e i s determine d b y th e availabilit y of mean s o f subsistence . 2. Th e rate of change of population is determined by the difference between the market and the subsistence wage rate. I f the difference is positive, population will increase; negative, decrease ; equal , population wil l be constant. 3. Th e marke t wag e rate i s a function o f th e rate of increas e in the demand for labor , which, in turn, depends on the rat e of increas e in the capital stock tha t determine s the pace a t whic h the marke t widens , specialization o f functio n proceeds , an d th e national wealt h increases . 4. A perio d o f rapi d increas e i n capita l formatio n an d growt h coul d thus , vi a hig h money wage s relativ e to the subsistenc e wage , set in motio n (throug h early mar riages an d fallin g infan t mortality ) a rise i n population an d th e workin g forc e that would, i n time, ten d t o brin g dow n the marke t wage rate . Thus Smith' s famou s conclusion: 82 It i s not th e actua l greatness o f nationa l wealth, bu t it s continual increase , which occasion s a rise i n th e wage s o f labour . I t i s not, accordingly , i n th e richest countries, bu t in the most thriving, or in those whic h are growing rich the fastest , tha t the wage s o f labour are highest . Englan d is certainly, i n th e present times , a muc h riche r countr y tha n any par t o f Nort h America . Th e wages of labour, however , are much higher in North America than in any part of England. ... i t i s i n th e progressiv e state , whil e th e societ y i s advancin g t o th e further acquisition , rather tha n whe n i t ha s acquire d its ful l complemen t o f riches, tha t th e conditio n o f th e labourin g poor, o f th e grea t bod y o f th e

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people, see m t o b e th e happies t an d th e mos t comfortable . I t i s har d i n th e stationary, an d miserabl e i n th e declinin g state . Th e progressiv e stat e i s i n reality th e cheerfu l an d th e heart y stat e t o al l th e differen t order s o f th e society. Th e stationar y i s dull; the declinin g melancholy. In Smith' s judgment , th e America n colonie s wer e i n a progressive state ; relativel y ric h China, stationary ; Bengal , declining . Smith also had a good deal to say about high and low wages, relative to the subsistenc e level, th e quality of the work force, an d the effective effort put forward by the worker. Hi s observations wer e no t alway s consistent . I n hi s Lectures, fo r example , Smit h evoke d vividly the costs of specialization of functio n (o n which Marx was to build), includin g a backward slopin g suppl y curv e fo r labor: 83 When th e greate r par t o f people ar e merchants, they always bring probit y and punctuality into fashion, and these, therefore , ar e the principal virtues of a commercia l nation . There are some inconveniences, however , arising from a commercial spirit. The firs t w e shal l mentio n i s tha t i t confine s the view s o f men . Wher e th e division o f labou r i s brough t t o perfection , ever y ma n ha s onl y a simpl e operation t o perform ; t o thi s his whol e attentio n i s confined , an d fe w idea s pass i n hi s min d bu t wha t hav e a n immediat e connexio n wit h it . .. . I t is remarkable tha t i n every commercia l natio n the lo w peopl e ar e exceedingl y stupid. The Dutc h vulgar are eminently so, an d the English ar e more s o than the Scotch . Th e rul e i s general; in towns they ar e not s o intelligent as in th e country, no r i n a rich countr y as i n a poor one . Another inconvenienc e attendin g commerc e i s tha t educatio n i s greatl y neglected. I n ric h an d commercia l nation s th e divisio n o f labour , havin g reduced al l trade s t o ver y simpl e operations , afford s a n opportunit y of em ploying childre n ver y young . . . . But, besides thi s want of education, ther e is anothe r grea t los s whic h attend s th e puttin g boys to o soo n t o work . . . . When he is grown u p he has no ideas wit h which he can amuse himself. . . . Their wor k through half the week i s sufficient t o maintain them, an d through want o f education the y hav e n o amusemen t fo r th e other , bu t rio t an d debauchery. In Th e Wealth o f Nations Smith' s vie w o f th e impac t o f progres s o n "th e commo n people" is , o n balance , mor e positive , althoug h ther e ar e stil l echoe s o f th e backwar d sloping suppl y curv e a s representin g th e minorit y respons e t o a ris e i n wages. 84 "Th e liberal rewar d o f labour, a s it encourages th e propagation , so it increases th e industr y of the common people . . . . Some workmen , indeed, whe n they can earn i n four day s what will maintain them through the week, wil l be idle the other three. This however, i s by no means th e cas e wit h the greate r part. " One of the most interestin g anticipator y strands in Adam Smith's view of the economi c development proces s i s his emphasi s o n the importanc e o f education no t merely fo r th e working forc e bu t als o fo r "peopl e o f som e ran k an d fortune. " Th e latte r observation s clearly reflec t Smith' s dissatisfaction s with hi s 6 years a t Oxfor d (1740-1746), an d hi s view tha t th e universit y then grossl y faile d t o trai n th e yout h fo r a productiv e role i n English society . Smit h strongly urge d that, at public expense, ther e b e establishe d "i n every paris h o r distric t a littl e school , wher e childre n ma y b e taugh t for a rewar d s o

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moderate, tha t even a common labourer ma y afford it . . . . "85 Hi s emphasis on the need for popula r education , generousl y financed , wa s linke d t o hi s sens e tha t governmen t should take pains to prevent the degenerative an d alienating consequences o f the division of labor. 86 A furthe r an d fundamenta l aspec t o f Smith' s treatmen t o f th e workin g forc e i s hi s distinction between productive an d unproductive labor. Th e distinction was familiar from the work of the physiocrats wh o viewed only labor employed in agriculture as productive. Smith widene d th e concep t ou t t o embrac e al l "labou r whic h add s t o th e valu e of th e subject upo n whic h i t i s bestowed . .. . I t is , a s i t were , a certai n quantit y of labou r stocked an d stored up to be employed, i f necessary, upon some other occasion.' '87 Menia l servants ar e Smith's prime exampl e of unproductive labor, bu t there ar e others as well:88 The sovereign , fo r example, wit h all the officers bot h of justice an d war wh o serve under him, the whole army and navy, are unproductive labourers. They are th e servant s o f th e public , an d ar e maintaine d b y a par t o f th e annua l produce o f the industry of other people. Thei r service , ho w honourable, ho w useful, o r ho w necessar y soever , produce s nothing for which an equal quantity o f servic e ca n afterward s be procured . From thi s passage Smit h moves directl y int o his formulation of what came late r t o be narrowed dow n t o a cor n growt h mode l i n whic h the rat e o f growt h i n a give n yea r i s determined b y th e suppl y o f cor n lef t ove r fro m th e previou s yea r allocate d a s workin g capital, t o sustai n productive labo r an d provide seed s fo r next year's output. 89 Both productive an d unproductive labourers, an d those wh o do not labou r at all, ar e all equally maintained by the annual produce o f the land and labour of th e country . Thi s produce , ho w grea t soever , ca n neve r b e infinite , bu t must have certain limits. According, therefore , as a smaller or greater propor tion of it is in any one year employed i n maintaining unproductive hands, the more i n the on e case an d th e less i n the other wil l remain for the productive , and the next year's produce wil l be greater o r smaller accordingly; the whole annual produce, i f we except th e spontaneous productions o f the earth, bein g the effec t o f productiv e labour . Smith plainly understood that servants and kings all commanded a market price for their services an d were, i n some sense, "useful. " A s a development economist (rathe r than an equilibrium marke t economist ) whos e mode l wa s drive n b y th e rat e o f savings-invest ment, Smit h palpably resented the diversion of potential investment resources allocate d t o "unproductive" services . Bu t h e wa s quit e capabl e o f statin g hi s doctrin e wit h coo l professional lucidity: 90 The annual produce of the land and labour of any nation can be increased in its valu e b y n o othe r means , bu t b y increasin g eithe r th e numbe r o f it s productive labourers , o r th e productiv e power s o f thos e labourer s wh o ha d before bee n employed . Th e number of its productive labourers, i t is evident , can never be much increased, but in consequence of an increase of capital, or of th e fund s destine d fo r maintainin g them. Th e productiv e power s o f th e same numbe r of labourer s cannot be increased , but i n consequence either of some additio n and improvemen t t o thos e machine s an d instrument s whic h

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facilitate an d abridg e labour ; or of a more prope r divisio n an d distribution of employment. In eithe r cas e an additiona l capital is almos t alway s required.

Investment and Technology The proces s o f capita l investmen t thu s plays a centra l rol e i n Adam Smith' s schem e o f things a s it is bound to do i n any serious theor y of economic growth . But , unlike Hume, Smith devotes a great dea l o f space an d care t o th e elaboration o f his doctrine: "O f th e Nature, Accumulation, and Employment of Stock" (Book II, abou t 10 0 pages) as well as "Of th e Profit s o f Stock " (deal t wit h in Chapters I X an d X of Boo k I) . Like th e res t of Th e Wealth o f Nations, Smith' s expositio n of capital investment "ha s its errors , it s gaps , it s ambiguitie s an d it s bias." 9J An d thes e hav e le d t o criticisms , differences o f interpretation, an d elaborate exigeses . Bu t his essential argument is reasonably clea r an d ca n b e summarize d i n thre e fairl y comple x propositions . 1. Al l savings ar e invested; th e motiv e fo r saving s is profit , takin g accoun t o f risk ; savings wil l rise wit h the leve l o f income . 2. Enlarged investment i s the basis for growth because i t is required fo r (a ) enlarging the market ; (b ) equippin g labo r to perform increasingly specialized functions ; an d (c) increasing wages above subsistence necessary t o induce the population increase , which will increase effective deman d an d the scale of the market while also generat ing th e labo r necessar y t o suppl y th e need s o f th e expande d market . Becaus e savings-investment rises wit h the increase i n income, a cumulative process is set in motion b y a n initia l rise i n the investmen t rate. 3. However, th e benign upward spiral is constrained. Th e rate of profit wil l decline as capital accumulates , incom e rises , an d a n econom y approache s it s "ful l comple ment of riches" ; but the potentialitie s for increase s in productivit y are greate r in manufactures tha n i n the primary productio n sectors. 92 "I t i s the natura l effect o f improvement .. . t o diminish gradually the real price of almost all manufactures. " Investment wil l continu e s o lon g a s th e profi t rat e (includin g th e ris k premium ) exceeds th e minimu m rate necessar y t o induc e men to save . Smith's theory of investment is closely linke d to his distinction between productive and unproductive labor, thu s inducing much aggravated prose among later commentators. Bu t what Smit h ha d i n mind—wh o the heroe s an d villains were—is quit e clear: 93 What is annually saved is as regularly consumed as what is annually spent, and nearl y i n th e sam e tim e too ; bu t i t i s consume d b y a differen t se t o f people. Tha t portio n o f hi s revenue whic h a rich ma n annuall y spends, i s in most cases consumed b y idle guests , an d menial servants, who leave nothing behind them i n return for their consumption. That portio n whic h he annually saves is immediately employed a s a capital, is consumed in the same manner, and nearly in the same time too, but by a different se t of people, b y labourers , manufacturers, an d artificers, who re-produce wit h a profit the value of their annual consumption . . . . The prodigal perverts i t in this manner. By not confining his expense within his income , h e encroache s upo n his capital . . . . This expenc e . . . no t bein g i n foreig n goods , an d no t occasionin g an y

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x Classical Economists exportation o f gol d an d silver , th e sam e quantit y of mone y woul d remain i n the countr y a s before . Bu t i f th e quantit y o f foo d an d clothing , whic h wer e thus consume d b y unproductive , ha d bee n distribute d amon g productiv e hands, the y woul d have re-produced, togethe r wit h a profit, the ful l valu e of their consumption . Th e sam e quantit y o f mone y woul d i n thi s cas e equall y have remained i n the country, an d there would besides hav e been a reproduc tion o f a n equa l valu e o f consumabl e goods . Ther e woul d hav e bee n tw o values instea d o f one .

There i s a kin d o f multiplie r buil t int o Smith' s vie w o f th e proces s induce d b y par simony-savings-investment; bu t ther e i s n o accelerato r a t wor k t o enlarg e investmen t i f profligate, unproductiv e expenditure s increase , eve n if there is no leakag e via imports . With respec t t o consumptio n expenditures , a s well , Smit h make s a shar p distinctio n between th e virtu e o f outlay s on durable versu s nondurabl e consumers goods. 94 As the one mode of expence i s more favourable than the other to the opulenc e of an individual, so is it likewise to that of a nation. The houses, the furniture, the clothin g o f th e rich , i n a littl e time , becom e usefu l t o th e inferio r an d middling ranks o f people. The y ar e able t o purchase the m whe n their superi ors gro w weary o f them . . . . The expence, besides , tha t is laid out in durable commodities, give s main tenance, commonly , t o a greate r numbe r o f people , tha n that whic h i s em ployed i n the most profuse hospitality. .. . I would not, however , b y all this be understoo d t o mean , tha t th e on e specie s o f expenc e alway s betoken s a more libera l o r generous spiri t than the other. . . . All that I mean is, tha t the one sor t o f expence , a s i t alway s occasions som e accumulatio n of valuabl e commodities, a s it is more favourabl e to private frugality, and , consequently , to the increase o f the public capital, an d as it maintains productive, rather than unproductive hands , conduce s mor e tha n th e othe r t o th e growt h o f publi c opulence. Smith, i n passage s suc h a s these , whic h apparentl y rejec t th e ultimat e legitimac y o f consumer's sovereignty , i s writing as a moralist a t least as much as a market analyst . H e saw lif e aroun d hi m a s a n uncertai n struggl e i n whic h th e moderate , beer-drinking , hardworking poor ha d to compensate fo r the profligate, gin-drinking, lazy poor; in which "private frugalit y an d good conduct " amon g th e well-to-d o ha d "t o compensate " no t only for "th e privat e prodigality an d misconduct" o f individuals but also fo r "th e publi c extravagance o f government." 95 Whe n Smit h addresse s himsel f t o thes e theme s on e cannot mis s th e stran d o f authenti c passio n tha t suffuse s th e text . H e fel t th e balanc e between salvatio n an d perdition wa s close . Smith's distinctio n betwee n productiv e an d unproductiv e labo r bring s hi m als o t o a lucid sectora l disaggregatio n o f investmen t an d th e notio n o f sectora l capital-labo r an d capital-output ratios . Fo r an analyst of economic growt h the following i s one of the mos t striking passage s i n Th e Wealth o f Nations: 96 Though al l capital s ar e destine d fo r th e maintenanc e of productiv e labou r only, ye t th e quantit y o f tha t labour , whic h equa l capital s ar e capabl e o f putting int o motion, varie s extremely accordin g to the diversit y of thei r employment; a s doe s likewis e th e valu e whic h tha t employmen t add s t o th e annual produc e o f th e lan d an d labou r o f th e country.

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A capital may be employed i n four different ways : either, first , i n procuring the rude produce annuall y required for the use and consumption of society; or , secondly, i n manufacturin g an d preparin g tha t rud e produc e fo r immediat e use an d consumption; or , thirdly , in transporting either th e rude or manufactured produc e fro m th e place s wher e the y aboun d t o thos e wher e the y ar e wanted; or , lastly , i n dividin g particula r portion s o f eithe r int o suc h smal l parcels a s sui t th e occasiona l demand s o f thos e wh o wan t them. I n th e firs t way are employed th e capitals of all those wh o undertake the improvement o r cultivation o f lands , mines , o r fisheries ; i n th e second , thos e o f al l maste r manufacturers; i n th e third , thos e o f al l wholesal e merchants ; an d i n th e fourth, thos e o f all retailers. I t is difficult t o conceive tha t a capital shoul d be employed i n an y wa y which may no t be classe d unde r some on e o r other o f those four . Each o f those fou r method s of employing a capital i s essentially necessar y either t o th e existenc e o r extensio n o f th e othe r three , o r t o th e genera l conveniency o f th e society . Here w e have something akin to the Clark-Kuznets disaggregation of economic activit y into primary, secondary , an d tertiary sectors ; a n assertion tha t all are "essentiall y neces sary' ' for the maintenance or expansion of output; and an awareness that the productivity of investment outlays in the several sector s may differ, howeve r necessary the expansio n of al l ma y b e fo r balance d growth . Althoug h Smit h aligne d himsel f agains t governmen t intrusion into the investment process, where private incentives were adequate, her e is the beginning o f a framewor k fo r developmen t planning . As note d earlier , Smit h ha d somethin g mor e t o sa y tha n Hum e abou t inventio n an d innovation, fixed capita l an d machinery; but, like Hume, the general thrust of his doctrine suggested inventio n an d innovatio n a s a n incrementa l improvemen t i n way s o f doin g things, evoke d b y profit possibilities that almost automatically accompanied th e widening of the market and the division of labor. He did recognize, however, tha t over long period s of time one could identif y a few major technologica l innovation s whose high productivity constituted a n identifiable discontinuity helping to explain a long period declin e i n price. For example , surveyin g the woole n industr y over 3 centuries, sinc e th e time o f Edward IV, h e identifies "thre e very capital improvements": 97 the exchange of rock an d spindle for the spinning wheel; machines for winding and arranging the yarn before being put into the loom ; an d th e fullin g mil l whic h supplante d treadin g i n wate r t o thicke n th e cloth . Both i n hi s Lectures an d Th e Wealth o f Nations Smit h dre w a distinctio n betwee n in ventions contrive d b y thos e wh o actually operate d th e machines— a kin d o f incrementa l learning b y doing—and thos e create d b y "philosophers " [scientists ] tha t involved "ne w powers not formerly applied." 98 He cites the water wheel, fire machines, [stea m engines , Newcomen vintage] , an d win d an d wate r mill s a s example s o f majo r discontinuou s inventions. I n makin g this distinction , Smit h clearl y foreshadow s Schumpeter . Although h e lef t ope n th e possibilit y o f majo r inventiv e breakthroughs , Smith , lik e Hume, envisage d productivit y improvement s mainl y withi n th e framewor k o f existing , essentially familia r technologies .

Business Cycles Neither Hume nor Smit h exhibite d an awareness of mor e or les s regular cyclical fluctua tions i n trad e an d manufactures . Th e dat a on pre-178 3 Britain , a t firs t sight , d o sugges t

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that fairl y regula r fluctuation s occurred." Between 170 0 an d 1783 , cycle s wit h an aver age lengt h of 5.25 year s ca n b e identifie d a s well as five buildin g cycles averagin g 17. 4 years. Examine d closely , however , eighteenth-centur y Britis h fluctuation s in trad e an d manufactures ar e closely linke d to the course o f the harvests and the timing of wars; and, as always , buildin g fluctuation s are extremel y sensitiv e t o th e timin g an d intensit y of wars. In addition the relative immobilit y of the labor force and wide variations in regional economic circumstance s mak e generalization s i n terms o f the nationa l economy o f Grea t Britain uncertain. Finally, the modest role of fixed capital outlays in manufactures reduce s the potentia l rol e o f wha t was late r t o b e a major variable i n business cycles . There is, nevertheless, som e evidence fo r an inventory cycle i n the British foreign trad e statistics fo r the period 1701-1801 . Twenty-on e cycle s i n British expor t volum e ca n b e marked off , averagin g 3. 8 years , a s oppose d t o a 4-yea r averag e fo r th e perio d 1783 1860.100 Thi s e x post identificatio n of a n elemen t of inventor y fluctuation s due t o tim e lags inheren t i n foreign trad e i s not reflected i n contemporary literature . Bu t there i s on e passage i n Smit h where , i n discussin g th e "scarcit y o f money, " h e come s clos e t o isolating th e ke y elements , includin g overoptimisti c expectation s an d tim e lags , tha t imparted a n authenti c cyclica l elemen t t o th e eighteenth-centur y internationa l tradin g arena:101 When th e profit s of trade happe n to be greate r tha n ordinary, over-tradin g becomes a genera l erro r bot h amon g grea t an d smal l dealers . The y d o no t always send mor e mone y abroa d tha n usual, but they buy upon credit bot h at home an d abroad , a n unusua l quantit y of goods , whic h they sen d t o som e distant market , i n hopes tha t th e return s will come i n before th e deman d fo r payment. Th e deman d come s befor e th e returns , an d the y hav e nothin g a t hand wit h which the y ca n eithe r purchas e money, o r giv e soli d securit y fo r borrowing. I t i s not an y scarcit y o f gol d an d silver , bu t th e difficult y whic h such peopl e fin d i n borrowing , an d whic h thei r creditor s fin d i n gettin g payment, tha t occasion s th e genera l complain t o f th e scarcit y o f money . It was only the major cycl e expansio n peaking in 1792 , wit h its substantial component of fixed capita l investment , (an d th e unemploymen t t o b e observe d i n 1793-1794 ) tha t a sequence o f (approximately ) 9-yea r majo r cycle s began . Thes e wer e initiall y s o inter woven wit h wa r an d immediat e postwa r event s tha t Kar l Marx , fo r example , wrongl y dated th e firs t majo r cycl e a s tha t peakin g i n 182 5 (p . 92) . Wit h Hum e an d Smith , however, w e are dealing wit h economists wh o assumed in their day that full employmen t was norma l an d tha t al l saving s wer e directl y invested . The y recognize d th e realit y o f various kind s of perturbation i n the system—notably , war s and harvest fluctuations ; but they regarded them , essentially , a s random. Nevertheless , Smith , with his consciousnes s of th e rol e o f expectations , tim e lags , an d credit , capture s som e essentia l element s required i n cyclical analysis . Relative Prices Again, Smith' s vie w o f th e prospect s fo r th e intersectora l term s o f trad e wa s wholl y consistent wit h Hume's fragmentary observations but much more explicit. Clearly, Smith believed tha t in the natural course of events, the prices of manufactures would fall relative to price s o f basi c commodities: 102

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It i s th e natura l effect o f improvement , however , t o diminis h gradually the real price o f almost al l manufactures. ... I n consequence of better machinery, o f greate r dexterity , an d o f a mor e prope r divisio n an d distributio n of work, al l o f whic h ar e th e natura l effects o f improvement , a muc h smalle r quantity o f labou r become s requisit e fo r executin g an y particula r piec e o f work; an d though , i n consequenc e o f th e flourishin g circumstances o f th e society, th e rea l pric e o f labou r should ris e ver y considerably, ye t th e grea t diminution o f th e quantit y wil l generall y muc h mor e tha n compensat e th e greatest ris e whic h can happen in the price . Smith here asserts , then , that the rise i n unit wage will be outweighed in manufactures by the reduction i n unit labor requirements—one of the most fundamental proposition s i n The Wealth o f Nations. H e the n goes on : There are , indeed , a few manufactures , in which the necessar y ris e i n th e real price o f the rude materials will more tha n compensate al l the advantages which improvemen t ca n introduce int o the execution of the work. In carpenters an d joiners work , an d i n the coarser sor t of cabinet work, the necessary rise i n the real price o f barren timber, i n consequence of the improvement of land, will more than compensate all the advantages which can be derived fro m the bes t machinery , th e greates t dexterity , and the mos t prope r divisio n and distribution o f work . But in all cases i n which the real price of the rude materials either doe s no t rise a t all , o r doe s no t ris e ver y much, that of the manufacture d commodity sinks ver y considerably . Smith's assertio n o f increasin g return s t o manufacture s is , essentially , a simple , straightforward proposition. * Hi s analysis of the possible an d probable course of productivity an d price s i n basi c commoditie s ("rud e produce" ) i s differentiate d an d rathe r complex:103 These different sorts of rude produce may be divided into three classes. Th e first comprehend s those which it is scarce i n the power of human industry to multiply a t all . Th e second , thos e whic h it can multipl y in proportion t o th e demand. The third, those in which the efficacy o f industry is either limited or uncertain. I n th e progres s o f wealt h an d improvement , th e rea l pric e o f th e first ma y ris e to an y degree o f extravagance, an d seems no t to be limited by any certai n boundary . Tha t o f th e second , thoug h i t ma y ris e greatly , has , however, a certain boundary beyond which it cannot well pass for any considerable time together. Tha t of the third, though its natural tendency is to rise in the progres s o f improvement, yet i n the sam e degree o f improvement it may sometimes happe n eve n t o fall , sometime s to continu e the same , an d some times to rise more or less, accordin g as different accident s render the efforts of human industr y i n multiplyin g thi s sor t o f rud e produce , mor e o r les s successful.

*I us e th e ter m "increasin g returns " her e an d elsewher e t o embrac e systematicall y falling cost s du e no t merely t o "economie s o f scale " but , also , t o technological change , whethe r incrementa l or discontinuous.

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He then proceeds for some twenty-five page s to examine each of his three categories wit h rich illustration s from histor y and the contemporar y scene . Fo r ou r purposes a ful l para phrase o f hi s argumen t is not required ; bu t th e followin g points are worth noting. 1. Smit h illustrates his first category, wher e an expansion of supply is virtually impossible, wit h scarc e bird s an d fish ; an d second , wher e economi c progres s reduce s supply an d increase s price , wit h the rise i n the price o f cattle as a hitherto uncultivated bu t fertil e regio n bring s it s exces s lan d int o foo d production , reducin g th e acreage hitherto used without opportunity cost for grazing; the third, where the real cost of a basic commodity rises irregularly in the course of economic progress, with the evolutio n o f prices fo r wool , hides , meat , an d fish . 2. I n accounting for historical price trends fo r particular commodities, Smit h adduce s changes i n bot h deman d an d supply . H e doe s no t sharpl y focu s o n diminishing returns although there ar e a good man y references t o more or less productiv e lands and mines , a s wel l a s th e likelihoo d o f disproportionat e pric e increase s a s th e intensity o f fishin g a give n are a rises . Hi s genera l propositio n i s tha t th e relativ e price o f al l basi c commoditie s excep t foo d wil l rise, a s an economy's rea l incom e increases; e.g. , textil e raw materials, buildin g materials, minerals, precious metals , and stones . 3. Quit e possibl y becaus e hi s imag e wa s o f a n ampl e grai n supply , supported i n th e eighteenth century by considerable improvement s in agricultural technology, which he cites, Smith does not assert i n general terms the operation o f diminishing returns to ra w produce ; but , o n balance , i t i s quite clear that he viewe d th e prospect s fo r productivity increase s i n such sectors wit h less optimism than in manufactures, and he expected, therefore , tha t the relative prices o f manufactures would fall. I t is, in fact, difficul t t o mak e sens e o f hi s inclusio n o f "soi l an d climate " amon g th e determinants o f th e limit s t o growt h withou t introducing diminishin g returns t o agriculture a t som e point i n th e expansio n process.

The Stages of and Limits to Growth Smith's discussio n o f th e stage s o f growt h appear s a t firs t glance , paradoxica l i f no t mildly schizophrenic . H e begin s b y assertin g th e centra l importanc e o f commerc e be tween tow n an d country in "ever y civilize d society " an d "th e mutua l and reciprocal" gains derived fro m tha t commerce, including both the impulse for the division of labor in urban manufactures and for higher productivity agriculture in the countryside. 104 He then proceeds t o defin e a sequenc e fo r developmen t tha t woul d confor m t o "th e natura l inclinations o f man:" 105 that is, agriculture , manufactures , and foreign trade. H e assert s that: This orde r o f thing s is s o ver y natural , that i n ever y societ y tha t ha d an y territory, i t ha s always , I believe , bee n i n som e degre e observed . Som e o f their lands must have been cultivated before any considerable towns could be established, an d som e sort o f coarse industr y of the manufacturing kind must have bee n carrie d o n i n thos e towns , befor e the y coul d wel l thin k o f em ploying themselve s in foreig n commerce . But thoug h thi s natura l orde r o f thing s mus t hav e take n plac e i n som e degree in every such society, it has, in all the modern states of Europe, been , in man y respects, entirely inverted. The foreig n commerc e o f som e o f thei r

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cities ha s introduce d al l thei r fine r manufactures , o r suc h a s wer e fi t fo r distant sale ; an d manufacture s an d foreig n commerc e together , hav e give n birth to the principal improvement s o f agriculture. The manners and customs which the nature of their original government introduced, and which remained after tha t governmen t wa s greatl y altered , necessaril y force d the m int o this unnatural an d retrograde order . Smith her e appear s t o argue that th e course of political an d military history ha d violate d and degrade d th e natura l sequenc e o f thing s despit e hi s awarenes s that , o f it s nature , agriculture require d a broa d spectru m of , essentially , urba n supporters: 106 "Smiths , carpenters, wheel-wrights , an d plough-wrights, masons, an d bricklayers, tanners , shoe makers, an d taylors . . . . Th e butcher , th e brewer , an d the baker , soo n joi n them , to gether wit h man y othe r artificer s an d retailers , necessar y o r usefu l fo r supplyin g thei r occasional wants , and who contribute stil l further t o augment the town." But he finds an attractive, somewha t nostalgi c sequenc e a t wor k i n th e uncorrupte d Nort h America n colonies wher e goo d lan d i s s o plentiful , an d th e psychologica l attraction s o f lif e a s a n independent landowning farmer so strong, that the successful artifice r does not move on to manufacture "fo r distan t sale" but buys land and becomes a planter.107 Only where good cheap lan d i s no t availabl e doe s h e becom e a manufacturer who produce s fo r widening markets. Thi s i s by n o mean s the onl y apparent clash i n The Wealth o f Nations betwee n Smith's somewha t romanti c attachmen t t o physiocrati c doctrine s an d hi s Humeia n awareness that, in the end, the wealth of nations, including the productivity of agriculture, depended o n th e widenin g o f th e marke t an d th e exploitatio n o f increasin g return s i n manufactures.108 Th e ultimat e reconciliation o f Smith' s apparentl y dualisti c view la y in his perception that a sound and sturdy process of economic development required produc tivity-increasing investment in agriculture as well as in manufactures an d commerce; an d that mercantilis t doctrin e an d polic y wer e biased agains t agriculture. This emphasi s o n the importanc e o f agriculture, as opposed t o the mercantilist priority for manufactur e and commerce, appear s i n Smith's "Introductio n an d Plan of Work;"109 and it becomes quit e clear whe n Smith turns from hi s discussion of stages and sequence s of growt h t o th e ric h country-poo r countr y debate tha t Hum e ha d heightene d wit h hi s attack o n th e beggar-thy-neighbo r thrus t of mercantilis t conception s an d policies. 110 Like Hume, Smit h believed the more advanced countrie s could continue to thrive in an environment o f fre e trad e i n whic h th e les s develope d countrie s an d region s (e.g. , th e North America n colonie s an d Scotland 111) cam e forwar d mor e rapidl y tha n th e riche r countries. Althoug h his argumen t differe d somewha t fro m Hume's , h e als o confronte d some difficult y whe n he deal t wit h the limit s to growth. Here are the key elements in Smith's position o n the rich country-poor country debate. 1. A rich country had a number of inherent advantages ove r a poor country that ough t to permit i t to retain it s lead, barrin g failur e t o conduc t correc t policies . 2. Thes e advantage s include d lowe r uni t labor costs , despit e highe r real wag e rates , resulting from the greater division of labor, i n turn made possible b y the abundance and cheapnes s o f capital . The y included also a mor e elaborate an d efficien t trans port syste m reducing the relativ e prices o f basic commodities. 3. Therefore , a ric h countr y could affor d t o mov e towar d fre e trad e wher e i t would enjoy th e advantage s o f a larg e an d productiv e commerce wit h it s partner s i n th e world economy , eve n wit h it s potential militar y adversaries.

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The flavo r o f Smith' s vie w i s well captured i n the followin g tw o quotations: 112 The mor e opulen t therefor e th e society , labou r wil l alway s b e s o muc h dearer an d wor k s o muc h cheaper , an d i f som e opulen t countrie s hav e los t several o f their manufactures and some branches of their commerce b y having been undersol d i n foreign markets b y the traders an d artisans of poorer countries, wh o wer e contented with less profi t and smaller wages, thi s will rarely be found to have been merely the effect o f the opulence o f one country and the poverty o f th e other . Som e othe r cause , w e ma y b e assured , mus t hav e concurred. Th e rich countr y mus t have been guilty of some error i n its police [policy]. A nation that would enrich itself by foreign trade, i s certainly most likely to do so when its neighbours are all rich, industrious, and commercial nations. A great natio n surrounde d o n al l side s b y wanderin g savages an d poo r barbar ians might , n o doubt , acquir e riches b y th e cultivatio n of it s own lands , and by it s own interio r commerce , bu t no t b y foreig n trade . The questio n the n arose, a s with Hume, of wha t would happen in the long run i f there were limit s t o growth . Woul d no t th e poo r latecomer s catc h u p wit h the initiall y riche r nations i f the latte r cam e t o a stead y state ? Smith wa s no t quit e capabl e o f envisagin g tha t his "philosophers " coul d generat e a sufficient flo w o f profitabl e majo r invention s and innovation s ove r lon g period s o f tim e that the ric h coul d exploi t i n a forehanded wa y t o maintain their place a t the fron t o f th e queue. Ther e were , therefore , limit s to the extent that the expansion o f the capital stoc k could expan d th e marke t an d rea p fo r nation s th e benefit s of th e progressiv e divisio n of labor. In a famous passage he explicitly acknowledged tha t there was, for each country, a ceiling o n real incom e pe r capita. 113 In a countr y whic h had acquire d tha t full complemen t o f riches whic h th e nature of its soil and climate, an d its situation with respect to other countries , allowed i t to acquire ; whic h could, therefore , advanc e no further, an d which was no t goin g backwards , bot h th e wage s o f labou r an d the profit s o f stoc k would probabl y b e very low . . . . But perhap s n o countr y ha s eve r ye t arrive d a t thi s degre e o f opulence . China seem s t o hav e bee n lon g stationary , an d ha d probabl y lon g ag o ac quired that full complemen t o f riches which is consistent with the nature of its laws and institutions. .. . A country which neglects o r despises foreig n commerce, and whic h admit s the vessel s o f foreign nation s into one or two of its ports only , canno t transac t th e sam e quantit y of business whic h i t migh t d o with differen t law s an d institutions. In Smith' s judgmen t Holland , whic h di d not neglec t o r despis e foreig n commerce , wa s nearer t o it s ful l complemen t o f riches tha n China. 114 Again, lik e Hume , Smit h di d no t tr y seriousl y t o resolv e th e logica l contradictio n between the short- and medium-run mutual advantages of free trade between rich and poor countries (an d regions ) an d a long-ru n prospec t o f stead y stat e stagnation . Th e latte r concept coul d not exclude the poor achievin g levels of wealth and productivity that might challenge the rich whe n all had achieved their "ful l complemen t o f riches" and , accord ing t o hi s analysi s o f thi s stead y stat e (an d th e cas e o f China) , wage s declined . Smit h

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could an d di d argu e that , wit h soun d policy , th e ric h ough t t o b e abl e t o loo k afte r themselves; but , i n fact , hi s interes t wa s no t i n th e lon g run bu t i n hi s "ver y violent " attack on current British and continental economic policy . I n a world where market forces were permitted (wit h a few specified exceptions ) t o work their will, colonies permitted to go their way , an d investment in agriculture (as well as manufactures and commerce) no t discouraged, th e prospect s wer e goo d tha t a high leve l o f incom e pe r capit a coul d b e sustained i n Britai n an d elsewhere . Here , a s Hon t point s out , wealt h an d virtu e ar e brought togethe r b y Smith' s centra l propositio n tha t hig h productivit y (lo w uni t labo r costs) induced by the triple impact of the widening of the market can reconcile high wages and lo w cost s i n manufactures. 115

Noneconomic Factors In concludin g th e discussio n o f Hume , I focuse d primarily on th e manne r in whic h hi s view of the complexities o f the human condition suffused hi s economic analysis. As noted at the beginning of the treatment of Smith, his interest i n the many dimensions o f human society tende d t o fal l awa y whe n h e deal t wit h strictl y economi c matters , a s i n th e following often-quote d passage. 116 [M]an ha s almos t constan t occasion fo r th e hel p o f hi s brethern , an d i t i s in vain for him to expect i t from thei r benevolence only . He will be more likely to prevail if he can interest their self-love in his favour, and shew them that it is for their own advantag e to do fo r hi m what he requires of them. Whoeve r offers t o anothe r a bargai n o f an y kind , propose s t o d o this . Giv e m e tha t which I want, and you shall have this which you want, is the meaning of every such offer ; an d i t i s i n thi s manner tha t we obtai n fro m on e anothe r th e fa r greater part of those good office s whic h we stand in need of. I t is not from th e benevolence o f th e butcher , th e brewer , o r th e baker , tha t w e expec t ou r dinner, bu t from thei r regar d to their own interest. W e address ourselves no t to thei r humanit y but t o thei r self-love , an d neve r tal k t o the m o f ou r ow n necessities bu t o f thei r advantages . Passages like these comfort greatly those who find relativ e utility and profit maximization a satisfactor y basi s fo r th e elaboratio n o f a n essentiall y mathematica l economic theory . Nevertheless, Th e Wealth o f Nations i s sho t through with passages i n whic h the eco nomic outcom e i s affected , bot h negativel y an d positively , b y noneconomi c huma n motives. Man y of these concern Smith's (an d Hume's) favorit e target, the rent-collecting large landowners , wh o dissipated thei r rents (an d part of the nation's investibl e surplus) by surroundin g themselves wit h nonproductive servants. But read closely , i t is clear tha t Smith trie d t o introduc e noneconomi c variable s quit e systematicall y whe n h e believe d them relevant . Fo r example , i n dealin g wit h th e motive s fo r havin g childre n an d i n seeking t o delineat e th e negativ e a s wel l a s positive consequence s fo r productivit y and human welfare of the specialized divisio n of labor, h e evokes the potentially healin g role of widesprea d elementar y education. 117 Smith provided another and rather engaging example of the role of noneconomic factor s in the course of the economy in discussing the favorable impac t of the rise of towns on the countryside:118 Merchants ar e commonl y ambitious of becoming country gentlemen, and when the y do , the y ar e generall y th e bes t o f al l improvers . A merchan t is

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x Classical Economists accustomed t o emplo y hi s mone y chiefl y i n profitabl e projects ; wherea s a mere countr y gentleman i s accustomed t o employ i t chiefly in expence. . . . Those differen t habit s naturall y affect thei r tempe r an d dispositio n i n ever y sort o f business . A merchan t i s commonl y a bold ; a countr y gentleman , a timid undertaker . . . . Whoeve r ha s ha d th e fortun e t o liv e i n a mercantil e town situate d in an unimproved country, must have frequently observe d ho w much mor e spirited the operations of merchants were in this way, tha n those of mer e countr y gentlemen . Th e habits , besides , o f order , econom y an d attention, t o whic h mercantil e busines s naturall y forms a merchant , rende r him muc h fitte r t o execute , wit h profi t an d success , an y projec t o f improvement.

More generally , Smit h was conscious of the extent to which the impulse to pursue selfinterest could be frustrated, deflected, o r heightened by the realities of social life. Ther e is shrewdness a s wel l as compassion i n his assessmen t o f the degre e t o which recipients o f rent, wages, an d profits are capable o f understanding and pressing forward their interests, with th e generator s o f profit s clearly i n th e mos t advantageou s position. 119 Unde r thes e circumstances, virtuall y the only effective recourse, i n Smith's view, was to insist on the strictest possibl e applicatio n o f competition. Bu t hi s vie w of the correct rol e o f the stat e was not wholly negative. Indeed , th e detail and explicitness of Smith's treatment of public policy i s a major distinctive characteristic of his work as compared t o that of his contemporaries. Despit e hi s central negativ e objective of attacking the "commercia l or mercan tile system,'' hi s analysis of the legitimate functions o f government and their financing is lengthy (some 250 pages), positive , an d principled. Smith begins with a lucid statement of the irreducibl e minimu m tasks o f governmen t unde r a regime o f "natura l liberty": 120 According t o th e syste m o f natura l liberty , th e sovereig n ha s onl y thre e duties t o atten d to ; thre e dutie s o f grea t importance , indeed , bu t plai n an d intelligible to common understandings: first, th e duty of protecting th e society from the violenc e and invasio n of othe r independen t societies; secondly , the duty o f protecting , a s fa r a s possible, ever y member of th e societ y fro m th e injustice or oppression o f every other member of it, or the duty of establishing an exac t administratio n o f justice ; and , thirdly , th e dut y o f erectin g an d maintaining certain public works an d certain public institutions, which it can never b e for the interes t o f any individual, or small number of individuals, to erect an d maintain ; because th e profi t coul d neve r repay th e expence t o an y individual or smal l number of individuals, though it may frequentl y d o much more tha n repa y i t to a great society . Smith's recommendation s fo r economic policy relate easily to these three functions. 121 Recognizing th e legitimac y o f the military functions o f the state , h e defended, fo r example, th e Navigatio n Acts a s providing a reserve o f seame n fo r th e nav y in time s o f war ; and, wit h a bit less conviction, h e was prepared t o countenance bounties in the export of British mad e sailclot h an d gunpowder . Wit h respec t t o th e secon d functio n of govern ment, he supporte d a considerable arra y of measures tha t would positively strengthen th e workings o f th e fre e competitiv e economy. H e commended: security of property, abov e all; control over primogeniture and entailing of estates, which he regarded a s a hindrance to agricultura l investment ; a Naderesqu e supervisio n of th e purit y o f metal s an d th e quality o f cloth ; an d th e regulatio n of publi c health. Smit h wa s als o prepared t o defen d

David Hume an d Adam Smith 4

9

usury laws , fixin g maximu m interes t rates , t o preven t desperat e debtor s fro m biddin g away resource s fro m productiv e investment . A s fo r th e thir d function , Smit h envisage d education an d a wid e arra y o f infrastructur e investment s a s legitimate . Indeed , i n hi s otherwise laudator y essa y o n the occasion o f Adam Smith's bicentenary Milton Friedma n suggested th e maste r ma y hav e gon e to o fa r wit h hi s definitio n of th e thir d legitimat e function o f government. 122 Bu t Peter Bauer , le t alone Milto n Friedman, ca n feel conten t with Smith' s dictu m o n sectoral investmen t planning: 123 What is the species o f domestic industr y which his capital ca n employ, an d of whic h the produce i s likely to be of the greatest value , ever y individual , it is evident, can , in his local situation , judge much better than any statesman or lawgiver can do for him. The statesman, wh o should attempt to direct privat e people i n wha t manne r the y ough t t o emplo y thei r capitals , woul d not onl y load himsel f wit h a mos t unnecessar y attention , bu t assum e a n authorit y which could safel y be trusted, no t only to no single person, bu t to no counci l or senate whatever, an d which would nowhere be so dangerous a s in the hands of a ma n wh o ha d foll y an d presumptio n enoug h t o fanc y himsel f fi t t o exercise it . Both Hum e an d Smith , however , wer e acutel y consciou s o f externa l economie s tha t government shoul d assur e wer e exploite d an d externa l diseconomie s tha t governmen t should prevent . Anticipatin g Smit h on the needs of " a grea t society," Hume had argued in A Treatise o n Human Nature tha t a large number of individuals would find it impossibl e to agree to concert and execute a project of public interest; but "politica l societies" find it easy t o proceed: 124 . . . Thus, bridge s ar e built , harbour s opened , rampart s raised , canal s formed, fleet s equipped , an d armies disciplined , everywhere , b y the car e o f government, which , thoug h compose d o f me n subjec t t o al l huma n infir mities, becomes , b y one of the finest an d most subtile inventions imaginable, a composition whic h is in some measur e exempte d fro m al l these infirmities. Similarly, Smith break s of f his disquisition on paper mone y to supply two examples of legitimate governmen t interventio n t o fen d of f undesirabl e consequence s o f a n unmodu lated syste m o f natura l liberty: 125 To restrai n privat e people , i t ma y b e said , fro m receivin g i n paymen t the promissory note s o f a banker, fo r any sum whether great o r small, when they themselves ar e willing to receive them ; or , t o restrain a banker fro m issuin g such notes , whe n al l hi s neighbour s ar e willin g t o accep t o f them , i s a manifest violatio n of that natural liberty which it is the proper business of law, not to infringe, but to support. Such regulations may, no doubt, be considere d as i n som e respec t a violatio n o f natura l liberty. Bu t thos e exertion s o f th e natural liberty o f a few individuals, which might endanger th e securit y o f the whole society, are , an d ought to be, restraine d by the laws of all governments; of the mos t free, a s well a s of the most despotical. Th e obligation of building party walls , i n orde r t o preven t th e communicatio n of fire , i s a violatio n of natural liberty , exactl y o f th e sam e kin d wit h th e regulation s of th e banking trade whic h ar e her e proposed .

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In terms of development theor y of the 1950 s and 1960s Hume and Smith might not full y qualify a s "structuralists; " bu t i t i s clea r tha t the y di d no t believ e competitiv e marke t economics would , withou t government intervention , maximize the wealth of nations, and they would have understood wit h sympathy Paul Rosenstein-Rodan's cas e for a Big Push to expan d infrastructur e i n a n underdevelope d econom y (t o follow , pp . 409ff.) .

3 T. R . Malthu s and Davi d Ricard o

T. R. Malthus (1766-1834) The close human ties betwee n Hum e and Smith an d between Malthu s and Ricardo ar e a splendid strand in the inheritance of professional economists. Hume and Smith first met in 1739; but their friendship dates from the early 1750s running on to Hume's death in 1776.

They wer e eac h other' s literar y executors , a functio n Smit h carefull y fulfilled . Thei r published works indicate that they did not always agree; but, excepting Hume's amiable

letter of April 1 , 1776, expressing pleasure at the publication of The Wealth of Nations bu t also disagreement with Smith's theory of rent (and with a lesser point), we have no formal record o f thei r exchanges o n economi c matters. 1 Thing s ar e quit e different in th e eve n more remarkabl e friendshi p of Ricardo and Malthus. There exis t ninety-two letters fro m

Ricardo to Malthus, seventy-five from Malthus to Ricardo.2 They run from 1811 to 1823;

that is, fro m their first meeting (June 1811) to Ricardo's death. Their exchanges constitute 30% of all Ricardo's preserve d correspondence o n economic an d political matters . Malt hus's Principles o f Political Economy (1820 ) was , i n good part, a response t o Ricardo's Principles o f Political Economy and Taxation (1817). Bu t there are also Ricardo's elabo rate book-lengt h an d mainly critical note s o n Malthus' s text. 3 Although Hum e an d Smit h ha d predecessor s an d contemporarie s wh o mad e seriou s contributions to economi c thought , they crystallized a coherent bod y of theory an d doctrine. The y can b e properly regarde d a s the key figures of the firs t generatio n o f moder n economists. Hum e ma y hav e been mor e original , bu t Smith' s claim t o primacy exceeds his because of the more systematic and spacious character of The Wealth of Nations and its widespread and abiding influence. Malthus and Ricardo are, evidently, the key figures of

the second generation. The y viewed themselves a s part of a living and accepted tradition . They fel t n o need , fo r example , t o reexamine th e psychologica l an d philosophica l as sumptions in which Hume and Smith rooted their basic economic propositions . Ricardo' s Political Economy begin s with a brisk bow to Smith and other predecessors ; a n assertio n that they had not correctly defined "the principles of rent" and, more generally, the laws determining distribution; and he's off and runnin g wit h a highly technical effort t o refine and elaborat e a receive d doctrin e whose basi c presupposition s about huma n being s i n society h e largel y took fo r granted. 4 Malthus was, to a degree, a different case . Hi s work on population and an appropriate

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stance o n th e issu e o f povert y plunge d hi m deepl y int o a n assessmen t o f basi c huma n drives an d needs. An d hi s late r mor e empirica l analysi s of population dynamics le d him back systematicall y t o noneconomi c variables . Bu t a s th e intens e wartime pressure s o f population increas e o n th e foo d suppl y ease d afte r 1812 , Malthu s focuse d o n a wide r agenda. Hi s Political Economy (1820 ) begin s with a discussion of the nature and limits of the scientific method a s applied to his subject. He, too, indicate s respectfully his judgment that some o f Adam Smith' s propositions requir e correction an d refinement. And when he comes to Book II , "O n th e Progress o f Wealth," he acknowledges in two brief pages th e importance o f institutional , moral , an d religiou s factors , an d the n goe s t o wor k o n th e variables "directl y within the province o f political economy." 5 And, indeed, h e was the first professor o f political economy a t Haileybury, the college o f the East India Company. For goo d o r ill , then , w e observ e i n th e wor k o f Malthu s and Ricard o a n emergenc e from th e spaciou s Bi g Sky setting of Hume and Adam Smith into a narrowing intellectual terrain mor e nearl y approximatin g contemporar y mainstrea m economics . We kno w i n grea t detai l tha t Malthus and Ricard o differe d substantiall y o n issue s of both theor y an d policy . Ther e i s somethin g extraordinarily engagin g abou t th e imag e o f Malthus peacefully readin g portion s o f his manuscrip t to Ricardo , a t the latter' s countr y house, Gatcom b Park— a manuscrip t directl y addresse d t o answerin g Ricardo "withou t giving my work a controversial air." 6 They held stubbornly to their respective views; but they appea r t o hav e s o respecte d th e integrit y o f eac h other' s pursui t o f truth , an d s o combined doggedness wit h humility in the face of the large problems they sought to solve , that thei r mutua l affectio n wa s unaffecte d or , perhaps , deepened . Thei r achievemen t i n this respect i s not unique but less common than it might be in the world of ideas; although it must be added that, despite mutual respect, affection , an d an almost compulsive flo w of communication, thei r exchange s constitut e virtuall y a dialogu e o f th e deaf . Thi s i s th e case because th e mos t importan t issue i n contention betwee n Malthu s and Ricardo was , almost certainly, a n issue of method rooted ultimately in temperament an d cast of mind, as Keynes suggests. 7 Both me n were ultimatel y concerned wit h public policy. Her e i s Schumpeter's memo rable descriptio n o f how Ricard o wen t abou t hi s business. 8 His [Ricardo's ] interes t wa s i n the clear-cu t resul t o f direct, practica l sig nificance. I n order t o get this he cut that general system to pieces, bundled up as large parts o f it as possible, an d put them in cold storage—so tha t as many things a s possible shoul d be frozen an d "given. " He then piled one simplifying assumptio n upo n anothe r until , havin g really settle d everythin g by these assumptions, h e wa s lef t wit h onl y a fe w aggregativ e variable s betwee n which, given these assumptions, he set up simple one-way relations so that, in the end , th e desire d result s emerge d almos t a s tautologies . Fo r example , a famous Ricardia n theor y is tha t profit s "depen d upon " the price of wheat . And unde r hi s implici t assumption s an d i n th e particula r sens e i n whic h th e terms o f th e propositio n ar e t o b e understood , thi s i s no t onl y true , bu t undeniably, i n fact trivially , so. Profit s could no t possibly depen d upo n anything else, sinc e everything else is "given, " that is, frozen . I t is an excellent theory tha t ca n neve r b e refute d an d lack s nothin g sav e sense . Th e habi t of applying results of this character to the solution of practical problems we shall call th e Ricardia n Vice.

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The bes t descriptio n o f Malthus's les s elegan t bu t mor e complex approac h t o politica l economy i s his own i n which he contrasts those under strong compulsion to simplif y an d generalize (clearly , Ricardo ) wit h thos e willin g to pu t thei r proposition s t o th e tes t o f experience a t the cos t o f admittin g "limitation s an d exceptions" (clearly , himself). 9 The principal cause of error, and of the differences which prevail at present among th e scientifi c writer s o n politica l economy , appear s t o m e t o b e a precipitate attemp t t o simplif y an d generalize . Whil e thei r mor e practica l opponents dra w too hast y inference s fro m a frequent appea l to partial facts , these writer s ru n int o a contrar y extreme , an d d o no t sufficientl y tr y thei r theories by a reference t o that enlarged and comprehensive experience which, on s o complicate d a subject , can alon e establis h thei r truth and utility. . . . In political economy the desire to simplify ha s occasioned a n unwillingness to acknowledg e th e operatio n o f mor e cause s tha n on e i n th e productio n o f particular effects . . . . The sam e tendenc y t o simplif y an d generalize , produce s a stil l greate r disinclination t o allo w o f modifications , limitations , an d exception s t o an y rule or proposition, tha n to admit the operation o f more causes than one. . . . The firs t busines s o f philosophy i s to accoun t for things a s they are . . . . Where unforesee n cause s ma y possibl y b e i n operation, an d th e cause s that are foresee n ar e liabl e t o grea t variation s i n thei r strengt h an d efficacy , a n accurate ye t comprehensiv e attentio n to facts i s necessary, . . . Ricardo's explanation s o f thei r cross purpose s i s related bu t distinct , focusin g o n th e difference betwee n force s operatin g ove r lon g an d shor t period s o f time—th e clu e o n which Alfre d Marshal l buil t th e bulk of his forma l analysis. The wor k o f Malthu s an d Ricard o wa s shape d no t merel y b y thei r rol e a s second generation refiner s an d elaborators , no t merel y b y thei r marke d difference s in tempera ment an d method , bu t als o b y radica l change s i n th e Britis h economy, th e problem s i t confronted, an d the internationa l settin g in which it operated. Malthu s and Ricardo wer e 25 t o 3 0 year s o f ag e i n th e decad e endin g i n 1802 : strictl y speaking , 1791-179 6 fo r Malthus, 1797-180 2 fo r Ricardo . Bu t th e fiv e essentia l changes the y bot h inescapabl y observed wer e no t sensitiv e t o fine-tune d distinctions. First o f course , Britai n wa s a t wa r wit h revolutionar y France , fro m 179 3 forward , excepting 1802 , a n interval that Malthus exploited for an important trip to the continent to test his theory o f population. The Revolutio n and the war left thei r marks on the formulations o f bot h men . Second, th e populatio n o f England an d Wales, virtuall y stagnant fro m 171 0 t o 1740 , increasing at .58% pe r annum from 174 0 to 1780 , accelerate d approximatel y as follows in the nex t 2 0 years. 10 1780-1785 1785-1790

1790-1795 1795-1800

.64% .98 1.05 1.16

Third, ther e wa s i n th e 1790 s a n extraordinar y acceleration in th e ris e i n th e pric e of wheat, whic h ha d begu n aroun d mid-century . Th e acceleratio n i s wel l capture d i n th e following table , Table 3.1 , fro m Dean e an d Col e an d i n Figur e 3.1 . The latte r exhibits

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Table 3.1. Inde x Number s o f the Pric e of Wheat 1695-180 5 1695-1705 1700-1710 1705-1715 1710-1720 1715-1725 1720-1730 1725-1735 1730-1740 1735-1745 1740-1750 1745-1755

122 105 121 109 92 99 94 84 86 84 90

1750-1760 1755-1765 1760-1770 1765-1775 1770-1780 1775-1785 1780-1790 1785-1795 1790-1800 1795-1805

101 106 117 141 136

132 142 148 196 250

SOURCE: Phylli s Dean e an d W . A . Cole , British Economic Growth, 1688-1959, 2 d ed . (Cambridge: a t th e Universit y Press , 1969) , p . 91 .

also th e post-181 2 declin e i n th e whea t price. 11 Thes e movement s had , o f course , a profound impac t o n agricultural rents , urba n livin g costs, an d real wages , whic h greatl y influenced th e wor k o f Malthu s an d Ricardo. 12 Fourth, th e industria l revolutio n asserte d itsel f unmistakabl y in th e 1780 s an d 1790 s with the astonishing rise of the factory-based cotto n industry , the progressive diffusio n o f Watt's stea m engine , an d the emergence o f Cort's steam-powered , coke-usin g forge s fo r fabricating iron . Th e impact o f machinery o n income distributio n and employment bega n to forc e itsel f o n economists . Eve n mor e important , th e firs t moder n busines s cycl e expansion peaked i n 179 2 wit h a substantia l component o f investmen t in fixed industria l capital. I t was followe d b y a sharp recession durin g which, perhaps, th e first substantia l period of cyclica l industria l unemployment occurred. 13 And despite the vicissitudes and erratic shock s o f a protracted majo r war , th e cyclical rhyth m continued t o 181 5 and , o f course, beyon d (Figur e 3.2). 14 Thus , ful l employmen t coul d n o longe r b e assume d without challenge, an d the question of gluts, underconsumption , an d overproduction wa s raised no t onl y b y Malthu s but als o b y a good man y others. 15

Figure 3.1. Gazett e Price of Wheat, 1790-1850 . [Adapted fro m A . D . Gaye r et al., Th e Growth and Fluctuation o f th e British Economy. 1790-1850, Vol . II (Oxford : a t th e Clarendo n Press , 1953), p . 826.|

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Figure 3.2. Busines s Cycl e Pattern, Grea t Britain , 1790-1850 . [Adapte d fro m Arthu r D . Gayer , W. W . Rostow , and Anna Jacobson Schwartz, with the assistance of Isaiah Frank, The Growth and Fluctuation of the British Economy, 1790-1850, Vol. I (Oxford: a t the Clarendon Press, 1953) , p . 355.] Finally, wartime inflation (with the bullion standard suspended afte r 1797 ) and postwar deflation stimulate d analysi s an d debat e o n monetar y theory , internationa l monetar y equilibrium, and the role of monetary an d real variables in determining price movements . The proposition s crystallize d an d the positions take n have significantl y affected the con tours of economic theory dow n to the present. Indeed, the causes of war and postwar price movements ar e stil l debated. 16 These changes i n the Britis h economy lef t clear-cu t mark s on the growth theorie s an d controversies o f the secon d generation , includin g a marked shif t i n the focus of attention from th e pre-1815 t o the post-1815 years . I t is against the background of these changes in setting tha t w e tur n t o th e view s o n growt h o f th e tw o majo r figure s o f th e secon d generation.

The Basic Growth Equation Malthus's theor y o f growt h i s essentiall y a variatio n o n Ada m Smith's . It s distinctiv e elements ca n b e trace d throug h th e sequenc e o f hi s writing s beginnin g wit h th e firs t edition (1798 ) o f hi s Essay o n th e Principle o f Population. H e presente d hi s analysi s of the determinants of growth in its most complete an d systematic form in Book I I ("On th e Progress of Wealth") of his Principles o f Political Economy (1820 , secon d editio n 1836) . We shall here use the second edition , published 2 years after hi s death, as representing hi s final reflection s o n th e subject. 17 H e begin s b y acknowledgin g bu t settin g asid e th e noneconomic force s tha t determine a society's rat e o f growth. H e isolate s th e economi c from th e noneconomi c variable s a s follows. 18 It i s obviously true that there ar e many countries, no t essentially differen t either i n the degree of security which they afford t o property, o r i n the moral and religious instructio n received b y the people, whic h yet, with nearly equa l natural capabilities , mak e a ver y differen t progres s i n wealth . I t i s the prin cipal object of the present inquir y to explain this. .. . I f the actual riches o f a country no t subjec t t o repeate d violence s an d a frequen t destruction o f pro duce, be not afte r a certain period in some degree proportioned to its power of producing riches , thi s deficiency must have arise n fro m th e wan t of a n ade quate stimulu s to continue d production. Th e practica l question then for ou r consideration is , wha t are the mos t immediate and effectiv e stimulant s to th e creation an d progres s o f wealth .

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He proceeds t o dea l wit h each now-familia r element i n the classi c growth equation in the followin g sequence: th e rate of growth o f population; capital formation ; land an d it s fertility; an d laborsavin g inventions . The n follow s hi s mos t distinctiv e contribution : a disquisition on the rol e of deman d as wel l as suppl y in determinin g the rat e of growth entitled "O f th e Necessit y o f a Unio n o f th e Power s o f Productio n with the Mean s o f Distribution, i n Order t o Ensur e a Continued Increase o f Wealth." Althoug h Malthus's insight o n th e significanc e o f effectiv e deman d ca n b e trace d bac k t o brie f bu t luci d passages i n Chapters V and XVI i n his firs t Essay o n Population (1798) , almost 60% of the exposition o f growth theory i n his Political Economy i s incorporated in this section of the text , whic h he introduce s a s follows. 19 The thre e grea t cause s mos t favourabl e to production are accumulatio n of capital, fertilit y of soil, an d inventions to save labor. They all act in the sam e direction; an d a s the y al l ten d t o facilitat e supply, withou t reference t o de mand, i t is not probable that they should either separately o r conjointly afford an adequat e stimulu s to th e continue d increase o f wealth. In dealing with these variables , a concern wit h effective demand suffused eac h dimension of Malthus's argument. His claim to originality in this respect does not depend on the ex post identification of a few precociously anticipatory passages suggestive of Keynesian doctrine. Hi s centra l theme, a s will emerge, i s in fact post-Keynesian . It is that dynamic equilibrium i n a growing economy require s an endless correct proportioning and balancing o f suppl y an d demand .

Population and the Working Force Perhaps becaus e h e ha d alread y writte n so muc h about population, perhaps becaus e th e pressure of British population increase on the food supply had eased, Malthus's discussion in Boo k Two o f his Political Economy run s only to three pages . H e argues, simply , that while "a n increas e i n populatio n i s a powerfu l an d necessar y elemen t o f increasin g demand," i t i s no t a sufficien t conditio n fo r the progres s o f wealth . He refers briefl y i n passing t o "th e natura l tendency of population to increase beyon d the funds destine d fo r its maintenance," bu t his central objective is to drive home the following proposition that one migh t wel l fin d i n a moder n tex t o n developmen t economics: 20 "[T]h e slowes t progress in wealth i s often mad e wher e the stimulu s arising from populatio n alon e i s the greatest." He cites Spain, Portugal, Poland, Hungary, and Turkey, as well as "nearl y the whole o f Asi a an d Afric a an d th e greates t par t o f America." Malthus asserted, however , a number of propositions about the productivity of labor in the context o f his discussion of wages rather than the progress of wealth. In the following passage h e comes close, i n fact, to evoking a kind of demographic transition in which an initial increas e i n rea l wage s i s no t overwhelme d b y a surg e i n populatio n bu t yield s a regime o f civil and political liberty , security of property, popula r education, "prudentia l habits," and , thus , a reduced birt h rate an d a progressive increas e i n real wages. 21 From hig h real wages , o r the power of commanding a large portion o f the necessaries of life , tw o ver y different result s may follow ; one, that of a rapid increase of population, in which case th e hig h wage s are chiefly spen t in the maintenance o f larg e and frequen t families ; an d th e other , tha t o f a decided improvement in the modes of subsistence, and the conveniences and comforts

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enjoyed, withou t a proportionate acceleratio n i n the rate of increase. .. . I n an inquiry into the causes o f these different habits , we shall generally b e abl e to trace those . . . whic h make the m [th e lower classes ] unabl e or unwilling to reason fro m th e past to the future , an d ready t o acquiesce, fo r th e sak e of present gratification , i n a very low standard of comfort and respectability; and those whic h . . . tend to .. . mak e them ac t as beings who look befor e and after, and who consequentl y canno t acquiesc e patientl y in the though t of depriving themselve s an d thei r childre n o f th e mean s o f bein g respectable , virtuous, an d happy. Among the circumstances whic h contribute to the character firs t described , the most efficien t wil l be foun d t o be despotism, oppression , an d ignorance: among thos e whic h contribute to the latter character, civi l and political liber ty, an d education . Here we have a glimmering of the calculus that has operated i n a good many developin g societies i n the second hal f of the twentieth century to help bring down birthrates; that is, an awareness tha t a limitation of family size can improve the prospects fo r each individual child i n the smalle r famil y "bein g respectable , virtuous , and happy." In hi s treatmen t o f th e force s determinin g th e attitud e of husbands an d wive s towar d family size , Malthu s introduce s a rather subtl e notion o f the dynami c interplay betwee n material circumstance s an d socia l behavior: 22 It rarely happens , however , tha t either o f them remains fixed fo r an y grea t length o f tim e together . Th e rat e a t whic h the fund s fo r th e maintenanc e o f labour increas e is , w e wel l know , liable , unde r varyin g circumstances, t o great variation ; and the habit s o f a people thoug h not s o liable, o r s o necessarily subjec t t o change , ca n scarcel y eve r b e considere d a s permanent . I n general, thei r tendency i s to change together. Whe n the funds fo r the maintenance o f labou r ar e rapidl y increasing , an d th e laboure r command s a larg e portion o f necessaries , i t i s t o b e expecte d tha t i f h e ha s th e opportunit y o f exchanging his superfluou s foo d fo r convenience s an d comforts , h e wil l ac quire a taste for these conveniences , an d his habits will be formed according ly. O n th e othe r hand , i t generall y happen s that , whe n th e fund s fo r th e maintenance o f labou r becom e nearl y stationary , suc h habits , i f the y eve r have existed , ar e foun d t o giv e away; and, before th e population come s t o a stop, th e standar d o f comfor t i s essentiall y lowered . . . . Th e ef fect . . . certainly becomes i n its turn a cause; an d there i s no doubt, tha t if the continuanc e o f lo w wage s fo r som e time , shoul d produc e amon g th e labourers o f an y country habits of marrying with the prospect onl y of a mer e subsistence, such habits, b y supplying the quantity of labour required at a low rate, woul d become a constantly operating caus e o f lo w wages . Thus, Malthu s envisaged socia l attitude s and behavior ("habits") as subject to change by th e protracte d operatio n o f economi c forces ; bu t h e als o envisage d th e economy , i n turn, shape d b y th e "habits " operativ e a t a given time . Malthus's vie w o f th e backward-slopin g supply curv e for labo r wa s on e reflectio n of this interactiv e economic-socia l dynamics . Lik e Smith , h e wa s consciou s tha t huma n beings could become s o fatalistic abou t the prospects for a long-run improvement in their lot o r tha t o f thei r childre n that a short-ru n rise i n rea l wage s caused a reduction in th e

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amount of labor supplied. Bu t his observations als o convinced him that the social behavio r of labo r coul d alte r i f it s range o f perceived choic e wer e widene d b y educatio n an d th e responsibilities o f increased politica l freedom . Explicitl y following Smith, h e judged th e facilities fo r popula r educatio n i n England deplorable: 23 It is surely a great national disgrace, tha t the education of the lower classe s of people in England shoul d b e lef t merel y t o a few Sunday schools , supporte d by a subscription fro m individuals , who can give to the course o f instruction in the m an y kin d o f bias whic h the y please . . . . The principa l argumen t whic h I hav e hear d advance d agains t a system o f national educatio n in England is, tha t th e common peopl e would be put i n a capacity t o rea d suc h work s a s thos e o f Paine , an d tha t th e consequence s would probabl y b e fata l t o government . Bu t o n thi s subjec t 1 agree mos t cordially wit h Adam Smit h i n thinking that, an instructed an d well-informe d people woul d b e muc h less likel y t o be led away b y inflammator y writings, and muc h bette r abl e t o detec t th e fals e declamatio n o f intereste d an d am bitious demagogues , tha n a n ignoran t people . It is in this chapter ("O f th e Mode s o f Correcting th e Prevailing Opinion s o n Popula tion") tha t Malthu s come s closes t t o foreshadowin g th e possibilit y o f a demographi c transition with the birth rate declining not only as the result of wider popular educatio n but also—in anticipatio n o f J. S . Mill— a "greate r degree o f respect an d personal libert y t o single women " an d othe r measure s tha t woul d underlin e th e connectio n betwee n indi vidual well-bein g an d reduce d famil y size . Investment and Technology Malthus's basi c propositio n abou t capita l investmen t is simpl e an d orthodox: 24 It i s certainly tru e tha t no permanent and continued increase o f wealth ca n take plac e withou t a continue d increas e o f capital ; an d I canno t agre e wit h Lord Lauderdal e in thinking that this increase can be effected in any other way than by savin g fro m th e stoc k which might have bee n destined for consump tion, an d adding i t to that which is to yield a profit; o r in other words, by th e conversion o f revenue int o capital . But th e balanc e o f Malthus' s treatmen t o f investmen t i s devote d t o othe r matters , notably hi s protracted argumen t wit h Ricardo , Jea n Baptist e Say , an d James Mil l abou t the possibility o f a "genera l glut"; that is, a phase of widespread unemployment of labo r and capita l marke d b y a pilin g u p o f unsol d manufactures . Thi s stran d i n Malthus' s writing is , asid e fro m hi s wor k o n population , hi s mos t memorabl e contributio n t o economic thought ; and , sinc e Keynes' s essa y o n Malthu s (1933) , i t i s th e mos t discussed.25 Malthus, a s severa l o f hi s e x post critic s hav e noted , di d no t produc e a formal , self contained theor y o f underemployment equilibrium . H e did, however , introduc e int o hi s argument certai n variable s tha t wer e late r perceive d t o b e importan t in moder n incom e analysis an d growt h models ; fo r example , th e relativ e insensitivit y o f mone y wages t o a decline i n deman d fo r labor, 26 an d th e possibilit y of change s i n th e savings-investment rate, an d therefore , the deman d fo r consumer goods, a s the leve l of incom e changes. I n

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addition, Malthu s adduce d a possibl e variabl e tha t migh t limi t th e expansio n o f th e economy an d yield , fo r a tim e a t least, genera l oversupply ; that is , a backward-slopin g curve for labor in which, beyond a certain point, leisure (as well as saving) is preferred to additional good s and service s wit h a rise in real income . Malthu s succinctly summed u p both dynami c strands in his argument as follows:27 "W e shoul d constantly keep i n mind that the tendency t o expenditure in individuals has most formidable antagonists in love of indolence, an d in the desire of saving, in order to better their condition an d provide fo r a family. . . . " But th e hear t o f Malthus's cas e agains t Ricard o and Say was much less abstrus e tha n these incomplet e foreshadowing s of modern macro-theory . I t lay i n his interpretatio n o f two severe cyclical depressions i n the aftermath o f the Napoleonic Wars.28 They extended from a peak i n March 181 5 to a trough in September 181 6 and from a peak i n Septembe r 1818 t o a trough 1 year later. 29 The firs t wa s marke d b y a convergenc e o f agricultura l and industria l depression tha t made 1815-181 6 one of the most difficul t period s i n the history of the British economy. Unemployment was widespread, an d contemporary journals are full o f accounts o f riots , strikes, an d arrest s unde r th e Combinatio n Acts . Th e fal l i n th e price s o f foodstuff s i n 1814 an d 181 5 had ease d th e position of labor somewhat; but the rise i n 181 6 turne d th e rioters' ange r agains t bakers an d millers. The secon d yea r o f crisis , 1819 , sa w perhaps the most seriou s labour disturbance s of the entire perio d 1790—1850 . Wages in many districts wer e reduced, an d unemployment again wa s severe . A distinctiv e character wa s imparte d t o th e disconten t by it s distinc t political overtones . Meeting s begun over wage decreases ende d wit h petitions fo r parliamentary reform. The movement had its center in Manchester, an d reached its climax with the meetin g a t St. Peter' s Field o n 1 6 August. Somewher e betwee n 50,00 0 an d 80,00 0 persons gathered . A deput y constabulary , frightene d b y th e mob , los t it s hea d an d charged. Eleve n person s were killed, abou t 400 injured. Th e government, feeling revolution i n the air , overrod e a distinguishe d opposition t o pass th e famou s Si x Acts , whic h virtually suppresse d freedo m of speech, o f the press, of free assembly . Bu t mos t significant were the banners carried at the Peterloo meeting: they forecast the direction of reform agitation durin g th e followin g years—"N o Cor n Laws, " "Vot e b y Ballot, " "Equa l Representation o r Death." A turning-poin t cam e i n 182 0 i n th e fortune s o f bot h industr y an d labour . A furthe r sharp fall i n living costs aided the working classes, a s did the mild trade revival that set in during th e year . Th e grea t boo m tha t peaked i n 182 5 was underway. The fina l sectio n o f Malthus's Principles, writte n in 1820 , i s addressed t o these painfu l postwar phenomena: "Applicatio n o f Some of the Preceding Principle s t o the Distresse s of the Labouring Classes sinc e 1815 , with General Observations." It is the most lucid and effective statemen t o f Malthus's differences wit h Ricardo with respect to both theory and policy—the latte r includin g monetary a s well a s tax an d tarif f policy . Ricardo's response s t o this section ar e rather peripheral excep t for a blunt an d at leas t mildly irritate d statemen t o f thei r mos t profoun d difference: 30 "Mr . Malthu s neve r ap pears t o remembe r tha t t o sav e i s t o spend , a s surely , a s wha t h e exclusivel y call s spending.'' Malthus's interpretatio n of th e perio d 1815-182 0 i s o f particula r relevanc e here be cause it is set out i n terms that relat e his theor y of growth to short-ru n fluctuation s o f th e economy. Centere d a s hi s argumen t was o n th e contras t between a wartim e boom an d

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what appeared i n 182 0 t o be a chronic perio d o f overcapacity an d high unemployment, it inevitably evoke s th e post-Worl d Wa r I settin g ou t o f whic h Keynes' s view s emerged . Malthus's thesi s a s o f 182 0 ma y b e summarize d a s follows . 1. Th e protracte d perio d o f wa r fro m 179 3 t o 1815 , accompanie d b y "prodigiou s public expenditure " constitute d a "violen t stimulant " yieldin g a n "unnatural " high rat e o f growth . Specifically , i t generate d i n al l it s ramification s hig h agri cultural prices , a n expansio n o f acreag e int o hitherto submargina l land, increase d application o f capita l t o bot h existin g an d ne w acreage , an d a settin g o f rura l prosperity tha t accelerated th e growth of population. Unlik e the situation during the American (1775-1783 ) an d earlie r wars , unlik e the situatio n envisage d b y Hum e and Ada m Smith , wh o believe d a smal l increas e i n th e publi c deb t woul d caus e bankruptcy, ther e wa s " a mor e rapi d an d successful progress i n the use of machinery tha n wa s eve r befor e known" ; an d th e "vas t increas e o f productiv e power " thus generated permitte d th e burdens of war to be carried whil e the nation's capita l and rea l incom e pe r capit a increased . (Malthu s doe s no t dea l wit h th e probabl e decline i n urba n rea l wage s durin g th e wa r year s du e t o chronicall y hig h foo d prices.) 2. Chroni c postwa r distres s wa s th e direc t resul t o f th e radica l declin e i n publi c expenditure an d the fal l i n agricultural prices, a s normal internationa l trade i n grain was resumed. 31 Agricultura l prices fel l b y nearl y a third, reducin g th e purchasin g power o f landlord s an d farmers: 32 "Th e failur e o f hom e deman d fille d th e ware houses o f the manufacturer s wit h unsol d goods, whic h urged the m t o export mor e largely a t all risks." 3. I n takin g thi s view , Malthu s deal s explicitl y wit h othe r explanation s o f thi s dis tinctly uncomfortabl e phas e o f Britis h economi c an d socia l history . H e deals , i n particular, wit h those wh o argued tha t British distress wa s caused b y prior cultiva tion o f low-grad e land , hig h tariffs , an d high taxes . Hi s response ha s the ela n of a political pamphlet , which , essentially , h e wa s writing: 33 ... I find i t very difficult t o admit a theory o f our distresses s o inconsis tent wit h th e theor y o f ou r comparativ e prosperity . Whil e th e greates t quantity of our poor lands were i n cultivation; while there wer e mor e than usual restriction s upo n our commerce, an d very littl e corn wa s imported ; and whil e taxation wa s a t its height, th e country confessedly increase d i n wealth wit h a rapidit y neve r know n before . Sinc e som e o f ou r poores t lands hav e bee n throw n ou t o f cultivation ; sinc e th e peac e ha s remove d many o f th e restriction s upo n ou r commerce , and , notwithstandin g ou r corn laws , we have imported a great quantity of corn; an d since seventee n millions o f taxe s hav e bee n take n of f fro m th e people , w e hav e experi enced th e greates t degre e o f distress , bot h amon g capitalist s an d labourers. 4. Turnin g to remedy fo r the pains of "transitio n fro m wa r to peace," Malthus makes clear tha t h e i s not , o f course , advocatin g a retur n t o hig h taxes , larg e militar y expenditures, an d th e impositio n of hig h protectiv e tariff s o n grain ; althoug h h e quotes Adam Smith on the nee d for gradualism in reducing tariffs. H e also oppose s a radical increas e in the issuance of paper money on grounds that empirical analysts from Thoma s Took e t o Phili p Caga n hav e confirmed: 34

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In th e histor y o f ou r pape r transactions , i t wil l b e foun d tha t th e abun dance o r scantines s o f currenc y ha s generall y followe d an d aggravate d high o r lo w prices , bu t seldo m o r never le d them; an d i t is of the utmos t importance t o recollect that , at the end of the war, the prices faile d befor e the contractio n o f th e currenc y began . I t was , i n fact , th e failur e o f th e prices o f agricultura l produce , whic h destroye d th e countr y banks , an d shewed us the frail foundation s on which the excess of our paper currency rested. Malthus's positiv e proposal s flo w fro m th e followin g simple bu t powerfu l dictum: 35 ". . .th e progres s o f wealt h depend s upo n proportions. " H e applie s thi s principl e t o what he takes to be the central task of adjusting fro m wa r to peace; that is, " a unio n of the means of distribution with the powers of production."36 He rejects increased savin g as an initial method fo r stimulatin g demand and, i n fact, find s i t counterproductive at a time of idle capacit y an d sever e unemployment . H e the n examine s thre e othe r possibilitie s fo r inducing "a n increase d nationa l revenue": the division of landed property; the extension of domestic an d foreign trade; and the maintenance of "such a proportion of unproductive consumers a s is best adapted to the powers of production." 37 H e concludes tha t al l are either unsatisfactory , slow , o r marginal: the abolition o f primogeniture "woul d produc e more evil than good," as a device for increasing nationa l revenue; a desirable but modest increase of international trade might be brought about by a gradual reduction in tariffs; an d "the maintenanc e o f unproductive consumers" (e.g. , servic e jobs) might , a t most, slo w the reductio n o f nationa l revenue . The n come s hi s famou s call fo r publi c (an d private) works accompanie d b y referenc e t o th e possibilit y o f chroni c rathe r tha n transitiona l unemployment:38 It i s als o o f importanc e t o kno w that , i n ou r endeavour s t o assis t th e working classe s in a period lik e th e present, i t is desirable t o employ the m in those kind s o f labour , th e result s o f whic h d o no t com e fo r sal e int o th e market, suc h a s roads an d public works . Th e objection t o employing a larg e sum i n this way, raise d b y taxes , woul d no t be it s tendency to diminis h th e capital employe d i n productiv e labour ; becaus e this , t o a certai n extent , i s exactly wha t i s wanted; bu t i t might , perhaps, hav e th e effec t o f concealin g too muc h th e failur e o f th e nationa l deman d fo r labour , an d preven t th e population fro m graduall y accommodatin g itsel f t o a reduced demand . Thi s however migh t be , i n a considerabl e degree , correcte d b y th e wage s given. . . . And a s soon a s the capitalists ca n begin to save from stead y an d improving profits, instea d o f fro m diminishe d expenditure , tha t is , a s soo n a s th e na tional revenue , estimate d in bullion, an d in the command of this bullion ove r labour, begin s yearl y an d steadil y t o increase, w e may then begin safely an d effectively t o recover our lost capital by the usual process o f saving a portio n of ou r increase d revenu e t o ad d to it . Thus th e hear t o f Malthus' s repl y t o Ricardo' s centra l questio n abou t savin g an d spending i s that a significant margi n of investment based o n saving is the result of a high marginal rate of plowback from a n expanding national revenue; and that if other forces are at wor k depressin g nationa l revenu e (e.g. , a declin e i n agricultura l price s o r inventor y overstocking i n expor t markets ) increase d privat e saving s ma y no t resul t i n increase d

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investment. On the other hand, at such a time, a purposeful policy of increased publi c (or private) outlay s migh t se t i n motio n a n increas e i n nationa l revenu e tha t woul d rende r increased saving s a public as well as private virtue. An accelerator a s well as a multiplier is clearl y laten t i n hi s analysis . Malthus's analysi s of the low level of activity in the British economy a s of 1819-1820, and it s short-run prospects, wa s in this part o f his exposition incomplete . Britai n i n 182 0 was just beginnin g a majo r sustaine d expansio n tha t ra n dow n t o a n explosiv e pea k i n 1825.39 And , althoug h th e subsequen t quarter centur y wa s clearl y marke d b y a stron g cyclical pattern , wit h recurrent years of severe unemployment, the overall Britis h growth rate wa s highe r tha n durin g the wa r years ; an d the trend movemen t o f urban rea l wage s more favorable. 40 Th e reason wa s that British growth wa s carried forwar d by two force s of whic h Malthu s wa s clearl y awar e but tha t he did no t identif y a s at wor k in 1820 : th e dynamism of an expanding world economy, t o which the dynamism of the British econo my itsel f significantl y contributed ; an d th e emergence , sinc e th e 1780s , o f ne w tech nology a s a n acceleratin g flow . A t thi s stag e Britai n wa s no t onl y th e mos t importan t single sourc e o f ne w technolog y i n th e worl d econom y (reflected , fo r example , i n th e declining pric e of it s cotton exports) , no t only a rapidly expanding market for exports o f other countries, but also the major sourc e of international long-term capital, notabl y in the expansions o f 1817-1818 , th e mid-1820s , an d th e mid-1830s. 41 Thus , a t firs t glance , Malthus's macroeconomic propositions relate rather better to the cyclical than to the trend phenomena o f th e period . But hi s analysi s takes o n a quite different cas t when he turns to machinery. A s should have been the case, Malthus was much more consciou s of the role of machinery in capital formation an d growt h tha n Ada m Smith ; and , quit e particularly, h e was , unlik e Smith , acutely consciou s o f th e dramati c evolutio n o f th e cotto n textil e industr y sinc e 1783. 42 The title of Malthus's section on machinery is: "Of Invention s to Save Labour, Consid ered as a Stimulus to the Continued Increase o f Wealth." Malthus begins with the already well-established dictu m that inventions are, i n the usual case, induced; that is, a n endogenous respons e t o " a decide d demand " fo r them. 43 Bu t he moves immediatel y t o asser t that th e ne w power s o f suppl y wil l b e "accompanie d b y a n adequat e extensio n o f th e market'' takin g int o accoun t bot h th e pric e elasticit y o f deman d an d wha t I cal l latera l spreading effects. 44 This effec t ha s been ver y strikingly exemplified in the cotton machiner y of this country . Th e consumptio n of cotton goods has bee n s o greatly extende d both a t home an d abroad, o n account of their cheapness, tha t the value of the whole o f the cotton good s an d twist now made exceeds, beyon d comparison , their forme r value ; whil e th e rapidl y increasin g populatio n o f th e town s o f Manchester, Glasgow , &c . durin g the las t thirt y years, ampl y testifies that , with a few temporary exceptions, th e demand fo r the labour concerned i n the cotton manufactures, in spite of the machinery used, has been increasing ver y greatly. Malthus then examine s a case wher e deman d is inelastic with respect to price. Labor saving machiner y then yield s unemploymen t and som e idlenes s i n "th e ol d fixe d cap ital." H e allow s for a shift o f idle labor and capital to new employments; but i s sceptical that the y wil l b e a s productive i n their new use s a s th e old . Th e ne t los s must be se t off against th e gai n fro m th e initia l us e o f th e ne w laborsavin g machinery . The outcom e i s inconclusive.

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Malthus proceeds to drive home his point with a marginal case. He assumes machinery that might permit al l home-manufactured commodities t o be produced wit h one-third th e labor currentl y employed , an d i n a n evocation o f somethin g akin to Hume' s stimulatin g effect o f foreig n luxuries , concludes a s follows: 45 ... i f only an increase o f domestic commoditie s coul d be obtained, there is every reason t o fear that the exertions of industry would slacken. The peasant, who migh t b e induce d t o labou r a n additiona l numbe r o f hour s fo r te a o r tobacco, migh t prefer indolenc e to a new coat. Th e tenant or small owner of land, wh o coul d obtai n the common convenience s an d luxuries of lif e a t one third o f thei r forme r price , migh t no t labou r s o har d t o procur e th e sam e amount o f surplu s produce fro m th e land . An d th e trade r o r merchant , wh o would continue in his business in order to be able to drink and give his guests claret and champagne, migh t think an addition of homely commodities b y n o means wort h th e troubl e o f s o muc h constant attention. Pursuing th e argumen t tha t th e impac t o f machiner y o n nationa l incom e hinge d o n a widening o f foreig n a s wel l a s domesti c market s Malthu s cite s an d reflect s o n som e dramatic evidence for 1817 , a year of cyclical expansion.46 H e finds that three machineryintensive manufacture s dominate exports : cottons , woolens , an d hardware. O n the other hand, 60 % of imports consist of items that cannot be produced in Britain: coffee, indigo , sugar, tea , silks , tobacco , wines , an d raw cotton : Now 1 would as k how we shoul d have obtaine d these valuabl e imports, i f the foreig n market s fo r ou r cottons , woolens , an d hardwar e ha d no t bee n extended with the use of machinery? And further, wher e could we have found substitutes a t home fo r suc h imports, whic h would have been likel y to have produced th e sam e effects , i n stimulatin g th e cultivatio n o f th e land , th e accumulation o f capital , an d th e increas e o f population? And h e draw s a genera l lesson : "I n th e actua l state of thing s therefore , ther e ar e grea t advantages t o b e looke d forwar d to , an d littl e reaso n t o apprehen d an y permanen t evil from th e increas e o f machinery. " Clarity abou t the concepts o f price and income elasticity of demand came to economi c theory onl y lon g afte r Malthus' s time ; but , b y makin g th e widenin g o f th e marke t a function o f cost an d price reduction permitte d b y the inventio n of machinery—a kind of inversion o f Adam Smith—Malthus captured essential element s o f the interplay between the Britis h and world economie s in his time .

Business Cycles I observe d earlie r tha t Malthus' s analysi s a s o f 1820 , whil e couche d i n term s o f a structural transitio n fro m wa r t o peace, wa s linke d quite particularly t o tw o interval s of deep cyclica l depression : 181 6 and 1819 . I concluded tha t his insights into macro-theor y related rather mor e t o short-run cyclical theor y tha n to the trend prospects fo r the British economy i n war an d peace. Bu t there is virtually no reference to regular cyclical fluctua tions i n Malthus . I sa y virtuall y because he twic e refers t o fluctuation s o f "eigh t t o te n years": once in 1817 ; and then in the final pag e of his Principles. (Th e major cycle peaks in hi s time , o n a n annua l basis, wer e 1792 , 180 0 |o r 1802] , 1810 , 1818 , an d 1825. 47 These tw o passage s deserv e furthe r explanation.

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The firs t i s in Malthus's response t o a thoughtful observatio n of Ricardo's tha t seeks to isolate "th e grea t caus e o f ou r differenc e i n opinion." 48 Ricard o find s th e caus e i n Malthus's concer n wit h "immediat e an d temporar y effects " wherea s h e [Ricardo ] put s them asid e an d fixe s hi s "whol e attentio n on th e permanen t stat e o f thing s whic h wil l result from them . Perhaps you estimate these temporary effects to o highly, whilst I am too much dispose d t o under-valu e them. T o manag e th e subjec t quite right the y shoul d b e carefully distinguishe d an d mentioned , an d th e du e effect s ascribe d t o each. " I n th e course o f hi s respons e Malthu s observes : " I reall y thin k tha t th e progres s o f societ y consists o f irregula r movements , an d tha t to omi t th e consideratio n o f cause s whic h fo r eight or ten years will give a great stimulus to production and population, or a great check to them, is to omit the causes of the wealth and poverty of nations—the grand object of all enquiries i n Politica l Economy. " The secon d referenc e i s the following: 49 . . . eigh t o r te n years , recurrin g no t unfrequently , ar e seriou s space s i n human life . The y amount to a serious su m of happiness o r misery, accordin g as the y ar e prosperou s o r adverse , an d leav e th e countr y in a ver y different state a t thei r termination . I n prosperou s time s th e mercantil e classe s ofte n realize fortunes , whic h g o fa r toward s securin g the m agains t the future ; bu t unfortunately th e workin g classes , thoug h the y shar e i n th e genera l pros perity, d o no t shar e i n i t s o largel y a s i n th e genera l adversity . The y ma y suffer th e greatest distress in a period o f low wages, but cannot be adequately compensated b y a perio d o f hig h wages . T o the m fluctuation s must always bring more evil than good; and, with a view to the happiness of the great mass of society , i t should be our object, a s far as possible, t o maintain peace, an d an equabl e expenditure . But beyond these tw o elusive references, I have not been able to find an y discussion of regular business cycles in Malthus. What we do have is a systematic emphasis on the role of effectiv e demand i n determining alterations in the rate of increas e in national income . We als o hav e tw o empirica l observation s tha t hav e playe d a n importan t par t i n th e evolution o f Keynesia n incom e analysis . First , a s indicate d earlier, h e envisage s th e possibility o f sticky mone y wage s and a decline i n the deman d for labor yieldin g unemployment rathe r tha n reduce d wages: 50 "W e kno w fro m repeate d experienc e tha t th e money pric e o f labou r neve r fall s til l man y workme n hav e bee n fo r som e tim e ou t o f work." And , contrar y t o a n assertio n o f Georg e Stigler , Malthu s di d introduc e th e concept of hoarding.51 I t appears, in fact, i n the first edition of his Essay on Population: 52 ". . .th e avariciou s man of Mr. Godwi n locks his wealth in a chest, an d sets i n motion no labour of any kind, either productive or unproductive.'' The possibility of savings not invested staye d with Malthus throughout his life. I n 1820 , fo r example, h e pounces on an admission of Say's that a good deal of savings that could not, at that time, find productive use as conceding "al l tha t I contend for."53 I n The Principles he also evoked "redundan t capital . . . glutting the markets of Europe . . ."i n th e wake of the coming of peace.54 And here , wit h a kin d o f accelerator—th e possibilit y o f inadequat e effectiv e deman d playing bac k o n th e motiv e fo r investment—w e come t o th e mai n thrust of Malthus' s theory. H . W . Spiege l quote s th e followin g passag e t o sugges t that Malthus anticipated Oskar Lange' s notio n (1938) o f a n optimum propensity to consume. 55 If consumptio n exceed production , the capita l of th e countr y must be di minished and its wealth must be gradually destroyed from it s want of power to

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produce; if production b e in a great excess abov e consumption, the motive to accumulate an d produce mus t cease fro m th e want of an effectual deman d in those wh o hav e th e principa l mean s o f purchasing . Th e tw o extreme s ar e obvious; and it follows that there must be some intermediate point, though the resources o f political econom y ma y not be able to ascertain it , where , takin g into consideratio n bot h th e powe r t o produc e an d th e wil l t o consume , th e encouragement t o th e increas e of wealt h i s the greatest . D. P . O'Brie n argue s effectivel y tha t Malthus' s i s a post-Keynesia n "stock-adjust ment" model: 56 ... th e firs t an d fundamenta l point t o gras p i s tha t i t i s no t a Keynesia n model with which Malthus is dealing. It is not a case of savers being unable to find a n outle t fo r thei r saving s so tha t ex ante savin g is greater tha n ex ante investment. Savin g i s realized—i t i s no t mer e hoarding—bu t thi s i s wha t causes the trouble. Wha t we have here is in fact a post-Keynesian model—a capital-stock-adjustment model . . . . Of cours e i t is possible t o be critica l of Malthus's handling of all this. Hi s neglect o f the multiplie r effects of the investment spending is important. Bu t he ha d latche d o n t o a n intellectua l proble m o f som e size : I t reall y wa s a capital stoc k adjustmen t problem whic h concerned him—hi s constan t refer ences t o "proportionality " betwee n productiv e an d unproductiv e activity , and between consumption an d investment, show this very clearly—and if we need post-Keynesia n economic s t o understan d what he was after , thi s is no t entirely hi s fault . One migh t add that, i n his emphasis o n the nee d for an appropriate "proportionality " between investmen t and consumption Malthus anticipates Marx's two-sector mode l of the second volume of Capital (following , p. 138 ) an d the subsequent lon g sequence of those who sough t t o defin e equilibrium growth i n these terms . Malthus did not produce a fully articulate d macro-theory , nor did he apply his insights satisfactorily t o th e busines s cycle . (Nor , fo r tha t matter , di d Keyne s i n th e General Theory). Thoma s Took e capture d th e dynamic s o f cyclica l fluctuation s of thi s perio d better than Malthus or, indeed , an y other economist of the day. But Malthus did relate his macro-theory t o the years o f acut e post-1815 depression . Hi s insights go far deeper than the simple underconsumptionist doctrine of which he is sometimes accused and constitute, in effect , essentia l component s i n an y viabl e theory o f growt h and fluctuations. 57 George Stigle r conclude s hi s relativ e evaluatio n o f Malthu s an d Ricard o wit h th e following counter-weight to Keynes's judgment:58 ' 'The triumph of Ricardo over Malthus cannot b e regrette d b y th e moder n economist : i t i s mor e importan t that goo d logi c wi n over ba d tha n goo d insigh t win ove r poor.' ' Eve n i f ther e wa s no t mor e goo d logi c i n Malthus's position than Stigler is willing to grant, his bon mot is rather more a stricture on modern mainstrea m economic s tha n on Malthus.

Relative Prices The argumen t here is, then, that Malthus' s direct observation of economic affairs ove r the span o f hi s matur e life generate d important insights int o the dynamic s of fluctuation s i n real nationa l income . Her e w e sugges t a n equall y remarkable tour d e force; namely , a

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Figure 3.3. Indexe s of Agricultural and Industrial Prices: Grea t Britain, 1790-1820 (1790=100). [Adapted from W. W . Rostow, World Economy: History an d Prospect (Universit y of Texas, 1978) , p. 114 , illustratio n derived fro m Glen n Hueckel , "Wa r an d th e Britis h Economy, 1793-1815 : A General Equilibriu m Analysis, " Explorations i n Economic History, Vol . 10 , No . 4 (Summe r 1973), p . 388. ]

rough modellin g o f th e dynamic s se t i n motio n b y change s i n th e relativ e price s o f agricultural product s an d manufacture s that brin g hi m withi n sigh t o f a 40-yea r cycl e along th e line s o f th e Kondratief f cycle. 59 Th e fac t is , o f course , tha t Malthu s live d through the First Kondratieff Upswing (say, 1790-1815) ; and, by the time of his death in 1834, h e had observed a good part of the First Kondratieff Downswing (say, 1815-1848) . But, a s w e shal l see , i t too k a rathe r special kin d o f imaginatio n i n 182 0 fo r Malthu s casually to toss out the suggestion tha t the early years of the twentieth century might be a time of war, high interest rates, rapidl y expanding international trade, an d relatively highpriced agricultura l commodities—which the y turned ou t t o be . Malthus's expositio n o f the dynamics o f the intersectora l term s o f trade begin s wit h a doctrine roote d i n the founding father s of political economy but heightened by the experi ence of the war years, whe n basic commodity prices rose much more rapidly than those of manufactured good s (Figur e 3.3) . O n a n index numbe r basi s (179 0 = 100 ) agricultura l prices rose to a peak o f 206 (1812), wherea s industria l prices peaked a t 126 (1814).60 So powerful wer e th e cost-reducing technologica l changes a t work in certain sector s that the price of British cotton exports (an d domestic commodit y export s a s a whole) peaked ou t in 1799 an d decline d thereafter . Britis h ba r iro n price s peake d ou t 2 year s late r an d als o subsequently declined . Here i s Malthus's enunciatio n o f the classic vie w o f relative prices: 61 The elementar y cos t o f manufactures , o r th e quantit y of labou r an d othe r conditions o f the supply necessary t o produce a given quantity of them, ha s a constant tendenc y t o diminish ; while the quantit y of labour and other condi tions of the supply necessary to procure th e last addition which has been made to the raw produce of a rich and advancing country, ha s a constant tendency to increase. The acceptance of this doctrine did not lead Malthus into predictions of an early stage of stagnation or worse. H e was, on balance, quite optimistic about the prospects for sustaining productivit y an d profit s i n agriculture . He cites , i n particular: improved agricultural machinery, method s of cropping and managing the land, and increased personal exertion

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by farm labor, notin g wide international variations in labor efficiency; the possibility of a rise i n domesti c price s dampe d b y increase d imports ; an d a declin e i n th e pric e o f manufactures du e to improved machinery , which may permit a rise in the money price of agricultural produc e withou t a proportiona l ris e i n th e mone y wag e rate . Malthu s concluded, i n fact , tha t diminishin g return s i n agricultur e migh t be fende d of f "fo r som e centuries t o come." 62 H e could, therefore , argu e against th e Ricardian doctrine tha t the rate of profit was doomed regularly to decline because it depended "o n th e fertility of the last lan d take n int o cultivation." 63 Profits , Malthu s argued , coul d var y aroun d a fairl y stable nor m depending o n "th e relative abundance or scarcity o f capital, and the demand for [agricultural ] produce compare d wit h the supply." 64 It is evident that Malthus was, in part a t least, le d to this conclusion by contemplating a succession o f thre e period s a s they wer e the n understood. 65 First , a lon g stretc h o f th e eighteenth century (excluding intervals of war) in which profits and interest rates were low (the latter about 3% ) and agricultural supplies ample. I n this interval profits also decline d and the prices of manufactures fell relative to wage rates. The n cam e the 20 years 1792 1812 when the convergence of war and a surge in agricultural prices, profits , and investment yielded an average market rat e of interest "rathe r above than below 5%." 66 Thi s is Malthus's descriptio n o f the force s a t work: 67 In the firs t place , ther e ca n be no doubt of the improvements in agriculture which were goin g forward during these twenty years, bot h in reference t o the general managemen t o f th e land , an d th e instrument s which ar e connecte d with cultivation , o r whic h i n an y wa y ten d t o facilitat e th e bringin g o f ra w produce t o market . Secondly , th e increasin g practic e o f task-wor k during these twent y years, togethe r wit h the increasin g employment o f wome n and children, unquestionably occasioned a great increase of personal exertion; and more work was done by the same number of persons and families than before. ... t o these tw o causes o f the increased productivenes s o f the powers of labour w e [must ] ad d a fal l i n th e price s o f manufacture s fro m improve d machinery, an d a rise i n the price o f corn fro m increase d demand , unaccompanied b y a proportionat e ris e o f mos t foreign , an d man y hom e commodities. . . . Then, a s w e have alread y seen , (preceding , p. 60 ) comes Malthus' s view of the thir d period—of post-181 5 agricultura l distress , a glu t o f capital , wit h lo w interes t rates , profits, an d rents , a s well a s a declining pric e level . From hi s examinatio n of thes e thre e historica l episodes Malthu s does no t generat e a n explicit theory of long cycles. And, clearly, the role of war and peace is important in his

interpretation, a s it was in fact. Bu t there i s more to his view than war and peace. He was conscious o f the importanc e o f lags i n the economic process . A s indicated i n note 61 , h e was sensitiv e t o th e slowe r respons e o f agricultur e tha n manufacture s to a n increas e i n demand. I n the Principles ther e is a second passage that captures in a demographic settin g the likelihoo d o f disequilibriu m in economic growt h du e to time lags: 68 ... i t appear s fro m experienc e tha t whil e th e productive power s o f labour remain nearly the same , the supplies of labour and the supplies of capital an d produce d o no t always keep pac e wit h eac h other . Practically, they are ofte n separated a t som e distance , an d fo r a considerabl e period ; an d sometime s population increases faster than capital and produce, and at other times capital and produc e increas e faste r tha n population.

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x Classical Economists It is obvious, fo r instance , tha t from th e very natur e of population, an d the time required t o bring full-grow n labourers int o the market, a sudden increas e of capita l an d produc e canno t effec t a proportionate suppl y of labou r i n les s than sixtee n o r eightee n years . O n the othe r hand , whe n capital an d produc e are nearly stationary from the want of will to accumulate, it is well known that population i n genera l i s ap t t o increas e faste r tha n th e produc e whic h i s t o support it , til l the wages of labour are reduced to that standard which, with the actual habits of the country, are no more tha n sufficient t o maintain a stationary population . These periods , i n which population and produce d o not keep pac e with each other, ar e evidentl y o f sufficien t extent , essentiall y t o alte r th e proportio n which goes to pay wages of labour; and consequently, to influence essentially the rat e o f profits .

Malthus's vie w of the possibility o f long cycles roote d i n shifts i n the relative price s o f basic commoditie s is , o f course , no t full y developed . I t contain s fo r example, som e bu t not all the elements I deploy i n my exposition o f Kondratieff cycles.69 It comes closes t t o Colin Clark' s sequenc e o f "capital-hungry " an d "capital-sated " period s tha t als o ar e related to wars, to periods o f relative scarcity and abundance of agricultural products, an d to period s o f mor e an d les s rapi d expansio n o f foreig n trade. 70 I n an y case , Malthu s proved capabl e o f the followin g rather remarkable projection base d o n historical analog y and reflection. 71 I shoul d fee l n o doubt , fo r instance , o f a n increas e i n the rat e o f profits in this countr y fo r twent y year s together , a t th e beginnin g o f th e twentiet h century, compare d wit h the twenty years whic h are now coming on; provided this near period wer e a period o f profound tranquillity and peace an d abundant capital, an d th e futur e perio d wer e a perio d i n whic h capita l wa s scant y i n proportion t o the demand fo r it owing to a war, attende d b y the circumstance s of a n increasin g trade , an d a n increasin g deman d fo r agricultura l produc e similar t o thos e whic h wer e experience d fro m 179 3 t o 1813 . Ricardo's respons e t o this passage dramatize s hi s instinct to drive for a single overrid ing an d fundamenta l cause i n th e fac e o f comple x phenomena: 72 "Wha t a numbe r of conditions! th e onl y on e o f importanc e i s the abundanc e or scarcit y o f capita l compare d with th e deman d fo r it , . . . " Behind wha t appears t o be a somewhat wil d fligh t o f imagination, base d o n reckonin g from a flimsy empirica l base , Malthu s is earnestly seekin g t o resolve hi s difference wit h Ricardo o n th e determinatio n o f profits . H e recognize s th e legitimac y o f th e long-ru n theory o f rent, profit , an d the stationar y stat e argue d b y Ricardo ; bu t he recognizes als o that it i s likely t o b e overwhelmed i n its effect b y th e operatio n o f force s o f great powe r and persistenc e that , h e feels , canno t be dismisse d a s simpl y short-run o r transitory: 73 . . . whe n cultivation is pushed to its extreme practica l limits , that is, when the labou r o f a ma n o n th e las t lan d take n int o cultivatio n wil l scarcel y d o more tha n suppor t suc h a famil y a s i s necessar y t o maintai n a stationar y population, i t is evident that no other cause or causes can prevent profits fro m sinking t o the lowes t rate require d to maintai n th e actual capital. Bu t though this principle is finally of the very greatest power, yet its progress i s extremely

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slow and gradual; and while it is proceeding with scarcely perceptibl e steps to its fina l destination , th e secon d caus e i s producin g effect s whic h entirel y overcome it, an d often for twenty or thirty, or even 10 0 years together, mak e the rat e of profits take a course absolutel y different fro m wha t it ought to b e according t o th e firs t cause .

The Stages of and Limits to Growth Malthus's view of the stages of and limits to growth is, i n effect, a n exercise in the relativ e power o f his "first " an d "second " causes in the quotation above. The first i s to be see n at work , i n immens e variety , i n th e empirica l section s o f hi s secon d (an d subsequent ) edition o f th e Essay o n Population. Usin g th e alread y conventiona l stage s o f hunting gathering, stock-raising , agriculture , commerce-manufacturing, h e set s ou t th e positiv e and, where they exist, preventiv e checks t o population increase i n more than 30 societies from "th e wretche d inhabitant s of Tierra de l Fuego" to "th e beggar s o f Teshoo Loom boo" (Tibet) ; an d fro m ancien t Greece t o contemporar y Europ e an d th e Unite d States . Exploiting some 10 2 authorities within the existing literature and his own travels, Malthus produced a n impressiv e an d coheren t stud y in what might be calle d comparativ e demo graphic anthropology. 74 Th e bul k of the case s h e examine s represent, i n on e fashio n o r another, th e operation of his first cause; that is, the inexorable expansion of population up to the poin t wher e the mean s of subsistence , whateve r the for m of the economy , can maintain a t bes t a stationar y populatio n a t a minimu m level . Bu t Malthu s find s som e exceptional cases ; fo r example , Norway , wher e h e judge d (perhap s inaccurately ) tha t military service and a lively communal sense of limitations of the environment discourage early marriages. 75 And , o f course , h e find s a happ y stat e o f affair s i n contemporar y United State s and , fo r transitiona l periods , i n previou s societies blesse d fo r a time with extremely favorabl e resource-populatio n balances . But , a s i n hi s firs t editio n o f th e Essay o n Population, Malthus' s "check s to population" constitut e a catalogue of horror s as variou s form s o f miser y and vic e ac t "positively. " When Malthus turns to the prospects fo r Britain, however, h e is back in the world of his second cause ; that is, th e extent to which diminishing returns can be fended off, aided by benign preventiv e check s t o th e population. Her e som e shif t i n Malthus's view s can b e detected. Fo r example , i n respondin g t o Godwin' s technologica l optimis m abou t th e future, Malthu s expresse s i n th e firs t editio n o f th e Essay o n Population a cautionar y scepticism, includin g observation s on the probable limitation s of the telescope tha t wer e short o f prescient. 76 And , whe n Malthus, like Hum e and Adam Smit h before him , get s into th e rich-country-poor-countr y problem , agai n his vie w i s mor e measure d an d les s sanguine tha n those o f hi s predecessors. 77 Th e resul t stems, i n part , fro m a shif t i n th e framework o f debate . Hum e and Smit h wer e arguin g against mercantilist protectionists ; Malthus wa s arguin g against extreme Fre e Traders . He begins th e discussio n wit h a lucid statemen t o f the Free Trader's poin t of view: 78 A countr y whic h excel s i n commerc e an d manufacture s may purchas e cor n from a great variety of others; and it may be supposed, perhaps, that, proceeding upo n this system, it may continue to purchase an increasing quantity, and to maintai n a rapidl y increasin g population, till th e land s of al l th e nation s with whic h it trades ar e full y cultivated . As thi s is a n even t necessarily at a

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great distance, i t may appear tha t the population of such a country will not be checked fro m th e difficult y o f procurin g subsistenc e till afte r th e laps e o f a great numbe r o f ages . Malthus the n adduce s a serie s o f circumstance s that coul d mak e difficult y lon g befor e fertile lan d i n surroundin g countries had ru n out: • "Advantage s whic h depen d exclusivel y upo n capita l an d skill , an d th e presen t position o f particula r channel s o f commerce , canno t i n thei r natur e b e permanent."79 8 Domesti c competitio n of the kind experienced i n the highly successful cotton industry is also capable o f driving down profits and wages to levels that would constitut e "a chec k o n population " tha t "n o ingenuit y of machiner y whic h wa s no t con tinually progressive " coul d prevent . • A country dependent on both food and raw material imports to sustain its people and industry i s vulnerabl e to a wide variet y of force s tha t might reduce it s capacity t o import fro m its suppliers; indolence or bad management of resources i n the supplying nation; a n unfavorable shif t i n the terms o f trade; or, a virtually certain shift in the supplyin g natio n fro m agricultura l and raw materia l productio n t o manufacturing. Malthu s conclude s tha t a balanced syste m of both agriculture and commerce i s optimal:80 ... i t is the union of the agricultural and commercial systems , an d not either o f them take n separately , tha t is calculated t o produce th e greates t national prosperity; tha t a country with an extensive and rich territory, th e cultivation o f whic h is stimulate d by improvement s i n agriculture , man ufactures, an d foreig n commerce , ha s suc h a variou s an d abundan t resources tha t i t i s extremel y difficul t t o sa y whe n the y wil l reac h thei r limits. That there is, however, a limit, which, if the capital and population of a country continu e increasing, the y mus t ultimately reach an d canno t pass: an d tha t this limit , upo n the principl e o f private property , mus t be far shor t o f th e utmos t power o f th e eart h t o produce food . Passages lik e tha t just quoted have yielded a somewhat belated revisionis t literature. 81 Malthus (an d Ricard o a s well ) i s associate d i n muc h o f th e literatur e o n th e histor y o f economic theor y wit h pessimistic view s about the prospects fo r the world economy . Th e popular image of economics a s "th e disma l science" owes a good deal to what many have believed wer e the practical conclusion s of Malthus and Ricardo on population an d diminishing returns . An d th e firs t editio n o f Malthus' s Essay o n Population, writte n i n th e 1790s i n a settin g o f chroni c strai n o n th e foo d supply , contendin g agains t th e arden t optimism o f William Godwin, certainl y contain s som e blood-curdlin g passages . Indeed , Malthus's own evaluation in the Preface is: "Th e vie w which he [the author] has given of human lif e ha s a melanchol y hue . . . . " An d i t i s wholl y understandabl e tha t a rathe r urgent limits-to-growt h stran d should enter the writings of close observer s i n the 1790 s as they projected , i n a n excessivel y linea r way , th e apparen t implication s o f risin g foo d prices, year s o f true foo d shortag e mitigate d onl y by larg e incom e subsidie s t o the poor, despite vastl y increased agricultural investment in hitherto submarginal land. As w e shal l see, suc h pessimism was t o recur i n each of the other Kondratieff upswing s of the next 2 centuries. Moreover, bot h Malthus and Ricardo used the stationary state as an expositional device to illustrate the operation of certain abstract forces; and as Frederic Kolb has emphasized,

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Ricardo's dedicate d disciples , Jame s Mil l and J. R . McCulloch , b y suggestin g the earl y arrival o f th e stationar y state , create d considerabl e confusion. 82 I a m incline d t o thin k tha t a n additiona l facto r a t wor k flow s fro m th e timin g of Malthus' s observation s an d writing . Th e somewha t more hopefu l secon d editio n o f Mal thus's Essay o n Population wa s writte n in a n interva l of remissio n fro m th e acut e population-food pressure s of 1795-1796 and 1799-1801 (see Figure 3.3, above) . From a peak in March 180 1 th e price of wheat fell fro m 154 s to 50s per quarter in March 1804. 83 The nex t acut e phas e o f pressur e o n th e foo d suppl y cam e i n th e perio d 1809-1812 , notably the extremely difficult year s 1811-1812 . From a peak in August 181 2 grain prices declined erratically to a trough in 1822 , afte r whic h they oscillated about a stable average level for 30 years. I t was in precisely this interval, 1813-1822, when the First Kondratieff Downswing ha d begu n an d the agricultura l interests wer e clamorin g for protection , tha t Malthus and Ricardo formulated their final temperately optimistic judgments on how long man's ingenuit y and the exploitation o f comparative advantag e could keep tha t old devil Diminishing Return s a t bay. 84

Noneconomic Factors Noneconomic factor s pla y a mor e importan t rol e i n Malthus' s analysi s o f economi c growth tha n i n Ada m Smith's , an d a somewha t differen t rol e than i n Hume's . The populatio n issue inescapably introduce d noneconomic variable s in both th e rather stark formulatio n o f th e firs t editio n o f th e Essay an d th e mor e nuance d secon d editio n containing i n Volum e I it s treatis e i n comparativ e demography . The firs t editio n take s it s start , o f course , fro m th e stat e o f heightene d excitement , tension, an d speculation evoke d by the revolution that had been unfolding in France sinc e 1789. Th e dialogue , a s Malthus saw it, wa s between "th e advocat e for the perfectibility of man" an d "th e defende r of establishments."85 The major contenders, Malthus judged, neither listene d t o eac h othe r no r fairl y judge d eac h other' s motives . I n definin g th e difficulties tha t impede d th e perfectibilit y of man , Malthu s sough t t o contribut e t o th e amelioration o f th e huma n condition. But , fro m th e beginnin g o f hi s inquir y he foun d himself inevitabl y dealin g wit h dimensions o f th e huma n conditio n beyon d th e conven tional terrain of political economy. Afte r all , the second of his two basic postulates, abou t which h e has a good deal to say, is: 86 " . . . th e passion betwee n th e sexes i s necessary, and will nearly remain in its present state." And even in his first edition , the passages o n "the preventiv e check " consis t o f a serie s o f shrew d sociologica l observation s on why men rangin g fro m "th e highes t rank" i n societ y t o "servant s wh o liv e i n gentlemen' s families" ma y choose to postpone marriag e or never marr y a t all. 87 Despit e a bit o f th e pomposity o f both youth and the ministry, there is also a strand of Jane Austen in Malthus. His handling of the greatly enlarged, empirica l materials i n the second editio n i s much more professional. Th e two books of Volume One of the 180 3 edition, surveyin g systematically "Th e Check s t o Population" i n ancient, primitive , an d less developed societie s and, then , i n contemporary Europe , ar e a tour de force o f general socia l science . Demo graphic statistica l calculation s ar e interwove n wit h social , political , psychological , an thropological, an d economi c analysis . It all permits him a less dramati c and more com forting conclusion—a t least for Europe—than the first edition: 88 " . . . i t appears that in modern Europ e the positiv e checks t o population prevail less an d the preventiv e checks more tha n i n pas t times , an d i n th e mor e uncivilize d part s of th e world." The ascendanc y of the preventive over the positive checks to population was linked, as

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we sa w earlie r (p . 57 ) t o larg e conclusion s abou t th e appropriate shap e societie s shoul d assume.89 I t wil l b e recalle d tha t Hum e an d Smit h argue d tha t a lively commercia l an d manufacturing society , buil t b y an d strengthenin g a stron g middl e class , sedulousl y protecting privat e property , woul d tend als o t o generate institution s of civil an d politica l freedom. I n a simila r bu t no t identica l vein , Malthu s argued tha t the nurturin g of thos e institutions plu s th e cultivatio n o f popula r educatio n woul d maximiz e th e strengt h o f preventive check s t o populatio n b y teachin g "th e lowe r classe s o f societ y t o respec t themselves b y obligin g th e highe r classe s t o respect them . . . ." 90 As a personality , Malthu s differ s fro m hi s tw o greates t predecessors . Davi d Hum e emerges, i t wil l b e recalled , a s a sanguine , humorous , somewha t stylize d eighteenth century figure, perhap s maskin g his frustrations and disappointments, bu t pretty much the wise, human e companion hi s friends describe, capabl e o f going abou t i n a black-spotte d yellow coat and, a s mortal illnes s closed in , mounting on July 4, 1776 , a cheerful farewell dinner fo r thos e closes t to him. Ada m Smit h is less penetrable, th e absent-minded bach elor professor who , i n Hume's commendation , wa s a "ma n o f true merit, though perhap s his sedentar y reclus e lif e ma y hav e hurt his ai r and appearanc e a s a man o f the world. " Smith was said to have had one great passion in his life; but for unknown reason s nothing came o f it . H e neve r married , no r di d she. 91 Wha t w e d o kno w i s tha t hi s fathe r die d before h e was born an d he was closely attache d t o his mother, wit h whom he lived for 60 years an d afte r whos e deat h h e wen t int o a rapid decline . But , Adam Smit h remain s i n recorded memor y abou t as pur e a scholar-teache r a s on e i s likely t o find . It i s somewha t differen t wit h Malthus . Hi s complexitie s ar e mor e exposed . Fo r on e thing, he carried the burden of a cleft palat e and a hare lip . As a curate of the Churc h of England and , later , professo r o f th e East Indi a College a t Hailebury, h e wa s neve r trul y affluent. Indeed , h e wa s onl y abl e t o marr y becaus e i n 1803 , whe n h e wa s 38 , th e rectorship o f the parish o f Walesby becam e ope n throug h the death o f the incumbent and was grante d t o him wit h a reasonably comfortabl e living. 92 There i s ever y evidenc e that , o n balance , Malthu s wa s " a mil d an d benevolen t per son."93 Bu t thes e qualitie s wer e sustaine d b y inne r discipline ; fo r Malthu s wa s clearl y driven b y a complex o f authentic passions, an d there ar e often flashe s of white heat in his prose. From al l accounts, he fell deepl y in love wit h Harriet Echersall i n 1802 ; bu t they coul d not marry withou t losing hi s income fro m hi s Cambridge fellowshi p an d had t o wait two nerve-wracking year s fo r the opening at Walesby. H e was clearly a man who felt compas sion for the unfortunate poor, even for unmarried mothers ("s o natura l a fault"); bu t logic and what he felt was scientific integrity led him to oppose the Poor Laws as they were then administered. Abov e all , i n writin g so vividly about issue s o f grea t sensitivity , Malthu s was plunge d int o controversie s tha t shadowed th e res t o f his life . Thes e focuse d aroun d matters o f maximu m intensity of feeling : religion , sex , an d the treatmen t o f the poor. 94 Controversy wa s heightene d becaus e Malthus' s formulatio n o f his position ofte n lef t hi m vulnerable—sometimes becaus e hi s judgments wer e unwise , ofte n becaus e the y wer e expressed i n unguarde d an d provocativ e languag e and alway s without humor. I t di d no t matter tha t his central hypothesis was to be found in Hume and Smith or that his argument was buttresse d b y a n impressiv e bod y o f evidence. The iron y of al l this is that of the four grea t classical figures—Hume, Smith, Malthus, and Ricardo— 1 woul d gues s tha t Malthu s fel t mos t deepl y an d personally—leas t ab stractly—the reality of human misery among the poor an d found th e greatest difficulty i n reconciling tha t realit y wit h belie f i n a just God .

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David Ricardo (1772-1823) In settin g th e backgroun d fo r Malthus , we dealt, inevitably , with aspects o f th e lif e an d work of Ricardo . The y wer e linke d not onl y by thei r tie s of professiona l association , friendship, an d respect, bu t als o b y thei r bafflement at the unresolvable difference s that flowed fro m thei r respective approache s t o political economy . The y wer e als o linke d b y an awarenes s tha t they stoo d a s leaders o f a second generation , operating i n the wak e of Adam Smit h and The Wealth o f Nations. An d they were linked by the dramatic sequenc e of problems confronte d b y the British economy i n their time that set their working agenda as politica l economists : th e pressur e o f a n accelerate d populatio n increas e o n th e foo d supply durin g the year s o f wa r an d it s dramati c easing i n the postwa r years ; a period o f sustained agricultural expansion and high profitability followed, after 1812 , by a dramatic fall i n grai n prices , agricultura l distress , an d a shar p debat e o n agricultura l protection ; wartime inflation , with detachment fro m a bullion standard and a floating exchange rate after 1797 , an d then retur n to a gold standar d i n 182 1 i n a contentious settin g o f falling prices; and , assertin g itsel f progressivel y i n the background, th e firs t roun d of the industrial revolution , makin g possibl e th e financing of the war agains t Napoleon i n good par t via cotto n exports , generatin g als o an enlarge d and increasingl y assertive industria l and commercial middle class and a volatile urban working class sensitiv e to fluctuations in the cost of living and employment. In the last years of Ricardo's life , whe n he was a membe r of Parliament (1819-1823) , the issue of electoral refor m was actively on the agenda; and he addresse d himsel f t o it . Ricardo's educatio n wa s distinctl y not i n the mainstrea m o f hi s time. 95 Hi s firs t tw o years' schoolin g wa s i n Holland , fro m whic h hi s fathe r ha d com e an d wit h whic h hi s family maintaine d clos e ties ; the n a commo n schoo l educatio n unti l his fathe r too k hi s eldest son , age d 14 , int o hi s fir m a s a Stoc k Exchang e broker . Ther e Davi d exhibite d remarkable capacit y fo r the business in hand and a precocious maturity , which his father recognized b y grantin g him responsibilitie s beyon d hi s years . O n his brother' s credibl e account, Davi d als o exhibite d " a tast e fo r abstract an d general reasonin g [and ] .. . a propensity t o go to the bottom o f the subjects by which [his mind] was attracted . . " 96 The capacity t o hold strong , independen t views against opposition, bu t without rancor— exhibited s o markedl y i n hi s relation s wit h Malthus—appears early an d ma y hav e bee n strengthened b y his relations wit h his parents. Ricardo' s father , a s described b y David' s brother, Moses , wa s a man of strong prejudices rooted i n "th e opinion s of his forefathers in points of religion, politics , education , etc." 97 He expected hi s children to accept thes e "upon faith and without investigation. . . . [H]is son [David], however, neve r yielded his assent o n an y importan t subject , unti l afte r h e ha d thoroughl y investigate d it . I t wa s perhaps i n opposin g thes e stron g prejudices , that h e wa s firs t le d t o tha t freedo m an d independence o f thought for which he wa s so remarkable. . . ," 98 Conflict in the famil y came to a hea d wit h Ricardo's marriag e in Decembe r 179 3 to Priscilla Wilkinson , daughte r o f a Quaker surgeon . Th e details of what must have been a nerve-wracking sequence ar e not firmly known. The evidence suggests a period of gradual loosening of Ricardo's commitment to Judaism as a religion;99 a formal break enforced by the Sephardi c view of marriag e outsid e the faith ; a mother s o offende d tha t sh e insisted that he r eldes t so n b e drive n fro m thei r home an d separate d fro m th e famil y business ; a reconciliation between fathe r and son 8 years later after th e mother's death. Ricard o did, indeed, have to set himself up in business independently when he married. Although only

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21 he had alread y acquire d a sufficien t reputatio n to be backed as a broker b y an eminent firm (Lubboch s an d Forster) , whic h remained hi s ban k for th e res t o f hi s life . Ricardo's withdrawa l fro m Judais m neve r wen t furthe r tha n Unitarianisrn . There i s some justice i n an observation no t meant to be friendly o f Lord Wilberforce i n his diary in the wak e o f a speec h i n Parliamen t i n which Ricardo sai d a t one point: 100 He must now inform the House, tha t after a long and attentive consideratio n of th e question , h e ha d mad e u p hi s min d that prosecution s ough t neve r b e instituted fo r religiou s opinions . Al l religiou s opinions, however absur d an d extravagant, migh t b e conscientiousl y believe d b y som e individuals . Why , then, wa s on e ma n t o se t u p hi s idea s o n th e subjec t a s th e criterion s fro m which no other wa s to be allowed to differ wit h impunity? Why was one man to be considered infallible , and all his fellow me n as frail an d erring creatures? Such a doctrine ought not to be tolerated: i t savoured too much of the Inquisition t o b e receive d a s genuin e in a fre e countr y lik e England. In Parliament , Wilberforc e observe d judiciously : " . . . th e hon . membe r fo r Por tarlington seemed to carry into more weighty matter s those principles of free trade he had so successfull y expounded. " Wilberforce' s diar y entr y afte r th e debat e reads : " I ha d hoped tha t ha d becom e a Christian ; I se e no w tha t h e ha s onl y cease d t o b e a Jew." (Th e dash was inserted by cautious editors of the diary, but the reference to Ricardo is clear. ) Ricardo wa s activ e i n Unitaria n circles, hi s wif e maintaine d a connectio n wit h th e Quakers. H e als o kep t clos e ties t o mos t o f his ow n an d hi s wife' s brothers an d sisters . Despite th e homeric effort s o f Sraffa an d Dobb there is still a good deal we do not know about Davi d Ricardo . A t times , hi s universall y attested competence , modesty , modera tion, independence, integrity , and commitment to the common goo d fai l to combine into a portrait o f a recognizable huma n being. I n part, thi s is probably the case because h e was, by temperamen t an d tempering , a highl y self-discipline d perso n livin g i n a n ag e o f stylized manner s an d language. Bu t there are enough glimpses o f him offstage an d eve n off-balance t o rende r credibl e hi s virtue s an d hi s humanity. Although Mari a Edg e worth's testimon y i n a letter t o he r stepmothe r durin g a visit t o Gatcomb Par k characterize s Ricardo' s styl e i n discours e alon g familia r lines, i t arise s from a fres h repor t o f a particular conversation o n a given day an d carries perhap s mor e conviction tha n e x post generalizations: 101 We ha d delightfu l conversation , bot h o n dee p an d shallo w subjects. Mr . Ricardo, wit h a ver y compose d manner , ha s a continua l lif e o f mind , an d starts perpetuall y ne w gam e i n conversation . I neve r argue d o r discusse d a question wit h any person wh o argues more fairl y o r less for victory and mor e for truth . H e give s ful l weigh t t o ever y argumen t brought agains t him, an d seems no t t o b e o n an y sid e o f th e questio n fo r on e instan t longer tha n th e conviction o f his mind on that side. I t seems quit e indifferent t o him whethe r you fin d th e truth , o r whethe r he find s it , provide d i t be found . On e get s a t something by conversing wit h him; one learns either that one is wrong or that one is right, and the understanding is improved without the temper being ever tried i n th e discussion . . . . And thre e day s late r Mari a Edgeworth i s reportin g t o he r siste r a rollickin g evening of charades wit h Ricardo appearing as a coxcomb, a monk, and a monkey. 102 We see a good

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deal more o f an agreeable, cheerful , and affectionate family man in his letters hom e from the continenta l gran d tou r o f 1822 , includin g commiseratio n wit h hi s so n Osma n ove r Eton's los s t o Harro w a t cricket . These persona l document s als o tel l a goo d dea l abou t Ricardo' s vie w o f money . Hi s operations o n th e Stoc k Exchang e mad e hi m a ver y ric h ma n i n a n astonishingl y shor t time. Whe n detache d fro m hi s father' s fir m in 179 3 he ha d £800 to his name . Whe n h e died i n 182 3 h e wa s wort h somethin g lik e £725,000. 103 Hi s estat e woul d conver t t o something lik e $42. 5 million (a s of the third quarter of 1987) , yieldin g an annual incom e of abou t $1,780,000 . Ricardo bega n hi s withdrawa l fro m busines s i n 181 4 t o liv e th e lif e o f a countr y gentleman an d completed th e process i n 1819 . Ther e i s no reason t o doubt his 181 4 lette r to Malthu s observin g " . . . I shal l no t sig h afte r th e Stoc k Exchang e an d it s enjoy ments ."' ° 4 And there is a good deal of evidence that he generously helped members o f his family an d his wife's whe n they were i n need. Thi s was not without embarrassment. H e had t o dea l wit h what he fel t to be overeffusive thanks; 105 bu t two of his sisters, i n fact, returned som e mone y h e sen t the m i n what mus t have involve d pai n a t both end s o f th e frustrated transaction. 106 Ricardo wa s apparentl y drive n i n hi s know n (an d n o doub t man y unknown ) phi lanthropies by two reflections: that, by chance, h e was "on e o f Fortune's chie f favorites" with respect to making money; 107 an d it was a source o f satisfaction to see sums, whic h meant s o little t o him, use d b y those to whom it might make a n important difference. H e was acutely awar e o f how different the relative marginal utility of money could be among individuals i n differen t circumstances . But perhap s th e most revealing insigh t into Ricardo's character ar e the occasions whe n he wa s move d b y mora l outrag e an d expresse d i t forcefully . Ther e ar e thre e strikin g examples. First, a n extraordinary letter written to his father-in-law when the latter was 75, Ricardo 31 . Dr . Wilkinso n was , b y al l accounts , a tyran t whos e behavio r drov e hi s children t o brea k wit h him . Th e occasio n o f th e lette r wa s th e departur e o f Ricardo' s sister-in-law Fann y t o liv e wit h her brothers . Ricardo begin s b y evokin g th e heavy-hande d disciplin e Wilkinso n impose d o n hi s children:108 " . . .n o enjoyments , no comforts, n o pleasures wer e to be obtained b y the highest o r lowest i n y r famil y unless they emanate d fro m you . Y r syste m wa s that o f an eastern monarc h rulin g over abjec t slaves . . . . " Ricard o the n reminds his father-in-law of th e successiv e escap e fro m hi s tyrann y of thre e o f hi s children: Josiah , Priscilla , an d Fanny. Speakin g the n for the famil y a s a whole he says its members bea r hi m no il l will and as k nothing o f him excep t t o " . . . trust every thin g to affectio n an d exact nothing . Come amon g us as a friend and a father and confide in our willingness to sooth your cares and contribut e t o you r happiness,—s o shal l th e remainde r o f you r day s b e passe d i n comfort an d peace. . . . " Ricardo's chivalrous strand emerged agai n in the unfortunate Cumberland affair . Brief ly, Mrs . Ricard o dismisse d a youn g maidservant , Catherin e Harrison , believe d b y th e Ricardos t o be of good character. Returnin g by stagecoach t o her family home in Burford she me t a youn g man , Sydne y Cumberland, an d proceede d wit h him t o Londo n a t he r suggestion. Cumberland , i t seemed , lef t he r a t a hous e of ill-reput e presided ove r b y a Mrs. Whiting . Ricardo got win d of th e girl' s failur e t o retur n to Burfor d an d enliste d a brother i n London t o establish the facts . I t firs t appeare d tha t Sydney Cumberland had a hand i n bringing Miss Harriso n t o London. O n the basi s of this report, Ricard o wrote a n evidently outraged letter to him. Cumberland denied strongly any wrongdoing. His father

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George Cumberland was soon i n the act. As the facts unfolded, it appeared tha t Ricardo's information ha d bee n wron g an d Mis s Harriso n wa s a duplicitous young woman, if no t simply "th e ba d girl" evoked by George Cumberland . Ricardo was forced to apologize . He did this handsomely and without equivocation but defended the honor and veracity of his brother . H e als o pose d thi s revealin g question: 109 "I f yo u ha d bee n a s firml y per suaded a s I wa s of th e girl s innocenc e an d virtue; i f .. . yo u had hear d tha t the write r [Sydney Cumberland ] ha d conveyed he r to such a house as Mrs. Whiting' s . . . [w]oul d not you r conclusion s hav e bee n ver y simila r t o thos e I formed ? an d woul d no t you r indignation hav e broken ou t i n language as severe a s mine?" Ricardo's capacit y fo r indignatio n emerges , finally , i n th e position s h e adopte d i n Parliament. A s note d earlie r h e wa s flatl y fo r freedo m o f religiou s expression ; bu t th e occasion wa s calculate d t o heighte n Ricardo' s rhetoric. 110 On e Mar y An n Carlil e ha d been prosecute d b y th e Societ y fo r th e Suppressio n o f Vic e fo r sellin g a cop y o f A n Appendix t o th e Theological Works o f Thomas Paine an d ha d bee n sentence d fo r blas phemous libe l to a year's imprisonmen t and a fine of £500 or to be imprisone d until the fine wa s paid. Whe n her term o f imprisonment expired, sh e was kept i n jail because sh e could not pay the fine. Sh e then petitioned Parliament through a member [Mr. Hume] and thus launche d th e debate . It ma y o r ma y no t b e significant , but i n al l thre e case s o f rathe r passionat e mora l outrage Ricardo was reacting to what he felt was the mistreatment of women: his sister-inlaw Fanny; Catherine Harrison before her true character was revealed; and the proselytiz ing Mar y An n Carlile . In a more conventiona l moo d o f dissatisfaction i n the face o f inequity , Ricardo was a steady advocat e o f parliamentary refor m an d vot e b y ballot. 111 Tw o majo r papers pub lished posthumousl y i n th e Scotsman i n 182 4 wer e o n those tw o themes. 112 Correctly reflectin g hi s time , then , Ricardo , emerge d afte r th e Napoleonic War s a s a man o f th e nineteent h rathe r tha n th e eighteent h century . H e di d no t concer n himsel f explicitly wit h the larg e issue s o f philosophical an d socia l scienc e analysi s that engaged Hume and Smith and framed their propositions i n political economy. Unlik e Malthus, his work wa s ahistorical . H e focuse d sharpl y o n th e unfoldin g operationa l agend a o f a n increasingly industrialized Britain: free trade , parliamentary reform, an appropriate policy toward the poor, and, as we shall see, th e impact on labor of the introduction of machinery. Ricardo , i n fact, reflected mor e accuratel y than Malthus what was to become main stream nineteenth-century economic policy. Malthus's reserved views on free trade had an eighteenth-century cast, hi s obsession wit h effective deman d foreshadowe d the twentieth century. Moreover , Malthus' s earl y identificatio n with population theory put him, in the public mind , i n a rather specia l category . I n any case, th e fac t tha t Ricardo's theoretica l formulations, howeve r abstract , wer e geare d t o increasingl y popula r politica l policies , enlarged hi s statur e a s a n economist, a t leas t dow n to th e mid-nineteent h century. Thus, a s Schumpete r perceive d i n hi s evocatio n o f "th e Ricardia n vice," th e mos t abstract an d forma l o f th e classica l theorist s wa s als o sharpl y focused and , i n a sense , controlled b y hi s concer n wit h policy. His drif t towar d public affairs , a s the grip o f the Stoc k Exchang e graduall y loosened , yielded a n importan t advantage fo r student s of hi s basi c concepts an d propositions . I n Parliament an d i n givin g evidenc e befor e public commissions Ricardo's position s were systematically rooted i n his theories; but he was, in those circumstances, terse and lucid. One ca n fin d i n hi s policy statements clear and unambiguou s formulations of most o f hi s theoretical doctrines.

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There is one more thing to be said abou t Ricardo: like Hume, but unlike the other fou r classical economist s considere d i n Part I , h e had a lively, often self-deprecatin g sense of humor. Hi s letter s t o hi s frien d Hutche s Trower , fo r example , wer e sho t throug h wit h quiet observations scorin g off himself and, occasionally, others. 113 This sense o f proportion an d perspective als o permitte d him without apparent pain to admit the possibility of error:114 The bullionists, and I among the number, considered gol d and silver as less variable commoditie s tha n they really are , an d the effect o f war on the price s of these metals wer e certainly very much underrated by them. The fal l i n the price of bullion on the peace i n 1814 , an d its rise again on the renewal o f the war on Bonaparte's entr y into Paris are remarkable facts, and should never be neglected i n an y futur e discussio n o n thi s subject .

The Basic Growth Equation Clearly foreshadowe d i n his earlier work, Ricardo's centra l theme when he came to write his treatis e wa s no t the determinant s o f the wealt h o f nations but it s distribution. A s the first sentence of the opening passage from the Preface of his On the Principles o f Political Economy an d Taxation indicates , h e too k fo r grante d th e term s o f th e alread y classica l basic equatio n o f economi c growth. 115 The produc e o f th e earth—al l tha t i s derive d fro m it s surfac e b y th e unite d application o f labour, machinery , an d capital, is divided among three classe s of the community ; namely, th e proprietor o f the land , the owne r of the stock or capital necessar y fo r its cultivation, and the labourers by whose industry it is cultivated . But i n different stage s o f society , th e proportions o f the whol e produce o f the eart h whic h will be allotte d t o each o f these classes , unde r the name s of rent, profit, an d wages, wil l be essentially different; dependin g mainl y on the actual fertility of the soil , o n the accumulation of capital an d population, an d on th e skill , ingenuity , an d instrument s employed i n agriculture . To determin e the law s whic h regulat e thi s distribution , is the principa l problem i n Political Economy : muc h as the science ha s been improved by the writings of Turgot, Stuart , Smith, Say, Sismondi, and others, they afford very little satisfactory informatio n respecting th e natural course o f rent, profit, and wages. Evidently, Ricardo' s theor y of distribution was intimately interwoven with his concept of th e proces s o f economi c growth . Quit e complet e an d internall y consistent Ricardia n growth model s hav e therefore no t been difficul t t o construct. 116 Ricard o provide s obser vations o n eac h o f th e variable s i n th e basic growt h equation , althoug h i n severa l case s those observation s ar e a bit thin. As th e passag e quote d abov e implies , Ricardo , lik e hi s predecessors an d successors , asserts tha t outpu t i s a functio n o f land , capital , and labor . Machiner y i s introduce d in quasi-independent statu s fro m th e beginnin g with th e implicatio n tha t "capita l i s t o b e viewed a s th e foo d an d th e necessarie s supplied , vi a wages , t o th e worke r durin g th e production process. " Ricardo managed t o generate by misadventure a great deal of harmless controversy b y

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sharpening (or appearing t o sharpen) Adam Smith's corn growt h model (preceding, p. 38) into a genera l paradig m fo r th e growt h process. 117 Th e simplificatio n wa s beguilin g because th e fact tha t corn coul d be regarded a s both circulating capital an d output permitted th e wag e rate , productivity , an d th e profit rat e t o be measure d i n real terms . Bu t it turned ou t tha t th e mode l wa s a bi t mor e Sraffa' s tha n Ricardo's , i n par t because , a s Ricardo wa s awar e (an d Malthu s pointed out) , wag e good s consiste d o f more tha n cor n (e.g., cotto n textiles) ; an d th e valu e proble m coul d no t b e evaded . Thus , a s Sraff a indicates, th e critical function of the labor theory of value in Ricardo's Principles i s as an alternative devic e fo r measurin g th e ke y economi c variable s i n uniform , comparabl e terms.118 Putting asid e thes e controversie s an d refinements , Ricardo's origina l mode l i s wort h noting briefly . It was presented i n his Essay o n Profits, a pamphlet published in 1815. 1l9 The Essay marke d Ricardo' s movemen t fro m th e bullionis t debat e t o a wide r terrai n i n political economy . As often in the history of economic theory, the occasion wa s an intens e controversy abou t polic y brough t o n by a quite particular economi c situation . Th e situation wa s th e dramati c declin e i n th e pric e o f whea t from a pea k o f 152 s pe r quarte r i n August 181 2 t o 75 s i n Decembe r 1813 , afte r whic h i t drifte d erraticall y downwar d t o a trough earl y i n 1815. 120 Ricardo' s pamphle t wa s publishe d i n a comfortabl e interval ; between Napoleon' s initia l defeat an d his return from Elb a (Marc h 1 , 1815) . Price s the n bounded u p moderatel y unti l th e outcom e o f th e Battl e o f Waterlo o (Jun e 18) . Wha t Ricardo wa s tryin g to do (along wit h Malthus, West, Torrens , an d other pamphleteers o f the time ) wa s t o influenc e th e forthcomin g debat e i n th e Hous e o f Common s o n th e following subject : Shoul d a tariff b e imposed o n imported grai n to protect the agricultural interests o f Britain against the halving of the wheat prices which had occurred? To capture the tempe r an d focu s o f th e occasio n i t i s worth , befor e examinin g th e growt h mode l involved, to quote the peroration of Ricardo's pamphle t that evoked the debating device of reductio a d absurdum t o oppose agricultura l protection. 121 ... I f the interests o f the landlord b e of sufficien t consequence , t o deter mine u s no t t o avai l ourselve s o f al l th e benefit s whic h woul d follo w fro m importing cor n a t a cheap price, the y should als o influenc e u s in rejecting al l improvements i n agriculture, an d i n the implement s of husbandry; for it is as certain tha t corn i s rendered cheap , rent s ar e lowered , an d th e abilit y of th e landlord t o pa y taxes , i s fo r a time , a t least , a s muc h impaire d b y suc h improvements, a s by the importation o f corn. T o be consistent then , let us by the sam e ac t arres t improvement , an d prohibit importation . The mode l Ricard o use s to arrive at his polemical conclusion is rooted, o f course, i n a theory of rent base d o n diminishing returns to land. In the course of the war years Britai n had experience d a relativ e ris e i n agricultura l price s an d rent s accompanie d b y bot h increased applicatio n o f capital t o existing land and the extension o f production int o ne w land. I n both cases rents rose as the marginal return on the application of additional labo r and capita l declined. 122 Ricardo's argumen t marches forwar d a s follows : 1. Th e operatio n o f diminishin g return s in a long-settle d an d develope d countr y can only b e hel d of f b y improve d agricultura l technology o r increase d agricultura l imports a t prices cheape r tha n th e cos t o f growing grain at home . 2. Assumin g thes e possibilitie s ar c no t availabl e an d tha t "capita l an d populatio n

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advance i n proper proportio n s o that th e real wage s o f labor remai n constant," 123 the expansio n of populatio n and incom e wil l yiel d rising rea l cost s in agriculture; that is , increase d labo r an d capita l wil l b e require d t o produc e additiona l unit s of physical output . 3. Th e resul t wil l b e a n increas e i n rent s an d a declin e o f profit s i n agricultur e an d elsewhere i n th e economy . 4. Ricard o the n relaxe d hi s assumptio n abou t fixe d wages. 124 H e note s tha t a fall i n real wage s coul d rais e profits ; an d thi s introduces , tersel y stated , hi s theor y o f population.125 The ris e o r fall o f wage s i s common t o all state s of society , whethe r it be the stationary, the advancing, or the retrograde state . I n the stationary state, i t is regulated wholl y by the increase or falling off of the population. In the advancing state, i t depends o n whether the capital or the population advance, a t the mor e rapi d course . I n the retrograde state , i t depends o n whether populatio n o r capita l decreas e wit h the greate r rapidity . As experience demonstrate s that capital an d population alternatel y tak e the lead , th e wage s i n consequence ar e liberal o r scanty, nothin g ca n be positively lai d down , respectin g profits , a s fa r a s wage s ar e concerned . But I thin k i t may b e mos t satisfactoril y proved, tha t i n every societ y advancing in wealth and population, independently of the effect produce d by libera l o r scant y wages , genera l profit s mus t fall , unles s ther e b e improvements i n agriculture, o r corn ca n be imported a t a cheaper price . It seems the necessary result of the principles which have been stated to regulate th e progres s o f rent . 5. Finally , Ricard o argue s hi s thesi s a t som e lengt h tha t th e long-ru n profi t rat e throughout th e econom y i s se t by "th e profit s o n agriculture." 126 Ricardo's Essay was, quite explicitly, a pamphlet for the times with its objective lucidly explained o n it s firs t page ; namely , t o demonstrat e tha t th e linkag e o f ren t an d profit s combined wit h the law of diminishing returns lea d directl y t o support fo r "th e polic y of leaving th e importatio n o f cor n unrestricte d b y law." 127 His Principles flow s i n tim e an d inspiratio n directl y fro m th e Essay; but , unde r th e prodding of James Mill and the dynamics of working on a broader canvas, it is much more nearly a genera l treatise , despit e th e allocatio n o f abou t hal f th e tex t t o th e subjec t o f taxation.128 As noted earlier , despit e it s focus on distribution rather than the determinant s of the wealt h of nations, it contains observation s on virtually all the elements i n the basi c growth equation. I t is possible, then , to proceed directly to examine Ricardo's vie w of its major components .

Population and the Working Force In the quotation o n wages from Ricardo' s Essay o n Profits (above , thi s page) he took the view tha t th e rat e o f growt h o f populatio n wa s closel y linke d t o th e rat e o f growt h o f investment; that the link was not stable through time, yieldin g periods whe n wage s wer e "liberal" o r "scanty." 129 I n Th e Principles thi s propositio n becomes , mor e formally , that the rate of population increase is a function o f the difference betwee n the market and natural rat e o f wages ; tha t a marke t rate abov e th e natura l rat e discourage s investment, reduces thereby the demand for labor, and thus tends to bring the market wage rate back to the natura l wage rate .

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The operatio n of diminishin g returns in agricultur e tended ultimatel y to constrai n the natural wag e rat e a s well a s the expansion o f the economy; but Ricardo introduce s quit e formally a proposition laten t in Malthus's 1803 and later editions of his Essay on Population:130 ... th e natura l pric e o f labour , estimate d eve n i n foo d an d necess aries, . . . varie s a t different times i n the sam e country , an d very materiall y differs i n different countries. I t essentially depends o n the habits and custom s of th e people . A n Englis h laboure r woul d conside r hi s wage s unde r thei r natural rate , an d to o scant y t o suppor t a family , i f the y enable d hi m t o purchase no other food tha n potatoes, and to live in no better habitation than a mud cabin; yet these moderate demand s of nature are often deeme d sufficien t in countrie s wher e "man' s lif e i s cheap, " an d hi s want s easil y satisfied . . . . The friend s o f humanit y canno t bu t wis h tha t i n al l countrie s th e labouring classe s shoul d hav e a taste fo r comforts an d enjoyments, an d the y should b e stimulate d b y al l lega l mean s i n thei r exertion s t o procur e them . There canno t b e a better securit y against a superabundant population . And i n Ricardo's view , " a diminishe d rat e o f increas e i n population" was , alon g wit h improvements i n agricultural technology an d food imports cheaper than domestic produc tion, on e o f the basi c instrument s for fendin g off the operatio n o f diminishing returns t o agriculture. On the othe r hand , withou t populatio n restrain t induce d b y a rise i n the natura l wag e rate due to elevated popula r tastes , withou t improved agricultur e technology o r increase d imports, a ris e i n th e marke t wag e rat e brough t abou t vi a diminishin g return s an d th e increased rea l cos t o f producin g additiona l foo d woul d prove self-defeating : profits and investment woul d be reduced; an d the excessive population perhaps brought into being by the prior phase of high wages would be painfully reduce d i n the manner of Malthus's firs t edition o f th e Essay. Essentially, Ricardo' s theor y o f populatio n an d wage s derive d fro m Smit h and , t o a degree, fro m Malthus . Hi s innovation—an d i t i s a trul y majo r innovation—lie s i n th e clarity wit h which he define d the minimum or natural wage i n social rathe r tha n physiological terms , i.e. , i n term s o f "habit s an d customs " an d " a tast e fo r comfort s an d enjoyments." Hi s othe r deviatio n fro m Ada m Smit h (an d hi s ow n earlie r work ) wit h respect t o labo r lie s i n hi s admittance , i n th e thir d editio n o f Th e Principles, o f th e possibility of new technology resulting in a net decline in the demand for labor (following, pp. 81-83) . Investment and Technology Ricardo recognize d explicitl y that capital represented a spectrum of degrees of durability, that th e types o f capita l coul d b e combine d i n different proportion s wit h eac h othe r an d with labor.131 For purposes o f exposition, however , he generally assumed that circulating and fixe d capita l move d i n fixe d relatio n t o eac h othe r excep t i n the specia l analysi s of machinery and unemployment. Circulating capital is the fund fro m whic h wages are paid and, therefore , th e deman d fo r labor determined . In this system where the demand for labor is geared to the value of investment, the latter is determine d b y th e rat e o f saving s which , i n turn , flow s "eithe r i n consequenc e o f increased revenue, or of diminished consumption."132 A s already noted in his exchanges

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with Malthu s (preceding , pp . 58-59) , Ricard o assume d tha t all saving was invested. 133 Saving-investment, i n tur n wa s assume d t o depen d o n tw o factors . First , profits ; i.e. , "net income " above th e allocation o f resources necessar y to maintain labor a t its subsis tence level . Second , o n th e impuls e to sav e tha t Ricard o assume d woul d var y wit h th e expected rat e o f profit . Lo w profit s combine d wit h th e inescapabl e risk s o f investmen t would induc e th e capitalist or landowner to expand his consumption rather than increas e his savings . Diminishin g returns in agriculture decree tha t ultimately profits wil l decline by a process Ricard o describe d a s follows: 134 . . . whe n poo r land s ar e take n int o cultivation , o r whe n mor e capita l an d labour are expended o n the old land, wit h a less retur n of produce, th e effec t must b e permanent . A greate r proportio n o f tha t par t o f th e produc e whic h remains t o be divided, after payin g rent, between the owners of stock an d the labourers, wil l be apportioned t o the latter. Eac h man may, and probably will, have a less absolut e quantity ; but as more labourer s are employed i n propor tion t o th e whol e produc e retaine d b y th e farmer , th e valu e o f a greate r proportion o f the whole produce wil l be absorbed by wages, an d consequently the valu e of a smaller proportio n wil l be devoted t o profits. Thi s wil l neces sarily b e rendere d permanen t b y th e law s of nature , whic h have limite d th e productive power s o f th e land . Thus w e agai n arriv e a t th e sam e conclusio n whic h w e hav e befor e at tempted t o establish:—that in all countries, an d all times profits depend on the quantity o f labou r requisite t o provid e necessarie s fo r th e labourers , o n tha t land o r wit h that capital whic h yields n o rent . Here, a s a t ever y opportunity , Ricard o drives hom e hi s lesso n fo r policy. 135 However extensiv e a country may b e wher e th e lan d is of a poor quality , and where the importation o f food i s prohibited, the most moderate accumula tions of capital will be attended with great reductions in the rate of profit, and a rapid rise in rent; and on the contrary a small but fertile country, particularly if i t freel y permits th e importatio n o f food , ma y accumulat e a large stoc k o f capital withou t an y grea t diminutio n i n th e rat e o f profits , o r an y grea t in crease i n th e ren t o f th e land . But fre e trad e i n grai n wa s no t th e onl y instrumen t Ricardo envisage d fo r fendin g off diminishing returns: 136 This tendency , thi s gravitation a s i t wer e o f profits , i s happily checked a t repeated interval s b y th e improvement s i n machinery , connecte d wit h th e production o f necessaries , a s wel l a s b y discoverie s i n th e scienc e o f agri culture which enables us to relinquish a portion of labour before required, an d therefore t o lowe r th e pric e o f th e prime necessar y o f the labourer . Ricardo's positio n o n capita l investment , relate d a s i t i s t o diminishin g returns i n agriculture, relativ e pric e trends , wages , rents , profits , an d th e prospec t fo r long-ru n stagnation of investment and growth, is elaborated further below. A word is required here, however, about his position on machinery in the third edition of the Principles, an d on the possibility o f technological unemployment. This is the case no t because his position wa s particularly wis e o r prescient , bu t becaus e i t wa s th e analyti c basi s fo r Marx' s famou s prediction o f a reserve arm y of th e unemploye d under capitalism.

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Ricardo start s wit h a micro-cas e an d the n generalize s th e resul t t o th e econom y a s a whole.137 Th e cas e i s o f a n entrepreneu r wh o produce s bot h foo d an d manufacture d "necessaries"; tha t is , manufacture s consume d b y labor . H e the n assume s tha t th e en trepreneur divert s i n a given year half his working force to manufacturing a new machine . Once th e machine is in operation hi s fixed capital expands , bu t he now operates regularly with onl y hal f th e circulatin g capita l formerl y use d and , i n Ricardo's system , therefore , half th e level of employment. Thus , the machine throws som e worker s ou t of their jobs. They would have less to spend o n the manufactured "necessaries." Output would decline because o f reduce d workers ' incomes , bu t profit s woul d b e maintaine d becaus e th e entrepreneur woul d have fewe r workers t o pay. Ricardo aimed t o demonstrate tha t net income to the entrepreneur (ne t of depreciation , but including replacemen t o f circulating capital ) could be maintained while gross incom e (including circulating capita l use d to pay labor ) coul d decline . He had hithert o regarde d the tw o variable s a s firml y linke d and , therefore , ha d rule d ou t th e possibilit y o f tech nological unemployment . He concluded: 138 In this case, then, although the net produce wil l not be diminished in value, although it s power o f purchasing commoditie s ma y be greatl y increased, th e gross produc e wil l have fallen . . . an d as the power of supporting a population, and employing labour, depends alway s on the gross produce of a nation, and no t o n it s ne t produce , ther e wil l necessaril y b e a diminutio n in th e demand for labour, population will become redundant, and the situation of the labouring classe s wil l be tha t o f distres s an d poverty . . . . All I wish to prove, is, that the discovery and use of machinery may be attended wit h a diminution of gross produce; and whenever that is the case, i t will b e injuriou s t o th e labourin g class, a s som e o f thei r numbe r wil l b e thrown out of employment, an d population will become redundant, compared with th e fund s whic h ar e t o emplo y it . But Ricard o conclude d thi s passage o n a mor e hopefu l note: ... i f th e improve d mean s o f production , i n consequenc e o f th e us e o f machinery, shoul d increase th e ne t produce o f a country in a degree s o grea t as not to diminish the gross produc e . . . the n the situation of all classes wil l be improved . Th e landlor d an d capitalis t will benefit, not b y a n increas e o f rent an d profit , bu t b y th e advantage s resulting from th e expenditur e of th e same rent , an d profit , o n commodities , ver y considerabl y reduce d i n value [i.e., price], while the situation of the labouring classes wil l also be considerably improved ; 1 st, fro m th e increase d deman d fo r menia l servants ; 2dly , from th e stimulu s t o saving s fro m revenue , whic h suc h a n abundan t ne t produce wil l afford; and 3dly , fro m th e low price o f al l articles o f consumption o f whic h thei r wage s wil l be expended . Ricardo evidentl y fel t hi s specia l cas e shoul d b e take n seriously . Bu t h e goe s o n immediately to describe a case where "ther e would not necessarily be any redundancy of people" and , a bi t later , h e expresse s th e hop e tha t hi s "statement s . . . wil l not . . . lea d to the inferenc e that machinery should not be encouraged."139 He argues in effect tha t machiner y and mor e capital-intensiv e production processes ar e a n inevitable consequence of the long-term rise in the price of food (du e to diminishing returns) and, in

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any case , th e diffusio n o f machiner y wil l b e require d t o sustai n the balance o f payment s and employment in export industries. He is also quite conscious throughout that the profits enlarged b y labor-savin g invention s could , i n time , resul t i n a n expansio n i n savings , investment, and , thus , employment . Despite thes e softenin g passages, Ricardo's blun t and lucidly acknowledged chang e of position o n machiner y an d employmen t ha s generate d sinc e 182 1 a substantia l bod y o f analysis an d debate . I t start s wit h Malthu s wh o explicitl y assume d a hig h elasticit y o f demand fo r the product o f machines (a s in the case o f cotton textiles) , rejected Ricardo's conclusion, an d found, a s we saw, a quite different explanatio n for post-1815 unemploy ment.140 Among other arguments that have underlined the special assumptions required t o yield Ricardo' s conclusio n ar e these: 141 • Ricardo' s assumption s about labo r requirement s in the old production process, th e building o f th e ne w machine , an d th e ne w productio n proces s ar e quit e arbitrary ; and the outcom e h e suggest s depends o n particular assumptions of dubious reality. • Ricardo' s neglec t o f th e employmen t multiplie r effect s o f th e investmen t i n ma chinery require d fo r th e new, mor e capital-intensiv e process . • Ricardo' s assumptio n tha t a n entrepreneu r woul d accep t th e risk s o f investin g i n new fixe d capita l t o produc e les s a t the sam e profi t has been challenged . Ricardo refer s explicitl y t o Joh n Barton' s essa y o n th e Condition o f th e Labouring Classes o f Society (1817) , disagreein g wit h some o f hi s observations bu t notin g that hi s work "contain s much valuable information." To some (disputed) degree Barton may well have influenced Ricardo. Bu t I suspect Ricardo felt the need to deal with the possibility of technological unemploymen t b y contemplatin g th e realit y o f th e sever e depressio n o f 1819, marke d b y heav y unemployment, riots , an d machine breaking by workers. A s we have seen, both Malthu s and Ricardo were deeply concerne d t o explain this phenomenon as well a s the shar p declin e i n agricultural prices. An d i n the latter's notes on Malthus' s Principles, writte n i n 1820 , ther e i s a clear foreshadowin g of th e machiner y cas e o f th e third editio n o f Ricardo' s Principles publishe d the nex t year.142 Ricardo wa s reacting t o apassag e i n Malthus's chapte r "O f th e Wages of Labour."143 Malthus argue d that , i n th e genera l case , whe n a greate r quantit y o f fixe d capita l i s introduced graduall y int o agricultur e ("th e onl y wa y i n whic h we ca n suppos e i t prac tically to take place") the result would be benign for labor despite an immediately reduce d requirement fo r labor i n agriculture. This happ y outcome woul d flow fro m the increase d demand fo r labo r i n manufacture s an d commerce , a n increas e mad e possibl e b y highe r agricultural productivity . Malthu s went o n to asser t i n general tha t ther e wa s " . . .n o occasion .. . t o fear that the introduction of fixed capital . . . wil l diminish the effective demand fo r labou r . . ." ; althoug h he allowe d fo r a n interval o f possible distres s i f th e timing o f increase d productivit y an d outpu t wa s no t matche d b y "a n adequat e mar ket .. . fo r the more abundan t supplies." Against the background of this general view—base d o n an appropriate dynamic proportionality between th e rates of increase of capital, output , and effective demand—Malthus suggested tha t eve n i n th e margina l cas e o f a substitutio n o f horse s fo r manpowe r i n agriculture, labor, on balance, gains. l44 A t this point Ricardo comes sharply to life with a comment foreshadowin g his machiner y doctrine: 145 If i t migh t be possibl e t o d o almos t al l th e wor k performe d by me n wit h horses, woul d the substitutio n of horses i n such case, eve n if attended with a

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As w e hav e seen , i n hi s elaboratio n o f th e machiner y case , Ricard o neve r specifie d satisfactorily th e condition s unde r whic h th e overal l deman d fo r labo r woul d b e dimin ished b y a "cheape r mod e o f cultivation. " Malthus , much influenced by th e indirec t a s well as direct expansion of employment induce d by the new cotton textil e machinery, was a long-run optimist about fixed capital; but he allowed for the possibility of a net reduction in the demand for labor i f the shif t i n factor proportions wa s sudden. Formally , Malthus' s analysis of the machinery case is, essentially, macro , Ricardo' s micro ; although Ricardo' s concluding, mor e hopefu l observation s o n th e longe r ru n impac t o f machiner y embrac e structural change s i n employmen t an d relat e t o th e econom y a s a whole . Despit e th e formal characte r of their efforts , bot h were brought to confront the problem b y the reality of sever e unemploymen t an d a Luddit e machine-breakin g moo d i n th e workin g force , notably i n th e year s 181 6 an d 1819 . Contrary t o Hicks's view tha t Ricardo's cas e ma y have captured a critical secula r tim e lag betwee n th e initiatio n o f innovatio n an d a ris e i n rea l wages, 146 I a m incline d t o believe tha t Ricard o an d Hick s (an d Malthus as well ) mistook a cyclical fo r a structural phenomenon. I n th e course o f 182 0 Britai n moved toward tranquility as the great expan sion o f 1819-182 5 began. 147 Th e nex t phas e o f labor volatilit y occurred i n 1824-182 5 when a combination of rising foo d prices and great labo r leverage led to strikes and other demands fo r higher mone y wages . Bu t with the sharp depressio n o f 182 6 we ar e back i n the difficul t worl d o f 181 9 wit h cotto n operative s takin g ou t "thei r resentmen t o n th e newly installe d powe r looms." 148 An d tha t i s th e episodic , cyclica l patter n i n whic h tensions unfolde d dow n t o mid-centur y and, even , beyond. 149 What, then , di d Ricard o hav e t o sa y abou t economi c fluctuations?

Business Cycles The answe r is : not much. H e reacted t o the problems pose d b y the severe economi c an d social distres s o f 181 6 an d 1819 , but he did not interpret the course of events from 181 5 to 1819 i n cyclica l terms . Th e bul k o f Ricardo' s reflection s o n economi c fluctuation s i s confined t o Chapter XI X in Principles, "O n Sudde n Changes i n the Channels of Trade." There are also passages bearin g on the problem i n his earlier Essay o n Profits, speeche s i n Parliament, an d hi s correspondenc e wit h Malthus. As the title of Chapter XI X suggests, Ricard o regarde d th e major source o f fluctuations in his time as resulting from the transition from peace t o war, with subsequent vicissitudes in wartime trade , and , then , th e transition from wa r to peace. A s a first approximatio n h e viewed th e analysi s o f th e tw o transition s as a n exercise i n movement fro m on e mor e or less stabl e growt h patter n t o another , a s the followin g passage suggests: 150 The commencement of war afte r a long peace, or of peace afte r a long war, generally produces considerabl e distress in trade. I t changes in a great degre e the natur e o f th e employment s to whic h th e respectiv e capitals of countries were befor e devoted ; an d durin g th e interva l whil e the y ar e settlin g i n th e situations whic h ne w circumstance s hav e mad e th e mos t beneficial , muc h

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fixed capita l i s unemployed, perhap s wholl y lost , an d labourer s are without full employment . . . . From contingencie s o f thi s kind, thoug h i n a n inferio r degree , eve n agri culture i s no t exempted . Wa r . . . interrupts th e commerc e o f States , fre quently prevent s th e exportatio n o f cor n fro m countrie s wher e i t ca n b e produced wit h little cost, t o others not so favourably situated . At the termina tion o f the war, th e obstacle s t o importation ar e removed, an d a competitio n destructive t o the home-grower commences . . . . The best policy of the Stat e would be , t o la y a tax , decreasin g i n amoun t fro m tim e t o time , o n th e importation o f foreign corn, fo r a limited numbe r of years, i n order to affor d to the home-grower a n opportunity to withdraw his capital graduall y from th e land. Ricardo conclude s wit h hi s majo r polic y theme ; namely , th e nee d t o mov e th e Britis h economy t o Fre e Trad e i n grai n a s fas t a s a decent transitio n for landowner s permitted. This proposal plu s his advocac y of a return to the gold standar d an d the retirement o f the national deb t b y a capita l lev y constitute d Ricardo' s progra m fo r postwa r Britain . H e understood wel l th e structura l change s i n manufacturin g tha t ha d bee n brough t abou t during th e wa r years ; an d h e believe d tha t Britai n wa s o n a secula r pat h o f expansio n likely to persist for a long time. But neither he nor Malthus grasped clearl y the notion tha t the British economy ha d been for some time in the grip of a regular business cycle pattern; although Malthu s ha d som e glimmerin g o f thi s possibility. A consciousnes s o f cyclica l fluctuations graduall y emerge d i n th e cours e o f th e nex t generatio n afte r Ricardo' s an d Malthus's wor k wa s done, 151 i n respons e t o cumulativ e evidenc e o f regularit y i n th e timing o f dramati c financia l crises ; e.g. , 1815 , 1825 , 1836 , 1847 , etc . Befor e 1815 , however, th e cycles were linked in popular perception with wartime events, even though, in most cases, thei r timing an d causation wer e more strictly economic tha n appeared. Fo r example, th e crisi s o f 179 3 cam e afte r a long-sustaine d commercia l expansio n wit h a concentration o f long-ter m investmen t in it s fina l stag e quit e typical of successo r majo r cycle upswings . Ther e i s i n 179 2 evidenc e o f strai n i n financia l markets , increase d bankruptcies, an d othe r phenomen a typica l towar d th e en d o f a perio d o f sustaine d expansion. Althoug h there would almost certainly have been a financial crisis in 1793, th e one that actuall y occurred was , i n fact, associate d wit h the outbreak o f war with revolu tionary Franc e o n Februar y 1 . Th e crisi s o f 1797 , whic h le d t o th e suspensio n o f th e bullion standard , was , indeed , th e produc t o f a mas s rus h for liquidit y induced by fals e rumors of an impending Frenc h invasion . It came afte r a serious perio d o f financial strai n had been successfully weathered i n 1795-1796—a strain induced by large grai n imports , heavy war-relate d remittance s abroad , an d a French retur n t o a metallic standard . In th e norma l rhyth m o f things , th e expansio n fro m th e troug h i n 179 7 woul d hav e peaked abou t 1800 ; bu t ther e was , i n fact , a doubl e peak : 180 0 an d 1802 . Th e norma l downturn o f 1800-180 1 wa s interrupte d b y th e brie f Peac e o f Amien s an d a transien t foreign trad e boom. Th e expansion of 1808-1810, driven by exports to Latin America, in the fac e o f a quite effective phase of Napoleon' s commercia l blockad e o f th e continent, was essentially an exploitation of the consequences of the Peninsular War for the transformation of Brazil in particular, Latin America in general. The brea k up of the Continental System, the War o f 181 2 with the United States, the initia l defeat of Napoleon, his return and fina l defea t a t Waterloo , al l lef t thei r marks on th e cours e o f th e Britis h economy.

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Then cam e th e typically overoptimistic surg e o f British exports t o the peacetime market s and th e subsequen t collaps e o f 1815-1816 . I t i s wholl y understandabl e unde r thes e circumstances tha t Ricardo's Chapter XIX should be entitled "O n Sudde n Changes i n the Channels o f Trade. " A secon d reaso n fo r failin g t o perceiv e th e cyclica l patter n operatin g beneat h th e "sudden changes'' o f war and peace is that while manufactures and trade in manufactures were rapidly expanding as a component o f the British economy they seemed les s dramati c to observer s o f a stil l heavil y agricultura l society , wit h much o f th e populatio n poo r o r close t o th e mean s o f subsistence , tha n th e dramati c upwar d an d downwar d trend s i n agricultural prices; the emergence o f phases of what appeared acut e pressure o f population on th e foo d supplie s available ; an d short-ter m movement s i n agricultura l prices o f grea t amplitude, responding to the luck of the harvests and the uncertain grain supply lines fro m the Baltic . In addition , ther e wa s th e postwar debate o n the return to a metallic standard. Britai n had slippe d int o nonconvertibilit y i n th e mids t o f a wartim e liquidit y panic ; and , i n retrospect, it is possible t o question whether the move wa s necessary.152 But the return to convertibility was an intensely debated issue at the time posing many abiding issues on the relation o f th e mone y suppl y t o othe r force s affectin g prices an d output. 153 I n short , agricultural protectio n versu s fre e trad e an d th e questio n o f th e monetar y standar d an d monetary polic y wer e a t the center of the post-1815 debate o n policy rather tha n counter cyclical policy ; an d it was on these tha t Ricardo mainl y brought his theoretical apparatu s to bear—a n apparatus , i n fact , significantl y shaped b y thos e issues .

Relative Prices As is already clear , Ricard o hel d quite unambiguously to the view that diminishing returns operated i n th e productio n o f ra w produce , increasin g return s in manufactures. 154 The natura l price o f al l commodities , exceptin g ra w produc e an d labour , has a tendency to fall, i n the progress o f wealth and population; for though, on one hand, they are enhanced in real value, from th e rise in the natural price of the ra w materia l o f whic h they ar e made , thi s is more tha n counterbalance d by th e improvement s i n machinery , b y th e bette r divisio n and distributio n of labour , an d b y th e increasin g skill , bot h i n scienc e an d art , o f th e producers. . . . From manufacture d commoditie s alway s falling, an d ra w produc e alway s rising, with the progress o f society, suc h a disproportion in their relative value is at length created, that in rich countries a labourer, b y the sacrifice of a very small quantit y only o f hi s food , i s abl e t o provid e liberall y for al l hi s othe r wants. Ricardo judged tha t machinery and scientific progress wer e relevant to agriculture a s well as manufacture;155 bu t he believed th e potentialities wer e less in the former than the latter sector. Wit h respect to agriculture, he distinguished two types of improvements: thos e that increased th e productive powers o f the land, such a s "th e mor e skilfu l rotatio n of crops ; or the better choice of manure;" an d those that permit the same output from a given piece of land wit h less labor , suc h as "[i]mprovement s i n agricultural implements, such as th e plough an d thrashing machine, economy in the use of horses employed in husbandry, and a bette r knowledge o f th e veterinary art. . . ," 156

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One does no t have to dig for passages suggesting diminishin g and increasing returns in Ricardo. Th e two concepts are pillars of his analytic system. And the reasons are obvious: the situatio n of Britis h agricultur e during the war s with Franc e dramatize d th e realit y o f diminishing returns; the acceleration o f invention and innovation from th e 1780s , including th e remarkabl e declin e i n cotto n textil e price s afte r th e tur n o f th e century , i n a n otherwise inherentl y inflationar y period , mad e clea r th e potentia l powe r o f increasin g returns. But , as in other importan t respects, the decline i n grain prices afte r 181 2 altere d Ricardo's perspectiv e o n the future .

The Stages of and Limits to Growth The rac e betwee n diminishin g an d increasin g return s playe d a central rol e i n Ricardo' s view o f th e stage s o f developmen t an d th e long-ru n prospect s fo r Britai n an d othe r advanced economies ; bu t wit h th e passag e o f tim e hi s vie w o f thos e prospect s becam e increasingly optimistic . Indeed , i t is not too much to say that, as with Malthus, his initial Schumpeterian "vision " change d rathe r radically . Unlike thos e o f Hume , Smith , an d Malthus , Ricardo' s expositio n i s almos t bar e o f references t o economie s othe r tha n that o f Great Britain . Ther e i s virtually no historica l dimension t o his writin g or allusions t o Greece, Rome , China , India , Lati n America, o r the les s advance d economie s o f Easter n Europe . Th e inde x o f hi s Principles contain s several reference s t o th e colonia l trad e i n a sustaine d passag e reexaminin g the view s of Adam Smith ; a reference t o Spai n drawn from Th e Wealth of Nations; a reference t o th e past effec t o f the discovery o f the new mines in America on the price of precious metals . There is also a reference t o the relative attractiveness o f substituting machinery for labo r in America as opposed t o England, not indexed. Ricardo's differenc e in this respect fro m Hume, Smith , and Malthus emerges i n his Notes on the latter's Principles. Malthu s at one point dispute s a Ricardia n generalizatio n b y referenc e t o earl y Britis h history, t o whic h Ricardo replies: 157 "Th e observatio n was applied to this country and not to countries only half civilized. " Malthus's reference s t o Spanish America 158 and Ireland159 evoked eve n more exasperate d response s fro m Ricardo . Despite thi s stran d o f candi d parochialism—hi s shar p focu s o n contemporar y Britai n and, indeed , o n certai n quit e specifi c polic y issue s o f hi s time—Ricardo' s theoretica l model wa s inherently dynamic and bore on certain broad issues of development and , most particularly, o n th e limit s to growth. Ricardo allowe d quite explicitly for a socially determine d an d rising subsistence ("natural") wag e an d relate d i t t o th e possibilit y o f reduce d populatio n pressure . H e dis tinguished, fo r example , actua l wage s fro m a tru e minimu m subsistence wage ; and , i n new countrie s wit h muc h goo d lan d an d relativel y fe w people , wa s prepare d t o regar d high mone y wage s a s containing "par t o f the profits o f stock." 160 He perceive d tha t in countrie s wit h chea p foo d and abundan t labor , the incentiv e to introduce machiner y woul d be weak.161 And one analyst has drawn from Ricardo' s third edition treatmen t o f machinery an d unemploymen t a n explicit conclusio n fo r contempo rary developin g countries ; i.e., "industrializatio n without growin g domestic saving s or foreign capita l ca n quit e easil y aggravat e unemploymen t o r accentuat e th e pric e inflation."162 One ca n fin d a goo d man y a d ho c reference s t o economie s a t differen t stage s o f development, ofte n i n exchange s wit h Malthus; and, i n a n importan t passage, Ricard o

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distinguished thre e quit e differen t stage s o f growt h wher e populatio n come s t o pres s against th e mean s o f subsistenc e o r actuall y doe s so: 163 In new settlements, wher e the arts and knowledge of countries far advanced in refinemen t ar e introduced , i t i s probabl e tha t capita l ha s a tendenc y t o increase faste r than mankind: and if deficiency of labourers were not supplie d by more populous countries, this tendency would very much raise the price of labour. . . . [Although] it will not long continue so; for the land being limite d in quantity , an d differin g i n quality , wit h every increase d portio n o f capita l employed o n it, ther e will be a decreased rat e of production, whils t the power of populatio n continue s alway s the same . In those countries where there is abundance of fertile land, but where, fro m the ignorance , indolence , an d barbarism of the inhabitants, they are expose d to al l th e evil s o f wan t an d famin e .. . a ver y differen t remed y shoul d b e applied. .. . T o be made happier the y require only to be better governed an d instructed, a s th e augmentatio n o f capital , beyon d th e augmentatio n o f people, woul d b e the inevitabl e result . . . . With a populatio n pressin g agains t th e mean s o f subsistence , th e onl y remedies ar e eithe r a reductio n o f people , o r a mor e rapi d accumulatio n of capital. I n rich countries , wher e al l the fertil e lan d i s already cultivated , th e latter remedy i s neither very practicable no r very desirable, becaus e it s effec t would be , i f pushe d ver y far , to rende r al l classe s equall y poor . But there is not in Ricardo's work even a routine reference to the sequence from hunting and gatherin g t o agricultur e t o domesti c an d foreig n commerc e an d th e expansio n o f technological virtuosity . Ricard o move d int o political econom y rather lat e in life, an d he found th e systematic exposition o f his views difficult. H e did not command knowledge of other societie s o r th e facilit y o f expositio n a classica l educatio n o f th e lat e eighteent h century migh t have provided. H e was, in a sense, force d t o focu s hi s talents on wha t he regarded a s mos t importan t i n hi s tim e an d place . A s h e wrot e t o Trowe r i n 1815 , he wished "t o concentrat e al l the talent I possess" on the principles governing rent, profits , and wages, wher e his opinion s differed fro m thos e of Adam Smith, Malthus, and others , and to draw "importan t deduction s fro m them." 164 In one sense , h e was, from hi s own perspective, mainl y a pamphletee r fo r fre e trad e i n grain. With his attention focused on Britain in, essentially , its second generatio n after takeoff , certainly the mos t importan t deduction s Ricardo dre w fro m hi s examination of the deter minants of the distribution of output related to the future prospects of dynamic economies . Like Malthus , Ricard o wa s judged i n his ow n tim e an d i n retrospect t o be a pessimistic oracle o f a comin g stationar y state . And , again a s i n Malthus , ther e ar e passages , a s Ricardo elaborate s th e formal consequences o f diminishing returns, tha t appear t o justify the vie w tha t h e contribute d t o th e imag e o f economic s a s th e disma l science ; fo r example:165 With ever y increase d difficult y o f producin g additiona l supplie s o f ra w produce from th e land, corn, an d the other necessaries of the labourer, would rise. Henc e wages would rise. A real rise of wages is necessarily followed by a real fal l o f profits, and, therefore, when the land of a country i s brought to the highes t stat e of cultivation , when more labou r employe d upon it will not

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yield i n retur n mor e foo d tha n wha t i s necessar y t o suppor t th e laboure r s o employed, tha t country is come t o the limit of its increase both of capital and population. And, indeed , wit h diminishin g returns t o agricultur e take n t o b e th e centra l economi c phenomenon, i t followed tha t the real cost of sustaining the working force a t a minimum level would rise. Bu t the rents of the passive landlord would also rise. A reduced propor tion o f outpu t woul d thereb y b e availabl e fo r profit s an d thu s investment . Unde r th e assumptions he laid down , Ricardo's formal model wa s a rather pure exercise i n limits to growth analysis . Hum e an d Ada m Smit h i n th e en d ha d als o accepte d th e notio n tha t economies, like trees, di d not grow to the sky; but Ricardo's metho d of utilizing abstract , simple case s t o illuminat e his basic proposition s rendere d th e stationar y stat e (or worse ) more vivi d and , apparently , inescapable . Besides , Ricardo , i n seekin g t o establis h th e ultimate principles a t work, wa s often fuzz y abou t timing. What, for him, were principles governing an undated long-run outcome could seem mighty vivid and immediate, lik e the fires o f Hel l i n a fundamentalist Baptist sermon . But th e fac t i s tha t he became systematicall y sanguine—no t pessimistic—abou t Brit ain's prospects . Ricardo' s ne t conclusio n flowe d directl y fro m hi s analysis , no t fro m visceral optimism . Hi s theor y le d t o th e conclusio n that th e timin g of th e arriva l o f th e stationary stat e depende d o n thre e variables : th e pac e a t whic h ne w technology—bot h machinery an d relevan t scientifi c knowledge—was generate d an d applied; th e exten t t o which a polic y o f fre e import s o f grai n wa s adopted , an d othe r aspect s o f comparativ e advantage exploited ; th e extent to which the workers, through education and rising aspira tions, elevate d thei r measur e o f the subsistenc e wag e and, thereby , reduce d famil y siz e and the rate of population growth . I n addition, sinc e he regarded al l savings as automatically invested, h e argued that a reduction in government expenditure and wise policies o f taxation woul d hel p postpon e th e stationar y stat e tha t diminishin g return s ultimatel y decreed. On the whol e h e was optimisti c abou t the probable cours e o f all these variables , onc e the war was over an d the grain price continued on the erratic downward course which had begun in the second hal f of 1812 . A s noted earlier, al l the optimistic quotations deploye d by Kol b i n makin g hi s cas e agains t Ricard o a s a pessimis t com e fro m th e perio d o f Napoleon's tim e o n Elba o r afte r hi s defeat a t Waterloo. Wha t gave Ricardo confidenc e was no t s o muc h th e pac e o f technologica l advance , wher e hi s direc t knowledg e wa s extremely limited ; no r firml y establishe d evidenc e on the upward trend o f working-clas s norms o f minimum consumption; no r authentic confidence i n the capacity o f government to constrain expenditures , o f which he had little. Wha t lifted hi s hopes fo r the future wa s the fal l i n th e pric e o f grain . A s th e followin g passag e fro m a lette r o f Trowe r o f 5 February 181 6 shows, his theory o f rent made the circumstances of the time a moment of rejoicing, despit e hi s persona l statu s a s landowner an d landlord: 166 The low price of corn i s an evil to the landed gentlemen which no decreas e of charge s ca n wholl y compensate—they mus t submi t to a fal l o f rent s an d they ought to rejoice i n the evidence whic h the low price of produce affords of the ye t unexhauste d stat e o f th e resource s o f th e country . Hig h rent s ar e always a symptom of an approach to the stationary state—we are happily yet in th e progressiv e state , an d ma y loo k forwar d wit h confidenc e t o a lon g course of prosperity. It i s difficult t o persuade the country gentlemen that th e

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fall of rents, unaccompanied by loss of capital and population, will essentially contribute to the general welfare , an d that their interest and that of the public are frequentl y in direct opposition . And, mor e positively , thi s general prognosi s a s o f 1819— a yea r i n whic h it required a rather deeply rooted long-ru n philosophic perspective to express what proved to be a quite realistic optimism: 167 The richest country in Europe is yet far distant from tha t degree of improvement [Th e Stationar y State] , bu t i f any had arrived at it, b y the ai d of foreig n commerce, eve n suc h a country could go on for an indefinite time increasing in wealt h an d population, fo r th e onl y obstacl e to thi s increase would be th e scarcity, an d consequent high value, of food an d other raw produce. Let these be supplie d fro m abroa d i n exchange for manufactured goods, an d i t is diffi cult to sa y where the limit is at which you would cease to accumulate wealth and t o deriv e profi t fro m it s employment .

Noneconomic Factors Whatever huma n sympathies migh t have been stirre d i n Ricardo by account s o f peoples elsewhere o r in other times, impoverished by poor government or poor soil, indolenc e or thoughtless procreation , o r b y som e combinatio n o f the m all , Ricard o a s a politica l economist wa s focuse d sharpl y o n thos e noneconomi c factors relevan t t o hi s tim e an d place: chancellors o f th e excheque r who milke d the sinkin g fun d an d otherwise diverted savings fro m productiv e investment ; economists an d politicians wh o argued th e case for agricultural protection; compassionat e bu t wrong-headed advocate s o f a poor la w that, in Ricardo's view , woul d perpetuat e rathe r tha n reduc e poverty . Bu t ther e wa s als o hi s argument that , i n th e commo n interest , "th e labourin g classe s shoul d have a tast e fo r comforts an d enjoyments , an d tha t they shoul d be stimulate d by al l lega l mean s in thei r exertions t o procur e them. " And , i n an d ou t o f Parliamen t h e fough t redoubtabl y fo r electoral refor m an d religiou s freedom . I n a phras e h e himsel f evoked , Ricardo , th e model-builder whos e exceedingl y abstrac t theorie s were , i n fact , tract s fo r th e times , belongs clearl y among "th e friend s o f humanity."

4 J. S . Mil l and Kar l Marx

John Stuart Mill (1806-1873) The linkag e o f Davi d Hum e an d Ada m Smit h i n Chapte r 2 an d o f Rober t Malthu s an d David Ricardo i n Chapter 3 was easy to defend. I n the case of each pairing , the two men were friend s whos e professiona l perspective s wer e shaped b y essentially th e sam e force s in th e societ y aroun d them . The y exchange d view s o n problem s tha t deepl y engage d them. Thei r professiona l view s were b y no means identical ; bu t their wider perspectives on th e natur e o f a goo d societ y wer e prett y muc h of a piece. Evidently, thi s was not the case wit h Mill and Marx. The latter went in 1849 to London believing he was a transient political refugee ; but, in fact, Englan d was his home until his death i n 1883. As nearly as we know, the two men never met. And there i s no indication that Mil l eve r rea d anythin g Mar x ha d written. 1 Mar x di d rea d Mill , quote d fro m hi m selectively whe n i t suite d hi s purpose , bu t generall y treate d hi m wit h th e compulsiv e polemical scor n tha t Mar x systematicall y accorde d thos e wit h who m h e disagreed . H e did, however , distinguis h Mill fro m "th e herd of vulgar economic apologists " wit h the following economium: 2 "O n th e leve l plain , simpl e mound s loo k lik e hills ; an d th e imbecile flatnes s of the presen t bourgeoisi e i s to be measure d b y the altitud e of its grea t intellects." And , on th e fac e o f it , th e ma n who m Gladston e calle d "th e Sain t o f Rationalism," th e autho r o f O n Liberty a s wel l a s th e mos t popula r tex t o n politica l economy i n th e mid - and late-Victoria n capitalis t world , doe s no t pai r easil y wit h th e impoverished revolutionar y zealot working away in the British Museum with total dedica tion t o th e tas k o f destroyin g th e economic , social , an d politica l syste m aroun d him. 3 There are , nevertheless, si x seriou s reason s fo r treatin g the m togethe r i n th e presen t context.4 First, th e technical economi c foundation s of both Mill and Marx are rooted i n the wor k of their predecessors in British political econom y ove r the previous century, David Ricar do i n particular . Bot h me n modifie d receive d economi c doctrin e i n importan t respects ; and both were concerned wit h social science a s a whole and with public policy rather than economics i n the narrow sense. Bu t in this, too, they were part of the classical tradition in political economy . Second, thei r view s o f th e Britis h an d continenta l economie s wer e forme d i n th e post-1815 period o f peace, i n an interva l of relatively low agricultura l prices , before the

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drama o f the Irish potato famine (1845-1847), th e doubling of the wheat price i n 1852 1854, an d th e mas s migratio n fro m Scandinavi a an d German y a s wel l a s fro m Ireland . Mill devote d a goo d dea l o f though t (an d spac e i n hi s Principles) t o th e populatio n question. But , i n fact, he was less urgentl y concerned wit h the pressure o f population on the foo d suppl y tha n Malthus an d Ricardo. Th e rate of increase i n the Britis h population was decelerating fro m th e 1820 s on ; for example, th e inter-census rate of increase fo r the period endin g 182 1 fo r Englan d wa s 18.06% , fo r th e perio d endin g 1861 , 11.90% . The limitation of family size remains in Mill's work a major factor determining th e real income o f workers; an important element in the liberation of women, to which he attached great importance ; an d a critical conditio n fo r the benig n stationar y stat e he evoke d a s a vision of the future. Unlike Malthus, Mill felt mor e o r less free , a t least a s a young man, to advocate an d distribute literature advocating birth control. H e was, in fact, hale d before a magistrate for the latter offense, an incident that might have cost him his newly acquired post i n th e Eas t Indi a Compan y i f i t ha d no t bee n handle d wit h discretion b y th e au thorities.5 Bu t ther e i s i n Mil l a n underlyin g confidenc e that , s o fa r a s Britai n an d continental Western Europ e were concerned , th e problem of the population-food balanc e would no t b e apocalyptic . Fo r goo d reasons , h e wa s eve n mor e o f a n optimis t tha n post-1812 Malthu s and Ricardo. Fro m 184 6 Britain was a Free Trade country, a position consolidated i n the 1850 s by access to the wheat fields in the American West being rapidly opened u p with railroads an d migrants from Norther n Europe . And , shockin g as the Irish famine wa s i n 1845-1847 , migratio n wa s possible t o Glasgow, Liverpool , an d Boston . Put another way , the deep concer n wit h excess populatio n in Mill is the foundation not so much fo r th e avoidanc e o f ra w huma n traged y a s fo r th e creatio n o f a mor e civilize d society i n whic h labo r overcome s it s prima l instinc t to rende r itsel f redundan t and , b y prudent restraint , render s labo r rathe r tha n land th e scarc e facto r o f production . Marx would have no truck with Malthusian doctrines. H e sought to explain the alleged downward pressur e o f th e labo r marke t o n rea l wage s by seizin g upon an d generalizing one specia l cas e fro m Ricardo' s reflection s o n th e introductio n o f machinery. Thus, th e concept o f th e reserv e arm y o f th e unemployed. Third, a s th e Britis h econom y move d forwar d i n th e postwa r years , wit h Belgium , France, Germany , an d th e Unite d States soo n demonstratin g a capacit y t o follo w i n it s footsteps, i t becam e clea r tha t a ne w kin d o f economi c syste m ha d bee n create d i n th e North Atlanti c world . Thi s sens e o f a n ongoing syste m wa s heightene d i n the 1840s— a critical decad e fo r bot h men—b y th e multipl e railwa y boom s o f tha t decade : i n th e American Northeast , Grea t Britain , Belgium, Germany , an d France. Bot h Mill and Marx brooded abou t the large r implication s for societ y of thi s system , includin g two of its central characteristics : th e introductio n into the econom y o f inventions not a s occasiona l events bu t a s a mor e o r les s regula r flow ; an d th e tendenc y o f th e syste m t o mov e cyclically, generatin g recurren t financial crises a s well as intervals of unemployment an d idle industrial capacity. For Marx the British crisis of 182 5 was viewed as a benchmark i n economic history , although , a s note d earlier , th e firs t moder n majo r cycl e peake d i n September 179 2 with its associated financia l crisis coming, a s was typical, later (Februar y 1793). Mill , o n th e basi s o f Tooke' s wor k (p . 108) , wa s awar e o f th e earlie r crises . Fourth, bot h recognize d tha t the ne w syste m was being accompanied b y a remarkable shift i n th e locu s o f politica l power. Charle s Babbage , autho r of a boo k whic h significantly influenced bot h Mill and Marx (On the Economy o f Machinery an d Manufactures), made a memorabl e referenc e t o th e Refor m Bil l o f 1832 . B y enfranchisin g th e newl y emergent industria l middl e class, i t clearly constituted a turnin g poin t i n Britis h politica l

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history. I n explainin g th e remarkabl e succes s o f th e firs t editio n o f hi s book , Babbag e adduced a s a majo r reaso n " . . .th e increasin g desir e t o becom e acquainte d wit h the pursuits an d interests of that portion of the people which has recently acquired s o large an accession o f political influence." 6 Mill , i n Schumpeter' s phrase , wa s " a ma n palpabl y out o f sympath y wit h the schem e o f values o f the industria l bourgeoisie' ' ; 7 whil e Marx was a t wa r t o th e deat h wit h th e emergin g capitalis t industria l system . Bu t bot h me n recognized tha t they lived in a time when change was possible; and each, in his own way, aimed t o bring abou t th e change s h e believed wer e desirable . Fifth, i n contemplating th e inequities of the industrial capitalism that had emerged, bot h Mill and Marx were drawn to Socialism. Thei r notions of Socialism were, of course, quite different; bu t th e followin g passag e fro m Mill' s Autobiography i s a useful reminde r that he was moved toward Socialis m b y some of the same aspects of the system that appear to have moved Marx; while the emphasis on individual liberty in this passage also underlines the centra l poin t of differenc e between th e prescription s o f th e two men. 8 While w e repudiate d wit h th e greatest energ y tha t tyranny of societ y ove r the individual which most Socialisti c system s are supposed to involve, we yet looked forwar d to a time when society wil l no longer be divided into the idl e and the industrious; when the rule that they who do not work shall not eat, will be applied no t to paupers only, but impartially to all; when the division of the produce o f labour, instea d o f depending, a s in so great a degree it now does , on the accident of birth, wil l be made by concert on an acknowledged principle o f justice ; an d whe n i t wil l n o longe r eithe r be , o r b e though t t o be , impossible fo r huma n being s t o exer t themselve s strenuousl y in procurin g benefits whic h are not t o be exclusively their own, but to be shared wit h the society the y belong to. Th e social proble m o f the future w e considered t o be, how t o unit e th e greates t individua l libert y o f action , wit h a commo n ownership in the raw material of the globe, and an equal participation of all in the benefit s o f combine d labour . There ar e also , a s w e shal l see , parallel s betwee n Mill' s visio n o f a benig n quasi stationary stat e an d Marx' s Utopia n visio n o f communism. Finally, ther e i s a connectio n betwee n Mil l an d Mar x tha t i s fundamenta l t o th e argument o f thi s boo k and , indeed , t o it s structure . Take n together , th e publicatio n i n 1848 of Mill's Principles an d Marx and Engels' Communist Manifesto, agains t the back ground of multiple revolutions and deep cyclical depression, constitute s a kind of hinge on which politica l econom y shift s fro m on e se t o f priorities t o another . Roughl y speaking , 1848 mark s the end of a centur y tha t begin s wit h Hume' s Treatise of Human Nature (1739) an d Ada m Smith' s Edinburg h lecture s o n politica l econom y (1748-1751) , a century i n whic h economi c growt h and polic y t o maximiz e growt h an d to postpon e th e victory of diminishing returns hold the center of the stage. Th e classical economists of the first roun d wer e sensitiv e t o the palpabl e inequit y o f contemporary incom e distribution ; but they looke d primaril y to economic development (growth plus education, an elevation of taste , etc. ) t o improv e th e lo t o f the majority. But taken together, what Mill and Marx had to say in 184 8 also marks the beginning of a centur y an d mor e i n whic h th e clas h betwee n th e imperative s o f efficiency , i n a competitive privat e enterpris e syste m o f changin g technologies, an d th e imperative s of human welfare , roote d i n wester n cultur e an d it s religions , dominat e th e agend a o f political econom y an d politics . I n addressin g the issue s the y did, both were creatures o f

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their time. Reviewin g a book entitled The Claims o f Labor; a n Essay o n the Duties of th e Employers t o the Employed, Mil l wrot e i n 1845 : "Th e claim s of labor hav e become th e question of th e day." 9 Those claims le d to the protracted struggl e not only over incom e distribution, a s affecte d b y th e ta x policie s an d organizatio n o f labor , bu t als o ove r policies t o mitigat e th e harshnes s an d vicissitude s o f moder n industria l society ; e.g. , unemployment insuranc e an d a wide rang e o f welfare policies. Th e passag e o f the Ten Hour Bill in Britain i n 184 7 i s a symbolic openin g trumpe t for the next century just as the coming of Free Trade in the previous year is a suitable symbolic conclusion of the century of British political economy that begins with Hume and Smith. The conventional dating of the watershe d i n the technica l and policy focu s of political economy i s 187 0 (following, pp. 153-154) , bu t th e late 1840 s i s a useful anticipator y benchmark. Excepting Hume , n o grea t economis t eve r spen t les s tim e o n economic s tha n Joh n Stuart Mill . An d th e ultimat e reason , articulate d o n th e firs t pag e o f th e Prefac e t o al l editions o f his Principles, deserve s t o be repeated dail y wherever economics i s taught or applied: "Excep t on matters of mere detail, ther e are perhaps n o practical questions, even among thos e whic h approac h neares t t o th e characte r o f purel y economica l questions , which admi t o f bein g decide d o n economical premise s alone. " Mill wa s concerned with the well-bein g of men and women i n society. H e recognized the relevance o f political econom y t o the outcome bu t judged it s role to be limited . Thi s perspective flowed naturally from hi s quite incredible education, unde r James Mill's, his father's, direc t tutelage . I t begins a t the ag e o f 3 with Greek an d comes t o a n importan t stage a t 14 , when the boy goes off for a happy year to France.10 Only in the final yea r of his father' s teaching—tha t is , a t th e ag e o f 13—wa s h e introduce d t o politica l econo my. 11 The first edition of Ricardo's Principles wa s the basis for his father's elucidation of the subject ; bu t youn g Mil l rea d Ada m Smit h and , no doubt , other s a s well . Political econom y becam e a permanen t par t of his intellectua l life , but its cente r initially wa s th e utilitaria n doctrine o f Jerem y Bentham , whic h he adopte d wit h fervo r about 182 2 when , afte r hi s retur n fro m France , h e wa s 15: 12 . . . I had become a different being . Th e principle of utility . . . fel l exact ly int o it s place a s th e keyston e whic h held togethe r th e detache d an d frag mentary componen t part s o f m y knowledg e an d beliefs . I t gave unit y t o my conceptions o f things. I now had opinions; a creed, a doctrine, a philosophy; in on e amon g th e bes t sens e o f th e word , a religion ; th e inculcatio n an d diffusion o f which could be made the principal outward purpose o f a life. An d I ha d a gran d conceptio n lai d befor e m e o f change s t o b e effecte d i n th e condition o f mankin d throug h that doctrine . On hi s seventeent h birthday , i n 1823—th e earlies t possibl e momen t b y compan y rule—he wen t to work i n the London offic e o f the East India Company, wher e his father had foun d regula r employmen t 4 year s earlier . Wit h thi s bas e established , h e mad e common caus e wit h a livel y grou p o f like-minde d youn g men , forme d th e Utilitaria n Society, and , i n his own phrase, became a "youthfu l propagandist." At this stage he was generally i n ste p wit h his father , wit h th e Westminister Review emergin g i n 182 4 a s a major instrumen t fo r disseminatin g the Radica l Benthamite view . Mill's firs t published work consiste d o f tw o letter s i n defens e o f Ricard o tha t th e latte r di d no t particularly welcome. 13 I t i s clea r fro m hi s ow n accoun t that freedo m o f religiou s belief an d ex pression, politica l and lega l reform, includin g women' s rights, and birth control, generated i n him mor e emotiona l fervor. Thi s was a phase when h e "ha d wha t might trul y b e

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called a n objec t i n life ; t o b e a reforme r i n th e world." 14 Economi c reform—notably, Free Trade—wa s par t o f th e agenda ; bu t fou r o f hi s fiv e Essays o n Some Unsettled Questions o f Political Economy, writte n in 1829-1830, were not published until 1844, by which tim e hi s Logic ha d achieve d considerable success . Then, in the autumn of 1826 , a t the age of 20, Mill suffered wha t can be regarded either as a precocious kind of mid-life crisis; or a sophisticated version of a typical young man's passage t o maturity , includin g th e takin g o f distanc e fro m hi s father ; or , a s som e hav e argued, a quit e rational bu t transien t reaction t o th e gloo m o f a British winter: 15 I wa s i n a dull state of nerves, suc h as everybody is occasionally liabl e to ; unsusceptible t o enjoymen t o r pleasurabl e excitment ; on e o f thos e mood s when what is pleasure at other times, becomes insipi d or indifferent; th e state, I should think, in which converts to Methodism usuall y are, whe n smitten by their first "convictio n o f sin." I n this frame o f mind it occurred t o me to put the questio n directl y t o myself : "Suppos e tha t al l you r objects i n lif e wer e realized; that all the changes i n institutions and opinions which you are look ing forward to, could be completely effected at this very instant: would this be a grea t jo y an d happines s t o you?' ' An d a n irrepressible self-consciousnes s distinctly answered , "No! " A t thi s m y hear t san k withi n me : th e whol e foundation o n which my life was constructed fell down. All my happiness was to have been found in the continual pursuit of this end. The end had ceased t o charm, and how could there ever again be any interest in the means? I seeme d to hav e nothin g lef t t o liv e for. Mill has described hi s crisis and its resolution so vividly that one hesitates to paraphras e or characteriz e it s natur e an d evolution ; althoug h i t ha s generate d a quit e substantia l literature, includin g psychiatric interpretations . Essentially , h e suddenl y concluded tha t the Benthamit e cree d an d metho d wer e excessively narrow ; that the habi t of analysi s in which h e ha d bee n sedulousl y traine d b y hi s fathe r "ha s a tendenc y t o wea r awa y th e feelings";16 and , quit e particularly, he fel t draine d o f a capacity t o derive joy fro m th e round o f life , doome d t o a n "eve r presen t sens e o f irremediabl e wretchedness." 17 Th e cloud began to lift whe n he found he was capable of being moved to tears by a story told in Marmontel's Memoires —a stor y with patricidal overtones. H e then discovered increasin g satisfaction i n music and poetry (notably, in Wordsworth), in closer association with those who were no t rigid Benthamites, an d in sympathetic but not uncritical examination of the views of British an d French socialists , th e latter of whom were to play an important role also i n the emergenc e o f Marx in the 1840 s a s a political economist. Mil l summed up as follows:18 If I a m asked , wha t syste m o f politica l philosoph y I substitute d for tha t which, as a philosophy, I had abandoned, I answer, no system: only a conviction that the true syste m was something much more complex an d many-sided than I had previously had an y idea of, an d that its office wa s to supply , not a set of model institutions, but principles from whic h the institutions suitable t o any give n circumstance s migh t be deduced . Mill also concluded, true to his analytic training, that he had identified the fatal fla w i n his father's metho d an d move d o n t o hi s wor k i n logic , notably on th e Logi c o f th e Mora l [social] Sciences. In huma n terms, however , Mill at last was free d t o let the strong romantic strands in his

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personality, straitjackete d by hi s early Benthamite commitment, express themselves . H e was evidentl y rip e fo r hi s meetin g wit h Harrie t Taylo r an d th e extraordinar y mergin g thereafter o f hi s emotiona l an d intellectua l life . From ou r narro w perspective , th e stor y of Mill's rit e o f passage bear s o n two charac teristics o f hi s politica l econom y includin g hi s theor y o f growth . First , i t le d t o hi s " . . . grea t readines s an d eagerness t o learn fro m everybody , an d to make roo m i n my opinion fo r ever y ne w acquisitio n b y adjustin g th e ol d an d th e ne w t o on e an other. . . . "19 A s Schumpeter justly says, the mature Mill "wa s th e opposite o f a zealot."20 This doe s no t mean his work is a shapeless, eclecti c amalgam. Bu t neither i s it a simple, powerful Ricardian or Marxist system. B y "learnin g from everybody " Mill turns some o f the abidin g critical problem s o f political econom y an d socia l philosophy around in hi s han d and exposes lucidl y their inherent complexity. His effort s a t resolutio n ma y not no w b e judged wholl y satisfactory ; but, i n some cases , almos t a century and a half after th e publication of Mill's Principles, w e have still not found agree d answer s to some of th e technical , social , an d institutiona l issue s h e deal t with . I n th e mid-1980s , fo r example, w e are still debating the impact of the introduction of laborsaving machinery on the level o f employment; the appropriate balanc e between competitio n an d public control of th e economy ; ho w t o reconcile societie s tha t cheris h huma n rights an d wid e political freedom wit h effectiv e governmen t an d avoidanc e o f tyrann y by th e majority ; t o wha t extent ca n voluntar y association b e cultivate d to fulfil l larg e socia l purposes ? Althoug h historians of economic theor y ten d to view Mill primarily as the economist wh o summarized th e cumulativ e technica l achievemen t o f th e previou s century , th e subtitl e o f hi s Political Economy i s seriousl y meant , indeed : with some o f their applications t o social philosophy. Second, Mill' s crisi s an d it s resolution , late r strengthene d b y hi s associatio n wit h Harriet Taylor , le d hi m t o tak e democrati c socialis m wit h increasin g seriousnes s a s a system tha t might , i n time , reconcil e efficienc y i n a n ongoin g industria l syste m wit h equity. Typica l o f the matur e Mill, hi s vision of socialis m was qualified in a good many directions: b y th e need t o protect th e individual from th e overbearing power o f the state ; by a continued belief i n the efficac y o f competitio n where competition was possible ; b y the nee d t o assur e tha t democrac y di d no t lea d t o a tyranny of the majority , a stran d of concern introduce d by Mill's reading o f Alexis de Tocqueville's Democracy i n America; and, abov e all , b y th e nee d t o generat e ove r tim e a citizenry much better educate d an d better prepare d t o assum e responsibility in socia l institutions. Before turnin g t o th e substanc e o f Mill' s view s on economi c growth , mainl y a s ex pounded i n hi s Principles, tha t boo k itsel f deserve s a fe w words . I t wa s writte n i n less than a year and a half in the period 1845-1847 . While writing this treatise of about 1,00 0 pages, Mil l carrie d forwar d his wor k at Indi a Hous e and barel y slackene d the pac e at which he turned out articles and editorials for journals and the press.21 Two contemporar y events ar e reflected i n the book . Th e great Britis h railway boom, accompanie d b y "th e speculative madnes s o f 1845, " peake d an d turne d dow n whil e h e wa s composin g Th e Principles,22 an d thes e were , o f course, als o th e years o f the Irish potato famine . There are a numbe r o f passage s i n Th e Principles devote d t o th e problem s o f Ireland ; and , indeed, Mil l took tim e off i n the period Octobe r 1846-Januar y 184 7 to writ e 43 leader s for th e Morning Chronicle o n Irish affairs . Unde r the pressur e o f the secon d successive potato crop failur e i n Ireland, an inadequate British wheat harvest, and similar conditions on the Continent, the British whea t price rose erratically from 46s . pe r quarter in August 1846 t o 93s . pe r quarte r in June 1847. 23

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Although touche d b y thes e event s an d othe r contemporar y concerns , Mill' s purpos e related to a much longer horizon. He sought to write for his own time a successor to Adam Smith's Wealth o f Nations, publishe d some 7 0 year s earlier, . . . simila r in it s object an d general conceptio n to that of Adam Smith, but adapted t o th e extende d knowledg e an d improve d idea s o f th e presen t age. . . . No attemp t . . . has yet been mad e t o combine his practical mod e of treatin g hi s subjec t wit h th e increase d knowledg e sinc e acquire d o f it s theory, o r t o exhibi t th e economica l phenomen a of societ y i n the relatio n i n which the y stan d t o th e bes t socia l idea s o f the present time. 24 The book achieved a n instant success and remained a widely used text for a half century and more. 25 Aside fro m th e correctness of Mill's judgment on the gap that existed i n the literature o f politica l economy , th e book' s popularit y flowe d fro m th e author' s gif t fo r lucid, logica l exposition . Jame s Mil l ha d systematicall y trained hi s son to summarize in writing as well as to expound what he had read. When Mill was about 15, after hi s return from France , his father had him write a short abstrac t of every paragrap h of the former' s Elements o f Political Economy, t o assis t th e autho r i n improvin g th e characte r o f hi s exposition. J . S . Mill' s tex t remain s notabl e fo r th e clarit y wit h whic h it s structur e i s delineated. But perhap s eve n mor e importan t for the succes s of his text , Mil l wrot e well . By the time he composed The Principles, h e was just about 40 years old. He had been writing for journals fo r a quarter-centur y an d writin g the discipline d memorand a o f a n Eas t Indi a Company officia l fo r almos t a s long . There i s a fina l observatio n t o b e mad e abou t Mill' s classi c text . I believ e i t help s explain bot h it s continue d vitality for thos e prepare d t o read i t as well as the bafflement and frustratio n o f som e o f Mill' s contemporarie s an d successors . W . S . Jevon s fo r example, sai d of Mill: " . . . howeve r it arose, Mill' s mind was essentially illogical." 26 Joseph Schumpete r cam e close r t o th e specia l characte r o f Th e Principles wit h thi s observation:27 What look s lik e s o man y tergiversation s o r wha t give s th e impression , energetically voice d b y Marx, that Mill never says a thing without also saying its opposite i s in part due to this cause. Bu t to a greater par t it is due to Mill's judicial habit of mind that forced him to consider all aspects of each question. Also, i t i s du e t o somethin g tha t i s stil l mor e creditable . H e wa s a ma n o f strong preferences. Bu t he als o was incorruptibly honest. H e would not twist either facts or arguments if he could help it. When the preferences—his socia l sympathies—did asser t themselves all the same, h e was not slow to apply the pruning knife . Henc e man y a n inconclusiv e result , o r eve n man y a contradiction. I would put it a bit differently. Mill was, like all interesting people, a household of quite different characters. 28 I n hi s case , thre e o f thes e character s ar e al l har d a t wor k i n Th e Principles: a gifted economi c theorist ; a romantic warm-hearted preacher; and , which is often forgotten , a shrewd , hard-minded man o f affairs . With respec t t o th e latter , I quot e a t lengt h th e followin g passag e fro m Mill' s Autobiography becaus e i t articulate s well a significan t stran d in hi s experienc e an d ap proach t o problem s no t usuall y give n much weight. 29

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. . . th e opportunity whic h my officia l positio n gave m e of learning by per sonal observatio n th e necessar y condition s of th e practical conduc t of public affairs, has bee n of considerable valu e to me as a theoretical reforme r of the opinions an d institution s of my time. Not, indeed, that public business transacted o n paper , t o tak e effec t o n th e othe r sid e o f th e globe , wa s o f itsel f calculated t o giv e muc h practica l knowledg e o f life . .. . A s a speculativ e writer, I shoul d hav e ha d n o on e t o consul t bu t myself , an d shoul d hav e encountered i n m y speculation s non e o f th e obstacle s whic h woul d hav e started u p wheneve r the y cam e t o b e applie d t o practice . Bu t as a Secretar y conducting political correspondence , I could no t issue a n order o r express a n opinion, withou t satisfying variou s persons ver y unlike myself, that the thing was fit to be done. .. . I learnt how to obtain the best I could, whe n I could not obtain everything ; .. . t o bear wit h complete equanimit y the being overruled altogether . I hav e found , throug h life , thes e acquisition s to b e o f th e greatest possibl e importanc e fo r personal happiness , an d they are als o a very necessary conditio n fo r enablin g any one , eithe r a s theoris t o r a s practica l man, to effect th e greatest amoun t of good compatibl e with his opportunities. Thus, i n a serious study of one aspect o r another of the human condition, one should not expect logica l consistenc y o f the kin d Jevons ha d i n mind; and on e shoul d vie w simple , powerful, logica l system s wit h grea t reserv e a s th e basi s fo r action . On e shoul d b e prepared fo r inconclusiv e result s an d contradictions; fo r David Hum e wa s certainl y cor rect with his expostulation: "Thes e principles o f human nature, you'll say, ar e contradictory. Bu t wha t i s ma n bu t a heap o f contradictions. " I n general , I believe , economist s have bee n somewha t deceive d b y takin g a t fac e valu e Mill' s rathe r modes t prefator y statement o f hi s purpose . H e emerge s a s a more subtl e an d origina l politica l economis t than hi s metho d o f appearin g t o refin e an d updat e Smit h an d Ricard o woul d suggest .

The Basic Growth Equation Mill's versio n o f th e basi c growt h equatio n begin s i n Boo k I ("Production" ) wit h a thoroughly professiona l reassertio n o f th e conventiona l wisdo m o f politica l economy , accumulated ove r the previous century , in the form o f the most coherent expositio n of the basic growt h equatio n t o b e foun d amon g ou r si x classica l economists . H e deal s suc cessively wit h labor, lan d ("appropriate natural objects"), an d capital; then the "degre e of productiveness" o f hi s three productio n agents ; finally , h e turns to a consideration o f the factor s determinin g th e rat e o f increas e o f eac h majo r variabl e i n hi s productio n function an d the determinants of the overall rate of increase i n production. The orderlines s of his sequenc e emerge s fro m thi s preliminary passage i n Chapter X as he turns from th e determinants o f th e leve l o f outpu t to th e rat e o f growth: 30 We may say, then , . . . that the requisites of production ar e Labour, Cap ital, an d Land . Th e increas e o f production , therefor e depend s o n .. . th e increase eithe r o f th e element s themselves , o r o f thei r productiveness . Th e law o f th e increas e of production must be a consequence of th e laws of these elements; the limits to the increase of production must be the limits, whatever they are , se t b y thos e laws . W e procee d t o conside r th e thre e element s successively, wit h referenc e t o thi s effect ; o r i n othe r words , th e la w o f th e

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increase o f production, viewe d in respect o f its dependence, firs t o n Labour , secondly o n Capital , an d lastl y on Land . Mill introduce s "th e limite d quantit y and limite d productivenes s o f land" a s "th e rea l limits to production."31 Diminishing returns is introduced as "th e mos t important propo sition i n politica l economy"; 32 an d then, th e "antagonis t principle" : "th e progres s of improvements i n production." 33 H e deal s wit h th e accelerate d declin e i n th e cos t an d prices o f manufacture s du e t o "th e mechanica l invention s o f th e las t sevent y o r eighty years" which he judges t o be "susceptibl e of being prolonged an d extended beyon d any limit which it would be saf e t o specify." 34 Bu t he deals also at greater length tha n any of his majo r predecessor s wit h th e ful l rang e o f invention s an d innovation s capabl e o f exercising "a n antagonis t influenc e t o th e la w o f diminishin g return t o agricultura l la bour."35 Amon g thes e innovation s ar e improve d educatio n o f th e workin g force , im proved system s of taxation and land tenure, and "more solid instruction" o f the "ric h and idle classes" tha t woul d increase thei r "menta l energy," generate "stronge r feelings of conscience, publi c spirit, o r philanthropy: and qualify the m for roles of constructive social as wel l a s economic innovation." 36 Mill concludes thi s initial restatement and elaboration of the classical model b y discussing th e remedie s availabl e t o postpon e th e tim e whe n diminishin g returns definitivel y asserts it s sway : populatio n restraint ; fre e trad e i n food; emigration . H e als o ha s some thing to say about generating growt h "i n countrie s where the principle of accumulation is as weak a s it i s in the variou s nation s of Asia . . . and . . . the less civilize d an d industrious part s o f Europe, a s Russia , Turkey , Spain , an d Ireland." 37 Mill appear s t o draw a quite sharp line between production , determined i n his view by firmly establishe d scientifi c principles, and distribution, determined b y law, custom, an d other huma n institutions . Later commentator s hav e criticize d Mill—sharpl y or gently—fo r failin g to unif y th e analysis o f price determination wit h the analysis of wage, interest , rent , an d profit deter mination, viewed a s market phenomena. Looke d a t closely, however , Mill did not draw a sharp line between th e rules governin g production an d distribution. He is quite awar e of the marke t proces s a t wor k i n determinin g incom e distribution . Bu t h e ha d a furthe r serious point to make in Book II. It is that a whole array of quite specific human and social institutions in fact do affec t incom e distribution ; e.g., privat e property, inheritanc e laws , custom as it affects rents , slavery , and land tenure, to which he devotes three chapters (84 pages), i n part t o promote th e progra m o f reform fo r Irelan d tha t h e advocated . When Mil l come s t o wages, th e role of custom, etc., doe s no t disappear, bu t he state s flatly:38 "Competitio n . . . must b e regarded , i n th e presen t stat e o f society , a s th e principal regulato r o f wages , an d custo m o r individua l characte r onl y a s a modifyin g circumstance, an d that in a comparatively sligh t degree." His treatment of rent and profits is equally linked to the market process. Indeed , he concluded the discussion of profits by referring t o its later, fulle r treatmen t under "Valu e and Price," an d goes o n to deal with rent i n Book I I only "s o fa r as it admits being treated independentl y of considerations o f value. . . ," 39 Similarly, i n dealin g wit h th e variable s determinin g th e leve l an d rat e o f increas e o f production, Mill introduces nonmarket variables such as levels of education and the extent to whic h custo m an d institution s provid e stron g or wea k incentives. I conclud e tha t th e faul t her e i s Mill's , t o th e exten t tha t certai n highl y quotabl e passages ar e distinctl y misleading; for example: 40 "Th e law s an d conditions o f produc -

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tion o f wealt h partak e o f th e characte r o f physica l truths . Ther e i s nothin g optiona l o r arbitrary i n them . .. . I t i s no t s o wit h th e distributio n o f wealth . Tha t i s a matte r o f human institutio n solely." The conventiona l caricatur e of his view is also th e product of rather careles s reading 41; fo r it is a purposeful characteristic o f Mill's Principles tha t the role o f noneconomi c factors , a s reflecte d i n law , custom , etc. , i s regularl y interwove n with conventional economi c analysis . And i n insisting that the political, social , an d legal framework o f th e econom y wa s subjec t to chang e wit h th e passag e o f time , Mil l wa s certainly correct . Th e organization o f Mill's Boo k II in relation t o Book III (and, indeed , Book I i n relatio n t o Boo k IV ) ma y o r ma y no t b e judge d felicitous . Bu t hi s basi c argument deserve s examinatio n on it s merits. This digression is relevant to any serious evaluation of Mill because one's judgment of his rol e an d statur e and contemporary relevanc e depends greatl y on one's imag e of what economics a s a social science should aim to be. In Mill's treatment of each of the variables in th e productio n function , on e ca n observ e no t onl y hi s capacit y t o tak e int o accoun t narrowly technica l view s generate d b y other s i n th e post-Ricardia n perio d bu t als o a steady insistence tha t the noneconomic variable s relevant t o growth are not only subject to change bu t also ar e legitimate, indeed , inescapabl e objective s o f economic developmen t policy.

Population and the Working Force There i s something o f a paradox i n Mill's treatmen t o f population. O n th e on e hand , he notes tha t since th e British census of 1821 , it s rate of increase wa s decelerating; an d that the birt h rate wa s declining in France. 42 The cor n law s had been repeale d i n Britain, th e railways an d improve d transoceani c trave l permitte d easie r emigratio n t o countrie s an d regions wher e foo d wa s chea p an d abundant. 43 Bu t i n Mill's view , thes e development s only granted "t o thi s over-crowded countr y a temporary breathin g time, capable o f being employed in accomplishin g thos e mora l and intellectua l improvement s in all classe s of people, th e ver y poores t included , whic h would rende r improbabl e an y relapse int o th e over-peopled state." 44 Here w e hav e clearl y the element s o f wha t is distinctive in Mill. Hi s basic positio n i s rooted, o f course , i n Malthu s an d Ricard o an d th e earlie r politica l economist s wh o foreshadowed th e concep t o f diminishin g return s t o agricultur e an d th e tendenc y o f population t o press agains t the mean s of subsistence. I n particular, h e accepts th e proba bility tha t diminishing returns will, on balance, triump h despite al l the likely postponin g devices o f huma n ingenuity , th e openin g o f virgi n lands , emigration , fre e trade , etc . More specifically , he accepts Ricardo's mode l that, ceterisparibus, a market wage rate higher than the natural rate has two simultaneous contrary effects: it induces an increase in population, an d i t discourage s investmen t and reduce s thereb y th e deman d fo r labor . Under th e dua l impac t o f thos e consequences , increasin g th e suppl y and decreasin g th e demand fo r labor , th e marke t wag e rat e decline s back t o th e natura l rate and , painfully , population declines . Tha t mode l wa s a sufficien t basi s fo r Ricard o t o mak e hi s cas e fo r free trade ; and , indeed , Ricard o include s among his conditions for fending off the opera tion o f diminishin g return s to agriculture " a diminishe d rate of increase in population. " This mino r stran d in Ricardo' s analysi s become s th e majo r thrus t i n Mill's. H e put s t o himself th e questio n beyond: Wha t permanentl y might avoi d "a n over-people d state " with it s attendan t marginally low wages , poverty , ignorance , and a degradation particularly acut e fo r women ? Hi s answe r i s a sustaine d publi c polic y t o encourag e smaller

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families; greatl y enlarge d effort s i n popular education ; and , ultimately , movemen t t o a higher incom e pe r capit a stationar y state . In on e sense , thi s compariso n suggest s wh y th e charg e tha t Mil l wrot e " a readabl e Ricardo" is, to a degree, sustainable. 45 The formal apparatu s underpinning Mill's theor y of populatio n i s substantiall y (no t wholly ) derivative . But , i n fact , n o on e ca n rea d carefully th e fou r majo r passage s i n Mil l bearin g o n populatio n an d th e workin g forc e without realizin g tha t a distinctl y differen t perspectiv e i s a t work . Mil l deal s wit h th e subject unde r th e headings o f population increas e as a determinant o f the rate o f increas e of production46; the determination of wages47; the characteristics of the stationary state 48; and i n hi s reflection s o n th e "Probabl e Futurit y o f th e Labourin g Classes." 49 Take n together thes e passage s ar e a n often passionat e plea for the limitation of famil y siz e a s a necessary conditio n fo r a civilized society ; a society wher e the rea l wage s o f labor wer e high, educatio n wa s universal , wome n wer e accorde d equa l rights by custo m a s well a s law; and the members o f the working class wer e not a servile mass to be governed "i n a tutelary manner,' ' bu t full an d dignified citizens capabl e o f taking their destinies int o their own hands. Mill's powerful argument is for something more than a rise in real income per capita abov e the subsistenc e level: 50 There is room i n the world, no doubt, and even in old countries, for a great increase o f population , supposin g th e art s o f lif e t o g o o n improving , an d capital to increase. Bu t even if innocuous, I confess I see very little reason fo r desiring it . Th e density o f population necessary t o enable mankin d to obtain , in th e greates t degree , al l th e advantage s bot h o f cooperatio n an d o f socia l intercourse, has , i n all the most populou s countries, been attained . A population ma y be to o crowded, thoug h al l be ampl y supplie d wit h food an d raim ent. It is not good fo r man to be kept perforce at all times in the presence of his species. A worl d fro m whic h solitud e i s extirpated , i s a ver y poo r ideal . Solitude, i n th e sens e o f bein g ofte n alone , i s essentia l t o an y dept h o f meditation o r of character; an d solitud e in the presence o f natural beauty an d grandeur, i s the cradle of thoughts and aspirations which are not only good for the individual , bu t whic h societ y coul d il l d o without . No r i s ther e muc h satisfaction i n contemplatin g th e worl d wit h nothing lef t t o th e spontaneou s activity o f nature ; with every roo d o f lan d brought into cultivation , which is capable o f growin g foo d fo r huma n beings; every flower y wast e o r natural pasture ploughe d up , al l quadrupeds o r birds whic h are not domesticated fo r man's us e exterminated a s his rivals for food, every hedgero w or superfluous tree roote d out , an d scarcel y a place lef t wher e a wild shrub or flower could grow without being eradicated a s a weed in the name of improved agriculture. If th e eart h mus t los e tha t great portio n o f it s pleasantness whic h i t owes t o things tha t th e unlimite d increas e o f wealt h an d populatio n woul d extirpat e from it , for the mere purpose of enabling it to support a larger, but not a better or a happier population , I sincerely hope , fo r th e sak e o f posterity, tha t they will b e conten t t o b e stationary , lon g befor e necessit y compel s the m t o it . It i s scarcel y necessar y t o remark that a stationary condition of capital and population implie s no stationar y state o f huma n improvement . There woul d be as much scope a s ever for all kinds of mental culture, and moral and socia l progress; a s muc h roo m fo r improvin g the Ar t o f Living , an d muc h mor e likelihood o f it s being improved, whe n minds ceased t o be engrosse d by th e

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art of getting on. Eve n the industrial arts might be as earnestly and as success fully cultivated , wit h this sole difference, tha t instead o f servin g no purpos e but the increase of wealth, industrial improvements would produce their legitimate effect , tha t o f abridgin g labour . Hithert o i t i s questionabl e i f al l th e mechanical invention s yet mad e hav e lightened th e day' s toi l o f an y human being. The y hav e enabled a greater population to live the sam e lif e o f drudgery an d imprisonment , an d a n increased number of manufacturers and other s to make fortunes. They have increased th e comforts of the middle classes. Bu t they have not yet begun to effect thos e great changes in human destiny, which it is in their nature and in their futurity t o accomplish. Onl y when, in addition to jus t institutions , th e increas e o f mankin d shal l b e unde r th e deliberat e guidance o f judicious foresight, can th e conquest s mad e fro m th e power s o f nature by th e intellect an d energy o f scientific discoverers, becom e th e com mon propert y o f th e species , an d th e mean s o f improvin g and elevatin g th e universal lot . There is in Mill's visio n something in common with those of an unlikely pair: with Karl Marx's visio n of Communism (following, p. 123) ; and that evoked almos t a century later (1930) b y J . M . Keyne s i n his "Economi c Possibilitie s for Our Grandchildren." 51 Mill embrace d i n th e quote d passag e th e underlyin g Malthusian argument but clearl y moved beyond. An d he moved beyond, a s well, with respect to birth control. He was what is known chastely i n the demographic literature as a neo-Malthusian; that is, a believer in birth control . Bu t th e logi c o f Malthus' s latter-da y argument s virtuall y qualify hi m a s a neo-Malthusian (preceding , pp . 56-57) . Ther e ar e a numbe r o f passages i n Mill' s Principles tha t argue s o strongly for the limitation of family siz e that one expects suppor t for birt h contro l t o becom e explicit . Fo r example: 52 . . . Whil e there is a growing sensitiveness t o the hardships of the poor and a ready dispositio n t o admi t claim s i n the m upo n th e goo d office s o f othe r people, there i s an all but universal unwillingness to face the real difficult y o f their position, o r advert a t all to the conditions which nature has made indis pensable t o th e improvemen t o f thei r physica l lot . . . . [T]her e i s a taci t agreement t o ignore totally the law of wages, o r to dismiss it in a parenthesis , with suc h term s a s "hard-hearte d Malthusianism" ; a s i f i t wer e no t a thousand time s mor e hard-hearte d t o tel l huma n being s tha t the y may , tha n tha t they ma y not , cal l int o existenc e swarm s o f creature s wh o ar e sur e t o b e miserable, an d mos t likel y t o b e depraved . . . . Despite the lack of any explicit reference to contraception i n Mill's published work, i t is clear that he remained a supporter o f birth control throughou t his life. Norma n E. Himes , an admirabl e sleut h i n thi s rather comple x matter , concludes: 53 (1) tha t John Stuar t Mill a s a young man playe d a t leas t a passive, i f no t a n active, rol e in the distribution of practical literature and that he was active in the early propaganda , a t least to the exten t of writin g on the subjec t wit h the purpose i n mind of influencing th e working classes; an d (2) that Mill accepte d in matur e life th e Neo-Malthusian principle, but entertained it diffidently a s a private opinion , preferring not t o embar k upo n an y public advocacy. As noted earlier (p. 92 ) there is no doubt that Mill was associated as a young man o f 1 7 or 18 wit h th e distributio n of birt h contro l literatur e an d wa s hale d befor e a magistrate .

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Himes goe s furthe r an d conclude s tha t h e wa s als o "th e autho r o f som e o f th e mos t brilliant essay s o n Neo-Malthusianis m written i n tha t earl y period." 54 Hi s subsequen t reticence wa s broke n o n only one known occasion. I n 1868 , fiv e year s before hi s death , he wa s sen t a privatel y printe d pamphle t o n Th e Marriage Problem dealin g wit h th e medical an d physiologica l aspect s o f contraception . H e replie d t o th e author , i n effect , that the issue was a matter of private judgment for the married people concerne d an d that the requisit e informatio n shoul d b e mad e availabl e b y professiona l medica l persons. 55 Aside fro m th e specifi c reason s fo r reticenc e arraye d b y Hime s (not e 53) , an d th e inhibitions on the public discussion of matters relating to sex in nineteenth-century British society, Peterse n adduce d th e following: 56 " . . . anothe r an d often mor e importan t reason for the isolation of neo-Malthusians was that they were in the main the type of peopl e who expounded unpopula r opinion of all kinds." He goes o n to document the "recurren t association o f neo-Malthusianism with every heterodox or crackpot idea'' from atheis m to free love ; bu t he judges progress wa s inhibited by "th e hostilit y between it [neo-Malthu sianism] an d socialism , tw o competitor s i n Utopia n wares. " The intensit y o f th e issu e i s suggeste d b y th e fac t tha t th e Londo n Times publishe d a "particularly malevolent " revie w o f Mill' s caree r o n th e occasio n o f hi s death. 57 Th e writer o f th e obituar y notice , Abraha m Hayward , not onl y recalle d th e charge tha t Mil l was associate d sinc e hi s yout h with the birt h control movement , bu t also circulate d to a substantial grou p of public figures a more explicit version o f this charge, thereby launching a public controversy a s Mill's friend s rallie d round to defend his name. It was, thus, no smal l thin g fo r Mil l i n hi s da y t o support—lik e hi s father—contraceptio n a s a n additional potentia l "negative " restrain t on population increase . From Mill' s poin t o f view , however , th e mos t distinctiv e stran d i n hi s treatmen t o f labor a s a facto r o f productio n wa s no t hi s semicover t suppor t fo r birt h contro l bu t hi s extensive examination of the forces determining the productivity of the working force. H e introduces, o f course, the factors of production with which labor must combine: e.g. , th e quality an d availabilit y o f the soil an d source s o f raw materials , a s well as the scal e an d quality o f capita l equipment . Bu t h e goe s o n t o explor e question s lik e these : Wha t determines th e capacity an d willingness of labor t o engage in "stead y an d regular bodil y and menta l exertion"? 58 I n wha t way s d o th e worker s o f variou s Europea n countrie s differ wit h respec t t o skill , adaptability , an d moral character? 59 How does th e degree o f security o f property affec t productivity? 60 Wha t have we learned abou t the potentialitie s and limit s o f th e divisio n o f labo r sinc e Adar n Smith an d hi s parabl e o f pi n manufac ture?61 Then, later , i n speculating on the future o f the working classes: Wha t effect s ca n be anticipate d o n th e size , quality , an d compositio n o f th e workin g forc e fro m th e expansion of popular educatio n and the movement of women toward equal rights? 62 Wha t is the evidenc e o n the relation betwee n labo r productivity and profit-sharing schemes?63 What abou t producer' s cooperatives? 64 To refer bac k t o Irma Adelman's version of the production function (preceding , p. 6) , Mill deal s mor e full y tha n an y o f hi s predecessor s wit h th e impac t o f U t ("th e socio cultural milieu" ) o n L t ("th e employmen t o f the labo r force") , althoug h i t wa s a con sistent stran d i n the classica l traditio n tha t sociocultura l force s b e taken int o account. Investment and Technology The distinctive elements in Mill's treatment of capital and technology are candidly derivative; and they do not reflect his central concerns as a reformer in quite the same way as his

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expositions o f populatio n dynamics , th e labo r supply , an d labo r productivity . I t i s no t unfair to say that Mill helped elevat e tw o authors into conventional histories of economic thought. On e wa s Charles Babbage, whos e On the Economy o f Machinery an d Manufactures (1841 ) is quoted substantially, and sometimes a t length, on eight occasions b y Mill; the other, Joh n Rae , whos e Statement o f Some New Principles o n th e Subject o f Political Economy (1834 ) i s quote d o n fou r occasions , includin g passages fundamenta l to Mill' s conclusions on saving and capital formation. 65 Mil l say s of Rae, the n virtually unknown: "In n o other book know n to me is so much light thrown, both from principl e an d history, on the cause s whic h determin e the accumulatio n of capital." 66 Mill' s chapte r "Of the Law o f th e Increas e o f Capital " is , almos t literally , a paraphras e o f a par t o f Rae' s doctrine. Th e centra l proposition , quit e origina l i n it s time , i s tha t al l accumulatio n involves th e sacrific e o f a presen t fo r th e sak e o f a futur e good . Th e force s makin g fo r weakness or strength in the process o f accumulation are then reviewed mainl y on the basis of specifi c illustration s drawn from Rae . Mil l then array s th e reasons fo r th e peculiarl y strong Britis h propensit y t o sav e an d invest : exemptio n fro m th e ravage s o f war ; a long tradition of security of property; a geographical setting that lent itself to commerce rathe r than war; the early declin e o f feudalism; and the socia l prestige and political influenc e of the wealthy . Th e conclusio n o f thi s passage—worthy o f G . B . Shaw—remind s us tha t Mill was, afte r all, of a Scottish family an d never lost his warm association wit h France.67 To ge t out o f one rank in society int o the nex t above it , i s the great ai m of English middle-class life , and the acquisition of wealth the means. . . . These causes have, i n England, been greatly aide d by that extreme incapacity o f the people fo r persona l enjoyment , whic h i s a characteristi c o f countrie s ove r which puritanis m has passed. Bu t i f accumulation is , o n on e hand , rendere d easier b y th e absenc e o f a tast e fo r pleasure , i t is , o n th e other , mad e mor e difficult b y th e presenc e o f a ver y rea l tast e fo r expense . S o stron g i s th e association betwee n persona l consequenc e an d th e sign s of wealth , tha t th e silly desir e fo r th e appearanc e o f a larg e expenditur e ha s th e forc e o f a passion, amon g larg e classe s o f a natio n whic h deriv e les s pleasur e tha n perhaps an y othe r i n th e worl d fro m wha t it spends . Rae combine s hi s analysi s o f th e motive s fo r accumulatio n with a quit e origina l an d complex analysi s of the human impulses which yield invention and the impact of the flo w of inventio n on the capita l stock. 68 It is difficul t to do justice to his extende d and richly illustrated argumen t in summary. But briefly, he asserts tha t the normal instinct of men in society i s to imitate an d "amalgamat e wit h the mass"; deviants and inventors are rarely rewarded; bu t revolutionary chang e impose d fro m th e outside o r the emergenc e o f "ne cessity" for new options can stimulate invention and render it acceptable. H e sensed i n his time a decline i n the barriers t o change. Little of this is reflected i n Mill except a passing reference: " . . . i t i s a just remar k o f Mr . Rae , tha t nothin g has a greate r tendenc y t o promote improvement s i n an y branc h o f production , tha n it s tria l unde r a ne w se t o f conditions."69 With respec t t o machiner y an d technology , Mil l relie s heavil y o n Babbage . Indeed , despite multipl e references to Babbage's work , Mill appears to have assumed his readers were familia r wit h it s argument . And h e ha d som e reaso n t o d o so . Th e firs t editio n of Babbage's book o n machiner y and manufacture s sol d som e 3,00 0 copies i n 2 months — the equivalent of about 40,000 copie s i n the Unite d States of the mid-1980s. Tw o furthe r printings shortl y followed.

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It is a curious best-seller. The author was a professor of mathematics at Cambridge. H e achieved a permanent place in the history of technology by designing and working long to complete a Calculating Engine, a s he called it , clearl y based on principles underlying the modern electroni c computer . I t was the engineering, not the scientific, problem s that held him up. I n seeking t o solve them, Babbage moved about England and Western Europe for 10 years studyin g machinery and its relation to manufacturing. Thus he "wa s insensibl y led to apply to them [th e various sources of mechanical art] those principles of generalization to which my other pursuit s had naturally given rise."70 This by-product of his work on th e compute r i s his major monument because, i n 1842 , th e government o f Sir Rober t Peel refuse d th e furthe r suppor t fo r th e projec t recommende d b y th e Roya l Society. 71 Babbage's stud y o f machiner y an d manufacture s is remarkabl e becaus e i t combine s scientific an d engineerin g expertis e wit h detaile d knowledg e o f productio n processes , business practice , an d basic economi c principles . I t is, i n these respects , a unique study. The closin g section s o f hi s thir d editio n dramatiz e it s range : Babbag e move s fro m a philosophic discussio n o f th e critica l linkage s betwee n basi c science , invention , an d manufacture (plu s a n attack on th e electio n o f the Duk e of Susse x to be President o f th e Royal Society ) t o some recen t innovation s including a vivid and detailed accoun t of how the horse-slaughtering houses at Montfaucon, near Paris, manag e "th e profitabl e conversion o f substance s apparentl y o f littl e value"—including maggot s an d rats. Although Babbage' s best-selle r wa s a rathe r specia l product , i t was clearl y par t o f a phase o f heightene d self-consciousnes s abou t th e scale , momentum , an d scop e o f th e technological revolutio n unde r way . Edwar d Baines' s excellen t History o f th e Cotton Manufacture wa s publishe d in 1835 , a s wa s Andre w Ure' s The Philosophy o f Manufactures.72 Knowledg e o f wha t wa s goin g o n wa s greatl y enlarge d b y th e testimon y lai d before th e parliamentar y Select Committe e o n Manufactures , Commerce, an d Shippin g (1833). Her e i s ho w I characterize d i n anothe r contex t th e perio d betwee n th e cyclica l peak i n 182 5 an d the tim e th e Select Committe e was set up: 73 Although evidenc e o n th e stat e o f Britis h industry suggests tha t ther e wa s no majo r cyclica l movemen t fro m 182 7 t o 183 2 [ther e wer e tw o mino r cycles], th e character o f these years can be clearly defined . Evidence before the Committee o f 1833—o n cotton , wool , iron , an d shipping—i s remarkabl y unanimous i n designatin g th e perio d a s on e o f fallin g price s an d profits , increasingly severe competition, risin g output. Fixed plant had been expanded in all directions i n the boom which ended in 1825 ; and , even in the following years, ther e wa s a stron g cost-reducin g incentiv e t o tak e advantag e o f ne w technical possibilities . Th e cos t o f machiner y an d construction , moreover, was falling , an d long-establishe d firm s faced th e competitio n of ne w plants , better equippe d and more cheaply constructed. Fo r many manufacturers they were extremely difficult years . A falling value for fixed capital had steadily to be accepted . These were th e underlying trends fro m 1815 , an d perhaps earlier. The y li e at the heart of the secular process called the Industrial Revolution. An extraordinarily inflate d stat e of demand was required in the middle twenties, thirties, and fortie s t o yield , an d the n onl y briefly , risin g prices an d profi t margins . Testimony befor e th e Committe e dramatize d th e manne r i n whic h ne w cost-reducing technologies wer e flowin g int o man y manufacturing sections, permitting forehande d en trepreneurs t o surviv e but exertin g pressur e o n th e profit s o f laggards , an d creatin g a

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general settin g o f idl e capacity . Al l thi s colored analyse s o f th e earl y 1830s , befor e th e majestic boo m o f 1833-183 6 go t unde r way. Babbage, fo r example, include s a chapte r "On Over-Manufacturing. " Th e Committe e als o generate d a large bod y o f information on whic h Babbage , Baines , an d other s drew . Mill exploited Ra e and Babbage , with generous acknowledgement; but in neither cas e did h e full y absor b an d develo p thei r insights . Wit h respect t o Rae , for example , Mil l accepted th e notio n o f savin g a s overcomin g th e tim e discoun t o f presen t ove r futur e satisfaction; bu t h e doe s no t dea l wit h Rae' s insigh t tha t a lengthenin g of th e perio d o f production of a capital good increase s its productivity—an anticipation of Bohm-Bawer k and the Austrians. 74 And , in a weakness share d by classical an d neoclassical economist s for th e bette r par t of2 1/2 centuries , Mil l fail s t o exploi t th e reflection s of bot h Ra e an d Babbage o n th e generatio n o f inventions. 75 Bu t i t shoul d b e immediatel y adde d that , perhaps reinforce d b y Babbage' s vigorou s view s on the subject , Mill did strongl y advo cate generou s publi c support fo r scientifi c (and other) researc h i n universities: 76 It i s highl y desirable . . . that ther e shoul d be a mod e o f insurin g to th e public the services o f scientific discoverers, an d perhaps of some other classe s of savants, by affording them the means of support consistently with devoting a sufficien t portio n o f time to their peculiar pursuits. . . . The mos t effectua l plan, an d at the same time least liabl e to abuse, seems to be that of conferring Professorships, wit h duties of instructio n attached to them. . . . [T]h e greatest advance s whic h have bee n mad e i n the variou s sciences, bot h mora l an d physical, hav e originated wit h those wh o wer e public teachers of them; from Plato an d Aristotl e t o th e grea t name s o f th e Scotch , French , an d Germa n Universities. I d o no t mentio n th e English , becaus e unti l ver y latel y thei r professorships hav e been , a s i s wel l known, little more tha n nominal. Putting aside th e issue posed b y the innovations of Rae and Babbage, Mill' s treatmen t of investmen t an d machiner y ca n b e see n a s a n orderl y elaboratio n o f th e structur e of thought inherite d fro m hi s grea t predecessors , mos t notabl y Ricardo . As wit h respect t o labor , Mil l proceeds b y viewin g capital firs t a s a factor o f produc tion; the n a s on e sourc e o f incom e (profits) . Finally , explicitly abandoning Statics fo r Dynamics, he moves t o consider capita l in Book IV, i n the context of "Th e Influenc e of the Progres s o f Societ y o n Productio n and Distribution. " Mill start s hi s expositio n o f th e rol e o f capita l i n production i n soun d textbook style : with a se t o f rathe r elaborat e definitions ; six fundamenta l propositions ; an d a detaile d exploration o f th e distinctio n betwee n fixe d an d workin g capital . I n dealin g wit h th e "degree o f productiveness" o f factor s of production h e exploit s Babbage o n machinery and manufacturin g and the n introduce s a fres h not e o f som e importance: 77 The us e o f machinery is far fro m bein g the only mode i n which the effect s of knowledg e i n aidin g production ar e exemplified . I n agricultur e and horticulture, machiner y is only now beginning to show that it can do anything of importance, beyond the invention and progressive improvement of the plough and a few other simpl e instruments . The greatest agricultura l inventions have consisted i n th e direc t applicatio n of mor e judiciou s processes t o th e lan d itself, an d t o th e plant s growing on it : such as rotation of crops, t o avoi d the necessity of leaving the land uncultivated fo r one season in every two or three; improved manures , t o renovat e it s fertilit y whe n exhauste d b y cropping ;

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ploughing and draining the subsoi l as well a s the surface; conversion o f bogs and marshes int o cultivable land ; suc h mode s o f pruning, an d of training and propping up plants and trees, as experience has show n to deserve the prefer ence; i n the cas e o f the mor e expensiv e cultures , plantin g the roots o r seed s further apart , an d mor e completel y pulverizin g th e soi l i n whic h the y ar e placed, &c . I n manufacture s an d commerce , som e o f th e mos t importan t improvements consis t in economizing time; in making the return follow mor e speedily upo n the labour and outlay. There are others of which the advantag e consists i n econom y o f material . In th e cours e o f th e 1830 s th e emergenc e o f ne w technologie s bega n t o hol d ou t th e hope o f renderin g Britis h farmin g profitable again afte r the lon g period o f declining an d stagnant agricultura l price s that started i n 1812 , bu t it was only from abou t 183 7 that th e application o f th e ne w method s bega n t o yiel d substantia l result s an d creat e a ne w mood.78 By the time Mill's Principles wa s published i t was clear tha t Britis h agriculture would profitabl y survive , despit e th e repea l o f the Cor n Laws . In dealin g wit h profit s mor e generall y h e distinguishe s thre e components : interest ; insurance against risk; and wages o f superintendence. H e then considers th e determinant s of the minimu m profi t rate ; variations ; and the tendenc y of profit s in variou s sector s toward equality . H e conclude s wit h th e followin g clarification of Ricardo: 79 We thu s arriv e a t th e conclusio n o f Ricard o an d others , tha t th e rat e o f profits depend s o n wages ; rising a s wage s fall , an d fallin g a s wages rise . I n adopting, however , thi s doctrine, I must insist upon making a most necessar y alteration i n its wording. Instead of saying that profits depend on wages, let us say (wha t Ricardo reall y meant ) tha t the y depen d o n th e cos t o f labour . He thus allow s fo r th e possibilit y o f a decline i n unit labor cost s wit h rising wag e rates . So far as machinery is concerned, however , Mill flatly reject s Ricardo's judgment that a shif t towar d fixe d a t th e expens e o f circulatin g capita l migh t b e a t th e worker' s expense:80 ... th e conversion o f circulating capital int o fixed, whethe r by railways, or manufactories , o r ships , o r machinery , o r canals , o r mines , o r work s of drainage an d irrigation, is not likely in any rich country, to diminish the gros s produce o r th e amoun t o f employmen t fo r labor . . . . Ther e i s hardl y an y increase o f fixe d capita l whic h doe s no t enabl e th e countr y t o contai n eventually a larger circulatin g capital .. . fo r there i s hardly any creation o f fixed capita l which , when i t proves successful , does no t cheape n th e article s on which wages ar e habitually expended. . . . All these improvement s mak e the labourer s bette r of f with the sam e mone y wages, bette r of f if they d o no t increase thei r rat e o f multiplication . In particular , th e Britis h railroa d boo m o f th e 1840s , wit h it s massiv e expansio n i n fixed capital , an d diffuse , strong , an d positiv e effect s o n employment , output , an d pro ductivity, made it clear to Mill and others that Ricardo's proposition about machinery was valid onl y under extremel y restricted assumptions— a view Ricard o himsel f held . Nevertheless, Mill' s vie w of th e investmen t process wa s incomplete . Schumpeter, fo r example, too k Mil l to tas k a s follows. 81

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In agreement wit h all the English "classics"—perhap s we might say, with the spirit of his age—he greatl y underrated the importance in economic development o f the element of personal initiativ e and, correspondingly, h e greatl y overemphasized th e importanc e o f mer e increas e i n physica l producers ' goods. An d i n this again, he overemphasize d th e importanc e of saving . . . . He too k i t fo r grante d tha t th e importan t thin g wa s t o hav e somethin g t o invest: th e investmen t itsel f di d no t present additiona l problems eithe r a s t o promptness—it wa s normally sur e t o b e immediate—o r a s to direction—i t was sur e t o be guided b y investment opportunities that were equally obvious to al l an d existe d independentl y of th e investin g man. Saving , then, wa s th e powerful leve r o f economi c development . Mill's depersonalized entrepreneur s an d what Schumpeter late r call s his "Colorles s Saving" ar e related i n a way Schumpeter doe s no t quite drive home in the preceding quote d passage; an d th e linkag e is , i n m y view , fundamenta l t o growt h analysis . I n a world of rapidly changin g production functions , of the kind, for example, Babbag e described , the entrepreneur i s caught up in a competitive, creativ e struggle in which two things are likely to b e true . First , hi s profits an d th e rat e o f growt h o f hi s fir m ar e likely to depen d o n a correct assessmen t o f th e risk s o f absorbin g a ne w technolog y a s wel l a s hi s skil l i n introducing i t efficiently . Thes e ar e skill s distinc t fro m profi t maximatio n wit h fixe d technology. Second , th e leve l o f savin g i n th e econom y wil l depen d heavil y o n th e aggregate success of entrepreneurs i n these functions; for a critical component of saving is the plowback o f profits. I n a sense, th e level of saving-investment becomes substantiall y a function no t o f private frugalit y bu t the pace o f absorption o f technology which , i n turn, helps determine th e rate of growth of output and the size of profits in particular sectors . O f all of Mill's majo r predecessors, Hume came closest t o capturing the role of the plowback of profits wit h his avariciou s merchant s exploiting the potentialitie s of widene d market s (preceding, p . 23) . By the mid-nineteenth century the creative, innovativ e performance of the industria l entrepreneu r ha d becom e critica l t o th e saving-investmen t process; an d Schumpeter wa s correct i n his judgment that Mill does not fully captur e the multi-faceted industrial an d transpor t revolutio n proceedin g aroun d him whic h was t o b e wel l drama tized i n th e Crysta l Palac e Expositio n o f 1851 , 3 year s afte r th e publicatio n o f hi s Principles.

Business Cycles Mill had mor e t o sa y about th e business cycle than an y of his predecessors o r contempo raries excep t Thomas Tooke . Indeed , h e acknowledge s tha t he learned a good dea l fro m Tooke.82 Mill's firs t discussion of the subject—and the most vivid—is in his essay on the commercial distres s o f 1826 , writte n when he was 20 years old. H e returned to the theme a fe w year s late r i n th e secon d o f hi s Essays o n Some Unsettled Questions o f Political Economy, entitle d "O f th e Influenc e o f Consumptio n o n Production." 83 An d h e ha s something t o sa y i n hi s Principles whe n dealin g wit h credit , th e possibilitie s o f exces s supply, th e rate of interest, profits, an d the "tendenc y o f profits t o a minimum." Bu t his major judgments on the subject wer e clearly formed during the dramatic financial crisi s of 1825 an d th e shar p cyclica l depressio n o f 1826 , th e firs t suc h sequenc e h e wa s i n a position t o observ e closel y in reasonabl e maturity.

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Mill's concep t o f th e busines s cycl e wa s firml y anchore d i n a theor y o f irrationa l expectations:84 . . . the caus e o f the evil [cycle s an d depression] i s one whic h legislation cannot reach—th e universa l propensit y o f mankin d t o over-estimat e th e chances i n thei r ow n favour . Whil e thi s propensit y subsists , ever y even t which stimulate s hopes, wil l give rise t o extensive miscalculation; and every miscalculation upon a sufficiently extensiv e scale, will terminate in the ruin of multitudes. All that we are entitled to hope is, that as the world grows older it may gro w wiser ; [and ] . . . that traders ma y on e da y acquir e sufficient pru dence t o abstai n fro m riskin g thei r ow n propert y i n rash speculations , an d sufficient probit y t o abstai n fro m riskin g i n any speculation s the propert y of others. Mill make s clea r tha t his generalization applie s no t merely t o 1824-182 6 but t o othe r "calamitous" period s tha t h e identifie s a s 1784 , 1793 , 1810-1811 , 1814-1815 , an d 1819. I n a passage a s ful l o f insight as any i n 2 centuries of business-cycle theory, Mil l distinguished thre e distinc t form s o f irrationa l expectations. 85 Firs t wer e thos e arisin g from fraudulen t projects. These , while dramatic, were generally exposed rathe r promptly and resulted i n only modest losses . Secon d wer e thos e arisin g fro m a n underestimate o f the time required for investment projects t o yield "adequat e renumeration." Mil l judged many such projects would prove viable in time, although returns on them would not fulfil l the exaggerate d hope s entertaine d a t th e pea k o f th e boom . Thir d wa s speculatio n i n commodities o r "over-trading, " a process tha t Mill trace s throug h a sequenc e o f self reinforcing stage s yieldin g a "frenzy " when: 86 . . . prices at length rise to such a height, as to induce a considerable numbe r of th e holder s t o think of realizing. The n commences the fal l o f prices. Thi s operates as a signal to all the other holder s to hurry their stocks to market, in order t o secur e wha t they ca n befor e th e pric e relapse s t o it s original level . The recoil i s hence almos t instantaneous . Not only do prices fal l t o the leve l from whic h the y rose , but , fro m th e increase d quantit y which has bee n im ported o r produced, they fall lower ; commonly much lower. . . . The failure of a few grea t commercial house s occasions th e ruin of many of their numerous creditors. A general alar m ensues, and an entire stop is put for the time to all dealings upo n credit: man y persons ar e thus deprived of their usual accommodation, an d ar e unable to continu e their business . In hi s "Pape r Currency an d Commercial Distress, " Mil l then goes on to criticiz e th e monetary remedie s for this process discussed in the parliamentary sessions of 1826. Tabl e 4.1 exhibit s the movement of some key commodities i n the period of intense speculation , crisis, an d depression . A fe w year s later , however , Mil l wa s force d b y event s t o dea l no t merel y wit h th e process o f boo m an d bus t bu t als o wit h th e proble m o f chroni c exces s capacit y i n th e system. I n a sense , h e wa s plunge d bac k int o th e worl d o f 1815-1820 , whic h ha d produced th e Malthus-Ricard o debat e on whethe r a "genera l glut " wa s rea l o r a the oretical possibilit y (preceding, pp . 60-62) . The whol e period 1826-183 2 was one frame d b y declining trends in prices and profit s (preceding, p. 105) . There was some overall expansion in the volume of exports and some

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Table 4.1. Selecte d Commodit y Pric e Movements , Grea t Britain , 1823-182 6

1823 1824 1825 1826

Raw cotton (exc. duty ) d. pe r Ib .

British pig iron £'s pe r ton

British manufactured copper

Jamaica Sugar Inc. duty d . perlb .

8.6 8.2 12.2 7.2

62.0 76.7 106.9 81.2

113.0 112.0 137.0 124.0

58.0 56.0 65.0 61.0

SOURCE: A. D . Gaye r et al.. Growth and Fluctuation, microfilme d supplementar y data, Table 128.

continuing technologica l change , includin g the inventio n of th e ho t blast , whic h mad e possible th e commercial exploitatio n of the hitherto unusable blackband ironstone depos its of Scotland . An d i t was i n this interval that commercial railwa y construction began in earnest, i f o n a relativel y smal l scale . Bu t i n general , thi s wa s a tim e o f idl e industria l capacity, an d investmen t prospect s wer e bleak: 87 British investment , fro m 182 7 t o 1832 , present s a strang e contras t t o th e optimistic developmen t whic h preceded 1825 . Foreig n loans and mining ventures virtually disappear fro m the market; railways and joint-stock companies were put forward on a much reduced scale; statistics of brick production, from 1827, fluctuat e irregularly about a level wel l below the peak of 1824-5 . The long-term interes t rat e tende d t o fall . A Circular t o Bankers, i n 1832 , com mented a s follows : "Th e genera l absenc e o f speculatio n i n th e commercia l affairs o f Englan d is , fro m th e extraordinar y lengt h i n whic h i t ha s bee n manifest, th e mos t remarkabl e featur e i n th e histor y o f commerc e o f th e present time. " In a manner quit e typical of Mill' s mod e o f exposition, he approache s th e questio n of general glu t i n hi s Essays b y firs t reaffirmin g strongly th e Ricardia n position: 88 . . . it was triumphantly established by political economists, that consumption neve r needs encouragement . All which is produced i s already consumed , either fo r the purpose o f reproduction or of enjoyment. The person wh o saves his incom e is no les s a consumer tha n h e who spend s it : he consumes it i n a different way ; it supplies food an d clothin g to be consumed , tool s an d mate rials t o b e used , b y productiv e labourers. . . . Wha t is consumed fo r mere enjoyment, is gone; what is consumed fo r reproduction, leaves commodities of equal value, commonly with the addition of a profit. Having reasserted orthodoxy , h e then turns to the problem o f how to explain th e palpabl e reality o f idl e capacity . H e emerge s wit h two proposition s that , i n fact , tak e hi m som e distance i n a Malthusia n direction . First , tha t th e divisio n o f labo r inherentl y result s in chronic idl e capacity , becaus e o f the tim e lag betwee n th e completio n o f production an d sale. Capita l previously laid ou t fo r productio n is "locke d up " i n inventories , transit, etc.; an d i t i s "no t disposable. " Hi s dictum: 89 "Thi s perpetua l non-employmen t of a large proportion o f Capital, is the price we pay for the division o f labour. The purchase is worth wha t i t costs ; bu t th e pric e is considerable. "

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Then a proposition whic h brings him back t o irrationa l expectations an d cycles: 90 ... th e calculations of producers an d traders being of necessity imperfect , there are always some commodities whic h are more or less in excess, a s there always som e whic h ar e i n deficiency . . . . Th e commones t caus e o f suc h delusion i s som e general , o r ver y extensiv e ris e o f price s . . . which per suades al l dealer s tha t the y ar e growin g rich . . . . Bu t whe n th e delusio n vanishes and the truth is disclosed, thos e whose commodities ar e relatively in excess mus t diminis h thei r productio n o r b e ruined : an d i f durin g the hig h prices the y hav e buil t mill s an d erecte d machinery , the y wil l b e likel y t o repent a t leisure. . . . In thi s las t case , i t i s commonl y sai d tha t ther e i s a genera l superabun dance. .. . A n overstocked stat e o f the market i s always temporary, an d is generally followe d b y a more tha n common brisknes s of demand . . . . The essentials o f the doctrine ar e preserved[;] . . . there cannot be permanent excess o f production, o r of accumulation ; though it be at the sam e tim e admitted, tha t . . . there ma y b e a temporar y exces s o f .. . commoditie s generally, no t i n consequence o f over-production, bu t o f a want of commer cial confidence . By th e tim e Mil l wrot e hi s Principles Britai n ha d experience d tw o furthe r majo r business cycles , peakin g i n 183 6 an d 1845 , wit h a n intervenin g perio d o f quit e sever e chronic idl e capacit y (1839-1842). 91 Hi s discussio n o f cycles follo w lon g muc h th e same line s a s hi s tw o previou s efforts ; bu t i t includes som e specia l features : • A n analysi s o f the differenc e between th e crises o f 182 5 an d 1845. 92 • A discussion o f "a glu t of commodities'' tha t introduces mor e explicitly than earlier the rol e o f a rush t o liquidity. 93 • A furthe r attac k o n th e underconsumptionis t stran d i n Malthus , Chalmers , an d Sismondi, includin g a tribute to his father' s writin g on this problem. 94 • A rather sophisticate d discussio n o f the forces determining the cyclical behavior of the interes t rate: 95 Fluctuations i n th e rat e o f interes t aris e fro m variation s eithe r i n th e demand fo r loan s o r i n th e supply . Th e suppl y i s liabl e t o variation , though les s s o tha n the demand . Th e willingnes s to len d i s greate r tha n usual at the commencement o f a period o f speculation, an d much less than usual durin g th e revulsio n whic h follows . . . . Durin g th e revul sion, . . . interes t alway s rise s inordinately , because , whil e ther e i s a most pressing nee d o n th e par t o f man y person s t o borrow , ther e i s a general disinclinatio n to lend . Thi s disinclination , whe n a t it s extrem e point, i s called a panic. . . . In the intervals between commercia l crises , ther e i s usually a tendency in the rate of interest to a progressive decline , fro m th e gradual process of accumulation. . . . and this diminution of interest tempts the possessor t o incur hazard s i n th e hopes o f a more considerabl e return . • Finally , ther e i s Mill' s rathe r od d doctrin e tha t "commercia l revulsions " hel p prevent th e rat e o f profi t fro m fallin g t o a minimu m and, thereby , postpon e th e arrival o f th e stationar y state . Hi s expositio n include s a vivi d accoun t o f wha t happens i n a cyclica l depressio n an d th e force s that , i n time , yiel d a revival. 96

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It i s clear , then , tha t Mil l ha d a livel y sens e tha t a n "almos t periodical " cyclica l process had been underway since the 1780s ; that its roots lay in the systematic tendency of the investmen t proces s t o procee d o n th e basi s o f overoptimisti c an d overpessimisti c expectations; that important time lags helped account for this process, whic h was the for m economic growth inevitably assumed in a system exploiting specialization of function an d in which investment decisions wer e made by individuals operating without full knowledge of the investmen t decisions o f others but in fact al l acting in response to the same signals of futur e profi t o r loss.

Relative Prices Like mos t o f Mill' s exposition , hi s treatmen t o f diminishin g returns t o agriculture , in creasing return s t o manufacture s is classical—bu t wit h som e distinctiv e features o f hi s own. On diminishing returns, he begins once again on a Ricardian note:97 "Th e genera l law of agricultura l industry is the mos t important proposition i n political economy. Wer e th e law different, nearly all the phenomena o f the production and distribution of wealth would be other than they are." Diminishin g returns to inferior new land or in the more intensive cultivation o f ol d lan d i s the n expounded . Mill the n turn s to "certai n exploration s an d limitations " o f the basic principle . • H e note s tha t "usage s connecte d wit h property i n land an d th e tenure o f farms " may caus e actua l practic e i n farmin g t o fal l shor t o f th e productivit y tha t migh t result fro m commerciall y viabl e bes t practice. 98 • I n taking account of the view of the American economist H. C. Carey, h e notes that the latte r indee d ha d establishe d th e possibilit y tha t the best lan d might not b e the first cultivated in a new undeveloped country, but he asserts that this exception doe s not subver t th e long-ru n validit y of the principl e o f diminishing returns. 99 « And , a s noted earlier , h e devotes mor e attentio n to the potentialities fo r improving agricultural technolog y an d practice tha n his predecessors. An d he observes, quit e explicitly, tha t the increase i n "agricultura l skill " sinc e 183 0 ha d reduced th e rea l cost of producin g foo d i n England and Scotlan d despit e th e rise i n population; the repeal o f the Corn Laws had intensified the pressure to increase agricultural productivity; and emigration and colonization of new fertile areas was working in the same direction.100 Bu t h e conclude s wit h the propositio n tha t ultimately determine s hi s acceptance a s inevitabl e th e comin g o f th e stationar y state. 101 To resume ; al l natura l agent s whic h ar e limite d i n quantity , are no t onl y limited i n thei r ultimat e productiv e power , but , lon g befor e tha t powe r i s stretched t o the utmost, they yield to any additional demands on progressivel y harder terms. This law may however be suspended, or temporarily controlled , by whatever add s to the general power of mankind over nature; and especially by an y extensio n o f their knowledge, an d their consequent command , o f the properties an d power s o f natura l agents. After then enunciating increasing returns in manufactures a s "a probabl e and usual, but not a necessar y consequence " o f expande d production , h e bring s th e tw o principle s together and predicts as follows th e likel y long-run shift i n the intersectoral terms of trade against manufactures.102

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As manufactures , however, depen d fo r thei r material s eithe r upo n agri culture, o r mining , o r th e spontaneou s produc e o f th e earth , manufacturin g industry i s subject , i n respec t o f on e o f it s essentials , t o th e sam e la w a s agriculture. Bu t th e crude materia l generall y form s so small a portion o f th e total cost, tha t any tendency whic h may exist to a progressive increas e in that single item, i s much over-balanced by the diminution continually taking plac e in al l th e othe r elements ; t o whic h diminutio n it i s impossibl e a t presen t t o assign an y limit. . . . [I]t follow s tha t th e exchang e value s o f manufacture d articles, compare d with the products o f agriculture and of mines, have, a s population an d industry advance , a certain an d decide d tendenc y t o fall . There i s no Malthusian inkling in Mill of cycles i n relative prices, althoug h he empha sizes strongl y wha t he regarde d a s the transien t nature of the pre-184 8 postponemen t o f diminishing return s t o agriculture . Hi s optimism abou t agricultura l technology an d relevant scientifi c knowledge , th e openin g o f ne w areas , an d migratio n wa s mor e solidl y based tha n the post-1815 optimis m o f Malthus and Ricardo. An d the later editions of th e Principles (the seventh and last of which was published in 1871) could reflect the opening of the American West with railroads an d the massive transatlantic emigration o f the 1850 s and th e post-186 5 years . Similarl y th e economie s induce d b y ne w technolog y an d th e increased scal e o f manufacturin g units, a s wel l a s multipl e revolutions in transpor t an d communications, clearl y strengthened Mill' s confidenc e about the future a s he looked ou t on a rapidly diversifyin g industrial system. Lik e Alfre d Marshall, Mil l never fully aban doned th e root Ricardian doctrin e tha t diminishing returns would ultimately prevail; but , as w e shal l see , h e looke d o n th e stationar y stat e i n a somewha t differen t way tha n hi s predecessors.

The Stages of and Limits to Growth By bringin g togethe r variou s scattere d passage s i n Mill's Principles on e can construct a quite coherent manua l on the stages of economic growt h including policy prescriptions fo r both underdevelope d an d advanced industrial countries . I t would have four components. First is th e extende d passag e i n "Preliminar y Remarks " tha t deal s wit h the stage s o f growth over the long sweep of human history, concludin g that one could fin d i n the world economy o f th e mid-nineteent h centur y approximations o f virtuall y every stage. 103 Hi s array i s base d o n th e degre e t o whic h eac h stag e generate s an d depend s o n a stoc k o f capital; and the stages flow, one from the other, not easily or automatically but from "th e spontaneous cours e o f events. " Mill begin s wit h a margina l case— a communit y livin g wholly o n "th e spontaneou s produce o f vegetation." Next are tribes that live "almos t exclusively" o n "th e produc e of hunting and fishing." "Th e firs t grea t advance " beyond this state of poverty, lackin g virtually al l forms of fixed workin g capital, come s wit h "th e domesticatio n o f the more useful animals " and a diet based not on hunting but "o n mil k and its products, an d on the annual increase o f flocks and herds." Inequality as among families and tribes emerges, a s well a s leisur e time, th e handicraf t manufactur e of textile s and othe r consumer s goods , and eve n th e beginning s of scientifi c observation . The pressure of expanding population and herds leads some communities to begin to till the ground ; th e struggl e betwee n th e nomad s an d th e farmer s (note d a s fa r bac k a s

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Aristotle) begins wit h the initial military advantages of the ruder, hardier nomads ; but, in time, th e farmer s lear n ho w t o defen d themselve s an d thei r crops , an d th e invadin g nomads "wer e obliged als o t o become agricultura l communities. " Mill the n turn s to th e variou s form s o f agricultural-base d societies t o b e observe d i n both history an d in his contemporary world : some generatin g great empires , i n which the collection o f relativel y smal l margin s o f revenu e (o r output ) fro m larg e number s o f peasants permit s ruler s t o conduct major military campaigns, t o build great monuments , and t o enjo y live s o f opulence ; som e startin g as smal l egalitaria n communities but, i n a complex, dynami c process , emergin g a s th e city-states , republics , an d empire s o f th e Mediterranean world , ultimatel y overcome b y the nomads fro m th e North to generate the chaos ou t of which cam e th e Middle Ages, th e states of Europe, an d "th e grea t commu nities whic h hav e bee n founde d beyond th e Atlantic by the descendents o f Europeans." He brings thi s tour deforce o f highly compressed an d stylized history to the following conclusion:104 The world no w contains severa l extensiv e regions, provide d wit h the various ingredient s of wealth i n a degree of abundance of which former age s had not eve n th e idea . . . . But i n all these particulars, characteristi c of the modern industria l communities, those communitie s diffe r widel y from on e another. . . . The diversitie s in the distributio n of wealth are still greater than in the production. Ther e ar e great difference s i n th e conditio n o f th e poores t clas s i n differen t countries ; and i n the proportional number s and opulence of the classes whic h are abov e the poorest . . . . Mill then notes tha t in the contemporary world of his day it was possible to observe all the historical economi c stage s o f the past : . . . Hunting communitie s stil l exis t i n America , nomadi c i n Arabi a an d the steppe s o f Norther n Asia ; Orienta l societ y i s i n essential s wha t i t ha s always been ; th e grea t empir e o f Russia is even now , i n man y respects, th e scarcely modifie d imag e o f feuda l Europe . Ever y on e o f th e grea t type s o f human society, dow n t o that of the Esquimaux or Patagonians, is still extant. He concludes : ... I n so far as the economical conditio n of nations turns upon the state of physical knowledge , i t i s a subjec t fo r th e physica l sciences , an d th e art s founded o n them . Bu t i n s o fa r a s th e cause s ar e mora l o r psychological , dependent o n institution s and socia l relations , o r o n th e principles o f human nature, thei r investigatio n belong s no t t o physical , bu t t o mora l an d socia l science, an d i s the objec t o f wha t i s called Politica l Economy . Mill's secon d propositio n abou t the stages o f growth concerne d th e linkage o f scienc e to th e economy . H e too k th e genera l vie w tha t th e "cultivatio n o f speculativ e knowl edge" wa s "on e o f th e mos t usefu l o f al l employments " an d deserve d th e financia l support of the state. 105 And, as the preceding quotation suggests, he saw clearly the link between "th e economica l condition of nations" an d "th e physica l sciences, an d the arts founded o n them." But, in a self-denying ordinanc e costly to economics, he treated these matters a s exogenous 106: a s variable s "Politica l Econom y does no t investigate , but as sumes. . . . " O n the other hand, without investigatin g their origins, Mil l wa s quite clear

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that a fundamenta l turnin g poin t ha d occurre d i n Britai n wit h "th e grea t mechanica l inventions of Watt, Arkwright , and their contemporaries. . . ." 107 Mil l marks the introduction of these technologies a s inaugurating a period whe n the forces contending against diminishing returns in agriculture gained ground , the real wage s of labor hel d thei r ow n and, i n Mill' s view , woul d hav e increase d i f there ha d no t been s o large a n increas e i n population. I n my vocabulary, Mill correctly identifie d the timing and proximate cause of the British takeoff; and, so far as I can make out, he was the first o f the major economist s to do so . The thir d stran d i n Mill's expositio n o f th e stage s o f growt h i s the mos t familiar : h' s distinctive vie w o f th e stationar y state . I t emerge s fro m Boo k IV , "Influenc e o f th e Progress o f Society o n Production and Distribution" certainl y the most innovative feature of Mill' s Principles, explicitl y presented a s "addin g a theory of motion to our theory of equilibrium—the Dynamic s o f political economy to the Static," whic h wer e taken up in Books I , II , an d III.108 He begins with an evocation of the potentialities of science and invention that, in itself, suggests endless progres s rathe r than a stationary state: 109 "[I] t i s impossible not to look forward t o a vas t multiplicatio n an d lon g successio n o f contrivance s fo r economizin g labour and increasing its produce; and to an ever wider diffusion of the use and benefit of those contrivances. " Despit e thi s optimisti c visio n of science, invention , and labor pro ductivity, Mil l di d no t quit e conceiv e o f inventio n a s a flow . I n a critica l passag e h e concludes:110 "Invention s an d discoveries , too , occu r onl y occasionally , whil e th e in crease o f populatio n an d capital ar e continuous agencies." Thi s assessmen t i s central t o his envisionin g a n ultimate stationar y state . But anothe r positiv e facto r i s a t work . Reinforcin g the improvement s i n technolog y would be , i n Mill' s view , a progressiv e improvemen t i n "th e securit y o f perso n an d prosperity" tha t h e regarded a s fundamental t o "industr y an d frugality." 111 He the n ring s th e change s o n fiv e case s i n whic h thre e variable s i n th e basi c growt h equation are assumed t o behave i n different ways : the rate of population increase; the rate of increas e i n the capital stock ; an d "th e art s of production." 112 At considerable ris k o f oversimplifying a rathe r remarkabl e exercis e in dynami c analysis , Mill' s case s can be summarized a s follows: Case 1 . Population increases; capital an d th e arts o f production stationary. Rea l wages wil l declin e due to diminishin g returns to agricultur e as population increases ; an initial tendency of profits to rise, due to cheaper uni t labor costs, may be countered in time by a rise i n the tota l wag e bil l a s more labo r i s drawn to agriculture to mee t rising foo d requirements unde r conditions of diminishing returns. Rents rise. Mil l implies that the fall in rea l wage s is met by a reduction in workers ' "indulgences " or "habitua l standard " rather than the dire consequences o f a sub-subsistence wage. Therefore, this case does not set in motio n a population decrease . Case 2 . Population stationary; capital increasing; arts of production stationary. Rea l wages rise. I n consequence, th e demand for food increases unde r conditions o f diminishing returns . Rent s rise , bu t profit s fall: 113 "Wha t th e Capitalist s lose , abov e wha t the labourers gain , is partly transferred to the landlord, an d partly swallowed up in the cost of growing foo d o n wors e land o r by a less productiv e process." Case 3 . Population an d capital increasing equally, th e arts o f production stationary. Real wage s remai n constant in th e fac e o f a ris e i n bot h agricultura l price s an d mone y wages. Th e profi t rate wil l fall , althoug h gros s profits ma y rise . Onc e again , rents rise . Case 4. Population an d capital stationary; th e arts of production progress. Mil l elab-

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orates thi s cas e i n thre e forms : a sudde n increas e i n agricultura l productivity; a gradua l increase i n agricultura l productivity ; an d a n increas e i n the productivity of manufactures consumed b y workers . A sudde n improvemen t i n agricultura l productivity woul d rais e real wages , lowe r rents , and leave profits unchanged. This assumes the rise in real wages took the form of relatively constant money wages and a falling price trend for wage goods, as indee d ha d happene d i n Britain between 181 2 an d 1848 . Th e longe r ru n outloo k wa s seen t o depend o n whether the rise in real wage s elevated th e "habitua l standard" of the workers' consumptio n o r induced a n increase o f population at the old, existing standard. In the latter case, mone y wages would fall a s the labor supply increased, th e rate of profit would rise. I n the former case—wher e th e intent to maintain a higher standard induce d a prudent restrain t o n famil y size—labo r rendere d itsel f th e scarc e factor , preservin g th e higher rea l wag e a t th e expens e o f rent s an d profits. Case 5 : Population, capital, an d th e arts o f production increase together. Here , Mil l argues, onl y rent would increase: 114 "Ther e is a greater aggregat e production , a greate r produce divide d among the labourers, and a larger gross profit; but the wages being shared among a large r population , an d th e profit s sprea d ove r a large r capital , n o laboure r i s better off , no r doe s an y capitalis t deriv e fro m th e sam e amoun t o f capita l a large r income." He the n goe s o n to conclud e hi s highly Ricardian exercise: 115 The resul t o f thi s lon g investigatio n may b e summe d u p a s follows . Th e economical progres s o f a societ y constitute d o f landlords , capitalists , an d labourers, tend s to the progressive enrichmen t of the landlord class; while the cost of the labourer's subsistenc e tends on the whole to increase, an d profits to fall. Agricultura l improvement s ar e a counteractin g forc e t o th e tw o las t effects; bu t th e first , thoug h a cas e i s conceivabl e i n whic h i t woul d b e temporarily checked , i s ultimatel y i n a hig h degre e promote d b y thos e im provements; an d th e increas e o f populatio n tends to transfe r al l th e benefit s derived fro m agricultura l improvement t o th e landlord s alone. As note d earlier , Mil l proceed s t o argu e that , wit h a fixe d "fiel d o f employment, " profits mus t ten d towar d th e minimu m rate require d t o induc e saving s an d productiv e investment, takin g risk int o account as well as the time discount of future agains t presen t income. Th e descen t t o th e minimu m ca n b e postpone d b y th e destructiv e effec t o f "commercial revulsions," improvement s i n production, th e impor t o f cheaper foo d an d capital goods , an d capita l exports . With thes e analyti c tools i n hand, Mill, lik e hi s four predecessors , confront s the limits to growth an d the stationary state . Here , mos t self-consciously, he breaks wit h "politica l economists o f the old school'':'16 they regarded the stationary state as an "unpleasin g an d discouraging prospect." Mill, i n the quotation noted earlie r (pp . 101-102) , takes a more cheerful view . And , i n th e firs t editio n o f Th e Principles, h e adde d thi s passage , with drawn fro m late r edition s i n th e wak e o f th e North' s Civi l War performanc e h e greatl y respected:117 The norther n an d middl e states o f America ar e a specimen o f thi s stage of civilization i n ver y favourabl e circumstances; having, apparently, go t ri d o f all social injustice s an d inequalitie s that affect person s of Caucasian rac e an d of the mal e sex, whil e the proportion of population to capital and land is such as to ensure abundance to ever y able-bodied member of the communit y wh o

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does no t forfei t i t by misconduct . They have th e si x points o f Chartism, and they have no poverty: and all that these advantages do for them is that the life of th e whol e o f on e se x i s devote d t o dollar-hunting , and o f th e othe r t o breeding dollar-hunters . But Mill' s positiv e acceptanc e o f the virtues of the stationary state did not stem simply from a revulsion against materialism. I t was rooted technicall y in the possibilities opene d up in general b y the elevation o f the intellectual and social positio n of the working class, and i n particular, b y birt h control. J . R . Hick s pu t the matte r succinctly: 118 If the populatio n ca n onc e be controlled, ther e i s no need fo r the econom y to go on expanding, in order tha t wages should be above the subsistence level. Instead o f lan d bein g th e mai n fixe d factor , s o tha t (a s i n th e Ricardia n stationary state ) surplu s production i s swallowe d up i n rent, i t i s labour that becomes th e main fixed factor , s o that surplus production can be made to go , at leas t i n large measure, t o wages. This i s an altogether different , an d much more agreeable , picture . Th e Stationar y Stat e i s n o longe r a horror . I t be comes a n objectiv e a t which t o aim . Clearly, Mil l wa s prematur e i n assertin g thi s proposition i n th e mid-nineteent h cen tury. 119 Al l classes i n the "mos t advanced" as well as "backward " countries still had a great dea l mor e to ask of the economic syste m as the flow o f new technologies expande d its potentialities fo r good s an d services , includin g a remarkable lengthenin g o f life . Bu t Mill, building explicitly on "th e juste r and more hopeful anticipations " o f Malthus's late r editions, comes close r to foreshadowing the demographic transition of the second hal f of the nineteenth an d twentieth centuries than any of his predecessors o r contemporaries. H e anticipates, a s well , strand s o f though t an d aspiratio n tha t bega n t o appea r i n th e third quarter o f th e twentiet h centur y a s a margi n o f th e populatio n i n th e mos t affluen t countries appeared to reject furthe r strivin g for a higher real income per capita, define d in conventional materia l terms . Mil l was the firs t majo r environmentalist. Bu t i t should b e underlined tha t hi s stationary stat e implie s onl y a fixed population : technological chang e could procee d elevatin g real incom e pe r capita. 120

Noneconomic Factors As Hont an d Ignatieff have dramatized afresh, The Wealth of Nations is , i n part, a n effor t to reconcile a paradox enunciate d by Adam Smith on the second pag e in his book: how to explain the fact that in primitive egalitarian societies, wher e all work, all are poor whereas in advance d societies , marke d b y grea t difference s i n wealt h an d income , an d muc h idleness, th e poores t worke r enjoy s a standar d o f lif e beyon d th e reac h o f a savag e ruler.121 Fro m Hum e and Adam Smith forward political econom y ha s acknowledged th e inequity—for some , th e immorality—o f thos e livin g in affluen t idlenes s o n th e basis of inherited wealt h o r enjoyin g th e risin g rent s induce d b y a n inelasti c deman d fo r th e product o f a facto r o f productio n subjec t t o diminishin g returns o r otherwis e rendere d increasingly scarce. I n general, th e classical politica l economists rathe r disliked the money-grubbing capitalist an d were (perhaps excepting Malthus) often outrage d at the profli gate rent-collecting landlord. The economists ' advocacy of rigorous competition, including Free Trade, wa s designed, i n part, to discipline the innate avarice of entrepreneur and landowner an d forc e them, agains t their natural bent, to serv e th e public interest.

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This ambivalenc e i n defens e o f a syste m o f privat e property , inherite d wealth , an d competitive capitalis m reache d a n acute stag e wit h Mill . On th e on e hand , hi s overridin g concern wa s wit h th e maximu m feasible freedo m o f thought and action for a society o f diverse unique individuals. This is the central theme of On Liberty: 122 The object of this Essay is to assert one very simple principle . . . that the sole en d fo r whic h mankin d ar e warranted , individuall y o r collectively , i n interfering wit h th e libert y o f actio n o f an y o f thei r number , i s self-protec tion. . . . Hi s ow n good , eithe r physica l o r moral , i s no t a sufficien t war rant. .. . I n the part whic h merely concern s himself, his independence is , of right, absolute . Ove r himself, over his own body an d mind, the individual is sovereign. This commitmen t t o the libertaria n cree d run s through Mill's Principles a s well . But, a s he full y acknowledged , th e reconciliation o f that need wit h the imperative s o f organized society—assurin g tha t one person's libert y did not harm another—was ofte n a complex calculus. Th e final two chapters of the Principles ar e devoted to sorting out the interferences o f governmen t grounde d i n erroneou s theorie s a s oppose d t o thos e Mil l judged t o b e legitimate. 123 But , a s i n O n Liberty, laissez-faire wa s "th e genera l rule " against which exceptions shoul d be cautiously and sceptically measured . An d in this spirit he sanctions : • Case s i n whic h th e consume r i s a n incompeten t judg e o f th e commodit y an d o f which educatio n i s the majo r example cited . • Case s o f person s exercisin g powe r ove r others , notabl y th e protectio n o f youn g persons an d th e insane . « Case s o f contracts i n perpetuity i n which an individual is not in a position t o judge his interes t a t som e futur e an d distan t time . • Case s o f delegated managemen t where public surveillanc e and limited powers ove r joint-stock companie s ar e judge d legitimat e t o assur e tha t inherentl y monopol y powers ar e no t abused . Mil l judged publi c ownershi p an d operatio n o f economi c units t o be "jobbing , careless , an d ineffective"; bu t he thought private joint-stock companies littl e better , i f better a t all. • Case s wher e public intervention i s required t o achieve a broadly agree d objective ; for example , th e reductio n o f hour s o f wor k which , i f no t accomplishe d b y law , could b e disrupte d b y a minority o f workers o r factory owners. Mil l als o cite s th e control ove r th e dispositio n o f lan d i n land-rich , population-poor colonia l areas . • Poo r laws, wher e i t is necessary t o reconcile th e need t o aid the destitute wit h the need t o avoi d generatin g habitua l reliance on suc h aid . • Colonization , wher e i t is necessar y t o reconcil e th e legitimat e privat e interest s of those plantin g o r developing colonie s wit h " a deliberat e regar d t o th e permanen t welfare o f th e nation s afterwards t o aris e fro m thes e smal l beginnings." 124 • Suppor t fo r enterprises, installations , or institutions clearly in the public interest but not capable o f generating adequate private support; e.g., voyage s of discovery, ligh t houses, scientifi c researc h in universities, etc. An d simila r public activitie s in areas where privat e agencie s "woul d b e mor e suitable " bu t wher e the societ y ha s no t developed th e experienc e an d habit s o f privat e cooperativ e action ; e.g. , roads , docks, harbors , canals , etc.

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The questio n the n arises : Ho w di d Mill , roote d i n th e individualis t utilitarian creed, believing that each individua l was the best judge of his or her own interest, carefully and reluctantly rationin g out exceptions t o laissez-faire, en d u p a qualified socialist of sorts? He begins his discussion of socialism with precisely th e issue Adam Smith confronts at the beginning of The Wealth of Nations: th e uneven distribution of wealth.125 He notes the complex an d violen t histor y tha t yielde d th e distributio n o f propert y i n contemporar y Europe an d th e legitimac y o f questionin g the appropriatenes s o f tha t distribution: 126 In a n ag e lik e th e present , whe n a genera l reconsideratio n o f al l firs t principles i s felt t o be inevitable, and when more than at any former period of history the suffering portion s of the community have a voice in the discussion, it was impossible but that ideas of this nature should spread far and wide. Th e late revolution s i n Europe [i n 1848 ] hav e throw n up a great amoun t of spec ulation o f thi s character, an d a n unusual share of attentio n ha s consequentl y been draw n to the various forms whic h these idea s hav e assumed: no r is this attention likel y to diminish, but o n the contrary, t o increase mor e an d more . In hi s typically fair-minded way, Mill turns then to the case for socialis m (or communism, whic h he uses interchangeably), an d to the arguments conventionally made against it. H e concludes : 1. Puttin g degrees o f efficiency aside, productio n wit h collective (o r state) ownershi p of propert y i s practical . 2. A s fo r evasio n o f work , th e proble m o f generatin g maximu m effor t wit h fixe d salaries i s real; but i t exists as well in private enterprise systems . His net judgment is: 127 If communistic labour might be less rigorous than that of a peasant proprietor , or a workma n labourin g o n hi s ow n account , i t woul d probabl y b e mor e energetic tha n that o f a labourer for hire, wh o has no personal interes t in the matter a t all . . . . Undoubtedly , a s a genera l rule , remuneratio n b y fixe d salaries doe s no t i n any class o f functionaries produce the maximu m of zeal ; and thi s is as much a s can be reasonably allege d against communistic labour . 3. H e acknowledge s a s real th e problem o f allocating labo r equitabl y to the task s fo r which it is best fitted; but asserts that any system that aimed at equality would be superio r to "th e inequalit y and injustice " o f the prevailing system . 4. I n general, th e balance shee t tip s toward s the idea of communism when set against current reality: 128 If, therefore , th e choice wer e to be made between Communis m with all its chances, an d the present stat e of society wit h all its sufferings an d injustices; if th e institutio n o f privat e propert y necessaril y carrie d wit h i t a s a conse quence, tha t th e produc e o f labou r shoul d b e apportione d a s we no w se e it , almost i n inverse rati o t o the labour—the larges t portions t o those wh o have never worke d a t all, the next largest t o those whos e wor k is almost nominal , and s o in a descending scale , th e remuneration dwindlin g as the work grows harder and mor e disagreeable , until th e most fatiguing an d exhausting bodily labour cannot count with certaint y on being able to earn even the necessaries of life; if this or Communism were the alternative, all the difficulties, grea t or small, o f Communis m would be bu t dus t in the balance.

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5. But that , Mil l argues , is not the appropriat e comparison. 129 ". . . to mak e the comparison applicable , w e mus t compar e Communis m a t it s best , wit h th e regim e o f individual property, not as it is, but as it might be made." He then evokes the possibilities open to a capitalist society t o render its distribution of income and wealth more equitable. It i s here tha t we com e bac k to th e autho r of O n Liberty: 130 If a conjecture may b e hazarded, th e decision wil l probably depend mainly on on e consideration , viz. whic h of th e tw o system s i s consisten t wit h th e greatest amoun t of human liberty and spontaneity. After th e means of subsistence ar e assured, th e next in strength of the personal wants of human beings is liberty ; an d (unlik e th e physica l wants , whic h a s civilizatio n advance s become more moderat e an d more amenabl e t o control) i t increases instea d of diminishing i n intensity , as the intelligenc e an d the mora l facultie s are mor e developed. Returning unreconstructe d t o the spiri t of Ada m Smith , he adds , late r on , a vigorou s defense o f competition: 131 ... I utterly dissent fro m th e most conspicuous and vehement part of their [socialists'] teaching , thei r declamations against competition. . . . They forget tha t wherever competitio n i s not, monopoly is ; and that monopoly, i n all its forms, is that taxation of the industrious for the support of indolence, i f not of plunder. . . . Instead of looking upon competition as the baneful and antisocial principl e whic h i t i s hel d t o b e b y th e generalit y o f Socialists , I con ceive that, even in the present stat e of society an d industry, every restrictio n of i t i s a n evil , an d ever y extensio n o f it , eve n i f fo r th e tim e injuriously affecting som e clas s o f labourers , i s always an ultimat e good. One can understand that some readers have found Mill on this and other issues a kind of Hamlet o f th e socia l sciences . Bu t the fac t i s that he defined wit h remarkable clarit y th e dilemmas wit h which the political proces s of the presently advance d industria l countries have wrestle d ove r th e past 14 0 years—and wit h which they continu e to wrestle . Socialist countrie s have , indeed , demonstrate d tha t they can operate a modern econo my; bu t they hav e paid a heavy price in "jobbing , careless , an d ineffective" enterprise s and fo r th e lac k o f stron g individua l incentives. And som e hav e even turned to forms of competition t o stimulat e sluggis h economie s overburdene d wit h heavy , self-servin g bureaucracies. Politically democrati c countrie s have, indeed , sough t to temper th e inequity of wealth and incom e distributio n a s decree d b y histor y throug h devices o f taxatio n an d a wid e range o f measure s t o gran t a better approximatio n of equalit y of opportunit y a s wel l a s welfare cushion s agains t th e vicissitude s of moder n industria l life. And, although the ultimate verdict of history has not yet been rendered, i t is altogether possible—even likely—tha t th e choic e betwee n communis m an d democrac y ma y wel l hinge o n "whic h o f th e tw o system s i s consisten t wit h th e greates t amoun t o f huma n liberty an d spontaneity. " Looking to the past as well as the future , i t is clear that Mill foreshadowed a great deal not merely in the ideolog y of social democracy but of virtually universal consensus in the Atlantic worl d o f th e lat e nineteent h an d twentiet h centuries ; an d h e identifie d wit h considerable precision th e increasingly intense internal contradiction s that have changed

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and are changing the character o f socialist regimes as the twentieth century moves towar d its close .

Karl Marx (1818-1883) In a study of this kind one i s tempted t o shear awa y the noneconomic aspect s o f Marx's doctrine (an d th e enormou s bod y o f polemica l argumen t tha t surround s it ) an d focu s narrowly o n hi s theor y o f economi c growth . I n tha t spiri t Joa n Robinso n onc e ob served:132 " . . . ther e is no need to turn him [Marx], a s many seek to do, into an inspired prophet. H e regarded himsel f a s a serious thinker, and it is as a serious thinker that I have endeavored t o trea t him . . . ."I n th e end, however, virtuall y all commentators o n Marx (including Robinson) ar e driven t o deal wit h him on a broader basis . Th e reason i s quite technical: Marx' s economic s i n general an d his theory o f economic growt h i n particular are the engine that drives his theory of history to its appointed conclusion; and, as he was quite aware , hi s theory o f history wa s designed a s a revolutionary weapon. Marx' s ow n identification o f hi s ke y innovation s i s quit e accurat e i f on e suspend s judgment o n th e word prove: 133 ... n o credit is due to me for discovering the existence o f classes i n modern society o r th e struggl e betwee n them . Lon g befor e m e bourgeoi s historian s had describe d th e historical developmen t o f this class struggl e an d bourgeoi s economists th e economic anatom y of the classes. Wha t I did that was new was to prove : 1 . tha t th e existence o f classes i s onl y boun d u p wit h particular historical phases i n the development o f production, 2 . tha t the class struggl e necessarily lead s to the dictatorship o f the proletariat, 3 . that this dictatorship itself onl y constitute s th e transitio n t o th e abolition o f al l classes an d t o a classless society. The fac t tha t Mar x wa s a genera l theoris t o f society , advocate d it s transformatio n i n quite specifi c directions , an d regarde d hi s writin g a s a n operationa l instrumen t fo r tha t purpose doe s not , i n itself, distinguis h hi m fro m th e fiv e othe r growt h theorist s thus fa r considered. Wit h th e partia l exceptio n o f Ricardo , al l wer e genera l socia l scientist s conducting their analyses from mor e or less explicit philosophical and value premises; and all, includin g Ricardo, sough t to bring about quite radical changes in policies, institutions , and i n th e balanc e o f politica l power . What distinguishe s Mar x fro m th e othe r classica l growt h economist s i s th e Hegelia n philosophic framewor k o n whic h h e buil t an d th e vie w o f th e individua l i n relatio n t o society i t incorporated . Th e lin e fro m Hum e t o J . S . Mil l wa s roote d i n a vie w tha t accorded th e uniquenes s of th e individua l a high priority in the organizatio n o f commu nities, despite th e inescapable disciplines the latter required. Indeed , the sense of community was traced bac k by Hume and Smith to the quality of "sympathy " a s among unique individuals, no t to the imperatives of an anonymous "state" or an anonymous "class. " In tracing the stages throug h which societies an d economies ha d passed and in looking to the future , th e progressive widening of political and social freedom fo r the individual was a centra l touchston e o f historica l progress an d a fundamenta l rational e for enlarging and diffusing th e wealt h of nations . Nothin g better characterize s the visio n o f th e classica l economists tha n Mill' s judgment that th e ultimat e decision a s betwee n capitalis m and

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socialism woul d depen d o n whic h "i s consisten t wit h th e greates t amoun t o f huma n liberty an d spontaneity. " Fo r Hege l an d Mar x histor y was a mor e abstrac t proces s i n which large force s endlessly contended, and the individual receded from th e center of the stage, findin g "freedom " i n actin g i n accordanc e wit h th e law s o f history . I n Hegel' s case, the clash was between nation states each embodying a distinct culture or idea. Out of the fermen t o f th e critica l phas e o f Marx' s intellectua l life—i n Pari s an d Brussel s i n 1843-1847, between the ages of 25 and 29—the following alternativ e emerged tha t Marx himself described , lookin g bac k fro m 1859: 134 The genera l resul t a t whic h I arrive d an d which , onc e won , serve d a s a guiding threa d fo r m y studies , ca n b e briefl y formulate d as follows : I n th e social production o f their life, me n enter into definite relations that are indis pensable an d independen t of thei r will, relations of productio n whic h corre spond t o a definite stage o f developmen t o f their material productiv e forces . The su m total o f these relations of production constitutes the economic struc ture o f society , th e rea l foundation , o n whic h rise s a lega l an d politica l superstructure an d t o whic h correspon d definit e form s o f socia l con sciousness. Th e mod e o f productio n o f materia l lif e condition s th e social , political an d intellectua l life process in general. I t is not th e consciousness of men tha t determine s thei r being, but , o n th e contrary, their social bein g that determines thei r consciousness. A t a certain stage o f thei r development, th e material productive force s o f societ y com e i n conflict with the existin g rela tions o f production, or—wha t i s but a legal expressio n fo r the same thing— with th e propert y relation s withi n whic h they hav e bee n a t wor k hitherto . From forms o f development o f the productive force s thes e relation s turn into their fetters. Then begins a n epoch o f social revolution. . . . No social orde r ever perishe s befor e al l th e productiv e force s fo r whic h ther e i s roo m i n i t have developed; an d new, highe r relations of production never appea r befor e the material conditions of their existence have matured in the womb of the old society itself . .. . I n broa d outline s Asiatic , ancient , feudal , an d moder n bourgeois mode s of production can be designated as progressive epoch s in the economic formatio n of society . Th e bourgeois relations of production are the last antagonistic form of the social process of production—antagonistic not in the sens e o f individua l antagonism, but o f one arisin g fro m th e socia l condi tions of life of the individuals; at the same time the productive forces develop ing i n th e wom b o f bourgeoi s societ y creat e th e materia l conditions for th e solution of tha t antagonism. This socia l formatio n brings, therefore, th e pre history o f huma n society t o a close . Thus, Hegel' s thesis , antithesis , an d synthesi s become dynami c sequence s i n which the imperatives o f changing technology an d modes o f production generate conflict s with the existing organizatio n an d institution s of societ y yieldin g revolutionary change. An d th e sequence tha t obsesse d Mar x wa s th e overthro w o f capitalis m b y th e proletariat ; th e installation of socialism ; and the ultimat e drea m of communism. This marriag e o f Hegelia n philosophy and historical materialism when buttressed with Marx's theory of growth under capitalism constituted "scientific socialism." Marx scorned socialist s who came to their convictions by assessing life unde r capitalism as inequitable or immoral. He insisted that the correct view was that the destruction of capitalism was historically inevitable ; tha t i t mus t an d woul d take place b y force; 13S and , besides , th e

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canons o f equity an d morality applied b y suc h deviant socialists were , themselves , a byproduct o f bourgeoi s capitalism . Here w e com e t o on e o f severa l deepl y roote d paradoxe s i n Marx' s doctrine . Hi s expositions—notably thos e fo r widesprea d publi c consumption , bu t hi s mor e technica l writings a s well—ar e sho t throug h wit h languag e designed t o evok e outrag e a t rea l o r alleged violation s o f bourgeois concept s o f equity and morality; and, no doubt, i n his day and beyond , i t was th e convergenc e o f moral outrag e an d the alleged inevitabilit y of th e historical outcom e tha t gav e hi s doctrin e it s appeal. I n short, Mar x trie d t o have i t bot h ways; and , t o a degree , hi s postur e a s th e morall y outrage d scientis t o f societ y wa s successful. In term s o f stage s o f growt h th e blood y sequenc e Mar x envisaged—includin g th e overthrow o f capitalis m b y forc e an d a dictatorshi p o f th e ne w rulin g class , th e pro letariat—dissolves, i n a romanti c Hegelia n synthesis , int o true communism. 136 When, i n the cours e o f development , clas s distinction s have disappeared , and al l production ha s been concentrate d i n the hands of a vast association of the whol e nation , th e publi c powe r wil l los e it s political character . Politica l power, properl y s o called , i s merel y th e organise d powe r o f on e clas s fo r oppressing another . I f the proletariat durin g its contest with the bourgeoisie i s compelled, by th e forc e of circumstances, t o organise itsel f as a class, if , b y means o f a revolution, i t makes itsel f th e rulin g class, and , a s such , sweep s away by forc e th e old condition s o f production, then it will, along with these conditions, hav e swep t away th e condition s fo r the existenc e of clas s antag onisms an d o f classe s generally , an d wil l thereb y hav e abolishe d it s ow n supremacy a s a class . In plac e o f th e ol d bourgeoi s society , wit h it s classe s an d clas s antag onisms, w e shal l hav e a n association, i n which the fre e developmen t of each is th e conditio n fo r th e fre e developmen t o f all . In a higher phas e o f communis t society, afte r th e enslavin g subordination of th e individua l t o th e divisio n o f labour , an d therewit h als o th e antithesi s between menta l an d physica l labour , ha s vanished ; after labour ha s becom e not only a means of life but life's prime want; after the productive forces have also increase d wit h the all-roun d developmen t o f th e individual , and al l th e springs o f cooperative wealt h flow mor e abundantly—onl y then can the nar row horizo n o f bourgeoi s righ t be crossed i n its entirety and societ y inscrib e on it s banner : Fro m eac h accordin g t o hi s ability , t o eac h accordin g t o hi s needs! In th e end, Marx' s imag e o f human beings "wise , creative , an d free," 137 release d fro m scarcity an d the brutalizing imperatives of the class struggle, bear s a family relationship , at least, t o J. S . Mill' s Stationar y State . Bot h were deeply rooted i n the humane values of Western cultur e an d religion. Mill , however , understoo d wel l tha t in the lif e o f societie s the results achieved ar e not independent of the means use d t o achieve them . On e deriva tion o f Mar x fro m Hege l wa s a separatio n o f end s an d means. There ar e othe r paradoxe s an d contradiction s embedded i n Marx' s doctrine ; and , ac cepting Hume' s dictu m abou t th e inheren t complexity o f huma n character , thi s i s n o surprise. Lik e Mill—an d all o f us—Mar x was a househol d of personalities . I n part , h e was a mid-nineteenth century German bourgeois, taking his family o n Sunday picnics and

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reading poetry fo r his own and their pleasure, deeply suspicious and critical of bohemians. In part, h e was a well-trained scholar, wit h a gift fo r creative synthesis, but also driven to pursue erudit e details . H e was quite easily diverted fro m hi s main task. Fo r example, h e turned t o learning Russia n and Turkish when he should have been completing Volume s II and III of Capital; l38 bu t he was in addition a vivid and sometimes ruthless simplifier and popularizer. Perhap s abov e all , h e was , i n hi s father' s phrase , drive n b y " a demoni c egoism."'139 This dimension o f his character suffuse s a good man y aspects o f his style: a determination t o leav e hi s mar k o n history , whic h carried hi m throug h years o f povert y and deprivatio n fo r himself an d his long-sufferin g family; a compulsion t o demand tota l loyalty o r t o denounc e thos e whos e view s deviate d fro m hi s own ; a n uncontrollabl e impulse t o us e vulga r an d destructiv e languag e in intellectua l an d politica l controversy . I hav e lon g been skeptica l o f psychobiography an d will , therefore, not e bu t no t try t o explain a curious characteristi c o f Marx . Ou t o f a childhood an d youth without apparen t frustration o r denial he emerges a s a profoundly lonely , self-isolate d ma n driven, i n part, by a stran d of violence, hatred , an d aggression. I n his sensitive essay o n Marx's lif e an d personality, Isaia h Berlin evokes his early days: a kindly, supportive if sometimes anxiou s father; succes s at school; a neighbor an d family friend , Freiher r Ludwi g von Westphalen , a distinguishe d governmen t officia l wh o befriende d the youn g scholar an d consente d t o the marriag e o f Mar x t o hi s daughte r Jenny. Berli n concludes: 140 Speaking o f Westphale n i n late r lif e Marx , whos e judgements o f me n ar e not note d fo r thei r generosity , gre w almos t sentimental . Westphale n ha d humanized an d strengthened tha t belief i n himself and his own powers which was at all periods Marx's singl e most outstanding characteristic. H e is one of the rar e revolutionarie s wh o wer e neithe r thwarte d no r persecute d i n thei r early life . Consequently , i n spit e o f hi s abnorma l sensitiveness , hi s amourpropre, hi s vanity , hi s aggressivenes s an d hi s arrogance , i t i s a singularly unbroken, positive an d self-confident figure that faces us during forty years of illness, povert y an d unceasin g warfare. We shal l com e late r (pp . 148-149 ) t o a vie w o f Mar x a s a less self-confident , mor e consciously frustrate d figure; but Berlin does capture one of the several profoun d puzzlements i n Marx's personalit y an d performance . In turning now to Marx's theor y of growth—the engin e that would cause capitalism t o self-destruct an d create th e setting for socialism an d then communism—two points should be noted . Firs t ther e wa s a quit e particula r respec t i n whic h Mar x wa s Mill' s pola r opposite. Mill , i n hi s ow n phrase , wa s read y an d eage r "t o lear n fro m every body, . . . adjustin g the old and the new to one another" Mar x als o read "everybody" ; but, onc e hi s system crystallize d i n the 1840s , h e read only to derive data and concepts t o support and elaborate that system. Everythin g else was set aside o r explicitly denounced . To his daughter Laur a o n April 11 , 1868 , h e wrote: 141 " I a m a machine, condemne d t o devour them [books ] an d then, throw them, in a changed form, on a dunghill of history." This mean s that despite th e special vocabular y manufacture d by Marx we are dealing with concepts quit e familia r an d ver y muc h i n th e classica l tradition . The y are , however , employed i n a highl y selectiv e an d exploitativ e wa y fo r a predetermined purpose . Marx and the study of Marx pose a second problem anyon e now writing about his work inescapably confronts . Fro m on e perspectiv e h e constitute s a classi c exampl e o f th e Confucius—Bagehot—Kcynes-Schumpeter proposition : his "vision " wa s fully forme d by the ag e o f 3 0 whe n the Communist Manifesto wa s published ; an d wit h almos t incredible

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single-mindness h e devote d th e res t o f hi s lif e t o provid e i t with a scientific foundation and, until discouraged b y the failure of the First International, to bring it politically to life. The simple , brute fact i s that he found i t impossible, despit e prodigious efforts, t o build a scientific foundatio n consistent wit h th e argumen t o f th e Manifesto . H e experimente d with variou s line s o f approach ; but , someho w subliminall y aware that things didn't add up, h e never finished the task. Volume s II and III of Capital were laboriously constructed by Engel s fro m Marx' s notes . Potentiall y significan t ideas ar e develope d bu t remai n unlinked or unreconciled wit h others t o which they inherently relate. Afte r a century and more o f adulator y an d critica l exegesis , ther e remain s a grea t dea l o f obscurit y an d contradiction i n Marx's writing . Critics anxiou s to fre e Mar x of charges of crude under consumptionism ca n fin d attack s o n tha t doctrin e writte n b y him ; bu t ther e ar e als o distinctly underconsumptionist passage s i n his writing. Similarly, without question Marx allowed fo r th e possibilit y of a rise i n the real wage s o f labor ; but elsewhere , wit h great eloquence, h e portrays th e balance o f power between capitalis t and worker as so skewed in favor of the former as to make the outcome appear virtually a literal subsistence wage— although tha t i s no t Marx' s doctrine . The n ther e i s th e "youthfu l Marx " ploy . Som e writers argue that the ardent young ma n who mainly authored the Communist Manifesto should not be confused with the mature scholar of Capital and other writings. But his later work is still suffuse d wit h his youthfu l visio n as well as with contradictions and passages of passionate , sometime s violen t prose. There are , i n fact, time s whe n Marx's writin g recalls a n anecdote told to his graduat e seminar at Yale in 1938—193 9 by Professor Alvin Johnson. It concerns Thorstein Veblen. Johnson, a s a graduate student , attended a seminar taught by Veblen , who spok e i n so a low a voic e tha t h e coul d ofte n no t b e understood . Johnso n was deputize d b y hi s col leagues t o confron t Veblen on the matte r an d request politel y tha t he spea k up . Johnso n did so. Veble n listened, looked up, an d said quite clearly: "Johnson , if you wish to create a cult , mumble." 142 But mumbles , distortion s derive d fro m hi s polemical purposes, confusion , an d major errors d o no t alte r th e fac t tha t Mar x wov e fro m th e corpu s o f classica l economic s a powerful an d origina l projectio n o f th e dynamic s of capitalism , profoundl y flawed and incomplete a s it proved t o be. 143

The Basic Growth Equation I shall begin with a terse summary of Marx's initial theory of growth set out according t o the usual headings employed i n our pattern of exposition, wit h minimum attention at this stage t o Marx' s change s o f position , contradictions, an d refinements. 1. Strictl y speaking , Mar x develope d n o theory of population beyond the propositio n that every mod e o f production—and th e society buil t upon it—generates it s own laws of population. Thi s propositio n la y behin d hi s impassione d rejectio n o f Malthusia n doc trines. Bu t Marx does include the notion of a minimum wage that provides subsistence for the worker s an d th e children wh o wil l succeed them . And , like Ricardo, Mar x provide s for a n "historica l an d mora l element " i n th e determinatio n o f th e minimu m wage , reflecting "th e habit s and degree of comfort in which the class of free labourer s has been formed." 144 Bu t Mar x is concerned no t wit h populatio n but wit h th e size , productivity, negotiating leverage , an d remuneratio n of th e workin g force . Al l thes e variable s derive from hi s view of the process o f capital accumulation that decrees a supply curve for labor of, essentially , infinite elasticit y except during the most intense phase of business expan-

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sions. Thu s in his mos t typical formulatio n th e wage rate oscillate s cyclically aroun d the societally define d subsistenc e an d reproductio n minimum , but ther e ar e othe r passages consistent wit h th e hypothesi s that Mar x di d no t rule out a secula r ris e i n th e real wag e rate.145 2. A s o n man y othe r subjects , Mar x sai d a goo d man y things about wages , no t al l consistent. Th e variations in his position ar e suggested a bit later in this analysis (p. 130) . In general , hi s vie w ca n b e state d a s follows : N o rul e govern s wag e rate s excep t th e bargaining powe r o f worke r an d capitalist , evidentl y subjec t t o change . H e wa s quit e aware that wages varie d a s among nationa l economie s an d over tim e within those econo mies.146 O n balance , however , Marx' s portrai t o f th e worke r unde r capitalis m i s on e where bargainin g powe r i s tipped heavil y i n favo r o f th e capitalist' s interest : "antag onistic condition s o f distribution . . . reduce th e consumption of the bulk of society t o a minimum varyin g within more o r less narro w limits. . . . " (following , p. 130) . Thi s is the cas e becaus e th e proces s o f capita l accumulatio n normall y generate s fro m thre e sources a n exces s suppl y o f labor : far m labo r displace d fro m th e land ; handicraf t labo r displaced b y factories ; and , i n a derivatio n fro m Ricard o o n machinery , a progressiv e capital-intensive bia s i n th e investmen t process tha t displace s labo r fro m th e factories . Thus, Marx' s famou s "reserv e arm y o f th e unemployed " tha t no t onl y permitte d th e capitalist to keep real wages at a depressed level but also provided him with a pool of labor to deploy from one sector t o another as the dynamics of growth (including the flow of new technologies) shifted th e locus of profitability. Mar x even rejected Mill' s counsel for labor to increase it s market leverage b y reducing the rate of population increase o n the ostensi ble ground s tha t th e deployin g o f suc h leverag e woul d merely increas e the incentiv e of capitalists t o substitut e machiner y fo r labo r an d thu s enlarg e th e reserv e arm y o f th e unemployed. Mar x wante d to leave the worker no way out except his kind of revolution. 3. Th e proces s o f accumulatio n a s a whol e i s rooted , however , no t simpl y i n th e capitalist's desir e fo r more profits, income, and wealt h but in a kind of satanic version of Hume's judgment that man seeks "action " an d "liveliness. " Psychologica l satisfactio n and social compulsion drive Marx's concept of capitalist accumulation; although the profit motive i n a more conventiona l sens e als o appears . Th e resource s availabl e t o th e com pulsively accumulatin g capitalist fo r investmen t derive fro m "surplu s value" ; tha t is , profits, interest , an d rents—the difference between total revenue and the amount paid out by th e capitalis t i n wages . Followin g certai n usage s i n th e classics , Marx viewe d wag e payments a s th e provisio n o f variabl e (o r working ) capital. H e als o accepte d fro m th e classics an d use d fo r hi s ow n purpose s th e notio n that all valu e derived ultimately fro m labor—a propositio n h e regarded a s a tautology. Constan t (or fixed ) capita l was define d as plant , machinery , an d ra w material s use d i n th e productio n process . Th e "rat e o f exploitation'' o f labor was the proportion o f surplus value to wage payments, which Marx assumed wa s a constant . Th e rat e o f profi t wa s th e proportio n o f surplu s value to bot h variable an d constan t capital. I n a powerful hypothesi s at th e center of capitalism's self destructing engine , Marx asserte d tha t the proportion o f constant to variabl e capital (th e "organic compositio n o f capital" ) woul d ris e wit h the passage o f time . Thus , wit h the rate o f exploitatio n fixe d (th e proportio n o f surplu s valu e t o variabl e capital ) an d th e proportion o f constan t to variabl e capital rising, the rate of profit , b y Marx' s definition, must fall. 147 4. Since , i n Marx' s scheme , accumulatio n is no t sensitiv e t o th e profi t rate , capita l investment continue s despite th e fal l i n th e profi t rate . Thi s produce s tw o result s tha t

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finally lea d th e syste m t o self-destruct : a progressiv e concentratio n o f productio n an d capital i n th e hand s o f a narrowin g circle o f industria l and bankin g monopolists, an d a progressive increas e i n the organic composition of capital. The concentration of labor and its impoverishmen t i n th e fac e o f th e self-emasculate d bu t growin g powers o f capitalis t production generat e finall y th e overthrow o f capitalism by workers painfully educate d b y their experience s t o perform th e task. 5. Lik e Mill , Mar x ha s a goo d dea l t o sa y abou t busines s cycles . Hi s vie w i s no t systematic, an d i t is not linked in a firm an d unambiguous way to his theory of growth. It is, however , connecte d t o three significan t element s i n his argument: the reserve arm y of the unemploye d whos e size (an d labor's wag e rate) fluctuates inversely (positively) with the busines s cycle ; th e fallin g rate o f profit , linke d to th e risin g organic compositio n o f capital; an d the tendency, a s the increas e i n the organic composition o f capital proceeds , for a gap to widen between the enlarging productive power of the system and the workers ' constrained (bu t no t necessaril y static ) capacit y t o consume . Crise s an d depression s brought o n by busines s cycle s playe d a large par t not only in Marx's theoretica l vie w of the mechanics o f capitalism's self-destruction but also in his sporadic role as a revolutionary politica l tactician . 6. Mar x rejected diminishin g returns to agriculture and raw materials production much as h e rejecte d Malthusia n populatio n doctrines. 148 H e foresa w al l productio n a s tech nically subject to increasing returns as the new technologies were applied and the organi c composition o f capital ros e in both industr y and agriculture . Marx had relatively little t o say abou t agricultur e i n th e Communist Manifesto, bu t h e foresa w unde r socialis m "[c]ombination o f agricultur e wit h manufacturin g industries ; gradua l abolitio n o f th e distinction betwee n tow n an d country , by a more equabl e distributio n of the populatio n over th e country." 149 I n dealing wit h agriculture and rent , Marx' s centra l analyti c purpose wa s t o reduc e i f not eliminat e the classic distinctio n between the basi c commodit y and industria l sectors. 7. Althoug h Mar x refer s t o earlie r form s o f societa l organizatio n (e.g. , primitiv e communism an d slave systems), his basic stages are feudalism, capitalism, socialism, and communism. Eac h presocialist stag e gives way to the next as the result of dynamic forces shifting th e balanc e o f powe r amon g contendin g classes . Withi n capitalism ther e wer e countries a t various stage s o f advancement and ripeness fo r revolution. And, as we shal l see, Mar x made some ad hoc observations on India and other underdeveloped countries of his day . Hi s description s o f ho w societie s an d thei r economies woul d actually be orga nized an d operat e unde r communis m were exceedingl y sketchy. 8. Marx' s basi c propositio n relatin g noneconomic factor s t o hi s theor y o f growt h is , evidently, tha t social, political , and cultural life derive s fro m th e technical characteristics of th e economi c syste m a t a give n perio d o f tim e an d th e propert y relationship s i t generates. I n Marx's writing—an d those o f his followers—one find s thi s linkage elabo rated with various degrees of sophistication. And Engels, at least, late in life allowed quite explicitly fo r interactio n betwee n th e economi c bas e an d th e societa l superstructure. 150 But the heart of Marx's charg e agains t capitalism was that it left "n o othe r nexus between man an d man than naked self-interest , tha n callou s 'cas h payment ' "; 151 an d he viewed contemporary Europea n politics , religion, marriage, and othe r socia l institutions as , es sentially, operationa l instrument s of th e capitalis t bourgeoisie. With thi s stylize d map o f Marx' s youthfu l visio n before us, w e tur n t o a somewhat more detaile d review of it s components , as the y wer e subsequentl y elaborated .

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Population and the Working Force There is no Marxist la w of population, but there is an observation draw n fro m hi s genera l doctrine o f historical materialism: 152 "Thi s [Malthus's] i s a law of population peculiar to the capitalis t mod e o f production ; an d i n fac t ever y specia l histori c mod e o f productio n has it s ow n specia l law s o f population , historicall y vali d withi n it s limit s alone . A n abstract la w of population exists for plants and animals only, and only in so far as man has not interfere d wit h them. " O n th e basi s o f thi s relativisti c view , Mar x an d Engel s systematically denounce d Malthu s i n th e mos t extravagan t terms , o f whic h "baboon " was among th e mildest.153 Behind this drumfire of vituperation there appears to have been several quite lucid and understandable objectives. First , t o provide th e economic founda tions for the vision of past, present, an d future incorporate d i n the Communist Manifesto, Marx neede d t o avoid acceptin g an y economic law s that transcended th e stages o f evolution he envisaged. In the world of socialism and then communism he wanted no carryove r from capitalis m o f a la w o f population . H e se t asid e diminishin g return s t o materia l resources fo r th e sam e reason , a concep t Mar x correctl y perceive d wa s fundamenta l t o Malthusian doctrine as originally formulated. Second , the Malthusian vie w clashed headon wit h hi s doctrin e o f th e reserv e arm y o f th e unemploye d generated , i n turn , b y hi s assumption of the rising organic compositio n o f capital. Th e latter assumption was critical to the self-destructing characte r o f capitalism. Malthu s was, therefore , a rather dangerou s competitor and , like competing socialists , ha d to be destroyed. Third , Malthus's examination o f famil y limitatio n in various societies i n the secon d an d subsequen t edition s o f hi s Essay o n Population, hi s increased emphasi s on the possibilities o f raising the real wage s of labor b y prudence an d education, and his increasing post-1815 optimis m about fending off diminishin g returns i n agriculture suggeste d a gradual an d ameliorative pat h fro m th e harshness o f life i n early industrial Britain that challenged a t its core Marx' s visio n of the necessity fo r violent revolutionary change . Engel s suggest s thi s uneasiness in the follow ing passage: 154 . . . even if Malthus were altogether right , it would still be necessary t o carry out thi s reorganizatio n [socialism ! immediately , sinc e onl y thi s reorganiza tion, onl y th e enlightment of the masses whic h it can bring with it , ca n mak e possible that moral restrain t upon the instinct for reproduction whic h Malthus himself puts forward as the easiest an d most effective countermeasure against over-population. What i f capitalis t societie s coul d generat e enlightenmen t leading t o mora l restrain t an d falling birthrates ? In it s ow n wa y Malthus' s mor e matur e vie w o f th e force s determinin g th e rat e o f increase o f population wa s quite as relativistic as Marx's, bu t it was linked to an array of stages an d type s o f societie s muc h mor e diversifie d tha n Marx' s narrowe r categorie s (preceding, p . 69) . I t was , therefore , quit e importan t fo r Marxist s t o presen t Malthu s falsely a s one wh o "presuppose s bourgeoi s condition s as a whole, an d then prove s tha t every par t o f them i s a necessary part—an d therefor e a n 'eterna l law. ' " 155 It should be noted that Marx's view of the population question in Western Europe—like Mill's—was colored b y the experience of relatively cheap food afte r the Napoleonic Wars and th e palpable availability of the vas t resources of the American West afte r th e railway boom o f th e 1850s . 1 d o no t propos e her e t o ente r a t an y lengt h int o th e so-calle d transformatio n prob-

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156

lem; that is , th e problem pose d b y the need to translate Marx's us e of the labor theor y of value and surplus value into terms o f conventional prices, interest , profits, an d rent. I t is no t essential to our purpose; and , to a substantial degree, th e debate ha s been resolve d as between Marxist s an d non-Marxists of our times. Fo r example , William Fellner con cluded:157 "Th e mai n functio n o f th e labour-valu e theor y i n Marx'fs ] wor k i s tha t o f linking a set of hypothese s t o a 'creed ' i n which the judgment is prominent that all nonlabour incom e result s fro m 'exploitation ' an d hence i s objectionable." Joa n Robinson, a more friendl y bu t independen t analys t of Marx, observed: 158 The awkwardnes s o f reckonin g i n term s o f value, whil e commoditie s an d labour-power ar e constantl y changin g i n value, account s fo r muc h o f th e obscurity o f Marx' s exposition , an d non e o f th e importan t idea s whic h h e expresses i n terms of the concept o f value cannot be better expresse d without it. But th e terminolog y whic h Marx employ s i s important because o f it s suggestive power . N o schoo l o f economic s ha s ever use d a perfectly colourles s terminology. Overtone s rin g i n th e min d o f th e reader , eve n i f th e write r believes himsel f t o be coldl y scientific . Robinson the n cites Marshall on interest as a legitimate reward for capitalists' "waiting " (not "abstinence" ) and Pigou on "exploitation " with respect to real wages under monopoly versu s fre e competitio n a s als o mobilizin g the suggestiv e powe r o f language . Paul Sweezy , a sophisticate d orthodo x Marxist , validates , in his own language , Fell ner's an d Robinson' s assessments: 159 It ma y b e urge d tha t th e whol e se t o f problem s concerne d wit h valu e calculation an d th e transformatio n o f value s int o prices i s exces s baggage . The real worl d is one of price calculation; why not deal in price terms from th e outset? A Marxis t ca n safel y conced e somethin g t o thi s point o f view . . . . One might be tempted t o go farther and concede that from th e formal poin t of view it is possible to dispense with value calculation even in the analysis of the behavio r o f the syste m as a whole. Ther e is , however , a weighty reaso n for believin g that thi s would b e a mistaken view . Th e entir e socia l outpu t is the produc t o f human labor. Unde r capitalis t conditions, a part o f this socia l output is appropriated b y that group i n the community which owns the means of production. This is not an ethical judgment, but a method o f describing th e really basi c economi c relatio n between socia l groups . I t finds it s most clear cut theoretical formulatio n in the theory of surplus value. As long as we retain value calculation, there can be no obscuring of the origin and nature of profits as a deductio n fro m th e produc t o f tota l socia l labor . Th e translatio n o f pecuniary categorie s int o socia l categorie s i s greatl y facilitated. Paul Samuelson , dealin g wit h the labo r theor y o f valu e i n strictl y economi c terms , i s less charitable: 160 "Marxolaters , to use [Georg e Bernard ] Shaw's term , shoul d heed th e basic economi c precep t vali d i n al l societies : Cu t you r losses!" If th e transformatio n proble m reduces , i n th e end , t o a matte r o f doctrine , creed , persuasion, propaganda, or social morality , Marx's judgment about and projection of real wages under capitalism is a matter of fundamental importance . The remarkable rise in real wages (a s wel l a socia l services ) fro m th e Napoleoni c War s troug h of , say , 181 2 con-

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stitutes th e greates t technica l and , i n th e end , politica l failur e of Marx' s visio n of cap italism an d it s future . Here ar e th e tw o memorabl e passage s i n th e Communist Manifesto bearin g o n th e prospect fo r rea l wages: 161 Owing t o th e extensiv e us e o f machiner y an d t o divisio n of labour , th e work of the proletarians ha s lost all individual character, an d consequently, all charm fo r th e workman . H e becomes a n appendag e o f the machine , an d i t is only the most simple , most monotonous, and most easily acquired knack, that is required o f him. Hence , th e cos t o f production o f a workman is restricted , almost entirely , t o th e mean s o f subsistenc e tha t h e require s fo r hi s mainte nance, an d for the propagation o f his race. Bu t the price of a commodity, an d therefore als o o f labour , i s equa l t o it s cos t o f production . I n proportion , therefore, a s the repulsiveness of the work increases, the wage decreases. Na y more, i n proportion a s the use of machinery and division of labour increases , in the same proportion th e burden of toil also increases, whethe r by prolonga tion of the working hours, by increase of the work exacted i n a given tim e o r by increase d spee d o f th e machinery , etc . The moder n laboure r . . . instea d o f risin g wit h the progres s o f industry, sinks deepe r an d deepe r belo w th e condition s of existenc e o f hi s ow n class . He becomes a pauper, an d pauperism develop s mor e rapidl y than population and wealth . In Capital itself , despit e it s technical character , ther e ar e passages o f equa l emotiona l intensity tha t als o impl y tha t rea l wage s o f labo r wil l be hel d t o a socially conventiona l subsistence minimum. 162 But there are other passages i n which Marx's view of real wage s is less clea r cut. Fo r example, i t is possible to interpret th e following as asserting tha t real wages migh t ris e t o a degre e s o lon g a s the y didn' t reduc e profit s i n suc h a wa y a s t o destroy th e impuls e t o accumulate ; and , i n Marx' s view , i t wa s ver y har d indee d t o destroy th e capitalist' s impuls e to accumulate: 163 Wages, a s w e hav e seen , b y thei r ver y nature , always impl y th e perfor mance o f a certai n quantit y o f unpai d labou r o n th e par t o f th e labourer . Altogether, irrespectiv e o f th e cas e of a rise o f wage s wit h a falling pric e of labour, &c. , suc h an increase onl y means at best a quantitative diminution of the unpai d labou r tha t th e worke r ha s t o supply . Thi s diminutio n can neve r reach the point at which it would threaten the system itself. Apart from violent conflicts a s to the rat e o f wage s (an d Ada m Smit h has alread y show n tha t in such a conflict, taken on the whole, th e master is always master), a rise in the price o f labou r resultin g from accumulatio n of capita l implie s th e following alternative. Either the price of labour keeps o n rising, because its rise does no t interfere with the progress of accumulation. .. . I n this case it is evident that a diminution in the unpaid labour in no way interferes with the extension of the domain of capital. —Or, o n the other hand, accumulation slacken s in consequence of the ris e i n th e pric e o f labour , because th e stimulu s o f gai n i s blunted . . . . The pric e of labou r fall s agai n to a leve l correspondin g with th e need s o f th e self-expansion o f capital , whether the leve l be below, th e same as , o r abov e the on e whic h wa s norma l befor e the ris e o f wage s took place.

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Table 4.2. Trend s in Real Adul t Mal e Full-tim e Earning s fo r Selecte d Group s o f Workers, 1755-1851 (185 1 = 100) Benchmark year

1755 1781 1797 1805 1810 1815 1819 1827 1835 1851

Farm labourers

Middle group

65.46

47.54

74.50

52.54 52.96

61.12

74.51 67.21 75.51

46.19

51.54 57.81

54.35

73.52 75.86

70.18

100.00

85.97 100.00

91.67

Artisans 56.29 48.30 46.73 42.55 42.73

52.18

50.26 66.39 78.62 100.00

All

All blu e collar

White collar

workers

56.50

23.93 22.24 23.45 20.82

42.74 39.24 42.48 40.64

50.19 53.61 51.73

50.04

58.15

55.68 69.25 83.43 100.00

25.49 27.76

39.41 46.71 46.13

66.52 100.00

58.99 78.69 100.00

19.97

39.10

Percentage Change , 1781-1851, under th e thre e sets o f cost-of-livin g weight s and pric e assumptions : 294.5% 61.8% 103.7% 68.0% 75.1% 31.6% Most pessimisti c 349.6% 99.2% S54.8% 107.0% 116.5% 63.6% "Best guess " 220.3% 520.3% 154.4% 164.2% 175.3% 107.0% Most optimisti c SOURCES AN D NOTES: Th e mos t pessimisti c and mos t optimisti c variant s ar e base d o n relativel y unrealisti c cos t o f livin g indices, selecte d a s extrem e cases fro m 1 6 alternatives. The most pessimistic used a cost-of-livin g inde x combinin g northern urban expenditure weights with Tucker's institutiona l clothing prices and Trentham cottage rents, while the most optimistic used an inde x combinin g northern rural weight s wit h expor t clothing prices and n o rents. Again, w e prefe r th e "best guess " index, combining souther n urban weight s wit h expor t clothing prices and Trentham rents . The 175 5 figure s ar e derive d b y relyin g o n th e Phelp s Brown-Hopkin s inde x t o exten d ou r 1781-185 0 serie s (Tabl e 4 ) backwards. SOURCE: Peter H . Linder t and Jeffrey G . Williamson , "English Workers' Living Standards During the Industrial Revolution : A Ne w Look, " Economic History Review, Vol . 36 , No . 1 (February 1983), p . 13 .

But th e mor e genera l impressio n on e get s fro m Marx' s technica l writing , take n a s a whole, i s that the capitalists ' powe r t o expand th e reserve arm y o f the unemployed i s so great that real wages oscillate cyclicall y about a level close to the subsistence minimum in a protracte d powe r struggle , whic h wil l end onl y whe n capitalis m is overthrown. 164 As the quotations already cited in this chapter indicate, however, Marx' s bill of particulars agains t capitalis m transcend s stagnan t o r inequitabl y constraine d rea l wages . H e vividly evokes lon g workin g hours; soul-destroying repetitive tasks rendering men, wom en, an d children the slaves of machines; poor conditions of housing, sewerage, an d water supply; an d vulnerabilit y to unemployment . Moreover , h e distinguishe d the situatio n of various categorie s withi n the workin g force , som e doin g rathe r well , other s trappe d i n abject poverty. I t is on these aspects of Marx's exposition that contemporary Marxists are inclined t o focu s increasingl y a s the weigh t of evidenc e slowl y gathers tha t the tren d o f real wage s i n Britai n wa s erraticall y upwar d fro m th e closin g year s o f th e Napoleoni c Wars. Indeed, one unambiguou s achievement of Marx's wa s to stimulate a protracted schol arly debate , runnin g down to the 1980s , o n what actually happened to British real wage s during th e Industria l Revolution.165 Table 4.2 an d Figur e 4.1 presen t the best estimates now availabl e for the trend of British real wages fo r several sectors of the working force. Overall, th e stor y i s reasonably clear. • Eve n befor e th e Frenc h Revolutionar y and Napoleoni c Wars, Britis h real wage s

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Figure 4.1. Adul t Male Averag e Full-tim e Earnings for Selected Group s of Workers, 1755-1851 , at Constant Prices. [Adapte d from Lindert and Williamson, "Englis h Workers ' Livin g Standards, " p. 12. ]

came unde r downwar d pressur e a s the ris e i n population converted Britai n into an increasingly regula r ne t grai n importe r from , say , th e lat e 1760s . • Ther e wa s a clear deterioratio n of real wages during the war years and a quite sharp postwar recovery , broke n b y tw o exceedingl y ba d years : 181 6 an d 1819 . • Th e tren d thereafter—from , sa y 1820—wa s erraticall y upwar d t o 185 0 an d beyond. It ha s take n a grea t dea l o f painstakin g scholarship , sharpene d b y sometime s heate d debate, t o achiev e suc h confidenc e a s w e hav e i n thes e propositions . Lookin g bac k a t Marx's time , th e resources availabl e to him, and his strongly asserted sympath y wit h the plight o f the industria l worker, on e should , i n my view, not be excessively critica l of his failure t o detec t an d measur e the trend o f real wage s afte r 1815 . Figur e 4. 2 sharpen s th e point. I n th e perio d 1840-1880 , whe n Marx's view s wer e forme d an d his matur e wor k written, British, French , an d United States rea l wages oscillate d a good dea l i n the 1840 s and 1850 s with no firmly detectable trend ; and they move u p unmistakably only after th e U.S. Civi l War an d the flood of cheap grain that came to Europe fro m th e American West when it s railwa y net wa s completed . It is, then , understandabl e that Marx , i n his time , woul d hav e formulate d a theor y of wages that, i n effect, yielde d cyclical oscillation s about a relatively static level as the pool of unemploye d contracte d an d expanded . Afte r all , whethe r accurat e o r not , Mil l als o concluded an d Mar x quoted: 166 "I t i s questionabl e i f al l th e mechanica l invention s ye t made hav e lightene d th e day's toi l o f any human being." And as a compulsive reade r o f the Factory Inspector s Report s and other descriptions of the round of life of workers of the time, i t i s als o understandabl e that Marx shoul d have reacte d strongly—a s man y of hi s contemporaries did—t o th e huma n an d socia l cost s o f th e maturin g industria l system. . Nevertheless, Marx' s analysi s ca n be criticized o n two grounds: on e relatively minor , the othe r o f fundamenta l importance . First, h e doe s no t recogniz e tha t bot h short-ter m as wel l a s tren d movement s in rea l wages were , i n this period, muc h mor e a result of movements in the cost of living than in money wage rates— a poin t illustrated vividl y in Figure 4.3. Mone y wages in some other

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Figure 4.2. Rea l Wages : Grea t Britain , France , an d the Unite d States , 1840-188 0 (1850=100). Col. I, 1840-1850 , R . S. Tucker, "Rea l Wages of Artisans in London"; 1850-1880, G. H. Wood, real wages at full wor k (in Walter T. Layto n and Geoffrey Crowther , An Introduction t o the Study o f Prices [London : Macmillan , 1938] , p . 273) ; col. 2 , Jea n Lhomme , "L e Pouvoi r d'acha t d e 1'ouvrier frangai s a u cour s d'u n siecle: 1840-1940, " L e Mouvement Social, no . 6 3 (April-June 1968), p . 46 ; col. 3, Hansen , "Factor s Affectin g th e Trend o f Real Wages, " p. 32 . sectors were , n o doubt, mor e volatil e tha n in the London Buildin g trade. Bu t the greater amplitude o f fluctuation s in cost o f livin g than i n money wag e rates i s wel l documente d for Britai n i n this period. 167 Second, Marx' s failur e to predict risin g real wage s a s a long-run feature of capitalis m reflects a profound error in theory as well as a failure of imagination. As suggested earlier , Marx drov e himsel f int o a cu l d e sa c wit h th e no w universall y acknowledge d incom patibility of his argumen t that real wage s woul d remain mor e o r less constant an d profits decline (preceding , p . 126). 168 A s Samuelso n notes: 169 " . . . modern Marxian s in creasingly tur n t o tha t par t o f th e sacre d writing s mor e consisten t wit h las t century' s tremendous rise in workers' rea l wage rates." And there are passages that suggest that real wages migh t rise so long as the profit rate remained sufficien t to induce a continued flo w of investment . But tha t i s no t a doctrin e likel y t o brin g worker s pourin g into the street s with revolutionar y fervor . Marx' s failur e t o predic t firml y an d lucidl y tha t risin g rea l wages was the likely outcome o f the capitalist process i s important because it illustrates a characteristic of Marx that can be observed quit e systematically: he tended to project in a rather linear way situation s and trends observable in his own times . This is an odd failin g

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Figure 4.3. Compariso n of Mone y Wages, Cost o f Living , an d Rea l Wages : Londo n Artisans, 1790-1850. [Adapte d from Rufu s S . Tucker , "Rea l Wage s of Artisans in London, 1729-1935," Journal o f th e American Statistical Association, Vol . XXXI, 1936 , pp. 78-79. ]

for a man wh o regarde d himsel f correctl y a s a Hegelian theorist o f history rather tha n an economist; but , i t i s a failur e that recurs . A fina l poin t t o b e underline d abou t labor . Jus t a s Mar x ha d n o genera l theor y o f population h e ha d n o genera l theor y o f wages . Th e sam e reaso n prevailed : wag e rate s were th e product o f historically determine d circumstance s rooted i n technologies, proper ty relations , th e institution s surroundin g them, an d th e contentio n o f th e classe s the y created. I n mos t formulation s Marx regarde d wag e rates unde r capitalis m a s determine d by a ra w struggl e fo r power i n whic h th e dec k wa s stacke d i n favo r o f th e employers , against th e worker . Onl y th e capitalist' s interes t i n keepin g th e worke r an d hi s childre n alive set a limit on his avaric e i n enlarging surplus value at the worker s expense . Behin d the power struggl e la y the perception that , under relatively ful l employment , th e bargaining powe r o f labo r woul d increas e an d wage s woul d ris e a t th e expens e o f profits . A cyclical depression—enlargin g th e poo l o f unemploye d worker s an d generatin g labor saving invention s raisin g th e organi c compositio n o f capital—emerge s a s a ke y instru ment fo r whippin g labo r bac k int o line. Thus, a s on e migh t expec t i n dealin g wit h a n autho r whos e majo r boo k i s entitle d Capital, Marx' s vie w of the position o f labor flows , like all else, from his analysis of the investment process , includin g the generatio n an d diffusio n o f technology .

Investment and Technology Marx's theory o f growth, lik e all others, come s t o rest on the process o f capital formation; but hi s nee d t o produc e a self-destructin g growt h proces s give s hi s syste m a specia l character. Th e impuls e of capitalists t o accumulate is sometimes presented i n terms o f an overriding socia l compulsion , independen t o f th e profi t motive , but , Marx' s argumen t generally run s i n term s o f th e exploitatio n of perceive d profi t possibilitie s under conditions o f ruthles s competition. At it s core , Marx' s theor y o f investmen t envisage s thre e relate d processes : th e pro gressive increas e in the proportion of fixed capita l to labor (a rise in the organic composi-

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5

tion o f capital) ; th e progressiv e concentratio n o f industr y an d bankin g i n increasingl y large units ; an d th e increas e i n th e reserv e arm y o f th e unemployed , a s labor-savin g machinery i s progressively introduce d i n agricultur e as well a s industry. The flavo r o f Marx's exposition of each process is captured i n the following quotations from Capital. 170 THE RISIN G ORGANI C COMPOSITION O F CAPITAL.

. . . [T]h e growin g exten t o f the mean s o f production , a s compared wit h the labour-powe r incorporate d wit h them , i s a n expressio n o f th e growin g productiveness o f labour. . . . [T]his growth in the mass of means of production, a s compare d wit h th e mas s o f th e labour-powe r tha t vivifie s them , i s reflected agai n i n .. . th e increase of the constant constituent of capital at the expense o f it s variabl e constituent . . . . THE PROGRESSIV E CONCENTRATION OF CAPITAL.

Capital grow s in one place to a huge mass in a single hand, because i t has in another plac e bee n los t by many . Thi s i s a centralization proper , a s distinct from accumulatio n an d concentration. . . . The worl d woul d stil l b e withou t railway s if i t ha d ha d t o wai t unti l ac cumulation had got a few individual capitals far enough to be adequate fo r the construction o f a railway. Centralisation , o n the contrary, accomplishe d thi s in th e twinklin g of a n eye , b y mean s o f joint-stock companies . . . . THE PROGRESSIV E EXPANSION OF TH E RESERV E ARM Y O F TH E UNEMPLOYED .

The additiona l capital s forme d i n th e norma l cours e o f accumula tion . . . serv e particularly as vehicles fo r the exploitation of new inventions and discoveries , an d industria l improvements i n general . . . . On th e on e han d . . . the additiona l capita l forme d i n th e cours e o f ac cumulation attract s fewe r and fewer labourers i n proportion t o its magnitude. On th e othe r hand , th e ol d capita l periodicall y reproduce d wit h chang e o f composition, repell s mor e an d mor e o f th e labourer s formerl y employe d b y it. .. . The industria l reserve army , during the periods o f stagnatio n and averag e prosperity, weigh s dow n th e activ e labour-army ; during the periods o f over production an d paroxysm, i t holds its pretensions i n check .. . a s soon as, by Trades' Unions , &c. , the y tr y t o organis e a regula r co-operatio n betwee n employed an d unemploye d i n order to destroy o r weake n th e ruinous effect s of this natural law of capitalistic production on their class, s o soon capital and its sycophant, Political Economy , cry out at the infringement of the ' 'eternal'' and s o t o sa y "sacred " la w o f suppl y an d demand. So fa r a s I a m aware , Mar x visite d only on e factory—nea r Karlsbad. 171 Bu t he was , evidently, fascinate d b y machinery ; and, like Mill, he dre w heavil y on Babbage, a s well as o n other s writin g in this phase o f increasin g awarenes s o f th e ongoing revolutio n tha t had unfolded sinc e the 1780s . An d h e went further back int o the histor y of machiner y in earlier times . Marx viewe d machinery as a great achievemen t of capitalism , as a satanic instrument fo r keepin g labo r i n subjection , and, ultimately , as a majo r instrumen t for capitalism's undoing , vi a th e force s se t i n motio n b y th e risin g organic composition o f capital. Marx's ambivalenc e towards machiner y is wel l reflected i n th e followin g passag e i n

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which h e begin s wit h a n evocatio n o f inventio n as th e busines s o f generatin g practica l applications fro m scienc e an d end s wit h a n analog y fro m Goeth e i n whic h labo r i s sexually possesse d b y machinery. 172 [Machinery] is , firstly , th e analysi s an d applicatio n o f mechanica l an d chemical laws , arisin g directly ou t o f science , whic h enables th e machin e to perform th e sam e labou r a s tha t previously performe d b y th e worker . How ever, th e developmen t o f machiner y alon g thi s pat h occur s onl y whe n larg e industry ha s alread y reache d a highe r stage , an d al l th e sciences hav e bee n pressed int o th e servic e o f capital ; an d when , secondly , th e availabl e ma chinery itsel f alread y provide s grea t capabilities . Inventio n the n become s a business, an d the applicatio n o f scienc e t o direct productio n itsel f becomes a prospect whic h determines an d solicits it. Bu t this is not the road alon g which machinery, b y and large, arose , and even les s the road on which it progresses in detail . Thi s roa d is , rather , dissectio n . . . throug h the division of labour , which graduall y transform s the workers ' operation s int o mor e an d more me chanical ones, s o that at a certain point a mechanism can step into their places. Thus, th e specifi c mod e o f working her e appear s directl y as becoming trans ferred fro m th e worke r t o capita l i n th e for m o f th e machine , an d hi s ow n labour capacit y devalue d thereby . Henc e th e workers ' struggl e agains t ma chinery. Wha t wa s th e livin g worker' s activit y becomes th e activit y o f th e machine. Thus the appropriation of labour by capital confronts the worker in a coarsely sensuou s form ; capita l absorb s labou r int o itself—"a s thoug h it s body wer e by lov e possessed." * Building o n observation s i n Ada m Smit h relatin g t o th e negativ e a s wel l a s positiv e consequences o f the divisio n of labor (preceding , p . 37) , Mar x elaborate d i n great detai l his vie w o f th e destructiv e psychologica l an d socia l consequence s o f machinery . I t i s a recurrent them e tha t suffuses muc h of his writing . In particular Chapter X V o f Volume I Capital, "Machiner y an d Moder n Industry, " i s a sustaine d polemi c o f 13 6 pages . I t concludes wit h one o f Marx' s mos t eloquen t attack s o n the consequence s o f technolog y for lif e unde r capitalis m includin g agricultura l life: 173 ... I n agriculture a s in manufacture, the transformation of production unde r the swa y o f capital , means , a t th e sam e time , th e martyrdo m o f th e pro ducer. . . . Moreover, al l progress i n capitalistic agricultur e i s a progress i n the art, not only of robbing the labourer, but of robbing the soil; all progress i n increasing th e fertilit y o f th e soi l fo r a give n time , i s a progres s toward s ruining th e lastin g source s o f that fertility . . . . Capitalist production , there fore, develop s technology , an d th e combinin g togethe r o f variou s processe s into a socia l whole , onl y b y sappin g th e origina l source s o f al l wealth—th e soil an d th e labourer . Despite Marx' s profoun d interes t i n and almost obsession wit h invention and machinery, an d despite his awareness o f the link between scienc e and invention, his analysis of the historical transitio n t o moder n industria l capitalis m i s curiousl y incomplete , an d hi s linkage o f technolog y t o capita l formatio n excessivel y simple . Historically , h e move s from th e widening of internationa l markets , the "primitiv e accumulation" brought about *"als hatt'e s Lie b i m Leibe, " Goethe , Faust, P t. I , Ac t 5 , "Auerbach' s Cella r i n Leipzig. "

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by colonization , th e slav e trade , th e expansion of the public debt , an d other mercantilis t policies, t o th e diversio n o f thi s pool o f resources—"drippin g fro m hea d t o foot , fro m every pore , wit h blood an d dirt"—to machiner y an d th e expansio n of fixe d capital. 174 There is no role in this story for the scientific revolution, Newton, and the new perception of th e huma n capacity t o understan d and manipulat e nature to hi s advantage. 175 Some what similarly, in dealing with the technological chang e i n modern industria l capitalism, Marx subsume s th e generatio n an d diffusio n o f ne w technolog y i n the whol e process o f accumulation.176 I n a sens e Mar x share d wit h hi s classica l predecessor s an d hi s suc cessors in mainstream economics a tendency to structure his analysis of capital formation in ways that obscured th e complex interpla y of science, invention , and innovation despite the critica l rol e i t played i n his system. 177 Marx's vie w o f th e dynamic s of capital formation, wit h its allege d technological bias toward laborsavin g innovations , le d hi m t o th e followin g basi c conclusion s abou t th e future o f capitalism : • Rea l wage s woul d oscillat e cyclicall y aroun d a sociall y determine d subsistenc e level—his predominan t bu t no t exclusiv e doctrine. • Th e pool o f unemployed, relative to the working force, woul d expand and contract cyclically, bu t increas e a s a matte r o f trend ; an d a t leas t onc e h e asserte d tha t business cycle s woul d progressively increas e i n their amplitude. • Th e social an d psychological costs of capitalism for the worker would progressively increase whateve r th e tren d i n real wage s migh t be. • Th e capital-labo r rati o i n industr y would rise , th e profi t rat e woul d fall , bu t th e volume o f profit s would ris e wit h the absolut e increas e i n fixe d capital . • Th e degree of concentration o f industr y would rise . • B y implication incom e distributio n would become increasingl y skewed . Looking bac k ove r th e mor e tha n 14 0 years sinc e 184 8 (o r more tha n 12 0 years sinc e 1867, whe n th e firs t volum e o f Capital wa s published) , non e o f thes e prediction s ha s come about. A s Samuelson notes in his centenary talk on Das Kapital, on e can understand with sympath y writer s i n th e 1930 s believin g tha t element s i n Marx' s prediction s ha d come true. 178 Indeed , Marxist s have perked u p a good dea l wit h the economic discom fiture o f th e noncommunis t worl d o f th e 1970 s an d 1980s. 179 But , evidently, th e real enough problem s o f the years since the wheat and oil price explosion s of 1972-197 3 are not significantl y illuminate d b y Marx' s analysi s of th e dynamics of capitalism . Surveying Marx's undistinguishe d record i n prognostication, Elti s makes thi s observa tion:180 "Marx' s argument commands far more attention when it is applied to the century and a hal f prio r t o th e publicatio n o f Capital. H e kep t clos e t o know n fact s an d hi s propositions deriv e fro m them. " I would not wholly agree wit h thi s proposition becaus e Marx a s a historia n wa s notabl y selectiv e i n hi s us e o f th e fact s availabl e t o him . I n constructing hi s capitalis t self-destructio n machin e t o giv e scientifi c substanc e t o th e predictions o f the Communist Manifesto, h e did not place a high premium on organizing a judicious, well-balance d argument . H e searche d hi s predecesso r politica l economists , government papers , contemporar y journals , an d pamphlet s fo r validatin g evidenc e o r argument, confiden t tha t hi s youthfu l visio n o f th e futur e wa s essentiall y correct. A s suggested earlier , in considerin g his vie w o f th e prospect s fo r rea l wages, hi s fla w a s a social scientist was familia r an d pedestrian: he predicted in a linear way. The futur e wa s a rather unimaginative extension of the dynamics of the present and recent past, as he saw it.

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A fina l brie f note is necessary o n the two-sector growt h model that emerges i n Volume II o f Capital. 181 Mar x pose s a s follow s hi s centra l question , derive d fro m Frangoi s Quesnay's Tableau Economique:182 ' 'How is the capital consumed in production replaced in valu e ou t o f th e annua l produc t an d ho w doe s th e movemen t o f thi s replacemen t intertwine with the consumption of the surplus-value by the capitalists and of the wages of the labourers?" Marx firs t elaborate s a circular-flow model wit h two sectors: Department I, Capita l Goods ; Departmen t II , Consumer s Goods . Outpu t in each secto r i s then appor tioned a s betwee n variabl e capital , i n suppor t o f workers ; constan t capital , t o mee t depreciation; an d surplus-value. After considerin g the intersectoral flows required for this system t o sustai n itself, withou t net investment , Marx move s o n t o begi n t o elaborat e a dynamic system i n which both fixed capital and the working force expand, a n exercise h e entitles "Accumulatio n an d Reproductio n o n a n Extende d Scale. " Thi s interesting , i f incomplete, exercis e stimulate d som e o f Marx' s successor s t o elaborat e furthe r the ex tended-scale mode l fo r two purposes: t o demonstrate the incapacity of capitalism to kee p capital good s an d consumer s good s productio n i n dynami c equilibrium and t o develo p models of cyclical crises create d systematicall y by underconsumption.183 If one takes into account Quesnay' s rol e i n stimulatin g Mar x t o develo p a two-secto r growt h model , Samuelson's ungrudgin g but modulate d tribut e is just.l84 First, we can make a deposition—as the lawyers say—that Marx did, in his posthumous Volum e II , innovat e two-secto r model s o f reproductio n an d growth. Thes e ar e usefu l anticipation s of wor k don e i n ou r da y b y Harrod , Domar, Leontief , Solow , Robinson , Uzawa , Pasinetti, Kaldor , Findlay , and many others . I d o no t honestl y thin k that moder n development s wer e muc h influenced, directl y o r indirectly , b y Marxia n writings ; instead the y gre w naturally ou t o f a marriag e o f th e Clark-Bickerdik e accelerato r an d th e Keynes multiplier , an d ou t o f earlie r work s b y Vo n Neuman n an d Fran k Ramsey tha t sho w n o Marxia n influence . Bu t stil l w e al l migh t wel l hav e benefited earlie r fro m stud y of th e Mar x Tableaux . I woul d ad d tha t painfu l a s i t migh t be t o Mar x an d Marxists , Malthus' s concep t o f "Proportionality" betwee n productio n an d consumptio n (preceding , p . 65) . belong s somewhere betwee n Quesna y and Marx. In the special perspectiv e of this study—which , in th e end , woul d treat busines s cycles a s a n endogenou s aspec t o f th e proces s o f eco nomic growth—i t i s Marx' s extensiv e but , again , incomplet e an d unresolve d wor k o n business cycle s tha t his scheme s o f reproductio n ar e mos t usefull y deployed . Business Cycles Marx wa s interested i n business cycles in two respects, th e first n o doubt heightenin g the second. A s a revolutionar y politicia n h e sa w cyclica l crise s an d dee p depression s a s potential catalytic occasions fo r the destruction of capitalism to be succeeded b y a socialist dictatorship o f the proletariat, a doctrine already proclaimed i n the Communist Manifesto. As P . F . Bel l an d Harr y Cleave r correctl y conclude: 183 "Mar x an d Engel s studie d economic crisis , no t as academic theorists but as militants[,l .. . a n integral part of their attempt to determine optimal working class strategy." Th e end of the 1840 s was for Marx a tim e o f hig h hopes , intensiv e political activity , and , afte r hi s 184 9 exile t o London , somber reflection . There wa s a reviva l o f hop e a decad e later . Isaia h Berli n notes: 186 "The grea t economic crisis, the severest yet experienced in Europe, which began in 1857,

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was warml y welcome d bot h b y hi m an d b y Engel s a s likel y t o bree d disconten t an d rebellion. . . . " Ther e i s n o clea r reflectio n i n Marx' s politica l stanc e o f th e Britis h recession o f 1866-1868 , whic h was a good dea l milder than those o f the 1850 s an d lat e 1870s.187 I n addition, th e cyclical phase s o f the major industrial powers wer e somewha t different i n thei r timing. 188 B y 187 3 the Firs t Internationa l ha d broke n up , th e Pari s Commune had failed, an d Bismarck had triumphantly created th e German Empire. Never theless, Marx anticipate d wit h relish th e evidently coming crisis of 1873 , but appeared b y that tim e t o expec t n o mor e tha n i t woul d teac h th e arrogan t Prussia n "mushroom upstarts" a bit of "dialectics." 189 Isaiah Berli n observe s tha t 186 7 when190 . . . the firs t volum e [Capital} appeare d mark s no t a turning but a breakingpoint i n Marx's life . Hi s view s during the remainin g sixteen year s o f his lif e altered little ; h e added , revised , corrected , wrot e pamphlet s an d letters, bu t published nothin g that wa s new; h e reiterate d th e old position tirelessly , bu t the ton e i s milder ; a fain t not e almos t o f querulou s self-pity , totall y absen t before, i s no w discernible . Hi s belie f i n th e proximity , even i n the ultimat e inevitability o f a worl d revolution , diminished . Hi s prophecie s ha d bee n disappointed to o often . . . , But dow n t o 186 7 and even beyond , Mar x ha d a second continuin g reason t o interes t himself deepl y i n business cycles. If , a s a revolutionary politician, h e was not to se e the destruction o f capitalis m i n his lifetime , he aime d t o provide th e scientifi c underpinning for th e Communist Manifesto's, confiden t predictio n o f capitalism' s inevitabl e self-de struction. Her e crise s were , evidently , o f centra l importance . Besides , lik e Mill , Mar x lived his formative years in a time when the phenomenon of roughly decadal majo r cycles , marked by dramatic crise s in the wake of their upper turning points, was inescapable; an d as a political economis t hi s attentio n wa s inevitabl y drawn to them. In dealing formall y wit h cycles, however , Mar x faced a problem h e never successfully resolved. Hi s long-ru n vision of the dynamic s of capitalism was based on the capitalists ' socially an d culturally determined impuls e to accumulate. A s Joan Robinson point s out, this propositio n denie d hi m a consisten t underconsumptionis t theor y o f th e busines s cycle:191 If capitalist s wer e alway s prepare d t o inves t thei r surplu s i n capita l goods , without regard t o the prospect o f profit, the output of capital goods woul d fil l the gap between consumptio n an d maximum potential output. Thu s to clinc h the [Marx's ] argumen t it is necessary t o sho w tha t investment depends upo n the rat e o f profit , an d tha t th e rat e o f profit depends, i n the las t resort, upo n consuming power . . . . This Mar x fail s t o do. . . . But, o n a detailed a d hoc basis , Mar x provide s i n Volum e II I of Capital som e observa tions that clearly evok e Malthus' s focu s on lack of "proportionality " between consump tion an d investmen t a s the basi s fo r unemploymen t an d "genera l glut": 192 . . . Th e entir e mas s o f commoditie s . . . mus t b e sold . . . . Th e condi tions o f direc t exploitation , an d thos e o f realisin g it , ar e no t identical . . . . The firs t ar e only limited by the productive power of society, the latter by the proportional relatio n of the variou s branches of production and the consumer

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But Mar x als o propounde d a quit e different theor y o f crisi s under capitalis m tha t ran counter t o th e conventiona l underconsumptionis t argumen t o f hi s day ; tha t is , crise s flowing fro m a falling rate of profit induced by the rise in wages during the latter stage of a business cycle expansion (preceding, p. 130) . It was this sort of pressure o n profits, Marx believed, tha t not only reduced investmen t in the shor t run but induced the invention and diffusion o f laborsavin g machinery , increasin g th e organi c compositio n o f capita l an d guaranteeing th e perpetuation o f th e reserve arm y of the unemployed . Thus Mar x score s off Rodbertu s an d othe r contemporar y underconsumptionis t theorists: 193 "I t i s shee r tautology t o sa y tha t crise s ar e cause d b y th e scarcit y o f effectiv e consumption , o r o f effective consumers . Th e capitalis t system doe s no t know any othe r mode s o f consumption tha n effectiv e ones, excep t tha t of su b forma pauperis o r o f th e swindler. " Aside fro m heading off at the pass a line of thought that might lead to the amelioration of capitalism, Mar x is evoking here part of the process b y which the dynamics of business expansion brings o n crisis an d depression. Risin g money wages, du e to a tightened labo r market, lower s th e expecte d rat e o f retur n ove r cos t tha t initiall y led t o th e increas e i n investment tha t helpe d se t i n motio n th e expansion . Othe r constrainin g forces tende d t o operate i n th e sam e directio n towar d th e pea k o f a n expansion ; e.g., risin g commodit y prices, risin g interes t rates , and a fal l in expecte d rate s of retur n as the product s of increased investmen t earlier in the boom begin coming on the market, increasing supply in the leadin g sector s an d reducin g expected profitabilit y in thos e sectors . Clearly, then, Mar x had no theory of business cycles that fitted coherentl y his theory of growth; an d hi s long-ru n theory o f fallin g profits , base d o n the assumption of a constant rate of surplus value, wa s of no help to him here, or, indeed, on other economic problems . But fro m his own observation s an d study, as well as from th e writing of others, Mar x did generate som e significan t insights. His bes t writin g on th e busines s cycle i s less preten tiously theoretical, chroniclin g th e phases an d timing of cyclical fluctuation s and relating them i n a rough-and-read y wa y t o th e growt h process. Fo r example: 194 The enormou s power , inheren t i n th e factor y system , o f expandin g b y jumps, an d th e dependenc e o f tha t syste m o n th e market s o f th e world , necessarily bege t .. . a serie s o f period s o f moderat e activity , prosperity , over-production, crisi s an d stagnation . Th e uncertaint y an d instabilit y t o which machiner y subject s th e employmen t .. . o f th e operative s becom e normal. . . . Excep t i n th e period s o f prosperity , ther e rage s betwee n th e capitalists th e mos t furiou s comba t fo r the shar e o f each i n the markets. Thi s share i s directl y proportiona l t o th e cheapnes s o f th e product . . . . [T]here . . . comes a time in every industrial cycle, whe n a forcible reduction of wage s beneat h th e valu e of labour-powe r is attempte d for th e purpos e of cheapening commodities. A necessar y condition , therefore, to th e growt h o f th e numbe r of factor y hands, i s a proportionall y much mor e rapi d growth of th e amoun t of capita l

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invested i n mills . Thi s growth , however , i s conditioned by the ebb an d flo w of th e industria l cycle. I t is , besides , constantl y interrupte d b y th e technica l progress tha t a t on e tim e virtuall y supplie s th e plac e o f ne w workmen , a t another, actuall y displace s ol d ones . . . . Th e workpeopl e ar e thu s con tinually both repelle d an d attracted , hustle d fro m pilla r to post, while , a t the same time, constant changes take place i n the sex, age, an d skill of the levies . This passage i s followe d b y a detaile d accoun t o f fluctuation s i n th e cotto n textil e industry fro m 181 5 t o 1863. 195 The weavin g o f laborsavin g technology int o the cyclical process—with th e impulse to generate o r diffuse suc h technology a t its maximum when wages rise toward the peak of a boom—evokes somethin g o f Gerhar d Mensch' s contemporar y doctrine. 196 Mensc h ar gues tha t inventions generate d i n depression for m the basis of the ensuing expansion (se e following, pp . 457-458). Marx has little or nothing to say about the process o f invention; and, indeed , hi s work, lik e Mill's, i s vulnerable to Schumpeter's charg e tha t the creativ e process o f innovation is underrated (preceding, p . 108) . Quite specifically, Marx does no t explore th e tim e lag s tha t migh t exis t betwee n a stron g cyclica l impuls e t o generat e laborsaving machiner y an d th e availabilit y o f suc h ne w devices . Time lag s do , however , ente r Marx's evocatio n o f the possibility of "periodi c crises" due t o "interconnecte d turnovers " relate d t o the length o f life o f capital goods. 197 Thi s concept emerge s i n th e elaboratio n o f hi s two-secto r circular-flo w mode l withou t ne t investment (preceding , p . 138) . Mar x envisage s th e nee d fo r periodi c replacemen t o f fixed capital, a s it becomes obsolescent , implyin g that its original installation was concentrated i n a shor t perio d rathe r than smoothl y sprea d throug h time. One Marxist schola r ha s even demonstrated tha t one can find i n Marx and Engels som e scattered passages tha t sugges t a n awareness o f the possibilit y o f a long cycle. 198 Thes e fragmentary passage s ar e not wholly consistent; but, in general, the y would fall within the framework o f a n innovationa l conceptio n o f th e lon g cycl e rather tha n on e centere d o n movements i n th e relativ e price s o f basi c commoditie s an d industria l products.

Relative Prices Marx rejected th e concept o f diminishing returns to agricultural and raw material produc tion a s he did the related Malthusia n populatio n doctrin e (preceding , p . 127). 199 Marx' s basic perceptio n wa s that, under capitalism, th e same forces were at work in agriculture as in industry . A s h e say s i n th e Grundrisse: 200 "Agricultur e mor e an d mor e become s a branch of industry , and i s entirely dominated by capital." To simplif y bu t not distort hi s argument, Mar x wa s conten t t o assum e i n Volum e I o f Capital tha t n o par t o f surplu s value wa s pai d t o th e landlor d a s rent; 201 bu t h e doe s devot e a few page s t o suggestin g certain difference s a s wel l a s similaritie s betwee n moder n industr y an d agriculture. 202 In Volume III of Capital, however , Marx turns directly and at length (200 pages ) t o the determination o f ren t unde r condition s o f industria l capitalism. 203 Essentiall y hi s effor t here i s to bring th e analysis of agricultur e in general an d rent payments in particular int o the genera l orbi t o f hi s analysi s of production , accumulation , surplus-value, and profits . Prices ente r int o the analysi s only a s Marx considers th e effect s o n rent of rising, falling, or constant prices in a regime of agriculture where capital investment and the application of technology (including chemical fertilizers) ca n alter productivity. S o far as diminishing returns is concerned, hi s central theme is:204 "Th e soi l . . . i f properly treated, improves

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all th e time . Th e advantag e o f th e soil , permittin g successiv e investment s o f capita l t o bring gains withou t loss o f previous investments , implies the possibility of differences in yield fro m thes e successiv e investment s o f capital. " H e admit s th e possibilit y o f a n increase i n production requiring more than "ca n be supplied wit h the help of this natural power [' a fre e gif t o f Nature's productive power'],"205 but he regards this situation not as diminishing return s bu t a s a requiremen t fo r additiona l capital "i n orde r t o secur e th e same output. Al l other circumstances remaining the same, a rise in the price of production takes place." 206 A part o f thi s effor t a t generalizin g the proble m o f diminishin g returns out of existence i s Marx's insistenc e that manufacturing, as well as agriculture or mining, exploits natura l forces ; e.g. , waterfalls , th e capacit y fo r wate r t o tur n int o stea m whe n boiled, etc . There is als o i n Volum e III o f Capital a n extended, i f somewhat shorter , treatmen t of the effects of raw material price fluctuations on the rate of profit.207 It will be recalled tha t raw materials, b y Marx's definition , are a component o f constant (c), not variable capita l (v). The rate of profit i s defined as s/(c + v) . Therefore , b y definition, a rise or fall i n raw materials prices , eithe r random o r cyclical, will raise or lower the profit rate, other things remaining equal . Mar x ring s th e changes o n this proposition bu t includes , fro m hi s ow n times, example s o f market adjustmen t wher e other things did not remain equal; e.g., the response o f non-America n ra w cotto n producer s t o th e cotto n famin e cause d an d hig h prices induce d b y th e Civi l War.

Stages of and Limits to Growth Down t o the modern industria l phase of capitalism Marx's notio n of the stages o f growt h in the lon g swee p o f history conforms t o the conventiona l sequence se t out i n the earlie r classics o f politica l economy : hunter s an d gatherers ; primitiv e agriculture ; feudalism ; commercial expansio n and premodern manufacture . He devotes a good deal of his exposition t o slavery i n Greece and elsewhere, partl y as a basis for analogy to the worker unde r capitalism. Wha t distinguishes Marx's treatmen t of these familiar stages is, o f course, hi s theory o f ho w change s i n method s o f productio n generate d revolutionar y clas s conflict s within eac h stag e ou t o f whic h a new stag e emerged wit h its own technologies, propert y relations, institutions , antagonisti c classes , an d laten t capacit y fo r sel f destruction: 208 "We see , therefore, ho w the modern bourgeoisi e i s itself th e product o f a long cours e of development, o f a serie s o f revolution s i n th e mode s o f productio n an d o f exchange. " In a broad sense , Mar x i s also quit e specific an d vivi d about th e dynamics that would lead t o th e self-destructio n o f industria l capitalism : th e progressiv e concentratio n o f industry an d bankin g a s increasingl y efficien t labor-savin g method s ar e introduce d i n response to the competitive struggl e amon g capitalists an d their shared interest in restraining wag e rates ; th e increase d concentratio n an d self-consciousnes s o f the proletariat . T o the latter Marx adde d a technological dimension: 209 "An d that union, to attain which th e burghers o f th e Middl e Ages , wit h thei r miserabl e highways , require d centuries , th e modern proletarians , thank s to railways , achieve i n a few years. " Examined more closely, however , the mechanics of the breakdown of capitalism is less clear i n Marx' s technica l analysi s tha n th e familia r litan y o f th e Communist Manifesto would suggest . Pau l Sweezy, fo r example, i n reviewing "The Breakdown Controversy" among Marxists indicates the various lines of thought Marx himself brought to bear on the problem bu t concludes: 210 " . . . nowher e in his work i s there to be foun d a doctrine of

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the specificall y economi c breakdow n o f capitalis t production . . . . [I] t i s clea r tha t hi s treatment of the problem, both in its positive and its negative aspects, prepare d th e ground for a long-drawn-out controversy whic h cannot be regarded a s fully settle d t o this day. " Marx's stage s o f growth procee d fro m controvers y t o obscurity when one moves fro m the breakdown of capitalism to socialism. Technically , Marx defined socialism in terms of a straightforward concept: abolitio n of private property; or, mor e operationally, a s Engels put it: "Th e proletaria t seizes political power and turns the means of production into state property."21' From tha t act there follows "a n unbroken , constantly accelerate d develop ment of productive forces , an d therewith for a practically unlimited increase of production itself."212 The Communist Manifesto i s lucid an d candi d o n a 10-poin t progra m t o complet e th e destruction o f the bourgeoisi e afte r th e proletaria t ha s seize d powe r bu t befor e powe r i s fully consolidated ; and , indeed , somethin g quit e close t o tha t progra m o f consolidatio n has bee n followe d b y Communis t parties i n their earl y days i n authority . But there i s in Marx virtually nothing on the economics o f socialism or, indeed, communism. In evoking the day when labor became "life' s prime want" (preceding, p. 123) , Marx did not appear to appreciate that, in a stable affluent societ y that had already brought the workweek down to, say , 40 hours, the decision t o seek n o further increas e i n real income per capita would provide onl y abou t a n extr a half-da y per wee k i n leisure. Thi s assume s zer o ne t invest ment but the need to allocate somethin g like 8%-10% of GNP to meet depreciation of the capital stoc k a s oppose d to , say , 16%-20 % fo r gros s investmen t at present. Th e sam e proposition woul d hold fo r Mill's affluen t Stationar y State , althoug h he di d not rule ou t continued technological progress an d net investment. There is , i n general, a tendency fo r economists (includin g Keynes) to become somewha t romantic in contemplating the world of affluenc e tha t the persistence o f compound interest migh t bring about; but the maintenance of high levels of affluenc e pe r capita will not be quite as effortless a s their visions suggest. In short, Marx failed to anticipate the real-enough problems of socialism with respect to pricing, planning , incentives, wag e setting, etc.; and he never replied satisfactoril y to his contemporary critic s wh o identifie d thos e problems . Mill , i n fact , wa s mor e luci d an d responsive tha n Marx in setting out his case fo r socialism (preceding, pp. 119-121) . The stages o f socialis m an d communis m thus remain , i n Marx's economi c writing , part o f a vision rathe r tha n a n operationa l program . On e derives th e impressio n tha t neither tem peramentally no r intellectually was Marx much interested in the happy times afte r victor y had bee n gaine d an d consolidate d ove r th e bourgeoisie . A s Engel s sai d o f Mar x i n hi s graveside speech : "Fightin g wa s hi s element. " Fo r whateve r reason, h e wa s obsesse d with th e objectiv e o f destroyin g the bourgeoisie . With respec t t o th e noneconomi c aspect s o f socialism , however , Mar x wa s quit e explicit i n the Manifesto, respondin g t o criticism of his program wit h respect to culture , the family , th e socia l trainin g of children , th e statu s of women , marriage , nationalism , and religion . I n eac h o f th e relevan t paragraph s o f th e Manifesto h e tell s of f th e bour geoisie with evident relish. H e is definitely still "fighting " rathe r than describing soberl y and professionall y ho w these critica l social an d cultura l dimensions of societ y woul d b e organized unde r socialism. The mos t interestin g o f Marx' s observation s o n th e characte r o f socialis t society , however, ar e hi s annotate d replie s t o Bakunin' s criticis m of Marxis m i n Statehood an d Anarchy (1873). 213 Bakuni n presse d har d o n th e proposition tha t th e proletariat , orga nized as the ruling class, would generate an elite ruling group that would oppress farmers,

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Slavs (on the assumption the revolution would first succeed in Germany), and, indeed, the workers themselves . Bakunin' s charge ha s a certain contemporar y resonance : " . . .th e so-called people's state will be nothing other than the quite despotic administratio n of the masses o f th e peopl e b y a new an d ver y nonnumerou s aristocracy o f rea l an d suppose d learned ones . . . . So , t o liberat e th e masse s o f th e peopl e the y firs t hav e t o b e en slaved. . . . [W] e answer : n o dictatorshi p ca n hav e an y othe r ai m tha n t o perpetuat e itself. . . . " Mar x replied , a t thre e levels . First , wit h invective : "schoolbo y drivel, " "the ass, " "democrati c nonsense," "politica l windbaggery," etc . Second , b y repeating in a rather woode n wa y hi s dogm a abou t the exclusivel y clas s characte r o f politics ; fo r example:214 The characte r o f election s depend s no t o n thes e designation s bu t o n th e economic foundations , o n th e economi c tie s o f th e voter s amongs t on e an other, an d fro m th e momen t thes e function s ceas e bein g politica l (1 ) n o governmental function s any longer exist; (2) th e distribution of general func tions takes o n a business character an d involve s no domination; (3) election s completely los e thei r present politica l character . Third, h e asserts Bakunin' s is, in the end, a counsel of passivity: " . . . Bakuni n deduce s that it's best for the proletariat not to undertake any action but to sit and await—the day of general liquidation, th e Last Judgement. " Readers hav e and will assess thes e exchanges i n different ways. It is my impression, a t least, tha t Marx was not at all convinced that the state would "fal l awa y after liberation" in quit e the eas y wa y h e argue d i t woul d fro m th e simpl e principles of dialectica l mate rialism; tha t h e had n o clear notio n o f what kind of political syste m migh t operate in the stages of socialism an d communism; and that a dictatorship in the name of the proletariat, run b y me n wit h his visio n o f history, woul d be, i n fact, quit e a n acceptable outcome . I believe Bakuni n wa s essentiall y correc t i n identifyin g Mar x a s a "stat e worshipper" ; a political an d ideological rathe r tha n economic determinis t when i t came t o actio n rathe r than historica l analysis ; in short , a Hegelia n rather than a Marxist. In an y case , Marx' s respons e t o Bakuni n is th e kin d o f passage tha t justifies Schum peter's observation: 215 ... a reade r wh o wishe s fo r anythin g othe r tha n indoctrinatio n must , o f course, lear n t o distinguish both fact s an d logically vali d reasoning fro m th e ideological mirage . Mar x himsel f help s u s i n this : sometimes , becomin g semiconscious o f ideologica l delusion , he rises, i n defense, t o the heights of his vituperative rhetoric, whic h therefore serves to indicate the spots a t which there i s somethin g wrong . So fa r a s a formal mode l o f stage s o f an d limits to growth i s concerned, wha t Marx's system asserte d wa s that , unde r socialism , th e econom y woul d b e organize d t o exploi t science an d inventio n i n a stead y flow ; cycle s woul d b e eliminate d alon g wit h "th e senseless extravaganc e o f the ruling classes;" output and real wage s would increase u p to the poin t wher e th e societ y woul d decide , throug h som e unspecifie d mechanism , tha t enough is enough; and income distribution would proceed o n the principle of "fro m eac h according t o hi s ability , t o each according to his need." I t is not diminishing returns but diminishing relativ e marginal utility tha t bring s Marx' s syste m to a mor e o r les s stead y state, an d thi s is als o essentiall y tru e of Mill' s vision and , later, Keynes's. On th e stage s o f growt h in th e contemporar y world rathe r than in a postrevolutionary

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future Marx' s view s were generally formulated in terms of the prospects fo r revolution in particular countries and , especially, on the stages through which they would have to pass before the y were officially rip e fo r revolution. Like some of his writing for the New York Tribune an d other journals, in which Engels often playe d a significant part, these observa tions appear i n letters, pamphlets, an d other occasional settings . In general, the y are more flexible tha n Marx's expositions in Capital, an d often full o f liveliness and insight. Marx begins his pamphlet on Louis Bonaparte , for example, by extending Hegel's observation that grea t historica l personage s appea r twic e by adding : "th e firs t tim e a s tragedy , th e second a s farce. " I n a n articl e i n th e Ne w York Tribune h e characterize s Indi a a s a "strange combination of Italy and Ireland, of a world of voluptuousness and of a world of woes. . . ," 216 H e judged tha t India , havin g experienced unde r Britis h rule bot h "th e annihilation o f old Asiati c society, an d the layin g of the materia l foundation s of Wester n society . . . " woul d hav e t o procee d throug h a stag e o f bourgeoi s capitalis m befor e achieving socialism . O n Russia , whic h Marx an d Engels ha d viewe d fo r mos t o f thei r lives as a center of reaction and hopelessly backward, Marx (but not Engels) began to alter his view late in life . He was responding, in part, to the strong positive reaction of a good many Russia n middle-class intellectual s to th e publicatio n in Russian of Capital: 217 Letters reache d hi m from Danielso n i n Russia, an d from th e exiles Lavro v and Ver a Zassulich , beggin g hi m t o appl y himself to specifi c problem s presented b y th e peculia r organizatio n of th e Russia n peasants int o primitive communes, holdin g lan d i n common , an d i n particula r t o stat e hi s vie w o n propositions derive d fro m Herze n and Bakunin and widely accepted b y Russian radicals , whic h asserted tha t a direc t transitio n was possibl e fro m suc h primitive communes to developed communism, without the necessity o f passing throug h th e intermediat e stag e o f industrialis m and urbanization , as ha d happened in the West. Marx , who had previously treated this hypothesis with contempt . . . wa s b y no w sufficientl y impresse d b y th e intelligence , se riousness, and , abov e all , th e fanatica l an d devote d socialis m o f th e ne w generation of Russian revolutionaries to reexamine the issue. . . . Marx wrote two lengthy letters i n which he made considerable doctrina l concessions. H e admitted that if a revolution in Russia should be the signal of a common rising of th e entir e Europea n proletariat , i t wa s conceivabl e an d eve n likel y tha t communism i n Russia could b e based directl y upon the semi-feuda l communal ownership of land by the village as it existed at the time; but this could not occur i f capitalism continue d amon g its nearest neighbours, sinc e this would inevitably force Russia in sheer economic self-defenc e along the path already traversed b y th e mor e advance d countries of the West . But, in general, despite this glimmer of hope to the East, Marx's closing year s were not cheerful. Germa n socialis m turned toward ameliorative measures and political democrac y in th e conventiona l sense . I n Britai n an d othe r industria l countries, th e urba n worker s experienced a rise in real income as food prices fell an d new technologies continued to cut the cost of manufacture s and transport . Socialis t an d other movements of protes t agains t the inequitie s and harshness of capitalist industrial societ y gathered strength on both sides of the Atlantic, but they generally did not validate Marx's vision of the scientific law s that would inevitabl y determin e the unfoldin g o f history. In retrospect , th e machin e tha t Mar x trie d t o construct t o validat e his youthfu l vision was a kind o f Ptolmei c instrument i n a Copernican world. As h e confronte d realit y in his

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years o f research , h e foun d th e piece s di d no t fi t wel l together . B y Copernicus' s day , followers o f Ptolemy (wh o argue d that the earth i s the center o f the Solar system ) ha d t o create mor e tha n 80 spheres "t o sav e appearances" ; i.e. , t o account for observed move ments of the planets.218 Marx left tha t task to later Marxists. H e went on with his researc h but wa s ofte n diverte d an d neve r finishe d th e secon d an d thir d volume s o f Capital. It i s worth askin g wh y thi s extraordinar y effor t dribble d off int o the sand ?

Noneconomic Factors In George Santayana's evocativ e phrase , al l human beings are destined to try to deal with ' 'crude fact s and pressing issues" in ' 'paper mone y of our own stamping, the legal tender of th e mind." 219 I t is , therefore , no t enoug h t o describ e Marx' s "pape r money " a s arbitrary. On e mus t tr y t o accoun t fo r it s specia l character . Marx's engin e o f capitalism's self-destructio n wa s evidentl y built up, piec e by piece , by carefu l selectio n fro m th e corpu s o f classica l economics . Fro m certai n passage s i n Adam Smith, for example, h e derives the image of the worker dehumanized by specialization o f function, settin g asid e other passages that suggest the advantages tha t th e worke r might derive fro m th e process. He generalizes b y simple assertio n Ricardo' s special cas e of unemploymen t cause d b y th e introductio n o f machiner y an d generate s thereb y th e reserve arm y of the unemployed, settin g aside Ricardo's conclusio n o n the net advantage to th e worke r o f th e introductio n o f th e machiner y (preceding , p . 82 ) a s wel l a s th e counterarguments o f Malthus, Mill, an d others. Fro m Quesna y and , quit e possibly, fro m the hate d Malthu s h e derive s th e notio n o f a possibl e disproportio n i n th e expansio n of capital an d consumptio n good s sectors ; bu t h e reject s ameliorativ e policie s tha t migh t restore th e balance . It i s systemati c selectivit y wit h respec t t o bot h idea s an d fact s tha t render s Marx' s analysis essentially a caricature o f reality. I t contains element s that command recognition ; but th e portrai t a s a whol e i s a vas t distortio n o f bot h th e lif e h e coul d observ e an d it s destined future.'Th e economic an d technical distortions in Marx's analysis , however , ar e evidently a product o f his determination t o generate a theory o f growth that would fulfil l his larger visio n of the past an d the future. On e must, therefore, tr y to establish what it is that distorted thi s larger vision . I believe i t was his view of the individual and his relatio n to societ y and , indeed , t o history . Mar x asserted , an d ma y wel l hav e believed , tha t al l previous forms of culture would, in a sense, b e repealed b y the revolutionary overthrow of capitalism, th e consolidatio n o f socialism , an d a n ending , onc e an d fo r all , o f clas s struggles. On e o f the most interestin g passages i n the Communist Manifesto bear s o n this question. Mar x begins: 220 The charge s agains t Communis m made fro m a religious, a philosophical, and, generally , fro m a n ideologica l standpoint , ar e no t deservin g o f seriou s examination. . . . What els e doe s th e history o f ideas prove, tha n that the intellectual production change s it s characte r i n proportio n a s materia l productio n i s changed ? The rulin g idea s o f eac h ag e hav e eve r bee n th e idea s o f it s ruling class. But h e the n goe s o n t o tak e the matte r quit e seriously , indeed: Undoubtedly, i t wil l b e said , religious , moral, philosophical and juridical ideas hav e bee n modifie d i n th e cours e o f historica l development . Bu t re -

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ligion, morality , philosophy, political science , an d law, constantl y survived this change . There are , besides , eterna l truths, such as Freedom, Justice , etc. , tha t are common to all state s of society . But Communism abolishes eterna l truths , it abolishes al l religion, an d al l morality, instead of constituting them on a new basis; i t therefore act s i n contradictio n to al l pas t historica l experience . What doe s thi s accusatio n reduc e itsel f to ? Th e histor y of al l past societ y has consiste d i n th e developmen t o f clas s antagonisms , antagonism s that assumed differen t form s a t differen t epochs . But whateve r for m the y ma y hav e taken , on e fac t i s commo n t o al l pas t ages, viz., th e exploitatio n o f on e par t o f societ y b y th e other . N o wonder , then, that the social consciousness o f past ages, despite all the multiplicity and variety i t displays , move s withi n certai n commo n forms , o r genera l ideas , which canno t completel y vanis h except wit h the tota l disappearance o f clas s antagonisms. The extraordinar y hypothesis asserte d her e is that because conflicting class interest s of one kin d o r anothe r existe d i n al l pas t societies , th e continuit y of certai n concept s o f justice, morality , an d religio n mus t be associate d wit h those conflicts . I f nothin g else , Marx's appeal to those concepts i n generating outrage at the ills of capitalism suggests that something i s wron g wit h his no n sequitur. An d hi s erro r i s underlined b y a furthe r 14 0 years of history, includin g considerable experience wit h consolidated socialis t rule during which th e abidin g character of certain fundamental political , social , an d economic prob lems ha s asserte d itsel f a s well as the continuity of important moral, cultural, and, even , religious values . The error—share d i n muc h post-187 0 mainstrea m economics—i s tha t huma n being s are much more complex units than Marx credited, fille d wit h conflicting impulses, a s the philosophers an d religious leaders, poets, an d storytellers of every culture have perceived. A Copernican syste m for societies mus t begin with human beings in their full complexity. In th e Communist Manifesto —and occasionall y elsewhere—Mar x buil t hi s vie w o f human beings around the "cas h nexus"—the crudest kind of materialistic motivation. In more matur e passages, h e allowed for a wider range of human impulses, although always rooted i n values and interest s determined b y the technological an d economic structure of particular societie s a t particula r periods o f time. In comparin g m y ow n stage s o f economi c growt h with Marx's , I foun d ou r ultimat e difference i n thi s economicall y determine d vie w o f huma n beings—whethe r crud e o r sophisticated.221 In th e stages-of-growt h sequenc e huma n beings seek no t merel y economic advantag e but als o power , leisure , adventure , continuity of experience, an d security; they are concerned wit h their family, th e familiar values of a regional and national culture, and a bit of fun dow n a t the local or some othe r congenial gathering place. An d beyond these diverse homely attachments , huma n being s are als o capabl e of bein g move d by a sens e of connection wit h thei r fellow s everywhere , who , the y recognize , shar e a n ultimatel y common human experience an d destiny. In short, net human behavior is seen not directly or obliquely as economically determined, but a s an act of balancing alternative and often conflicting huma n objectives—often abiding and universa l objectives—in the face o f the range o f choice s me n an d wome n perceive to b e open t o them. This notio n o f balanc e amon g alternative s perceived to b e ope n is , o f course , mor e

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complex an d difficul t tha n a simpl e maximizatio n proposition; an d i t does no t lea d t o a series of rigid, inevitable stages of history. I t leads t o patterns of choice mad e withi n the framework permitte d b y the changing setting of society; a setting itself the product both of objective rea l condition s an d o f th e prio r choice s mad e b y me n tha t hel p determin e th e current settin g tha t men confront. The sector s o f a society interact : cultural, social, an d political forces, reflectin g differ ent facet s of huma n beings, hav e their own authentic , independent impac t on the perfor mance of societies, including their economic performance. Thus, the policy of nations and the tota l performanc e o f societies—lik e th e behavio r o f individuals—represen t act s o f balance rathe r tha n a simpl e maximizatio n procedure . On thi s vie w i t matter s greatl y ho w societie s g o abou t makin g thei r choice s an d balances. Capitalism , whic h i s th e cente r o f Marx' s accoun t of th e postfeuda l phase , i s thus an inadequate analytic basis to account for the performance of Western societies. One must look directl y a t the ful l mechanis m o f choice amon g alternativ e policies, includin g the political process—and, indeed , th e social an d religious processes—as quasi-independent arena s fo r makin g decision s an d choices . It was on this inherently comple x view o f human beings an d societies that the line from Hume to Mill was built. And a respect fo r that complexity lies behind the forces that drove Western societie s progressivel y t o build their political system s around universal suffrage, multiple parties , an d th e secre t ballot . Th e Refor m Bill of 186 7 was , i n part, a conven tional maneuve r in two-party politics; but it was also a "lea p in the dark" vote d b y men concerned wit h more tha n the cash nexus , moved by forces deeply rooted i n the values of a societ y committe d t o democracy . Th e widenin g of the electorat e wa s a major forc e i n achieving ove r th e nex t centur y many o f th e objective s Mar x professe d t o see k fo r th e worker i n his magnum opus published the same year. And it is not inappropriate tha t Marx died i n th e yea r (1883 ) tha t Bismarc k pu t throug h majo r healt h insuranc e legislation , responding t o conventional political pressures fro m a social democratic party whose unity and ameliorativ e progra m Bismarc k feare d bu t Mar x ha d bitterl y opposed i n 1875 . But a n analysis of Karl Marx i n a book o n theorists of growth shoul d no t end here. H e was bot h a polemicis t an d a socia l scientist . Hi s visio n o f th e dynamic s o f history , o f capitalism, it s demis e an d supersessio n b y socialis m an d the n communis m wa s full y formed b y 1848 . I t yielded i n the Communist Manifesto a powerful call to arms, appealin g with som e succes s bot h t o the conscienc e o f th e Western Europea n middl e clas s an d th e frustration o f the worker. An d a part of his life was subsequently devoted t o the politics of bringing that vision to life. Bu t he committed mos t of his lif e t o an almost inhuman effort to underpi n tha t visio n wit h a scientifi c foundation . Writin g i n 186 7 o f Capital, i n explanation o f failure to correspond wit h a friend , h e wrote: 222 " I therefor e [becaus e of illness] ha d t o use every momen t i n which I was capable o f working in order t o complet e my book , t o whic h I hav e sacrifice d m y health , m y happiness , an d my family. " A recen t biographe r conclude s an d cite s a strikin g imag e Mar x evoke d o f hi s ow n dilemma:223 The dram a o f Marx' s lif e wa s th e confrontatio n of theor y an d reality , thought an d th e world . Th e struggl e wa s powerful because it s stag e wa s th e whole o f human history, and becaus e each of th e two protagonists—intellectual visio n and actual experience—was equally clothed with th e ful l intensit y of Marx' s commitmen t to it. Thi s double devotion wa s Marx' s dilemm a and his glory . Hi s lif e ha d al l th e characte r and dimension s o f tragedy.

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In th e 1860 s Mar x foun d a literar y imag e o f hi s ow n pligh t i n a stor y of Balzac. Pau l Lafargu e wrote : One o f Balzac' s psychologica l studies , "Th e Unknow n Master piece" . . . mad e a grea t impressio n o n hi m becaus e i t wa s i n par t a description o f hi s own feelings . A talented painte r tries again and agai n to lim n th e pictur e whic h ha s forme d itsel f i n hi s brain ; touche s an d retouches hi s canvas incessantly ; to produce a t last nothin g more tha n a shapeless mas s of colors; whic h nevertheless t o his prejudiced eye seems a perfec t reproduction o f th e realit y i n his ow n mind. Lafargue's testimon y is the only evidence tha t Marx regarde d Balzac' s char acter a s a n imag e o f hi s ow n dilemma , bu t Mar x recommended th e stor y t o Engels a s a "masterpiece " i n Februar y 1867 , just a t th e tim e Volum e On e was goin g t o th e printer . . . . Som e feature s of Balzac's painte r recall Marx' s own literar y creation , the Democritu s o f hi s doctora l dissertation . Drive n by th e contras t betwee n the ligh t i n hi s min d an d th e pal e reflectio n o f hi s visio n realit y offered , Democritus ha d als o travele d th e worl d i n searc h o f evidence . Cicer o call s him a vi r eruditus. H e i s competen t i n physics , ethics , mathematics , i n th e encyclopedic disciplines , i n ever y art . S o di d Mar x becom e a vi r eruditus, extending his learnin g t o som e o f the sam e disciplines Democritu s had cultivated. Hi s notebook s an d manuscript s bulged wit h accumulate d knowledge. He di d not , like Democritus , trave l throug h hal f th e worl d i n orde r t o ex change experiences , piece s o f knowledge , an d observations , bu t h e learne d new language s an d constantly expanded the scope of his reading. He wrote to friends a t variou s time s tha t Capital coul d no t b e complete d unti l h e ha d a t hand one more piece of information—from Belgium , or Russia, or the United States. Marx' s self-induce d illnesse s were les s radica l an d violen t than De mocritus' blindin g himself , bu t thei r self-destructivenes s serve d a simila r purpose, preservin g the theoretical vision underlying Capital fro m th e threatened revelation tha t the empirical reality o f market relations might not correspond t o it . Marx clearly faile d to fulfill th e coherent but romantic destiny he defined for himself in his "sacre d decade. " (But , then, neithe r di d Hum e no r Ada m Smit h no r Marshal l no r Schumpeter—to nam e fou r wh o se t themselves task s beyon d their reach.) A s Marx wel l knew, hi s syste m a s a whol e did no t captur e economic, social , an d political reality as it progressively unfolde d after 1848 . But alon g the wa y he generated a range of insights — often inconsisten t an d derivativ e as the y were—tha t wil l continue to mak e him a major figure amon g classical economists— a designatio n that a part, a t least, of his exceedingly complex personalit y migh t no t hav e resented .

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II GROWTH THEOR Y MOVE S TO THE PERIPHERY , 1870-1939

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5 The Settin g

The perio d considere d i n Part I I runs from, roughly, 187 0 to the outbreak of the Secon d World War . A s the analysis of Part I makes clear, 1848—whe n th e Communist Manifesto and the first edition o f Mill's Principles wer e published—might be taken as the end of the classical centur y of growth analysis, i n terms of intellectual history, although it evidently took som e tim e fo r th e attitude s the y reflecte d an d their doctrine s t o diffuse . Th e mor e conventional benchmar k dat e o f 187 0 come s close r t o th e tim e whe n Jevon s (1871) , Menger (1871) , an d Walra s (1874 ) publishe d thei r respectiv e formulation s of margina l analysis, althoug h Jevons's "coefficien t o f utility" dates back to 1862 . I would add that also about this time (1873) almost a quarter-century of secular price decline began, which had importan t effect s o n the contour s o f economic theor y a s well as of the worl d econo my. I n addition , th e dat e approximate s 186 7 whe n the firs t volum e of Capital appeare d (and Marshall began his serious stud y of economics); i t is close enough to 187 1 when the seventh editio n o f Mill' s Principles, th e las t edited b y the author , was published ; an d it was just abou t th e time whe n chairs o f political econom y bega n to be establishe d i n th e leading America n universities , foreshadowin g the emergence, i n the next generation, o f U.S. an d British economi c association s an d learned journals. As turning points go, then , 1870 i s a reasonable i f somewha t arbitrar y symbol . Note 1 to thi s chapte r incorporate s characterization s o f th e 187 0 watershe d b y nin e historians of economic thought. ' Broadl y speaking , the y underline the shif t fro m a focu s on growt h to social refor m an d welfare ; a new emphasis on th e refinement of analysis ; a heightened concer n wit h the optimum allocation of resources, i n terms of marginal analysis; an d th e emergenc e o f economic s throughou t th e Atlanti c worl d a s a n academi c profession. While acceptin g a s legitimat e virtuall y al l th e insight s se t ou t i n Not e 1 , m y ow n formulation o f wha t happened t o political econom y afte r 187 0 woul d distinguish, rathe r sharply, a s d o som e historian s o f doctrine , th e perio d dow n t o 191 4 fro m th e interwa r years. I n the 4i decades before the First World War, the earlier relative convergence o f the formal theoretical concepts o f mainstream economists with the great issues in political and social contentio n wa s weakened . Th e advance d industrial societies o f that er a bega n t o come seriousl y to grips with problems o f welfare, income distribution, monopoly power, and othe r contentiou s matters that force d themselve s to th e cente r of th e politica l stage. Operationally, thes e issue s were pose d b y th e ris e of ne w politica l forces: th e Populists, Grangers, an d Progressive s i n th e Unite d States ; th e Labou r Part y an d th e invigorated

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Liberals i n Britain ; th e socialist s o n th e Continent ; the labo r union s everywhere ; and , down to the mid-1890s, the embattled American farmers . Thes e developments were quite consistent wit h the critical question s t o which Mill an d Marx ha d addressed themselves . Mill's Principles reigne d a s th e mainstrea m textboo k dow n t o th e 1890 s whe n Marshall's Principles bega n t o tak e over , i n th e Anglo-Saxo n worl d a t least . Marshall , quite consciousl y i n Mill' s tradition , too k problem s o f welfar e ver y seriousl y indeed , regarded himsel f as a socialist fo r some time, an d rejected socialis m only after protracted soul-searching. Bu t mainstrea m economics, a s a formal method o f analysis , move d i n a quite differen t direction . Tru e t o Malthus' s insigh t (p. 581 , n . 9) , th e calculu s prove d capable o f expressin g wit h precisio n certai n fundamenta l economi c proposition s and , especially, defining , under strict limiting assumptions, conditions of stable equilibrium in both specifi c market s an d fo r a n economy a s a whole. The majo r economic figures—i n Britain, o n th e Continent , an d i n th e Unite d States—were caugh t u p i n th e authenti c adventure of refining market analysis for both final output and factors of production under what came to be known as Marshallian short-period assumptions—excluding the dynamic supply forces, as well as changing incomes and tastes, at work in the process of economi c growth. Withou t these complications , pur e theorie s o f production an d distribution coul d be brought togethe r i n splendid symmetry , but political economy gave way to economics . The discipline becam e th e evolving methods o f analysis, not the great problems demand ing solutio n i n the activ e world; and th e increasingl y refined methods o f analysi s led, i n most—not all—cases , awa y from, rathe r than toward, the issue s i n active contention i n the political arena . Wha t John Williams had to say after an exhaustive test of the classica l theory o f foreign trad e could be said of mainstream economics a s a whole i n the wake of the revolution of 187 0 an d after: 2 "Th e classica l theory assumes as fixed, for purposes of reasoning, th e ver y thing s which , in m y view, shoul d be chie f object s o f study . . . . " And Alfred Marshall , a t once major architect and major critic of mainstream economics in its secon d century , would agree. Moral and ethical issue s did not, o f course, disappea r fro m economics , an d economists certainly di d no t abando n th e right to hold stron g personal view s on issues of policy an d social justice . Eve n Leo n Walra s wa s a n advocate o f wide-ranging economic an d socia l reform; bu t thi s stanc e wa s clearl y divorce d fro m hi s wor k a s a n analys t o f genera l equilibrium. Economists di d not become less concerned wit h the fate of their societies; but the linkag e of theoretical formulatio n to problems o f policy wa s attenuated by the seduc tive eleganc e o f th e ne w concept s an d method s o f analysis. The gap between theoretical formulatio n and the complexities of current economic an d social life were sometimes deal t with by including within general treatises a good dea l of empirical materia l in the tradition of Adam Smith and J. S . Mill. This is true, for example, of Marshall' s Principles, discusse d i n i n Chapte r 6 . Bu t ther e i s a sens e i n whic h th e intellectual underpinnings of the movement for what we might broadly call welfare reform were quit e precisel y relate d t o th e gap s betwee n th e forma l assumption s underlyin g post-1870 mainstrea m economic s an d reality . The centra l propositions o f mainstream economic theor y assumed perfect competitio n and stead y ful l employment ; th e dissident s dramatize d th e realit y o f monopolie s an d severe cyclica l unemployment . Formal theor y linked income distribution to the ne t marginal valu e product o f th e economi c function s performe d b y individuals , th e dissident s dramatized (a s ha d Mill ) th e institutions , pattern s of lan d ownership , inheritanc e law, relative access t o education, and other noneconomic determinants of incom e distribution emerging fro m th e histor y of particula r societies.

The Setting 15

5

Among th e inequitie s the y identifie d wa s th e asymmetr y i n th e labo r marke t o f th e individual worke r vis-a-vi s th e mor e concentrate d powe r o f th e employer , operatin g individually o r collectively . Th e market-oriente d theor y o f distributio n i n it s pur e for m was silen t on suc h vicissitudes a s accidents at the workplace, health facilities an d educa tional opportunit y fo r th e poor , an d old-ag e insurance . B y on e for m o f argumen t o r another, th e dissident s dragge d thes e issue s toward the center o f the political arena . Th e examples could g o on to embrace Henry George's powerful polemic built on an interpretation o f the Malthus-Ricard o theor y of rent; Thorstein Veble n on conspicuous consumption, the monopolistic corporation , an d technology; Upton Sinclair on the Chicago slaughterhouses; th e America n institutionalists ; the Fabians , includin g Shaw; the Germa n an d British historica l schools , includin g R. H . Tawney . An d then—sometimes overlappin g these example s an d categories—ther e wer e variou s kind s o f socialists , includin g some writing an d arguin g i n th e traditio n o f Marx a s they chos e t o interpre t him . I woul d emphasiz e agai n tha t th e mainstrea m economist s di d no t universall y an d systematically oppos e th e measure s tha t aros e fro m thes e heterodo x sources . Some , i n fact, supporte d them . Bu t th e forma l construct s o f mainstrea m economic s wer e a poo r basis fo r crusading zeal ; an d the social welfar e movement, whic h progressively gathere d momentum dow n t o th e Firs t Worl d War , was , i n fact , nourishe d mainly b y a n array of iconoclasts wh o were crusading not only on behalf of the less advantaged but also against the inadequacie s the y though t they perceived i n mainstrea m economics . It does not follow that the quiet acknowledgmen t of the inhumanities of capitalism, th e exploration o f possibl e remedies , an d authenti c concer n fo r th e les s advantage d tha t motivated Mill , Marshall , Pigou, and others in that nonpolemical tradition were unimportant in democratic societies . They di d not provide the banners and rhetoric fo r the arden t reformers. Bu t they helpe d persuad e th e critically important "moderate , decent , conser vative margin'' i n the middle of the political spectru m that major reforms were legitimat e and necessary. 3 On on e point, centra l t o this book, bot h orthodox an d heterodox economi c analyst s of the 1870-191 4 period—with a few exceptions noted later—more o r less silently agreed : the analysis of economic growt h could be dropped fro m th e agenda. Bot h groups assumed the existenc e o f a n ongoing , viable , expandin g economi c system . Althoug h th e line s between the m wer e no t sharp , on e grou p wa s devote d primaril y t o refinin g theoretica l knowledge o f ho w i t worked , th e othe r t o diagnosin g an d remedying , i n mor e o r les s radical ways , it s inhumanities . Bu t b y an d larg e th e theor y o f economi c growt h wa s placed by both groups on protracted holiday . The political process came to concentrate o n a more or less civilized struggle over the division of a pie virtually all contestants assume d would continu e t o expan d a s a matte r o f trend . Tha t struggl e determine d th e shap e o f democratic politic s i n advance d industria l societies fo r abou t a century. One aspec t o f the history of the world econom y di d generate fresh, creativ e though t in the 4 0 pre-191 4 years : th e powerfu l declinin g pric e tren d fro m 187 3 t o abou t 1896 ; th e subsequent risin g tren d tha t wa s t o b e exacerbate d b y th e Firs t Worl d War , reachin g a peak i n 1920 . Th e declining price trend fro m 187 3 to the mid-1890s wa s the occasion fo r extended analysi s b y virtuall y all th e majo r pre-191 4 an d interwa r monetar y theorists , including Cassel , Fisher , Giffen , Keynes , Layton, Marshall , Pierson , Wells, an d Wicksell.4 I n the case of Marshall, his written and oral testimony before the Royal Commission on the Depression of Trade and Industry (1886), and the Royal Commission on the Values of Gol d an d Silve r (1887-1888), wer e the occasio n to crystallize an d present the monetary doctrine s that h e ha d generate d i n his teaching and tha t ha d become par t of the oral

156 Growth

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tradition at Cambridge. I n his lengthy biographical essay on Marshall, Keynes observes: 5 "It wa s an odd stat e of affairs tha t one of the most fundamenta l parts of monetary theory should, fo r abou t a quarter o f a century, have been availabl e to students nowhere excep t embedded i n th e for m o f question-and-answe r before a Governmen t Commissio n in terested i n a transitor y practical problem. " There was mor e tha n th e falling price tren d of 187 3 t o the mid-1890s tha t affected th e contours o f politica l econom y i n th e pre-191 4 era . • Th e worl d aren a of power wa s reshaped: i n part, b y the emergence o f Bismarck' s German Empire i n 187 1 and, at about the same time, a unified Unite d States bound together b y a continenta l railwa y net ; i n part , b y th e movemen t int o takeof f o f Sweden i n th e 1870s , Japa n an d Denmar k i n th e 1880s , Russi a an d Ital y i n th e 1890s, wit h regional takeoff s in parts of th e Austro-Hungaria n Empire. Germany , Japan, Russia, and Italy bestirred themselves to assert imperial claims in Africa an d East Asi a befor e al l option s wer e closed , whil e th e nationalis t strains withi n th e Ottoman an d Austro-Hungarian Empires becam e mor e intense. Analysi s of imperi alism became a popular subject; and the multiple minor wars of this period all relate to the new impulses at work: the Italian campaign in Africa; th e Sino-Japanese and Russo-Japanese wars ; th e Boe r war ; th e Spanish-America n war ; an d tw o Balkan wars. • Th e upwar d shif t i n th e relativ e price s o f agricultura l products an d ra w material s after th e mid-1890 s impose d a sever e chec k o n th e tren d rise i n real wage s i n th e advanced industria l countries tha t ha d marke d th e previou s quarter-century . Th e political force s tha t ha d bee n gatherin g i n suppor t o f expande d welfar e measure s rapidly increase d i n strength a s urban workers turned to politics for redress agains t the forces operating on prices in the world economy. German socia l insurance dates from th e 1870s : agains t accident s (1871,1884) ; sicknes s (1883) ; an d ol d ag e an d invalidity (1888) . A measurabl e increas e i n socia l outlay s as a proportion o f GN P occurred i n the Atlantic world in the pre-1914 generatio n (Tabl e 5.1), althoug h the increase wa s modest compared t o that which took place during the interwar years.6 • Although , o n th e whole , busines s cycle s wer e o f modes t amplitud e fro m th e mid-1890s t o 1914 , this was the period when systematic study of the business cycle began, an d man y o f th e fundamenta l pioneering studie s were published. • Th e relativel y hig h price s o f basi c commoditie s an d favorabl e term s o f trad e i n agricultural an d ra w materia l producin g region s afte r 189 6 le d t o phase s o f rapi d development, including large flows of capital and immigrants, expanded investment in infrastructur e as wel l a s export commodities , and , i n two cases at least (Canada and Australia) , movemen t int o takeoff. 7 These developments were , t o a degree, reflecte d i n the writings of mainstream econo mists; bu t th e barrie r betwee n forma l theor y an d th e problem s o f th e activ e worl d wa s heightened b y an institutional development t o which Heilbroner refers (Not e 1) : economics became a n academic disciplin e throughout the Atlantic world. Tha t meant professors , learned journals, doctora l (o r fellowship) theses, specialize d field s within the discipline , and th e emergenc e o f school s o f economi c thought and method. 8 One consequenc e o f thes e development s wa s considerabl e continuity o f though t that transcended th e great chasm of the First World War—and, to a degree, eve n the Second. Table 5. 2 i s meant to suggest, with n o pretense to completeness, the rough—very rough —grouping o f fiv e o f th e majo r school s of th e perio d 1870-1939 .

The Setting

157

Table 5.1 . Socia l Servic e Expenditures as a Percentage of GNP: 1890-1932 (all levels of government) United State s Unite

1890 1.8 1900 1. 1913 2. 1932 6.

% 1.9 9 2. 1 4. 3 12.

d Kingdom German

% 6 1 5.1 9 19.

y

% 3

SOURCE: Richard A . Musgrave , Fiscal Systems (Ne w Haven: Yale University Press, 1969) , pp. 94-9 5 (Tabl e 4-1) . Socia l service s includ e education , welfar e programs , an d housing as well a s social insurance . There are no estimates fo r total German socia l expenditure s fo r 189 0 and 1913 . Th e mor e narro w categor y o f socia l insuranc e expenditure s appear s t o hav e in creased as follows as a proportion o f GNP. 1891 , 0.7% ; 1901 , 1.3% ; 1913 , 1.8% . (Calculated from Supa n Andi c an d Jindric h Veverka , "Th e Growt h o f Government Expenditur e i n Ger man Sinc e the Unification, " Finanzarchiv , Vol . 23 , No . 2 , Januar y 1964 , pp . 199-20 0 (pe r capita tota l budge t expenditure s i n constant [1900 ] prices an d per capita socia l insuranc e a s % of tota l expenditure ; p . 23 8 [population] ; an d p . 24 1 [GN P a t 190 0 prices]. )

They reflec t man y anomalies . Non e kept vitalit y an d eve n approximat e continuity fo r more than three generations; Schumpeter, althoug h a devoted pupil of Wieser and BohmBawerk, wen t of f i n hi s ow n direction , influence d mor e b y Walras—and perhap s eve n more b y Marx—tha n b y hi s Vienn a teachers . Th e Stockhol m School , i n it s firs t tw o generations, wa s marke d by intens e siblin g rivalries . Leontief , althoug h clearly buildin g on Walras, emerged as a young ma n not from Lausann e but from th e Soviet Union o f the 1920s. An d a goo d man y economist s o f distinctio n absorbe d element s fro m variou s traditions an d schools; in England, for example, Roy Harrod , John R . Hicks , an d Lionel Robbins. Th e America n economist s wer e notabl y diverse . J . B . Clar k (1847-1938 ) Table 5.2. Fiv e Major School s of Economists Austrian School Carl Menge r (1840-1921) Friedrich vo n Weise r (1851-1926 ) Euge n von Bohm-Bawerk (1851-1914) , Ludwig vo n Mises (1881-1973 ) Josep h A. Schumpete r (1883-1950), Friedrich vo n Haye k (1899- ) Stockholm School Knut Wicksel l (1851-1 926) Gusta v Cassel ( 1 866- 1 945) , Johan Akerma n (1896-1982) Eri k Lindah l ( 1 89 1 - 1 960) , Gunnar Myrda l (1898-1987) Berti l Ohli n (1899-1979) Lausanne School Leon Walra s (1834-1910) Wilfre d Paret o ( 1 848- i 923) [Wassily Leontie f (1906 - ) ] Cambridge School Alfred Marshal l (1842-1924) Arthur C . Pigo u ( 1 877- 1 959) Joh n M . Keyne s ( 1 883- 1 946) Dennis H . Robertso n (1890-1963) Joa n Robinson (1903-1985) American Institutionalists Thorstein Veblc n (1857-1929 ) Herber t J. Davenpor t (1861-1931 ) John R . Common s (1862-1945 ) Wesle y C. Mitchel l (1874-1948 ) Walton Hamilto n (1881-1958 ) Clarenc e Ayres (1891-1972)

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Theory Moves t o th e Periphery

reflected i n hi s wor k th e Germa n historica l schoo l an d Britis h socialism ; bu t hi s mos t memorable contributio n wa s i n applyin g margina l productivit y analysis t o distribution theory. Irvin g Fishe r (1867-1947 ) began , lik e Marshall, a s a mathematician bu t move d over t o economic s unde r th e influenc e of Willia m Graham Sumne r an d studie d in Ger many and France i n 1893-1894; but, essentially, Fisher was a school unt o himself despite his gracious acknowledgmen t o f debts to others. Fran k Taussig (1859-1940), on the other hand, elaborate d an d sough t t o tes t empiricall y th e Britis h classica l theor y o f foreig n trade, althoug h Schumpete r note s a bi t o f Bohm-Bawer k i n hi s theor y o f distribution . One i s dealing, then , i n the 44 years befor e th e First World War, wit h an increasingly complex, diversifie d professiona l field , roote d in universities, its widening content fed by a number of distinctive streams o f thought, interpenetrating with the passage o f time. Bu t there wa s also a substantia l cacophonous choru s of critica l dissidents; notably, the Ger man and British historical schools, the British Fabians, the American Institutionalists, an d an assortmen t o f not-always-harmoniou s socialists. From th e presen t perspective , th e central fac t abou t th e period 1914-193 9 i s that the conceptual barrier s betwee n mainstrea m economi c theor y an d problems o f public polic y were notably lowered as the apparently solid institutional framework of the world econo my wa s shattered , firs t b y war , the n b y a n unexample d sequenc e o f acut e problems : chronic unemployment , extrem e trad e an d payment s disequilibrium , a shar p relativ e decline afte r 192 0 i n basic commodit y prices , a great depression , an d a neo-mercantilis t fragmentation o f the worl d economy , a s a second worl d war becam e a virtual certainty . Figure 5. 1 seek s t o captur e somethin g o f thi s discontinuit y for Grea t Britain . On bot h side s o f the Atlanti c the First Worl d Wa r drew a good man y economists int o government, confrontin g the m wit h circumstances wher e th e norma l operatio n o f com petitive market s palpabl y di d no t suffice . Tha t experience , however , lef t les s profoun d marks o n economic theor y an d analysis than the array of decisions of public policy posed initially b y reparation s an d wa r debts , an d b y th e subsequen t sequenc e o f traumati c problems confronte d in th e Atlanti c world ove r th e nex t generation. These urgen t problem s force d th e pace o f both theoretica l an d empirica l work . Inten sified effort s wer e concentrated , i n particular, o n th e transfe r problem, th e intersectora l and internationa l terms o f trade, optimu m exchange rates, and , abov e all , o n unemployment in general an d the business cycle in particular, where the foundations for theoretica l analysis ha d bee n lai d befor e 1914 . Keynes' s reshapin g o f macroeconomi c theor y t o capture th e theoretica l possibilit y of chroni c high unemployment and th e direction o f it s remedy was simply the most dramatic of a number of forced-draft theoretical response s t o a worl d econom y deepl y trouble d fo r a mor e protracte d interva l tha n an y sinc e 1815 . In thes e area s th e impuls e t o produc e conclusion s promptl y usefu l fo r polic y wa s evidently strong ; bu t mor e influentia l than a sense o f short-ru n urgency was th e fac t that the conventiona l theoretica l structure s applie d t o thes e problem s wer e generall y se t u p under Marshallia n short-ru n assumptions . Thus , neithe r th e economi c an d politica l en vironment o f th e interwar years no r the reigning structure s of mainstream economics le d the majo r figures in economics t o place the analysi s of economic growt h at the cente r of the stage. Nevertheless, importan t insights related t o economic growt h emerged a s a kind of by-produc t of wor k induce d by th e pressur e of current problems. Th e stat e of growth analysis i n th e 1980 s canno t be understoo d without referenc e t o thes e oblique interwar contributions. Gathering momentum even before 1914 , but greatly heightened by th e interwar imperatives, wa s a development that ranks in importance with major creativit y in theory; that is ,

The Setting

159

Figure 5.1. Th e Inter-Wa r Discontinuity : British Historical Data, 1870-1939 . [Adapte d fro m B . R. Mitchell , Abstract o f British Historical Statistics (Cambridge : a t the Universit y Press , 1971). ]

the systemati c amassin g o f reasonably reliabl e statistica l data . Th e power o f the Keyne sian revolution depended , i n fact, o n the parallel emergenc e o f national income account ing that matched its terms, althoug h early national income estimates were mainly designed to establis h pattern s o f incom e distribution . Meanwhile, a few substantia l figure s marche d t o th e bea t o f thei r ow n drummers , o f whom four certainly belong i n any review of theories o f economic growth: Joseph Schum peter, Simon Kuznets , Coli n Clark , an d Roy Harrod. Non e generated a theory of growth covering wha t 1 regard her e a s all the relevant variables. Non e approached growt h in the broad societa l terms o f Marshall an d the century of classics o n which he built. Nevertheless, each in different ways carried th e analysis of growth beyond th e classics. An d there were others o n the periphery who , under one impulse or another, mad e significant contributions t o growt h analysis . How, then , shoul d on e organiz e a n accoun t o f growt h theor y fro m 187 0 t o 1939 ? Evidently, on e cannot agai n pick six commanding figures , analyz e them along the lines of the heroe s o f Par t I , an d fee l on e ha s a n approximat e accoun t o f ho w growt h theor y evolved. Ther e i s a parado x here : o n th e on e hand , a goo d man y economist s mad e contributions t o growth analysis as by-products arisin g fro m wor k addressed primaril y to other problems ; o n th e othe r hand , ther e ar e no t eve n si x majo r figure s wh o ca n b e regarded primaril y a s analyst s o f growth . Under thes e circumstances, I begin wit h a chapter o n what Marshall had to sa y about the long-ru n an d economi c growt h (Chapte r 6) . I t i s longe r tha n I initiall y planne d bu t presented withou t apology . I foun d Marshal l ha d a grea t dea l t o sa y abou t th e ke y economic growt h variables . H e b y n o mean s solve d al l th e problem s h e defined , bu t neither hav e hi s successors. I concluded h e is still worth reading a s a growth economist , and I hop e Chapte r 6 wil l encourag e a reexaminatio n o f hi s view s i n those terms . Th e balance o f Part II is built around the key variables used as the matrix for Part I: population and th e workin g forc e (Chapte r 7) ; investmen t and technolog y (Chapter s 8 an d 9) ; th e business cycl e an d growt h (Chapter s 1 0 and 11) ; relative price s an d Kondratief f cycle s (Chapter 12) ; and th e stage s o f an d limit s to growt h (Chapter 13) . The contribution s o f such majo r figure s a s Schumpeter, Kuznets, an d Coli n Clar k are wove n into thes e func tional chapters .

6 Alfred Marshal l (1842-1924)

I onc e entitle d a piece on the evolution o f theories o f economic development , includin g my own , "Development : Th e Politica l Econom y o f th e Marshallia n Lon g Period." 1 What I ha d i n min d wa s this , amon g a number of simila r passages fro m Marshall: 2 The theory of stable equilibrium of normal demand and supply helps indee d to giv e definitenes s t o ou r ideas ; an d i n it s elementar y stage s i t doe s no t diverge fro m th e actua l fact s o f life , s o fa r a s t o preven t it s givin g a fairl y trustworthy pictur e o f th e chie f method s o f actio n o f th e stronges t an d mos t persistent grou p of economic forces . Bu t when pushed to its more remot e an d intricate logical consequences , i t slips away from th e conditions of real life . I n fact w e ar e her e vergin g o n th e hig h them e o f economi c progress ; an d her e therefore it is especiall y needfu l to remembe r tha t economi c problem s are imperfectly presente d whe n the y ar e treate d a s problem s o f statica l equi librium, an d no t o f organi c growth . Fo r thoug h th e statica l treatmen t alon e can give us definiteness an d precision o f thought, and is therefore a necessar y introduction t o a more philosophi c treatmen t o f societ y a s a n organism ; i t is yet onl y a n introduction . . . . [I] t i s barel y eve n a n introductio n t o th e stud y o f th e progres s an d development o f industrie s whic h sho w a tendenc y t o increasin g return . It s limitations ar e so constantly overlooked, especiall y b y those who approach i t from a n abstrac t poin t o f view , tha t ther e i s a dange r i n throwin g i t int o definite for m a t all. But , with this caution, the risk may be taken; an d a short study o f th e subjec t i s give n i n Appendi x H . Appendix H then demonstrates tha t under condition s o f increasin g return s (decreasin g costs)-—the normal conditio n o f many firm s an d sector s i n an economy regularl y absorb ing ne w technologies—n o singl e stabl e equilibriu m position exist s fo r price an d output; when " a casua l disturbance" results in a substantial increase i n capacity and output (and, thereby, lowe r costs) , a cessatio n o f tha t disturbanc e doe s no t resul t i n a retur n t o th e initial capacity-output-cos t position; and , wit h respec t t o demand , a shar p reductio n i n costs an d pric e ma y resul t no t merel y in increased purchases but a n irreversibl e outward shift o f th e deman d curv e a s consumer s becom e accustome d t o th e commodit y whos e price ha s bee n greatl y reduced. 3 A reversa l i n cos t an d pric e will , unde r these circum -

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stances, no t return the demand curv e to its initial equilibrium position. Thus , no t only do both demand an d supply curves slope downward but they cease to be independent of each other; an d conventiona l equilibrium microeconomic s become s inoperative . Although, a s J . K . Whitake r notes , Marshal l ma y hav e bee n give n t o occasiona l hyperbole, h e reflecte d a powerfu l an d recurren t obsessio n when , i n a lette r t o N . G . Pierson, th e Dutc h economist , h e wrote: 4 . . . [T]h e boo k [Principles] wa s written to express on e idea; & one only. That ide a i s that whereas Ricard o & Co. maintai n that value is determined by Cost of production, & Malthus, Macleod , Jevons & (in a measure) the Austrians tha t i t is determined b y utility , each wa s righ t i n what he affirme d bu t wrong in what he denied. The y none of them paid, I think, sufficient attentio n to the element o f Time. Tha t I believe hold s the key of all the paradoxes w h. this lon g controvers y ha s raised. Whe n Ricardo spok e o f Cos t o f productio n as determining valu e he had i n mind periods a s to which cost of production is the dominan t force ; whe n Jevons emphasize d utility , he had i n min d shorte r periods. Th e attemp t t o wor k al l existing knowledg e o n the subjec t of value into on e Continuou s & harmoniou s whole , b y mean s o f a complex stud y of the element o f Time permeates ever y Book almos t ever y page o f my volume. It i s the backbon e o f al l that, fro m a scientific poin t o f view , 1 care t o say . But Marshall was acutely aware that he had not fully me t his own challenge an d woven the element o f time into a continuous and harmonious whole. A t the close of Appendix H in th e Principles h e reflect s o n "th e imperfectio n o f ou r analytica l methods " and , a s often, throw s ou t a clue a s to ho w progress migh t be mad e i n dealing scientificall y with the long run; i. e., b y dating the time a certain volume of production became ' ' normal." In one sense , th e larg e bod y o f historica l an d empirica l materia l i n Marshall's thre e majo r volumes reflect s th e extraordinaril y hig h goa l (o r Schumpeterian vision ) h e se t fo r him self. I t was to produce a set of principles that matched reality in its full complexity . Unlik e Marx, h e visited many factories, me t many businessmen, labor leaders, an d workers. H e understood and often sai d tha t the study of "organi c growth," whic h lay at the center of the proble m o f tim e i n economi c theory , wa s a biologica l field , no t a derivativ e o f o r parallel t o Newtonia n Physics . But th e technical tool s Marshall inherited an d substantially refined did not permit hi m to com e t o grip s i n a systemati c wa y wit h "societ y a s a n organism. " Writin g retro spectively, Marshal l said: 5 " . . . th e purely analytical work in Book V of my Principles, with a part of Book III, wer e the kernel fro m whic h my volume expanded backwards and forwards t o its present shape. " Mos t o f Book V and, almos t certainly, th e parts o f Book III to whic h Marshall referre d ar e susceptibl e o f formulation i n mathematical terms wit h supply—demand equilibriu m condition s define d unde r short-perio d assumptions . O n th e other hand , Boo k IV ("Th e Agent s of Production")—Marshall' s mos t extende d treat ment o f th e determinant s o f growth—i s o f quit e different , mor e descriptiv e textur e without a n explicitl y state d theoretica l bon e structure . I n fact , Marshal l di d mak e note s that constitut e a quit e luci d approximatio n o f a n aggregat e neoclassica l growt h model ; but, lik e thos e late r models , Marshall' s di d no t brin g hi m ver y clos e t o th e realit y h e sought t o evoke . An d o f thi s he wa s quit e aware. The dichotomy between the rigorous exposition of "introductory " proposition s and the evocation o f th e interacting , irreversibl e dynamic s o f economic , social , an d politica l processes i n the active world persisted in Marshall's mind and exposition to the end. Th e

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1920 Preface t o the last edition of th e Principles h e edited (the eighth) contained thes e two passages tha t capture th e divergen t strand s in Marshall's work: 6 The mai n concer n o f economic s i s thu s wit h human beings wh o ar e im pelled, fo r goo d an d evil , t o chang e an d progress. Fragmentar y statica l hy potheses ar e use d a s temporar y auxiliarie s to dynamical—o r rathe r biolog ical—conceptions: bu t th e centra l ide a o f economics , eve n whe n it s Foundations alon e ar e unde r discussion , mus t b e tha t o f livin g forc e an d movement. ... I t [the differential calculus ] is still in its infancy; it has no dogmas, an d no standar d of orthodoxy. I t has no t yet had time to obtain a perfectly settle d terminology; an d som e difference s a s t o th e bes t us e o f term s an d othe r subordinate matter s ar e bu t a sig n of healthy life. I n fac t howeve r ther e i s a remarkable harmony and agreement on essentials among those wh o are working constructively by the new method; an d especially amon g such of them as have serve d a n apprenticeship i n the simpler an d more definite , an d therefor e more advanced , problem s o f physics. Er e anothe r generation ha s passed, it s dominion over that limited but important field of economic inquir y to which it is appropriat e wil l probably b e n o longe r i n dispute. The harmonizatio n o f thes e tw o perspectives—Darwinia n an d Newtonian—ha s no t proved eas y ove r th e subsequen t 7 decade s no r th e achievemen t o f consensu s o n th e limited bu t importan t fiel d o f economi c inquir y t o whic h th e differentia l calculu s i s appropriate. It was this clash between Marshall's visio n of what economics shoul d be and the partial equilibrium analysi s o f competitiv e market s unde r short-ru n assumptions—i n whic h Marshall excelled—that account s for his curious attitude toward the use of mathematics in economics. I t wa s th e fiel d i n whic h h e wa s traine d a s a Cambridg e undergraduate , emerging wit h distinction a s Second Wrangler. Whitake r argues, no t unpersuasively, that this achievement , i n itself , doe s no t mea n tha t h e wa s " a bor n mathematician." 7 Whitaker point s t o other s wh o excelle d i n th e Cambridg e Mathematica l Tripo s o f th e period wh o di d no t g o o n wit h mathematic s and , mor e cogently , t o th e fac t tha t th e examinations at that time were more a test of endurance, memory, an d rapid manipulation than of a capacity fo r research i n mathematics. This is an issue I am certainly not qualified to settle . Bu t th e fac t i s that Marshall's "awkwardnes s an d hesitancy" i n mathematical economics as opposed to the evident greater "comfort " o f Jevons and Edgeworth, despit e their inferior technical training , were th e product o f Marshall's more acut e sense tha t the use o f mathematic s i n economic s coul d be dangerousl y limiting as wel l a s helpful . I n a statement wit h overtones o f Francis Baco n (following , p. 331) , Marshal l concluded that the principal legitimat e us e of mathematics was extremely limited. It was to clear the way to the center of the "difficul t problems" in economic theory that neither in his time nor in ours, len d themselve s t o mathematica l resolution. 8 Like professor s sinc e histor y too k not e o f them , Marshal l wa s no t abov e a bi t o f professional rivalry—althoug h he struggled stoutl y against it; and he was certainly quintessentially English , despite his oft-acknowledged intellectua l link s a s a social scientist to Cournot, vo n Thunen , Roscher , an d Hegel . Bu t Walra s misse d something , s o fa r a s Marshall wa s concerned , whe n he despaire d o f th e insuperabl e insularit y of "MM . le s economistes Anglais." 9 Marshal l deepl y believe d tha t economic s a s a Mora l Scienc e should aim higher than the elegant elaboration of essentially static theory, abstracted from

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the evolving political and institutional life as well as the technological base of the societie s of which they were a part. After all, the first sentenc e o f the Principles reads: ' 'Economic conditions ar e constantly changing , an d each generatio n look s a t its own problems i n its own way. " Th e acceptanc e o f tha t dictu m i s no t calculate d t o lea d a n economist t o b e satisfied wit h a world o f Walrasia n equilibrium. This centra l propositio n relate s t o th e thir d sourc e o f tension—an d distinction—i n Marshall's work . H e cam e t o economic s b y a rout e tha t le d hi m fro m mathematic s t o metaphysics t o ethics , and , finally , without enthusiasm, t o political economy . Th e hear t of hi s dedicatio n t o economic s la y i n a deeply-roote d desir e t o lif t fro m th e workin g classes the degrading burde n of poverty.10 Ther e is something in Clark Kerr'S observation that, wit h all their differences , Marshal l and Marx shared the view that "th e transforma tion o f the workin g class " wa s "th e ke y to Utopia." 11 Thus , i n the firs t edition o f the Principles (1890) , " . . . th e study of the causes o f poverty i s the study of the causes of the degradatio n o f a larg e par t o f mankind"; 12 i n hi s Prefac e t o Money, Credit, an d Commerce (writte n abou t 1917): 13 "It s [psychology's ] fascinatin g inquirie s int o th e possibilities o f the higher and more rapid development o f human faculties brought me into touch wit h th e question : Ho w fa r d o th e condition s o f lif e o f th e Britis h (an d other ) working classes generall y suffice fo r the fullness o f life?"; and , reminiscing near the end of hi s life: 14 So I rea d Mill' s Political Economy an d go t muc h excite d abou t it . I ha d doubts abou t the propriety of inequalities of opportunity, rathe r than of material comfort . Then , i n m y vacation s I visite d the poores t quarter s o f severa l cities an d walke d throug h one stree t afte r another , lookin g at the faces of th e poorest people . Next , I resolve d t o mak e a s thoroug h stud y a s I coul d o f Political Economy . It wa s "th e qualit y o f life" wit h which Marshall wa s ultimately concerned. 15 Keynes' s toast o f 194 5 t o the Royal Economic Societ y was thus much in the Marshallian tradition , with echoes reaching, through Mill, back to Hume and Adam Smith: " . . . t o economics and economist s wh o ar e th e trustee s no t o f civilizatio n bu t o f th e possibilit y o f civilization."16 A final introductor y observatio n i s required o n Marshall's systemati c emphasis o n the continuity of change i n the life of societies, a n observation crystallized in the quotation on the title page of the Principles: ' 'Natura nonfacit saltum.'' I n the prefaces to the first and eighth edition s h e state s quit e clearl y wha t he ha d i n mind: 17 The notio n o f continuit y wit h regar d t o developmen t i s commo n t o al l modern school s o f economic thought , whethe r the chie f influence s acting on them ar e those o f biology, a s represented b y the writings of Herbert Spencer ; or of histor y an d philosophy, a s represented b y Hegel's Philosophy o f History. .. . Thes e tw o kinds of influences have affected, more than any other, the substance o f the views expressed i n the present book; but their form has been most affecte d b y mathematica l conception s o f continuity , a s represente d i n Cournot's Principes Mathematiques d e l a Theorie de s Richessea. H e taught that i t i s necessar y t o fac e th e difficult y o f regarding the variou s element s of an economi c problem—no t a s determinin g one anothe r in a chain o f causation, A determinin g B, B determinin g C, an d s o on—bu t a s al l mutuall y determining on e another. " [Firs t edition. ]

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Economic evolutio n i s gradual . It s progres s i s sometime s arreste d o r re versed b y politica l catastrophes : bu t it s forwar d movement s ar e neve r sud den. . . . An d thoug h an inventor , o r a n organizer , o r a financie r of geniu s may see m t o hav e modifie d th e economi c structur e o f a peopl e almos t a t a stroke; yet ... hi s influence ... i s found o n inquiry to have done little more than brin g t o a head a broad constructiv e movement whic h had lon g been i n preparation. . . . The Mecc a o f th e economis t lie s i n economi c biolog y rathe r tha n i n eco nomic dynamics . [Eight h edition.] This view wa s rooted, in part, i n Marshall's analysis of the interacting process at work between ma n an d hi s environment . I t i s summarize d as follow s by Whitaker: 18 One o f it s theme s i s .. . th e effec t o f economi c condition s o n huma n character, particularl y "th e influenc e whic h th e dail y occupation s o f me n exert o n thei r character. " Sinc e characte r i s intimatel y relate d t o ethica l beliefs, thi s lead s t o Marshall' s majo r theme : th e mutua l interdependenc e between economi c condition s and ethical progress . Marshall use s thi s proposition a s the framework for reflections o n his visi t to the United States i n 187 5 and , especially , hi s analysi s of th e origin s an d implication s of the highe r degree o f mobilit y i n American tha n i n Europea n society . Clearly, Marshal l wa s drive n t o hi s vie w o f th e primac y o f incrementa l chang e b y a convergence o f what he derived fro m hi s study of mathematics and philosophy, psychol ogy an d economics . H e wa s prepare d t o reaffir m hi s judgment i n Octobe r 192 0 i n th e wake o f th e Firs t Worl d War , bu t befor e th e chroni c patholog y o f th e interwa r perio d asserted itself . On e ca n not , o f course , b e sure ; bu t on e i s tempte d t o conside r tha t Marshall's doctrin e of the power of environment on human perspectives might be applie d to himself—a socia l scientis t whose basi c ideas took shap e in the 1860 s an d 1870s , wh o lived almos t al l hi s lif e i n a centur y o f uniquel y peaceful, incrementa l chang e fro m a n Englishman's poin t o f view . Th e centur y 1815-191 4 migh t no t hav e seeme d quit e s o peaceful an d incremental to citizens of Russia or Japan, China or Mexico, o r the Ottoman Empire, o r eve n France , Germany , Italy , o r th e Unite d States . B e tha t a s i t may , Marshall's visio n o f th e proces s o f chang e suffuse s wha t he ha d t o sa y abou t economic growth. The Basic Growth Equation In hi s surve y o f developmen t theories , Lione l Robbin s note s that , unlik e hi s majo r contemporaries, "Marshall' s focus was upon growth" and, in that sense, hi s Principles i s "akin t o tha t o f th e earlie r nineteent h centur y economists." 19 Thi s i s no t a surprisin g outcome fo r a ma n wh o bega n a s a n economis t b y translatin g some o f Ricardo' s an d Mill's key propositions int o mathematical formulae an d geometric diagrams. 20 So far as the theor y o f economic growth is concerned, Whitake r mobilizes persuasive circumstantial evidenc e tha t Marshal l wa s strongl y influence d b y Boo k I V an d part s o f Boo k I (bearing on population and labor efficiency) fro m Mill' s Principles;21 an d he began with a set o f explorator y exercises , focuse d aroun d th e determinant s of incom e distribution , based o n a highl y recognizabl e aggregate growth model whose fiv e equation s arc se t out

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in the notes. 22 Here is how Marshal l introduce s his model wit h its two driving variables : the rate of saving and the rate of increase i n the size and efficiency of the working force: 23 The gros s rea l incom e o f a country depends o n (i) the number and averag e efficiency o f th e workers i n it, (ii) the amoun t of its accumulated wealth, (Hi) the extent , richnes s an d convenience o f situation of its natural resources, (iv) the state of the arts of production, [and ] (v) the state of public security an d the assurance t o industr y an d capita l o f th e fruit s o f thei r labou r an d abstinence. . . . The total ne t income availabl e for saving is the excess of this gross incom e over wha t i s require d t o provid e th e necessarie s o f life ; tha t i s thos e thing s which are require d for sustainin g the efficienc y of the severa l grade s of industry [i.e. , labor] ; an d th e pric e whic h ha s t o b e pai d i n taxe s fo r th e maintenance o f public security . No separat e allowanc e nee d b e made fo r th e taxes levie d fo r maintainin g public works, o r education . . . . The exten t t o whic h th e countr y make s us e of th e powe r o f savin g which this ne t incom e gives , o r i n othe r word s th e rat e o f growt h o f it s wealth , depends o n (i ) th e amoun t o f thi s ne t income , (ii) th e willingnes s o f it s inhabitants t o sacrific e presen t enjoymen t fo r future , (Hi) the strengt h o f family affection s among them (sinc e i t i s not a man's ow n futur e enjoymen t but tha t o f hi s famil y whic h i s generally th e chie f motiv e of hi s saving ) an d (iv) th e rat e o f interes t o n capital , whic h afford s a premium t o saving . . . . The rate s o f increas e o f the numbe r an d efficiency o f the working population of a country depend , broadl y speaking , o n (i) the number an d efficienc y of the population alread y existing , (ii) the gross real income that there i s to be distributed amon g the differen t classe s of the nation, (Hi) th e evenness o f th e distribution of that income (for an increase o f income of a less wealthy class at the expens e o f a n equa l aggregat e los s t o a mor e wealth y clas s generall y promotes th e increase o f the number and efficiency o f the population, provid ing it is obtained withou t injury t o public security), (iv) on the strength of the family affection s in so far as they incline people to lead a domestic lif e an d to incur trouble an d expense on bringing up their children, an d (v) their willing ness to sacrifice present an d immediate enjoyment for more distant enjoyment (this counting in two ways, leading them on the one hand to delay marriage so as to retain a high Standard of Comfort, and on the other to think highly of the advantages o f a good education) . I n addition , th e growt h of the efficiency of the populatio n depend s o n th e magnitud e o f th e rewar d tha t i n th e existin g state o f th e art s o f productio n ca n b e obtaine d b y industria l ability. . . . The rate of interest depend s o n the labour which can be got in exchange for a given amount of the produce o f past labour. This depends on (i) the amount of wealt h already accumulated , (ii) the number an d efficiency of the people , (iii) th e scop e tha t th e art s o f productio n offe r fo r th e us e o f machiner y an d other form s o f capital , an d (iv) the relativ e importanc e o f th e futur e enjoy ments a s i t appear s o n th e on e han d t o spendthrift s an d other s wh o borro w wealth fo r th e purpose s o f immediat e enjoyment , and o n th e othe r t o thei r creditors. After probin g a t several way s thi s structur e might b e elaborated , Marshall se t it aside, apparently "discouraged." 24 An d i t i s no t difficul t t o understan d wh y thi s should have

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been so . Eve n in this exercise i n notation and simplification, Marshall insisted o n including so many variables as relevant to the determination of the rate of saving and the rate of interest—including variable s difficul t o r impossible t o measure—that he forced himself, as i t were , int o a wide-rangin g descriptive , institutiona l mode o f exposition . Until these mathematica l notes were discovered , n o one had deduced fro m Marshall' s passages o n incom e distributio n in Th e Economics o f Industry an d thos e o n growt h an d income distributio n in th e Principles tha t he ha d formulate d a quite straightforwar d and rather comple x forma l growth model. I f one turn s back t o those passages, however , on e can perceive that their elemental bon e structur e might well have lent itself to such formal treatment. Bu t one als o perceives tha t Marshall' s practica l interest s force d hi m t o leav e mathematics behind: interests in the complex, intensel y human determinants of the rate of saving an d th e efficienc y o f th e workin g force ; i n th e efficac y o f variou s form s o f industrial organizatio n an d the pro s an d cons o f labor unions ; and, i n the end , lik e Mill, the pro s an d con s o f capitalis m an d socialism . Marshall's vie w o f th e prospect s fo r growt h see n throug h th e spectru m o f th e basi c growth equatio n ca n b e briskl y stated . So far as population is concerned, he perceived a decelerating trend in marriage, birth, and death rates. I n Britain, these trends were accompanied b y rising real wages. Th e bulk of his analysis was devoted t o the full arra y offorces tha t determined efficiency , including not only diet and education but "hopefulness , freedom , and change." After surveying the negative a s wel l a s positiv e force s a t work , agai n hi s conclusio n wa s temperatel y optimistic:25 . . . [I] f th e strengt h an d vigou r o f th e rac e improves , th e increas e o f numbers wil l not fo r a long tim e t o com e caus e a diminution of the averag e real incom e o f th e people . Thus the n th e progress o f .. . medica l science , th e ever-growing activit y and wisdo m o f Government i n all matters relatin g to health, an d the increas e of materia l wealth , all ten d to lesse n mortalit y and to increas e healt h and strength, an d t o lengthe n life . O n th e othe r hand , vitality is lowered an d the death-rate raised b y the rapid increase of town life, and by the tendency of the higher strains of the population to marry later and to have fewer children than the lower . . . . [T]h e tw o set s hol d on e anothe r ver y nearl y i n balance , th e forme r slightly preponderating. Whil e the population of England is growing nearly as fast a s ever, thos e wh o ar e out of health in body or mind are certainly not an increasing par t o f th e whole : th e rest ar e muc h bette r fe d an d clothed . . . . The averag e duratio n o f lif e bot h fo r me n an d wome n ha s bee n increasin g steadily fo r man y years . Behind thi s relatively hopefu l prospect la y his conclusio n o n increasing versu s diminishing returns . H e foun d increasin g return s widel y a t wor k i n mos t o f industr y an d transport; whil e diminishin g returns wa s hel d of f b y Britain' s acces s t o chea p foo d an d raw material s fro m fertile source s throughou t the world. Bu t Marshall concluded wit h a warning:26 . . . England's foreign supplie s of raw produce may at any time be checked by changes in the trad e regulations of other countries, and ma y be almost cut off b y a great war, while th e nava l and militar y expenditur e which woul d be

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necessary t o mak e th e countr y fairl y secur e agains t thi s las t risk , woul d appreciably diminish the benefits that she derives from the action of the law of increasing return . Marshall came to think diminishing returns would reassert itself in the world economy (pp. 183-184 , following), but, unlike Mill, he saw that British and other workers had still too much to as k of the economi c syste m fo r diminishing relative marginal utility for rea l income itsel f t o decre e a stationar y stat e fro m th e sid e of demand: 27 There seems to be no good reason for believing that we are anywhere near a stationary stat e in which there will be no new important wants to be satisfied; in which there wil l be no more room fo r profitably investing present effor t i n providing for the future, an d in which the accumulation of wealth will cease to have any reward. The whole history of man shows that his wants expand with the growt h o f hi s wealt h an d knowledge . Nor di d h e envisage stagnatio n from th e sid e of th e productivity of investment . In th e advanced industria l countrie s h e note d th e declin e o f interes t rate s fro m 187 3 t o th e mid-1890s; bu t he did not judge the trend decline i n interest rates would lead, along with all th e othe r determinant s o f saving , to a cessation o f investmen t an d a stationary state . But Marshall , i n concludin g hi s discussio n o f valu e and utility , does permi t himself , "as a preacher and pastor o f men" (i n Keynes's phrase) , t o go beyond th e expansion of conventional good s an d services: 28 Laws agains t luxur y have been futile ; but i t woul d be a gain i f the mora l sentiment o f the communit y could induc e people t o avoid al l sorts of display of individua l wealth . Ther e ar e indee d tru e an d worth y pleasures t o b e go t from wisel y ordere d magnificence : but the y are a t their best . . . when they centre round public buildings, public parks, public collections o f the fine arts, and publi c games an d amusement . . . . The worl d woul d g o muc h better i f everyon e woul d bu y fewe r an d simpler things, and would take trouble i n selecting them for their real beauty; being carefu l of course to ge t good valu e in return for his outlay, bu t prefer ring t o bu y a fe w thing s mad e wel l b y highl y paid labou r rathe r tha n many made badl y b y lo w paid labour . This i s no t quit e Mill' s stationar y stat e wit h hig h qualit y o f life , bu t bear s a famil y relationship t o it . Althoug h there i s somethin g o f Mil l i n thes e reflections , Marshal l i s more typicall y realisti c i n notin g that: 29 The Englishma n Mil l burst s int o unwonte d enthusias m whe n speak ing .. . o f the pleasures o f wandering alon e i n beautiful scenery: an d many American writer s giv e fervi d descriptions o f th e growin g richness o f human life a s the backwoodsman find s neighbours settling aroun d him, a s the backwoods settlement develops int o a village, the village into a town, and the town into a vas t city. Marshall tended , i n th e end , t o focu s o n "practica l conclusions " o f more immediat e relevance t o the futur e o f Britain . Thus Principles end s no t with a portrait of the remot e outcome for society of an era of sustained compound interest but a summation of his views on the issue he regarded a s central in his time: the situation of and prospects for labor. H e

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starts with a historical sketc h of the force s that had made for an increased standar d of lif e in Britai n i n th e secon d hal f o f th e nineteent h century. 30 H e the n goe s o n t o explor e a range of variables bearing o n the future o f real wages, includin g hours of work; the effect of excessivel y hig h wage s o n th e directio n o f investment , includin g investment abroad ; the positive an d negative effects of labor unions; and an evaluation of incom e inequities. He concludes that , o n balance, " . . . ther e i s no real necessity , an d therefore n o mora l justification fo r extreme povert y sid e b y side with great wealth." 31 Th e summation ends with a n analysi s o f capitalis m versu s socialism . Wha t distinguishe s these passage s i s Marshall's effor t t o use economic analysi s to the limit in exploring thes e larg e question s while acknowledgin g i n th e end: 32 "W e hav e reache d ver y fe w practica l conclusions ; because i t is generally necessar y t o look a t the whole of the economic, t o sa y nothing of the mora l and othe r aspect s of a practical proble m befor e attemptin g to dea l wit h it at all. . . . "

Population and the Working Force Marshall's treatmen t of population and the working force in the Principles illustrate s wel l his central doctrin e about method i n economics:38 "Economic s affords n o scope fo r long chains o f deductiv e reasoning . . . . Constructiv e imaginatio n i s th e dominan t forc e i n scientific work : it s strengt h i s show n no t i n developin g abstrac t hypotheses , bu t i n cor relating th e multitudinou s influences o f real economi c force s actin g over a wide area. " Marshall devote s thre e successiv e chapter s coverin g 4 6 page s i n Boo k I V ("Th e Agents o f Production" ) t o th e forces governin g th e growt h of population, it s health an d strength, it s skil l an d mobility. 34 Marshall begin s wit h a genera l proposition: 35 In th e anima l an d vegetabl e worl d th e growt h o f number s is governe d b y the tendency o f individuals to propagate their species on the one hand, and on the othe r han d by th e struggl e fo r lif e whic h thins out the youn g before the y arrive at maturity. In the human race alone th e conflict of these two opposin g forces i s complicate d b y othe r influences . On th e on e han d regar d fo r th e future induce s man y individual s to control thei r natura l impulses; sometime s with the purpose o f worthily discharging their duties as parents; sometimes, a s for instanc e at Rome unde r the Empire , fo r mean motives . An d o n the othe r hand society exercises pressur e o n the individual by religious, mora l and lega l sanctions, sometime s wit h the object o f quickening, and sometimes wit h that of retarding , th e growt h o f population. He the n summarize s evidence fro m th e rapidl y emerging professiona l fiel d o f demogra phy, a s wel l a s fro m olde r historica l sources bearin g on : th e force s makin g for pro- an d anti-natalist public policies a t various times and places; the forces that had determined th e evolution o f the English birth rate and death rate down to the early years o f the twentieth century (eight h edition) . Alon g th e way he deals wit h the impact on short-run populatio n movements o f oscillation s i n the cos t o f living , th e business cycle , an d emigration. Turning t o th e healt h an d strengt h o f th e population , agai n Marshal l begin s wit h a general proposition: 36 The marriage-rate , th e birth-rat e and th e death-rat e are diminishin g in al most ever y country . But th e genera l mortality i s hig h wher e the birth-rate is

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high. Fo r instance , bot h ar e high i n Slavoni c countries, and both ar e lo w i n the Nort h o f Europe. Th e death-rate s ar e low i n Australasia, an d the "natu ral" increas e ther e i s fairly high , though the birth-rate i s low and falling very fast. The followin g revie w o f determinin g variable s embraces , inter alia, innat e muscula r strength, climate , race , food (and the quality of its preparation), clothing , shelter, the fue l supply, rest , an d "thre e closel y allie d condition s o f vigour, namely , hopefulness , free dom, an d change." 37 H e then examines the influenc e o f occupation on health, strength , and mortality , a s wel l a s the reason s fo r highe r death rate s i n th e town s an d citie s an d other socia l force s operatin g o n the vitality of the population, includin g the following: 38 In the later stages of civilization the rule has indeed long been that the upper classes marr y late, an d in consequence hav e fewer children than the working classes, an d the vigou r of the natio n that is tending to be damped out amon g the uppe r classe s i s thu s replenishe d b y th e fres h strea m o f strengt h tha t i s constantly wellin g u p fro m below . Marshall then casts u p the balance sheet o f positive an d negative forces a t work on the health an d strengt h o f th e population—quit e awar e bu t unembarrase d becaus e the y ar e quantitative i n thei r influenc e bu t no t measurable—an d emerge s wit h a temperatel y optimistic judgmen t o n Britis h prospects . In th e thir d chapter , Marshal l turn s t o al l th e substantia l force s h e ca n perceiv e tha t affect wha t h e call s "industria l training" ; tha t is , th e capacit y t o sustai n efficiency i n modern factor y work. Onc e again he insists on ranging over an extraordinary spectrum of relevant variables : th e generationa l tim e lag s i n th e perceptio n o f a dynami c curren t reality;39 th e exten t t o whic h rapid technologica l chang e create s a premiu m fo r gener alized rathe r tha n specialize d working-forc e skills ; the influences, starting with mothers, that determin e whethe r innat e abilities wil l be developed; Britis h education policy i n the light o f th e increasin g scientifi c capacit y bein g generate d b y th e Germa n educationa l system, buildin g u p to thi s powerful statement: 40 There i s no extravagance more prejudicial to the growth of national wealth than that wasteful negligence whic h allows genius that happens to be born of lowly parentage to expend itsel f in lowly work. No change would conduce so much to a rapid increase of material wealth as an improvement in our schools , and especiall y thos e o f th e middle grades , provide d i t be combine d wit h a n extensive syste m of scholarships, whic h will enable the clever son of a working man to rise graduall y fro m schoo l to school til l he has the best theoretica l and practical educatio n whic h the ag e can give . Clearly, Marshal l regarded increase d outlays for education in England of his day as a form of investmen t subjec t t o increasin g returns . Hi s analysis—an d it s predecessor analyse s back to Hume and Adam Smith—makes i t difficult t o regard the emergence o f investment in "huma n capital " i n post-194 5 developmen t economic s a s a pioneerin g revelation . Marshall's analysi s goe s o n t o reflec t o n th e importanc e o f an d relation s betwee n education in art and industrial design; the indirect as well as direct virtues of education to a society; the irreducibl e responsibilities of parents with respect to education. He concludes by returning to the linkage in classical economics between wages and the size and vigor of the population , concludin g tha t th e answe r wa s difficul t t o predic t becaus e th e critica l

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variables wer e "th e ethical , socia l and domestic habit s of life" whic h were influenced, in turn, by economic causes operatin g ove r long periods o f time by routes difficult t o trace.41 In facing up to this lagged interpla y between economic an d noneconomic forces , Marshal l is returning to a relationship identifie d by Malthus (preceding, p. 57, and note 22, p. 582) . Marshall's treatmen t o f th e determinant s o f th e siz e an d qualit y of th e workin g forc e demonstrates ho w seriously and responsibly h e went about the business of grappling with all th e variable s h e perceive d a s relevant , mobilizing , i n th e bes t traditio n o f th e grea t classical economists , everythin g h e coul d deriv e fro m history , statistica l analysis , an d protracted direc t observatio n o f the societ y aroun d him . In terms o f theory, then , Marshal l regarded th e size and quality of the population a s an endogenous variable , i f viewed fro m th e perspective o f the complex dynamics of societies as a whole . O n balance , eve n mor e tha n Mill, h e wa s awar e tha t the rat e o f population growth i n England wa s declinin g an d that , i n times o f peace , th e foo d suppl y wa s wel l assured; bu t lookin g muc h farthe r ahead , a t worl d populatio n a s a whole , h e wa s les s sanguine, an d th e shado w o f Malthusia n anxiety reemerges: 42 Taking th e presen t populatio n o f th e worl d a t on e an d a hal f thousan d millions; an d assumin g tha t it s presen t rat e o f increas e (abou t 8 pe r 100 0 annually, se e Ravenstein's pape r before th e British Association i n 1890 ) wil l continue, w e fin d tha t i n les s tha n tw o hundre d year s i t wil l amoun t t o si x thousand millions; or at the rate of about 200 to the square mile of fairly fertil e land (Ravenstein reckon s 2 8 million squar e miles of fairly fertil e land, an d 14 millions o f poor gras s lands . Th e firs t estimat e i s thought by many to be too high; but, allowing fo r this, if the less fertile land be reckoned i n for what it is worth, th e result will b e about thirt y million squar e miles as assumed above. ) Meanwhile ther e wil l probabl y b e grea t improvement s i n th e art s o f agri culture; and, if so, th e pressure o f population on the means of subsistence ma y be hel d i n chec k fo r abou t two hundre d years, bu t n o longer . The jury i s stil l ou t o n Marshall' s prediction , althoug h i t appear s tha t moder n medicin e and public healt h wil l take almos t a century off Ravenstein's predicted arriva l of a global population o f 6 billion .

Capital and Technology Marshall's treatmen t o f capital investmen t and technology i s governed b y two considera tions. First , b y th e questio n h e take s a s centra l t o a macr o theor y o f growth : Doe s th e productivity of each facto r of production—its ' 'power o f productive work"—increase or decrease with the "volum e of work" it is called upo n to perform? Second , b y a determination t o link his macro-analysis o f growth to his micro-analysis o f the case o f increasing return t o busines s firm s an d industries . Thus , th e followin g two passages fro m th e con cluding chapte r o f Boo k IV: 43 At th e beginning o f this Book w e saw how the extra return of raw produc e which natur e afford s t o a n increased applicatio n o f capita l an d labour, othe r things being equal, tends i n the lon g run t o diminish. I n the remainde r of th e Book . . . w e have . . . see n how man' s power o f productive work increases with th e volum e of th e wor k tha t he docs . . . . [E]ver y increase i n the physical, menta l an d mora l vigou r o f a peopl e make s the m mor e likely , othe r

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things being equal , t o rear t o adul t age a large numbe r of vigorous children . Turning nex t t o th e growt h o f wealth , w e observe d ho w ever y increas e o f wealth tends i n many ways to make a greater increas e mor e easy than before . And lastl y w e sa w ho w ever y increas e o f wealt h an d ever y increas e i n th e numbers an d intelligenc e o f th e peopl e increase d th e facilitie s fo r a highly developed industria l organization, whic h in its turn adds muc h t o the collective efficienc y o f capita l an d labour . Meanwhile a n increas e i n th e aggregat e scal e o f productio n o f cours e increases those economies , whic h do not directly depen d on the siz e of individual houses of business. The most important of these result from th e growth of correlated branches o f industry which mutually assist one another, perhaps being concentrate d i n the sam e localities , bu t anyhow availing themselves of the moder n facilitie s fo r communicatio n offere d b y stea m transport , b y th e telegraph an d by the printing-press. The economies arising from suc h sources as this , whic h ar e accessibl e t o an y branc h o f production , d o no t depen d exclusively upo n it s ow n growth : bu t ye t the y ar e sur e t o gro w rapidl y an d steadily wit h that growth; and they are sure to dwindle in some, thoug h not all respects, i f i t decays . Behind this quite sophisticated linkin g of macro- and micro-analysis is Marshall's hard won knowledge tha t the process o f technological chang e cannot be well understood a s an aggregate phenomeno n bu t mus t b e relate d t o particula r sector s a t particula r phase s o f their evolution , an d hi s acut e awarenes s tha t th e cas e o f increasin g returns—o n whic h growth analysis depends—is extremel y difficult to handle formally with the conventional tools o f economics . In dealin g wit h diminishin g returns Marshal l illustrate s vividly how Capital , Knowl edge, an d Organizatio n ca n hol d of f th e da y whe n equal dose s o f input s yield les s tha n proportional increase s i n output ; but h e concludes that—fro m Abraham' s partin g fro m Lot44 dow n t o th e earl y twentiet h century and int o the foreseeabl e future—diminishin g returns will, in the end, assert itself: 45 " . . . whateve r may be the future development s of the arts of agriculture, a continued increase in the application of capital and labour to land must ultimatel y resul t i n a diminution o f th e extr a produce whic h can b e obtaine d b y a given amoun t o f capital an d labour.' ' Most of Book IV , however , including important aspects o f Marshall's treatment of the determinants o f the quality of the working force, is devoted to the complex forces making for increasin g returns . He begins by noting changes in the sources of British savings since the early nineteenth century, introducin g alon g th e wa y a quit e radica l conclusio n o n th e relatio n betwee n income distribution , investment , an d growth: 46 . . .[E]arl y i n th e presen t century , th e commercia l classe s i n Englan d ha d much mor e savin g habit s tha n either th e countr y gentlemen o r th e workin g classes. These cause s combined to make English economists of the last gener ation regar d saving s a s mad e almos t exclusivel y fro m th e profit s o f capital . But eve n in modern England rent and the earnings of professional me n and hired worker s ar e a n importan t source o f accumulation : an d the y hav e been the chie f sourc e o f i t i n al l th e earlie r stage s o f civilization . Moreover , th e middle and especially the professional classes have always denied themselves

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much in order to invest capital in the education of their children; while a great part o f the wages o f the working classes i s invested in the physical health and strength o f their children. Th e older economist s took to o little account of the fact tha t human faculties are as important a means of production as any othe r kind of capital; an d we may conclude, i n opposition t o them, that any change in th e distribution of wealth which gives more t o the wage receivers an d les s to the capitalist s i s likely, other thing s being equal, to hasten the increas e of material production , an d tha t i t wil l no t perceptibl y retar d th e storing-u p of material wealth. Of course other things would not be equal if the change wer e brought abou t by violent methods which gave a shock to public security. . . . A peopl e amon g who m wealt h i s wel l distributed , an d wh o hav e hig h ambitions, ar e likel y t o accumulat e a grea t dea l o f publi c property ; an d th e savings mad e i n thi s for m alon e b y som e well-to-d o democracie s for m n o inconsiderable par t o f th e bes t possession s whic h our ow n ag e has inherite d from it s predecessors . Th e growt h o f th e co-operativ e movemen t i n al l it s many forms , o f building societies, friendl y societies , trades-unions , o f working men' s savings-banks , etc. , show s that , eve n s o fa r a s th e immediat e accumulation of material wealth goes, the resources of the country are not, as the olde r economist s assumed , entirel y los t whe n the y ar e spen t i n payin g wages. In a manne r foreshadowe d i n hi s earl y aggregat e macro-growt h mode l Marshal l ex plores variou s motives for saving, focusing mainly, in the end, on family affectio n an d the rate of interest. Referrin g explicitly to sardonic Marxist criticisms of interest as the reward for abstinence , Marshal l identifie s it as a reward fo r waiting. 47 H e concludes b y introducing onc e agai n hi s doctrin e o f th e hig h rat e o f retur n associate d wit h working-clas s education:48 ' 'From the national point of view the investment of wealth in the child of the working ma n i s a s productive a s it s investment i n horse s o r machinery." Thus fa r Marshall' s argumen t is , essentially , a modernize d versio n o f th e classica l theory of saving. There follow, however, fiv e chapters on industrial organization in which he seek s t o identif y an d examin e al l th e element s tha t ente r int o th e ne t increas e o f productivity wit h th e expansio n o f outpu t i n industry . Ou t o f hi s sustaine d empirica l examination o f th e industria l proces s Marshal l perceive d tha t th e ne t tendenc y towar d increasing returns was not a simple matter of the enlargement of the market, specializatio n of function, and the progressive introductio n o f laborsaving machinery . At every point he identifies negativ e a s well as positive force s a t work: i n some cases , extrem e specializa tion increase s efficiency , i n others, not ; machinery has bot h goo d an d bad effect s o n th e quality o f huma n life ; advantage s ar e identifie d for larg e ove r smal l factories , bu t also , under specified circumstances , fo r small over large production units. Similarly, Marshal l was acutely sensitiv e to the fact that economic progres s wa s not linear for either firms o r industries. Hi s analysi s o f wh y son s rarel y succee d i n carrying forwar d successfull y the family fir m i s perceptive sociolog y muc h in the vein of Thomas Mann' s Buddenbrooks, 49 He notes : " . . . creativ e idea s an d experiments i n business technique , an d in business organization, t o b e ver y rar e i n Governmenta l undertakings , and no t ver y commo n i n private enterpris e whic h have drifte d toward s bureaucratic methods as the resul t of their great ag e and larg e size." 50 In more conventiona l economic passages Marshal l cite s the differential effect s o n employmen t of technologica l progres s i n stee l versu s textiles, i n steamships versu s docks. 51

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In dealin g wit h the dynamic s of industria l progress, Marshal l analyze s with considerable subtlety , anticipatin g th e late r conclusion s o f Coli n Clar k an d Simo n Kuznets , th e proportionate shif t of the labor force out of agriculture, the relative constancy (since 1851 ) of th e proportio n i n manufactures , an d th e relativ e ris e o f servic e employment , du e primarily t o th e comparativ e lac k of technologica l progres s i n the latter. 52 On balance, then , Marshall sa w no end to the operation o f increasing returns, although he perceive d th e cost s a s wel l a s benefit s o f th e comple x proces s involved . Bu t th e continued ne t progres s o f th e syste m required , i n his ow n famou s image, tha t new tree s rise i n the fores t a s the grea t ol d tree s reac h thei r natura l limits, "los e vitality ; and on e after anothe r giv e place t o others, which , though of less materia l strength , hav e on their side th e vigou r o f growth." 53 An d o f al l th e force s Marshal l perceive d a s necessary t o sustain th e forest—o r t o assur e it s continue d expansion—investmen t i n th e talente d young o f th e workin g classe s appeare d t o be th e mos t important . One fundamenta l weakness i n Marshall's analysi s of the long period shoul d be underlined. H e create d variou s device s fo r dealin g wit h increasin g returns—the tree s i n th e forest, th e representativ e firm , interna l an d external economies , a historic succession of short-period cos t curve s movin g downwar d through time in response t o improving tech nology but permitting a definition of equilibrium at a moment of time. Wit h these he could more o r les s cop e wit h th e analysi s of firm s i n existin g industries . Bu t Marshal l neve r found a wa y t o dea l formall y wit h wha t h e kne w t o b e a majo r characteristi c o f tech nological history ; namely , the emergence fro m tim e to time of inventions so radical a s to create ne w industrie s (e.g. , th e railroa d an d electricity ) o r profoundl y to transfor m ol d industries (e.g., cotton textile s an d steel). Moreover , Marshal l was extremely sensitive to the fact that, a t any particular period of time in a given country, there were fast-growing, slow-growing, an d declining sectors; and that their pace wa s often relate d to the historical stages o f thei r underlyin g technologies . Bu t h e neve r generate d a sectora l theor y tha t might have linke d his macro- an d micro-analysis. H e could comfor t himself with Natura nonfacit saltum, wit h its implication that all events were deeply rooted i n the past, a s he did i n th e Prefac e t o th e eight h editio n o f Principles; 54 bu t Marshall' s failur e t o dea l adequately wit h the role i n increasing return s of Adam Smith's invention s by "Philoso phers" produce d evasiv e theoretical formulation s (following , p. 336) . I t opened a n are a for intellectua l innovation that Schumpeter launched with panache, but with imbalance in another directio n (following , pp. 233-242) .

Business Cycles Marshall ha d somethin g t o sa y about business cycles in all four o f the books h e wrot e as well as in the testimony he gave before the two Royal Commissions o f the mid-1880s. Bu t in his own mind his earliest analysi s of the problems i n The Economics o f Industry (1879) , was evidentl y judged th e mos t important , because h e referred bac k to i t quite systemat ically.55 Marshal l ha d som e observation s t o mak e o n his earl y vie w i f not quit e secon d thoughts; bu t h e evidentl y felt n o fundamenta l modification s were necessary . In considering Marshall' s view of the business cycle, tw o facts shoul d be kept in mind: his poin t o f departur e wa s Mill' s analysi s o f th e busines s cycle (preceding , pp . 108— 112);56 an d Marshall's view s crystallized during a major cycl e (1868-1879) marke d b y an intens e inflationary phas e toward the en d o f th e expansio n (1871-1873), the n b y th e protracted busines s declin e o f 1873-1879 , accompanie d b y a dramati c an d sustaine d decline in prices but with high levels of unemployment (over 5%) in only the final 2 years.

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It i s understandable , therefore , tha t h e begin s hi s treatmen t o f th e busines s cycl e b y focusing o n changes i n the price leve l rather than the level of unemployment. Afte r a few observations o n strikin g price changes i n the mor e distan t and mor e recen t past , an d the emergence durin g th e nineteent h centur y o f credi t a s th e predominan t form'o f mone y supply, Marshal l launche s into a quite recognizable accoun t o f the phases o f the business cycle, i n whic h hi s acknowledge d deb t t o Mil l i s evident. 57 First, expansion : The beginning of a period o f rising credit i s often a series o f good harvests . Less havin g t o b e spen t i n food , ther e i s a bette r deman d fo r othe r com modities. . . . Employer s compet e wit h on e anothe r fo r labour ; wage s rise ; and the employed i n spending their wages increase the demand for all kinds of commodities. Ne w publi c an d privat e Companie s ar e starte d t o tak e advan tage of the promisin g opening s whic h she w themselve s amon g the genera l activity. Thu s th e desir e t o bu y an d th e willingnes s to pa y increase d price s grow together ; Credi t i s jubilant, and readily accept s pape r promise s t o pay. Prices, wages and profits g o on rising: there is a general rise in the incomes of those engaged i n trade: the y spend freely, increase th e demand fo r goods an d raise prices stil l higher. Many speculators seeing th e rise, an d thinking it will continue bu y good s wit h th e expectatio n o f sellin g the m a t a profit . . . . [A]nd ever y on e wh o thu s enter s int o th e marke t a s a buyer , add s t o th e upward tendenc y of prices , whethe r he buy s with his ow n o r wit h borrowe d money. Then tensio n and crisis : This movemen t goe s o n fo r som e time , til l . . . trade i s i n a dangerou s condition. Thos e whos e busines s i t i s t o len d mone y ar e amon g th e firs t t o read th e sign s o f th e times ; an d the y begi n t o thin k abou t contractin g thei r loans. Bu t the y canno t d o thi s withou t much disturbin g trade. . . . Tradin g companies o f all kinds have borrowed vas t sums with which they have begun to buil d railway s an d dock s an d ironwork s an d factories ; price s bein g hig h they do no t get muc h buildin g done for their outlay , and though they ar e not yet ready to reap profits on their investment, they have to come agai n into the market to borrow mor e capital. The lenders of capital already wis h to contract their loans ; an d th e deman d fo r mor e loan s raise s th e rat e o f interes t ver y high. . . . Some speculators hav e to sell goods i n order to pay their debts; and by s o doin g the y chec k th e ris e o f prices . Thi s chec k make s al l othe r spec ulators anxious , and many rush in to sell. . . . When a large speculator fails , his failur e generall y cause s tha t o f other s wh o hav e len t thei r credi t t o him ; and thei r failur e again that o f others. .. . A s credit b y growing make s itsel f grow, s o whe n distrus t ha s take n th e plac e o f confidence , failure and pani c breed pani c an d failure . Th e commercia l stor m leave s it s pat h strew n wit h ruin. Depression descends : lW]hen i t i s over ther e is a calm, but a dul l heav y calm. Those wh o hav e saved themselves are in no mood to venture again; companies, whose success is doubtful, ar e wound up; new companies cannot be formed. Coal, iron , and

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the othe r material s fo r makin g Fixe d capita l fal l i n pric e a s rapidl y a s the y rose. Iro n work s an d ship s ar e fo r sale , bu t ther e ar e n o buyer s a t an y moderate price . . . . after a crisis the warehouses are overstocked wit h goods in almost ever y important trade; scarcely an y trade can continue undiminished production s o as to affor d a good rat e of profits to capital an d a good rat e of wages to labour. . . . [W]hen confidence has been shaken by failures, capital cannot be go t to star t new companies o r extend ol d ones. . . . [T]her e i s but little occupation in any of the trades which make Fixed Capital. Those whos e skill an d capital i s Specialise d i n these trade s ar e earning little , and therfore buying littl e o f th e produc e o f othe r trades . . . . Thu s disorganizatio n spreads, th e disorganization of one trade throws others ou t of gear, an d they react o n i t an d increas e it s disorganization. " Finally, Marshall reflects on how the cycle bottoms out and expansion asserts itsel f again: The chie f caus e o f th e evi l i s a want of confidence . The greate r part o f it could b e remove d almos t i n a n instan t if confidenc e coul d return , touc h al l industries with her magic wand, an d make them continue their production and their deman d fo r the ware s of others. . . . But the revival of industr y comes about throug h th e gradua l an d ofte n simultaneou s growt h o f confidenc e among many various trades; it begins as soon a s traders think that prices will not continu e to fall ; an d wit h a revival o f industr y prices rise . As wit h Mill, Marshall' s analysi s is a n exercis e i n th e economic s an d psycholog y o f irrational expectations, suffusin g th e behavior of the short- and long-term capital markets . It recall s th e marvelou s simplicit y of th e titl e o f Walte r Bagehot' s rathe r sophisticate d rendition o f hi s business cycle theor y in Chapter VI of Lombard Street: "Wh y Lombar d Street i s Ofte n Ver y Dul l an d Sometime s Extremel y Excited. " Marshal l correctly cap tures th e manne r i n whic h th e boo m spread s fro m th e expansio n o f consumer s good s industries t o increase d investmen t i n fixe d capital—a n accelerato r o f sorts ; ho w th e expansion o f investmen t increases competitio n fo r labo r an d thos e employe d "increas e the demand for all kinds of commodities"—a multiplie r of sorts; how the boom itsel f (by raising th e price s o f ra w materials , money-wag e rates , an d interes t rates) lower s th e initially calculated expected rate of return over cost for fixed investments, and, in the end, plunges th e investment goods industries into a particularly dee p depression, a s a rush for liquidity follow s a belate d recognitio n o f ho w th e dynamic s of th e expansio n itsel f ha s altered profi t expectations . There follo w passages dealin g with the relation between movements in prices, profits , output, and real wages in the course of the business cycle.58 These foreshadow the kind of analyses tha t becam e quit e conventiona l whe n th e examinatio n o f th e busines s cycl e became a specialized professiona l spor t i n the pre-1914 generatio n and then between th e wars (following , Chapter s 1 0 and 11) . 1. Ther e i s a n importan t symmetr y i n th e positio n o f th e entrepreneu r i n a period o f rising and falling prices. I n the former case, th e price of his product is likely to rise mor e rapidly tha n thos e o f th e relevan t ra w material s an d labor ; hi s profit s will expand ; rea l wages will come under pressure, although employment will be high. I n the latter case, th e reverse i s true. 59 . . . thus a fall i n prices lowers profits an d impoverishe s the manufacturer : while it increases the purchasin g power of those who have fixed incomes . S o

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again, i t enriche s creditor s a t th e expens e o f debtors . . . , [A]n d i t im poverishes thos e wh o make , a s mos t busines s men have , considerabl e fixe d money payment s fo r rents , salaries , an d othe r matters . Whe n price s ar e as cending, th e improvement i s thought to be greater tha n it really is . .. . Bu t statistics prove that the real incom e of the country is not very much less in the present tim e o f lo w prices , tha n it was i n the period o f high prices tha t went before it . Th e tota l amoun t o f th e necessaries , comfort s an d luxurie s which are enjoye d b y Englishme n is bu t littl e less i n 187 9 tha n it wa s i n 1872 . Marshall's analysi s is essentiall y correc t for the period 1872-1879 ; tha t is, the leve l of consumption was sustained by the radical fal l i n prices. Consumptio n only fell belo w th e 1872 leve l i n 1878-187 9 whe n unemployment rose t o 6.3% an d 10.7% , respectively. 60 Real wage s fo r thos e i n ful l work , however , ros e 7 % between 187 3 an d 1879 . 2. Th e amplitud e o f fluctuation s in outpu t an d price s wa s greates t i n capita l good s industries.61 3. Britis h imports wer e sustaine d better than exports in the period 1873-1879 , in part because th e radica l declin e i n capita l (an d capita l goods ) exports , mainl y fo r foreig n railways, led to a switch in the direction of British investment towards the building trade s at home tha t sustaine d the level o f demand for imports, wherea s major markets i n which the boom of 1871-187 3 had centered wer e more depressed than Britain and their demand for Britis h export s radicall y reduced . 4. Wag e increases and decreases systematically lag price (and profit) movements in the course of the business cycle. Wag e movements are, therefore, not a primary cause of price fluctuations, an d thei r amplitud e o f fluctuatio n is less tha n for prices an d profits. 62 Marshall was , o f course , awar e o f th e huma n and socia l cost s o f unemployment ; and comments o n thes e dimension s o f th e proble m ru n throug h his wor k fro m beginnin g t o end. He advocated credi t policies i n the banking system and wage policies by unions that would damp th e amplitud e of fluctuations . An d he examined the proposals o f others. I n The Economics o f Industry, fo r example , h e reject s i n wha t migh t be calle d indecisiv e puzzlement a socialis t suggestio n fo r usin g th e power s o f th e stat e t o dam p cyclica l oscillations:63 The mos t plausible o f al l the plans that have been suggeste d by Socialist s for th e artificia l organization o f industry is one which aims at the "abolitio n of commercia l risk.' ' The y propos e tha t i n times of depressio n Governmen t should step forward, and, by guaranteeing each separate industry against risk, cause al l industries to work, an d therefore t o earn an d therefore to buy eac h other's products . Government , b y runnin g every ris k a t once , would , the y think, run n o risk. Bu t they have not yet shewn how Government shoul d tell whether a man's distress was really due to causes beyond his control, no r how its guarantee could be worked withou t hindering that freedom on which energy an d th e progress o f inventio n depend . The fina l sentenc e reflects Marshall' s oft-repeate d perceptio n tha t technological chang e inevitably involve d som e short-ter m frictiona l unemployment . Marshall wa s questione d a t lengt h i n Decembe r 188 7 befor e th e Gol d an d Silve r Commission abou t th e impac t of th e post-187 3 environment o n th e leve l o f unemployment.64 He dealt along the way with a number of structural changes affecting th e leve l of unemployment an d publi c perception s of tha t level ; e.g., th e progressiv e movemen t of

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labor fro m household s t o factories , a larg e proportionat e shif t fro m unskille d t o skille d labor, possibl e distortion s i n the unemploymen t statistic s arisin g fro m th e fac t that the y were generated fro m the records of labor unions, special technological change s that might affect th e situatio n o f iro n founders , whose unemploymen t data tende d t o dominat e th e statistics available . Her e is the climactic passag e i n which Marshall assert s hi s judgment that, average d ove r decennia l period s (t o eliminat e cyclica l bias) , th e averag e leve l o f unemployment ha d no t increase d i n Britain: 65 9823. D o yo u shar e th e genera l opinion tha t during the las t few years w e have bee n passin g throug h a perio d o f sever e depression?— Yes, o f severe depression of profits. 9824. An d tha t ha s bee n durin g a perio d o f abnormall y lo w prices?— A severe depression of profits and of prices. . . . I cannot see any reason for believing that there is any considerable depression in any other respect. There is, of course, great misery among the poor; but I do not believe it is greater than it used to be. I do not mean that we should idly acquiesce in the existence of this misery, and regard it as inevitable. I hold rather extreme opinions in the opposite direction. 9825. (Chairman.) The n I understand yo u t o thin k that th e depressio n i n those thre e respects is consistent with a condition of prosperity?—Certainly. 9826. (Mr. Chaplin.) Th e depression o f profits, does no t that more or less affect al l classes?—No, I believe that a chief cause of the depression o f profits is that the employer gets less and the employee more. 9828. Can you speak a s to the fact whethe r there has been a larger number of the working classes than usual unemployed altogether during this period of depression?—My belief i s that there have not been a larger number of people unemployed during the last ten years than during any other consecutive ten years. Of course there are many more unemployed now than there were in 1872-73. 9830. Are you aware that we have had evidence given by gentlemen speak ing wit h definit e knowledg e o f a directl y opposit e natur e t o wha t yo u ar e stating now?— / a m aware that some persons actively engaged i n business have given evidence that they believe there is an increasing unsteadiness of employment. But the facts which they bring forward are, in my opinion, outweighed by the statistical and other evidence in the opposite direction. .. . I have, however, omitted on e thing o f very great importance. . . . that is the transitional stage in which a great number of industries are. When an improvement is brought into an industry it benefits the public at once, and in the long run it is pretty sure to benefit even the trade into which it is introduced; but in many cases an improvement in the methods of the industry injures that industry, and throws people temporarily out of employment. Now, I do not think there has been any period in which there have been so many great changes. . . . The changes are, I think, chiefly due to the great fall, the unparalleled fall, in the cost of transport, which renders it worth while to do a great many things that it was not worth while to do before; but besides this there are an immense number of changes in all industries, chemical and mechanical. . . . 9833. (Mr. Barbour.) You said that in so far as the fall of prices had tended

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to giv e th e wage-earnin g classe s mor e fo r thei r labour , i t wa s a distinc t gain?—That i s m y opinion. When he cam e to publish his Principles, Marshal l repeat s agai n what he and his wif e had t o sa y in 187 9 in The Economics o f Industry, includin g a quotation fro m Mil l o n th e impossibility o f genera l overproductio n marke d b y th e no t highl y illuminatin g dictum: "what constitutes th e means of payment for commodities i s simply commodities." Bu t in a footnote, afte r referrin g t o the Mill quotation, Marshal l expresses his uneasiness an d his sense that , i n thi s domain , economist s ha d no t brough t thei r stud y t o "successfu l issue:"66 It i s tru e tha t i n times o f depressio n th e disorganizatio n o f consumptio n i s a contributory caus e t o th e continuanc e of th e disorganizatio n o f credi t an d o f production. Bu t a remedy is not to be got by a study of consumption. . . . But the main stud y needed i s that of the organization of production and of credit . And, thoug h economist s hav e no t ye t succeede d i n bringin g that stud y t o a successful issue , th e caus e o f thei r failure lies i n the profound obscurity an d ever-changing form of the problem. . . . Economics from beginning t o end is a stud y o f the mutua l adjustment s of consumption an d production: whe n th e one i s under discussion, th e othe r i s never ou t o f mind. In Money, Credit, an d Commerce a chapter i s devoted t o "Influence s o n the Stability of Employment Exerte d b y Development o f Techniques'' an d a second o n the relations of the mone y marke t t o industria l and trad e fluctuations; 67 bu t the y contai n littl e tha t wa s new, repeatin g onc e agai n theme s an d passages published 4 4 year s earlier . What explain s Marshall' s failur e t o com e t o grip s wit h th e busines s cycl e an d it s amelioration? Th e Principles an d Marshall's tw o subsequent major books conclud e with many appendixes. Wh y not one on business cycles? Keynes, in his memoir, suggest s tha t the failur e la y i n leavin g unti l to o lat e th e writin g o f Money, Credit, an d Commerce (originally Money, Credit an d Employment). 68 Schumpeter assert s that , essentially , Marshall neve r wen t beyond Mil l i n dealing wit h the busines s cycle.69 I a m incline d t o thin k that , wit h respec t t o analysis , Marshall' s proble m wit h th e business cycl e wa s mor e substantive . I t la y i n th e fac t tha t ther e wa s n o luci d linkag e between th e dynamic micro-analysis of production an d prices h e had evolved a s his major theoretical achievemen t an d th e dynami c macro-analysi s o f productio n an d price s h e inherited i n the for m o f th e quantit y theory o f money . The latte r h e modified bu t recon ciled onl y partiall y wit h hi s micro-analysis. And ther e wa s anothe r problem . H e neve r reconcile d th e classi c growt h equatio n h e formulated i n mathematica l term s a s earl y a s 1881-1882—an d which , i n effect, under pinned Boo k I V o f th e Principles —with hi s versio n o f th e quantit y theory o f money . With respect to the first failur e of linkage, i t will be recalled that, i n an effort t o solv e the proble m o f dynami c micro-analysi s unde r condition s o f changin g technolog y an d increasing returns , Marshal l adopte d th e concep t o f "th e representativ e firm " an d th e "normal suppl y price " o r "expense s of production." Fo r example: 70 These result s [external economies] wil l be of great importance when we come to discuss the causes which govern the suppl y price of a commodity. . . , an d for thi s purpos e w e shal l hav e t o stud y th e expenses o f a representative producer fo r tha t aggregat e volume . . . . [O]u r representative firm mus t b e

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one whic h has had a fairly lon g life, an d fai r success , whic h is managed with normal ability , an d which has norma l acces s t o the economies, externa l an d internal, whic h belong t o tha t aggregate volum e of production. 71 In terms of these concepts, Marshal l envisaged that the volatility of human expectations led i n the cours e o f the boom—whe n confidenc e was excessive—to a n overshooting of the normal suppl y price of the representative firm, a rise in profits, and to an expansion of output an d employmen t tha t could no t b e sustained , becaus e ful l employmen t brough t with i t a n unexpecte d ris e i n expenses o f production beyon d th e long-ru n normal level ; i.e., i n th e price s o f ra w materials , i n wag e rates , an d interes t rate s tha t ha d initiall y lagged th e ris e in the marke t price o f output. A consequent decline in profits an d loss of confidence le d t o a n undershooting of the norma l suppl y price o f the representative fir m and, wit h it s costs relatively sticky , a further declin e i n profits an d output. Now, implicitly or explicitly, virtually all business-cycle theories involve an overshooting an d undershootin g o f som e conceptua l dynami c "normal " o r "optimum " path . Marshall's proble m wa s that , whil e he define d a representativ e fir m i n a n industr y o r sector whose normal path was linked to the positive or negative growth path of that sector, he did no t defin e the determinant s o f sectora l growt h paths. Thus , he oscillated analyti cally between the micro-analysis of firms an d the macro-behavior of the monetary system implied b y hi s overridin g emphasi s o n "fluctuation s o f commercia l credit, " bypassin g the critica l processe s proceedin g i n the sectors . In Marshall' s descriptio n o f th e cyclica l upswin g and downswin g that clearly lef t o n him the most powerful impression (upswing 1868-1873; downswing 1873-1879), he was quite aware that the cyclical pattern could not be explained without reference to its distinct sectoral characteristics: a n extraordinary expansion of capital and capital goods exports i n the boom , relate d t o a surg e i n railwa y building abroad , whic h came t o res t o n a bot tleneck i n coal output and an exaggerated pric e inflation i n the coal-iron-steel-engineerin g complex; a rapid subsidenc e from 187 3 i n capital an d capital goods exports , cushione d in its impact on the overall behavio r of the economy dow n to 1877 , by a building boom—a sector crowde d ou t b y capita l export s a t hig h interes t rate s dow n t o 1873 . Marshal l could—and did—discus s al l thi s quit e precisel y i n a d ho c terms . Bu t ther e wa s n o sectoral bon e structur e i n hi s system ; th e representativ e firm di d no t fil l th e gap ; an d i n Keynes's memorabl e description , Marshal l was caught in a trap that bedeviled economic s from th e beginning an d that by no means has been disposed of, despit e Keynes' s efforts , down t o the present day: 72 So lon g a s economist s ar e concerne d wit h wha t i s calle d th e Theor y o f Value, the y hav e been accustome d t o teac h tha t price s ar e governe d b y th e conditions o f supply and demand; and, in particular, changes in marginal cost and th e elasticit y o f short-perio d suppl y hav e played a prominent part . Bu t when the y pas s i n Volum e II , o r mor e ofte n i n a separat e treatise , t o th e Theory of Money and Prices, we hear no more of these homely but intelligibl e concepts an d move into a world where prices ar e governed by the quantity of money, by its income-velocity, by the velocity of circulation relatively to the volume of transactions, by hoarding, by forced saving , by inflation an d deflation et hoc genus omne; and little or no attempt is made to relate these vaguer phrases t o ou r forme r notions of th e elasticitie s of suppl y an d demand . . . . We have all of us become used to finding ourselves sometimes on the one side

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of th e moo n an d sometime s o n th e other , withou t knowin g wha t rout e o r journey connect s them , related , apparently , afte r th e fashio n of ou r wakin g and ou r dreamin g lives . But the quantity theory of money—even with Marshall's cash balances modification — also proved a n inadequate instrument for the serious analysi s of either business cycles o r price trends , bot h o f whic h figure d i n th e probin g o f th e Roya l Commission s o f th e mid-1880s. I n eac h cas e th e proble m centere d o n th e rat e o f growt h o f rea l output. So far as the business cycle was concerned, Marshall' s description of its phases implie d that, i n som e sense , th e generatio n o f excessivel y optimisti c expectation s le d t o credi t expansion, whic h pushed the syste m int o inefficien t overful l employment, strivin g for a level o f outpu t beyon d it s overal l tren d capacity . I t s o happene d tha t th e 1868-187 3 expansion and , notably , it s fina l highl y inflationar y phase, wa s a vivi d illustratio n o f Keynes's effor t t o make sense of the Quantity Theory o f Money, unde r explicit restrictive assumptions:73 Thus if ther e i s perfectly elasti c suppl y so long a s there i s unemployment, and perfectl y inelasti c suppl y s o soo n a s full employmen t is reached, an d if effective deman d change s i n th e sam e proportio n a s th e quantit y of money , the Quantit y Theor y o f Mone y ca n b e enunciate d a s follows : "S o lon g a s there i s unemployment, employment wil l change in the same proportion a s the quantity o f money ; and whe n there i s ful l employment , prices wil l change in the sam e proportio n a s th e quantit y of money. " To dea l formall y wit h a situatio n define d i n suc h term s require s th e concep t o f a maximum sustainable overall growt h rate fo r output at full employmen t rooted i n the rate of growt h o f th e fundamenta l factor s o f productio n an d thei r productivit y embrace d i n Marshall's macro-growt h model an d Book IV of Principles. Marshall' s descriptio n o f the business cycl e i s wholl y consisten t wit h suc h a construct ; an d i t i s vivid , acute , an d accurate. With th e notion o f a trend real-growth-rat e ceiling (pretty well implied in Boo k IV) an d a n interactin g multiplier-accelerato r mechanis m (no t al l tha t muc h beyon d Marshall's description ) h e could hav e produced a fair approximatio n o f a modern macro economic busines s cycle . Bu t th e busines s cycle di d no t prov e analyticall y manageabl e with th e tool s h e ha d i n hand , includin g those o f hi s ow n fabrication. Marshall wa s quit e conscious tha t he lef t a great dea l stil l t o be done i n monetary an d business-cycle analysis . Schumpete r include s amon g Marshall' s virtue s hi s capacit y t o point i n helpfu l directions wit h respect t o task s unfulfilled:74 But ther e i s somethin g abou t Marshall' s wor k tha t i s muc h greate r tha n anything h e actuall y accomplished—somethin g tha t assures immortalit y or , let u s say , vitalit y far beyon d th e lifetim e of an y definite achievement. Ove r and above th e products of his genius which he handed t o us to work with and which inevitabl y wea r ou t i n ou r hands , ther e ar e i n th e Principles subtl e suggestions or directions fo r further advance , manifestation s of that quality of leadership tha t I hav e mad e a n effor t t o defin e at the start . Pigou, Robertson , an d Keynes , amon g his othe r pupils , di d indee d carr y forwar d wit h Marshall's agend a influence d b y th e cours e o f event s aroun d the m a s wel l a s b y th e guidance o f thei r respected master .

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Relative Prices In th e cas e o f th e analysi s of pric e trends , Marshal l onc e agai n wa s i n th e positio n o f holding a lucid , defensibl e view o f th e cours e o f event s withou t a solid , coheren t theoretical base; once again the problem was embedded i n how to deal wit h the real growth rate, an d i n thi s cas e hi s dilemm a wa s heightened—indeed , openl y acknowledged — because h e wa s sharpl y questione d b y member s o f th e Gol d an d Silve r Commission . Although formall y the issu e h e confronted was the determinatio n of th e genera l pric e level, i n fact , th e questio n of relative pric e movement s was als o involved . Specifically, two issue s concerned the Commission. T o what extent had the post-1873 declining price trend, only modestly interrupted in the 1879-188 3 business expansion, been caused by a relative shortage o f bullion in the worl d economy a s opposed t o a decline in real costs of production? To what extent could a shift o f the British pound to a bimetallist base reverse the downwar d pric e trend , i f tha t shoul d b e judge d desirable ? Th e evidenc e o n thes e points generate d b y the Commission on the Depression i n Trade an d Industry (1886) had been s o confusin g and contradictor y tha t a successo r Roya l Commissio n o n Gol d an d Silver (1887-1888 ) wa s se t u p wit h a narrowe r focus . Marshal l submitte d writte n re sponses t o question s fro m th e firs t commission ; responde d i n writin g and appeare d fo r extensive questioning before the second. Th e general character of his judgment about the period sinc e 187 3 is incorporate d i n the precedin g quotatio n (pp. 177-178). In explaining th e concurrenc e o f declining price trends , increase d output , a n accelera tion i n rea l wages , an d a normal leve l o f unemployment (average d ove r majo r cycles) , Marshall encountere d tw o problems existin g theory could not grip. 75 First was the prob lem of introducing into the quantity-theory framework the role of reduced costs, which, in Marshall's view , ha d playe d a decisiv e rol e i n th e pric e declin e afte r 1873 . All th e quantity theory provide d wa s a term for total output or, i n the vocabulary Marshall used before th e Commission , "th e suppl y of commodities." Bu t th e suppl y of commoditie s could b e increase d b y a numbe r o f factors , asid e fro m reduce d costs . How , then, t o separate th e effect s o f reduce d cost s fro m othe r factor s affectin g tota l outpu t an d avoi d double counting? Marshall, i n his writte n submission to the Commission on the Depres sion in Trade in May 1886 , begins by quoting Thomas Tooke's cost-reduction explanation for th e pric e decrease betwee n 181 4 and 1837 , affirming tha t wit h a fe w technologica l additions i t fitte d rather wel l the pric e declin e fro m 187 3 to 1886 . But Marshal l add s a theoretical objection: 76 He [Tooke ] has no t made it clear that diminution of the cost of production of commodities mus t no t b e counte d a s a n additiona l cause o f a fal l o f prices , when it s effect s o n increasin g th e suppl y o f commoditie s relativel y t o gol d have alread y bee n allowe d fo r separately . Thi s i s a point of som e difficulty , and it s interes t i s theoretical rathe r tha n practical. In fact , fo r the Commissioner s th e issue wa s highly practical because the economists' unlinked dual vocabulary for dealing with prices prevented an agreed answer to the second question that puzzled Marshall as well as the Commissioners: to what extent was the price decline a deman d phenomenon , impose d b y a gol d shortage , a s oppose d t o a suppl y phenomenon reflectin g rapi d technological change in industry an d transport, the opening up o f ne w oversea s supplie s of foo d an d ra w materials , and reduced interes t rates? Here, too, Marshall found his theoretical tools inadequate. He began bravely:77 "I look

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with scepticism o n any attempt to divide the recent fall of prices into that part which is due to change s i n th e suppl y o f commoditie s an d tha t whic h i s du e t o th e availabl e gol d supply." Bu t th e shrew d an d persisten t Commissioners , alread y knowledgeabl e an d hardened b y the conflicting answers they had heard, were not about to be put off by such purist academi c scepticism . The y insiste d that Marshall tr y t o trace ou t precisel y ho w a scarcity o f gold comes t o affect prices— a proces s tha t Marshall acknowledged "puzzle s me down to this moment."78 The testimony then marches through the Bank of England's reserve position , it s discoun t rate , an d th e consequence s fo r th e availabilit y o f credit . Marshall acknowledge d tha t interest rates were lower i n the post-1873 perio d tha n in the decade befor e bu t argue d that , fo r fou r reasons , the y shoul d hav e bee n stil l lower : th e growing international characte r o f the money market; improved managemen t of the Bank of England ; a lack o f wars ; a lower long-ter m rat e o f interest. 79 Marshall conclude d tha t th e majo r force s tha t cause d th e pric e declin e wer e o n th e supply side but that "th e scarcit y of supplies of gold have made themselves felt a little in the Bank parlour. "80 Bu t clearly this was a matter of personal judgment that could not be rigorously demonstrated . In retrospect, Marshall's testimony o n what had happened to the British economy sinc e the crisis of 187 3 was sensible and holds up quite well. H e argued correctly tha t the trend decline i n price s di d no t impl y a chroni c depressio n i n employmen t o r output ; that th e price decline had, on balance, accelerate d th e rise in real wages, shifting incom e distribution i n favo r o f labor ; tha t th e pressur e o n profit s ha d no t bee n suc h a s t o restric t investment an d innovatio n abnormally ; tha t th e majo r cause s o f th e pric e declin e wer e nonmonetary, technological , cost-reducing , an d salutary; and that the government should not ac t radicall y wit h respect t o bimetallism or an y other monetar y reform . On th e othe r hand , Marshall' s testimon y dramatized tha t a s o f th e mid-1880 s main stream economic s ha d no t unifie d effectivel y micro - an d macro-price analysi s nor foun d an agreed method for isolating the impact of monetary forces from othe r variables a t work in pric e determination . And , despit e Keynes' s effor t i n Th e General Theory, th e sam e propositions ca n be asserted, a century later, a s the awkwardness of macro-economists i n dealing wit h fluctuations in oil prices ove r th e period 1973-198 9 suggests . Strictly speaking, the analysis thus far does not conform to the title of this section; i.e. , Relative Prices . An d i t is somewhat surprising that the question of relative prices—and, especially, th e relativ e price s o f Britis h export s an d imports—di d no t ente r mor e ex plicitly int o Marshall' s testimon y develope d fo r th e tw o Commissions . Fo r a striking aspect o f th e perio d fro m 187 3 down t o th e mid-1890 s wa s a phenomenon tha t derive d substantially from shift s in relative prices; namely, a sustained rise in real wages at a rate substantially in excess o f that during the third quarter of the century and, in fact, in exces s of the rate of growth o f real outpu t per capita. 81 Marshal l took th e opportunity of laying before th e Committe e o n India n Currency , i n testimon y presented i n 1899 , newl y published dat a organized b y Arthur Bowley that reinforced the position o n the course of real wages he had taken 11 years earlier before the Gold and Silver Commission (Table 6.1).82 Behind the almost revolutionar y ris e in real wages afte r 187 3 was a decline in the British wheat price between 187 3 and the trough in the 1890 s of about 60%, only slightly less fo r barley an d oats; 83 a decline i n U.S . far m prices a s a whole of 62%. 84 Th e bes t curren t estimate of the movement of British retail prices as a whole for this period was a decline of 32%.85 But a s th e 1890 s wor e o n an d gav e wa y t o th e ne w century , by whic h time relative prices had begun to reverse, Marshall did come to grips with the issue. Hi s approach was,

Alfred Marshall (1842-1924) 18

3

Table 6.1. Averag e Real an d Nominal Wage s in the Unite d Kingdom , France, and th e Unite d State s as Percentages of Those in 189 1 Country 1844-185 United Kingdom Nominal Real France Nominal Real United States

Nominal

Real

3 1854-186

3 1864-187

3 1874-188

3 1884-189

3 189

1

61 53

73 8 51 5

29 98

39 29

5 10 7 10

0 0

52 55

65 7 61 6

38 77

69 89

5 10 4 10

0 0

53 54

58 7 53 5

28 77

69 69

5 10 5 10

0 0

SOURCE: J . M . Keyne s (ed.), Official Papers o f Alfred Marshall (London: Macmillan, 1926) , p. 287 .

indeed, foreshadowe d by passages i n the Principles in which he argued, in considering th e "General Influence s o f Economi c Progress, " tha t th e greates t benefi t t o th e Britis h people fro m th e technologie s generate d i n th e previou s centur y derive d no t fro m th e cheapened cos t o f manufactures but from th e radically cheapening i n the cost of transport by land and by sea. I n a book o n growth, this passage, ultimatel y concerned wit h the real (productivity) term s o f trade , i s wort h extensiv e quotatio n includin g it s evocativ e climax:86 But thoug h in the eighteenth century , as now, the real nationa l dividend of England depende d muc h o n th e actio n o f th e la w o f increasin g retur n wit h regard to her exports, th e mode of dependence ha s very much changed. The n England ha d somethin g approachin g t o a monopol y o f th e ne w method s o f manufacture; an d eac h bal e o f her good s woul d b e sold—at al l events whe n their suppl y wa s artificiall y limited—in retur n fo r a vast amoun t o f the pro duce o f foreig n countries . Bu t partl y becaus e th e tim e wa s no t ye t rip e fo r carrying bulk y good s grea t distances , he r import s fro m th e far-eas t an d th e far-west consiste d chiefl y o f comfort s an d luxurie s for th e well-to-do ; the y had bu t littl e direc t effec t i n lowerin g th e labour-cos t o f necessarie s t o th e English workman . . . . [I] t had very littl e effec t o n the cost of his food; and that wa s lef t t o ris e unde r th e tendenc y t o diminishin g return , whic h wa s called int o actio n b y th e rapi d increas e o f populatio n i n ne w manufacturing districts wher e th e ol d customar y restraint s o f a narro w villag e lif e di d no t exist. A little late r th e great Frenc h war , an d a series o f bad harvests, raise d that cos t t o much th e highest poin t i t has eve r reache d i n Europe . But graduall y th e influenc e of foreig n trad e bega n t o tel l o n th e cos t o f production o f our staple food. As the population of America spread westwar d from th e Atlantic, richer an d still richer whea t soils hav e come unde r cultivation; an d th e economie s o f transpor t hav e increase d s o much , especiall y i n recent years, that the total cost of importing a quarter of wheat from th e farms on th e outskirt s of cultivatio n has diminishe d rapidly, though th e distance of that margi n ha s bee n increasing . And thu s Englan d has been save d fro m th e need o f mor e an d mor e intensiv e cultivation. The blea k hill-sides , up which the wheat-fields were laboriously climbing in Ricardo's time, have returned to

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pasture; an d th e ploughma n work s no w onl y wher e lan d wil l yiel d plentifu l returns to his labour : wherea s if Englan d had bee n limite d to her own resources, h e mus t hav e plodde d ove r eve r poore r an d poorer soils , an d mus t have gon e o n continuall y reploughin g lan d tha t ha d alread y bee n wel l ploughed, i n the hope of adding by this heavy toil an extra bushel or two to the produce o f each acre. " Marshall addresse d himself mos t directl y to the question of relative prices, however, i n the context o f a "Memorandu m o n Fiscal Policy of International Trade," written in 1903 but no t publishe d unti l 190 8 when member s o f th e Hous e o f Common s prevaile d upo n him to permit it s publication as a public paper afte r mino r modification. The occasion wa s the debat e o n protectionis m launche d b y th e Conservativ e Party' s positio n that , i n a n increasingly competitiv e world , Britai n shoul d abando n fre e trad e an d mov e towar d a system o f imperia l preference. 87 In responding t o protectionist arguments , Marshal l introduce d th e questio n o f relativ e prices i n bot h a short-ru n an d long-ru n context . I n th e shor t ru n h e note d clearly , bu t without alarm , tha t force s wer e generatin g i n the Unite d States—notably , th e transitio n from "pionee r wheat farming" t o diversified agriculture—likel y t o end the decline i n the wheat pric e tha t had s o strikingl y benefite d th e British consumer. 88 At a late r poin t i n his memorandum , Marshal l introduce s hi s long-ru n anxiety, which Keynes an d D. H . Robertso n wer e t o ech o dow n t o 192 0 (following, pp. 302-304): 89 . . . [T]he world i s being people d up very quickly. It is but a century sinc e Britain accumulate d he r grea t Publi c Debt ; an d befor e anothe r centur y ha s passed th e scen e ma y have changed. Ther e ma y then remain bu t a few smal l areas of fertile soil , an d of rich mineral strata , which are not so well supplie d with both population an d capital as to be able to produce most of the manufactured product s whic h the y require, an d to be abl e t o turn to a tolerably goo d account mos t of their raw products fo r their own use. When tha t time comes , those wh o hav e surplu s ra w product s t o sel l wil l hav e th e uppe r han d i n all international bargains . Actin g concurrently, whethe r by mutual agreement o r not, the y wil l b e i n th e possessio n o f a n unassailabl e monopoly ; an d an y taxes, howeve r oppressive , whic h the y ma y choos e t o impos e o n th e onl y products whic h densel y people d countrie s ca n offe r t o the m wil l b e pai d mainly by those countries . I t is this consideration, rathe r tha n the prospect of any immediat e danger , whic h make s m e regar d th e futur e o f Englan d wit h grave anxiety . Thus, i n Marshall, muc h more than in Mill or Marx, diminishing returns reasserts itsel f as he contemplate s th e historica l outcom e o f movemen t b y a lengthenin g arra y o f nation s through th e stage s o f growth .

Stages of and Limits to Growth It was Marshall's acut e sens e o f the relevance o f time and place tha t forced hi m to suffus e all his substantial work with historical references an d analyses. Joined with his conviction that history moved slowly , by smal l increments , this sens e also lead him to the view that the stud y o f histor y permit s a n estimat e no t onl y o f th e firs t bu t als o o f th e secon d derivative o f th e cours e o f events ; tha t is , th e manne r i n whic h th e rat e o f chang e i s

Alfred Marshall (1842-1924) 18

5

changing:90 " . . . [Observatio n o f th e presen t onl y show s wha t i s perhap s it s rate o f movement: som e guidance is needed als o as to the rate of increase of movement. Tha t can only b e go t by lookin g backwards. " Marshall look s backwar d and, cautiously , forward i n four distinc t contexts: • Observation s o n stages o f economic growt h along the lines of the classical econo mists wit h som e observation s als o o n th e mor e moder n Germa n stag e theorists . • Historica l passage s directl y relate d t o institutional or technical features of the contemporary scene ; e.g. , th e evolution of banking, joint stock companies, an d transport facilitie s a s they influence d the grain suppl y for urba n areas . • Th e immediat e challeng e t o Britis h economi c leadershi p mounted , notably , b y Germany and the United States, including the competitive strengths and weaknesses of th e contenders ; an d th e longe r ru n competiv e prospect s fo r a wide r grou p o f potential economic leaders . Asid e fro m continuing to elevate th e level an d quality of lif e o f the working classes I would guess Marshall regarded thi s problem—with its echoes o f Hume on the rich-country-poor-country problem—a s th e most important issu e o f politica l econom y confronte d b y Britai n in his time . • Finally , once again, is Marshall's deeply rooted anxiet y about the prices of food and raw material s relativ e t o manufacture s in th e longe r future . What we might call the lon g swee p of stages o f growth appears as early as 187 9 in The Economics o f Industry, Boo k I , Chapte r VII. 91 In six pages Marshal l takes hi s reader, i n reasonably colorfu l style, fro m th e egalitarian life o f the savage through the early phases of the division of labor to the emergence o f agricultural systems supporte d by specialize d handicraft manufacture and other services in villages. After a diversion on societies roote d in slaver y an d serfdo m he return s t o the ris e o f towns, craf t guilds , banking , trade—al l associated wit h a marked increas e i n specialization of function. Withou t further explana tion, machinery (alon g with "th e train , the steamship, the printing press , and telegraph") appears an d a curiou s paralle l t o Marx' s ris e i n th e organi c Compositio n o f Capital: 92 "The amoun t which a manufacturer devotes t o the purchase of machinery increases much faster than the amount he spends on the hire of labour. In other words, Auxiliary capital is increasing at a greater rat e than Remuneratory.'' Th e passage closes with emphasis on the increased mobilit y of labor and capital and the tendency toward s equal profits in trades of "equal risks , discomforts , an d exertions." A more spacious versio n of this stylized passage of economic histor y is incorporated i n Appendix A o f th e Principles entitle d "Th e growt h o f fre e industr y an d enterprise, " running t o thirt y pages . I t begins , again , wit h th e force s tha t determin e th e shap e o f primitive societies, cover s the evolution of Europe down through medieval times, and the emergence o f the powerful monarchies in Austria, Spain, and France. H e then defines the critical turnin g poin t a s follows: 93 Then the world might have gone backwards if it had not happened that just at tha t tim e ne w force s wer e risin g t o brea k u p the bond s o f constraint, an d spread freedo m ove r th e broa d land . Withi n a ver y shor t perio d cam e th e invention o f printing , th e Reviva l o f Learning , th e Reformation , an d th e discovery of the ocean routes to the New World and to India. Any one of these events alon e woul d hav e bee n sufficien t t o mak e a n epoc h i n history ; bu t coming togethe r a s the y did , an d workin g al l i n th e sam e direction , the y effected a complet e revolution. "

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Marshall ha s a good dea l mor e t o say abou t the emergenc e o f moder n manufacturing than in his earlier account . H e brings together severa l strand s including the prior capitalis t organization o f agriculture , th e impac t o f th e Reformation , an d th e rol e o f th e nonconformist:94 England's industria l and commercial characteristics were intensified by the fact tha t many of those who ha d adopted the new doctrines in other countries sought o n he r shore s a saf e asylu m from religiou s persecution . B y a sort o f natural selection , thos e o f the Frenc h an d Flemings, an d others whos e char acter wa s most akin to the English, and who had been le d by that character t o study thoroughnes s o f wor k in th e manufacturin g arts, cam e t o mingle with them, an d t o teac h the m thos e art s fo r whic h thei r characte r ha d al l alon g fitted them. During the seventeenth and eighteenth centuries, the court and the upper classe s remaine d mor e o r less frivolou s and licentious; but th e middle class and som e part s o f the working class adopte d a severe vie w of life; they took littl e deligh t i n amusement s that interrupte d work, an d they ha d a high standard a s t o thos e materia l comfort s whic h coul d b e obtaine d onl y b y unremitting, har d work . The emergence o f the factory system, its diffusion throughou t Britain, to the Continent, and acros s th e Atlanti c i s evoked , an d the stor y ends wit h reflections, late r t o be much elaborated, o n th e industria l prospects fo r th e Unite d States, Germany , an d others. I n a footnote, h e lucidly identifies the critical three initial innovations of the industrial revolution (Watt' s stea m engine , th e ne w textile machinery, and the new method fo r manufacturing iro n wit h coke ) an d enumerate s som e o f those tha t followed. 95 Two thing s are strikin g about this highly compressed essa y i n the swee p of economi c history. First, Marshal l obviously had read thoroughly the rapidly expanding professiona l literature in economic history, notabl y th e writings i n Germany an d Britain. Second , he wove togethe r easil y factor s deriving fro m climat e an d geography , custo m an d culture, social structure , lega l systems , politics , religion , an d a recurrent stran d of emphasi s o n racial characteristics . Marshall' s synthesi s was distinctive , although what he ha d t o say was not particularly original. Fo r our purposes, however , wha t this appendix underlines is the wid e range o f variables Marshall correctl y perceive d a s relevant to a serious analysi s of the process o f economic growth . No reader o f Appendix A in the Principles wil l fail t o understand wh y Marshal l di d no t regar d th e refinemen t o f hi s incipien t neoclassica l growth mode l (preceding , p . 167 ) a s high-priorit y business. H e believe d th e economis t should, lik e the economic historian , b e "saturate d with a knowledge of the religious an d moral, th e intellectual an d aesthetic, th e political an d social environment . . ," 96 The sam e insistenc e o n th e relevanc e o f histor y with all it s dynami c complexity suffuses th e tw o appendice s tha t follow : B , "Th e Growt h of Economi c Science, " an d C , "The Scop e an d Metho d o f Economics." Excep t fo r a brief, initia l passage i n Money, Credit, an d Commerce, reachin g back t o medieval times, Marshal l returne d t o the lon g sweep o f stage s o f growt h onl y once : i n Appendi x B o f Industry an d Trade, wher e h e fences a bit with Roscher's three stages related t o virtuosity in manufactures: total depen dence o n imports ; simpl e manufactures ; and sharin g industria l leadershi p a t th e tech nological frontier. 97 There are also more conventional excursions into economic history in Appendix C ("England's Earl y Industry and Trade") as well as an essay (Appendix D) on "The Englis h Mercantilist s and Adam Smith. " This brings us to Marshall's second use of economic history—as an essential part of the

Alfred Marshall (1842-1924) 18

7

setting fo r analyzin g a contemporar y economi c problem . Her e h e was quite systematic. Starting wit h The Economics o f Industry, Marshal l provided whereve r he judged i t appropriate a historical prelud e to his analysis of particular problems; for example, wit h respect to population, 98 lan d tenure, " an d trad e unions. 100 B y th e tim e th e mor e spaciou s Principles wa s published, 1 1 years later , Marshal l had elaborated the technique of appendices; bu t th e tex t itself , notabl y Book s I V an d VI , contain s a goo d man y passages o f throwback to earlier times.101 The same two devices—appendices an d historical introductions i n the text—ar e use d i n Industry an d Trade an d Money, Credit, an d Commerce t o provide a stereoscopic , dynami c dimensio n t o his analysis— a perspectiv e h e applied t o the histor y o f economi c theor y an d doctrine, a s well. Perhaps Marshall's mos t striking use of the historical method was in framing the central issue deal t wit h i n Boo k I o f Industry an d Trade whic h come s t o res t o n th e futur e o f industrial leadershi p i n th e worl d economy . On e ca n observ e i n th e sequenc e o f Marshall's work—stretchin g ove r a hal f century— a gatherin g awarenes s tha t Britain' s critical economi c proble m wa s how to meet th e challenge pose d b y the rise t o industrial maturity o f th e Unite d State s an d Germany. Marshall begins his mos t detailed consideration of the problem in Industry an d Trade with three chapters tha t are, i n effect, analyti c essays in British history. 102 They cover the elements i n th e longe r pas t tha t prepare d th e foundation s fo r it s pioneerin g o f wha t Marshall call s "massiv e industry"; Britain's industria l leadership, whic h he dates prox imately fro m th e mechanizatio n o f th e cotto n industr y in th e lat e eighteent h centur y t o 1873; th e subsequen t challenge t o Britain's primacy, an d the British response. Chapter s follow o n th e specia l characteristic s o f French, German , an d American industrialization. The geniu s o f each , h e found , respectively , i n "fin e goods , embodyin g som e artisti c feeling an d individua l judgment"; industries that can be nurtured by "academi c training and laboratory work" ; and "massiv e multiform standardization. " He closes with "som e slight speculation s a s t o futur e home s o f industria l leadership." The firs t editio n o f Industry an d Trade wa s publishe d i n 1919 , th e fourt h an d fina l edition i n 1923 . But , typica l of Marshall' s lon g period s o f gestation , som e o f th e boo k was set in type as early as 1904. Hi s analysis of Britain's relative position and the intensity of the challeng e i t confronted reflects rathe r better th e moo d of 190 4 than 191 9 or 1923 . The poin t i s german e becaus e th e recommendation s o f Marshal l t o hi s countryme n ar e modest, and , lik e his analyse s of France, Germany , an d the United States, d o not reflect the majo r economic consequence s o f the First Worl d Wa r an d its aftermath; although h e inserted reference s t o wartime developments an d notes that "Britai n surprised the rest of the world , i f not herself , b y th e energ y whic h she has show n in the Worl d War : an d the English-speaking peoples of four continent s have proved themselves to be united in spirit and truth." 103 Specifically, Marshal l commend s t o hi s countryme n a n intensificatio n o f measure s already belatedl y underway : an expansion and improvement of popular education, a need recognized an d acte d upo n starting i n 1904; 104 an improvement o f University educatio n for "th e well-to-d o classe s i n England;" 105 a n expansio n o f trainin g i n scienc e an d engineering a s wel l a s increase d allocatio n o f publi c resource s fo r scientifi c researc h laboratories;106 improved informatio n about overseas market s and less conservative methods o f industria l financing.107 (The agend a doe s no t greatl y differ fro m prescription s in the lat e 1980 s fo r th e Unite d State s i n th e fac e o f challenge s fro m withi n th e Pacifi c Basin.) Despite hi s sens e that Britai n wa s responding to the industria l challeng e in appropriate

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directions and his evident pride in its redoubtable wartime performance the general tone of Marshall's view of the future i s not unlike Hume's mild, long-run philosophic acceptanc e that manufacture s tend t o shif t fro m countrie s and province s the y have alread y enriche d and fl y t o others (preceding , pp . 29-31) . Marshall look s t o some o f the Britis h Dominions assuming, in time, degree s o f industrial leadership, bu t notes tha t they ar e likely to be more influence d by the experience o f the United States tha n Britain.108 His concluding reflections went beyond the Atlantic and English-speaking worl d and , o n th e whole , ar e prescient. 109 Passing awa y fro m Europea n races , w e fin d i n Japa n a bol d claiman t fo r leadership o f the East o n lines tha t are mainly Western. He r insular position, contiguous to a great Continent, is almost as well adapted for the development of industry and trade as that of Britain. She has learnt so much during the last thirty years , tha t sh e ca n hardl y fail t o becom e a teacher er e long . I t seem s indeed tha t stronge r foo d tha n they no w hav e wil l be require d t o enabl e he r people to sustain continuous, severe, physica l strain: but the singular power of self-abnegation, whic h they combin e wit h high enterprise, ma y enabl e the m to attain great ends by shorter and simpler routes than those which are pursued where man y superfluou s comforts an d luxurie s have lon g bee n regarde d a s conventionally necessary . Thei r quic k rise t o power support s the suggestion, made b y th e histor y o f pas t times , tha t som e touc h o f idealism , religious , patriotic, o r artistic, can generally be detected a t the root of any great outburst of practica l energy . India, though less agile, i s developing renewed vigou r and independence i n industry a s i n thought. Sh e i s the home o f som e o f the greatest thought s that have eve r com e t o th e world ; an d th e originato r of man y of th e subtles t and most artisti c manua l industries . Sh e ha s suffere d i n th e pas t fro m lac k o f unity, an d a scarcit y o f powe r fo r manufacture s and transport . Bu t sh e ma y yet be found to have considerable store s o f coal: and some of her regions may be enriched b y electrical energ y derive d fro m wate r power. Th e rapid recen t rise of her large r industrie s is a source o f just pride to her, an d of gladness t o Britain. Great future s may als o awai t Russia an d China . Eac h i s large, continuou s and self-contained : eac h ha s enormou s resources , whic h could no t be devel oped so long as good acces s t o ocean highway s was a necessary conditio n fo r great achievement . Thei r population s diffe r i n temperament ; th e persistenc e of th e Chines e bein g complementary t o th e quic k sensibility of th e Russian: each ha s inherite d grea t power s o f enduranc e fro m man y generation s o f an cestors wh o hav e suffere d much. Bu t recent event s obscure th e outlook. Marshall doe s capture , i n thi s passage , som e o f th e principa l actors (e.g. , Chin a an d India) in what might be called the coming third round of adjustment of advanced industrial countries t o th e challenge o f maturin g latecomers: th e firs t havin g been Britain's adjustment t o th e maturin g o f countrie s whos e takeoff s bega n i n th e secon d quarte r o f th e nineteenth centur y (Belgium, France, th e Unite d States , an d Germany) ; the second , the adjustment o f Wester n Europ e an d th e Unite d State s to th e maturin g o f countrie s whose takeoffs bega n i n th e 1880 s an d 1890 s (Japan, Russia, an d Italy) . As fo r th e long-ter m prospect fo r growth in th e worl d economy a s a whole, Marshall was, a s alread y noted , somethin g o f a limits-to-growt h pessimist . Lookin g bac k an d

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projecting forwar d the prospects fo r increase i n population and the demands fo r food an d raw materials, hi s sense was that, despite the potentialities of science, diminishin g returns to natura l resource s woul d constrai n th e expansio n o f th e worl d econom y rathe r tha n diminishing relativ e margina l utilit y fo r rea l incom e itself , an d h e conclude d tha t thi s constraint woul d prevai l befor e th e en d o f th e twenty-firs t century. Thus, Marshall , o n this point , wa s mor e ki n to the olde r classica l economists tha n to J. S . Mil l an d Marx . Noneconomic Factors In his remarkable essa y o n Marshall, Keyne s portrays him as a man with a double nature: a preacher an d pastor o f men ; an d a scientist. Keyne s goes on: 110 . . . [A] s a preache r an d pasto r o f me n h e wa s no t particularl y superior t o other similar natures. A s a scientist he was, within his own field, the greatest in th e worl d fo r a hundre d years. Nevertheles s i t was t o th e firs t sid e o f hi s nature that h e himself preferre d t o give the preeminence. Thi s sel f shoul d be master, h e thought ; the secon d self , servant . Th e secon d sel f sough t knowledge for its own sake ; th e firs t sel f subordinate d abstrac t aim s to the need fo r practical advancement . The piercing eyes and ranging wings of an eagle wer e often calle d bac k t o eart h t o d o th e biddin g o f a moraliser. This doubl e natur e was the clue to Marshall's mingle d strength and weakness; t o his own conflictin g purposes an d waste of strength; to the two views which could alway s be taken abou t him; to the sympathies an d antipathies he inspired. In a subtl e transitio n Keyne s the n link s "th e diversit y o f hi s nature " t o a thir d quit e distinctive characteristi c o f Marshall: 111 In another respect the diversity of his nature was pure advantage. The study of economic s doe s no t see m t o requir e an y specialise d gift s o f a n unusually high order . I s i t not , intellectuall y regarded , a ver y eas y subjec t compared with th e higher branche s o f philosophy an d pure science ? Ye t good, o r eve n competent, economist s ar e the rarest o f birds. A n easy subject, a t which very few excel ! Th e parado x find s it s explanation , perhaps , i n tha t th e master economist must possess a rare combination o f gifts. H e must combine talent s not ofte n found together. H e must be a mathematician, historian, statesman , philosopher—in som e degree . H e mus t understan d symbol s an d spea k i n words. He must contemplate th e particular in terms of the general, an d touch abstract an d concrete i n the same flight o f thought. He must study the present in the light of the past for the purposes o f the future . N o part of man's natur e or his institution s must lie entirely outside his regard. H e must be purposeful and disintereste d i n a simultaneou s mood ; a s aloo f an d incorruptibl e a s a n artist, yet sometimes as near the earth as a politician. Much, but not all, of this ideal many-sidenes s Marshal l possessed . This is the quality that emerges as paramount if one examines Marshall's work from th e perspective o f economi c growth . He insiste d o n bringin g t o bea r o n ever y proble m h e confronted insight s from history , sociology, psychology , philosophy, or an y other discipline h e judged migh t be relevant . Keynes's distinction betwee n Marshall as a scientis t and hi s multifaccte d technique of analysi s obscure s an essentia l point. Marshall's meth-

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od—with it s introductio n of noneconomic a s well a s economic force s interactin g dynam ically throug h time—wa s th e essenc e o f hi s visio n o f wha t th e economist , a s scientist , should be. A t one point i n his memorial essay , Keyne s (wit h the assistance o f notes fro m Edgeworth) list s seven of Marshall's strikin g contributions to knowledge.112 Fiv e of thes e are components o f mainstream economics , som e afte r considerabl e modification, dow n to the present day : (1) clarification of the respectiv e role s o f demand and cost o f productio n in price determinatio n i n short-term partia l equilibrium analysis; (2) the extensio n of this formulation t o general equilibriu m analysis, strengthened b y the substitution of factors o f production a s well as consumers goods at the margin; (3) the concept o f consumer's Ren t or Surplus , notabl y it s rol e i n openin g th e wa y t o welfar e analysis ; (4 ) th e analysi s o f monopoly; an d (5 ) clarificatio n o f th e concep t o f th e elasticit y of demand . This chapte r ha s hardl y referred t o an y o f these innovation s that constitute the bul k of what would be conventionally regarded a s Marshall's "scientific " contribution , to accep t for th e momen t Keynes' s distinction . The othe r tw o contribution s referre d t o i n th e Keynes-Edgewort h arra y are : "th e explicit introductio n o f th e elemen t o f tim e a s a facto r i n economi c analysis"; 113 an d Marshall's large-scal e mobilizatio n of historical materials. Wit h respect t o time, Keyne s notes th e variou s device s Marshal l create d t o tr y t o giv e systemati c orde r t o th e lon g period; bu t h e note s tha t Marshal l lef t muc h fo r hi s successor s t o do . Wit h respec t t o economic history , Keyne s ca n barel y concea l hi s regret , i f no t irritation , that Marshal l spent s o muc h tim e an d energ y o n th e subject. 114 The vie w her e is , o f course , tha t Marshal l regarde d historica l analysi s a s on e o f th e essential tool s fo r dealin g wit h th e proble m o f time , th e lon g period , an d "organi c growth." He (and his successors dow n to the present) di d not devise the tools tha t would permit economist s t o deal with growth and the lon g period i n as tidy a way a s they woul d like; bu t i t wa s a grea t scientifi c virtu e o f Marshall' s tha t h e insiste d tha t growt h b e confronted i n all its irreducible complexity—a decision heightene d by knowledge that he formulated i n the early 1880 s a pretty fair approximatio n o f a neoclassical growt h model , and, afte r explorin g it s properties , se t i t asid e fo r goo d reasons . On th e othe r hand , Marshal l wa s quit e conscious that , in insisting on th e relevance t o economic analysi s of every face t o f the human experience, n o framewor k existed o r wa s in sight that would order each dimension in relation to the others:'l5 "I t i s vain to speak of the higher authority of a unified social science. N o doubt if that existed Economics woul d gladly fin d shelte r unde r its wing. Bu t i t does not exist; it shows no sign s of comin g int o existence. Ther e i s n o us e waitin g idly fo r it ; w e mus t d o wha t w e ca n wit h ou r presen t resources." Marshal l wa s arguin g here agains t the narrowness an d excessive dogmatis m of som e o f th e Britis h economist s earlie r i n th e centur y an d o f wha t h e regarde d a s Comte's incorrec t deductio n fro m hi s correc t insistenc e o n th e complexit y o f socia l phenomena. Marshal l rejecte d Comte' s notio n tha t economi c phenomen a coul d no t b e studied separately . H e insiste d that they should be studie d by inductio n as well as deduc tion and with a biologist's willingnes s to take "organi c growth" as the focus of attention. He observed:116 "Th e sam e ben t of mind, that led our lawyers to impose Englis h civi l law o n the Hindoos, le d our economists t o work out their theories o n the tacit assumptio n that th e worl d wa s mad e u p o f cit y men." 117 I n thi s methodologica l dialectic Marshall held, then, a middle position and buil t his work systematically upon it. His wide-ranging, loose-jointed, societa l approach t o economi c analysi s was directly and quite consciously in th e traditio n o f Mil l an d Smith . An d thi s wa s th e case , a s well , fo r hi s rol e a s " a preacher an d pasto r of men." Th e classica l traditio n i n economics, even i n its apparently

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most antiseptic , abstrac t Ricardia n form, was inspired by moral values and objectives its practitioners wer e prou d t o proclai m an d defend. I hav e alread y cite d a numbe r o f th e unembarrasse d mora l judgment s tha t suffus e Marshall's economi c analysis ; fo r exampl e th e mora l basi s fo r hi s initia l dedicatio n t o economics (p . 163) , hi s ple a fo r greate r craftsmanshi p in consume r goods (p . 167) , hi s truly radical proposal for reducing the skewness of income distribution in Britain (following, p. 192) . Bu t a final wor d is required on Marshall's position with respect to socialism. I begin wit h one of Schumpeter's barbs that Marshall's late-Victoria n style appears t o have generate d i n th e former' s Centra l Europea n soul: 118 "Marshal l professe d t o b e i n sympathy with the ultimate aims of socialism, though he expressed himself in so patronizing a wa y a s t o evok e nothin g but irritation. " Schumpete r ma y captur e accuratel y th e human reactio n generate d amon g contemporar y socialist s b y Marshall— a reactio n Schumpeter wa s i n a positio n personall y t o observe. 119 Bu t I d o believ e Marshall' s sympathies with socialism were more deeply rooted than Schumpeter implies; his reservations grounde d i n seriou s issue s o f bot h metho d an d substance ; and , on e ca n add , tha t whatever irritations Marshall may have stirred in socialist intellectuals, he got on well and easily wit h worker s an d labor leaders. As fo r th e dept h o f Marshall' s concer n fo r the poor , th e evidenc e i s abundant that he was drawn to economics b y a compulsion to answer the question: "Ar e th e opportunities of rea l lif e t o b e confine d t o a few?"; 120 an d th e centralit y of tha t question in hi s wor k remains to the end. I n the best tradition of the classics—notably Smith and Mill—he was intensely awar e o f th e imperfections , costs , an d inequalitie s o f capitalism . Hi s forma l analysis led him to refine and dramatize the proposition (at least as old as Hume) that "th e same su m o f mone y measure s a greate r pleasur e fo r th e poo r tha n th e rich, " wit h it s powerful implication s fo r th e scientifi c legitimac y o f progressiv e taxation. 121 A s note d earlier, Marshal l opened the way for the modern analysis of monopolistic competition and welfare economics . An d ther e i s n o reaso n t o questio n hi s ow n testimon y o n th e se riousness as well a s the sympathy with which he read an d considered socialis t writings of his time. 122 But he drew back in the end because he found the analytic methods of the socialists (and the Germa n historica l school ) unpersuasive , an d becaus e h e cam e t o questio n whether socialism would , in fact, solv e the problem of mass poverty that was his central concern. Here i s hi s ow n articulatio n o f bot h points , se t dow n i n thir d perso n fo r a Germa n compilation o f shor t autobiographica l sketche s o f th e live s o f leadin g economists: 123 . . . [H] e wa s attracte d toward s th e ne w view s o f economic s take n b y Roscher an d othe r Germa n economists ; an d b y Marx , Lassall e an d othe r Socialists. Bu t i t seeme d t o him tha t the analytica l methods o f th e historica l economists wer e no t alway s sufficiently thoroug h t o justify thei r confidence that the causes whic h they assigned t o economic events were the true causes . He thought indee d tha t the interpretatio n of the economic past was almost a s difficult a s the prediction o f the future . Th e Socialist s als o seeme d to him t o underrate th e difficult y o f their problems, an d to be too quick to assum e that the abolition o f private property would purge away the faults an d deficiencies of huma n nature. . . . Marshall fel t th e historica l metho d wa s philosophicall y inadequate:124 " . . . |T]h e facts b y themselve s are silent . Observatio n discovers nothing directly o f th e action s of causes, bu t onl y sequence s i n them. " H e kne w tha t theory , explici t o r implicit , wa s

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inescapable; an d h e fel t n o confidence tha t the explicit o r implicit theories o f history, on which socialis t analyse s o f th e contemporar y scen e an d remed y fo r it s ill s wer e based , were valid . A t on e poin t i n hi s inaugura l lectur e a t Cambridg e h e compare s th e oversimplifications o f the socialis t historical schoo l to "th e careles s saying s o f the leaders of the Ricardia n schoo l i n the las t generation." 125 As for Marx, th e labor theor y o f value , surplus-value , and the structur e he built on it , Marshall tartl y observed: 126 " . . . [Tjhi s assumptio n that the whole o f this Surplus is the produce of labour, alread y take s for granted wha t they ultimately profess t o prove by it — they mak e n o attemp t t o prov e it ; an d i t is no t true." But, mor e fundamentally , he doubte d tha t socialis m woul d generat e tha t expansion of output and increase in productivity on which the lifting o f poverty ultimately depended; h e was convince d it s bureaucratic character woul d violat e the inheren t right s o f individuals and inhibi t their creativity; and h e ha d fait h tha t there wa s a n alternative. H e se t out this argument mos t fully , i n "Socia l Possibilitie s o f Economi c Chivalry " (1907). 127 Th e following extract s capture , I believe, Marshall' s sometime s Veblenia n lin e of argument , which amount s t o a precise—eve n quantitative—cas e fo r the democrati c welfar e state : It is a common sayin g that we have more reaso n to be proud of our ways of making wealt h tha n o f our ways o f using it . .. . Opinions ar e no t likel y t o agre e a s t o th e amoun t o f privat e expenditur e which i s t o b e regarde d a s sociall y wastefu l fro m thi s poin t o f view . Som e may pu t i t a s hig h a s fou r o r eve n fiv e hundre d million s a year . Bu t i t i s sufficient fo r th e present tha t there i s a margin of at least on e o r two hundred millions* whic h migh t b e diverte d t o socia l use s withou t causing an y grea t distress t o those from whom it was taken; provided thei r neighbours wer e in a like position , an d no t abl e t o mak e disagreeabl e remark s o n th e absenc e o f luxuries an d o f conventional "necessarie s for social propriety" whic h ar e of little soli d advantage . . . . Th e La w o f Diminishin g Retur n i s almos t in operative i n Britai n just now , bu t afte r a generation o r two i t may agai n b e a powerful influenc e here and nearly all over the world. . . . There is an urgent duty o n u s t o mak e eve n mor e rapi d advanc e durin g thi s ag e o f economi c grace, fo r i t ma y ru n ou t befor e th e en d o f th e [twentieth ] century . Men o f certai n type s o f mind , whic h ar e no t morbid , deligh t now , a s i n previous generations , i n vehemen t indictment s o f existin g social conditions . Their effort s ma y rous e a passing enthusiasm, whic h is invigoratin g whil e i t lasts; bu t the y nearl y alway s diver t energie s fro m sobe r wor k fo r th e publi c good, an d ar e thu s mischievou s i n th e lon g run . . . . ... I was a Socialist befor e I knew anything of economics; an d indeed, i t was m y desir e t o kno w wha t wa s practicabl e i n socia l refor m b y Stat e an d other agencie s whic h le d m e t o rea d Ada m Smit h an d Mill , Mar x an d Lassalle, fort y year s ago . . . , an d I have watched wit h admiration th e strenuous and unselfish devotion t o social well-bein g that is shown by many of the able me n wh o ar e leading th e collectivis t movement . I do not doubt tha t th e paths, o n whic h they woul d lea d us , migh t probably b e strewn with roses for some distance . But I a m convince d that , s o soo n a s collectivis t control ha d spread s o fa r a s t o narro w considerabl y the fiel d lef t fo r fre e enterprise , th e *By Marshall' s calculation U.K . annua l incom e wa s £1, 7 billion. Hi s proposed additiona l socia l allocation would, therefore , b e 5.9%-l 1.8 % of nationa l income .

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pressure o f bureaucratic method s woul d impair not only the spring s o f mate rial wealth , bu t als o man y o f thos e highe r qualitie s o f huma n nature , th e strengthening o f whic h shoul d b e th e chie f ai m o f socia l endeavour . . . . [U]nder collectivism ther e would be no appeal from th e all-pervading bureaucratic discipline . . . . [W] e . . . nee d t o fac e th e difficult y . . . that thos e improvements i n metho d an d i n appliances , b y whic h man' s powe r ove r nature ha s bee n acquire d i n th e past , ar e no t likel y t o continu e wit h eve n moderate vigou r if free enterprise be stopped, before the human race has been brought up to a much higher general leve l of economic chivalr y than has ever yet bee n attained . Th e worl d unde r fre e enterpris e wil l fal l fa r shor t o f th e finest ideal s unti l economic chivalr y is developed . Bu t unti l it is developed , every grea t ste p i n th e directio n o f collectivis m i s a grav e menac e t o th e maintenance eve n o f ou r presen t moderat e rat e o f progress . . . . [l] t seem s best tha t th e difficultie s o f collectivis m shoul d b e studie d muc h mor e care fully, befor e th e scop e fo r creativ e enterpris e i s furthe r narrowe d b y need lessly intrudin g collective administratio n into industrie s i n whic h incessan t free initiativ e i s needed fo r progress. This wa s Marshall' s repl y t o th e questio n wit h which he challenge d himsel f an d hi s generation i n his inaugural lecture:128 "Wh y shoul d it be left fo r impetuous socialists an d ignorant orator s t o cr y alou d tha t non e ought to b e shu t out b y th e wan t of th e materia l means fro m th e opportunit y o f leadin g a lif e tha t i s worthy of man?" Today , 10 4 years later, tha t reply is likely to be judged fresh an d relevant in capitals of developing countries from Ne w Delh i t o Brasilia , t o sa y nothin g of Beijin g an d Moscow . As fo r th e require d metho d o f transformation , h e believe d Natura nonfacit saltum — nature doesn' t mak e a jump—sai d i t all : th e technological , educational , social , an d political transformation s required to achieve an opportunity for all to achieve the good lif e would tak e tim e an d unrelentin g effort ; progres s woul d hav e t o b e slow—ye t solid ; h e could perceiv e n o shor t cuts . Here a t th e clos e o f th e Principles i s hi s definitio n o f th e middl e groun d betwee n "impatient insincerity " an d "mora l torpor " o n which he fel t comfortable. 129 . . . [T]h e pessimis t description s o f ou r ow n age , combine d wit h romanti c exaggerations o f the happiness o f past ages, mus t tend to the settin g asid e of methods o f progress, th e wor k of which if slow i s yet solid ; and t o the hasty adoption o f other s o f greate r promise , bu t whic h resemble th e poten t medi cines of a charlatan, and while quickly effecting a little good, so w the seeds of widespread an d lastin g decay . Thi s impatien t insincerit y is a n evil onl y les s great tha n tha t mora l torpo r whic h ca n endur e tha t we , wit h ou r moder n resources an d knowledge , shoul d loo k o n contentedl y a t th e continue d de struction o f al l that is worth having in multitudes of human lives, an d solac e ourselves wit h th e reflectio n tha t anyho w the evil s o f ou r ow n ag e ar e les s than thos e o f th e past .

7 Population an d the Workin g Force

The focu s shift s no w fro m majo r analyst s of th e growt h process a s a whol e t o th e now familiar ke y dimension s o f the growt h process a s I have defined them. Thi s phas e o f the story begin s wit h a brie f revie w o f th e evolutio n o f populatio n analysi s i n th e perio d 1870-1939 a s i t relate s t o economi c growth .

The Statistical Analysis of Population For mor e tha n thre e centurie s th e stud y of population—fertility , mortality , migration — has ha d a statistica l cas t becaus e publi c authorities , includin g the churches , generate d a progressively widene d rang e o f interest s i n th e siz e an d characte r o f population s unde r their politica l o r spiritua l dominion . Demographer s wer e thu s not unique, but they wer e rather specia l amon g socia l scientist s in their early sense that they could fil l thei r concep tual empt y boxe s wit h more o r les s reliabl e numbers . This i s not th e occasio n fo r eve n a short histor y of population analysis ; but i t i s worth noting tha t th e orderl y us e o f statistic s i n th e socia l science s begin s wit h John Gaunt' s pamphlet, publishe d i n London i n 1662 : Natural an d Political Observations . . . Made upon th e Bills o f Mortality, a study of weekly records o f burials.' Gaun t was a close and influential frien d o f Willia m Petty , whos e wider , mor e imaginative , an d les s rigorou s exercises in "Politica l Arithmetick" wer e published i n the period of 1662-1676 . Indeed , historians of demography trac e Gaunt' s influenc e directly and indirectly through a variety of seventeenth - an d eighteenth-centur y figure s dow n t o Malthu s an d Darwin. 2 Amon g those o n who m h e lef t hi s mar k wa s th e Germa n cleric , mercantilist , pro-natalist , an d demographic pioneer , Johan n Siissmilch (1707-1765). 3 Although ther e wer e som e Europea n an d colonia l populatio n enumeration s i n th e seventeenth century , regula r censuse s begi n i n the eighteent h century : Sweden, Prussia , the United States ; and then Great Britai n and France in 1801. 4 B y the time Malthus wrote his secon d editio n there wa s a considerable body o f materia l on whic h to cal l including some statistica l data. The controvers y stirre d u p b y Malthus' s firs t editio n di d no t immediatel y stimulat e many empirical population studies and may, indeed, have discouraged them to a degree in

Population an d th e Working Force 19

5

Britain.5 Nevertheles s i t helped generat e Michae l Sadler' s demographi c stud y of Irelan d and had , o f course , a powerfu l long-ru n influence on populatio n research an d analysis. There wa s i n th e nineteent h century considerably mor e progres s i n studie s o f mortalit y than of fertility. The general rule governing the focus of demographic researc h a s enunciated by Sauv y appears t o have been a version of that determining the directions t o which economists allocate d thei r talen t an d energies: 6 "Jus t a s a ma n i s engrosse d wit h th e diseased o r painfu l part s o f hi s body , s o demographi c researc h wa s centere d primaril y around the points where some social malady was indicated. Thus, we see that demography was influence d directly b y the very history of population or, mor e precisely, b y anxieties which develope d abou t it. " The rang e o f anxietie s varied , o f course , wit h plac e an d time . Officia l circle s i n mercantilist Europ e focuse d o n th e lin k o f populatio n to militar y manpower. I n France , for example , ther e wa s considerable concer n abou t sluggis h population trends startin g i n the lat e seventeent h centur y an d runnin g down t o abou t 1780 . Clearly , Franc e di d no t experience a s dramatic a population setback a s Spain in the seventeenth century ; but ther e was a widespread sens e (engaging , for example, Montesquieu ) that population had fallen and povert y increased , whic h reache d a clima x i n 175 6 wit h Mirabeau' s L'ami de s hommes o u traite d e l a population, whic h asserte d tha t "th e strengt h o f th e nation , dependent o n th e well-bein g o f th e peasant s an d workers , wa s bein g sappe d away , a s evidenced by the declin e in population." 7 A good dea l of empirical effor t wa s stirre d u p by th e subsequen t controvers y which , o n th e whole , establishe d tha t birth s exceede d deaths, even modestly, i n the latter half of the eighteenth century. Sauvy reports that' 'the national anxiet y wa s les s acut e . . . afte r 1780 . Economi c demograph y . . . underwent an eclips e i n th e nineteent h century." 8 Bu t th e Prussia n defea t o f Austri a i n 186 6 an d France i n 187 0 revive d demographi c anxiet y and research . The flavo r of the post-1870 debate, centere d o n the lo w French birt h rate but reachin g beyond, i s well captured i n a June 1904 articl e b y E. Castelot. 9 It includes th e following passage:10 " . . . Frenc h publicist s . . . insis t on the indisputable fact tha t in 186 0 Ger many an d Franc e ha d th e sam e population , tha t th e forme r no w ha s abou t 5 2 millio n inhabitants agains t only 3 8 fo r th e latter , an d thi s ominou s difference goes o n growin g steadily an d rapidly. " A par t o f Castelot' s discussio n anticipate s aspect s o f th e secula r stagnation argumen t o f th e 1930s. " Th e lo w Frenc h birt h rate , regarde d wit h relativ e complacency i n Franc e i n th e perio d 1815-1870 , becam e th e focu s o f a wid e rang e of fertility studie s i n othe r countries . From a quit e differen t directio n increasin g concer n o f governmen t authoritie s wit h public healt h an d socia l welfar e a s well as the sprea d o f lif e insuranc e stimulated studie s of mortalit y a s th e centur y wor e on . Th e lat e nineteenth-centur y wave o f immigratio n from Easter n an d Souther n Europ e generate d studie s i n th e Unite d State s o f th e com parative fertility of immigrant and native-born populations. Echoin g Benjamin Franklin' s 1751 concer n that the immigrants would, i n time, "ea t th e natives out," Franci s Walker stirred no t onl y controvers y bu t als o a refinemen t o f method s fo r calculatin g th e ne t impact o f immigratio n on population. 12 A s with fertility an d mortality studies, migratio n studies gathered momentu m and were consolidated in the monumental National Bureau of Economic Researc h projec t organize d by Walte r F. Willco x and Imr e Ferenzi. 13 These and other impulses derived from specifi c problems stimulated the empirica l an d theoretical stud y of populatio n in governmen t departments, international organizations , and universities. There wer e no regular population or demography departments in universities, bu t me n an d wome n wer e draw n t o th e stud y o f populatio n from a variet y of

196 Growth

Theory Moves t o th e Periphery

directions: sociology , mathematics , th e physica l sciences , publi c health, economics , a s well as business and government. The name demography wa s invented as early as 185 5 by Achille Guillard; and, fro m 1882 , whe n the Fourth Internationa l Conference o n Hygiene gathered i n Geneva, th e demographers manage d t o get together under its tent and regularly to keep i n touch thereafter. They read each other's work, argued with and learned from each other , an d cumulativel y buil t u p a n increasingl y soli d statistica l bas e fo r thei r analyses. By th e mid-1930s , A . M . Carr-Saunder s coul d publis h estimate s o f pas t an d curren t world population. 14 O n foundation s reaching bac k t o th e eighteenth-centur y wor k o f Siissmilch an d th e Swis s mathematicia n Leonhard Euler , a sequenc e o f majo r figure s refined th e conceptua l an d mathematica l tools for analyzin g the determinant s o f popula tion changes ; fo r example , A . L . Bowley , Loui s I . Dublin , Alfre d J . Lotka , Raymon d Pearl, and Walter F . Willcox . A s in economic theory , demographers foun d i t clarifying to develop a concep t o f genera l equilibriu m "a s a limitin g typ e towar d whic h a close d population tends , give n a constan t schedule of age-specifi c fertility , and a constan t se x ratio a t birth." 15 A n elegan t genera l theor y o f populatio n growt h emerge d b y analog y with th e dynamic s o f frui t flie s i n th e limite d environmen t o f a mil k bottle . I t wa s incorporated i n Pearl' s Th e Biology o f Population Growth (1925) . Th e stretche d ou t S curve whic h Pearl derive d fro m hi s frui t fl y experiment s bear s a famil y relatio n bot h t o Adam Smith' s pat h o f nations to their "ful l complemen t o f riches" (preceding , pp . 46 47) an d t o th e analyse s of growt h rates i n relation t o real incom e pe r capit a i n the thir d quarter o f th e twentiet h centur y (following , pp. 363-365): 16 The long-ru n tendency of population growth can be represented b y a curve which starting fro m a previously established stationary level, representing th e supporting capacit y of its region a t the prevailing level o f culture, productive technique, an d standar d o f living—rises a t first slowly , then a t an increasin g rate, finall y levelin g ou t a s th e curv e approache s a n upper asymptot e whic h represents th e supportin g capacit y o f th e environmen t a t th e las t stag e o f culture development . By the coming of the Second Worl d War the study of population and its dynamics was a recognized multidisciplinar y branc h of the socia l sciences , wit h a good dea l mor e confi dence tha n other branche s i n its powers o f prediction. Tha t confidenc e was to be shaken by post-1945 populatio n developments in various parts of the world, but demography had achieved a respectable degre e of maturity since Joh n Gaunt went to work o n the Londo n burial records .

Population and Growth Theory: Advanced Industrial Countries There ar e essentiall y thre e linkage s o f populatio n analysi s t o growt h theor y tha t ha d emerged wit h mor e o r les s clarit y b y 1939 : th e notio n o f a n optimu m population ; th e demographic transition ; an d th e introductio n o f population-working-forc e variable s i n formal growt h models. The formal concept of an optimum population is usually associated with the publication in 195 4 o f Harve y Leibenstein' s A Theory o f Economic-Demographic Development. Spengler, however , assert s th e concep t was anticipate d a t leas t a s early as 1848; 18 an d 1 shall commen t late r on a rather shar p pre-1939 debat e focused explicitl y o n th e concep t

Population an d th e Working Force 19

7

(following, p . 199) . Detractin g nothin g fro m Leibenstein' s importan t contribution , th e fact i s tha t a n optimum populatio n concep t i s laten t i n al l but on e o f th e si x economist s dealt wit h in Part I . Excepting Marx, they all had the notion, in one form or another, tha t population migh t be "to o low " o r "to o high. " Up to a point, for example, Adam Smith perceived tha t a n increasin g populatio n wa s require d bot h t o expan d th e marke t an d t o supply th e workin g forc e fo r th e increasingl y specialize d manufacture s necessar y t o supply that market. Bu t since his growth process i s constrained, life becomes "har d in the stationary an d miserabl e i n the declinin g state" (preceding , pp . 36-37) . Th e optimu m population ("th e happies t an d mos t comfortable" ) is , evidently , tha t foun d i n "th e progressive state , whil e th e societ y i s advancin g t o th e furthe r acquisition , rathe r tha n when it has acquired it s full complemen t o f riches. . . . " Smit h did not envisage a more or less regular flo w o f inventions and innovations that might indefinitely frustrate the three determinants o f hi s growt h ceiling : soil , climate , an d "situatio n wit h respec t t o othe r countries." Bu t hi s criterio n fo r th e optimu m i s clear : a n environmen t o f risin g rea l income pe r capita . But thi s wa s al l abstract : Smit h fel t n o apparen t anxiet y abou t th e leve l an d rat e o f increase o f populatio n i n Britain . With pre-181 2 Malthu s an d Ricardo , w e ar e dealin g with analyst s wh o fel t populatio n increas e wa s dangerousl y excessive, agai n in terms o f its impact on real income per capita. Thu s their recommendations for postponed marriage , prudence, education , an d a "subsistence " wag e reflectin g highe r economi c an d social aspirations. Mil l advocate d a determine d effor t t o limi t famil y siz e t o a poin t wher e population wa s constant . Technologica l innovatio n would continue, an d real income pe r capita woul d increas e i n a setting wher e the physical environment was not under degrad ing pressur e an d th e qualit y of lif e i n ever y dimensio n could rise. In the period 1870-193 9 in the advanced industrial countries, the occasions fo r sharpes t focus o n optimum populatio n wer e Britain , Sweden, an d the United States , i n the Grea t Depression o f the 1930s. 19 As Table 7.2 (following , p. 200 ) indicates , th e fal l i n the British net reproduction rat e brought i t by th e year s o f dee p depressio n t o virtuall y the same lo w point a s Sweden's . Public concer n wa s heightene d b y a consciousnes s o f th e populatio n los s o f th e Firs t World Wa r and , a s th e 1930 s wor e on , b y th e likelihoo d o f a secon d grea t militar y conflagration. Keynes's General Theory, an d th e shar p recessio n o f 1937-193 8 lon g befor e ful l employment had been achieved i n Britain and the United States, spurre d speculation abou t secular stagnatio n i n whic h th e possibilit y o f a declinin g populatio n generall y figured . Keynes's onl y referenc e t o th e economic s o f populatio n decline i n th e General Theory relates to it s negative impac t o n investment ; bu t i t is set i n the contex t of business-cycl e analysis rathe r tha n secula r stagnation: 20 . . . [T]h e interva l of time , whic h wil l hav e to elapse befor e th e shortag e o f capital throug h use , deca y an d obsolescenc e cause s a sufficientl y obviou s scarcity t o increase th e marginal efficiency, may be a somewhat stabl e func tion of the average durabilit y of capital in a given epoch. If the characteristics of the epoch shift , th e standard time-interval will change. If, fo r example, w e pass from a period o f increasing population into one of declinin g population, the characteristi c phase o f th e cycl e will b e lengthened . In a subsequent article published in The Eugenics Review Keyne s discussed population in the contex t o f hi s the n vie w o f secula r stagnation. 21 So fa r a s I ca n mak e ou t i t i s th e

198 Growth

Theory Moves t o th e Periphery

occasion whe n h e come s closes t t o statin g lucidl y hi s versio n o f th e classi c growt h equation. Hi s argumen t i s a s follows: » Th e deman d fo r capita l i s a functio n o f thre e variables : th e rat e o f growt h o f population, the rate of growth of "th e standar d of life," and the rate of increase and character o f technology . • Puttin g aside the other tw o variables, a positive rate of population increas e enlarge s the deman d fo r capita l b y diffusin g a hopeful—even excessivel y hopeful—se t o f expectations amon g investors ; bu t suc h error s o f overoptimis m ar e rapidl y cor rected. The error s of pessimism induce d by a falling populatio n correc t themselve s more slowly , an d the changeover fro m optimisti c to pessimistic expectations, root ed i n population projections , ca n be "ver y disastrous. " • I n a n interestin g combinatio n o f conventiona l Britis h an d Austria n analyse s o f capital, Keyne s argue s that , as compared t o the long swee p of th e past, invention s are getting les s capital intensive, with a lower "averag e period o f production," due to th e hig h incom e elasticit y o f deman d fo r services . • Projectin g forwar d on the basis of considerable confidence a stationary or declining population "i n a ver y shor t time " plu s a declin e i n th e capita l intensit y o f ne w inventions plu s an assumed 1 % per annu m limit on th e rise i n per capita consumption ("standard of life"), Keyne s concluded tha t "to ensur e equilibrium conditions of prosperity ove r a period o f years i t will be essential, either that we alter . . . th e distribution of wealth [t o reduce the savings rate] .. . o r reduce the rate of interest sufficiently t o mak e profitabl e ver y larg e change s i n techniqu e .. . o r .. . a s would b e wises t . . . both policie s t o a certain extent. " Keynes close d b y recallin g tha t Malthu s focuse d hi s wor k successivel y aroun d tw o anxieties: th e earl y Malthus , aroun d th e danger s o f excessiv e populatio n (P); th e late r Malthus, of chronic unemploymen t (£/) : "When devil P . . . i s chained up we are free of one menace; but we are more expose d t o the other devi l U . . . . I only wish to warn you that the chaining up of one devil may , if we are careless, onl y serv e to loose anothe r still fiercer an d mor e intractable. " Technically, Keynes' s argument , whos e basic assumption s wer e t o be mainly belied in the post-194 5 quarter-century , i s a n interestin g exercis e i n th e us e o f comparativ e sta tics to draw dynamic policy conclusions centere d aroun d an implicit notion of an optimum population growt h rate . W. B . Reddaway' s Th e Economics o f a Declining Population, firs t publishe d i n 1939 , reflects th e bes t systemati c prewa r Britis h thought o n th e economi c implication s o f th e potential populatio n declin e implici t in a ne t reproductio n rat e clos e t o .7. 22 Hi s argu ment—and th e British discussion in general—is rathe r narrowly economic a s compared to the concurren t debat e i n Sweden ; and , a s on e woul d expect , i t i s colore d strongl y b y Keynesian analysis . Reddawa y argue s tha t the leve l o f investmen t will fal l wit h popula tion retardatio n an d decline , bu t capita l pe r hea d wil l increase . Hi s balanc e shee t fo r an economy experiencing populatio n declin e i s set out in Table 7.1: 23 But he identifies "th e skeleton i n th e cupboard" i n terms simila r to Keynes's i n the General Theory (se e not e 20): "th e increase d ris k of slumps."24 His proposed remedies, therefore, come to rest on those commonl y recommende d a t th e tim e "t o avoi d genera l unemployment, " t o us e Reddaway's phrase . Sweden is the most interestin g case of anxiety about a stagnant or falling population for two reasons . First , it s greates t an d mos t influentia l economist , Knu t Wicksel l (1851 -

Population and the Working Force

199

Table 7.1. Factors Influencing.the Real National Income per Person Employed Factor Absolut

e effect Relativ

e effec t

Capital Supply Technical Progres s etc.

Very favorabl e Favorable

Favorable

Age-Composition Scale of Productio n

Perhaps slightl y favorabl e Unimportant

International Trad e

May b e unfavorabl e bu t

Unimportant Unfavorable, bu t no t very importan t Unfavorable

probably no t ver y im portant

Nil

SOURCE: W . B . Reddaway , Th e Economics of a Declining Population (London: Allen and Unwin, 1946) , p. 152 .

1926), wa s le d int o economic s throug h an interest i n population and related social questions—an interest he never lost.25 In this matter he shares, in fact, a distinction with J. S . Mill: the y bot h go t i n troubl e wit h th e lega l authoritie s over th e issue . Wicksel l wa s arrested (an d sen t t o priso n i n 1909 ) fo r wha t Lione l Robbin s delicatel y refer s t o a s "strong utterances on certain o f its [population's] non-economic aspects." 26 Aside fro m his redoubtable publi c advocacy of birth control, Wicksell explicitl y explored the consid erations bearin g o n th e definitio n o f a n optimu m population . H e acknowledge d tha t circumstances o f underpopulatio n migh t exis t bu t h e leaned , lik e J . S . Mill , towar d population limitatio n a s a wa y o f increasin g rea l incom e pe r capit a an d elevatin g th e quality o f life . Hi s dictum: 27 "Th e denses t populatio n (the maximum ) is th e mos t un favorable (th e pessimum ) fo r a country. " Sweden i s also of considerable interest because th e radical fall i n the net reproduction rate se t i n motio n durin g the 1930 s generate d a major nationa l debate o n the populatio n question; sophisticate d analyse s by first-class economists an d sociologists; polic y recom mendations from a Swedish Population Commission; and pro-natalist legislation passed in the 193 7 sessio n o f the Swedish Parliament known as "th e mother s and babies session. " Table 7. 2 suggest s wh y concern in Sweden was particularly intense. A s of the mid-1930 s it wa s a t th e botto m o f the ne t reproductio n league—b y a bare margi n beneath Englan d and Wales . What was thought and done about population at this time are well captured in books by Gunnar an d Alv a Myrdal. 28 Gunna r Myrdal's 193 8 Godki n lecture s a t Harvar d linke d demographic, economic , social , political, an d psychological analysis in ways extremely rare in social science, foreshadowin g his great study of the race issue in the United States , An American Dilemma (1940) . H e reject s th e theor y o f optimu m populatio n a s i t ha d evolved i n th e wak e o f Mill' s Principles, includin g Wicksell's formulation; 29 specifie s the economic an d social force s makin g for a falling populatio n trend in Sweden; analyzes in detai l th e dynami c degenerativ e effect s o f a fallin g populatio n tren d o n saving s an d investment, unemployment and poverty; and concludes that a set of positive economic an d social policies redistributin g income in favo r o f those with larg e familie s i s required that would "tak e away the obstacles preventing ordinary persons from followin g thei r natural urge to marry and to have children."30 Since the objective was to improve the quality as well a s t o sustai n the siz e o f th e population , Myrdal propose s a wid e rang e o f socia l legislation t o achiev e th e require d redistribution of income.

Growth Theory Moves to the Periphery

200

Table 7.2. Ne t Reproductio n Rates , Selecte d Advance d Industria l Countries: 1935-1939 , 1955-1959, an d 1975-197 9 1935-1939 Austria Belgium Bulgaria Canada Czechoslovakia Denmark Finland France Germany (Federa l Republic ) Germany (GDR ) Hungary Italy Japan Luxembourg Netherlands Norway Poland Sweden United Kingdo m (Englan d and Wales ) United State s USSR Yugoslavia

1955-1959

1975-1979

1.15 (1932-1934 ) 0.78 (1936-1939 ) 0.79

1.12 1.14 1.03 1.82 1.23 1.19 1.31 1.27 (1956-1960 ) 1.04 1.11 (1959 ) 1.07 1.08 (1959 ) 0.96 0.98 1.46 1.32 1.52 1.06 1.13

0.80 (1975-1979 ) 0.80 (1978 ) 1.05 (1976 ) 0.84 (1978 ) 1.16 (1975 ) 0.82 (1975-1979 ) 0.79 (1978 ) 0.88 (1978 ) 0.65 (1978 ) 0.90 (1978 ) 0.97 (1978 ) 0.91 (1977 ) 0.86 (1977 ) 0.70 (1978 ) 0.76 (1978 ) 0.88 (1975-1979 ) 1.05 (1977 ) 0.81 (1975-1979 ) 0.83 (1978 )

0.96 1.53 (1938-1939 ) —

1.73 1.29 (1958-1959 ) 1.55 (1950-1954 )

0.86 (1978 ) 1.07 (1978-1979 ) 1.00 (1977 )

0.96 (1939 ) — 1.16 — 0.94 0.99 (1936-1939 ) 0.86(1936-1937) — — 1.04 (1930-1931 ) 1.18 (1936-1939 ) 1.49 — 1.15

0.81

SOURCE: Population Index, Apri l 1973 , Apri l 1974 , Apri l 1975 , Apri l 1976 , an d Summe r 1981 .

In effect , Myrda l argue d tha t the classic optimu m population wa s define d staticall y a t the point where rea l incom e per capita was at a maximum, after th e benefits of increasin g returns wer e exploited , befor e the y bega n t o b e overwhelme d b y diminishin g returns . Myrdal's optimum—roughly , a constant population wit h rising real income—require s a n active an d purposefu l socia l an d economi c polic y fo r it s achievemen t an d maintenance . Alva Myrdal' s late r stud y elaborates th e argumen t wit h special attentio n t o th e mea sures take n i n Swede n wit h respec t t o education , famil y planning , housing , nutrition , health, an d socia l security . Clearly, th e anxiet y abou t populatio n trend s wa s use d b y th e Myrdals—no t withou t considerable legitimacy—t o heighte n th e case fo r the welfar e state . In the United State s the concern about the falling ne t reproduction rat e emerged mainl y in the 1930 s as part o f the vie w that the country was in the grip of secular stagnation ; that investment opportunitie s ha d diminishe d fo r technologica l a s wel l a s demographi c an d geographical reasons ; an d tha t a radical an d systemati c Keynesia n stimulu s to consump tion woul d be required fo r the long pull to bring the economy bac k to full employmen t an d keep it there. W e shall return t o this argument as a whole, a s expounded b y Alvin Hanse n in Chapte r 1 3 (pp. 321-323) . Population entere d thi s argument in terms of a decelerating demand for housing and th e package o f durabl e consumer s good s whic h had becom e a standar d feature o f America n family formatio n i n th e 1920s . Alvi n Hanse n fo r example , cite s th e followin g tabl e showing the decennial increas e i n U. S . population. 31 His imag e of secular stagnation in the 1930 s als o included—eve n i n retrospect— a natura l deceleratio n i n th e innovationa l

Population an d th e Working Force 20

1

Table 7.3. U.S . Populatio n Increase: b y Decades, 1900-190 9 to 1940-194 9 Decade Increas 1900-1909 16,000,00 1910-1919 13,700,00 1920-1929 17,000,00 1930-1939 8,900,00 1940-1949 18,000,00

e 0 0 0 0 0

SOURCE: Alvi n Hansen , Business Cycles an d National Income (Ne w York : W . W . Norton , 1951), p . 76 . n . 23 .

leading sector s o f wha t I a m incline d t o cal l th e Thir d Industria l Revolution (p . 456) , yielding i n th e 1930 s a cyclica l depressio n o f peculia r depth , analogou s t o tha t o f th e 1890s when , h e believed , th e Secon d Industria l Revolution had run it s course. 32 Like Leibenstein' s luci d crystallizatio n of the concep t of the optimum population, th e concept of the demographic transition is, i n its present standar d form , a post-1939 phe nomenon enunciate d notabl y b y Fran k Notestei n ("Population : Th e Lon g View" , 1945)33 an d Warre n S . Thompso n (Plenty o f People, 1948) . I n it s usua l formulation, approximating th e populatio n dynamic s of th e West , th e demographi c transitio n is as in Figure 7. 1 a movement fro m a static equilibriu m population at a high leve l of birth an d death rates to a low-level equilibrium with a great population surge induced by the initially more rapi d declin e o f deat h tha n birt h rates . Somethin g lik e thi s for m o f transitio n i s implicit in Pearl's S-shaped population growth curve; and with real GNP per capita plotted along th e horizontal axis , is quite well empirically established o n the basis of data drawn from th e period 1950-197 0 (Figure 7.2) , whic h will be discussed in Chapter 2 0 (following, pp . 450-451). The pre-193 9 foreshadowing s o f thi s concep t ar e t o b e foun d i n th e wor k o f Walte r Willcox (ed. ) (International Migration, 1931 ) an d A. M . Carr-Saunder s (World Population, 1936) . Th e latter' s plottin g o f birth and death rate s ove r considerabl e tim e period s for a variety of countries , an d his discussion of them, constitute, i n effect, a n exercise in the analysi s o f the demographi c transition. 34 The third linkage of population to growth analysis is, in a sense, the least sophisticated ; i.e., th e pro forma introductio n of th e rat e o f populatio n increase i n two-secto r growt h models. Again , th e heyda y o f such models come s afte r 194 5 (following , pp. 332-351) . But the y ar e clearl y foreshadowe d i n th e perio d w e ar e no w considering . Indeed , thei r lineage can be traced fro m Quesnay , through Malthus, Marx, an d forward. Her e we shall

Figure 7.1. Th e Demographic Transition: Abstract (The Modern Cycle). [Adapted from Donal d O. Cowgill, "Th e Theor y o f Populatio n Growth Cycles," American Journal o f Sociology, Vol . LV , 1949, pp . 163-170 , reprinte d in P . M . Hause r and O. D . Duncan , Study o f Population, p . 298. ]

202

Figure 7.2. Th e Demographic Transition : A Cross-sectional Vie w (1950-1970) : Birth and Deat h Rates pe r Thousand ; GN P pe r Capita . {Adapte d fro m Holli s B . Chener y an d Moise s Syrquin , assisted b y Haze l Elkington , Patterns o f Development, 1950-1970 (London : Oxfor d Universit y Press [fo r the Worl d Bank] , 1975) , p . 57. }

briefly not e th e manne r i n whic h populatio n and/o r th e workin g force , includin g th e quality o f th e workin g force , appear s i n th e principa l forma l growt h model s generate d between 187 0 an d 1939 . 1. Marshall. A s note d earlier , Marshal l formulated bu t did no t persevere wit h a quite recognizable growt h mode l (preceding , pp . 165-166) , reflectin g hi s earl y stud y o f Mil l and the origina l strand s in his Economics of Industry. The workin g forc e and its rate of increase are , o f course , variable s i n hi s growt h equation . H e als o introduce s labo r effi ciency an d calculate s th e workin g forc e i n efficienc y units. I n hi s mos t full y elaborate d case, h e envisage d tha t th e rat e o f increas e o f bot h th e workin g forc e an d it s efficienc y depended o n the sam e arra y o f variables: 35

In these equations n = numbe r of workers; e = labor efficiency; g = gross income; E = degree of equality of income distribution; A' = strength of family affections; and D = rate

of discoun t a t whic h peopl e o n th e averag e discoun t futur e enjoyments . In a further version o f his growth equation the rate of population increase i s set out in a simpler, mor e classi c form: 36

Where w = th e wag e rat e an d s = th e standar d of comfor t (th e socially defined subsistence wage) . 2. J . B . Clark. J . B . Clark' s Essentials o f Economic Theory (1907 ) migh t wel l b e

Population and the Working Force

203

regarded, lik e Marshall' s fou r volumes , as an exception t o the general view that growth moved afte r 187 0 fro m th e cente r o f th e stage . Clark' s othe r majo r studie s reflec t th e conventional post-187 0 shif t i n priority ; e.g. , Th e Philosophy o f Wealth (1885) , Th e Distribution o f Wealth (1899), an d The Problem o f Monopoly (1904) . But the Essentials, while reflectin g th e curren t concerns o f politica l economist s o f hi s generatio n is , i n th e end, structure d lik e a classic treatis e wit h the dynamic s o f growt h a t its core . Here , fo r example, i s how he sums up: 37 The law s whic h govern progress—whic h caus e th e socia l nor m t o take a different characte r fro m decad e t o decade, an d cause actua l societ y to hover near i t i n it s changes—ar e th e subjec t o f Socia l Economi c Dynamics . W e have mad e a stud y o f th e mor e genera l economi c changes whic h affec t th e social structure , an d the y stan d in this order : 1. Increas e o f population , involvin g increase i n the suppl y of labor . 2. Increas e i n the stoc k o f productiv e wealth . 3. Improvement s i n method . 4. Improvement s i n organization. Here w e focus on one narrow aspect o f Clark's exposition . In a chapter devoted t o the law o f population , Clar k argue s tha t contrary t o Malthus' s initial fears , th e increas e i n wages, accompanie d by social changes h e specifies, have produced " a retarde d growt h of population."38 H e concludes tha t a strand of Malthusianism may operate cyclically—i n the shor t period—bu t i n the lon g ru n the sociall y define d subsistence wag e (Marshall' s Standard o f Comfort ) wil l rise: 39 . . . [T]h e general result of this uneven advance of the general prosperity may be expresse d b y th e followin g figure: The line AC measures time in decades and indicates, b y the figures rangin g from 1 to 10 , the passing of a century. AB represents the rate of wages which, on th e average , ar e neede d fo r maintainin g th e standar d o f livin g a t th e beginning o f th e century ; an d C D measure s th e amoun t that is necessar y a t the end. The dotted line which crosses an d recrosses th e line BD describes th e actual pa y o f labor , rangin g now abov e th e standar d rat e an d now belo w it .

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As wa s natura l fo r a n economis t writin g in the Unite d State s i n the mids t o f th e grea t wave o f pre-191 4 immigration , Clar k als o reflect s o n th e manne r i n whic h th e flo w o f immigrants wa s offsetting—an d more—the retardatio n i n the growth of the native popu lation. I n another o f his abstract historica l diagrams he acknowledges tha t the consequen t increase i n the labo r suppl y may hav e dampe d th e rise i n real wage s bu t asserts that , o n balance, th e increase i n the supply of capital had more than compensated fo r this factor: 40 We ma y represen t th e resultan t o f th e actua l growth o f populatio n an d o f capital b y th e followin g figure : Measuring tim e b y decade s alon g th e horizonta l base lin e an d th e rat e o f wages a t the beginning of a century by the line AB, w e represent th e increas e in the pay of labor which would be brought about by an increase of capital not counteracted b y an y other influenc e by the dotted lin e BC , an d the reductio n which woul d b e cause d b y a n increas e o f populatio n by th e dotte d lin e BE . The lin e B D describe s th e resultan t effec t o f thes e tw o change s actin g to gether, o n the supposition that during the latter part of the century the growth of population i s somewhat retarded an d that the increase o f capital i s the pre dominating influence .

3. Gustav Cassel. I n his Th e Theory o f Social Economy, firs t publishe d in German i n 1918, Gusta v Casse l include d a rather strikin g two section s i n hi s firs t chapte r entitled : "The Stationar y State " an d "Th e Uniforml y Progressin g State, " followed , 10 0 or so pages later , b y a pros e descriptio n o f a n essentiall y mathematica l mode l generatin g increased outpu t per capita.41 These passages, covering about twenty pages, belon g among the fairl y lon g lis t o f forerunner s to post-1945 growt h model s considere d i n Chapter 15 . The hear t o f Cassel' s initia l dynami c system—i n whic h population expand s bu t rea l income pe r capit a remain s constant—i s a saving s rat e tha t wil l permi t th e suppl y o f circulating an d fixed (real) capital t o expand at the assumed rat e of progress; i.e. , th e rate of populatio n increase. 42 It i s necessar y t o wide n th e conceptio n of real incom e for the purpose s o f the progressive state. Real income must, in this context, be defined, i n harmony wit h th e commo n us e o f phrase , a s th e total real income serving fo r purposes of consumption plus the increase of real capital during the income period selected. . . .

Population an d th e Working Force 20

5

It follow s tha t i f incom e i s t o gro w i n thi s way , th e formatio n o f capita l must als o gro w i n th e sam e way . . . . In tha t particula r typ e o f progressiv e stat e .. . i n which progres s merel y consists of an expansion o f economic processes in proportion t o the growth of population, th e sacrific e of savin g is undergone purely fo r th e benefi t o f th e increasing population . . . . First an d foremost , ne w house s mus t be built for th e ne w population , bu t under moder n condition s th e economi c syste m mus t als o b e equippe d wit h additional transpor t facilities , factories , machines , etc. , i n proportion t o th e growth i n population. Th e productiv e resource s use d for this increase o f real capital canno t be use d for the satisfactio n of dail y wants , so that , at any moment, les s want s wil l b e satisfie d tha n coul d hav e bee n withou t th e in crease i n population. This initia l model requires , then , fo r dynamic equilibrium a kind of Malthusian "pro portion" between saving and consumption to match the system's production requirement s for th e maintenanc e o f th e capita l stoc k a s wel l a s increase s i n capita l an d consumer s goods to match th e assumed rate of population increase . A t a later point, Cassel describes a dynami c mode l wit h incom e pe r capit a increasing , wit h th e rati o o f allocation s t o purchase consumer s good s an d capita l good s determinin g th e rate o f progress . Cassel's furthe r rathe r perfunctor y comment s o n populatio n ar e t o b e foun d i n hi s chapter o n wages for which he was taken to task (among a good many other matters) in the famous critica l revie w o f Knu t Wicksell. 43 Hatred's pioneerin g highl y aggregate d dynami c growt h mode l (following , pp. 254 256) contain s literally one sentenc e o n population in it s penultimate paragraph assertin g that a stagnant population, b y lowering the natural growth rate, increased th e tendency of the syste m to laps e int o depression befor e ful l employmen t is reached. The mechanis m envisaged i s tha t movemen t fro m a n expandin g t o a stagnan t populatio n create s o r en larges th e ga p betwee n th e warrante d and natura l growth rates . One fina l linkag e o f population dynamic s to the economy shoul d be noted. Th e perio d 1870-1939, wit h it s mountin g attentio n t o business cycl e analysis , generated studie s of the statistica l relationshi p between marriage , birth , an d deat h rate s an d cyclical fluctuations a s wel l a s researc h o n pattern s o f migratio n i n relatio n t o business cycles. 44

Population and Development Whereas th e statistica l dat a bas e fo r population studie s wa s progressively expanded , th e tools fo r demographic analysi s refined, an d the link between demography an d the lif e o f the mor e advance d industria l economies explored , some—bu t relativel y little—though t was give n t o populatio n problem s an d prospect s i n Lati n America , Africa , th e Middl e East, an d Asia. Th e issu e of relative degree s o f development arose , o f course, i n migration studies; but there wa s a beginning, at least, o f modern demographic analysis in a few cases i n whic h population wa s relate d t o th e proble m o f development . Of these, India had probably moved further dow n the road toward modern demography and wit h speculation, at least, abou t an appropriat e population policy. There i s evidence of sophisticated census techniques in India back to the fourth century B.C.; and under

Akbar's stron g unifie d rul e (1556-1605 ) economi c a s wel l a s populatio n dat a wer e collected. Bu t regular censuses begin under British rule, on a n all-India basis, only fro m

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1881,45 Demography go t caught up, however , i n the debate i n India over British rule and the struggl e fo r independence: 46 The settin g wa s hardl y suitabl e fo r th e developmen t o f a scientifi c attitud e toward th e census , fo r th e populatio n proble m ha d the n becom e a politica l question. Th e British administrators were prone to point out that the large siz e of th e populatio n o f Indi a wa s th e caus e o f India' s poverty , whil e Indian s imbued wit h the spirit of nationalism were eage r t o maintain the contrary an d to sho w tha t the British rul e was th e cause o f poverty i n India. Accordin g t o them, th e relatively slow growth of the population wa s in itself a reflection on the Britis h administration. Thu s the inhibitin g effec t o f the political situatio n was a fundamental handicap in the development o f demography unti l a t least the thir d decad e o f th e presen t century . Under th e impac t o f th e growin g intensit y an d increasin g refinemen t o f demographi c studies i n th e Wes t an d th e growin g sophisticatio n o f India n socia l scientists , seriou s discussion o n demographic issue s began i n the mid-1930s wit h population conferences i n 1936 i n Lucknow an d 193 8 i n Bombay . Th e latte r touche d of f a n intens e debat e o n th e probable outcom e o f th e 194 1 censu s betwee n thos e wh o estimate d a lo w versu s thos e who envisaged a n "alarming " increas e i n population over th e decade. A t about this time two studie s wer e published , on e linkin g the prospec t o f a populatio n o f 40 0 millio n t o agricultural polic y (Radhakama l Mukerjee , Food Planning fo r Four Hundred Millions, 1938, an d Cyan Chand's India's Teeming Millions, 1939) . Bu t without question the most important symbo l o f the acceptance o f excessive populatio n as an obstruction to development was this passage fro m a 193 8 resolution of the National Planning Committee chaired by Pandi t Jawaharla l Nehru: 47 In the interests o f social economy , famil y happiness, an d national planning, family plannin g and a limitation of children are essential; and the State shoul d adopt a policy t o encourage these . I t is desirable t o lay stress o n self-control , as wel l a s t o sprea d knowledg e o f chea p an d saf e method s o f birt h control . Birth Contro l Clinic s shoul d b e establishe d an d othe r necessar y measure s taken i n thi s behal f an d t o preven t th e us e o r advertisemen t o f harmfu l methods. Meanwhile i n 1929 , a classic, pioneerin g stud y had been published in London b y Ver a Anstey, Th e Economic Development o f India. 48 Mrs . Anste y ha d live d i n Bombay fo r 7 years (1914-1920) , wher e he r husband was principal o f the Sydenha m Colleg e o f Com merce. After his death i n India, sh e taught at the London Schoo l o f Economics an d wrot e her stud y of India' s stag e o f developmen t an d it s prospects. It s structure s an d substanc e are examined i n Chapter 13 . Here it is sufficien t t o note tha t her stud y includes a quietly impassioned sectio n o n population ; and , i n he r conclusions , sh e judged th e populatio n problem th e firs t o f th e thre e grea t obstacle s t o India n economi c development. 49 Afte r tracing briefl y the evidence o n the growth o f Indian population since 1872 , an d noting an acceleration sinc e 1921 , sh e concludes: 50 No definit e tren d i n population growt h ca n b e discerned , bu t i t seem s quit e clear tha t i n th e pas t th e populatio n ha s bee n prevente d fro m growin g stil l more rapidl y mainl y owin g t o th e operatio n o f "positive " checks—i.e. , poverty, disease , misery , an d vice . Prudential checks, suc h a s deferring th e age o f marriage , limitin g th e siz e o f th e famil y an d contraceptiv e practices, have no t ye t bee n adopte d i n Indi a t o a n exten t whic h effectivel y limit s the

Population an d th e Working Force 20

7

rate of increase , excep t i n so far a s intervals between births are prolonged b y continuation o f suckling . In othe r words , Indi a i s stil l at that stage, throug h which mos t Western countrie s have recently passed, characterize d b y a high death- and a high birth-rate. This stage is necessarily accompanied by terrible waste o f life , an d mora l an d economi c misery . . . . The hig h densit y of populatio n (especiall y i n rura l areas), th e fac t tha t a rapid increas e i n populatio n ha s take n plac e i n area s wher e prosperit y ha s been rathe r suddenl y increased , an d the experience o f other countries wher e high birth- an d death-rates have usually been accompanie d by a low standar d of life, al l tend to the conclusion that the population of India tends to increas e at an uneconomic rate , an d that the mass of the people would be better of f if this tendenc y coul d b e checked . She then examines the religious and social foundations of Indian life, concluding: 51 "Th e economic result s o f th e custom s an d institution s that hav e jus t bee n describe d ca n b e summarized b y sayin g that they tend towards over-population, improvidence, th e check ing of economic enterprise , an d the prevalence of a poor standar d of mental and physical development, particularl y i n th e cas e o f women. " He r fina l assessmen t wa s unam biguous:52 "Th e populatio n proble m lie s a t th e roo t o f th e whol e questio n o f India' s economic future, and it is useless t o try to bilk the fact." Wha t Anstey saw in India was a society almos t literall y medieval i n Europea n terms . Sh e drew , i n fact , o n th e wor k o f Eileen Power , he r distinguishe d contemporar y a t Th e Londo n Schoo l o f Economics , i n making certai n analogie s betwee n medieva l attitude s an d socia l structur e an d Indi a i n the firs t quarte r o f th e twentiet h century. 53 I n terms o f Ada m Smith' s concep t of stage s of growth , Anste y wa s describin g a societ y tha t ha d com e t o it s "ful l complemen t o f riches," wher e populatio n ha d expande d to the limit and lived literall y at the margin of subsistence, pushed periodically beneath i t by famine and plague. Lif e wa s "dull " if not "melancholy." Bu t this outcome wa s the product of two conflicting forces. One , which Smith di d no t envisage , wa s the positive forc e of the post-1780s technologie s already a t work in enclaves of modern industria l activity in India, which Anste y describes i n detail : notably, cotto n textiles , iro n an d steel , an d th e railroads . Thes e kep t Indi a fro m th e declining stat e Smit h judged Benga l t o b e caugh t u p i n durin g the thir d quarte r o f th e eighteenth century. But the power of the new technologies was damped and frustrated by the noneconomic factor s tha t Smith evoked under the heading of "law s and institutions," which, h e judged, kep t eighteenth-centur y China fro m a "ful l complemen t o f riches " higher tha n i t had, i n fact, achieved . S o fa r a s Indi a was concerne d th e impac t of thos e noneconomic factor s o n populatio n wa s critical. A secon d distinguishe d study of development durin g this period is Tawney's Land an d Labour i n China, whic h i s als o examine d i n mor e detai l i n Chapte r 13. 54 Hi s genera l conclusions o n population ar e muc h like Anstey' s on India: 55 The fundamenta l fact, i t i s urged , i s o f a terribl e simplicity . I t i s tha t th e population of China is too large to be supported by existing resources. While , in Chin a a s a whole , it s mea n densit y i s lo w compare d wit h tha t o f mos t western countries, i n certain areas it is appalling. Whole provinces, as large as European states , may properly be described as congested districts. The strug gle o f a swar m o f huma n being s fo r a bar e physica l existence is a n ever present reality . Al l th e phenomen a o f rura l distress—minut e holdings, tin y incomes, female infanticide , starvation—ar e the unavoidable result of it. . . . It i s tru e that th e populatio n attempting to liv e b y agricultur e i s i n Chin a

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excessive; th e practical proo f i s that so many persons die . .. . I t is true that Chinese habit and doctrine put a premium on the growth of population, which appears t o wester n eye s unnatura l an d artificial . Sentiment , hallowe d b y immemorial tradition , makes i t a duty to leave sons , an d th e communism of the patriarchal famil y dissociates th e production o f children from responsibil ity for their maintenance . Henc e prudentia l restraints act with less force than elsewhere; an d population, instead of being checked by the gradual tightening of economi c pressur e o n individuals , plunge s blindl y forward , til l whol e communities go ove r th e precipice. Apar t fro m th e improvemen t of methods of agriculture, th e principal expedients adopted elsewhere , thoug h extremel y various, ma y be reduced t o three—migration, th e development of alternativ e sources o f livelihood, an d the deliberate limitation of the size of families. Th e question i s ho w fa r an y o r al l o f the m ar e applicabl e t o China , an d what , if applied, thei r effec t woul d be. " Tawney review s i n turn each remedy ; find s potentialitie s i n each; bu t concludes tha t th e achievement o f effectiv e politica l unity , efficien t administration , an d a larger , mor e modern educationa l syste m ar e th e overridin g requirements. One specific potentialit y examined was Chinese migration to sparsely populate d Manchuria. Before Tawney's boo k wa s published, the Japanese had occupied Manchuria, and China face d 1 8 years o f wa r an d civi l wa r befor e th e developmen t issue s Tawne y dis cerned s o well coul d retur n t o a hig h place o n that nation' s agenda . Lillian Knowles' s Economic Development o f th e British Overseas Empire (1924) 56 is also among th e few empirica l studie s of economic developmen t between 187 0 an d 1939 . It contain s a fe w observation s o n populatio n problems , notabl y wit h respec t t o publi c health polic y an d it s achievements ; bu t demographi c pattern s i n variou s part s o f th e empire ar e no t systematicall y examined .

An Interim Conclusion The stud y o f population , a s a distinc t disciplin e linke d wit h man y others , gathere d momentum and came to a highly professional maturity between 187 0 and 1939. Th e scope and qualit y of data improved , includin g estimates of population ove r lon g tim e periods ; population growt h dynamic s wa s refined , fertilit y a s wel l a s deat h rate s cam e unde r careful examination ; th e rathe r sophisticate d concep t o f th e ne t reproductio n rat e wa s established a s a usefu l foreshadowin g o f th e future , i f other thing s remained equal ; th e demographic transitio n wa s defined, an d the concept o f an optimum population debated . Before 1939 , thre e distinc t link s o f demograph y t o developmen t wer e identifie d an d expounded: i n th e advance d industria l countries, th e relatio n o f populatio n retardation , stagnation, o r decline to investment, growth, and unemployment rates and to prospects for real income pe r capita; th e kinds of public policies, includin g social policies , best calcu lated t o retur n th e ne t reproduction rat e t o unity ; in India and China, th e nature, causes , and cures fo r the raw operation o f Malthusian "positive " population restraint, in a setting of bar e subsistenc e incom e levels. The prid e of demographers in their empirical and conceptua l progress wa s palpable as they looke d bac k fro m th e lat e 1930s ; bu t they—an d everyone else—wer e i n fo r som e demographic surprise s in th e worl d that emerge d afte r 1945 .

8 Investment an d Technology, Part One: The Emergenc e of National Income Accounting

The Statisticians Blow Their Trumpets—Again In th e cours e o f th e 1920 s th e statisticians , consciou s o f thei r growin g skill s an d th e proliferation o f governmenta l statistica l series , consciou s als o tha t ne w an d puzzlin g problems wer e shakin g th e complacenc y o f th e mainstrea m economists , unfurle d thei r flags an d asserte d wit h confidence a major role i n the furthe r development o f th e socia l sciences. One coul d quot e variou s American s and Briton s to thi s effec t (as wel l as Norwegian, Dutch , an d other econometricians); but in Britain Si r Josiah Stamp captures the spirit i n which the statisticians, with more than two centuries of professionality behin d them, stake d ou t a new enlarge d are a o n th e tur f of economics. 1 Science san s experienc e N'apporte pas grande assurance . —Fare's Cano n (1510-90) * Anyone who reflects upo n the troubles an d problems o f the civilized world to-day mus t realize tha t question s ar e constantly put t o economic scienc e t o which no clear answer , and sometimes n o answer at all, is being given. I f we are satisfie d tha t no bod y of knowledg e is worth y [of ] the nam e of scienc e unless it has a capacity for development t o meet suc h new needs, w e shall be looking aroun d t o see upon what lines growth and change i n economics mus t take place. Will the old methods of inquiry and proof suffice , o r must we see k new ones , no t necessarily "better, " but more adapte d t o cope wit h the fresh problem an d t o unfol d hidden secrets ? It i s m y vie w tha t th e analytica l method i n the lin e of Ricardo , Mill , an d Marshall has , fo r th e tim e being , a t an y rate , reache d th e limi t o f it s usefulness, an d that no striking advance can be made thereby from th e ground now occupied. I do not think, moreover, that the refinements and extension of *"Science withou t experimen t doe s not provid e grea t confidence."

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it i n th e mathematica l o r Cambridg e Schoo l i s likel y t o lea d t o importan t results. Certainly inductions by the Historical School must be so broad, and so lacking in touch with modern data, that they will yiel d only a small contribution t o th e constructiv e problems o f th e moment. I believe that for the next advance we must depend upo n realistic statistical investigation an d verification , an d tha t w e stan d o n th e threshol d o f a ne w method, whic h is o f genera l application. Although Stam p an d hi s colleague s appea r unawar e of thei r predecessors, the y wer e echoing almos t precisely th e argument s and ambitions articulated a century earlier whe n there wa s grea t fermen t o n th e subjec t of statistic s on bot h side s o f th e Channel. 2 Th e Statistical Societ y o f Londo n (late r th e Roya l Statistica l Society ) wa s organize d wit h Malthus an d Babbag e amon g it s foundin g members . Lik e thei r counterparts i n France , they wer e stirre d t o concer n an d measuremen t b y "th e trouble s an d problems" o f th e emerging industria l societies. In Britain, as a century later, there was a conscious effort t o escape fro m th e limit s of "th e abstract , deductiv e style of Ricardian economics."3 Having blown agai n their ideological trumpets , with renewed hop e and conviction, the post-1918 statisticians wen t to work. Thei r most significan t interwa r achievement was in filling th e empt y boxe s o f nationa l incom e account s wit h reasonably reliabl e numbers. Out o f th e interpla y of the relate d concern s o f governments an d economists, Britai n and the United States possessed, on the eve of the Second World War, fairly reliable estimates of national income (or gross national product) and its components. They were used for the first time as major instruments of policy analysis during the war years; and such estimates diffused t o virtually all national states quite promptly after 1945 . Th e components came to include estimates fo r investmen t and yielde d inevitabl y a comparison o f investmen t pro portions t o GNP and GNP growth rates. Thu s emerged th e marginal capital-output ratio, a rough, black-box , aggregat e measure o f the rate of productivity increase associate d with investment; that is , th e proportion o f GNP investe d require d to produce a 1 % increase i n real GNP . Keynesian incom e analysis , a s clarifie d afte r th e 193 6 publicatio n o f Th e General Theory, heightene d an d helped shap e national income analysis; but it is fair to say that the Keynesian doctrin e would not have attained the influence it did without the generation o f statistical dat a t o fil l it s empt y boxes . Bu t th e proces s o f generatin g nationa l incom e estimates wa s set in motion by a concern wit h quite different issues ; and the firs t substan tive sectio n o f thi s chapter seek s t o identif y th e impulses that led t o the creatio n o f thes e powerful tool s fo r bot h th e short-ru n an d long-ru n analysis of economic growth . The cumulativ e and sustaine d efforts tha t took plac e i n Britai n and th e Unite d State s between say , 190 0 an d th e en d o f th e Secon d Worl d War , se t th e patter n fo r suc h calculations sinc e 1945 . Bu t th e British and American economist s an d statistician s wer e by n o mean s alone . Ther e wer e pioneerin g calculation s of nationa l income i n Australia and Canada, an d significant work in Germany an d elsewhere o n the European continent . Writing i n 193 3 Simo n Kuznet s wa s abl e to cit e mor e o r les s reputabl e national incom e estimates fo r fiftee n countrie s (following , p. 222 , an d not e 56) .

The British Story: From William Petty to Richard Stone As i n the case o f the statistical analysis of population, nationa l income accounting can b e traced back t o Britain in the secon d half o f th e seventeenth century—to the writing s and

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calculations o f William Petty and Gregory King. 4 Lik e most statistical calculations, those generated afte r 166 0 reflecte d no t scientifi c enquir y but concer n wit h public policy. A s Petty's lat e nineteenth-centur y edito r concludes: 5 His writings then are not conscious elaborations of some economic system , more o r less clearly conceived . Eac h of them, on the contrary, was prompted by som e circumstance s o f th e times , an d addresse s itself , i n fac t i f no t i n form, t o some question of the day. The "Treatis e of Taxes" the most systematic of them all, grows out of the changes in the revenue which the Restoratio n occasioned. Th e "Verbu m Sapienti" is due to the costliness of the first Dutch war, the "Quantulumcunque " to the recoinage projects of Halifax. The moral of the "Politica l Arithmetik, " implici t but clearly implied, i s that Charles II may, i f he will , make himsel f independen t of the bribes o f Louis XIV. . . . The "Essay s in Political Arithmetick" instruc t James, wavering on the verge of an independent policy, that London is more considerable tha n the two best cities o f th e Frenc h monarchy . Even Petty' s trenchan t observation o n the disproportionate role o f religious minorities in the conduct of trade concludes operationally: 6 " . . . fro m whenc e it follows, that for the advancement o f Trade , (i f tha t b e a sufficien t reason ) Indulgenc e mus t b e grante d i n matters o f Opinion. . . . " Two eighteenth-centur y figures , Josep h Massi e an d Arthu r Young , wer e stirre d t o calculate Britis h national income i n the third quarter o f the eighteent h centur y bu t i t has proved difficul t t o reconcil e thei r approximation s t o eac h othe r o r t o Gregor y King' s estimates a century earlier. 7 It was not until the convergence of the industrial surge in last two decades of the century with the radical rise in agricultural prices and the imposition of the wartim e income tax that analysts again turned seriously t o estimating Britis h income and wealth. Le d by Patrick Colquhoun, estimates fo r Britis h national income were mad e for 1800-1801 , 1803 , 1812 ; and in the postwar years, 1822 , 1823 , 1833 , wit h some half dozen furthe r estimate s down to midcentury.8 The latter calculations were generated fo r a variety o f purposes . Firs t an d perhap s mos t importan t wa s a desir e t o measur e "Th e Progress o f th e Nation, " t o us e th e titl e of G . R . Porter' s 184 7 statistica l compilation . Second, ther e wa s a growing interest in income distribution and, especially, th e extent to which British workers shared o r failed t o share in the palpable expansion of the economy . After 1870 , wit h the increasing professionalization of both statistical and economic analysis, an d the rise of the democratic socialis t movemen t in Britain and on the continent, th e latter issu e wa s extensivel y explored . Fo r example , Rober t Giffen , a majo r nationa l income an d wealth analyst, delivered his presidential address before the Statistical Society in 188 3 on "Th e Progres s of the Working Classes i n the Last Half Century."9 From 187 3 to the mid-1890s the declining trend in interest rates and palpable rise in real wages as the cost of living fell, yielde d a shift i n income distribution in favor of urban workers; and this was duly captured b y the statisticians. 10 B y 1892 , tha t extraordinary if somewhat untamed statistician an d collector of statistics, Michae l G. Mulhall , could presen t a table purport ing to show "th e annua l earnings or income" of eighteen nations: fourteen in Europe plus the Unite d States , Canada , Australia , an d Argentina. 11 Nine categories o f earning s ar e calculated b y th e metho d described i n Not e 8 a s wel l a s averag e incom e pe r capit a i n British pounds. None of the calculations cited provided estimates of investment rates; although Mulhall estimated foot-ton s i n us e pe r inhabitan t (hand , horse , an d steam ) that yielde d a rough

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index o f capita l intensity; 12 an d hi s wealth figures included breakdown s fo r land, cattle , houses, railways , ships , etc. 13 Bu t th e consequence s o f growt h fo r nationa l welfar e an d income distributio n rathe r tha n th e mechanic s an d dynamic s o f growt h itsel f wer e th e principal motive s fo r nationa l incom e calculation s i n Britai n dow n t o th e en d o f th e nineteenth century . An d this continue d to be the case for some time as two majo r figures emerged: A . L . Bowle y an d A . C . Pigou . On e wa s a first-clas s statistician, th e other , Marshall's successor , a first-class theorist. 14 Bowley' s wor k ove r a 40-year spa n i s wel l summarized, an d it s centra l focu s accuratel y reflected, i n hi s Wages an d Income i n th e United Kingdom since 1860. l5 Bowley' s estimate s o f national incom e were , i n the firs t instance, a by-product o f his concer n t o establish the extent t o whic h the rea l incom e o f British worker s ha d increase d o r faile d to increase ; an d whethe r incom e distributio n had shifted i n favo r o f th e wag e earne r o r agains t him . Th e outcom e turne d ou t t o hing e substantially on forces se t in motion by movements i n relative prices an d the British term s of trade . Bu t i t wa s fro m Bowley' s estimate s o f Britis h nationa l incom e i n 192 4 (don e with Josia h Stamp ) tha t Coli n Clark' s wor k i n this fiel d take s it s start. 16 It wil l b e recalle d (preceding , p . 192 ) tha t Marshal l use d no t onl y th e concep t o f national income but boldly estimated the proportion of that income that might b e diverted from "sociall y wasteful " t o constructiv e socia l use s "withou t causin g grea t distress, " thus adding to the community's welfare. Pigou share d fully his conviction that the purpos e of economics was to enrich the lives o f human beings b y liftin g fro m them the burden of poverty. In Pigou's vivid phrases: 17 "I t i s . . . the social enthusias m which revolts fro m the sordidness o f mean street s an d the joylessness o f withered lives, that is the beginning of economic science. " Pigou greatl y extended Marshall's effor t t o identify circumstance s where the social and private net product of an economic activit y can be distinguished.18 In elaborating his argument , Pigou use d the concepts o f "economi c welfare" an d the "na tional dividend," devoting a good deal of attention to refining the latter and exploring th e problems involve d i n it s measurement. 19 Colin Clark' s initia l interes t i n nationa l incom e an d it s measuremen t flowe d quit e explicitly fro m Pigou' s Economics of Welfare, whos e purposes Clar k paraphrased i n hi s own way: 20 . . . [to] discover method s whic h will advance, an d counsel the rejection of proposals whic h wil l hinder, th e followin g three objects : 1. T o increas e th e averag e nationa l dividend . 2. T o regularis e it s flo w throug h time. 3. T o equalis e it s distributio n between persons . The studen t of economic s soo n become s awar e tha t proposal s whic h ma y advance on e o f thes e object s wil l injur e another , an d i t i s th e dut y o f th e economists t o attemp t t o fin d method s fo r balancin g th e gain s an d losse s o f human welfar e cause d thereby . Clark bega n hi s studie s a s a natural scientist and, a s he turned t o economics, brough t with hi m a bias h e define d in retrospect a s follows: 21 "I t ha s alway s been m y profound conviction tha t economics shoul d be based o n empirical observation and classification of what ha s actuall y been happening , with theor y occupyin g only a secondar y position. " After receivin g his B.A . fro m Oxfor d i n 192 8 h e too k par t i n a socia l surve y o f Mer seyside an d wa s o n th e staf f o f th e Britis h Economi c Advisor y Council i n 1930-1931 . This bod y wa s chaire d b y Keynes , wh o recommende d Clar k fo r th e pos t o f University

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Lectureship in Economic Statistic s at Cambridge. There Clark worked from 193 1 to 1937 , from th e ages of 26 to 32, when , in classic style , the major themes of his subsequent work crystallized. He began b y carryin g Britis h national incom e estimate s forwar d from 192 4 t o 1931 22 from th e welfar e perspectiv e o f Bowle y an d Pigou; but hi s 193 7 study , National Income and Outlay, reflect s a reaching beyon d wit h considerable originality in four direction s al l relevant t o th e analysi s o f growth: 23 capita l investmen t i n relation t o economi c growth ; changes i n th e component s o f nationa l income, includin g investment, in the cours e o f a business cycle ; th e impac t o f changin g relativ e prices (an d th e term s o f trade ) o n rea l wages, investment , an d employment ; an d th e statistica l measuremen t o f growt h an d it s structure ove r lon g periods , an d a s amon g nations , coming t o res t o n th e condition s o f economic progress . For th e limite d purpose s o f thi s portion o f ou r expositio n i t i s sufficien t t o not e tw o aspects o f Clark' s analysi s of investment . First , h e conclude d wit h a proposition whos e implications migh t be widely accepted i n principle—over, say , a faculty club lunch—but have stil l no t bee n full y absorbe d i n macroeconomi c theory ; namely , tha t growt h i s determined b y a comple x o f factor s rathe r tha n b y th e amoun t o f capita l investe d tha t ' 'seems to be an effect rathe r than a cause.' '24 H e arrived at this conclusion by comparing the Britis h econom y i n th e pre-191 4 decad e wit h it s position i n th e 1920s . I n th e earl y years o f th e centur y th e averag e leve l o f unemploymen t wa s low , th e term s o f trad e deteriorating, productivit y increas e decelerating , rea l wage s stati c or slightl y declining , and a n enormous volum e o f British savings flowing abroad . I n the interwar years , o n th e contrary, Britis h productivity was much higher than earlier and increasing, and the term s of trad e wer e favorable ; but th e gain s from thes e sources wer e dissipate d i n high unem ployment. Lookin g bac k a t his analysi s of thi s perio d Clar k rephrase d hi s conclusio n a s follows:25 "A t tha t time , an d fo r man y year s afterwards , it wa s believe d tha t th e ke y factor i n economi c growt h wa s th e accumulatio n o f capital . A s earl y a s 193 7 I bega n profoundly t o question this doctrine. . . . [W]e know now that such a n accumulation i s a necessary bu t no t a sufficient conditio n fo r economi c progress , a n importan t logica l distinction." In National Income an d Outlay (1937 ) Clar k brought together th e factors h e judged, i n fact, t o b e critical , i n th e followin g rather strikin g passage: 26 If technica l knowledg e ha d the n been better , o r th e qualit y of th e population; or if British industries had been abl e to work for a larger market at home or abroad , an d t o enjo y furthe r economie s o f increasin g returns , withou t suffering diminishin g returns in their supply of food-stuffs an d raw materials , the genera l leve l o f productivit y migh t hav e bee n greater . Bu t thes e thre e factors betwee n the m see m t o hav e bee n th e consideration , settin g a n uppe r limit t o whic h the curv e o f productivity wa s tending . W e hav e no w broke n through tha t particula r limit , largely , I thin k throug h improvemen t i n ou r technical knowledge, and , what is equally important from th e point of view of the nationa l productivity , th e growin g u p o f a generatio n o f traine d an d experienced worker s and technician s who ca n appl y this knowledge. I have stated abov e a positive view o f the condition s dominating the longterm possibilitie s of a n increas e i n productivity , because I believ e th e fact s have destroyed the vie w up til l no w generall y prevalent, i.e., tha t the rat e of economic growt h wa s primaril y dependent upo n th e rat e a t whic h capital

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could be accumulated. Th e very rapid expansion in productivity at the presen t time i s takin g place a t a tim e of heavil y diminishing capital accumulation . Clark perceived clearl y th e key determinants of growth, wit h one exception: th e specif ic, sectora l characte r o f th e flo w o f innovation s tha t h e viewe d i n aggregat e for m a s "improvement in our technical knowledge." I n any case, he never attempte d t o bring his variables togethe r i n a formal exposition o f growth, althoug h he was certainly one o f the few majo r analyst s o f growt h betwee n 187 0 an d th e Secon d Worl d War . Clark captured a narrower poin t related to investment in his detailed analysi s of British business cycl e fluctuations , 1929-1936. 27 I n th e cours e o f thi s exercise h e subjecte d to empirical analysi s R . F . Kahn' s famou s analysi s of th e investmen t multiplier. 28 Clar k found th e propensities t o save and to consume to be rather mor e comple x than the simpl e notion o f a consumptio n functio n woul d suggest: 29 We have already show n that during recent years impersona l saving through undistributed company profits and local-authority sinking funds accounte d fo r the greater part o f the observed tota l of investment. During the last few years , it appeared that private savin g b y the rich ha d altogether disappeared or even became negative Th e ke y factor i n the situatio n would therefore see m to b e th e propensit y (i f tha t wor d ma y b e used ) o f compan y official s t o distribute i n dividends, o r not to distribute in dividends, an y given increment of income Th e analysi s is delightfully simple. Th e dat a fo r the perio d 1924-35 li e almos t exactl y alon g a straigh t line , indicatin g a mor e o r les s constant propensit y t o sav e o n th e par t o f compan y authorities . O f eac h additional £1 of income, whethe r starting from a low leve l or a high level, o n the average £0.46 will be distributed in dividends and the remainder added t o reserves.* The remarkabl e constanc y o f thi s relation probabl y explain s the closenes s with whic h the multiplie r 2 i s adhere d t o i n the relatio n betwee n investmen t and nationa l income . Clark's National Income an d Outlay alread y reflect s th e impac t o n nationa l incom e analysis o f th e publicatio n i n 193 6 o f Keynes's General Theory. Boo k I I of the General Theory ha d deal t a t som e lengt h wit h definitions of income , saving , an d investment; 30 and, a t a later point , Keyne s relate s hi s discussion of capital depreciation (gros s an d net investment) t o th e statistica l calculation s o f Coli n Clar k an d Simo n Kuznets . A s th e Keynesian concept s wer e clarifie d the y wer e increasingl y linke d t o nationa l incom e statistics that , a s note d earlier , ha d bee n evolvin g i n Britai n out o f a n arra y o f welfar e concerns rathe r tha n th e shar p Keynesia n focu s o n th e proble m o f chroni c hig h unemployment. But th e crisis i n Europe soo n turne d Keynes' s though t towards th e economics o f war : first, th e question of commodity stockpiling ; then, from October-November 1939 , ho w to pay fo r the war. 31 He outlined i n letters t o the Times (an d in an Economic Journal articl e of December) a plan t o contain wartime inflation by compulsory saving ; and he published in Februar y 194 0 a short book , Ho w t o Pay for th e War, whic h may wel l hav e bee n th e first occasio n whe n double-entr y national account s wer e use d a s a framewor k for ex pounding a major policy position. Although Britain used taxation and rationing rather than the large-scal e force d savin g Keynes commended , th e Britis h budge t presented b y th e *In othe r words , a s th e prover b goes, "£ 1 fo r th e compan y an d £ 1 for th e shareholders. "

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Chancellor of the Exchequer in April 1941, with its supplementary income and expenditure analysis, represented a kind of irreversible triumph of the Keynesian revolution with which Keynes an d two of his disciples—James Meade an d Richard Stone—were person ally connected. 32 Within , say , 10 years, th e settin g o f publi c financ e in th e contex t o f national incom e dat a an d analysi s had becom e a n almos t universal political convention .

C. K. Hobson and Paul Douglas Before turnin g to the quite distinctive but parallel evolution of national income estimate s in th e Unite d States , tw o studie s o f Britis h investmen t dat a shoul d b e noted : C . K . Hobson's Th e Export o f Capital an d Pau l Douglas' s "A n Estimat e o f th e Growt h o f Capital i n the United Kingdom , 1865-1909." 33 Hobson's work was a doctoral thesis at the University of London that, in addition to its valuable an d much-use d statistica l calculation s o n Britis h capita l exports, reviewe d th e history o f th e flow , it s institutiona l mechanisms, an d it s link s t o emigratio n an d th e domestic stat e o f th e Britis h economy . H e conclude d wit h a judiciou s bu t tentativ e evaluation o f th e ne t effect s o f capita l export s o n Britis h nationa l incom e an d rea l wages:34 . . . [W]her e th e amoun t o f capita l exporte d i s small , s o tha t th e rat e o f interest a t home i s practically unaffected, th e loss to home production, resulting from th e fact that the capital is not invested at home (or is withdrawn from home investment) , i s measure d b y th e incom e whic h woul d hav e bee n ob tained fro m th e home investment . I f the rate of interest at home i s materially increased a s th e immediat e resul t o f foreig n investment , the los s t o hom e production i s greate r tha n th e amoun t o f incom e whic h woul d hav e bee n obtained fro m hom e investment . But , in eithe r case , th e amoun t of th e na tional incom e fro m al l source s i s presumably increased b y th e highe r return obtained fro m investmen t abroad, excep t in so far a s the amoun t of labour at home tends to mean that a larger share of the home output goes to capital, and a smaller share to labour. . . . [I]n the long run , foreign investmen t tends to produce a n improvemen t i n th e economi c lo t o f th e wag e earner—a n in creased demand fo r work-people, a s well as for capital at home—which may outweigh the injurious effects o f a high rate of interest upon those who own no considerable amoun t o f capital . Th e benefi t whic h Britis h capita l investe d abroad confer s o n foreig n countrie s may , however , possibl y be greate r tha n the advantage which it brings to British wage-earners. I n this case the inducement to emigrate may increase , despit e the improvement in their positio n at home. Hobson's analysi s capture s al l th e relevan t consideration s except , perhap s th e mos t important; i.e. , th e substantia l pre-1914 rol e o f Britis h capita l export s i n openin g u p overseas supplie s o f foodstuff s an d ra w material s thu s improvin g i n th e lon g ru n th e British term s of trad e an d thereb y dampin g th e ris e i n the Britis h cost o f living . Douglas wa s concerne d t o establish , fro m estimate s o f th e Britis h domesti c capita l stock at different periods , an d from Hobson' s estimates of the export of capital, an answer to this question: How doe s th e suppl y o f capita l relate to trend movement s in the rat e of interest an d i n rea l wages ? The period for which Douglas made his estimates saw, on balance, a decline in the rate

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of interest; althoug h the trough for the rate of interest (the yield on consols) cam e in 1896 1898, afte r which the rate rose with the rise i n the price level . Dougla s wa s awar e of th e problem o f the real rat e of interest i n periods o f falling an d rising price trend, but made no correction.35 And , indeed , give n th e unambiguou s result yielde d b y hi s data , n o suc h refinement wa s required. 36 These figure s show a n increase o f 78 per cent in the amount of real capita l per capit a withi n th e Unite d Kingdo m durin g thi s period , while , i f foreig n investments ar e als o included , the increas e wa s 9 0 per cent . . . . It is apparent . . . that capital has increased much faster than the quantity of labor. Since the hours of work have decreased durin g this period, thi s increas e has bee n appreciabl y greate r tha n tha t indicate d b y th e relativ e capita l pe r capita. This greater increase , i t should be remembered, occurre d durin g a period in which th e interes t rat e wa s o n th e whol e falling, * whil e rea l wage s wer e rising. Th e fac t tha t capital thu s increase d a t a n appreciabl y faste r rate tha n labor indicate d that , durin g thi s perio d o f industria l advanc e a t least , it s supply was , historicall y speaking , muc h more elasti c tha n wa s that of labor . The emergenc e o f nationa l incom e estimatio n i n th e Unite d States , a s compare d t o Great Britain , i s an essay in the comparative sociolog y o f innovation. In Britain, the olde r society, suc h estimates run back to the end of the seventeenth century. From th e beginning they reflec t a sequence o f efforts to illuminate and, usually , to provide a basis for advic e on publi c policy ; whethe r i t wa s post-Restoration ruler s confrontin g France, th e estima tion of the tax base fo r the struggle against Napoleon, or the pattern of income distribution as, i n Mill' s phrase , "th e claim s o f labou r [became ] th e questio n o f th e day " i n th e second hal f o f th e nineteent h an d earl y twentiet h centuries. Drive n o n b y thes e welfar e concerns, a handfu l o f men , mainl y centere d a t Cambridge , buil t th e concepts , an d amassed an d discipline d th e awkwar d dat a require d fo r mor e o r les s rigorou s nationa l income estimates : Bowley, Stamp, Pigou, Clark, Keynes, and, recruited into the Treasury during th e war , Jame s Mead e an d Richard Stone . Th e critica l lin k t o the Treasury cam e when Keynes , withou t stipend, wa s give n a Treasury offic e i n a vaguely defined role a s wartime advisor . H e an d a good man y major economist s o f th e interwa r year s ha d see n government servic e in the First World Wa r and, as the crisis with Hitler intensified, turned their mind s t o th e economi c dimension s o f th e struggl e ahead . Onc e i n th e Treasury , Keynes helpe d pu t togethe r an d encourag e th e smal l tea m tha t produce d th e nationa l income supplemen t t o the April 194 1 budget , settin g a pattern for regular analysi s of th e economy an d projectio n i n nationa l incom e term s tha t wa s t o continu e int o th e postwa r period. Th e sag a ha s th e character o f a n old-boy, famil y affair , wit h an illusory , casual , amateur qualit y to it .

The American Story From George Tucker to Simon Kuznets There ar e strong similarities and differences in the American story. The latter also begins proximately with pre-1914 efforts t o clarify th e facts abou t income distribution, a concern The chang e i n th e valu e o f th e principa l resultin g fro m th e movemen t of th e pric e leve l is , however , a complicating fac t whic h makes i t difficul t t o determin e what the "real " rate s o f interes t were .

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that persisted int o the 1920 s and was heightened b y the issues posed in the Great Depres sion o f th e 1930s . I t wa s i n th e contex t o f depressio n tha t th e initia l lin k wa s forge d between th e America n governmen t an d th e researc h communit y engage d i n buildin g national income estimates; but, as in Britain, the use of such calculations to frame wartime economic policy , withi n the intellectua l matri x o f Keynesia n incom e analysis, consoli dated the empirical foundation s for implementing the mandate of the Employment Act of 1946. Fro m it s creatio n i n 1946 , th e Counci l o f Economi c Adviser s place d nationa l income an d it s component s a t the cente r o f it s analyses . As on e woul d expect , ther e wa s a relatively shor t an d thin history of national incom e estimates i n the United States , i n part because , unlik e Britain and Germany, th e incom e tax wa s onl y introduced i n 1913 . Mulhal l cites on e estimate by George Tucker fo r 184 0 that h e judged t o be inaccurate. 37 Mulhall array s estimates o f national wealth, however , starting i n 1790 , base d o n censu s returns by states. 38 In th e pre-191 4 generation , th e dampin g pressure o f cost-of-livin g increases o n rea l wages stimulate d furthe r estimates , centere d o n possibl e shift s i n incom e distributio n against labor . A majo r pionee r o f moder n U . S . nationa l income estimates , Willfor d I . King, identified , fo r example , tw o reputabl e predecessor s t o hi s 191 5 Th e Wealth an d Income o f th e People o f the United States: Charles B. Spahr' s The Present Distribution o f Wealth in the United States (1896); an d Frank H. Steightoff' s The Distribution o f Incomes in the United States (1912). 39 Problems of finance during the First World War heightene d interest i n the subject . The firs t estimat e of nationa l incom e within the governmen t wa s don e b y Adolp h C . Miller, a n economist servin g on the Boar d of Governors o f the Federal Reserv e i n 1917 . Anticipating Britis h an d U . S . calculation s i n Worl d Wa r II, h e sough t t o estimat e th e surplus (above minimum consumption an d capital maintenance ) available for the conduct of the war.40 Miller's propose d metho d did not take hold, however, until issues of welfare asserted themselve s i n the wak e o f the Armistice . The issu e o f nationa l incom e estimate s wa s brough t to a head i n a manne r reflecting three abidin g aspect s o f th e America n operatin g styl e a t its mos t effective : a n importan t role fo r individual s who tak e on themselve s the responsibility for trying to solve a larg e problem; th e building of a wide-based communa l consensus; the creation, o n the basis of that consensus , o f a n institutiona l mechanis m to carr y forwar d o n a regular basis . The process was instigated by two men: Malcolm Rorty and Nahum Stone, respectivel y a busines s statisticia n an d a labo r arbitrator . Thes e characters , o f modes t hierarchica l stature, fel t somethin g shoul d b e don e t o clarif y th e fact s "o n controversia l economi c issues of great public interest,'' startin g with the issue of income distribution. 41 The y had in mind, in particular, the controversial 191 6 estimate of Scott Nearing—a socialist—tha t U. S . nationa l incom e wa s divided 50-50 between what Nearing defined as "property " and "service " income . Althoug h one of the tw o protagonists wa s associated wit h business, th e othe r wit h labor arbitration—an d the y ha d differe d o n othe r occasions—the y were both sceptical of Nearing's calculations. One, (Rorty) assumed the role of innovator; the outcom e wa s th e creatio n o f a n institution : The Nationa l Burea u o f Economi c Re search (NBER). I t was envisaged fro m th e beginning and, in fact, organize d as a communal venture. It was to have embraced "well-know n economists representing every school of economi c though t from extrem e conservative to extreme radical who shoul d associat e with the m representatives o f al l th e importan t organized interest s in th e country : Financial, industrial , agricultural, labor, etc;" 42 bu t i n fact th e extremes got loppe d off . Note 11 provide s som e o f th e detail s of thi s process o f institutiona l inventio n an d innovation

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climaxed b y th e launchin g of th e NBE R i n 192 0 wit h th e estimatio n o f nationa l incom e and its distribution already determine d t o be its first task, the analysis of business cycle s to follow (following , pp. 286-294). The brief but intense phase of U. S. war mobilization in 1917-1918 had widene d th e communit y of economists wit h experience o f public polic y and strengthene d th e consensu s tha t an institutio n like th e NBE R wa s desirable . Within 2 year s a two-volum e stud y o f nationa l incom e an d it s distributio n wa s com pleted.43 Willford I . Kin g was primarily responsible for the national incom e estimates b y sources o f production ; Oswal d Knauth , fo r estimate s b y income s received ; Frederic k Macaulay, fo r estimate s o f persona l incom e distribution . The shor t summar y volum e is firmly integrate d an d clearl y bear s th e mar k o f th e edito r an d NBE R researc h director , Wesley C . Mitchell . Befor e publication , the directors o f the NBER, representing a wide range o f academi c an d othe r perspectives , bu t chosen als o fo r their "judiciou s tempera ments," had reviewed th e stud y for possible bia s an d judged it , unanimously , "fai r an d unbiased and reasonably close to the truth." Altogether the study (and the NBER) closel y approximated th e share d visio n of Messrs. Ston e an d Rorty (bot h o n the boar d o f direc tors) whe n the y ha d though t th e whol e thin g up. The project wa s financed mainl y b y two philanthropi c privat e foundation s wit h addi tional modes t contribution s fro m individual s and busines s firms . Th e high-minde d spiri t of th e enterpris e wa s wel l symbolize d b y th e fac t tha t offic e spac e wa s donate d b y a theological seminary . I t i s no t difficul t t o understan d the acerbi c ton e o f Coli n Clark' s 1937 commen t comparin g hi s hard-pressed situatio n to that of his American an d Germa n brethren:44 ... 1 have ha d to do th e entire wor k o f investigation an d calculation fo r this book wit h the exception o f such clerical assistanc e a s I paid for out of my own pocket. Th e more detaile d investigations , which are needed t o bring our knowledge o f thi s subjec t t o th e exten t an d precisio n t o whic h i t ha s bee n brought i n Americ a an d Germany , canno t b e mad e b y individua l investiga tors. I f th e sayin g i s true, tha t economics i s eventually capable o f benefitin g the huma n rac e a s muc h a s th e othe r science s pu t together , i t mus t b e equipped no t onl y wit h th e scientifi c spirit , bu t als o wit h th e financia l re sources, o f th e olde r sciences . Work o n national income estimates continued at the NBER as it moved simultaneousl y to come t o grips wit h systematic analysis of business cycles. Fou r further national incom e studies wer e published , climaxe d i n 193 0 b y King' s revie w o f the 1921-192 2 volume s based o n th e cumulativ e result s o f continuin g research , Th e National Income an d It s Purchasing Power. Its special featur e was the inclusion of a detailed analysi s of corporat e dividends pai d t o stockholder s i n relatio n t o profit s earned . Th e Nationa l Industria l Conference Boar d (NICB ) entere d th e fiel d i n 192 7 wit h a metho d fo r keeping nationa l income estimates—usuall y availabl e onl y after considerabl e delay—reasonabl y current . The estimate s wer e move d forwar d fro m a base yea r i n accordanc e wit h change s i n si x readily accessibl e indexe s reflectin g th e gros s valu e of output . In th e lif e o f the NBE R and , indeed , i n the history o f economic though t and doctrine , 1930 was a significant year . It was then that Wesley Mitchell asked Simon Kuznets to take over the work on national income. As Solomon Fabricant notes, it was a decision Kuznets made wit h "som e hesitation," 45 fo r i t took hi m awa y fro m on e approac h t o economi c analysis an d committe d him , for th e res t o f hi s professiona l life, t o another.

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In 1930 , Kuznets , a studen t o f Mitchell's , ha d publishe d hi s Secular Movements i n Production and Prices, Their Nature and Their Bearing upon Cyclical Fluctuations, a study begu n 5 year s earlier , complete d i n 1927 , recommende d fo r publicatio n th e nex t year by the Hart, Schaffner , and Marx Committee.46 Lik e Colin Clark, Kuznets, born i n 1901, fulfill s th e Confucius-Bagehot-Keynes insigh t about when one is likely to formulate one's mos t creativ e ideas an d guiding Schumpeterian "vision. " Secular Movements is on e o f th e fe w studie s almos t wholl y directe d t o th e proces s o f economi c growt h published between 187 0 and 1939 . I t recognized three factors as the key dynamic "push ing" force s i n growth : th e growt h o f population ; change s i n demand ; an d technica l changes, includin g both mechanical o r engineering progress, an d improvements i n business organization. 47 Technica l chang e was judged th e mos t importan t of th e thre e variables. It s pattern s an d consequence s fo r growt h an d cyclica l fluctuation s i n individua l sectors o f th e econom y i s th e subjec t o f th e book ; althoug h Kuznets' s "Concludin g Notes," and a few other passages contai n a vision of the link between hi s initial sectoral findings an d the process o f economic growt h as a whole. Kuznets clearly understood that a high degree of disaggregation was necessary t o study technical change. An d his Secular Movements i s examine d late r a s one of the majo r work s o f this perio d bearin g on technology (following , pp. 242-246) . For the moment the simple point to be made i s that in moving as Mitchell requested t o the field of national income analysis, Kuznets shifted to estimation i n an inevitably more highly aggregated world . In that world, i n which he was a secon d generatio n figur e succeeding King' s pioneering work, he became th e acknowl edged intellectua l leade r in the furthe r developmen t of nationa l incom e estimate s in the United States, and , after th e Secon d Worl d War , the leader i n a great international effor t to generate an d use such data for the analysis of economic growth. But he was never able to lin k the important sectoral insight s concerning technological chang e in Secular Movements to his later highly aggregated nationa l income growth analysis—a grave matter for an analys t who understoo d th e centra l rol e o f innovatio n in the proces s o f growth. 48 Nevertheless, wit h Kuznets in command at the NBER, national income analysi s prospered i n the Unite d States. O n June 8, 1932 , a not trivial if not quite earth-shaking event occurred i n American politica l history—Senato r Robert L a Follett e of Wisconsi n intro duced th e following resolution:49 Resolved, tha t th e Secretar y o f Commerc e i s requeste d t o repor t t o th e Senate o f the United States on or before December 15 , 1933 , estimate s of the total national income of the United States for each of the calendar years 1929 , 1930, an d 1931 , includin g estimates o f th e portion s o f th e nationa l incom e originating fro m agriculture , manufacturing , mining , transportation , an d other gainful industrie s an d occupations , an d estimates o f the distributio n of the national income in the form o f wages, rents, royalties, dividends, profits , and other types of payments. These estimates shal l be prepared b y the Bureau of Foreig n an d Domesti c commerce , an d the burea u shal l us e availabl e offi cial and unofficial statistic s and such relevant data as may be in the possessio n of th e variou s departments , bureaus , an d independen t establishment s o f th e Federal Government . Mr. L A FOLLETTE. . . . "Ma y I say, Mr. President , that for a number of years ther e ha s bee n n o stud y o f th e ver y importan t questio n o f nationa l income, it s distribution , and it s sources . Th e onl y availabl e data o n thi s

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question hav e bee n furnishe d b y unofficia l agencies , particularl y the Bureau of Nationa l Economi c Research . Tha t burea u has , however , no t mad e an y study sinc e th e year s prio r t o 1929 . In the consideration o f legislation i n the future, I believe tha t the data to be compiled unde r the authorization of the resolution introduced by me will be of very grea t importanc e i n helpin g Congres s t o determin e policie s relatin g t o fiscal affair s o f th e Government , a s wel l a s t o othe r legislatio n whic h i s economic i n character . A vot e wa s delaye d t o permit consultatio n with the Departmen t o f Commerce; bu t on June 1 3 the link between the federal government and national income analysis was forged without dissent. The Department of Commerce turned to Kuznets for help in designing the unit responsibl e fo r makin g th e ne w officia l estimate s o n a regular basis. 50 Behind Senato r L a Follette' s initiativ e lay no t onl y a n awarenes s o f th e wor k goin g forward o n nationa l income a t the NBER but als o th e convergence o f tw o group s within the governmen t als o activel y intereste d i n th e developmen t o f improve d statistic s o n purchasing powe r a s wel l as nationa l income. On e grou p wa s centere d i n th e Researc h Division o f th e Bureau of Foreign an d Domesti c Commerce, i n the Department o f Com merce, an d included a t the time Willar d L . Thor p an d J. Frederic k Dewhurst . Th e othe r group wa s directly associated wit h Senator LaFollett e and included Isador Lubin and Paul Webbink. Thes e tw o group s mad e commo n caus e and were , proximately , the lobbyist s behind the Senat e resolution . But Caro l Carso n is no doub t correc t in underlinin g the retrospective judgmen t of severa l o f th e participant s i n thi s initiative: 51 . . . [A]ny one person's rol e in initiating the official wor k on national income should not be exaggerated. Suc h a step was in the air, for it was a convenient and logica l metho d o f broadenin g ou r knowledg e of th e nationa l economy , considering th e crisi s situatio n existing a t that time an d the almos t complet e lack o f reliabl e dat a upo n whic h t o mak e majo r polic y decision s regardin g what the government could an d should t o do improv e the economic outlook . Having helped th e Nationa l Income Sectio n i n the Departmen t o f Commerc e com e to life wit h its initia l respons e t o th e L a Follett e Resolution, 52 Kuznet s was abl e t o se e i t turned over, i n time, t o one of his students and friends, Robert R . Nathan , who directed i t down t o Decembe r 194 0 whe n he joined th e Defens e Advisory Commission. 53 Before gettin g caugh t u p i n th e Secon d Worl d War , Kuznets , bac k a t th e NBER , completed thre e majo r national incom e studies : National Income an d Capital Formation (1938); Commodity Flow an d Capital Formation (1938) ; an d National Income (1941) . Kuznets's wor k i n capita l formatio n incorporate d th e highl y origina l studie s o f capita l consumption o f Solomo n Fabricant , a t th e NBE R fro m 1930 , presente d i n detai l i n hi s Capital Consumption an d Adjustment (1938) . Fro m the perspective o f this portion o f our analysis thes e studies have a special importance : they focused sharply, as NBER Directo r David Frida y ha d counsele d i n 1933 , o n "Th e divisio n of incom e as between these tw o categories of capital formation and consumption" wit h the explicit purpose o f providing the data whic h would permit a damping of the extreme amplitude of fluctuations in capita l formation.54 Frida y wa s a n economis t of imaginatio n and substanc e as wel l a s a majo r figure i n th e Socia l Scienc e Researc h Counci l and a n NBE R director. These pre-wa r year s als o saw the bringin g togethe r of economists working this terrain

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in th e NBER , universities , an d government—throug h the creation o f th e Conferenc e o n Research i n National Income an d Wealth. Th e meeting s held yielde d severa l volume s of studies i n incom e an d wealt h i n whic h unsolve d problem s wer e identified , solution s explored an d debated. Kuznet s was clearl y th e leade r i n this enterprise . In the period 1942-194 4 Kuznet s brought his now-matured expertis e t o the War Pro duction Board , wher e h e serve d a s Associat e Directo r o f th e Burea u o f Plannin g an d Statistics, a function reflected i n hi s National Product i n Wartime (1945) . Kuznets an d Nathan wer e closel y involved , o n the sam e side , i n a shar p bureaucrati c conflict o f som e genera l historica l interes t bu t particularl y relevan t her e becaus e i t forced—unfortunately fo r a transient interval—the linkin g of national income t o sectoral analysis. Th e conflic t appear s i n the literatur e a s "Th e Feasibilit y Dispute." 55 Briefly, th e stor y appear s t o hav e unfolded a s follows: • I n mid-1941, wit h the likelihoo d o f full U . S . involvemen t in the war increasingly accepted i n Washington, The Supply, Priorities, and Allocation Board (SPAB) was directed t o formulate a Victory Program o n the basis of requirements submitted b y the militar y departments an d other agencies . Th e existence o f the enterprise repre sented the triumph of the group in Washington that, against considerable resistance , had advocate d a maximu m U . S . militar y production effor t i n 1940-1941 . Tha t included th e redoubtable Frenchman Jea n Monnet, a member of the British Supply Mission, wh o lobbied a t both ends o f the communications lines between th e Whit e House an d 1 0 Downing Street . • Th e Victory Program wa s directed by Robert Nathan , then chief planner for SPAB. It containe d requirement s fo r planes , tanks , ships , etc. , i n term s o f aggregat e expenditures, ($15 0 billio n b y Septembe r 1943) , a s wel l a s i n term s o f steel , copper, aluminum , etc. Th e exercise was completed i n December 194 1 and became Roosevelt's production response to Pearl Harbor and the German declaration o f war on th e Unite d States . • Onc e wa r wa s on , th e militar y department s bega n t o reques t (an d Congres s t o acquiesce in ) radically expande d productio n programs . Natha n and his colleague s (now th e Plannin g Committe e o f th e Wa r Productio n Board ) judge d tha t thes e uncoordinated, enlarge d program s migh t no t al l prov e feasibl e and , i f attempte d simultaneously, could produce considerable confusion an d inefficiency. The y there fore undertoo k a preliminar y feasibilit y study , complete d i n Marc h 1942 , whic h indicated th e likelihoo d tha t th e programs woul d not prove compatibl e i n the tim e period planned . Kuznet s wa s brough t in , an d h e playe d a n importan t par t i n thi s study. I n May , agai n wit h Kuznets' s activ e participation , a 4-mont h stud y wa s launched tha t examine d th e feasibilit y o f productio n plan s i n term s o f nationa l income aggregates , ra w materials , industria l equipment, an d labor supply . Again , the nee d t o stretc h th e program ou t ove r a longe r time perio d tha n wa s originall y envisaged wa s demonstrated . • Bureaucrati c conflict arose whe n the Army's Chie f of Services an d Supplies, Gen eral Breho n B . Somervell , urge d tha t th e Plannin g Committee's initia l feasibility report be suppresse d an d that the civilian busybodies get out of his way . Somervell lost thi s battle but, apparently , neve r quite forgave hi s adversaries. The exercis e reflects not only the important analytic role of national income accounting as a tool fo r wa r production planning but als o the manne r in whic h that kind o f planning

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forced a bringin g togethe r o f macro - an d sectora l analysi s that , i n th e Unite d States , a t least—but not immediate postwar France—were subsequentl y permitted to go their sepa rate ways . Kuznets's major published work down to the end of the Second World War was focused sharply o n th e elaboratio n an d refinemen t o f nationa l incom e estimate s fo r th e Unite d States. Bu t on e o f hi s mos t impressiv e piece s o f work—stil l somethin g o f a classic — written earl y i n hi s researc h o n nationa l income , foreshadow s hi s late r concer n wit h national incom e estimate s o n a n international basis: th e essay o n "Nationa l Income" in Volume Eleve n o f th e Encyclopedia o f th e Social Sciences (1933). 56 I t explore s th e problems, difficulties , an d choice s inevitabl y confronted i n nationa l incom e estimate s including philosophical , theoretical , an d institutiona l problems. I t als o include s a tabl e arraying pre - an d post-Worl d Wa r I tota l per-capit a rea l incom e estimate s fo r fiftee n countries a s wel l a s th e mos t complet e internationa l bibliograph y o f nationa l incom e estimates o f tha t time. 57 It woul d b e satisfyin g t o b e abl e t o recor d tha t th e refinemen t o f nationa l incom e estimates fro m 193 0 forward and then their incorporation afte r 193 2 in the routine work of the Department of Commerce had a significant an d constructive impac t o n United States economic polic y in the prewar decade. But , useful a s these developments were and proved to be over the long run, they do not appear to have had substantial consequences fo r policy in the 1930s . It is almost certainly true, as in Great Britain , that national income estimate s played thei r first substantia l policy role in providing a coherent framework for problems of the wa r economy . The buildup of national income estimates betwee n 187 0 an d 1941 , i n the United States as i n Grea t Britain , clearl y too k place , then , a s a by-produc t o f concern s wit h urgen t problems othe r tha n long-ru n economic growth ; notably , incom e distribution , welfare, unemployment, and , finally , th e economi c conduc t o f a grea t war . Nevertheless , th e process generate d dat a indispensabl e fo r th e long-ru n analysi s o f growth , a s nationa l income serie s were , wit h increasing difficulty, pushe d backwar d into the historical past . Above all, it became possibl e t o estimate the level of gross an d net investment, its relation to gros s an d ne t nationa l product, an d it s changing components. As bot h Coli n Clar k an d Kuznet s were aware , growt h analysi s require d a grea t dea l more tha n analysi s o f th e investmen t rate . I t wa s necessar y t o understan d wha t wa s happening to technology and to productivity, which did not relate in a simple, straightfor ward wa y t o th e curren t leve l o f investment . A goo d dea l o f wor k o n technolog y an d productivity was done between 187 0 and 1939 , includin g the mobilization of more or less relevant statistica l data . Afte r som e reflection , I hav e decide d th e statistica l material s generated b y analyse s tha t embrace d technologica l chang e shoul d be treate d alon g wit h those analyses , t o whic h w e no w turn .

9 Investment an d Technology, Part Two : Growth Theor y

With certai n partia l exception s (e.g. , Coli n Clark , W . G . Hoffmann , Kuznets , an d Schumpeter), contribution s to growth analysis , lik e early nationa l income estimates , ar e by-products—sometimes unintende d by-products—o f interes t i n othe r problems . Wit h the diffusio n an d professionalizatio n o f economics , th e stag e get s progressivel y mor e crowded. Ther e is a danger o f losing the thread of analysi s in a catalog o f worthy names and crypti c references. Moreover , i n term s o f th e basi c growt h variables , a good man y contributions overlap . Kuznets' s Secular Movements an d Schumpeter's Business Cycles, for example , dea l with both technology in the process of growth and cyclical fluctuations in outpu t an d prices . Som e o f th e studie s o f th e transfe r proble m (e.g. , thos e o f Joh n Williams, Jaco b Viner , an d Alexande r Cairncross) involv e the dynamic s o f growt h i n both capital-exporting, advance d industria l countries and in capital-importing, developing countries. I have, therefore , mad e arbitrary decisions o n where to comment on particular economists. Fo r example , I shal l hav e somethin g t o sa y abou t studie s o f th e transfe r problem i n this section, bu t I have allocated Hoffmann' s Th e Growth of Industrial Economies and Colin Clark's Condition of Economic Progress to the section on the stages of and limits t o growth . Tha t sectio n als o contain s references t o the 1930 s literatur e o n secula r stagnation, eve n thoug h i t migh t wel l hav e bee n treate d alon g wit h othe r analyse s o f technology an d growth . Aside fro m thes e arbitrar y allocation s I hav e resolve d th e by-produc t proble m b y grouping the contributors to growth analysis of this period around certain major issues that did no t dominat e bu t significantl y affecte d th e focu s o f thei r work ; an d resolve d th e second problem—th e over-crowde d stage—b y concentratin g attentio n o n on e o r tw o major figure s an d makin g n o pretens e t o a ful l "revie w o f th e troops. " W e proceed , therefore, wit h si x subsection s an d thei r ke y figures , as follows: A. Defendin g the legitimac y of interest : Bohm-Bawerk . B. Th e interes t rate an d price trends : Fisher and Wicksell. C. Th e transfe r problem : William s and Cairncross. D. Technolog y an d growth : Kuznets and Schumpeter.

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E. Tw o unorthodo x views : Adams an d Veblen . F. Forma l growt h models : Bickerdik e an d Harrod.

Defending the Legitimacy of Interest: Bohm-Bawerk The Austria n School command s a respectable and substantial place in conventional histories o f economic doctrin e mainly but not exclusively a s one of the concurrently emergin g centers o f margina l analysis . Th e Schoo l embrace s no t onl y Wieser , Bohm-Bawerk , Mises, an d Haye k bu t leave s it s mar k i n Swede n vi a Wicksel l an d Cassel , Britai n vi a Wicksteed, Robbins , an d th e Londo n Schoo l o f Economics , an d acros s th e Atlanti c vi a Frank Taussi g an d Irvin g Fisher , whos e Theory o f Interest i s dedicate d t o Joh n Ra e (preceding, p . 104 ) a s wel l a s to Bohm-Bawerk . In hi s Capital an d Interest, Bohm-Bawer k reviewed exhaustivel y the debate s abou t interest tha t run fro m th e tim e o f Aristotl e through th e attac k o n usur y by th e medieval church t o th e controversie s o f th e lat e nineteent h century stirred u p b y Marx' s surplus value an d othe r socialis t assertion s tha t interes t wa s th e immora l produc t o f th e ra w exploitation o f labor. ' Hi s ow n theor y o f interes t is briefl y outline d in thi s volum e an d fully elaborated in his The Positive Theory of Capital. 2 I n the present perspective only one of hi s thre e famou s determinant s o f interes t i s relevant: hi s "thir d reason. " Like Marshall , Bohm-Bawer k focused sharpl y on th e question o f tim e as i t related t o the phenomeno n o f interest . I n Marshall , interes t was th e rewar d fo r waiting . In BohmBawerk ther e wer e three time-related factors: two stemmed fro m huma n psychology, on e was linke d t o productivity . Psychologically , huma n beings plac e a premium o n present over futur e good s because , i n Schumpeter' s ters e bu t authoritativ e paraphrase , "th e possession o f present goods permits provision both for alternative present as well as futur e wants."3 Wit h respec t t o productivity , interes t exist s i n Bohm-Bawerk' s formulatio n "because 'time-consuming ' roundabou t productio n i s mor e efficient , tha t is , a give n quantity o f origina l mean s o f productio n yield s a large r physica l product whe n applie d first t o the production of intermediate products (e.g., tools) an d then to the production of consumer's goods , tha n whe n the y ar e applie d entirel y t o th e direc t productio n o f con sumers' goods." 4 A s critic s wer e quic k t o note , thi s proved a somewhat unsatisfactory way to deal with the productivity of investment since, in fact, al l technical improvement s do no t requir e greate r roundaboutness . Moreover , lumpin g togethe r roundaboutnes s o f different degree s int o a n aggregat e averag e perio d o f production fo r al l forms o f invest ment explained littl e about what, i n fact, determine d th e productivity of investment. An d there wer e a goo d man y othe r objection s t o Bohm-Bawerk's "thir d reason." 5 In Irvin g Fisher's hands , however Bohm-Bawerk' s argumen t wa s powerfully an d ele gantly simplified . Hi s Theory o f Interest reduce d Bohm-Bawerk' s tw o psychologica l factors t o "incom e impatience " an d roundaboutnes s t o "opportunity " o r th e rat e o f return ove r cost. 6 Fishe r was thu s a kin d of paren t to Keynes' s margina l efficienc y of capital, a s Keynes acknowledged , jus t as Fisher acknowledge d hi s debt t o John Rae and Bohm-Bawerk. A s fo r the latter's "averag e period of production," i t emerges i n a more manageable for m i n moder n growt h models a s th e capital-outpu t ratio ; although the latter als o turn s ou t t o b e a blac k bo x tha t obscure s a s muc h a s i t illuminate s (following , p. 454) . Nevertheless, th e effor t t o clarif y th e somewha t untidy inheritanc e o f th e classic s o n

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interest and to meet th e socialist challenge led to clarification and some moderately usefu l tools o f bot h short - an d long-run analysi s of the investmen t process .

The Interest Rate and Price Trends: Fisher and Wicksell In Chapter 6 I noted that the secular price declin e i n the world economy fro m 187 3 to the mid-1890s an d it s upwar d tren d dow n t o 191 4 capture d th e attentio n o f a n impressiv e array of contemporary economists . Writing of the major analyses of the price decline fro m 1873 t o 1896 , I once divide d th e types o f theory applie d int o th e following categories: 7 1. Those tha t argue d directl y fro m gol d t o th e pric e level . 2. Those that took into account changes i n M'V, dealin g explicitl y with the monetary and bankin g system . 3. Thos e tha t looked explicitl y t o the interes t rat e a s the lever b y whic h price move ments wer e achieved . 4. Thos e tha t explaine d movement s in th e genera l pric e leve l i n term s o f a supply demand analysi s o f individua l prices . 5. Finally , ther e wer e thre e effort s t o combin e th e variou s strand s int o a consisten t general explanation : thos e o f Marshall , Wicksell , an d Keyne s i n th e Treatise. We hav e alread y considere d Marshall' s interestin g bu t indecisiv e grapplin g wit h this question (preceding , pp . 181-182) . Fo r ou r purposes here , Fisher' s versio n o f th e firs t and third categories an d Wicksell's somewha t more complex analysis of the third type will suggest ho w concer n wit h thi s proble m bor e o n (o r faile d t o bea r on ) th e analysi s o f growth. Keynes' s vie w in the Treatise on Money add s little to the arguments of Fisher an d Wicksell.8 A s a kin d o f cod a t o thi s section , I shall , however , repor t Keynes' s retro spective vie w o f th e price decline , i n the post-General Theory period . Fisher's general propositio n relatin g interest rates an d the price level i s summarized in his usua l clear manne r i n Th e Theory o f Interest. 9 We have found evidence genera l an d specific, from correlatin g P' [th e price level] wit h both bon d yield s an d short-term interes t rates , tha t pric e change s do, generally and perceptibly, affect the interest rat e in the direction indicated by a priori theor y [tha t is , the y mov e i n th e sam e direction] . Bu t sinc e forethought i s imperfect , th e effect s are smalle r tha n the theory requires an d lag behind price movements , in some periods , ver y greatly. When the effect s of pric e change s upo n interes t rate s ar e distributed ove r severa l years , w e have foun d remarkably hig h co-efficient s o f correlation , thu s indicating that interest rates follo w price changes closely i n degree, thoug h rather distantly in time. The fina l result , partl y du e t o foresigh t an d partly to th e lac k o f it, i s that price changes d o after severa l year s and with the intermediation of changes i n profits an d business activity affec t interest very profoundly . I n fact, while th e main objec t o f thi s book i s to sho w ho w th e rat e of interes t woul d behave i f the purchasin g power o f mone y wer e stable , there ha s neve r bee n an y long period o f tim e durin g whic h thi s conditio n ha s bee n eve n approximately fulfilled. Whe n it is not fulfilled , th e money rate of interest, and still more the real rate of interest, is more affected b y the instabilit y of money than by those

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more fundamenta l an d mor e norma l cause s connecte d wit h incom e impa tience, an d opportunity , t o whic h this book i s chiefl y devoted . As Fisher wa s aware, hi s conclusion that price changes affect interes t rates wit h a lag ran counter to the view of Wicksell and others tha t interest rates influenced price movements . But whe n Fishe r cam e t o dea l directl y wit h th e pric e declin e fro m 187 3 to 1896 , his argument was no t i n terms o f a lag of a falling rat e of interest behind a still more rapidly falling "natural " rat e bu t i n these rathe r conventiona l quantity theory terms. 10 Between 187 3 and 189 6 prices fell . Thi s fal l wa s presumabl y du e t o th e slackening in the production of gold ; to the adoptio n of the gol d standar d by nations previously on a silver basis, an d the consequent withdrawal of gold by these ne w user s fro m th e old, to th e arres t o f th e expansion o f silve r mone y consequent o n th e closur e o f th e mint s t o silver ; t o th e slackenin g i n th e growth of banking; and to the ever-present growt h of trade. .. . I t is not that the left-hand side of the equation did not increase , bu t that it did not increase so fast a s trade. .. . I t will be seen that the history of prices has in substance been th e history o f a race between th e increas e i n the medi a o f exchange ( M and M' ) an d th e increas e i n trad e (T) , whil e (w e assume ) th e velocitie s o f circulation wer e changin g i n a muc h less degree . In bot h th e Purchasing Power o f Money an d th e Theory o f Interest Fishe r explore d th e relation betwee n th e interes t rat e an d pric e movements ; yet , i n a so-calle d statistica l verification, h e find s a correlatio n betwee n gol d stock s an d price-leve l movement s a sufficient test. 11 Ther e i s no investigation of capital market conditions calculated to reveal whether, i n fact , th e mone y rate wa s laggin g behin d the "real " rat e o f interest . A s fo r production an d employment , Fisher , lik e monetarist s dow n t o an d includin g Milto n Friedman—and i n th e spiri t o f th e Ricardia n vice—make s a powerfu l an d somewha t evasive simplifying assumption:12 ' 'Knowing little of the variations in the development of trade, we may tentatively assume a steady growth, and pay chief attention to the variations of circulatin g media." Th e fac t i s that steady growt h rate s have not been a characteristi c of moder n economies ; an d t o assum e the y wer e yield s inaccurat e assessment s o f th e determinants o f pric e movements . But ther e i s a quite different—almost Schumpeterian—dimension to Fisher tha t flow s from hi s concept o f Opportunity. In his Theory o f Interest h e explores i n the spirit of John Rae th e relatio n betwee n interes t rate s an d discover y an d invention. 13 Hi s central argu ment is that the emergence o f a major innovation (in the broad Schumpeteria n sense ) ha s the initia l effec t o f raisin g th e rat e o f interest , bu t i n th e longe r run , as th e innovation matures, it s particular impac t on the rate of interest is to lower it. A n extended discussio n of th e growin g institutionalizatio n of th e invention-innovatio n process, focuse d o n th e United State s i n th e 1920s , follows . I n concludin g an d summarizin g his analysi s o f fluctuations o f Opportunit y (th e rate of return ove r cost ) Fishe r writes: 14 . . . [T]he invention of the automobile, an d the inventions and discoveries in electricit y and chemistry have succeeded th e railroads as a field fo r investment an d hav e require d new sacrifice s of immediat e income fo r th e sak e of future income . Thus, as fast a s the first effec t o f any one invention, tending to raise interest , wears of f an d i s succeede d b y it s secondary effect i n lowering

Investment and Technology: Part Two Til interest, thi s secondar y effec t i s likel y to b e offse t b y th e oncomin g o f ne w inventions. In hi s fir m gras p o n th e rea l force s a t wor k o n th e rat e o f interes t (an d o n th e capita l markets as a whole) Fisher stand s unique among those often classe d a s monetarists; but he never unite d hi s rea l an d monetary perspectives o n th e economy a s fully, say , as D. H . Robertson. Fishe r came closes t i n the 193 0 versio n of his analysis of the determinants of the interes t rate . Wicksell's argumen t i s interesting because he reverses th e quantity theor y explanation for pric e movements , attribute s the m to lag s between th e "natural " an d money rates of interest, and , somewhat like Malthus in his debate with Ricardo on the post-1815 declin e in British prices (preceding , pp . 60-61) , view s the supply of money primarily as reflecting price change s rathe r than causing them, without wholly ruling out a role fo r independent monetar y factors . Hi s key theoretica l passag e i s worth quotation: 15 . . . [T]h e explanatio n suggested b y the Quantity Theory—that risin g prices are due t o a n excess o f money, fallin g price s t o a scarcity—does no t accor d with actually observed movement s of the rate of interest. If it were correct, we should expec t tha t a t a tim e o f risin g price s ther e woul d b e a temporar y reduction i n th e rat e o f interest , a t a tim e o f fallin g prices a temporar y increase; and that when prices had become accommodated to the change in the stocks o f preciou s metal , th e rat e o f interes t woul d once agai n retur n to it s normal position. Observation teaches us , however, that when prices ar e rising there i s a continual rise i n rate s o f interest , an d tha t when prices ar e fallin g there i s a continua l fall i n rate s o f interest . All thes e difficultie s an d complication s a t onc e disappea r whe n i t i s changes, brough t abou t by independen t factors, in the natural rate of interest on capital tha t are regarded a s the essential cause of such movements . These changes can be regarded a s the cause, not only of the movement of prices, but indirectly of the analogous but somewhat later alteration, in the money rate of interest. Abundanc e or scarcit y o f money , an d i n particula r the quantit y of cash held by th e banks, i s now imbued with a merely secondar y importance . Such factors ar e to be regarded a s consequences o f changes i n the demand fo r instruments o f exchang e brough t abou t by change s i n th e leve l o f prices . I t still remain s true , however , tha t the y ma y tak e thei r origi n i n independent causes (the production of precious metals, issue of paper money, development of th e credi t system , etc.) , an d tha t the y the n hav e a n independen t signifi cance i n regard to movements of prices, i n so far a s they accelerate or retard the movement o f the mone y rate of interest to the new position of the natural rate (they may even cause the money rate to move in the opposite directio n t o the natura l rate) . Wicksell applies thi s theory to the movement o f British prices ove r the century starting in th e 1790 s i n a chapte r entitle d "Actua l Pric e Movement s i n th e Ligh t o f Precedin g Theory."16 Hi s conclusio n o n th e pric e declin e fro m th e earl y 1870 s t o the mid-1890 s centered o n a fall i n the natural rate of interest, as the railway age waned, real wages rose, and a surge in savings confronted " a considerabl e lack of really profitable openings " fo r investment. 17 H e then argues that, although the interes t rate fell , i t didn't fall fa r enough

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due t o increase d monetar y deman d fo r gol d an d a decelerating supply . A t thi s point , h e brings himsel f u p shor t b y notin g tha t the gol d shortag e coul d no t hav e bee n importan t because th e bank s ha d larg e idl e reserves . Thi s statemen t doe s cente r attentio n o n th e changed directio n o f investment. I t is developed, moreover , i n a set of unified terms , bu t fails t o indicate tha t the typ e o f investment "increasin g rea l capital , servin g t o raise rea l wages," would , i n itself, lowe r prices whethe r a lag in the money rat e o f interes t behin d the real rat e cause d a chronic deflatio n of deman d o r not. Unles s Wicksell contemplate d two separat e pressure s downwar d o n prices—on e fro m th e sid e o f suppl y ("increasin g real capital , lowerin g cost s an d prices , raisin g rea l wages") , th e othe r fro m th e sid e o f demand (" a laggin g mone y rat e o f interest")—ther e i s a real conflic t here. It shoul d b e underline d tha t Wicksell' s central concer n wa s no t growt h bu t a n alter native t o th e Quantit y Theory o f Money . H e sympathize d wit h Tooke's criticis m o f th e monetarists bu t fel t tha t Took e had no t supplie d a full y unifie d an d coheren t theoretica l alternative.18 Wicksell' s alternativ e coming to rest on the relation between the natural and money rate s o f interes t wa s used b y hi m to sugges t policie s t o achiev e th e objectiv e tha t then concerne d him : a stabl e pric e level. 19 Wicksell presented his theory as a tentative and somewhat uncertai n hypothesis . It soon became the object o f acute criticism an d modification including (or especially) criticism s by hi s respecte d friend , Davi d Davidson , an d hi s mos t devote d disciples : Eri c Lindahl , Gunnar Myrdal, an d Bertil Ohlin . But there has rarely been a more fruitfu l formulation . It led on directly to the anticipation i n Sweden o f much of Keynes's analysi s in The General Theory; an d Wicksell's concep t o f the progressive, cumulativ e processes set in motion b y natural interes t rate s abov e an d belo w th e mone y rat e wer e brough t t o bea r i n Myrdal' s Monetary Equilibrium not on th e objectiv e of a stable price leve l bu t "th e mitigatio n of business fluctuations " whic h Myrda l regarde d a s "th e mai n objective." 20 Eve n mor e remarkable, a direct lin e can be traced fro m Wicksell' s cumulativ e processes to one of the major tool s o f analysi s i n Myrdal' s stud y o f th e rac e proble m i n th e Unite d States , A n American Dilemma. 21 In th e presen t perspectiv e i t wa s Wicksell' s awarenes s o f th e technologica l an d othe r forces determinin g th e productivit y o f investmen t an d th e deman d fo r capita l i n th e century h e analyze d tha t mad e hi m a contributor to growth analysi s whe n h e was mainly focused on the problem of the determinants of price trends. But his basic insight—that the source o f pric e an d monetar y movement s wa s t o b e sough t o n th e righ t han d (output ) rather tha n th e lef t han d (mone y supply ) side o f the Quantit y Equation—rendere d hi m a growth analys t despit e himself . Now a brief not e on Keynes's vie w of this problem afte r h e abandoned Th e Treatise o n Money an d had written The General Theory, fo r it relates a bit to Wicksell's natura l rate of interest, Fisher' s rate of return over cost , a s well as to the concept o f secular stagnation t o which w e shal l retur n (following , pp . 321-325) . Thi s i s what Keynes wrot e i n 1940. 22 Reading abou t my own opinions as set forth i n the Treatise does indee d fee l like an historical exercise ! On e of the many elements which I entirely omitted then an d certainly shoul d stress now is the greatly increased volum e of investment require d t o produc e ful l employment , a s the year s wen t by afte r 1870 , owing t o th e grea t growt h in wealth . Th e opportunitie s fo r profitabl e investment hav e no t merely t o kee p pace wit h wha t the y ha d been formerly , but to increase fa r beyon d that , i f the y ar e t o matc h a greatl y increase d volum e of savings, correspondin g t o ful l employmen t i n a muc h riche r community .

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9

In my view, Keynes stil l had it wrong. He persisted, a s in the Treatise, i n looking for an explanation o f the tren d declin e i n prices afte r 187 3 primaril y to the deman d rather tha n the suppl y side— a mistak e Marshal l did no t make .

The Transfer Problem: Williams and Cairncross The manne r i n whic h wor k o n a quit e differen t proble m generate d insight s fo r growt h analysis i s rathe r vividl y illustrate d b y historica l studie s o f capita l export s conducte d during th e interwa r years. Th e issu e arose , i n fact , befor e th e Firs t Worl d Wa r i n th e context of the unfavorable trend movement in the British terms of trade. W e shall consider analyses of such trend movements i n Chapter 1 3 (Relative Prices). Her e we are concerne d with a related bu t distinct problem: ho w it came about that analyses of the capital transfe r problem becam e par t o f th e literatur e of economi c growth . The convergenc e o f tw o distinc t experience s accoun t fo r th e surg e o f interes t i n th e transfer proble m afte r th e First World War. First, was the intense debate ove r the Germa n capacity t o pay reparation s heightene d by the publication of Keynes's Economic Consequences o f th e Peace i n 1919 . Centra l t o his argumen t wa s a proposition, derive d fro m classical foreig n trad e theory ; i.e. , tha t th e effor t t o pa y reparations—i n effec t larg e capital exports—woul d tur n th e term s o f trad e agains t German y an d stil l furthe r im poverish th e country. Keynes' s anxiet y was reinforced by his concern wit h a long perio d factor roote d i n th e classica l theor y o f productio n bu t no t embrace d i n conventiona l foreign trad e theory; namely , that diminishing returns had been operatin g o n the relativ e prices o f th e foo d an d ra w material s industria l Europ e importe d i n th e perio d fro m the mid-1890 s t o 1914. 23 Keyne s assume d tha t thi s tren d woul d continu e t o operat e on th e Europea n term s o f trad e afte r th e war , an d tha t th e transfe r proble m involve d i n the paymen t o f wa r debt s t o th e Unite d State s woul d put a dangerou s strai n o n al l o f western Europe , no t merely Germany . Second , som e analyst s of the reparations transfe r problem wer e consciou s tha t th e extraordinar y pre-191 4 flow s o f capita l t o Argentina , Canada, an d Australia, as well as the experience o f French reparation s payment s after th e Franco-Prussian wa r provide d a n opportunit y to establis h th e relevanc e o f th e classica l analysis o f th e transfe r problem . It is , indeed , somethin g o f a parado x tha t th e testin g o f tha t analysi s shoul d hav e contributed t o growt h analysis ; fo r a s John H . William s once vividl y pointe d out , trad e theory wa s formulate d unde r assumption s tha t quit e literally , exclude d th e proces s o f growth.24 . . . [T]he English classical theory of international trade. . . has always rested mainly upo n th e distinctio n mad e b y Ricard o betwee n externa l an d interna l mobility of economic factors. It abstracts too , fo r simplicity's sake, fro m cost of transport . Les s obviously , perhaps , i t assume s fo r eac h tradin g countr y fixed quanturn s of productiv e factors , alread y existen t an d employed , an d asks how , subjec t to the assumptions , these ma y be mos t effectivel y applied under condition s o f internationa l trade. . . . The classica l theor y assume s as fixed, for purposes o f reasoning, th e very things which, in my view, should be the chief objects of study if what we wish t o kno w i s th e effect s an d cause s o f internationa l trade, s o broadl y regarded tha t nothing of importanc e in th e fact s shal l fail t o fin d it s plac e in the analysis.

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It i s th e writer' s [Williams ] view : 1. tha t th e premise s ar e inaccurat e i n sufficien t degre e t o rais e seriou s question o f th e soundnes s o f th e theory , o r a t leas t o f th e rang e o f it s useful applicatio n t o th e trad e o f th e world ; 2. tha t th e relatio n o f internationa l trade t o th e developmen t o f ne w re sources an d productive forces i s a more significan t part of the explana tion of the present statu s of nations, of incomes, prices, well-being , than is th e cross-sectio n valu e analysi s of th e classica l economists , wit h its assumption o f give n quantum s o f productiv e factors , alread y existen t and employed ; 3. tha t th e internationa l movemen t o f productiv e factor s ha s significanc e relative t o comparativ e prices , incomes , position s o f nations , a t leas t equal t o that of the trade i n goods . . . . 4. tha t internationa l trad e i n goods , cos t o f transport , an d mobilit y o f economic factors—externall y an d internally—continuall y reac t upo n each other ; an d b y investigatin g thes e interactions—i n thi s actual , growing, changing world—we may hope to throw light upon the causes and effects o f international economic contacts, upo n market and productive organisation , upo n price s an d pric e processes , upo n income s an d general well-being, an d finall y upo n th e wisdom or unwisdom of international commercial , financia l and labou r policies . In short, William s came to believe the transfer problem shoul d be studied in the context of economic growth , wit h all the Marshallia n long period factor s i n play. H e earne d hi s right to this judgment the hard way. His was one of the historical studies , mainly fostered by Fran k Taussig , i n a n admirabl e effor t t o subjec t th e classica l theor y o f th e transfe r process t o empirica l test . Not e 2 5 list s th e majo r suc h studie s publishe d befor e 1939. 25 Under Taussig' s inspiration , Williams undertook t o test the doctrine of classic interna tional trad e theor y unde r a depreciate d pape r mone y standard ; tha t is , wit h gol d aban doned an d drive n fro m circulation . William s pose d hi s proble m lucidl y i n terms Davi d Hume, i n effect, pioneere d (preceding , p . 30): 26 Summed u p baldly , th e base s o f th e usua l statemen t o f th e theor y o f international trad e an d foreig n exchang e ar e a s follows: 1. Th e tradin g countrie s ar e o n a gold basis . 2. Throug h th e mechanism of the specie points , gol d flows freely betwee n the tradin g countries . 3. Whe n gol d flow s out of a country the level of prices withi n that country falls, an d i n consequenc e export s increas e an d import s diminish : an d conversely, whe n gold flows in, the price level rises, s o that imports are encouraged, an d export s discouraged . Given thi s mechanism , a comparativel y sligh t disturbanc e o f th e balanc e o f international payments, as for example an increase in borrowings, will se t the machinery i n motio n an d effec t a chang e i n th e merchandis e import s an d exports. A disturbanc e sufficiently marke d would result in an overturn of th e trade balance . But ho w explai n suc h a n overtur n without th e mechanism?

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1

Argentina fro m 188 0 t o 190 0 wa s a n admirable laboratory in which to see k a n answer because i t wa s o n a depreciated pape r standar d fo r mos t o f th e period ; an d i t suffere d a dramatic "overtur n o f th e trad e balance " i n th e wak e o f th e Barin g crisis o f 1890 . The resul t o f Williams's enquir y was a sophisticated analysi s of Argentin a during the first o f th e tw o grea t turnin g points i n it s economi c history—th e secon d bein g it s surg e into the firs t phas e o f serious industrializatio n in the form of its import substitution drive of the 1930s . As Williams says, a s of 1930: 27 "Th e decad e fro m 188 0 to 189 0 is the great 'boom' perio d o f Argentine economi c history . I t is not too much to sa y that in those te n years Argentin a underwen t a greate r economi c developmen t tha n i n al l th e precedin g decades o f the century." The boom was based on capital imports on a scale relative to the size of the importin g countr y rarely see n in economic history , permittin g risin g import s despite rising interes t payments . The n comes th e great Barin g crisis of 1890-189 1 and a period o f painfu l readjustmen t dow n t o th e mid-1890 s a s capita l import s cease , good s imports collapse , export s hol d u p but i n an environment of falling worl d prices. Finally , there is , fro m 1894 , a surge of production and the volume of exports, soo n reinforce d b y rising worl d price s fo r Argentin e exports ; th e trad e surplu s permits import s t o expan d despite interest payments tha t excee d foreig n borrowings ; a conversion law is passed in 1899 endin g th e gol d premium ; capita l import s revive ; an d Argentina is launched on it s great pre-191 4 boom . All thi s i s quit e clea r i n Williams' s account , althoug h th e distortio n impose d b y hi s narrowly defined tas k force s hi m to put one of his most important pieces of analysis i n an extended footnote. 28 William s put the conclusions of this thesis in narrow unrevolutionary terms althoug h th e base s fo r hi s late r apostas y ar e clear. 29 Since the exports ar e of an agricultural character, the y are subject, as we have seen, t o th e uncontrollabl e vagarie s o f nature . Natura l irregularitie s occu r which are in no wise connected wit h domestic monetary and price conditions , but which interfere profoundly wit h any set of forces which are dependent o n conditions o f money an d prices. O n the other hand , the imports , being man ufactured good s an d draw n fro m a variet y of foreig n sources , ar e relativel y unaffected b y fluctuatin g natura l conditions . Again , sinc e th e export s for m only a minor part of the world's supply . . . fluctuations in the world price. . . affect the tota l valu e of export s far mor e deepl y tha n doe s the effec t of a fluctuating gol d premiu m upo n domesti c pape r prices . . . . In othe r words , i t woul d seem probabl e tha t a s regards agricultura l countries "othe r things" ar e mor e ap t to remain "equal " i n the case o f import s than i n th e cas e o f exports . One can not easily deduce th e strong genera l attac k on classical foreign trade theory in Williams's 192 9 articl e cite d i n note 2 4 fro m th e conclusion s of hi s stud y of Argentina , except fo r hi s arrayin g o f multipl e force s tha t ac t o n th e expor t price s o f agricultura l countries an d the unlikelihood that "othe r things" wil l remai n "equal. " What struc k William s a s he looked bac k a t his study—an d what led, on e suspects, t o his 192 9 broadside—i s wha t also strike s th e modern reader ; tha t is , th e most interestin g passages i n the boo k hav e nothing directly to do wit h foreig n trad e theory. They explain why th e boo m o f th e 1880 s happened ; wh y force s i n Londo n a s wel l a s Argentin a generated th e extraordinar y flow o f capital ; why th e flo w coul d not be sustained , Baring collapsed an d had t o be rescued b y a consortium organized by the Ban k o f England; how the investments of the 1880s—i n larg e part railways—plus a massive flow o f immigrants

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generated, wit h a painful tim e lag, th e output and exports that carried Argentina forward triumphantly fro m th e mid-1890 s t o 1914 . William s remains loya l to th e outlin e he se t himself i n conductin g a laborator y tes t o f th e theor y o f internationa l trade ; i.e. , th e interrelations o f depreciate d pape r money , foreign borrowings , an d foreig n trade. Bu t in accounting fo r the dynamics of these three variable s and how they interacted, h e wrote a still-relevant trac t o n a fast-movin g passag e i n a nation' s developmen t an d th e rol e o f capital import s i n tha t development. I n th e en d i t i s no t difficul t t o understan d his late r conclusion (preceding , p . 229): 30 "Th e classica l theor y assumes as fixed, fo r purposes of reasoning th e very things which, in my view, shoul d be the chief object s o f study. . . . " Across th e Atlantic , i n th e othe r Cambridge , muc h th e sam e impulse s w e hav e just examined appea r t o have led Alexander Cairncross to address himself i n the 1930 s to his studies i n capital accumulation , later published as Home an d Foreign Investment, 1870— 1913:31

. . . [T]he origin was an undergraduate thesis on "Capital Transfer and the Terms o f Trade." Reare d o n Keyne s an d Taussig , I though t tha t I detecte d both o f th e master s i n confusio n i n thei r treatmen t o f reparation s an d it s consequences an d was move d b y so unaccustomed a spectacle t o develop my own idea s o n the subject. My interes t in foreign investment and the dynamics of internationa l trade gradually widened and eventually focused on two relationships: between foreign investmen t and home investment on the one hand, and betwee n th e migratio n o f capita l and o f labou r on th e other . In a sense Cairncross wa s mor e fortunat e than Taussig's pupil s a t Harvard. Th e latte r were led to begin their research by testing the classical theor y of the transfer problem. An d that i s wher e Cairncros s als o bega n i n hi s undergraduat e thesis ; notably , becaus e h e developed th e tentative judgment that capital movements responde d t o shift s i n the terms of trade rather than causing them. But it is clear he felt himself to be on looser rein; and as his Prefac e indicate s h e had th e benefi t and advice o f scholar s wit h interest s that range d far beyon d th e classica l theor y o f internationa l trade ; fo r example , Keyne s an d D . H . Robertson. The upsho t wa s tha t Cairncross di d no t fee l constrained t o spen d his time an d energ y establishing precisely th e extent to whic h classical trad e theory wa s helpful , misleading , or wrong. He proceeded directl y to a series of pioneering studies—whic h he regarded a s a prolegomenon t o late r research—o f th e scale , character , an d fluctuation s of Britis h investment in the period 1870-1914 . Cairncros s does touc h on the behavior of the terms of trade durin g th e capita l transfe r process; an d h e foun d th e sam e lac k o f consistenc y a s Taussig's pupils. 32 Whil e hi s interes t wa s not , initially , growth itself , hi s head-o n ap proach t o capita l accumulation , nevertheless , le d hi m t o touc h o n man y aspects o f th e process o f growt h i n bot h advance d industria l and developin g countries ; fo r example : • Investmen t an d migration. 33 • Th e institutiona l structure of th e pre-1914 capita l market, 34 an d the changin g sec toral compositio n o f investment. 35 • Cyclica l fluctuation s in British domestic an d foreign investment. 36 • Relativ e prices an d the terms of trade from th e perspective of capital exporter37 an d capital importer. 38 • Th e dynamic s of th e Canadian takeoff.39

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Evidently, w e have here anothe r exampl e of a substantial oblique contribution to growth analysis. In addition, Cairncros s i n a thoughtful penultimat e chapter reflects on the question: Did foreign investmen t pay?40 Like Hobson , Cairncros s concludes , o n balance, tha t it did up to 1914 : by stimulatin g the expor t industries ; generatin g and spreadin g informatio n on profitable outlet s fo r furthe r Britis h investment ; cheapenin g foo d import s an d thereb y raising rea l wages . Cairncross' s cost-benefi t assessmen t o f capita l export s afte r Worl d War I was distinctl y les s sanguine. It shoul d b e recalle d tha t thes e essay s wer e a preliminar y exploratio n b y a youn g scholar o f groun d h e migh t late r cultivat e systematically . Cairncros s di d no t attemp t t o integrate hi s finding s int o a genera l theor y o f investmen t and growt h i n a n internationa l economy subjec t t o cyclica l fluctuations . Bu t hi s willingnes s t o questio n Taussi g an d Keynes o n th e transfe r problem yielde d a quite ric h hau l in terms o f growt h analysis .

Technology and Growth: J. A. Schumpeter and the Early Simon Kuznets Loring Alle n close s hi s excellen t biograph y o f Josep h Schumpete r wit h th e followin g summation:41 He wor e man y garments i n the course o f his life , an d a s disparate a s they were, al l seemed someho w tailor-made . Hi s 67 years sa w him play countless, yet natural , roles—thos e o f inspire d student , enfan t terrible , governmen t minister, bank president an d businessman, and above all, professor; pretende r to aristocracy, true elitist, an d gentleman o f manners; public speaker, scholar , writer, an d counsellor ; ar t historian , horseman , an d traveller ; complainer , critic, an d ebullient entertainer; historian, theoretician, an d secret worshippe r to a private God . Al l these roles intertwine d to mak e a multi-faceted man of paradox. Hi s life raises questions a s to how a man can persevere i n the face of repeated traged y an d disappointment ; ho w a grea t romanticis m ca n coexis t with a deep commitmen t t o science; how a man eaten up with grief, guilt, and inner tormen t ca n produc e a life' s wor k tha t overwhelm s i n shee r volume , erudition, an d spa n o f knowledge ; an d ho w a man wh o viewe d himself a s a failure coul d reac h th e pinnacl e of hi s professio n an d stil l be haunte d by th e belief tha t it wasn't enough . A deep melanchol y pervade d Schumpeter' s lif e and character, self-doub t dogge d hi s every turn , and his quest for knowledg e left hi m frustrate d an d despairing . Yet he suffere d silentl y s o that he could d o what he did best: teach . Com mitted t o openin g doors , h e devoted himsel f t o unlocking that "sacre d dec ade" withi n others, alway s convinced tha t answer s t o th e mysterie s o f how and wh y th e worl d work s a s i t does coul d b e found , understood , an d acte d upon. Schumpeter' s work is there fo r anyone to study, confirming his reputation a s on e o f thi s century' s grea t economist s an d socia l scientists . An d hi s public lif e stand s a s an open testament to the rewards of seemingly boundless energy an d deep conviction . His interior life, however , must remain in shadows, illuminate d her e an d there , bu t ultimatel y s o paradoxica l tha t i t con -

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founds an d confuses . Thi s is , perhaps , th e wa y Schumpete r woul d hav e wanted it . This boo k deals only wit h the various dimension s o f Schumpeter's work on economic growth. Bu t even ther e on e can not wholly escape th e persistently paradoxical strand s in his characte r an d performance . Lik e al l of us , bu t perhaps a little mor e so , Schumpete r confirmed Hume' s dictum : " . . . [Wjha t is man except a heap of contradictions". From th e perspective of growth analysis it is clear that one of the few major theoretica l works publishe d betwee n 187 0 an d 193 9 i s th e youthfu l Schumpeter' s Th e Theory o f Economic Development (1911) . H e report s tha t "som e o f th e idea s submitte d .. . g o back a s far as 1907 ; al l of them had been worke d out by 1909 . . . ." 42 I n the latter yea r Schumpeter becam e 26 . Onc e agai n w e ar e dealin g wit h a classi c cas e o f a "vision " articulated i n the "sacre d decade"; 43 for his subsequen t work , exceptin g the History o f Economic Analysis, i s a n elaboratio n o f proposition s roote d i n Th e Theory o f Economic Development. As for originality, no addition to knowledge is wholly without antecedents. Indeed , i n a rough paralle l t o Myrdal' s late r expositio n o f Monetary Equilibrium embedde d withi n a Wicksellian framework , Schumpete r begin s explicitly with Walras an d Menger , Wiese r and Bohm-Bawerk, notably the latter.44 But these acknowledgments are somewhat illusory. I n fact, he seized a nettle none of his predecessors an d virtually none of his successors in mainstrea m economic s wa s willin g t o grasp ; namely , tha t th e processe s o f inventio n and innovation were not always exogenous no r incremental; although clear that all innovations were undertake n because of their believed profitability , he was of two minds on the extent to whic h they were, strictl y speaking, a n endogenous respons e t o "necessity." 45 In hi s ow n words , h e asserte d innovatio n was "spontaneou s an d discontinuous. " Schumpeter doe s no t tel l u s wha t le d hi m t o mak e majo r discontinuou s innovations generated b y economi c incentive s the cente r o f hi s system. 46 Perhap s h e didn' t know . But, objectively , w e ca n identif y thre e suggestiv e antecedents : • Ada m Smith' s distinctio n betwee n incrementa l inventions contrived b y those who actually operated the machines and those create d b y "philosophers " that involved "new power s no t formerly applied " (preceding , p . 41) . • Kar l Marx's expositio n o f a circular flow and , then, a dynamic economic mode l a t the openin g o f Volum e II of Capital (preceding , p . 138) . « Alfre d Marshall' s explici t recognition—eve n dramatization—o f th e cas e o f in creasing returns , th e sever e theoretica l problem s i t posed, an d his effort to resolve them, a recognitio n Schumpete r respecte d whil e regarding Marshall' s solutio n as unsatisfactory. As a n economist , Schumpeter' s forma l commitment and highes t praise wen t to Leo n Walras, mathematica l exposito r o f static general equilibriu m who separated hi s reformis t zeal from hi s scientific effort. But , taking Schumpeter's work as a whole, I am inclined to feel, withou t fir m evidence , tha t i t wa s th e challeng e pose d b y Kar l Marx' s historical , theoretical, an d polemica l analysi s o f th e dynamic s of capitalis m that mos t profoundly influenced Schumpeter. 47 Schumpeter begins his expositio n in Economic Development wit h a particular version of a stati c equilibrium Walrasian (or Marxian ) syste m i n a stat e o f circula r flow . H e introduces (or accepts from Walras ) a powerful simplifyin g assumption ; namely, that "w e shall primaril y thin k o f a commerciall y organize d state, on e i n whic h private property,

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division o f labor , an d fre e competitio n prevail." 48 Th e acceptanc e o f thi s assumptio n blocked of f Schumpete r throughou t his career from the analysi s of the process o f growth from underdevelope d beginnings , an d thereb y limite d hi s rang e a s a growth economist . Put another way , Schumpeter wa s a rather parochia l economist o f the advanced industria l world, abov e all , o f post-takeoff Germany , Britain , and the United States. I t was logica l that hi s initia l insigh t shoul d lea d him , i n th e end , t o speculat e o n th e probabl e fat e o f capitalism rathe r tha n o n th e emergin g problem s o f growt h an d modernizatio n i n th e developing worl d or , i n the Hume-Smith tradition, on the relation between th e more and less develope d nations . Schumpeter's circula r flow syste m is , however , no t quit e a s stati c a s i t migh t a t firs t appear. It does no t imply that "yea r after year 'th e sam e things' happen." 49 It allows for incremental change s i n technolog y tha t displac e th e equilibriu m point o f th e syste m s o marginally a s t o permi t ne w equilibriu m position s t o b e reache d fro m th e ol d "b y infinitesimal steps" with which unimaginative managers (as opposed to heroic innovating entrepreneurs) ca n deal. 50 It als o allow s fo r changes i n response t o powerful exogenous events wit h economi c implications ; e.g. , ba d harvests, wars , revolutions . Chapter II ("The Fundamenta l Phenomeno n of Economic Development") focuses wit h great clarity—an d a foreshadowin g o f chao s theory—o n th e on e concep t tha t dis tinguishes developmen t fro m circula r flow—th e concep t tha t remaine d th e cor e o f Schumpeter's subsequen t work: 51 Development i n ou r sens e i s a distinc t phenomenon , entirel y foreig n t o what ma y b e observe d i n th e circula r flo w o r i n th e tendenc y towar d equi librium. I t i s spontaneou s an d discontinuou s chang e i n th e channel s o f th e flow, disturbanc e of equilibrium, whic h forever alters and displaces th e equilibrium stat e previousl y existing . . . . This concep t cover s the followin g five cases : (1) the introductio n of a new good—that i s on e wit h which consumers ar e no t ye t familiar—o r o f a new quality of a good. (2 ) The introductio n of a new method of production, tha t is one no t ye t teste d b y experienc e i n th e branc h of manufactur e concerned , which need b y no means be founded upon a discovery scientificall y new, and can als o exis t in a new wa y of handling a commodity commercially . (3 ) Th e opening o f a new market , tha t is a market int o which the particular branch of manufacture o f the country in question has not previously entered, whethe r or not this market has existed before . (4 ) The conquest of a new source of supply of ra w material s o r half-manufacture d goods, agai n irrespectiv e o f whethe r this source already exist s or whether it has first to be created. (5) The carrying out o f th e ne w organisatio n o f an y industry , like th e creatio n o f a monopol y position (fo r example throug h trustification) or the breaking up of a monopoly position. Schumpeter wa s quite conscious tha t his assumptio n that the majo r economi c change s of the capitalist epoch occurre d i n an irreversible revolutionary way rather than by contin uous adaptatio n wa s theoreticall y explosive . H e referred , fo r example , t o Marshall' s failure t o overcome "th e difficultie s whic h surround the problem of increasing return."52 But he proceeded forwar d courageously to explore the implications of his proposition that "spontaneous an d discontinuou s changes i n the channe l of th e circula r flow" wer e th e heart o f capitalis t development.

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The tw o broa d implication s Schumpeter derived fro m thi s exploration in his Theory o f Development wer e these : • Particularl y creativ e individuals—entrepreneur s a s oppose d t o managers—wer e required t o respond effectivel y t o the potentialities fo r profitable innovation generated withi n th e system . I n a remarkabl y sensitiv e huma n passag e Schumpete r evokes the lonely creativity involved when an innovating entrepreneur, wit h imperfect information , steps off uncertainly into the dark to do something new:53 "Carry ing out a new plan and acting according to a customary one are things as different a s making a road an d walking along it. " • T o finance the early stage of their creative endeavors, the entrepreneurs require that capitalists gran t the m credit . Sinc e Schumpete r assume s ful l employmen t i n hi s circular flow model , th e granting of credit fro m capitalis t to entrepreneurs i s inherently inflationary , because innovatio n takes time . Although Schumpeter' s brea k awa y fro m hi s contemporarie s i n Vienna , Lausanne , Sweden, Britain , an d the Unite d States was seriou s and dramatic, h e wa s still , i n part of his being , a loya l produc t o f th e Austria n School. Thi s fac t i s reflecte d no t onl y i n hi s respectful obeisanc e t o Wieser, Menger , an d Bohm-Bawerk but, more important , i n th e fact tha t h e elaborate d hi s breakthroug h aroun d thre e o f th e issue s tha t obsesse d tha t school, i.e. , th e natur e o f capital , profit , and interes t on capital . Onl y a fe w o f Schum peter's majo r point s i n thi s portio n o f hi s expositio n (Chapter s III , IV , an d V ) nee d concern u s here : • Profi t (as opposed to "Wages of Management" in the static circular flow system) is the exces s o f tota l receipt s ove r tota l cost s induce d b y innovatio n an d it s conse quences fo r developmen t throughou t the system. 54 • Th e consequences includ e a "clustering " of entrepreneurship around the new innovation onc e trul y pioneering entrepreneur s demonstrat e profi t possibilities, a s well as "creativ e destruction" o f activities superseded an d rendered unprofitabl e by the diffusing innovation. 55 • Capita l investmen t and the expansion of wealth derive mainly from th e plowback of profits associate d wit h innovation. 56 • Schumpeter' s theor y o f interest , whic h le d t o considerabl e controversy , i s fairl y complex i n it s ful l exposition , but essentially , lik e th e res t o f hi s argument , quit e simple. I t can be reduced t o three propositions . First: 57 "Interes t is a premium on present ove r futur e purchasin g power." Second , certai n form s of interest paymen t are unrelated t o development and could exist "i n th e circular flow";58 e.g., interes t on consumptiv e loans , o n distres s loans , an d loan s t o governments . Third , other wise interest woul d not exist in the circular flow economy ; but it exists throughout a dynamic, innovationa l econom y becaus e productiv e loan s ar e "a n offshoot " o f profits o n innovationa l ventures tha t hav e a n impac t "ove r th e whol e economi c system."59 After a lon g an d rathe r laboriou s elaboratio n o f th e thir d proposition , Schumpete r emerges wit h a demand-supply formulatio n tha t bears a famil y relatio n to both Fisher' s intersection of a "rat e of return over cost" demand curve and a savings supply curve and to Keynes's intersectio n of a liquidity preference demand curve and the supply of money decreed b y the monetary authorities generating a rate of interest that confronts the margin-

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al efficiency of capital deman d curv e to determine the leve l of investment, 60 The critica l players in Schumpeter's capita l market are the demanding entrepreneurs and the supplying capitalists.61 Schumpeter finall y puts his syste m to work on the business cycle wit h a dictum that I regard a s the most important proposition t o be asserted in this field:62 cycles are viewed as "the for m economic developmen t take s i n the er a of capitalism. " Schumpete r does no t claim originality for this proposition. Indeed , h e introduces it by indicating he shares thi s perspective wit h Spiethoff.63 Bu t no one asserted it more lucidly or built his analysis more systematically aroun d it . This qualit y i s heightene d i n Th e Theory o f Economic Development becaus e Schum peter doe s no t attemp t ther e a ful l analysi s of the busines s cycl e bu t rather present s " a torso" tha t link s his vie w of the busines s cycl e to his theor y of development . The sequence o f hi s argumen t can b e paraphrase d i n the followin g propositions . 1. Th e question to be answered is: Why does economic development proceed not in " a smooth line " bu t i n cycles ? 2. Th e fundamenta l answe r i s tha t innovations—"ne w combinations"—ar e no t "evenly distributed through time . . . but appear . . . discontinuously in groups or swarms." 3. Swarmin g occurs because th e appearance of a few entrepreneurs who meet succes s induces a progressively widene d circle o f entrepreneurs, of progressively diminishing creativ e talen t an d spirit , t o tr y t o exploi t th e newl y revealed possibilitie s fo r profit. 4. Th e concentratio n o f entrepreneuria l talen t i s heightene d becaus e "ever y norma l boom start s i n on e o r a few branche s o f industr y (railwa y building, electrical an d chemical industries , and so forth), an d that it derives its character fro m th e innova tions i n th e industr y where i t begins." Thus , i n Schumpete r th e business cycl e is basically a sectora l phenomeno n wit h macroeconomic manifestations . Schumpeter concludes: 64 . . . [T]h e swarm-lik e appearanc e o f ne w combination s easil y an d neces sarily explain s the fundamenta l features of periods o f boom. I t explains wh y increasing capita l investmen t i s the very firs t sympto m of the coming boom , why industrie s producin g means of production are the first to show supernor mal stimulation, above all why the consumption of iron increases. I t explains the appearanc e o f ne w purchasin g powe r i n bulk , thereb y th e characteristi c rise in prices during booms, whic h obviously no reference t o increased nee d or increased cost s alon e ca n explain. Further , it explains the decline of unemployment an d th e ris e o f wages , th e ris e i n the interes t rate, th e increas e i n freight, th e increasin g strai n o n ban k balance s an d ban k reserves , an d s o forth, and , a s w e hav e said , th e releas e o f secondar y waves—th e sprea d o f prosperity ove r th e whol e economi c system . But, Schumpete r goe s o n t o argue , th e swarmin g entrepreneur s i n th e innovationa l sectors als o produce, via three routes, the crisis and the slump: by expanding the demand for means of production, using credits, and thus raising costs and imposing losses on firm s "which belong to the circular flow" ;65 by expanding supply, when the period of gestation is complete ("afte r a few years or sooner") and thereby inducing a tendency for prices to

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decline;66 an d b y inducin g " a credi t deflation , becaus e entrepreneur s ar e no w i n a position—and hav e ever y incentive—t o pay off their debts; an d .. . n o other borrower s step int o thei r place . " 67 In m y vocabulary , Schumpete r i s assertin g that, out of it s lagged dynamics , th e boo m brings dow n th e expecte d rat e of return over cost s i n the leadin g sector s by raisin g costs and lowering the expected rat e of return and, thereby , induces a tendency for prices t o fall both fro m th e sid e o f suppl y an d demand . In his growth-oriente d theor y o f the business cycle Schumpete r takes, o n the whole , a benign view of the depression. I t is "normally" a time of "resorptio n and liquidation."68 This proces s i s require d becaus e th e boom , le d b y on e o r a fe w innovationa l sectors , inherently produces "disproportionality " i n output and prices amon g the sectors. Bu t the depression als o leads to "a ne w equilibrium position" as innovations are "digested," and "it fulfill s wha t the boom promised " wit h a long-term declin e i n costs an d prices. 69 He acknowledges, nevertheless , i n a vivid but passing phrase, tha t unemployment "is a great and unde r certai n circumstance s annihilatin g misfortune for those concerned." 70 It i s her e tha t Schumpete r i s mos t redoubtabl y Austria n a s h e wa s t o b e i n opposin g what migh t b e broadl y calle d Keynesia n measure s i n th e interwa r years includin g th e Great Depressio n o f th e 1930s . But , a s th e concludin g paragrap h i n Th e Theory o f Economic Development indicates , Schumpete r had his eyes fastene d firmly on the some times painfu l bu t creativ e dynamic s o f a capitalis t society: 71 . . . [N] o therap y ca n permanentl y obstruct the great economi c an d socia l process b y whic h businesses , individua l positions, form s o f life , cultura l values an d ideals , sin k i n the socia l scal e an d finall y disappear . I n a societ y with private propert y an d competition, thi s proces s i s the necessary comple ment o f th e continua l emergenc e o f ne w economi c an d socia l form s an d o f continually risin g rea l income s o f al l socia l strata . Th e proces s woul d b e milder i f ther e wer e n o cyclica l fluctuations , but i t i s no t wholl y du e t o th e latter an d i t i s complete d independentl y o f them . Thes e change s ar e the oretically an d practically, economically an d culturally, muc h more importan t than th e economic stabilit y upon whic h all analytical attention has been con centrated fo r s o long . An d i n thei r specia l wa y bot h th e ris e an d th e fal l o f families an d firm s ar e muc h mor e characteristi c o f th e capitalis t economi c system, o f it s cultur e an d it s results , tha n an y o f th e thing s tha t ca n b e observed i n a societ y whic h i s stationar y i n th e sens e tha t it s processe s re produce themselve s a t a constan t rate . Before movin g on to Schumpeter's late r work it may be helpful to make a few observa tions o n hi s syste m fro m th e perspectiv e o f m y ow n theor y o f economi c growth . First, i t i s incomplete—" a torso"—a s Schumpete r wa s quit e aware. 72 I t lacks , fo r example, a theor y relatin g birt h an d deat h rate s t o development , includin g population related investmen t i n housing , infrastructure , and agriculture ; it lumps th e openin g o f a new sourc e o f suppl y for raw material s wit h technological an d institutional change without examinin g it s specia l features , includin g prior shift s i n relativ e price s an d typicall y longer period s o f gestation than industrial investment; it does no t dea l wit h the complex interactions o f science , invention , and innovation ; it does no t dea l with the stage s o f an d limits to growth. Schumpete r clings fiercely to his initia l distinction between the worl d of static circular flow and innovational entrepreneurship when his own analysis suggests that

one is , i n fact , dealin g a t a momen t o f time , wit h a spectru m o f degree s o f creativ e

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entrepreneurship a s among sectors and firms. Abov e all, Schumpeter' s theor y o f growth and it s relate d busines s cycl e analysi s i s se t i n th e wron g matrix. H e counterpose s th e erratic disproportionat e cyclica l for m innovatio n actuall y assume s i n histor y wit h hi s static, circula r flo w Walrasian system . I n m y view, hi s theor y implicitl y assumes—an d should b e matche d against— a syste m wit h al l it s sector s movin g forwar d i n dynami c sectoral equilibrium at different rates (following, pp. 429-431). Some of these limitation s yielded a n essentiall y fals e analog y betwee n Schumpeter' s theor y o f the majo r conven tional busines s cycl e an d th e Kondratief f cycl e tha t mar s his late r Business Cycles. Bu t taken o n it s ow n terms , i n it s ow n time , Th e Theory o f Economic Development i s a powerful, creativ e landmar k in the history of economic thought . Subsequen t mainstrea m economics i s a good dea l les s tha n it might have been if its practitioners ha d not acted i n terms o f a ban mot attributed to Winston Churchill: 73 "Me n ofte n stumble over the truth, but most manage to pick themselves up and hurry off as if nothing had happened.'' But, as Marshall's indecisiv e wor k o n increasin g return s demonstrated , an d th e late r effort s o f others (following, pp . 45 4 and 470), i t is not easy to bring together technologica l chang e and either mainstrea m micro - o r macroeconomic s a s they emerged afte r 1870 . Schumpeter's Business Cycles wa s publishe d i n 1939 , som e 3 0 year s afte r h e ha d arrived a t the basic concepts tha t form the substance of his Theory o f Economic Development. Th e late r stud y i s a massiv e two-volume work o f 110 0 pages , almos t fou r time s the size of the earlier book. Bu t as Schumpeter's Prefac e make s clear, the central theme is the same: 74 "Analyzin g busines s cycle s mean s neither more no r less than analyzing th e economic proces s o f the capitalist era. . . . [CJycles are . . . like the beat of the heart, of the essenc e o f th e organis m tha t display s them." Th e title s o f the tw o work s d o reflec t some chang e o f emphasi s an d environment . Th e earl y stud y i s o f development , wit h business cycle s deal t wit h i n a fina l incomplet e bu t suggestiv e chapter . Th e late r stud y focuses on business cycles, althoug h Schumpeter notes "th e subtitl e really renders what I have trie d t o do": 75 A Theoretical Historical an d Statistical Analysis o f th e Capitalist Process. On e suspect s that a convergence o f enforced attentio n to business cycle s i n the depressed 1930 s an d th e characte r o f the literatur e h e fel t impelle d t o tak e int o accoun t explains th e shif t i n focus. But, on the whole, there can be few examples o f an economis t so faithfull y tryin g to turn th e "scaffolding " o f his yout h "int o a house."76 The bul k o f th e firs t fiv e chapter s o f Business Cycles elaborates , wit h one importan t exception, theme s familia r from Th e Theory o f Development: th e stationar y flo w equi librium model; external an d endogenous sources of change; innovation and the role of the entrepreneur; innovation , credi t creation , an d th e capita l market ; th e cyclica l proces s starting fro m a n initia l positio n o f assume d ful l employment ; th e critica l rol e o f th e plowback o f entrepreneuria l profits in capital formatio n seen, i n turn, as the generation , diffusion, an d absorptio n o f innovations . Alon g thi s beate n pat h ther e ar e man y mor e references t o the views of others than in the earlier study, and a few refinements. Bu t the only substantia l chang e introduce d i s th e notio n o f thre e concurren t cycles : Th e Kondratieff (say , 55 years); the Juglar (9-10 years) ; the Kitchin (40 months). The Theory of Development onl y recognize d th e Juglar. This introductio n o f interactin g multipl e cycle s build s up t o a climactic synthesi s i n which the three cycles are combined in a single abstract chart.77 A s I have pointed out on a number of other occasions, Kondratief f demonstrated that there were rough long cycles in prices, interest rates, and money wages reaching back to, say , 1790 ; but he failed in his effort t o associat e the m with cycle s in rates of real growt h or unemployment. 78 Schumpeter's synthesi s is based o n th e assumptio n that the Kondratieff cycle was, essentially,

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the Juglar writ large; that is, a cycle in employment and rate of growth of output as well as in prices. Fo r example , Schumpeter , respondin g t o an observation o f Wesley Mitchell's , asserts tha t "thos e movements [lon g waves ] are associated (t o say the least) wit h definite historical processe s i n industr y whic h ar e o f th e sam e natur e an d produc e th e sam e symptoms a s those whic h are responsible fo r and produce the symptom s of cycles whic h are universall y recognized a s suc h [presumabl y decennia l Juglars]." 79 Thi s conclusio n leads Schumpete r t o accep t rathe r blindly , for example, evidenc e o f this kind: 80 Summing u p earlie r wor k o f his , Professo r A . Spiethof f showe d i n hi s monograph o n cycle s (Krisen i n Handworterbuch de r Staatwissenschaften, 4th ed., 1923 ) tha t there ar e epochs i n which prosperities an d other epochs i n which depression s ar e relatively mor e marked , an d these epoch s h e consid ered as bigger unit s without, however, combinin g them into cycles containing an upgrade and a downgrade and also without going beyond a statement to the effect tha t they wer e probably due to other causes tha n what he was prepare d to cal l cycles. Applyin g hi s criterio n o f iro n consumptio n h e foun d tha t fo r England th e period fro m 182 2 to 184 2 constitute s suc h a span of (prevalenc e of) depressio n (Stockungsspanne ) an d tha t fo r German y th e year s 184 3 t o 1873 an d 189 5 t o 191 3 make up spans of (prevalence of ) prosperit y (Aufschwungsspanne), whil e fro m 187 4 t o 189 4 w e hav e a spa n of depression . Spiethoff (an d Schumpeter) introduce s an inadmissible distortion: i n defining his prosperous period s h e i s measurin g fro m cyclica l (Juglar ) trough s t o peaks ; hi s depresse d periods, fro m cyclica l peak s t o troughs. 81 An d ther e ar e othe r factor s t o b e take n int o account i n Spiethoff' s figures , e.g. , th e precis e timin g of th e comin g o f th e railroa d i n Germany relativ e t o Britai n an d th e Unite d States ; th e lengt h an d intensit y o f Jugla r upswings i n relatio n t o subsequen t downswings , etc . With respect to Kitchins, Schumpeter notes that he did not have time to investigate eac h short cycl e bu t h e assume s tentativel y tha t i t als o i s relate d t o th e sam e innovationa l process tha t suffuses th e Kondratieff and Juglar. H e therefore fel t reasonabl y comfortabl e in producin g a n abstrac t composit e "three-cycl e schema, " eac h cycl e distinguishe d b y "the period s o f gestation an d absorption" o f the innovational investment taking place.82 This analysis builds up to a climactic chart combining the three types of cycles in the form of sine curves, wit h time (57 years) o n the horizontal axis and (implicitly) unemploymen t and/or th e rat e o f growt h o f outpu t on the vertica l axis. 83 Schumpeter exhibit s an awareness of the complexity of the relationships assumed in his stylized three-cycl e schema ; and , a t a later stage, h e goes int o detail, coverin g some 250 pages, t o explore empirically, withi n th e considerable limit s of the evidence, wha t actually happene d betwee n th e 1780 s an d 191 4 t o prices , growt h rate s i n output , level s o f unemployment, th e behavio r o f majo r individua l prices, wages , th e capita l supply , an d interest rates . These passages , whic h reflec t muc h accumulate d scholarshi p b y other s an d a goo d many debate s abou t bot h theor y an d history , ar e peculiarl y indecisive . Schumpete r i s reported to hav e sai d lat e i n life tha t he regretted tha t h e was not an economic historian . There i s a certain derivative akwardness in the historical sections of Business Cycles; an d he was quit e aware that they did not firmly suppor t the initia l abstrac t presentation of hi s vision. The y ar e however , a tribut e t o hi s energ y an d hi s awarenes s tha t a dynami c economic theor y must, i n the end, be a theory about history. This inadequacy explains the seriousness o f thi s passage i n Schumpeter' s preface t o Business Cycles. 84

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It too k longe r tha n I though t t o tur n tha t scaffoldin g int o a house , t o embody th e result s o f m y late r work , t o present th e historica l an d statistica l complement, t o expand old horizons. Nevertheless I doubt whether the result warrants that simile. The house is certainly not a finished and furnished one— there ar e too man y glaring lacunae and too man y unfulfilled desiderata . Th e restriction t o th e historica l an d statistica l materia l o f th e Unite d States , En gland, an d Germany , though serious, i s not the mos t serious o f all the short comings. Th e younge r generation o f economists shoul d look upo n this book merely a s something to shoot at and to start from—as a motivated program for further research . Nothing , a t an y rate , coul d pleas e m e more . Schumpeter's brie f treatment of developments i n agriculture and raw material supply (6 pages) i s particularl y inadequate . H e focuse s mainl y o n th e playbac k o f innovation s (notably the railroa d an d farm machinery) on expansion and cost-reduction in agriculture from th e 1780 s t o 191 4 rathe r than the whol e mor e comple x proces s o f opening up ne w agricultural areas. 85 The analytic historical sections of Business Cycles, dealin g with Germany, Britain, and the Unite d State s (1787-1913) , cove r som e 23 0 pages wit h a furthe r 35 0 pages fo r th e period fro m 191 9 to th e lat e 1930s . Again , as i n the analyti c confrontation of his theory with th e behavio r o f long-tim e series , Schumpete r reflects a prodigou s effor t t o maste r historical materials—matche d amon g economists onl y by Hume, Smith , an d Marshall— and a good deal of integrity in acknowledging the failure of history neatly to fit his model. Despite th e spac e devote d t o th e projec t an d it s conceptua l grandeur , mos t o f thes e historical passage s remai n a collectio n o f ters e reference s t o complicate d phenomen a linked loosely and episodically to Schumpeter's theory of the cyclical character of growth. The on e elemen t i n hi s schem e tha t comes throug h persuasivel y i s the thre e period s o f relative concentratio n o f majo r innovations : cotton textiles , goo d iro n fro m coke , an d Watt's stea m engin e startin g i n th e 1780s ; th e railroads , startin g (awkwardl y fo r th e Kondratieff cycle ) in the 1830 s and 1840s , leading on to steel, i n the late 1860s ; and then, round about the turn of the century, electricity, a batch of new chemicals, an d the interna l combustion engine . This i s a bit different from Th e Theory o f Development, wher e the primary emphasis is on the heroi c innovato r in a given sector rather than on the tendency of certain groups of leading sector s t o mov e fro m inventio n to innovatio n at about the sam e time. Th e latte r phenomenon i s discussed later , pp . 459-460 . Schumpeter's extende d analysis of the interwar years emphasizes, of course, th e grea t power o f exogenou s force s i n shapin g economi c events , bu t see s als o a goo d man y characteristics o f a Kondratief f downswing . He concludes wit h a n importan t argumen t bearing o n technology an d innovation. I t starts b y reviewing the technical cas e made, i n the lat e 1930s , fo r the arriva l of secula r stagnation . The expansio n of the U.S. econom y between 193 3 an d 193 7 still lef t 14 % unemployed at the peak o f what Schumpeter calle d "The Disappointin g Juglar." 86 Then came th e partially self-inflicted wound of the shar p American recessio n o f 1937-1938 . I n th e latte r yea r Alvi n Hanse n publishe d hi s Full Recovery an d Stagnation. Th e substanc e of th e debat e belong s wit h th e discussio n of limits to growth. For present purposes, what is significant i s that Schumpeter argued that in n o objective , technical sense ha d investmen t opportunities diminished.87 "Nor ca n it be urged that fundamentally ne w opportunities of first-rate magnitud e are not in prospect. Barring the question whether that is so, i t is sufficient t o reply that in the eighteen-twenties

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hardly anybod y can hav e foreseen th e impendin g railroad revolutio n or, i n the eighteenseventies, electrica l development s an d th e moto r car. " Afte r makin g his cas e tha t cap italism wa s imperile d no t b y a wanin g o f investmen t opportunitie s bu t b y a hostil e political, social , an d intellectua l environmen t plu s self-generate d degenerativ e forces , Schumpeter concludes: 88 " . . .[I] f our schema i s to be trusted, recover y an d prosperity should be more, and recession an d depression phases less strongly marked during the next three decade s tha n the y hav e bee n i n th e las t two . Bu t the sociologica l drif t ca n no t b e expected to change." That was a quite remarkable prognosis t o make in 1939 , eve n if the period o f extraordinary prosperity occurred i n a Kondratieff downswing (1951-1973) and the sociologica l drif t toward s socialis m bega n t o revers e from , roughly , th e mid-1970s (following, pp . 483-484) . Schumpeter' s deepl y roote d Centra l Europea n pessimis m would hav e been astonishe d b y th e rapidl y risin g an d widel y diffusin g respec t fo r com petitive privat e enterpris e an d th e pric e syste m i n the 1980s . Simon Kuznets' s Secular Movements i n Prices an d Production (1930 ) share s wit h Schumpeter's Theory o f Economic Development an d Business Cycles a fe w strikin g similarities an d i s marke d b y severa l equall y strikin g differences. Like Economic Development, Secular Movements i s a young man's book incorporatin g a large visio n of the terrain th e author intended to explore i n his professional career and a definition o f his propose d strategy. 89 Bot h Schumpete r an d Kuznets aimed t o contribut e to the generation of intimately linked, dynamic theories o f economic growt h and business cycles tha t would combine historica l an d statistical analysis wit h theory. Abov e all , they identified innovatio n a s th e critica l dimensio n o f growth ; the y perceive d th e inheren t unevenness of the process of innovation as key t o an understanding of cycles of differin g lengths; the y accepte d tha t th e pursui t o f thes e insight s require d no t merel y aggregat e analysis but detailed analysi s of the sectors wher e innovation actually happened; an d they based their analyses on the inescapable path of deceleration followe d by a sector caught up in radica l innovationa l change . In building on these insights both men broke awa y from the mainstream preoccupation s of their day ; although Kuznet s had availabl e Schumpeter's Economic Development; and , in Business Cycles, Schumpete r ha d availabl e Kuznets' s Secular Movements. 90 The first of their differences lay in the theoretical hypotheses whic h framed their work. Schumpeter wa s traine d i n th e Austria n School , whic h wa s suffuse d b y a consciou s commitment to theory. I t had conducted agains t the German historical schoo l a protracted debate abou t method . Moreover , Schumpete r wa s strongl y draw n t o th e eleganc e o f Walras's genera l equilibriu m system, whic h i s hi s point o f departure. 91 Kuznets emerged from a different intellectua l matrix with a bias towards the primacy of facts ove r theory. He was a pupil of Wesley C. Mitchell , who belonged wit h the pragmatic philosophica l traditio n o f Charle s Pierc e (1839-1914) , Willia m Jame s (1842-1910) , and John Dewe y (1859-1952) . As an economist Mitchel l wa s influenced by but was less iconoclastic tha n Thorstei n Veblen . Mitchel l (an d Kuznets ) di d no t rejec t th e us e o f economic theory . The y did not belong, say, wit h the German historica l school , o f which they wer e explicitl y critical . Indeed , Mitchel l regularl y taught a course i n the histor y of economic though t at Columbia. Bu t th e institutionalis t tradition on Morningside Height s of th e 1920 s wa s les s rigorou s wit h respec t t o theory , mor e flexibl e an d eclecti c tha n Schumpeter's Vienna in the first decade of the century; and, above all, it was more acutely focussed o n th e fact s which , i t wa s believed , th e conventiona l theorists ignored . Thus, Schumpeter begins i n his Theory o f Development wit h a static (or incrementall y expanding) circular flow equilibriu m mode l of a n economic system into which h e introduce s his

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disruptive, creative , innovatin g entrepreneur. Kuznet s begins with a se t of observation s on th e empirica l evidence. 92 The picture of economic developmen t suffers a curious change as we examine it first in a rather wide sphere, then in a narrower one. If we take the world from th e en d o f th e eighteent h century, there unroll s before u s a process of uninterrupted an d seemingl y unslackene d growth. . . . But if we single out the various nations or the separate branches of industry, the picture becomes less uniform. Some nations seem to have led the world at one time, other s a t another. Some industries were developing most rapidly at the beginnin g o f the century, other s a t the end . . . . Great Britai n has relin quished th e lead i n the economic worl d becaus e it s own growth, so vigorous through th e perio d 1780-1850 , ha s slackened . Sh e ha s bee n overtake n b y rapidly developin g German y an d the United States . .. . A s we observe th e various industrie s withi n a give n nationa l system , w e se e tha t th e lea d i n development shifts fro m on e branch to another. The main reason for this shif t seems to be that a rapidly developing industr y does not continue its vigorous growth indefinitely , but slacken s it s pac e afte r a time , an d i s overtake n b y industries whose perio d o f rapid development comes later . Within any country w e observ e a successio n o f differen t branche s o f activit y leadin g th e process of development, and in each mature industry we notice a conspicuous slackening i n the rat e o f increase . . . . But contraste d wit h our belie f i n th e fairly continuou s marc h o f economi c progress , i t raise s a frequentl y over looked question . Wh y i s there a n abatement i n the growt h of old industries ? Why i s not progress unifor m in all branches of production, with the inventive and organizin g capacit y o f th e natio n flowin g i n a n eve n strea m int o th e various channel s o f economi c activity ? Wha t concentrate s th e force s o f growth and development in one or two branches of production at a given time, and wha t shift s th e concentratio n fro m on e fiel d t o anothe r a s tim e passes ? These question s ca n bes t b e answere d b y a n inspectio n o f th e historica l records o f industria l growth , focuse d upo n th e processe s tha t underlie eco nomic development. " At this point Kuznets, having used a series of empirical observations to come to rest on the proces s o f sectora l retardation , introduce s som e economi c theory; but h e slide s i t in with referenc e t o "factor s discusse d b y economi c historians " an d trace s a pat h tha t permits him , like Schumpeter, t o assert that changes in technique are the decisive factor in growth:93 Of th e numerou s factor s discusse d b y economi c historian s i n connectio n with th e histor y o f a n industry , thre e group s stan d ou t a s th e dynamic , th e pushing forces . The y are : (1 ) growt h of population ; (2) changes i n demand ; (3) technical changes, including both mechanical or engineering progress, an d improvement i n busines s organization. These group s of factors are, of course, not independent of one another. The growth of population is conditioned to a large extent by the standard of livin g (demand) and the supply of means of subsistence, the latter in its turn depends upon the state of technical arts. Change s in demand usually follo w changes in technique, whil e the volum e of deman d i s i n clos e an d definit e connection

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with the size of the population. And technical progres s come s to be realized in response t o some fel t needs , whic h may b e brought about b y th e pressure of population o r b y change s i n demand . . . . While al l thre e force s ar e interdependent , th e change s i n techniqu e mos t clearly conditio n th e movement s i n bot h populatio n an d demand , whil e th e dependence o f technica l progress upo n populatio n an d deman d i s les s clea r and immediate. I n the chain interconnection o f the three, thi s link seems t o be most prominent . Thus, a similar focus on innovation leads Kuznets to much the same hypothesis that had governed Schumpeter' s Economic Development a generation earlier ; bu t their conceptua l framework differe d rathe r sharply . The secon d majo r differenc e betwee n Schumpete r an d th e earl y Kuznet s i s muc h narrower. Schumpete r mad e the creative entrepreneu r an d the progressively lesse r breeds that swarme d afte r hi m th e cente r o f th e innovationa l process; fo r Kuznets, at the cente r were hi s logisti c curve s (o r thre e constant s Gompert z curves ) capturin g statisticall y th e process of retardation that suffuse d the life of sectors in a dynamic economy. Retardation in a sequence o f leading sectors wa s an observed statistica l uniformity. He identified four reasons for retardation: th e slowing down of technical progress; dependence o f the innovational sectors on slower-growing sectors supplyin g raw material inputs ; a relative declin e in the fund s availabl e for expansion o f the innovational sectors; and competition fro m the same industr y in a younger country. Schumpeter's analysi s of the waning contribution of an innovationa l secto r t o overal l growt h i s no t inconsisten t wit h Kuznets's ; bu t i t i s distinctively differen t i n its emphasis o n certain nonstatistica l and sociologica l factor s a t work.94 A third differenc e between th e two approaches t o innovation and cycles concern s wha t might be called the technical or intermediate objective of their work. For Schumpeter , in Business Cycles, th e major objective was to give substanc e to his innovational interpreta tion of the long, half-century (Kondratieff) cycle, suggesting also its linkage to sequence s of stron g an d wea k decennia l (Juglar ) cycles . His selectiv e evocatio n o f histor y i n Business Cycles —often impressionistic—wa s meant t o provide evidence , statistica l and otherwise, tha t amids t th e clutte r and nois e of historical sequences , ful l o f externa l intrusions , ther e wa s somethin g t o th e three-cycl e process b y whic h h e believe d developmen t wen t forward . Kuznets wa s focuse d o n a relate d bu t no t identica l se t o f problems : Wha t wer e th e secular an d cyclica l path s o f outpu t an d prices i n the majo r sectors ? Kuznet s wa s quit e aware o f th e wor k o f Kondratief f an d other s wh o intereste d themselve s i n economi c movements tha t transcende d conventiona l busines s cycles ; bu t h e wa s determine d t o proceed from a more soli d statistica l bas e tha n Kondratieff, even if that meant that all the phenomena Kondratief f identified could no t be embraced i n his conclusions. His metho d was t o establis h a long-ru n primary trend , b y clearin g his dat a o f short-ru n cyclica l an d other movements ; the n to establish secondary movements i n production and prices around the primar y trend ; and , finally , t o examin e th e relatio n betwee n th e rat e o f growt h o f a sector an d th e amplitud e of th e cycle s i t experienced. Kuznets foun d tha t primary trends in production and prices reflected systematically the life cycl e o f a give n technica l innovatio n (o r openin g u p o f a ne w territor y o r natura l resource); that is, a phase of rapid, then decelerating, increase in output and of rapid, then decelerating, decreas e i n price.

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The firs t thin g Kuznets' s analysi s o f primar y trends demonstrate d wa s tha t th e cost reducing effec t o f innovatio n was generall y translate d promptly into price reductions— a proposition Schumpete r faile d to take into account. In fact, wit h the passage of time, pric e reductions wer e subjec t to retardation, just as were increase s i n output. In these path s of decelerating increase s i n output accompanied b y diminishing rates of price decrease—an d then pric e increase—Kuznet s had the materials in hand to proceed t o a more satisfactor y explanation than Schumpeter was to provide for Kondratieff's long cycles in overall pric e indexes. Bu t h e di d no t tak e tha t route. H e staye d wit h the sectors . Kuznets exhibited a similar reserve wit h respect t o overall production . He did not link his insight s int o sectora l retardatio n t o statistica l dat a o n th e cours e o f nationa l outpu t during th e tim e perio d wit h whic h h e dealt . I n dealin g wit h secondar y movement s i n production an d prices, however , Kuznet s came seriously to grips in aggregate terms with the relation s amon g output , prices , labo r productivity , an d real wages . H e firs t demon strated tha t secondar y expansion s an d contraction s i n productio n aroun d th e primar y trends wer e systematicall y precede d b y price increases and decreases, suggestin g clearl y the role o f price movement s a s a mechanism for shifting th e direction of investment. In a sustained theoretical passage of some fifty pages , Kuznets then poses the question of why a period of rising prices shoul d be, a t once, a period o f rapidly expanding outpu t and of constrained rea l wages . Hi s answe r is , essentially , tha t th e downwar d relativ e shif t i n (urban) consume r income , du e t o risin g prices , i s compensate d fo r b y reduce d saving s and by enlarge d opportunitie s for employment in the production of capital goods, whos e financing i s rendere d easie r b y th e shif t i n incom e distributio n fro m wage s t o profits . Kuznets the n explores wh y a n expansion phas e o f this kind shoul d come t o a n end . H e adduces a declin e i n labo r productivity , a s th e workin g forc e i n th e rapidl y expandin g sectors is increased, combine d wit h monetary restraints, as rising prices reduc e the incentive to mine gold under a gold standar d regime. I would not wholly agree with this model , but i t reflect s a wa y o f goin g abou t tren d analysi s highl y german e t o th e phenomen a confronted i n the Unite d State s an d in other advance d industria l economies i n the perio d from th e mid-1890 s t o 1914 . Kuznets then raise d th e questio n o f whether thes e secondar y movement s in prices an d production ar e t o b e regarde d a s cycles . H e conclude d tha t the y ar e not : the y ar e t o b e viewed a s specific , historica l occurences . Finally, Kuznet s explore d ho w th e rat e o f growt h o f a primar y tren d i n productio n affected th e amplitud e o f bot h secondar y fluctuation s an d conventiona l cyclical move ments. H e foun d an d sough t to explai n th e expecte d positiv e correlation . In general, Kuznets regarded his book as a preliminary reconnaissance of the issues that had t o b e face d i f a genera l dynami c theor y o f productio n an d price s wa s t o b e built. Nevertheless, i n its analysis of primary trends in a succession of leading sectors an d in the lagged linkag e he established betwee n secondar y trend movement s i n prices an d production, thi s germina l stud y ha d a gri p o n severa l o f th e ke y mechanism s basi c t o a n understanding o f secula r trends . The greates t differenc e betwee n Schumpete r an d th e youn g Kuznets , however , con cerns th e ultimat e problems t o which their initia l visions were addressed . Fro m th e fina l paragraphs o f hi s youthfu l Economic Development t o th e fina l paragraph s o f Business Cycles (an d beyond to Capitalism, Socialism, an d Democracy) Schumpeter' s min d wa s focused o n a ver y larg e proble m indeed : woul d capitalism , a s a socia l an d politica l system, prove capable of maintaining a setting that would encourage and support the corps of innovatin g entrepreneurs on who m its growth and survival depended? Kuznets's ambi-

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tion was a bit less gran d but also ample: " . . . a complet e an d general theory o f dynamic economics."95 But , i n both Secular Movements an d his late r work o n economic growt h (following, pp. 352-355) he cut his analysis down to what he could measure with more or less reputable data ; and it turned out that all the empty boxes he perceived a s essential for a genera l dynami c theory coul d no t b e filled . For Schumpeter , innovatio n wa s th e measur e o f a society' s vitality ; the innovatin g entrepreneur a kind of Hegelian hero. An d he did not draw back from evokin g the process in such human, societal terms , consciousl y breaching the conventional walls of his discipline as had the major classical economists, includin g Marx. But he was never able to link his evolutionar y an d essentially dynami c vision of whol e societies to hi s commitment t o conventional neo-Newtonia n economic theory . Kuznets , in pursuing his goal o f a firml y based dynamic economics di d so within the framework of the old German dictum: "Mas tery lie s i n limitation." 96 Th e limitation s he accepted—long , reliabl e tim e serie s an d modern statistica l methods—prove d insufficien t fo r mastery . And , i n effect , h e aban doned hi s youthful vision . The central fac t is , then , that neither Schumpeter nor Kuznets ever developed a full dynami c theory of growth although they made solid partial contributions t o a n understandin g of growth.

Two Unorthodox Views : Henry Adams and Thorstein Veblen Schumpeter an d Kuznet s are, o f course , no t alone , bu t the y ar e majo r figure s betwee n 1870 an d 193 9 i n th e relativel y small ban d o f economic professional s who explore d th e relation betwee n major , discontinuou s technologica l innovation , the economy , and , i n Schumpeter's case , th e fat e o f capitalis t society . Ther e were , o f course , man y other s beyond the conventional boundaries o f economics wh o reflected o n the larger meanin g of the sequence o f technological revolution s that had been going on since the 1780s . On e of the most memorable was Henry Adams, who captured his reflections o n the Paris Exhibition o f 190 0 i n a n essay , "Th e Dynam o an d th e Virgin." 97 B y 190 0 th e thir d grea t grouping o f technologies was just emerging on the scene: th e internal combustion engine , electricity, an d a ne w arra y o f chemicals , som e linke d t o th e moto r vehicl e (e.g. , vul canized rubber , refine d gasoline) . Adams—historian , professor , novelist , disenchante d commentator o n post-186 5 American society—wa s guided through th e Exposition, em bracing bot h ar t an d technology , b y a friend , th e America n scientis t Samue l Langley . Here is the passage tha t builds up to his central analogy between th e power o f electricity and th e powe r o f Christia n faith , crystallize d i n the cul t o f th e Virgin. 98 . . . [T] o Adam s th e dynam o becam e a symbo l o f infinity . A s h e gre w accustomed t o th e grea t galler y o f machines , he bega n t o fee l th e forty-foot dynamos a s a moral force , muc h a s th e earl y Christian s fel t th e Cross . . . . For Adams ' object s it s value s la y chiefl y i n it s occult mechanism . Between the dynamo in the gallery of machines and the engine-house outside, the break of continuity amounted to abysmal fracture for a historian's objects . N o mor e relation coul d h e discove r betwee n th e stea m an d th e electri c curren t than between th e Cross an d th e cathedral. . . . and thus it happened that, afte r te n years' pursuit , h e found himsel f lying in the Gallery of Machines at the Great Exposition o f 1900 , hi s historica l neck broke n b y th e sudde n irruptio n of forces totall y new .

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Since n o on e els e showe d muc h concern , a n elderly perso n withou t other cares ha d n o nee d t o betra y alarm . Th e yea r 190 0 wa s no t th e firs t t o upse t schoolmasters. Copernicu s an d Galile o ha d broke n man y professoria l neck s about 1600 ; Columbu s had stood th e world on its head towards 1500 ; but th e nearest approac h t o the revolution of 190 0 wa s that of 310 when Constantin e set up the Cross. Th e ray s that Langley disowned , a s well a s those which he fathered, wer e occult, supersensual , irrational ; they were a revelation o f mysterious energ y lik e tha t o f th e Cross ; the y wer e what , i n terms o f mediaeva l science, wer e calle d immediat e mode s o f the divin e substance. This insight leads t o no prescriptions for policy but to a rather despairing passage—lik e much of his writing, more in sorrow tha n in anger—on the rich strands of Western cultur e somehow missin g fro m America n life: 99 The force of the Virgin was still felt a t Lourdes, an d seemed to be as potent as X-rays; but in America neithe r Venus nor Virgin ever had value as force — at most a s sentiment. N o American had ever bee n truly afraid o f either. . . . The Woma n ha d onc e bee n supreme ; i n Franc e sh e stil l seeme d potent , no t merely a s a sentiment , bu t a s a force . Wh y wa s sh e unknow n i n Amer ica?. . . . The true American knew something of the facts, but nothing of the feelings ; he rea d th e letter , bu t h e neve r fel t th e law . Before thi s historica l chasm , a mind lik e tha t o f Adams fel t itsel f helpless ; .. . O n one side, a t the Louvre and at Chartres, . . . was the highest energ y eve r known to man, th e creator of four-fifth s o f hi s nobles t art , exercisin g vastl y mor e attractio n ove r th e human mind than all the steam-engines an d dynamos ever dreamed of; and yet this energy wa s unknown to the American mind. A n American Virgi n would never dar e command ; a n America n Venu s woul d neve r dar e exist . There is also an unlikely element of nostalgia in the reflections o f Thorstein Veble n o n the meanin g o f th e ne w technology . H e looke d bac k no t t o th e classic s o f th e ancien t world o r t o th e creativ e forc e o f mediaeva l Christianit y bu t t o t o wha t h e calle d "th e instinct of workmanship." Veblen defines this concept a s the characteristic o f the human race ove r th e age s tha t lead s i t t o respon d t o challenge s an d problem s wit h purposefu l actions, guide d b y intelligence—actions tha t "ma y b e rated a s purposeful by an observer , in the sens e that they ar e see n t o further th e life o f the individual agen t or species, whil e there i s no consciousness o f purpose o n the part of the agent under observation. . . ." 100 Thus, huma n societie s gradually accumulat e an d pass along , fro m generatio n t o genera tion, an expandin g bod y of technology , induce d by the requirement s of societ y but , in turn, reshapin g society. 101 Inventio n an d innovatio n i s a n instinctiv e cultura l refle x i n Veblen, no t a narrowly economi c process . Veblen wa s something of a philosopher, anthropologist , sociologist , psychologist , an d historian wh o brought thes e multipl e perspective s t o bear on the America n economy , it s institutions, an d thei r wide r impac t o n th e society . Adams' s detachmen t wa s tha t o f a member o f a mainly superseded elite , a status he accepted with a sometimes gentle , ofte n acid, philosophi c pessimism . Veblen, wit h hi s Scandinavia n heritag e still strong , moved about th e America n academi c establishment , a peripatetic outsider , acut e criti c of bot h mainstream economic s o f hi s da y an d o f America n society , propoundin g evolutionary rather tha n neo-Newtonia n proposition s abou t th e working s o f economies , pas t an d contemporary.

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Instinct o f Workmanship is , essentially , a stylized history of technology fro m th e life of primitive man forward. His climactic final chapte r ("The Machin e Industry") dramatize s the clas h betwee n th e businessma n an d th e engineer: 102 " . . .[U]nde r th e rul e o f th e current technolog y an d busines s principles , industr y i s manage d b y businessme n fo r business ends , no t b y technolog y expert s o r fo r the materia l advantag e o f the communi ty." Veble n goe s o n t o evok e th e dange r tha t th e dynamic s of busines s woul d lea d t o monopolies whe n "th e materia l fortune s of the community would come t o rest unreser vedly an d i n al l detail s i n th e hand s o f thos e large r businessme n wh o hol d th e fina l pecuniary discretion." 103 It wa s directl y fro m thi s lin e of though t that som e o f Veblen' s disciples , viewin g th e Great Depressio n a s th e ultimat e mismanagement of bi g business , advocate d a planne d economy operate d b y technocrat s "fo r th e materia l advantag e o f the community. " Evidently, Adam s an d Veble n contemplatin g th e increasingl y powerfu l technologica l potential of the society they were closely observing, had different posts of observation an d drew differen t conclusions . But , i n passing , i t i s wort h notin g tha t Veblen , i n a quit e different context , als o evoke s th e mystica l powe r o f women—no t unrelate d t o tech nology—in thei r role a s divinitie s in primitive societies.104 But i f th e magical-technologica l fitnes s and efficac y o f wome n ha s le d t o the growth of institutions vesting the disposal of the produce in the women, in a mor e o r les s discretionar y way , th e lik e effec t ha s bee n eve n mor e pro nounced, comprehensiv e an d lastin g as regards th e immateria l development s of th e case . Wit h grea t uniformit y th e evidenc e fro m th e earlie r peaceabl e agricultural civilisation s runs to the effec t tha t the primitive ritual of husbandry, chiefly of a magical character , i s in the hands of the women an d is made up of observances presume d to be particularly consonant with the phenomen a of motherhood . . . . Th e deities , grea t an d small , ar e prevailingl y females ; and th e grea t one s amon g the m see m invariabl y to hav e se t ou t wit h bein g mothers. Adams an d Veble n share d anothe r strand . The y bot h accepte d th e ne w roun d o f tech nology a s a n irreversibl e fact . The y di d not , i n Veblen' s phrases , "wit h a tinctur e of affectation an d make-believe " see k " a remed y i n a 'retur n t o Nature, ' " despit e " a feeling o f maladjustmen t an d discomfort." 105 Bu t the y articulate d i n differen t way s a n uneasiness abou t technology and society that has not abated as the twentieth century draws toward it s close .

Formal Growth Models: Bickerdike (1876-1961) and Harrod (1900-1978). In paying tribut e to Marx's two-sector growt h mode l (preceding , p . 138 ) Paul Samuelso n observed tha t the distinguished hord e of economists wh o tilled thi s field afte r th e Second World Wa r move d o n no t fro m Marx' s wor k bu t "ou t o f a marriag e o f th e Clark Bickerdike accelerato r an d th e Keyne s multiplier , an d ou t o f earlie r work s b y Vo n Neumann an d Fran k Ramse y tha t sho w n o Marxia n influence." Withou t implyin g any derivation or dependence, those who preceded R . F . Harrod' s 193 9 formulation o f a twosector growt h mode l wer e a bi t mor e numerou s tha n Samuelso n suggests. 106 I n hi s various paper s relatin g to C . F . Bickerdike , Bruc e Larson identifies , a s predecessors , a

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considerable arra y o f Marxists , plu s Gusta v Cassel , t o sa y nothin g o f Quesnay ; an d Aftalion certainl y belong s o n th e lis t of accelerato r pioneers. 107 I have decided t o include in this section a brief sketch of Bickerdike's wor k on growth, as wel l a s Harrod's , fo r fou r reasons : Sweez y ha s memorialize d th e Marxis t growt h theorists,108 an d thei r wor k ha d littl e impac t beyon d thei r ow n circle; 108 Bickerdik e appears to be the first t o formulate an algebraic as opposed t o a simple arithmetic growth model an d t o incorporat e th e mone y suppl y (and the savings-investmen t balance) i n his reckoning; he considered som e disequilibrium aspects of the growth process no t generally examined even by his successors; and , for reasons that will emerge, h e deserves a bit more attention in the histor y of economi c though t tha n he has bee n accorde d thu s far. 109 Briefly, Bickerdike' s rathe r frustrate d bu t stil l fruitfu l professiona l caree r unfolded , from th e littl e w e know, as follows. 110 Bickerdike wen t to Oxford (Merton ) from Whitgif t Schoo l i n Croydon i n 1895 , study ing mathematics an d history, receiving hi s B.A. i n 1899 . I n that year, h e came under the influence o f Franci s Edgeworth , the n Professo r o f Politica l Economy , a distinguishe d mathematical economist, an d joint editor (wit h J. M . Keynes ) of the Economic Journal. Bickerdike competed successfull y fo r the 190 2 Cobde n Priz e o n land valu e taxation, a subject o f particular interest to Edgeworth. Bickerdike move d on to London and sought a doctoral degre e a t th e Londo n Schoo l o f Economics , hi s thesi s bein g oversee n b y Pro fessor Edwi n Cannan , a nonmathematica l economis t o f th e olde r school . Bickerdike' s thesis o n The Theory o f Tariffs yielde d tw o articles , stil l remembered i n the history of th e field; bu t hi s thesis wa s turne d dow n i n 1906 , presumabl y a t Cannan's insistence , quit e possibly reflecting his Thurberesque wa r against the kind of theory symbolized by Edge worth. A t tha t time Bickerdike wa s apparentl y supporting himself a s a schoolmaster. I n 1910, however , h e was appointed a Lecturer at the University of Manchester; but he gave it up in 191 2 to join the civil service in a unit within the Board of Trade tha t later becam e part of the Ministry of Labour. He received a n O.B.E. i n May 1937 ; and there is evidence of hi s employmen t a s lat e a s 1952 , whe n h e woul d have been 7 6 years old . H e die d 9 years later. Althoug h he published nothing after 1929, 111 ther e is evidence suggestin g that Bickerdike's writin g in economic theor y continued ; but he share d hi s papers onl y with a small circl e o f friends . A s nearl y a s w e know , h e die d a bachelor . A collectio n o f Bickerdike's paper s is believed to exist (or to have existed); but they have not yet been run down. Bickerdike's bibliograph y o f published work include s fourteen articles, al l bu t tw o of which appeare d i n Th e Economic Journal; an d thirty-eigh t boo k reviews , virtuall y all done fo r th e sam e publication. 112 The y spa n th e year s 1902-1929 . Bickerdik e range d over a wide spectrum o f economi c problems . H e i s best remembere d fo r hi s writin g on international trade , derive d fro m hi s ill-fate d doctora l thesis , an d fo r hi s path-breakin g 1914 articl e o n th e accelerator : " A Non-Monetar y Caus e o f Fluctuation s i n Employment."113 Larson traces out a quite coherent three-stage progression i n Bickerdike's work down to his 192 4 an d 192 5 article s o n growth. 114 I t is , onc e again , a stor y o f ho w a n initia l concern wit h welfare problems leads rather circuitously to insights into the growth process and, i n thi s case , t o it s inheren t instability. Bickerdike's firs t phase , in the period between about 190 7 and 1914 , is one o f intense concern with certain aspects of welfare economics under the influence of (but in occasional debate with ) Pigou and Edgeworth. He focused, in particular, o n positive and negative external effects ("co-operative " or "non-co-operative " condition s of production). Thes e

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concepts covere d case s wher e th e pursui t o f individua l self-interes t reduce d cost s o r increased pleasur e fo r othe r individuals—o r th e contrary . Wor k o n specifi c micro economic problem s unde r thi s rubri c involve d systematicall y th e distinctio n betwee n individual an d socia l point s o f view , emphasize d notabl y b y Pigou ; an d th e distinctio n between th e outcom e i n th e lon g an d shor t run , whic h Edg e worth elaborate d ou t o f Marshall. Bickerdike shifte d his focus fro m micro - t o macrowelfare problems wit h the coming o f war, retaining stil l his sensitivity to the distinction between individua l and social perspectives an d his interest i n external effects . Alon g the way he became increasingl y intereste d in th e role of expectations . Althoug h no t set out in macro terms , Bickerdike' s " A Non Monetary Caus e of Fluctuations in Employment'' emerge s a s a kind of hinge on which he shifted fro m issue s o f micro - t o macropolicy , a s h e perceive d tha t th e interpla y o f th e accelerator an d multiplie r i n a give n secto r migh t hav e a genera l impac t o n industria l fluctuations. He begin s wit h a bol d reversa l o f th e emergin g awarenes s o f th e accelerato r an d suggests tha t wha t woul d late r b e calle d th e multiplie r effect s o f th e larg e amplitud e o f fluctuations i n durabl e good s productio n (includin g consumer s durables ) ma y b e mor e important:115 It ha s bee n observe d fo r a lon g tim e tha t th e trade s connecte d wit h th e construction o f durable goods, such as buildings, ships, machinery, works of construction, &c. , ar e liabl e t o speciall y heav y fluctuation s i n em ployment. . . . [U]sually the argument has taken the line that if .. . ther e is a fluctuation i n general trad e .. . th e producers o f the instrument s of produc tion will be more particularly affected. . . . I would suggest . . .tha t perhap s we ough t rathe r t o pu t th e argumen t th e othe r wa y round , an d fin d i n th e independently-caused fluctuation s in th e productio n o f durabl e goods on e a t least o f th e principal factor s i n producing monetary disturbance s an d genera l fluctuations. Focusing sharpl y on the degree of durability, with reference to Pigou and Robertson,116 he the n goe s o n t o elaborate a cyclical sequenc e o f interactio n betwee n accelerato r an d multiplier, wit h proposals fo r remedy : • Becaus e o f their relative durability, changes i n demand cause dramatically differen t changes i n productio n a s betwee n consumer s good s (e.g. , woole n clothes ) an d capital good s (e.g. , ships) . • O n the other hand, the "exaggerated " variabilit y of production of durable goods in response t o small changes i n demand i s "on e o f the principal underlying causes of industrial fluctuations" t o which the monetary syste m responds—as a result, no t as a primar y caus e o f fluctuations. • Th e inputs to shipbuilding from engineering, iro n and steel, an d other sectors yiel d a "doubl e exaggeration" and therefore " a considerabl e disturbanc e of purchasing power b y th e fluctuatio n i n earnings o f workme n an d shareholders . . . ." 117 • Thus , unemploymen t insurance is " a prope r remed y to take and a way to check th e extension o f th e disturbance." 118 • Anothe r dampin g devic e woul d b e t o permi t a ship-ownin g trust, "whic h wa s governed by the interests of the public, and had to earn only a normal remuneration

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of capital, " t o maintai n a n adequat e reserv e tha t "woul d suffic e t o preven t th e occurrence o f an y seriou s deficiency." 119 • Th e outcome for shipbuilding applies in lesser degree to other durable-goods sector s where "ther e i s a failur e o f competitiv e self-interes t t o ten d toward s maximu m social interest." 120 • S o far as period o f gestation i s concerned, self-interes t would work toward "check ing tha t kin d o f irregularity " tha t aros e fro m incorrec t forecast s o f marke t condi tions at the end of the period o f production—taken i n Bickerdike's exampl e to be 5 years.121 Effort s i n this directio n woul d not alway s succeed; bu t th e magnitud e of the proble m woul d b e muc h less tha n i n the cas e o f durable goods . On these welfar e economics foundation s Bickerdike turne d to problems o f war finance and agricultura l policy. On e issue posed b y war finance was the following: 122 Wa s i t not possible (puttin g inequalit y of ta x incidenc e aside ) fo r individua l savers t o sustai n thei r level o f consumptio n durin g th e war—tha t is , i n th e shor t run—b y foregoin g futur e interest an d ceasing t o save, s o long as the war effort, o n a macrolevel, wa s financed out of "norma l savings? " In 192 4 Bickerdik e turne d bac k t o th e socia l impac t o f th e decision s o f saver s o r nonsavers i n his "Individua l an d Social Interest s in Relation to Saving." But this time the context wa s no t th e short-ru n framework of wa r bu t th e long-ru n proces s o f growth . Here i s ho w Bickerdik e begins: 123 A genera l surve y o f economi c progres s durin g the las t tw o centurie s cer tainly give s th e impressio n tha t th e capitalis t syste m o f privat e savin g an d investing ha s resulte d i n benefit s no t onl y t o individual s wh o save d an d invested (an d thei r heirs ) bu t als o t o the non-savin g proletarians. Thes e tw o centuries however , hav e been characterised i n a marked degree by the discov ery o f ne w processes , an d especiall y b y cheapenin g o f transport , an d suc h discoveries ar e no t necessaril y a n accompaniment o f savin g pure an d simpl e [a distinctio n i n th e spiri t o f Coli n Clark , preceding , pp . 213-214 , and , Solow, following , p . 622] . Th e questio n whethe r an d ho w savin g a s suc h benefits th e non-saver s canno t be settle d merel y b y thi s kind of observation , therefore. I t has to be examined analyticall y and is then seen to be not so very simple a matter whe n we tak e accoun t o f the fac t tha t the save r get s interes t and h e o r hi s heir s may ultimatel y spend bot h interes t an d capital . So far as the incidenc e o f saving is concerned, Bickerdike' s conclusion i s based o n th e effect o f saving in the firs t instance—an d th e later disposal o f interest an d of capital—o n the price level . Hi s analysis is framed by assumptions that decree that savings yield lower prices b y reducing the demand for consumers goods. Thus, so long as falling prices do not "dislocate" production, the nonsaver, wit h a constant money income, gain s from savin g via lowe r prices ; an d h e continue s t o gai n i f interes t an d principa l ar e plowe d bac k i n savings. From th e poin t o f vie w o f ou r concer n wit h growt h modeling , Bickerdik e start s ou t essentially wit h Cassel's primary model (preceding , pp. 204-205), assuming for purposes of simplification a socialist state and banking system, a constant rate of growth, geared t o a constan t given rate of growt h in population, with n o technological change . Bickerdike then establishes that a constant price level can be maintained if "th e rat e of money interest

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would b e identica l wit h th e rat e o f growt h o f physica l wealt h an d o f money , an d th e aggregate amoun t of interest received b y th e Stat e pe r unit of time would equal the tota l increase o f money needed t o finance increase as distinct from merel y replacement production"—the latte r a distinction Cassel firml y makes . Bickerdike the n proceed s to conside r the equilibriu m conditions require d if one assumes a nonsocialist economy i n which individual savin g takes place. H e concludes i n a Harrodian vein: 124 In a regime o f individualis m it is mainly bank credit which takes th e plac e of th e Stat e creatio n o f money . . . . A smoot h stat e o f growth , wit h uniform price-level , is possible i f the tw o conditions are fulfilled : (1 ) growth is uniform, (2 ) saving an d the creation o f bank credi t alway s continuall y equa l th e amoun t require d fo r financin g growth a s distinc t fro m maintenanc e production. I f thes e condition s ar e no t fulfilled, ther e is almost inevitably involved not only disturbance of individual prices, bu t disturbanc e o f th e genera l leve l o f price s and , unde r ordinar y conditions of individualism, oscillation of trade activity. . . . [A] study of the conditions o f unifor m growth , eve n thoug h tha t conditio n doe s no t actuall y exist, i s usefu l a s a preliminar y t o th e consideratio n o f th e effect s o f irregularity. Bickerdike's 192 5 articl e attempt s to meet challenge s posed by the analysis of "irreg ularity" b y relaxin g severa l assumption s governin g th e earlie r essa y an d identifyin g various circumstances i n which the growth rate would not be uniform; e.g., change s in the rate of population increas e vi a increase d immigration ; acceleration i n the rate o f produc tivity increase; a rate of interest higher than the rate of growth in output due to discount of the future ; a failur e o f privat e saving s t o matc h th e investmen t require d t o sustai n a constant growt h rate ; th e consequence s fo r price s an d saving s o f a n accelerate d growt h rate; the cyclical impact on prices an d growth rates of investment in a major sector (e.g., housing) where the capital stoc k is highly durable and the period o f production is long;125 and th e rol e o f inflationar y episodes—an d force d savings—i n providin g th e shif t o f income t o profit s an d saving s require d fo r a hig h rat e o f growth . Thi s i s Bickerdike' s large, final , almos t Schumpeteria n reflection: 126 What actuall y happens i s that there ar e spurts of rapid growth, with exten sion o f credi t beyon d th e curren t rat e o f saving , an d risin g prices , whic h enable cleve r an d fortunat e men to make much more considerable gain s than they would be able to do if prices wer e uniform, and they save a large part of such gains , an d i n that roundabou t way th e aggregat e saving s is made suffi ciently great , takin g th e perio d o f th e boo m an d the depressio n together . I t was no t purely b y normal saving s that the rapid growth o f wealth in England and Americ a durin g the nineteent h century, i n German y fro m 187 0 t o 191 4 was financed , but largel y b y extensio n of bank credit i n excess, fo r the time being, o f norma l saving , resultin g i n periodica l inflations . I f th e leve l o f prices i s to b e kep t muc h steadier, an d if, i n addition, ther e i s to continu e a high rat e o f super-tax and o f death duties, ther e is real danger that the rate of growth of wealth might become very slow unless some other way of providing for i t ca n b e found . This i s th e mos t importan t practical consideration to whic h the discussion

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leads. Th e "capitalis t system " ha s impose d a fairl y rapi d rat e o f growt h i n developed communities , bu t throug h a hig h degre e o f inequalit y i n th e dis tribution o f wealth , an d b y a financia l syste m whic h tend s t o preven t th e destruction o f that inequality, by way of periodical inflationary periods . Ther e is no w a strong attac k on th e inequality of distributio n through the system of taxation an d muc h discussion, a t least, o f methods of checking the monetar y fluctuations. Th e questio n ho w growt h i s t o b e maintaine d a t a goo d rat e requires als o t o b e tackled , and , b e i t remembered, s o fa r a s thi s country i s concerned, th e growth of the outside territories , fro m whic h so large a part of our supplie s i s obtained , i s include d i n th e problem , becaus e hithert o thei r growth ha s mainl y bee n dependen t o n th e suppl y o f Britis h capital . I f th e community determine s no t t o allo w th e accustome d rat e o f growt h t o b e forced upo n i t i n th e ol d way , o r no t t o th e exten t whic h prevaile d unti l recently, i t has to be seriously considered whethe r there is any really practicable alternativ e othe r than a substantial slowing down of the rate of growth of wealth. Except for some passages summarizing his own already published views in a critique of Foster an d Catchings' s Profits, Bickerdik e neve r returne d i n prin t t o th e theme s o f hi s 1924-1925 articles.127 In fact he only wrote five reviews afte r "Savin g and the Monetar y System." Betwee n 192 9 an d hi s deat h i n 196 1 h e published nothing although, a s note d earlier, h e se t down an d share d som e o f his thoughts with friends an d regularly attende d meetings o f th e Politica l Econom y Clu b o f London. 128 Thus Bickerdik e too k ove r fro m Casse l a simpl e growt h mode l tha t expande d i n uniform proportion s geare d to the rate o f growth of population; but Cassel di d not explor e the monetary implication s o f a constant growth rate. This i s what Bickerdike did. H e firs t established th e condition s fo r th e maintenanc e o f a constan t pric e level , assumin g a monopolistic state bank under socialism, an d he then examined an array of conditions in a regime o f private saving and investment that would not only bring about alterations in the price leve l bu t als o i n growth rate s an d employment ; i.e., differin g period s o f gestatio n and durabilit y o f capita l instruments , th e likelihoo d tha t th e price-reducin g effect s o f saving woul d lea d t o unemployment, an d the unlikelihood that private savings would b e exactly matche d b y privat e decision s t o replace an d expand th e capita l stock . Each o f th e buildin g block s introduce d b y Bickerdik e ca n b e trace d t o o r associate d with on e o r anothe r figur e o f hi s time ; e.g. , Marshall , Cassel , Pigou , Edg e worth, Robertson.129 An d th e analysi s o f instability , unemployment , an d slo w growt h wa s endemic in Britain of the mid-1920s. Moreover , in this pre-General Theory time , Bicker dike's analysi s o f savin g an d investmen t appear s a bit antiqu e and awkward . Nevertheless, in a quite original way, he wove together som e importan t partial insights of his time; carried growt h modelin g forwar d far beyond J. B . Clar k and Cassel; se t out his exercise s in algebrai c form ; an d clearl y anticipate d th e method s an d "irregularity " concern s o f Harrod-Domar and their neoclassical successors—addin g a few with which they did not choose t o grapple . I n fact , hi s casua l modest y abou t dynami c models i n a stead y equi librium an d acut e consciousnes s tha t thei r prope r us e wa s merel y a s a prelud e t o th e analysis of irregularity and disequilibrium might well hav e been emulate d by som e o f his successors. It shoul d also b e note d that Bickerdik e was quit e aware of the sectora l unevenness of

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productivity increases , whic h captured th e imagination of both Schumpete r an d the earl y Kuznets:130 Growth o f wealt h ha s bee n regarde d a s du e t o correspondin g growt h o f population. Suppose , now , i t is due t o the increasin g productivity o f labour , with, a t first , a constan t population. Th e increasin g productivit y ma y b e th e result o f improvin g processes , o r o f economie s o f large-scal e production , o r of th e conjunctio n o f th e two . Under actual conditions, increasin g productivit y does no t affect al l kinds of production alike , bu t w e can conside r th e fundamenta l questions o n the sup position that the improvement applies equally to all production, an d continues at a unifor m rate . Thus, Bickerdik e consciousl y se t that problem asid e to pursue, out of his early fixation on welfare economics, th e implications for the common interes t of the privately motivate d and separat e decision s t o save an d to invest, i n a capitalist banking and monetary system . Harrod make s n o referenc e t o Bickerdike , a s on e migh t expec t fro m a regula r reade r (and late r editor) of the Economic Journal, wher e Bickerdike mainly published . Perhaps, writing i n th e blindin g ligh t generate d b y Keynes' s General Theory, othe r strand s o f thought an d lesse r figure s fro m th e past wer e temporaril y los t fro m sight . Nevertheless, despit e it s ampl e arra y o f foreshadowin g predecessor s an d progenitors , Harrod's "A n Essa y i n Dynamic Theory" (1939 ) i s likely to retain its present plac e a s a landmark i n economi c analysi s i n general , growt h analysi s i n particular. 131 It s statu s derives fro m th e fac t tha t it crystallized and rendered explici t a way of looking a t growt h and fluctuation s towar d whic h a numbe r o f economist s wer e tending ; and , despit e it s imperfections, i t provide d a bas e an d poin t o f referenc e fo r criticis m an d furthe r refinements. Proximately, Harrod' s "Dynami c Theory" derive s directl y fro m hi s own Trade Cycle (1936).132 That exercise , i n turn, as Harrod point s out , was built on the bringing togethe r of thre e strand s i n economic thought. 133 . . . (i ) There i s a well-established relation, 134 vouche d fo r b y experienc e and the laws of arithmetic, between the demand for consumable good s and the demand for durable goods, th e essence o f which is that the absolute amount of the latter depends primaril y on the rate of increase o f the former. Th e implica tions o f thi s for trad e cycl e theor y ar e her e explored . (ii) Mr. Keynes , i n his recent volume , Th e General Theory o f Employment, Interest, an d Money ha s developed certai n importan t idea s concernin g th e relation s betwee n th e de mand fo r capita l goods , th e propensit y o f th e communit y t o save , an d it s general level of activity and income. Ful l use is made o f these. (iii) I have had occasion i n th e pas t t o wor k upo n th e theor y o f imperfec t competition ; th e object o f thi s branc h o f economic s ha s bee n t o brin g th e genera l theor y o f value int o close r relatio n wit h th e facts . Th e doctrine s s o develope d hav e proved o f relevanc e t o th e trad e cycl e problem . Harrod's 193 6 conclusion was that the trade cycle "result s fro m th e joint operation o f the Relatio n |Accelerator ) an d the Multiplier." 133 I n a summar y section, entitle d "Th e Inevitability o f th e Cycle, " befor e h e turn s t o possibl e remedies , Harro d anticipate s hi s later approac h t o a growt h model: 136 " . . . [L]e t u s suppos e a conditio n o f a stead y advance. Ever y batc h of hostage s t o fortun e (ne t investment) i s precisely justified b y th e

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result, an d on the basis of this experience the advance is maintained.'' H e then goes on to examine th e force s tha t migh t slo w dow n th e rat e o f increas e i n outpu t durin g a trad e expansion; concludes tha t outcome is, on balance, likely: 137 "An d her e is the crux of the matter. If there is any drop in the rate of advance, a recession must occur. A t that point the Relation dominate s th e scene . A declin e i n th e rat e o f advanc e involve s a recession o f investment. Bu t then , i n accordanc e wit h th e Multiplier , consumptio n mus t recede. " Clearly, then , Harrod' s interes t wa s not economic growth , but (like Bickerdike's "ir regularities") cyclica l fluctuation s or hig h chroni c unemployment—a n understandabl e emphasis i n Britai n o f th e mid-1930s . H e wa s led , nevertheless , b y th e natur e o f th e question he posed—what prevents "stead y advance"—to touch briefly on certain growth issues; e.g. , th e relatio n betwee n cycle s an d the rhythm of technologica l innovation, 138 the capital or labor bias of the flow of innovations, 139 the prospects fo r the future increas e in populatio n an d flo w o f innovations. 140 Th e latte r passag e introduce s on e o f th e ke y concepts i n Harrod's 193 9 growt h model; 141 tha t is, th e rate of advanc e "warrante d b y the normal increas e in population and the normal increase i n efficiency throug h inventions and improvements within the period." In fact Harrod introduces his 193 9 excursion int o a dynamic mode l o f growt h b y linkin g it explicitl y to th e passage s cite d abov e fro m hi s 1936 Trade Cycle study. 142 Putting asid e refinements , Harrod' s growt h analysis proceeds i n si x stages . 1. The Fundamental Equation. I n its simplest form, the warranted rate of growth (G w) is determine d b y th e followin g equation: G w = s/ c wher e s is the proportion o f incom e individuals and corporate bodie s (private and public) choose to save; and C is the value of capital good s require d fo r th e productio n o f a uni t incremen t of outpu t (th e accelerato r converted int o th e margina l capital-outpu t rati o o r capita l coefficient) , s an d C ar e as sumed to be independent of the value of output (G). In dynamic equilibrium the warranted rate o f growt h i s "th e on e leve l o f output a t which producers wil l feel i n the upshot that they have done the right thing, and which will induce them to continue in the same line of advance. Stoc k i n han d and equipmen t availabl e wil l b e exactl y a t the leve l whic h the y would wis h to have them." 143 2. Departures o f Actual Growth Rate (G)from G w. I f G exceeds G w a capital shortag e will asser t itself ; production fo r stock s an d equipment will expand; G will depart furthe r and further from G w i n a cumulative process of expansion, via the interaction of multiplier and accelerator . Similarly , i f G falls below G w, capita l equipmen t and stocks are redun dant, an d a self-aggravating decline i n output is set in motion. Th e inheren t instability of the dynami c equilibriu m path i s fundamenta l for busines s cycle analysis . 3. Endogenous Accelerator Investment versus Exogenous (or "Independent" or "Long-Range") Investment. I n fact , al l investmen t i s no t determine d b y th e rat e o f growth o f outpu t (th e accelerator) . Som e component s o f investmen t may be determine d by: (a ) judgment s abou t "prospectiv e long-perio d increas e o f activity" ; (b ) ne w in ventions calculate d t o revolutioniz e production cost s o r consumers ' tastes ; an d (c ) th e level o f incom e rathe r tha n the rate o f growth o f incom e (e.g., publi c works outlay s by public authoritie s o r even busines s firms sensitive t o current profit levels). Thes e refinements reduc e th e role o f the accelerator principl e i n determining the dynamics of growth and fluctuations . 4. Th e Role o f the Foreign Balance. G w i s raised by a rise in imports as a proportion of current income , lowere d b y a ris e in export s or othe r foreig n exchange earnings. 5. Th e Natural Growth Rate. Wherea s Gw varie s with phases of the business cycle and the level of activity, affecting s and C, th e "natura l rate of growth'' is defined b y Harrod

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as "th e maximu m rate of growth allowed by the increase o f population, accumulation of capital, technologica l improvement , an d the work/leisure preference schedule , supposin g that there is always full employment i n some sense.'' Against this background a ' 'proper'' warranted rat e i s define d a s th e rat e "whic h woul d obtai n i n condition s o f ful l em ployment. '' I f the latter i s above th e natural rate a chronic tendenc y to depression exist s because, b y definition , the natura l rate set s a limit on the growt h rate a given econom y can, i n fact, attain. If the proper warrante d rate i s below th e natural rate, th e syste m will experience a successio n o f boom s marke d b y inflatio n an d a shif t o f incom e t o profits . 6. Possible Implications for Policy. I f the proper warrante d rate is substantially above the natural rate, a chronic rather than cyclical problem of underemployment i s confronted and may require long-term anti-cycl e measures. Fo r example, a low interest rate encour ages high values for investment independent of the accelerator an d a high value for C; that is, capital-intensive investment . I t may also reduce s . A virtually permanent public works supplement may also be required. On balance three factors suggested t o Harrod tha t Great Britain as of the late-1930s wa s in such a state and required such remedies: (a ) the decline in populatio n growth ; (b ) th e believe d tendenc y o f th e mor e wealth y t o sav e a large r fraction o f their income; and (c) the possible tendency towar d capital-savin g innovations . This kin d of analysis, linkin g the multiplier and the accelerator, was , a s Harrod note d (in a feebl e bu t rar e pu n i n th e literatur e o f economics ) "rapidl y accelerating " a s th e 1930s dre w t o a close.144 Among the more famous such exercises, fo r example, wa s Paul Samuelson's multiplier-accelerato r essay , virtuall y concurren t wit h Harrod's. 145 Thi s form o f economic analysi s had many antecedents reaching back more than a century; and the pac e o f it s developmen t intensifie d with th e contribution s of a good man y including the most nearly Harrodian, Bickerdike. Nevertheless , Harro d put it all into a neat bundle, focusing i t wit h a touc h o f the Ricardia n Vic e on th e proble m o f Britain i n the 1930 s a s Keynesians sa w it . Notabl y in th e wak e of the recessio n o f 1937-1938 , occurrin g lon g before th e econom y ha d attaine d anythin g approximatin g ful l employment—an d lik e Hansen i n the United State s (following , pp. 321-323)—the y took th e British problem t o be on e o f secula r stagnation. Looked a t closely, virtuall y all elements i n the classic growth equation were to be found somewhere i n Harrod's equation s except educatio n and the quality of the working force . The rate of population increase was there, a s were the investment rate and the productivity of investment . But neithe r Harro d (no r Samuelson) knew what to do wit h Schumpeter' s insight that major innovations were endogenous an d discontinuous, and that their ebb and flow wer e a t th e hear t o f cyclica l fluctuations ; nor di d the y kno w wha t t o d o wit h Kuznets's insigh t that the continuit y of growth hinge d o n a sequence o f leading sectors . Harrod (lik e Bickerdike ) wa s awar e tha t sectora l growt h rate s varied: 146 "Eve n i n a condition o f growth, which generally speakin g was steady, i t is not to be supposed tha t all the componen t individual s ar e expandin g a t th e sam e rate. " Bu t th e convenience s o f highly aggregate d growt h an d cyclica l analysi s wer e to o grea t t o forego ; an d withou t facing u p t o th e inherentl y sectoral characte r o f th e innovatio n process, n o satisfactory growth o r cyclica l analysi s i s possible. 147 This, then , wa s th e mainstrea m economist' s visio n of growt h tha t emerge d fro m th e Keynesian Revolutio n on th e ev e o f th e Secon d Worl d Wa r an d whic h was reaffirme d quite promptl y i n it s wak e once i t wa s clea r tha t reconstruction in Wester n Europ e wa s likely t o succee d an d th e Unite d State s no t plung e agai n int o dee p depression . Evse y Domar's versio n of the growth equatio n was published i n 1947-1948 ; Harrod' s elabora tion o f his 193 9 essay , Towards a Dynamic Economics, i n 1948. 148 A s a framewor k fo r

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viewing th e macroperformanc e o f advance d industria l economies thi s approach ha d th e virtue of employing concepts capable of statistical measurement. The cumulative achievement o f nationa l incom e accountin g provide d usable approximation s for G w, s , an d C . Moreover, i t i s possibl e t o approximat e Harrod' s natura l rat e o f growth ; tha t i s th e approximate rat e o f advanc e tha t th e increas e i n th e workin g forc e an d technologica l change wil l permit, a t relatively ful l employment , given the ful l employmen t value of s . Some suc h path , whe n compare d wit h the actua l path of growth, measure d th e shortfall and proved usefu l fo r some public finance and other purposes. And , so long as the world economy—and especiall y it s advanced industria l countries—moved forward with D. H . Robertson's "slooms and bumps" rather than pre-1914 decennial cycles or a repetition of the European interwar chronic unemployment levels, the refinement of such highly aggregated growt h model s di d n o grea t har m an d afforde d a substantia l phalan x o f talente d mainstream economist s a grea t dea l o f innocen t pleasure i n th e 1950 s an d 1960 s (se e Chapter 15 , t o follow) . On the other hand, it is hard to conceive of a framework less likely to grip and generate understanding of the great boom o f the 1950 s an d 1960 s roote d a s that boom wa s in fou r variables lost among th e black boxes of Harrod-Domar and neoclassical growth models : « Th e larg e backlo g o f technologie s availabl e t o Wester n Europ e an d Japa n alread y applied i n the U.S . economy . • A considerable poo l of relatively new technologie s availabl e for rapid diffusio n i n all the mor e advance d industria l countries, e.g., television , syntheti c fibers, plas tics, a ne w batc h o f Pharmaceuticals , atomi c energy . • A n approximatel y 20 % favorabl e shift fo r th e advanced industria l countries in the terms o f trad e i n the period 1951-1964 . • Despit e a generally adverse shif t i n the terms of trade, an historically unexampled if somewhat errati c phas e o f growt h i n the developin g regions . Nor wa s i t a framework that illuminated the growt h problems o f the 1970 s an d 1980 s (following, pp . 350-351) ; and as Chapter 1 1 argues, i t represented a setback rather than a stage o f progres s i n the pre-193 9 evolutio n of business-cycle analysis.

10 Business Cycle s an d Growth: From Jugla r to Keynes

The perio d 1870-193 9 wa s th e heyda y o f business-cycl e analysi s i n tw o respects : th e problem attracte d a n extraordinar y arra y o f talen t throughou t th e Atlanti c world ; and , from initia l diversit y an d disarray , business-cycl e analysi s move d toward s substantia l consensus.' Combinin g th e inde x of two majo r histories o f economic theory , her e i s the list o f names reference d unde r Business Cycle s fo r this period: Fisher , Hawtrey , Hayek , Hobson, Juglar , Kitchin, Kondratieff, Kuznets, Mitchell (and the NBER), Mises, Moore , Panteleoni, Pigou , Robertson , Schumpeter , Spiethoff , Tinbergen , Wicksell . An d the list is palpabl y incomplete ; e.g. , Burns , Haberler , Hansen , Harrod , Keynes , Myrdal , an d Samuelson o f th e Multiplier-Accelerato r (1939 ) faile d t o mak e it . For reason s se t ou t earlie r I shal l not attemp t t o identif y the angl e o f approac h o f al l these worthies , bu t will simply make two observations. First, i t should be recalled tha t the business cycl e wa s increasingl y recognize d a s a recurrent phenomeno n an d a problem i n the interva l betwee n Malthus-Ricard o (say , 1820 ) an d Mill-Mar x (say , 1870) . Th e central them e o f the period 1870-1939 , a s we have ofte n noted , wa s welfare rather than growth; an d periodi c sever e unemployment , it s vicissitude s inadequatel y cushione d b y private an d publi c measures , emerge d i n democrati c societie s a s a criticall y importan t welfare issu e fro m th e 1870 s forward . Second , a s th e rhyth m o f th e decennia l cycl e persisted betwee n 187 0 an d 1914 , i n a n environment wher e th e volum e of usefu l statis tical dat a progressivel y improved , th e opportunitie s fo r scientifi c stud y o f th e busines s cycle expande d an d wer e increasingl y seize d upo n b y scholar s o n bot h side s o f th e Atlantic. The numbe r an d qualit y o f mind s tha t turne d t o th e stud y o f busines s cycle s thu s resulted fro m a convergence o f rising human and social concern and cumulatively expanding historical an d currently collected evidence . Fro m th e special perspective of this book , however, th e outcom e o f thi s rathe r gran d internationa l scientifi c effor t prove d anti climactic. Jus t a s the linkages betwee n growth and cycles wer e emergin g wit h increasing clarity—moving toward a convergence o f Marshallian long- and short-perio d analysis — the dept h an d socia l patholog y o f th e depressio n o f th e 1930 s drov e economist s t o pu t aside concer n wit h the lon g period. Th e lin k wit h growt h was attenuate d or broken . Le d by Keyne s o f th e General Theory th e operationa l focus for mos t economists became th e expansion i n short-perio d term s o f outpu t an d employment . For thes e purpose s highl y

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aggregated analyse s o f the determinants of effective demand woul d do; and this tendenc y was heightene d b y the maturin g of methods for the measurement of national income an d its majo r components . Chapte r 1 5 demonstrates tha t th e characte r o f th e problem s con fronted (an d not confronted) in the post-1945 worl d encouraged mainstream economists t o persist alon g highl y aggregated line s for almost 3 0 years: until the quadrupling of the oil price i n 1973-1974 . I anticipat e thes e judgments becaus e the y gover n th e organizatio n o f this chapte r an d the nex t whos e sub-titl e migh t be: "Th e Ris e an d Fal l o f Business-Cycl e Analysis. " I believe th e applicatio n o f th e high-powere d overaggregate d theoretica l tool s an d econo metric exercise s tha t dominate d post-194 5 macroeconomic s hav e reduce d rathe r tha n expanded ou r knowledg e o f th e cause s o f fluctuation s i n rea l incom e i n general , th e cyclical proces s i n particular. Som e 4 0 year s late r I wholly agre e wit h thes e gentl e bu t acute observation s o f D. H . Robertso n o n business-cycle analysi s as of 1948. 2 Referring to hi s youthfu l Study o f Industrial Fluctuations (1915 ) he observed : Those lon g hour s o f wallowin g i n th e Economis t Annua l Historie s an d similar material , howeve r crud e an d amateuris h thei r externa l fruits , ha d certain enduring internal consequences. T o one so drenched with the vision of eternal eb b an d flow , relaps e an d recovery , Keynes ' fina l attemp t i n hi s General Theory t o dea l wit h th e savings-investmen t comple x i n term s o f a theory o f static an d stabl e equilibriu m was bound to see m a step backwards , and hi s embrace , o n th e strengt h o f on e ba d depression , o f 10 0 percen t stagnationism a t leas t premature . A s t o stylise d model s o f th e cycle , o f th e kind now so fashionable, they doubtless have their uses, provided thei r limitations are clearly understood . W e must wait with respectful patience whil e the econometricians decid e whether thei r elaborate method s are really capabl e of covering suc h model s wit h flesh an d blood. Bu t I confess tha t to m e a t leas t the force s a t wor k see m s o complex , th e questio n whethe r eve n th e fe w selected parameters ca n be relied o n to stay put through the cycle or betwee n cycles s o doubtful , tha t I wonde r whethe r more trut h wil l no t i n the en d b e wrung fro m interpretativ e studie s o f th e crud e dat a o f th e genera l typ e con tained i n thi s volume , bu t mor e intensive , mor e scrupulously-worde d and more expert . Behind Robertson' s conclusio n i s a more genera l judgment . Sinc e th e busines s cycl e happens t o b e th e for m growt h ha s assume d ove r th e pas t tw o centurie s a t least , th e separation o f th e tw o domain s i s inappropriat e an d ha s prove d analyticall y costly; al though i t i s theoretically quit e possibl e i f a sufficien t numbe r of unrealisti c assumptions are made . In an y case, the reader shoul d b e aware o f the narrow focus tha t governs th e organization o f thi s chapter . I t examine s a highl y selecte d grou p o f significan t business-cycl e analysts, focusin g sharply on whether and , if so, ho w they linked cyclical analysi s to the process o f economi c growth .

Juglar and Some Other Continentals Schumpeter ma y hav e exaggerated somewha t in describing Clement Juglar (1819-1905 ) as "amon g the greatest economists of all times"; but despite hi s predecessors, who m he

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consulted i n a systematic and scholarly way , Juglar's Des Crises Commerciales remain s a major benchmar k in business-cycle analysis , and Schumpete r wa s just i n using his name to designat e th e 9-10-year majo r cycle. 3 Juglar, a medica l doctor , bega n fro m a n unusua l angle: a stud y of populatio n growt h including fluctuation s in marriages , births , an d deaths. 4 Afte r discountin g fo r drought , wars, an d epidemic s h e wa s le d t o reflec t o n th e possibilit y tha t busines s fluctuations might have had an independent impact on these variables. A series of studies, starting out with Ban k o f Franc e dat a fro m 1800 , buil t u p t o th e 186 0 publicatio n o f De s Crises Commerciales. In subsequent editions, Jugla r progressively extended the range o f data he mobilized an d cam e t o embrac e Britai n an d th e Unite d States . H e date d accuratel y th e cycles as well as times of crisis; surveyed various theories of causation, mainly focused on the expansio n an d contractio n o f ban k credit ; explore d i n detai l th e behavio r o f variou s value-denominated variable s (e.g. , prices , interes t rates , exchang e rates , component s o f central ban k balance sheets) ; surveye d proposals fo r remedy (mainl y financial and mone tary); compare d th e sam e crise s i n th e thre e countries , an d analyze d comparativel y th e sequence o f crise s h e identifie d (fro m 169 6 t o 188 2 fo r Britain ; 1800-1882 , France ; 1814-1882, U.S.A.) ; and , finally , h e examine d th e impact o f cyclical fluctuation s o n a wide arra y o f economi c (plu s a fe w social ) variables : This orderl y treatise , organize d wit h impeccable Frenc h logic , close s i n the spiri t o f a wise ol d docto r offerin g advic e t o a n overvolatile—eve n manic—patient: 5 What w e wishe d t o demonstrat e i n thi s wor k an d woul d b e happ y i f w e have succeede d i n suggestin g is: —to thos e wh o place excessiv e confidenc e in th e futur e durin g a perio d o f prosperity , Prudence i n vie w o f th e inev itability o f crisi s an d th e means for calculating th e approach o f crisis; —[t]o those wh o permi t themselves t o become excessivel y depresse d b y th e suffer ing imposed b y the crisis, th e hope o f certain futur e recovery; —to thos e wh o employ or distribute that formidable but fragile power, credit , th e moderation which woul d rende r i t mor e stabl e an d th e backbone t o maintai n it;—t o al l those wh o ar e interested i n human affairs a means t o explain th e facts o f th e past and , perhaps , th e futur e i n way s whic h woul d permi t u s i f no t t o eliminate a t leas t soften thes e terribl e accident s w e cal l Commercial Crises. As Schumpeter points out, Juglar clearly anticipates those, lik e Wesley Mitchell—and , he migh t hav e adde d amon g others , Robertson , Pigou , an d himself—wh o muc h late r sought t o combin e systematicall y theory , history , an d th e orderl y us e o f statistic s t o understand cyclica l fluctuations. But, Juglar , wit h al l hi s pioneerin g virtue , i s somethin g o f a washou t s o fa r a s th e relation between growth and fluctuations is concerned. H e clearly perceived tha t crisis and depression wer e roote d i n the excesses of prosperity; but, except for the need fo r modera tion b y al l hand s durin g th e boo m an d fo r fait h durin g depression , h e ha d n o clea r definition o f th e variable s tha t drove th e economy forwar d alon g th e path i t would hav e followed, i f perfect wisdom—or moderation—ha d prevailed. Lik e his contemporaries, J . S. Mil l and Marx, h e assumed economic progres s wa s normal and, i n a sense, automatic . Against that assumed background his view is well captured in the lines set out on the title page o f Des Crisen Commerciales, her e translated: "The regula r expansion of the wealth of nations does not take place withou t pai n an d resistance. In crises everything stops fo r a time, social life appears paralyzed; but it is only a passing stagnation (torpeur), prelud e to happier times ; in a word , i t i s a genera l liquidation."

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But whatever the theoretical inadequacie s of Juglar's insights, he asserted correctl y an d definitively that a more or less orderly cyclical process existed ; and he demonstrated tha t it was subjec t t o systemati c exploratio n b y th e testin g o f theoretica l hypothese s agains t statistical evidence . One o f the most obviou s characteristic s of cyclical behavio r wa s the greater amplitud e of fluctuation s o f statistica l serie s linke d t o durabl e tha n nondurabl e goods ; an d th e explicit linkag e o f cycle s t o economi c growt h take s it s start—o n th e Continen t a s i n Britain an d th e Unite d States—wit h analyse s tha t com e t o rest o n the volatilit y o f longterm investment . A s Schumpeter pu t it bluntly:6 "Mos t theories o f cycles ar e nothing but different branche s o f that commo n trunk , 'plan t an d equipment.' " At som e ris k o f oversimplification , th e Continenta l successio n i s fro m Tugan-Bar anowsky t o Spiethof f to Haberler's Leagu e o f Nations synthesis (1937 ) an d then Schum peter's Business Cycles (1940). 7 Mar x hover s explicitl y or implicitl y in th e backgroun d throughout, no t because h e outlined a business-cycle theory other s teste d an d refined bu t because he had insisted that the business cycl e was an integral part of economic develop ment unde r capitalis m an d that the cycle relate d someho w t o the process o f fixed capita l formation. Tugan-Baranowsky's stud y o f Britis h industria l crise s wa s publishe d i n Russia n i n 1894, Germa n i n 1901 , Frenc h i n 1913. 8 Tugan-Baranowsky dramatizes his own cyclica l theory i n term s o f th e operatio n o f a stea m engine , a n analog y Hanse n summarize s a s follows.9 ... I t is the accumulatio n o f loanable capita l whic h plays th e role o f the steam i n th e cylinder ; whe n th e pressure s o f th e stea m agains t th e pisto n attains a certain force, th e piston i s set in motion, and is pushed to the end of the cylinder ; her e th e stea m escape s an d th e pisto n return s t o it s forme r position. Th e accumulate d loanabl e fund s operat e i n th e sam e manne r i n industry when they reach a certain volume . Th e funds ar e set in motion—i.e. , expended o n fixe d capita l goods . Onc e th e loanabl e fund s ar e exhausted , industry return s t o it s forme r position . I n thi s manne r crise s recu r periodically. Loanable capital—th e pisto n i n thi s analogy—derive s fro m idl e balance s buil t u p during th e depression ; enlarge d curren t saving s generate d durin g the boom , throug h th e multiplier impac t o f increase d investmen t on income ; an d the expansio n o f bank credit. The bottleneck i s clearly on the supply side of the capital market: expansion proceeds until the source s o f capita l suppl y ar e exhausted . But Tugan-Baranowsk y goe s a bi t beyond . H e devote s a considerabl e portio n o f hi s exposition t o wha t migh t be called th e rea l sid e o f the cycle; tha t is , th e demand fo r and production o f capita l goods , an d th e disproportion s tha t ca n develo p durin g th e boo m between requirement s fo r consumers goods , workin g capital, fixe d industria l capital, an d infrastructure.10 Th e linkag e o f thes e structura l problems—evocativ e o f Marx' s analy sis—to Tugan-Baranowsky' s capital-suppl y pisto n i s not lucidly an d persuasively made ; but it is clear that Tugan-Baranowsky took business-cycle analysis some distanc e beyon d Juglar an d Mar x wit h th e rudiments , a t least , o f a supply-deman d analysi s o f capita l formation. Spiethoff move d forwar d o n thes e foundation s i n tw o respects. 11 First , h e linke d cyclical expansio n mor e explicitly to the growth process by underlining the importance of new invention s an d th e openin g u p o f ne w territories ; second , h e attribute d th e cyclica l

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crisis an d depressio n primaril y t o "overproduction " althoug h h e di d no t exclud e th e operation o f Tugan-Baranowsky' s shortag e o f loanabl e capital a s well. 12 Spiethoff s concep t o f overproductio n does , indeed , tur n ou t t o b e quit e complex , consisting of a long arra y of circumstances in which a "lac k of balance between produc tion an d consumption " ma y exist. 13 Th e critical for m o f overproduction was, of course , what Spiethof f envisaged a t the peak o f the boom, i.e. , th e saturatio n of capital require ments brought abou t by the surge of investment i n durable capita l an d consumers goods. For example: 14 The demand for productive equipment and durable consumers' good s is not continuous; an d whe n an economy ha s bee n full y supplie d wit h such goods , the plan t and machine s whic h produced the m ar e throw n out o f work . Onc e the iro n industr y o f a countr y ha s produce d th e necessar y railways , mer e repair an d upkee p ar e insufficient t o keep th e industr y operating a t capacity. A less obviou s aspec t o f Spiethoff' s analysi s is a question he poses fro m tim e to time but neve r clearl y answers : wha t woul d th e "idea l profitabl e balanced production " b e like?15 Bu t h e i s content t o specif y th e dynami c supply-and-demand force s i n a moder n capitalist econom y tha t render imbalanc e th e norma l conditio n an d t o conclud e almos t wistfully: 16 ". . . balanced profitable productio n . . . as a contrast to overproduction i s a phenomenon o f short duration occurring only at the height of prosperity. Perhap s indee d it is onl y a n idea l whic h is never actuall y realized." It will b e recalled tha t Schumpeter hold s up the image of a n economy i n circular-flow equilibrium an d describe s i t i n professiona l detail , unlik e Spiethoff' s rathe r mystica l "balanced profitabl e production. " Lik e Spiethoff , h e specifie s th e force s tha t rende r smooth dynami c equilibriu m impossible unde r th e broa d rubri c o f "innovation " a s h e defines it . H e the n goe s o n (i n Business Cycles) t o argu e tha t the inherentl y pioneerin g and, then , "swarming " character of the innovation process yields a three-cycle pattern of growth. Hi s accoun t o f the Juglar cycle i s distinguished from tha t of most of his contemporaries b y hi s insistenc e (alread y articulate d i n Theory o f Development) o n th e benig n and constructive role o f cyclical depression a s the process o f diffusing "th e achievement s of the boom ove r th e whol e economi c syste m throug h the mechanis m of the struggl e fo r equilibrium."17 But , lik e Spiethoff , Schumpete r neve r define d clearl y th e shap e o f th e dynamic equilibriu m fro m whic h capitalis m deviated . He did, however , provid e u s with a useful statemen t of the character o f his agreemen t and disagreemen t wit h Spiethoff: 18 ... I should only . . . add one thing, that capital investment is not distributed evenly i n tim e bu t appear s e n masse a t intervals . Thi s i s obviousl y a ver y fundamental fact . . . . Th e effec t o f th e appearanc e o f ne w enterprise s e n masse upon the old firms and upon the established economic situation , having regard t o the fact . . . that as a rule the new does no t grow out of the old but appears alongsid e of it and eliminates it competitively, is so to change all the conditions tha t a specia l proces s o f adaptatio n become s necessary . Thus, Schumpete r placed himself firmly wit h th e mainstream continental tradition but identified i n one terse sentence the factor that most distinguishes his view from tha t of his predecessors an d contemporaries; i.e., hi s recognition that innovations appear "e n masse at intervals " an d se t in motio n a painful a s wel l a s creative proces s o f adaptation . Gottfried Haberler' s Prosperity an d Depression, A Theoretical Analysis o f Cyclical

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Movements (1937 ) belongs , t o a degree, wit h this brief surve y of continental analyses of cycles an d growth; but it is, i n fact, a magisterial effort a t analytic summation embracing cyclical theory throughou t the advanced industrial world. It was a serious respons e to the challenge pose d b y it s Leagu e o f Nation s sponsorship. 19 H e summarize s th e variou s existing business-cycl e theorie s i n reasonabl y clean-cu t categories , wit h the continenta l overinvestment theorists given an ample but not overwhelming hearing, and he construct s a quit e persuasiv e syntheti c portrait of the cycle , as it moves throug h the fou r phase s he defines. Prize s ar e awarde d t o al l withou t the los s o f analyti c coherence. But under the heavy weight of the depression of the 1930 s and the governments' urgen t search fo r short-ru n solutions , growt h virtuall y disappear s fro m Haberler' s analysis . Reflecting the consensus that had emerged sinc e 1870 , investmen t takes over the center of the stage ; bu t i t i s a rathe r abstrac t aggregat e investment—essentiall y a componen t o f effective deman d rathe r tha n a n engin e o f growth . Schumpeter' s creative entrepreneur s make onl y a cameo appearance , an d specific innovations are mentioned mainly as a force that raise s th e profi t rat e abov e th e mone y rat e o f interest , thu s inducing an increas e i n investment, effectiv e demand , an d employment. Growth appear s briefly disguised as "secular trend," a variable, lik e seasonal fluctuations, fo r whic h correctio n i s required: 20 " . . . bein g primaril y intereste d i n cyclica l movements o f th e orde r o f magnitude of three t o twelve years, w e ar e concerned no t s o much with the 'Secula r Trend' a s with departures fro m i t which our series exhibit." Focus on the depression an d its remedy wa s so intense that the accumulating wisdom of the past several generation s o f business-cycl e analysi s was, fo r a time, los t fro m sight ; i.e., th e insight tha t th e busines s cycl e wa s simpl y the for m growt h assumed.

Three Cambridge Giants A sequenc e somewha t simila r t o tha t w e hav e trace d o n th e continen t wa s enacte d i n Cambridge over muc h the same period of time by three remarkable economists wh o cam e along i n Marshall' s wake : D . H . Robertson , A . C . Pigou , an d J . M . Keynes , wh o i s treated i n Chapte r 11 .

D, H. Robertson I begi n th e Britis h stor y arbitraril y wit h th e appearanc e o f th e 23-year-ol d Denni s Robertson a t a sessio n o f th e Roya l Statistica l Societ y o n Decembe r 16 , 1914 , wit h Edgeworth i n the chair. 21 Th e years preceding th e First World War were particularly rich in majo r business-cycl e studies . A s Hutchiso n points out , Spiethoff' s majo r wor k o n business cycle s wa s publishe d i n 1909 ; Pigou' s Wealth an d Welfare an d Schumpeter' s Economic Development i n 1912 , Irving Fisher's Purchasing Power o f Money an d Ludwig von Mises' s Theory o f Money an d Credit wer e als o publishe d i n 1912 , wit h explici t application o f thei r doctrine s t o busines s cycles ; Wesle y Mitchel l an d Alber t Aftalio n published massiv e work s i n 1913 , an d R . G . Hawtrey , hi s extrem e articulatio n o f a monetary theor y o f th e cycle , Good an d Ba d Trade. 22 Cassel' s Boo k I V o n business cycles in his Theory o f Social Economy, publishe d accessibly in German in 1918 , was, in fact, writte n i n 1914 . Thi s wa s als o th e perio d whe n J . A . Hobso n (The Unemployed, 1895), H. H . Davenpor t (1896), Thorstein Veblen (Theory o f Business Enterprise, 1904), and Mento r Bouniatia n (1908 ) wer e publishin g thei r unorthodox , generally undercon-

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sumptionist cyclica l doctrines . Writin g o f th e perio d 1918-1929 , Hutchiso n observe s that:23 "Mos t o f th e mai n contribution s i n thes e year s too k th e for m o f revise d an d perfected version s o f thei r theorie s b y pre-wa r pioneers . . . . " H e cite s Spiethoff , Mitchell, Hawtrey , an d Pigou , an d h e migh t wel l have include d Schumpeter . I introduc e thi s livel y an d creativ e pre-191 4 settin g becaus e youn g Robertso n wa s clearly affecte d b y i t a s wel l a s par t o f it . Ther e wa s evidentl y a n intense , interactiv e international ferment underway, evocative o f the 1930 s on chronic unemployment and of the 1950 s o n economi c development . Robertso n b y n o mean s conforme d t o Myrdal' s image o f th e parochia l Anglo-Saxo n economist s engage d i n "unnecessar y originality" : (p. 623 , not e 44). Robertso n reflecte d a respectful knowledge o f Spiethoff, Aftalion, and other continenta l figures , although hi s acknowledge d weaknes s i n German le d to lags in his direc t comman d o f th e literature . At Robertson' s presentatio n t o the Royal Statistical Society i n January 1914, hi s paper focused narrowl y o n th e possibl e implication s fo r cyclica l fluctuation s o f th e perio d o f gestation o f investment in a wide range of (mainly but not exclusively) British industries. Among others , h e deal t wit h qualitative as wel l as statistica l data relatin g to th e Britis h railway boo m o f th e 1840s ; a serie s o f cycle s i n coa l an d pi g iron ; freigh t rate s an d shipbuilding; coffee , cotto n spinning , an d oil . Wit h great—almos t exuberant—energy , Robertson sough t t o evok e th e institutiona l setting i n whic h thes e sectora l investment s took place; and , i n accounting fo r year-to-year and cyclical movements i n the time serie s he ha d collected , h e sedulousl y consulte d Th e Economist Annual Reviews an d othe r contemporary sources . Th e whole was unifie d b y incisive theoretica l observations , som e of which, a s Robertson late r noted, di d not stand the test of time. Bu t his central proposi tions were essentially correct: (a) the cycle was determined i n part by investment decision s governed b y current marke t indication s of profit to which many responded withou t taking into accoun t th e consequence s fo r suppl y an d profitabilit y of thei r collectiv e decision , when th e perio d o f gestatio n ha d passe d an d ne w supplie s cam e o n th e market , thu s lowering radically th e expected rat e of return over cost in that sector; and (b) the cycle was also affected by the length of life of the capital good, notabl y ships, an element Bickerdik e thought Robertso n ha d inadequatel y stresse d althoug h i t appear s i n his Roya l Statistica l Society paper. 24 Robertson's 191 4 pape r i s th e basi s fo r th e firs t chapte r i n hi s A Study o f Industrial Fluctuations, which , a s Hutchison justly says , wa s "th e firs t monograp h devote d t o the subject b y a n Englis h academi c economis t combinin g historical , statistical , an d the oretical analysis." 25 So far a s the linkin g of growt h t o cycles i s concerned , I would rate Robertson' s stud y among th e fe w mos t origina l o f th e work s publishe d betwee n 187 0 an d 1939 . After "wallowing " lon g hour s in Economist Annual Histories an d similar material, h e emerged wit h a n indelibl e sens e o f ho w an d wh y on e shoul d begi n th e stud y o f bot h growth an d fluctuation s in thei r ful l complexity , i n th e sectors , includin g al l th e majo r factors determinin g sectora l overinvestmen t an d underinvestment . Par t I o f hi s stud y opens wit h three chapter s on "Phenomen a of Supply" followe d by four on "Phenomen a of Demand," includin g an exploration o f th e significance of crop fluctuations. After th e experience o f writin g Part I , n o on e ha d t o tel l Robertso n tha t Marshallia n long-period forces wer e a t wor k ever y day , shapin g event s ove r shor t period s o f time , producin g irreversible structura l change. Another distinguishing characteristic of Robertson's stud y is that he was force d by th e logic of his initiall y sectora l approac h to deal with the profound and inescapable intercon-

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nections withi n th e internationa l economy . Thi s i s a quit e differen t matte r than , say , studies, startin g with Juglar's, tha t place national accounts of cyclical fluctuations side by side or, even , those tha t place emphasis on the macroeffects arising from th e interconnection o f mone y an d long-ter m capita l markets . Whethe r i t wa s th e impac t o n Britis h shipbuilding i n 187 9 o f th e expecte d ris e i n Britis h iro n price s du e t o resume d U.S . railway building, or the recurrent impact of U.S. harvests and construction activity on the Yorkshire woole n trade , Robertso n viewe d th e world economy a s an intensely intercon nected an d interactin g uni t a t the sectora l level. 26 On th e othe r hand , Robertso n di d no t ge t los t amon g th e trees . H e quit e explicitly linked sectora l an d macroanalysis . For example , h e note s i n his 194 8 Introduction: 27 ... I should like to draw attention to the attempt (pp. 2-7), t o define what the whole discussion i s about. One featur e of this attempt is the deliberate selec tion o f real national income . . . rathe r tha n prices , profit s o r eve n em ployment, a s th e thin g whos e fluctuatio n i s t o b e th e primar y objec t o f study. . . . The nex t poin t fo r commen t i s th e stres s lai d o n th e rol e o f invention (including lega l an d geographica l "invention" ) i n mouldin g th e cours e o f investment and hence of general activity. . . . [T]here was nothing really new about this—thoug h Schumpeter's wor k wa s not known to m e till lon g after , and thoug h I had t o procee d i n face o f m y maste r Pigou's the n belief, after wards handsomel y reconsidered , tha t "specifi c invention s ar e like enduring booms i n Nature's bounty, and ar e not, therefore, of first-rate importance for the stud y o f fluctuations." I ventur e t o hop e tha t th e passage s i n thi s boo k which attempt t o trace the differen t consequences , fo r general activity , of the diverse nature s an d successiv e phase s o f th e grea t innovations—railways , basic steel, electricity, oil—ma y stil l be worth searching for clues. Anyway, my exploration s i n thi s field , cursor y a s the y were , hav e lef t m e wit h a n abiding sense of the difficult y o f providing, in a world in which so many and such variou s change s ma y b e wrough t b y th e wan d o f Science , nea t littl e models o f th e trad e cycl e an d ( a fortiori) nea t littl e packet s o f therapeuti c pills. Although hi s analysi s wa s tippe d heavil y t o rea l factors , Robertso n deal t wit h th e monetary aspec t o f cycles a s well in a chapter o n "Th e Wag e and Money Systems," that begins wit h this paragraph: 28 "Th e influenc e of a money, especially o f a credit money , economy upo n th e cours e o f trade i s of suc h obvious importance that it has mor e o r less completely hypnotise d al l but a very few of those who have contributed to the discussion of thi s problem. " He then proceeds to analyze how the banking system plays its part in each phase of the cycle. Alon g the way he rejects a strictly monetary argumen t for crisis an d depression:29 "Monetary influences , though they aggravate the severity of the crisis, ar e not its essen tial cause. " Robertson's conclusio n i s tha t th e busines s cycl e i s th e resul t o f th e peculia r wa y growth proceeds ; tha t is , th e wa y investmen t is conducted . I n general , h e i s content to accept the limpid dictum of Marcel Labordere, a rich French eccentric whose pamphlet on the America n crisi s o f 190 7 mad e a dee p impressio n o n Robertson. 30 "L a cris e es t venue . . . parce qu'o n a voul u faire tro p vit e trop de chose s a l a fois." * *"The crisi s came . . . becaus e people trie d t o d o to o quickl y to o man y thing s a t th e sam e time."

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In fact , Robertso n argue s tha t expansion can b e halted by a reversal o f an y one o f th e forces tha t pulle d th e economy fro m "th e nadi r of depression i n the firs t place." 31 Th e positive force s ar e define d as : (1 ) a n increas e i n productivit y du e t o mor e efficien t methods adopte d "unde r th e stimulu s of depression"; (2 ) goo d globa l harvest s shiftin g the terms of trade favorabl y for industrial products an d raising real incomes ; (3 ) a rise in the expected productivit y of capital goods du e to the wearing ou t of " a larg e numbe r of existing instruments," " the discovery o f the industrial possibilities of a new country," or "some physical o r legal invention"; an d (4) an expansion of credit du e to increased gol d reserves o r an increase i n confidence otherwise caused. Robertson the n specifies how the dynamics of the boom i s capable of reversing each of these expansionary forces: the boom tends t o induc e increasing margina l costs an d decelerate d increase s i n productivity; bad harvests turn up after good ; th e expected rate of return on capital goods will decline as the period o f gestatio n end s an d ne w supplie s com e o n th e market ; an d risin g price s an d interest rate s an d a depletio n o f gold reserve s ma y wel l erod e confidence . So fa r a s growth an d cycle s ar e concerne d i t is clea r tha t (3)—th e ris e an d fal l i n th e expected rat e o f return over cos t (late r Keynes's marginal efficiency of capital)—is what most matter s i n Robertson's analysis ; and that factors (1 ) and (4) play their part vi a their impact o n expectation s an d costs , a s well . From 191 5 t o th e autum n of 191 9 Robertso n wa s i n militar y servic e mainl y i n th e Middle East . H e resume d hi s Trinit y fellowship and wa s assigne d t o writ e th e boo k o n money i n th e Cambridg e Economi c Handboo k series, a t a time , a s Hick s notes , whe n money had become "important." 32 Chart 5.1 exhibitin g the movement o f British prices, unemployment, an d rea l GN P fo r th e perio d 1870—1939 , suggest s th e basi s fo r th e pre-1914 sense of continuity among the major British (and other) economists, th e interwar sense of discontinuity and vulnerability, and the underlying reason for a focusing of talent on problem s o f unemployment , sluggis h growth , an d (unti l th e mid-1930s ) pric e deflation. Robertson, startin g wit h hi s mone y textbook , emerge d quickl y as a majo r exper t o n monetary matters , hi s mos t substantia l work bein g Banking Policy an d th e Price Level (1926), subtitle d An Essay i n the Theory o f th e Trade Cycle. 33 Althoug h a good dea l o f Robertson's boo k i s his contributio n to a n intense contrapuntal dialogue with Keynes on how t o formulat e th e relatio n betwee n saving s an d investment , both me n (an d others ) having recognized tha t the two act s are often performe d b y different actor s wit h differing motives. Ou t o f thi s fermen t Keynes , workin g wit h a circl e tha t increasingl y exclude d Robertson,34 was t o emerge wit h the formulation s in The Treatise o n Money (1930 ) an d General Theory (1936) . Robertson' s insistenc e on th e continuit y of hi s Banking Policy with hi s youthfu l Study o f Industrial Fluctuations, wit h it s stron g emphasi s o n rea l a s opposed t o monetary factors , i s of som e interest . Fo r example, th e opening paragrap h o f the introductio n t o th e firs t editio n o f Banking Policy an d th e Price Level include s this reaffirmation:35 " I suspec t tha t the minds of some moder n writer s ar e unduly influenced by certain exceptiona l feature s of the great post-war boom and slump: I hold that far more weight must be attached than it is now fashionable to attach to certain real, a s opposed t o monetary o r psychological, cause s of fluctuation. . . . " And, lookin g bac k fro m 1949 , Robertso n make s eve n mor e explici t the lin k t o hi s earlier work: 36 My objec t i n writin g th e boo k was , first , t o preserv e and re-present som e part o f the analytical framework of my Study o f Industrial Fluctuation (1915) ,

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which had fallen out of print and which I could not bring myself to attempt to re-write; an d secondly t o interweave with the mainly "non-monetary " argu ment of that work a discussion of the relation between saving, credit-creation and capital-growth . What, then , ca n w e conclud e abou t Robertson' s vie w of growth and cycles? I would make fou r points . First, Robertson' s intellectua l root s were , i n the end, mor e i n the continental than th e British (i.e. , Mill-Marshall ) traditio n o f business-cycl e analysis. In hi s introductio n to Banking Policy, who m doe s thi s so n o f a schoolmaste r an d Anglica n countr y parson , educated a t Eton and as a classics schola r at Trinity, a bachelor whos e only real home for all hi s lif e wa s hi s room s a t Trinity , reare d o n Marshall , taugh t b y Pigou , influence d strongly an d emotionall y b y Keynes—who m doe s thi s ma n cit e i n listing hi s obliga tions?37 Aftalio n (Les Crises Periodiques d e Surproduction)', Cassel (Theory o f Social Economy)', Labordere' s pamphlet of 1907 ; and Spiethoff ("So fa r as I [D.H.R.] can judge without readin g th e original") . Pigo u i s ofte n cited ; and , i n th e 192 6 introduction , th e chapters o n savin g and investment ( V and VI) are described a s the product of "s o man y discussions wit h Mr. J. M. Keyne s . . . that I think neither of us now knows how much of the idea s therei n containe d i s his an d ho w muc h i s mine." 38 Bu t i t wa s a n unflinching lifelong insistenc e o n the role of real supply factors that most distinguishes Robertson an d earns from Schumpeter considerabl e praise tempered by resentment at his imperfect grasp of th e Germa n language. 39 Second, Robertso n wa s clearl y awar e tha t eac h cycl e ha d it s ow n character , an d it s uniqueness ha d t o b e identifie d i n par t b y th e sectora l characte r o f investmen t i n th e leading sector s o f tha t cycle . Ther e is , fo r example , a n extende d passag e tha t begins : "The secon d aggravatio n arises from th e fact tha t the invested resources ar e not as a rule equally distributed among all industries. . . . "40 I t is followed by references t o booms in railroads, electri c traction , rubber , oil , electri c power , etc . Later , i n Banking Policy, h e has a blun t footnote whic h assert s simply : "Th e internationa l boo m o f 187 2 i s i n m y view, t o b e particularly connected wit h railway building; that of 188 2 with invention s in the stee l trade ; thos e o f 190 0 an d 190 7 wit h electricity; that of 191 2 with oil-power." 41 This is as solid a linking of growth to cycles as one is likely to find. Moreover , Robertson , in returning to this theme in Banking Policy, come s closest of any economist o f his time to the notio n o f sectora l optimu m level s o f outpu t (an d investment ) with hi s concep t o f "Appropriate Fluctuation s o f Output " (Chapte r II ) an d "Inappropriat e Fluctuation s o f Output" (Chapte r IV). Chapter II supplies criteria for defining dynamic sectoral equilibri a but mainl y in a cyclical context. Changes i n output would be appropriate i f they reflecte d accurately (1 ) changes i n real operatin g cost s that may reflect innovations in the sector of long-run significanc e or cyclica l fluctuation s in productivity; (2) changes i n demand fo r both capita l good s an d durabl e consumers du e t o the operatio n o f the accelerato r or th e period o f gestation; and (3) intersectoral shift s i n the terms of trade:42 " . . . [T]hu s [it ] is that eve n i n th e simplifie d industria l worl d whic h w e hav e constructe d w e shoul d no t expect the appropriat e or optimu m rat e of industria l outpu t to be constant , but to be subject to a succession o f what may be called 'justifiable ' increases an d decreases, som e at leas t o f whic h are o f a fairl y rhythmica l nature.'' "Divergences betwee n actua l an d appropriat e output " (Chapte r IV) deriv e fro m th e following circumstances : (1) I n man y trades instrument s o f productio n are "ver y large , expensive, an d durable" and , in addition, costly to adjus t t o decreased demand (e.g., the

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laying up of a ship, the damping down of a blast furnace, the closing of a coal pit); (2) the tendency for an excessiv e respons e to an increas e in deman d due to a convergenc e of response tim e lags and excessive estimate s by each firm of its future shar e of the enlarge d market; (3 ) th e vulnerabilit y to mutuall y reinforcing an d excessiv e optimis m (o r pessi mism) about the future i n interconnected privat e markets; and (4) the money illusion—in which a seller is excited b y the rise in his selling price but does no t correctly estimat e th e likely ris e i n price s o f th e good s an d service s h e purchases . Robertson concludes: 43 "Th e ai m o f monetary policy shoul d surel y be not to preven t all fluctuations in the general price-level , bu t t o permit thos e whic h are necessary t o the establishment o f appropriate alteration s in output and to repress thos e whic h tend to carry the alterations i n output beyond the appropriate point.'' Robertson does not pursue the ful l significance o f his distinction between "appropriate " and "inappropriate " expansion o f output fo r a simpl e reaso n w e hav e encountere d ofte n i n thi s parad e o f theorists : hi s interest i s not the construction o f a theory of growth but a theory of cycles o r other lapse s from ful l employmen t o f th e workin g forc e an d o f productiv e capacity . Bu t o f al l th e pre-1939 (and, I would add, post-1945 ) economists , h e came closes t t o commanding the insights required t o link a disaggregated sectoral-growt h theory to the macroperformanc e of th e economy . Third, i t wa s Robertson' s vie w o f the economic process—with it s strands of dynami c real force s powerfull y at wor k i n the sector s an d the increasingl y strong bu t stil l limite d powers o f macropolic y instrument s to moderat e th e impac t o f thes e rea l forces—tha t explains th e differenc e between Robertso n an d Keynes , whic h came t o a head wit h the publication o f the General Theory an d its aftermath. Here i s Robertson's 194 8 reflectio n on bot h Keynesia n theor y an d policy: 44 . . . [T] o spea k frankly , I think there i s too great a disposition amon g th e general publi c t o believ e tha t in th e mid-'30 s som e revolutionar y discover y was mad e abou t "effectiv e demand " whic h has transformed th e whole out look. And the highly inflationary twist then given to that schematic statement of the whole problem whic h has won the widest measure of attention from th e world seem s t o m e t o hav e ha d a n unfortunat e effect o n policy , i n Englan d and th e Unite d States , sinc e th e en d o f th e war . Finally, on e shoul d note th e manne r i n whic h Robertson wov e togethe r th e shor t ru n and th e lon g ru n i n prescribing remedie s fo r industria l fluctuations.45 When fairl y faced , th e proble m o f th e preventio n o f industria l fluctuation becomes nothing less formidable than the problem of maximising the community's aggregate o f net satisfaction through time,—in othe r word s of attaining the best distribution through time of its income of consumable goods which is practicable withou t undesirabl e restrictio n o f th e tota l o f tha t income. In the light o f this definition we may lay down the following propositions. The desired ai m is likely to be furthered first .. . b y anything which increases the tendenc y t o inter-loca l an d inter-tempora l compensatio n i n agriculture ; secondly, b y anythin g which , withou t sacrific e o f efficiency , reduce s th e necessity fo r discontinuit y in th e proces s o f investment ; thirdly, b y anythin g which diminishes the tendency of miscalculation either during the "boom " or the "depression" ; and fourthly , b y anything which mitigates those incidental

Business Cycles an d Growth 26

9

effects o f over-investmen t durin g th e boo m whic h preven t i t fro m bein g followed b y a very larg e volum e o f consumptio n during the "depression. " He closes , afte r explorin g remedie s fo r "inappropriat e fluctuations, " i n a moo d o f questioning evocative o f J. S . Mill , but a good deal les s confiden t of the right answer: 46 From som e points of view the whole cycle of industrial change presents th e appearance of a perpetual immolation of the present upon the altar of the future. During the boom sacrifices are made out of all proportion to the enjoyment over which they will ultimately give command: during the depression enjoymen t is denied lest it should debar the possibility of making fresh sacrifices . Out of the welter o f industria l dislocatio n th e grea t permanen t riche s o f th e futur e ar e generated. Ho w far are we bound to honour the undrawn bills of posterity, and to acquiesce in this never-closing hyperbola of intersecular exchange? Shall we sacrifice ourselve s a s willing victims to the Urge an d urg e an d urg e Always th e procreant urg e of th e world? Or shal l we liste n t o th e word s of one o f the wisest of English philosophers , who counsels us to eat our grapes downwards, and who always washed up the knives first in case it should please God to take him before he got to the forks? The questio n i s on e o f ethics , rathe r tha n o f economics : bu t le t u s a t leas t remember that we belong to an age which is apt to forget the

the

among

and immolate ourselves, it we must, witn our eyes open and

not as in a trance.*

A. C. Pigou (1877-1959) Strictly speaking , Pigo u shoul d b e accorde d precedenc e i n tim e ove r Robertso n i n a discussion o f Britis h analyse s o f th e busines s cycle . H e wa s 1 3 year s older ; becam e Marshall's successo r a s Professo r o f Politica l Econom y i n 1908 ; devoted a substantia l section o f hi s 191 2 Wealth an d Welfare t o "th e Variabilit y of th e Nationa l Dividend;" and supervised Robertson' s Study. 47 O n the other hand, Pigou came at the business cycl e quite explicitl y fro m th e sid e o f welfare . H e conducte d carefu l bu t als o impassione d elaborations o f Marshall . H e demonstrate d i n a tradition reaching back to Hum e that, if one grante d th e legitimac y o f roug h interpersona l compariso n o f utility , transfer s o f income an d wealth from the rich to the poor could enlarg e total satisfactio n in a society . This possibility wa s at the center of his vision; and it found expressio n in his most famous and influential book, Th e Economics o f Welfare. 48 Th e treatment of the business cycle in Wealth and Welfare i s mainly focused on the burdens imposed on labor by fluctuations in income an d employment , an d o n remedies , includin g "a n efficien t nationa l labou r ex change" an d "regularize d deman d fo r labour. " Analytically , Pigo u concentrate s o n irregularities, i n th e "bount y o f nature " an d "th e variabilit y of erro r i n business fore *In a world where the stud y of Greek i s less common than i n Robertson's youth, I should report that reliabl e authority inform s m e th e tw o Gree k phrase s ar e reasonabl y translated, respectively, as "ultimat e aims" an d "inescapable necessities. " I n Richard Kahn's The Making o f Keynes' General Theory, p . 20 , th e phrase s are rendered: "Thing s whic h really matte r amon g the thing s whic h we canno t do without."

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casts" as underlying causes of fluctuations. As noted earlier, Pigo u then firmly held t o a view late r abandoned: 49 "Specifi c invention s are like enduring booms i n Nature's bounty, an d ar e not , therefore , o f first-rat e importanc e fo r th e stud y of fluctuations. " In the end, Pigou' s view comes heavily to rest on the large amplitude of fluctuations in expectations. Thi s turns out to be " a ver y great danger" because "[a ] chang e i n tune in one par t o f the busines s world diffuse s itself , i n a quite unreasoning manner, over othe r and wholly disconnected parts. ' '50 Caugh t up in "sympathetic an d epidemic panic, which so largely sway s communities of men" [Kernmerer , Money an d Prices] there come s int o play a quasi-hypnoti c syste m o f mutua l suggestion: "On e wit h another, sou l wit h sou l they kindle fire fro m fire.'' Thus , " . . . [ t jhey rush in combined panic from sid e to side.'' As w e hav e seen , successiv e error s o f optimis m an d pessimism , wit h thei r impac t o n investment decisions, ha d long been recognized a s part of the business-cycle process. Bu t in hi s tim e Pigo u dramatize d tha t stran d memorably . The busines s cycl e wa s droppe d fro m th e Economics o f Welfare an d pursue d mor e systematically a t boo k lengt h i n Industrial Fluctuations, a stud y whic h illustrate s wel l Robert Skidelsky' s bo n mot 51: " . . . Pigou' s wa y of learnin g a subjec t wa s t o writ e a book on it. . . . " An d he wrote a book which , like Robertson's Study, seek s t o combine theory, statistics , an d frequent historical illustration. It i s a bit like Haberler' s Leagu e of Nations stud y i n tw o respects : i t embrace s an d seek s t o integrat e th e majo r analyti c hypotheses, includin g real, psychological , and monetary factors, with generous acknowl edgments to the wor k of others; an d i t budgets about 15 0 pages for a critical examination of "remedies"—centra l bank and credit policy , wage policy, an d a variety of devices t o stimulate th e deman d fo r labor , includin g relie f works , unemploymen t insurance , etc . As fo r growth , Pigou , lik e mos t o f hi s contemporaries , wa s quit e wel l awar e tha t cyclical fluctuation s are a product o f th e proces s o f growth ; but hi s metho d i s to isolat e cycles fro m growt h fo r purpose s o f bot h analysi s an d prescription . Fo r example : • I n defining the problem o f cyclical analysis, which he identifies in terms o f fluctuations i n employment , h e focuse s o n "deviations i n th e movement o f th e demand schedule away fro m it s general line o f trend"; i.e. , fro m th e pat h o f growth. 52 • I n introducing rea l cause s o f cycles, Pigo u begins with a static norm or steady tren d and the n move s on: 53 In a non-stationar y stat e . . . rea l cause s ma y se t goin g psychologica l causes: actua l prosperity, fo r example , leadin g peopl e t o take a n unduly optimistic vie w o f th e future . O n th e othe r hand , psychologica l cause s must se t going real causes, fo r an error of expectation made by one group of busines s men , leadin g t o increased or diminished output on their part , alters th e facts wit h whic h othe r group s ar e confronted . No r i s thi s all . The reaction s se t u p may , whe n onc e started , b e reciprocatin g an d continuous . . . " • I n dealing wit h technological change , Pigou firs t introduce s "mino r inventions and improvements" that, "fro m th e point of view of general industria l fluctuations [are] a minor factor tha t may safel y b e left ou t of account."54 He then goes on with this passage tha t draws a sharp Schumpeterian line between invention and innovation. 55 There are , however , fro m tim e t o tim e larg e an d dominatin g in ventions, suc h a s thos e associate d wit h railwa y development, electrical development, an d s o on . . . .I t i s no t th e makin g of a n inventio n or a discovery tha t set s u p eithe r the reaction s of whic h w e hav e just bee n

Business Cycles and Growth 27

1

speaking i n th e industr y primarily concerne d o r th e reaction s i n othe r industries: i t i s th e adoption an d actual working o f th e inventio n o r discovery tha t does this . • Som e fort y page s furthe r o n he evokes th e pioneering entrepreneur: 56 In these circumstances [lowe r cyclical turning point] certain of the bolde r spirits i n industry begin to make preparations for an enlarged output, or to venture upon some hitherto untried type of enterprise, fo r which scientific advance ha s opened u p th e way. The pioneers , wh o thu s undertak e and expand enterprises , at onc e fil l a socia l nee d and lay up treasur e for themselves. Gradually , a s n o disaste r happen s t o them , othe r les s bol d spirits follo w thei r example ; the n others an d ye t others. . . . All these people are further encouraged by the fact . . . that, during the preceding perio d o f depression, ther e has probably been a n accumulation of technica l improvements . . . . Advanc e thus take s plac e all alon g the line. • Thes e tw o passages—take n together—represen t a considerabl e advanc e ove r Pigou's positio n i n Wealth an d Welfare. And , if read , a s the y ca n be , a s simpl y emphasizing the distinction between the technological functio n o f invention and the investment proces s o f innovation , the y stan d a s a legitimat e par t o f th e busines s cycle story . I woul d thu s conclud e tha t Pigo u carrie d forwar d i n Britai n i n th e 1920 s wit h les s originality bu t o n a wide r fron t th e precociou s prewa r pioneerin g wor k o f hi s student , Dennis Robertson . Al l the diverse essential element s wer e present in his work; but he did not begin with the process of economic growth and ask: What in that process made growth assume the form of cycles? He asked: How can I eliminate the trend (or growth) elemen t from th e data , s o that I can isolat e the purely cyclical elements i n the process? The tw o questions are not quite identical; although it should also be noted that, in a footnote, Pigou quoted withou t criticism Schumpeter' s centra l doctrine : "Th e recurring periods of prosperity o f the cyclica l movemen t ar e the for m progres s takes i n a capitalistic society." 57 He di d not , however, pursu e th e ful l implication s o f tha t proposition. But in Britain as elsewhere, business-cycle analysis, as it had been evolving in the firs t third of the twentieth century towards an increasingly sophisticated linkag e of cycles and growth, o f th e Marshallia n shor t an d lon g periods , wa s transforme d an d almos t over whelmed b y th e Keynesia n Revolution.

11 Business Cycle s an d Growth: Keynes an d Afte r

J. M. Keynes (1883-1946) So much has been writte n about Keynes an d the Keynesian Revolution—th e ma n was so multi-faceted, hi s impac t o n economic s s o ramified , hi s nam e associate d wit h s o man y parallel or obliquely related developments—tha t i t would be easy to be drawn at this point into on e mor e spaciou s essa y o n hi s characte r a s a personality an d scientist , an d o n hi s times, ideas , an d influence . Wha t I have t o sa y wil l b e mor e usefu l i f disciplined rathe r sharply t o th e narro w questio n tha t concern s u s i n thi s chapter ; i.e. , Ho w i f a t al l di d Keynes's business-cycl e analysi s lin k t o th e analysi s o f growth ? Th e answer , w e shal l find, i s that there wa s a considerable retrogressio n betwee n A Treatise o n Money an d The General Theory. In both books hi s purpose wa s to use analysis of the trade cycle to exercise an d illustrate his central themes . I n A Treatise, h e begins with an already familia r proposition; i.e. , tha t saving an d investmen t ar e function s performe d b y differen t person s o r institution s fo r different purposes . Th e dynamic s o f A Treatise depend s o n definition s o f incom e an d saving tha t exclud e windfal l profits an d losses o f entrepreneurs. 1 Savin g and investment are, therefore , unlikel y t o b e equal . Th e differenc e between the m drive s th e economi c system int o expansion (i f investment exceeds saving ) or contraction (vice versa); but each process i s inherently limited . Keynes begin s hi s treatment o f the trade cycl e (whic h he calls th e "credi t cycle") by defining a dynamic equilibriu m i n which ' 'the suppl y of money i s being increase d a t the same stead y rat e a s that of general output ; e.g., (say ) 3 % per annum." 2 In this quantitytheory-of-money proposition , M V i s increasing a t the rate o f Q , an d P i s steady. Keyne s then asks : "I n wha t wa y ca n thi s stat e o f equilibriu m be upset? " Keyne s respond s b y identifying potentia l source s o f disequilibriu m i n monetary , investment , an d industria l factors. Against this background h e traces ou t in generalized terms the "life-history " of a credit cycle, whic h takes it s star t a s follows: 3 Let u s suppos e tha t circumstance s hav e com e abou t whic h lea d en trepreneurs t o believ e tha t certai n ne w investment s wil l b e profitable ; fo r example, a new technica l discovery, suc h as stea m or electricity or the inter-

Business Cycles an d Growth 27

3

nal-combustion engine , or a shortage o f houses du e to a growth of population , or mor e settle d condition s i n a country where previousl y th e risk s of norma l development ha d bee n excessive , o r a Capital Inflatio n due to psychologica l causes, o r a reaction stimulate d b y chea p mone y fro m a previou s perio d o f underinvestment; i.e., a previous slump . I f they ar e to put their projects int o operation, the y mus t eithe r attrac t factor s o f productio n fro m othe r em ployments or employ factor s previousl y unemployed. Keynes the n argue s tha t thi s process (whic h ca n tak e variou s forms ) i s likel y t o se t i n motion a ris e i n bot h price s (Commodit y Inflation ) an d cost s o f productio n (Incom e Inflation); bu t th e forme r wil l exceed th e latter , windfal l profit s wil l result , and , o n hi s definitions, investmen t wil l exceed savings . All this implies compliance o f the monetar y authorities an d a n increas e i n interes t rate s no t sufficientl y grea t t o destro y th e moo d o f confidence tha t pervade s wha t Keyne s call s th e Primar y Phas e o f the credi t cycle . In th e Secondar y Phase , a s expansio n diffuse s an d ful l employmen t i s approached , costs ris e faster than prices of output (Income Inflatio n overtake s Commodity Inflation) , and "soone r o r late r consumptio n good s wil l b e comin g o n th e marke t whic h ca n n o longer be sold at the previously rulin g price; s o that the downward phase of the cycle now commences."4 Othe r force s ar e likel y t o operat e tha t als o decre e a fallin g expecte d profitability o f investment , spreadin g los s o f confidence , excessiv e interes t rates , an d credit contraction . Al l can b e drawn together unde r the rubric of a shift t o a perio'd when entrepreneurial losses , b y definition , yiel d a n interval wher e savin g exceeds investment . Keynes concludes an d draws on e of the two major operational lesson s o f A Treatise a s follows:5 All thi s presume s o f cours e tha t th e Bankin g Syste m ha s bee n behavin g according t o the principles whic h have in fact governe d i t hitherto, an d that it lies eithe r outsid e it s purpose o r outside it s power s o to fi x and maintai n th e effective bank-rat e as to keep Saving and Investment at an approximate equal ity throughout. Fo r i f it were t o manage th e Currency successfully accordin g to th e latte r criterion , th e Credi t Cycl e woul d no t occu r a t all. The secon d majo r lesson follows , namely , tha t a stabl e price leve l ma y no t alway s b e a correct overriding criterion fo r public policy because ther e may be circumstances wher e a protracted (a s wel l a s a temporary ) Commodit y (no t Income ) Inflatio n migh t prov e salutary:6 It shoul d b e notice d tha t the Commodit y Inflatio n phase o f a Credit Cycl e cannot be of use for continuously raising the rate of wealth-accumulation. It is only usefu l fo r th e purpos e o f producing a short , sudde n spurt . . . . A prolonged Commodit y Inflatio n du e to progressive increase s in the sup ply o f money, a s contrasted wit h a prolonged Commodit y Deflation, i s quit e another thin g . . . an d ma y b e a mos t poten t instrumen t for th e increas e o f accumulated wealth . . . . The advantage s to economic progres s an d th e accumulatio n of wealt h will out-weigh th e elemen t o f socia l injustice , especiall y if the latter can be taken into account, and partially remedied, by the general system of taxation;—and even without this remedy, i f the community start s fro m a low level o f wealt h and i s greatl y i n nee d o f a rapi d accumulation of capital .

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Volume II of A Treatise extends hi s analysis of the volatility of investment and provide s eight historica l illustration s o f hi s syste m an d th e polic y doctrin e h e evolve d fro m it. 7 Once again , a s we sa w in Keynes's descriptio n o f the possible initiatin g forces fo r th e primary phase o f the credit cycle , his analysis fully embrace s th e Marshallian long perio d and th e factor s makin g for growth. H e focuses o n the greater volatilit y and amplitude of movement o f investmen t as th e caus e o f disequilibriu m between savin g and investment , and he returns to the role of innovational investment with this reference to Schumpeter and the wor k o f other s wh o sough t t o lin k growt h an d cycle s bu t weavin g i n a n explicitl y Robertsonian linkag e o f rea l an d monetar y factors. 8 In the case of Fixed Capita l it is easy to understand why fluctuations should occur i n th e rat e o f investment . Entrepreneur s ar e induce d to embar k o n th e production o f Fixed Capita l or deterred fro m doin g s o by their expectations o f the profit t o be made. Apart fro m th e many minor reasons wh y these shoul d fluctuate i n a changin g world , Professo r Schumpeter' s explanatio n o f th e major movement s ma y be unreservedly accepted . H e points to "th e innova tions mad e fro m tim e to time by the relatively small number of exceptionall y energetic busines s me n . . . whe n a fe w highly-endowe d individual s hav e achieved success , thei r exampl e make s th e wa y easie r fo r a crow d o f im itators. So , onc e started , a wave o f innovatio n gains momentum. " It i s onl y necessar y t o ad d t o thi s tha t th e pac e a t whic h th e innovating entrepreneurs wil l b e abl e t o carr y thei r project s . . . wil l depen d o n th e degree o f complaisanc e o f thos e responsibl e fo r th e bankin g system . Thu s whilst th e stimulu s t o a Credi t Inflatio n come s fro m outsid e th e Bankin g System, i t remains a monetary phenomenon i n the sense that it only occurs if the monetar y machin e i s allowe d to respon d t o th e stimulus . . . . Accordingly I find mysel f i n strong sympathy with the schoo l o f writers— Tugan-Baranovski, Hull , Spiethof f an d Schumpeter . . . . But non e o f thes e writers clearl y apprehen d th e direc t effec t o n prices o f disequilibri a between savings an d investmen t an d th e par t playe d b y th e Bankin g System . Th e pioneer wor k at this point is due to Mr. D . H . Robertson (Banking Policy an d the Price Level). Moreover , lackin g a versio n o f th e Quantit y Theor y o f Money applicabl e t o th e problem o f Credi t Cycles , the y hav e no t go t t o th e root of the matter or perceived tha t Cycles due to a growth of Working Capita l are a t leas t a s "characteristic " a s thos e primaril y due t o a growth of Fixe d Capital. And growt h doe s no t disappea r fro m Keynes' s eigh t historica l illustration s which , a t some ris k o f oversimplification , ca n b e summarize d tersel y a s follows: • Spanish Treasure. Th e inflo w o f bullio n to Europ e startin g early i n the sixteenth century yield s fo r Britai n an d Franc e a greate r rat e o f Commodit y tha n Incom e Inflation an d a salutar y protracte d increas e i n investmen t relativ e t o saving . H e concludes tha t eve n th e workin g class , whic h experience d a fal l i n relativ e rea l income, wa s rewarded in the long run; but that the lesson for the present should not be hastil y drawn. 9 • Th e Depression o f the Eighteen Nineties. Keyne s takes this period to be a "perfec t example o f a prolonge d Commodit y Deflation'' directl y analogous to hi s vie w of Britain i n th e 1920s : price s fel l mor e tha n costs , investmen t fel l of f radically ;

Business Cycles an d Growth 27 savings an d rea l wage s fo r th e employe d were , respectively , wel l maintaine d an d increased; interes t rate s wer e extraordinaril y low. Th e Ban k of Englan d als o wal lowed i n gold , a situatio n no t typica l o f th e 1920s . T o dea l wit h th e cas e o f relatively protracte d an d stubborn exces s o f saving over investment , Keynes counseled a s follows: 10 ... I t may have been a case where nothing but strenuous measures on the part o f th e Governmen t coul d hav e bee n successful . Borrowin g b y th e Government an d other public bodies to finance large programmes o f work on Publi c Utilitie s an d Government guarantee s o n the lines of the recen t Trade Facilitie s an d Expor t Credi t Act s wer e probabl y th e onl y way s of absorbing curren t saving s an d s o avertin g th e heav y unemploymen t o f 1892-95. But any such policy was of course utterl y incompatible with the ideas an d orthodoxie s o f th e period. • The War Boom, 1914-1918. By trial and error, withou t an adequate theor y of war economy o r eve n wa r finance, Britai n evolved a "virtuous " system: 11 ... I t is expedient t o use entrepreneurs as collecting agents . But let them be agents an d no t principals . Havin g adopte d fo r quit e goo d reason s a policy whic h pours the booty into their laps, let us be sure that they hand it over i n the form o f taxes, an d that they are not enabled to obtain a claim over th e future incom e o f the community by being allowe d t o "lend " to the Stat e wha t ha s thu s accrue d t o them . T o le t prices ris e relativel y t o earnings and then tax entrepreneurs t o the utmost is the right procedure fo r "virtuous" wa r finance . . . . Whilst I am not aware that the theory of the matter was ever expresse d quite in this way, this is very nearly the system which the British Treasury had actuall y evolve d b y th e metho d o f trial-and-error towards the en d of the war. 9

Th e Post-War Boom, 1919-1920. Commodit y Inflatio n (an d investmen t in exces s of saving) continued from th e sprin g of 191 9 to the middle of 1920 ; i t then reverse d with wage s outrunnin g prices t o th e en d o f 1921 . Keyne s concludes: 12 Looking back , w e se e that the extreme prolongatio n of the slum p was due t o th e Profi t Deflatio n which occurred i n the firs t hal f of 1921 . Thi s was doubtless inspired by the object of cancelling some part of the Incom e Inflation o f the wa r an d post-war periods—a s was , indee d effecte d fro m the middl e o f 192 1 t o th e en d o f 192 2 an d agai n subsequentl y t o 1924 . But from th e standpoint of national prosperity i t was a mistake. W e might have avoide d mos t o f th e trouble s o f th e las t ten years—an d been , per haps, jus t abou t a s rich a s the Unite d States—if w e had endeavoured t o stabilise ou r monetar y positio n o n th e basi s o f th e degre e o f Incom e Inflation existin g a t th e en d o f 1920 , i.e. , abou t 17 5 pe r cen t u p a s compared wit h pre-war. Incidentall y this would have left th e real burde n of th e Wa r Deb t a t less tha n two-thirds of it s presen t figure . Th e polic y actually adopte d increase d th e severit y o f th e Deb t proble m b y 5 0 pe r cent, an d gave us a decade o f unemployment which may have diminished the productio n of wealt h by mor e tha n £1,000,000,000 .

• Great Britain's Return t o the Gold Standard (May 1925]. Th e Ban k of England's return to the gold standard produced a fall i n commodity prices and profits but not in costs (i.e. , wages). 13

5

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The entrepreneur , face d with prices fallin g faster than costs, had thre e alternatives ope n t o him—t o pu t u p wit h hi s losse s a s best h e could ; t o withdraw fro m hi s les s profitabl e activities , thu s reducin g outpu t an d employment; t o embark o n a struggle with his employees t o reduce thei r money-earnings per unit of output—of which only the last was capable of restoring rea l equilibriu m from th e nationa l point o f view . . . . The entrepreneu r trie d al l three. . . . ... th e loss of national wealth entailed by the attempt to bring about an Income Deflatio n b y means o f the weapons appropriat e t o a Profit Defla tion wa s enormous . I f w e assum e tha t onl y hal f th e unemploymen t wa s abnormal, th e los s o f nationa l outpu t ma y b e estimate d a t mor e tha n £100,000,000 per annum— a los s whic h persisted ove r severa l years . « British Home an d Foreign Investment after th e Return to Gold. Th e post-May 192 5 adjustment o f th e Britis h econom y wa s furthe r complicate d b y a viciou s circle . Profit deflatio n a t hom e rendere d capita l export s mor e attractiv e a t a tim e whe n Britain's overvalue d exchang e rate rendered i t impossible to generate the surplus on trade accoun t tha t shoul d financ e capita l exports . Th e consequen t pressur e o n th e overall Britis h balance o f payments led to higher interest rate s in London, prolong ing th e excess of domestic savin g over investment , increasing further the attractio n of foreign lending . Since the attainment of an adequate trade surplus appeared rule d out when Keynes wrot e (1930 ) h e advocated a series o f familiar remedial measure s of publi c polic y plu s the following: 14 It ma y b e tha t th e attainmen t o f equilibriu m i n accordanc e wit h ou r traditional principles woul d be the best solution,—if w e could get it. Bu t if socia l an d political force s stan d in the way of our getting it, the n it will be bette r t o reac h equilibriu m by suc h a device a s differentia l terms fo r home investmen t relativel y t o foreig n investment , an d even , perhaps , such a fallin g of f fro m grac e a s differentia l term s fo r home-produce d goods relatively t o foreign-produced goods , tha n to suffer indefinitel y the business losse s an d unemploymen t which disequilibrium means. Thus, afte r abou t 17 5 years , th e mainstrea m traditio n o f advocac y o f fre e trad e b y British politica l economist s cam e t o a n end . • Th e United States, 1925-1930. Th e America n boo m an d cras h wa s a puzzl e t o Keynes an d his Treatise syste m wit h which he felt impelle d t o grapple. H e viewe d the boo m a s marke d b y a rare maintenanc e of balance betwee n savin g an d invest ment wit h commodity price s falling , down t o it s climactic phase (1928-1929) . I n part this equilibrium was due to a great expansion in corporate saving , about 60% of the U.S. total , despite th e lack of Commodity Inflation an d the windfall profit s that thereby accru e t o entrepreneurs. Keyne s concluded that a Profit Inflation di d occu r in 1928-192 9 in which, for corporations, hig h short-term money-marke t rate s wer e outbalanced b y hig h stoc k prices relativ e t o dividen d yields . Nevertheless , i n th e end, th e protracte d perio d o f dear mone y precedin g th e stoc k marke t cras h ha d it s effect, reinforce d b y th e depressin g psychologica l effec t o f th e cras h itsel f o n consumers' purchase s o f ne w motorcar s an d othe r "extravagances. " • Th e "Gibson Paradox." Why , systematically , did long - an d intermediate-term trends i n commodity prices mov e in the same direction as interest rates, all the way back t o 1820 ? Keynes' s centra l propositio n was quit e Wicksellian: the marke t rat e of interes t tende d systematicall y to la g behin d th e natura l rate ; th e la g induce d a

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' 'prolonged tendency for investment to fall behin d saving when this [natural] rate is falling . . . and to run ahead of saving when it is rising. . . . " 15 Thu s he concludes again wit h a lesso n fo r Britai n in 1930: 16 In general, I am inclined to attribute the well-known correlation t o .. . a failur e o f th e market-rat e o f interes t t o fal l a s fas t a s th e natural rate. . . . ... I repeat that the greatest evil of the moment and the greatest dange r to economi c progres s i n th e nea r futur e ar e t o b e foun d i n th e un willingness of the Centra l Bank s of the worl d to allow the market-rat e o f interest t o fal l fas t enough . I hav e summarize d these application s o f th e Treatise syste m fo r tw o reasons . First , I have lon g conclude d tha t the simples t way to verify one' s understandin g of an economi c theorist's concepts i s to observe ho w he applies them to a familiar body of fact.17 This is a particularly usefu l supplementar y metho d i n dealin g with a rather comple x treatis e lik e Keynes's, ful l o f special definitions , learned elaboration s and detours, an d the somewha t ponderous self-consciousnes s o f a grea t boo k summarizin g a quarter-century' s study , experience, an d reflection. I don't believ e an y one can read thes e eight illustrative homilies withou t understandin g the essenc e o f Keynes' s Treatise syste m an d it s message . A secon d reaso n i s t o sugges t ho w closel y geare d Keynes' s Treatise theor y i s t o it s message. Despit e it s scale , academi c texture , reference s t o th e literature , an d almos t leisurely pace , th e Treatise i s quit e a s muc h a pamphle t fo r th e time s a s th e General Theory. I t argued the sequence o f consistent position s he had taken, startin g in July 1923 , opposing th e return to the gold standar d at prewar parity , proposing positively a mixture of monetary an d fiscal policies, domesti c an d international, designed t o free Britain fro m the tyrann y o f impose d deflatio n an d chroni c hig h unemploymen t that average d 13 % in 1921-1924 an d 11 % i n 1925-1929. 18 Th e definition s o f savin g an d investment , th e distinction betwee n Commodity an d Income Inflation, and all the rest of the paraphernalia constitute, fro m th e perspectiv e o f economi c theory , on e o f a numbe r o f effort s i n Keynes's generatio n t o escape from th e limitations of the quantity theory of money, with its obsessiv e focu s o n th e price leve l rathe r tha n the rat e of growt h of output or leve l o f unemployment. A s on e o f Keynes' s biographer s ha s written: 19 "Th e histor y o f th e Keynesian revolutio n i s largel y a stor y o f Keynes' s escap e fro m th e quantit y theory o f money." But mor e fundamentally , the theoretica l structur e Keynes devise d betwee n 192 5 an d 1930 wa s designe d t o provid e a fir m underpinning—an d i f possible , a professiona l consensus—for policy positions he felt were fundamental t o the survival of a vital Britain. This was , o f course , als o Keynes' s purpos e i n Th e General Theory. Wha t evoke d a second heroi c effor t t o remak e th e theoretica l foundation s of wha t w e no w cal l mac roeconomic policy ? First, th e Treatise faile d t o achiev e Keynes's gran d purpose. Alon g wit h testimony t o the Macmillan Committee i n 193 0 and , indeed, al l he had written and argued since 1923 , Keynes contribute d significantl y t o th e consensu s tha t shape d th e radica l revisio n o f British domesti c an d foreig n economi c polic y i n 1931 . Bu t th e Treatise, whil e widel y respected, faile d t o rall y th e economic s professio n t o th e fir m analyti c consensu s h e judged necessary to force a radical change in public policy. Fe w of his fellow economists accepted eve n hi s criticall y importan t definition o f savin g an d investment , althoug h in imprecise, commonsensica l form th e notio n of a gap achieve d wide currency.

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In a curious wa y Keynes's sens e of frustration i f not failure in the wak e of the Treatise ranks i n the history of economic doctrin e with David Hume's reactio n t o what he judged to be the failure of his youthful Treatise o f Human Nature. Tha t reaction yielded Hume' s brilliant and highly successful short policy essay s i n economics an d politics. I n Keynes' s case it yielded a determination th e next time round t o capture the attentio n of his professional colleague s an d th e economically-literat e publi c b y hittin g th e sluggis h mul e o f conventional wisdo m wit h a 2 x 4 . I n th e clima x t o on e o f th e bes t passage s i n hi s biography o f Keynes , coverin g th e transitio n fro m A Treatise t o th e General Theory, Harrod state s th e poin t well: 20 It has been said , wit h some sho w of justice, that in this volume he went out of hi s wa y t o stres s difference s from an d fin d weaknesse s i n traditional economic theory . .. . T o som e h e seeme d t o tak e a mischievou s pleasure — perhaps h e did—i n criticisin g revere d names . I n fac t thi s wa s don e o f se t purpose. I t was his deliberate reactio n to the frustrations he had felt, an d was still feeling, a s the result of the persistent tendency to ignore what was novel in his contribution. He fel t h e would get nowhere i f he did not raise the dust. He mus t ra m i n th e poin t tha t wha t h e wa s sayin g wa s inconsisten t with certain line s o f classica l thought , and that those wh o continued to argu e tha t he wa s merel y embroiderin g ol d theme s ha d no t understoo d hi s meaning. A second facto r a t work in the post-Treatise (post-1930 ) perio d wa s a worsening o f the world (and British) economic situation . The average leve l of British unemployment in the 5 years 1930-193 4 wa s over 19%, rising to a peak of 22% in 1932; but it was still 17% in 1934, a t the end of which year The General Theory began to circulate for criticism. I n the 1920s, whos e problem s generate d A Treatise, th e Unite d States enjoye d grea t sustaine d prosperity, an d France and Germany quit e goo d time s i n the period 1925-193 0 whe n A Treatise wa s written. I t aimed primarily to stir Britai n from wha t Keynes regarded as the costly perversit y o f Treasur y an d Ban k o f Englan d policy . I n th e 1930 s Keyne s wa s concerned fo r th e fat e o f th e Wes t an d democrati c civilizatio n a s a whole , palpabl y threatened fro m abroa d b y faspis m an d communism , an d a t hom e b y th e unwisdo m of conventional politica l econom y an d the bedeviled politician s who had no other doctrine s to turn to . Third, i n hi s escap e fro m th e Quantit y Theor y o f Mone y t o on e tha t relate d money , prices, output , and employmen t i n a better way , Keynes's Treatise prove d t o b e a way station. H e began immediately t o move beyond, stimulate d by the emergence as the 1930 s began, o f a livel y circl e o f youn g economists . Thei r leade r i n relatio n t o Keyne s wa s Richard Kahn , wh o alon g wit h Denni s Robertso n wa s cite d b y Keyne s fo r importan t assistance i n th e fina l stage s o f A Treatise. Startin g with his celebrate d "Hom e Invest ment and Unemployment'' (Economic Journal, Jun e 1931), Kah n and his multiplier was a major acto r in the process that yielded the General Theory. Th e multiplier related chang e in th e level o f investmen t directly to a change i n the level of employment o r income , th e impact o n th e latte r dependin g primaril y o n th e proportio n o f incom e save d an d spent . This eliminate d th e rol e o f windfal l profits an d losse s (an d Commodity versu s Incom e Inflations an d Deflations ) as th e instrument s driving the syste m t o expan d o r contract . And, a s every elementary student of economics now knows, Keynes argued that the level of investmen t (and thus employment and income) was determined by the intersection of a marginal efficiency o f capital curve (essentially Fisher's expected rate of return over cost)

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and th e rat e o f interest ; bu t interes t wa s determine d independentl y by th e multipl e de mands for money (liquidit y preference) and the supply of money provided b y the banking system. Wit h the rate of interest thus determined by forces other than a simple equilibrium clearing o f demand an d suppl y i n th e investmen t market , a n explanatio n coul d b e pro vided fo r chronicall y hig h level s o f unemployment . Keynes' s decade-ol d suppor t fo r active publi c policies to reduc e interes t rate s an d stimulat e investmen t and consumptio n had a new theoretica l rationale . In thi s formulatio n investmen t an d savin g wer e brough t int o equalit y b y a dynamic process i n which , fo r example , intende d savin g i n exces s o f investmen t s o lowere d income a s to yield , e x post, equalit y with investment. Now, wha t about growth and cycles i n the General Theory? I t will be recalled that , in the Treatise Keyne s accepted , a s descriptive background , th e insight s of hi s contempo raries wh o took int o account changes i n technology (preceding , p . 274) . Th e investment that exceeded o r fel l shor t o f saving , as he then defined them , embrace d quit e explicitl y major discontinuous innovations. It is true that Keynes was much more at home in dealing with th e bankin g system, th e capita l markets , an d internationa l finance than with indus trial investmen t an d technology . Unlik e Robertson , Keyne s neve r slogge d throug h th e Economist file s o r calculate d period s o f gestatio n fo r coa l mine s an d ships , coffe e an d railroads. Nevertheless , th e Marshallian long-period rea l factors have a significant place in th e business-cycl e analysi s incorporate d i n A Treatise o n Money. Formally, a t least , th e General Theory i s se t u p i n strictl y Marshallia n short-perio d terms:21 We tak e a s give n th e existin g skil l an d quantit y o f availabl e labour , th e existing qualit y an d quantity of availabl e equipment , th e existing technique , the degree o f competition, th e tastes and habits of the consumer, the disutility of differen t intensitie s o f labou r an d o f th e activities o f supervisio n an d organisation, a s wel l a s th e socia l structur e includin g the forces , othe r tha n our variables se t forth below , whic h determine the distribution of the national income. Thi s doe s no t mean that w e assume these factor s to be constant; but merely that , i n this place an d context, we ar e not considering o r taking int o account th e effect s an d consequence s o f changes i n them . Robert Solo w make s thi s point , althoug h h e i s thinkin g of th e lon g perio d i n mor e highly aggregate d term s tha n I am: 22 Perhaps th e largest theoretica l ga p in the model of the General Theory wa s its relative neglec t o f stoc k concepts , stoc k equilibrium , an d stock-flo w rela tions. I t may have been a necessary simplificatio n for Keynes to slice time so thin tha t th e stoc k o f capita l goods , fo r instance , ca n b e treate d a s constan t even whil e ne t investmen t i s systematicall y positiv e o r negative . Bu t thos e slices soo n ad d u p t o a slab, acros s whic h stoc k difference s are perceptible . Besides, i t i s importan t t o ge t th e flow-relationship s right; an d sinc e flow behavior i s ofte n relate d t o stocks , empirica l model s canno t b e restricte d t o the shortes t o f shor t runs . In dealin g wit h the trade cycle, however , Keynes's narro w General Theory focu s o n the short perio d di d no t prove wholl y possible . Like th e analysi s o f th e credi t cycl e i n A Treatise, Keynes' s "Note s o n th e Trad e

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Cycle" in the General Theory is a self-conscious exercise in applying to complex realit y his curren t theoretica l system , whic h h e summarize d wit h admirabl e compressio n a s follows:23 Thus we can sometime s regar d ou r ultimate independent variables as consisting o f (1 ) th e thre e fundamenta l psychologica l factors , namely , th e psycho logical propensit y to consume, th e psychological attitud e to liquidity and the psychological expectatio n o f futur e yiel d fro m capital-assets , (2 ) th e wage unit as determined b y the bargains reached between employers and employed, and (3 ) the quantity of money as determined by the action of the central bank; so that, i f we take as given the factors specifie d above, thes e variable s deter mine th e nationa l incom e (o r dividend ) and th e quantit y of employment . He begins wit h the latter stage s o f the boom an d onset of the "crisis " runnin g briskly through th e phases o f the cycle with heavy emphasi s on the ' 'three fundamental psychological factors." 24 Keyne s argue s tha t th e boo m proceed s unti l overoptimistic expecta tions about the profitability of investment cease t o offset th e decline in the yield of capita l goods due to their ' 'growing abundance [diminishin g return s to the capital stock] and their rising costs of production [Cos t Inflatio n in the languag e of A Treatise} and, probably, a rise in the rate of interest also." 25 Thus , booms "wea r themselves out." 26 The crisis and turn fro m prosperit y t o depressio n i s no t brough t o n primaril y b y a ris e i n th e rat e o f interest—as prosperity increases two of the sources of liquidity preference ("for trade and speculative purposes")—but b y " a sudde n collapse in the marginal efficiency of capital" ["the psychologica l expectatio n o f futur e yiel d fro m capita l assets"] . Keyne s does no t specify th e triggerin g mechanis m "whe n disillusio n falls upo n a n over-optimisti c an d over bough t market" ; bu t h e note s tha t it precipitates " a shar p ris e i n liquidit y prefer ence—and hence a rise in the rate of interest," whic h will aggravate a decline i n investment primarily caused b y a reversal of expectations about the expected rate o f return ove r cost (i.e. , the collaps e of the marginal efficiency of capital). It is the convergence of the collapse o f th e margina l efficienc y o f capita l an d th e ris e i n liquidit y preferenc e tha t "renders the slump so intractable." Bu t an end to the liquidity crisis and a fall i n the rate of interes t a s depressio n take s hol d (reducin g th e transaction s deman d fo r money ) ar e insufficient foundation s for th e reviva l of th e economy: 27 . . . [I]t is not so easy to revive the marginal efficiency o f capital, determined, as i t is , b y th e uncontrollabl e an d disobedien t psycholog y o f th e busines s world. I t i s the retur n of confidence, t o speak i n ordinary language, whic h is so insusceptible to control in an economy of individualistic capitalism. This is the aspec t o f th e slum p whic h bankers an d busines s me n hav e bee n righ t in emphasising, an d which the economists wh o have put their faith i n a "purel y monetary" remed y hav e underestimated . . . . Unfortunately a seriou s fal l i n the margina l efficiency of capital also tends to affect adversel y th e propensity to consume. For it involves a severe declin e in the market value of Stock Exchange equities. . . . With a "stock-minded" public, as in the United States to-day, a rising stock-market ma y be an almost essential conditio n of a satisfactor y propensity to consume; and thi s circumstance, generall y overlooked unti l lately , obviously serve s t o aggravat e stil l further th e depressing effect o f a decline in the marginal efficiency o f capital. ... I n condition s o f laissez-faire th e avoidanc e o f wid e fluctuation s in

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employment may , therefore , prov e impossibl e without a far-reaching change in the psychology of investment markets such as there is no reason to expect. I conclude tha t th e dut y o f orderin g th e curren t volum e of investmen t cannot safely b e lef t i n privat e hands. This argumen t evidentl y wa s designe d t o buttres s Keynes' s cas e fo r systemati c stat e intervention both "t o promot e investmen t and, at the same time, to promote consumption, not merely to the level which with the existing propensity to consume would correspond t o the increase d investment , bu t to a higher level still." 28 At several points in this systematic application of his system to trade-cycle analysi s and remedy, Keyne s breaks ou t of his formal structure with ad hoc observations o f relevanc e to growt h analysis . He introduces repeatedly , fo r example, the notion that each boom is marked by certai n sectors where overoptimism is particularly marked, th e increase in investment particularly heavy, an d th e patter n o f investmen t thus "misdirected." 29 I t i s i n thes e sector s wher e overshooting i s greates t tha t th e dramatic collaps e o f th e margina l efficienc y o f capita l occurs, wit h its multipl e spreadin g effects . Thi s i s a correct an d powerful insight ; but i t cannot b e realisticall y introduce d int o business-cycl e analyse s frame d b y Marshallia n short-period assumptions. Moreover, Keynes doe s not define the sectoral levels of output and investmen t tha t woul d defin e a correc t a s oppose d t o a "misdirected " patter n o f investment. H e introduce s th e point merely t o illustrat e his basic conclusio n that , a t the peak o f th e boom , overinvestmen t exist s i n only a limited sense: 30 . . . [T]h e ter m over-investmen t i s ambiguous . I t ma y refe r t o investment s which ar e destined t o disappoint the expectations which prompted the m . . . or i t ma y indicat e a stat e o f affair s wher e ever y kind of capital-good s i s s o abundant tha t there i s n o ne w investmen t which is expected, eve n i n condi tions o f ful l employment , t o ear n i n th e cours e o f it s lif e mor e tha n it s replacement cost . . . . [I] t i s only i n the forme r sens e tha t the boo m ca n b e said t o b e characterise d b y over-investment . .. . I t may , o f course, b e the case—indeed it is likely to be—that the illusions of the boom cause particular types o f capital-assets t o be produced i n such excessive abundanc e that some part of the output is, on any criterion, a waste of resources. .. . I t leads, that is t o say , t o misdirected investment . In my view this is the critical insight ; i.e., tha t "over-investment " in a boom is a sectoral and no t an aggregate phenomenon. I t was not pursued by Keynes or by his successors in business-cycle analysis . Th e link of growth to business cycles was thereby rendered muc h less realistic than if his insight into unbalanced sectoral distortion was sedulously pursued. In expoundin g hi s vie w o f th e trad e cycl e Keyne s wa s force d t o sli p out o f th e shor t period a t several furthe r points ; for example, th e declining yield from th e capital stoc k a s it expands durin g the boom i s hard to fit into a short-period framework and, historically, the kind of sectoral surge s yielding , for the time, gros s investmen t distortion ("misdirection") were associated with the introduction of major new technologies, th e opening up of new territories, larg e waves of immigration, and other phenomena of the Marshallian long period. I n addition, th e General Theory move s explicitly int o the lon g perio d a s Keynes introduces hi s the n rathe r depressin g vie w o f th e long-ter m prospects fo r th e marginal efficiency o f capita l unde r capitalism.31

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During th e nineteent h century , th e growth of population an d of invention , the opening-up of new lands, th e state of confidence an d the frequency of war over th e averag e o f (say ) each decad e see m t o have bee n sufficient , take n in conjunction wit h th e propensit y t o consume , t o establis h a schedul e o f th e marginal efficiency of capital which allowed a reasonably satisfactor y averag e level o f employment t o be compatible with a rate of interest high enough to be psychologically acceptabl e t o wealth-owners . . . . To-day an d presumably for the future th e schedule o f the marginal efficiency o f capita l is , fo r a variet y o f reasons , muc h lowe r tha n i t wa s i n th e nineteenth century . Th e acutenes s an d th e peculiarit y o f ou r contemporar y problem arises , therefore , ou t of the possibility that the average rat e of interest which wil l allo w a reasonabl e averag e leve l o f employmen t i s on e s o un acceptable t o wealth-owner s tha t i t canno t b e readil y establishe d merel y b y manipulating the quantity of money. . .[, ] time-honoured methods may prov e unavailing. The General Theory wa s not expounded i n a lucid and felicitous way, despite Keynes' s great stylistic gift; and , i n addition, it met the kind of resistance any book i s liable to mee t that applie s a ne w vocabular y t o a familia r subject. 32 Th e relativel y youn g wer e les s affronted tha n their older colleagues ; an d a variety of efforts wer e made quite promptly to clarify, improve , o r g o beyon d th e General Theory; e.g. , Harrod' s Trade Cycle (1936 ) and Samuelson' s bringin g togethe r o f the multiplie r and the accelerator. Ther e wer e als o elaborations, amon g others , b y Michael Kaleck i and Nicholas Kaldor.33 What was lost in these elegan t exercise s in highly aggregated short-ter m incom e analysi s was the growing pre-General Theory consensus—reflecte d withi n th e boo k bu t no t pursued—tha t per ceived tha t cycles an d growth wer e intimatel y interwoven; that the analysis of growth had to confron t th e proces s o f innovation ; tha t innovation had to be understoo d a s initiall y a sectoral process; and , therefore, cyclica l analysi s had to be conducted i n sectoral as well as macro terms . Th e setting asid e of these insights in post-General Theory models draine d both growt h an d cycle s o f thei r sectora l conten t and , thus , innovationa l substance .

W. C. Mitchell (1874-1948) Wesley Mitchell' s 191 3 classic , Business Cycles, i s on e o f a grou p o f business-cycl e studies that came t o fruition a t about the same time—on th e Continent, in Britain, and in the Unite d States . Despit e importan t difference s i n method , style , an d substance—an d unquestioned "subjective " originalit y an d independence—the y constitute , i n Schum peter's phrases , wor k don e "i n a kindre d spirit " bearin g " a certai n famil y likenes s i n their conception s o f the problem:" 34 . . .([A] s in the case o f the discovery—or invention—o f the calculus, and many simila r ones) ther e i s the fac t tha t men's minds , a t any given time, ar e apt to converg e i n similar views but i n such manner a s to make these men — and their pupils—see secondar y differences between one another more clear ly than the essential similarities. In the case before us, workers were under the impression tha t th e numbe r o f differen t "explanations " [fo r th e busines s cyclej was increasing , whereas the fact i s that a certain family likenes s in their

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conceptions o f th e problem—o f cycle s versu s "crises" ; thei r methods — involving increasin g appea l to statistica l material; an d their results—such a s emphasis upo n a generalize d for m o f wha t w e cal l no w th e acceleratio n principle, becam e mor e strongl y marked all the time. N o one author led in this movement an d none seems to have been greatly influence d by the others. Bu t the dat e o f Mitchell' s volum e assure s t o i t a n outstandin g positio n i n th e history o f th e movement . Like Keynes , Mitchel l di d no t produc e i n hi s twentie s a boo k tha t frame d an d fore shadowed hi s life work. One can, it is true, find in Mitchell's doctora l thesis a t Chicago, A History o f th e Greenbacks (1903)—publishe d whe n th e autho r wa s 29—a n integrate d analysis of monetary an d real factors that constituted " a firs t ste p toward a general theor y of th e mone y econom y o f today , hi s rea l topi c throughou t hi s adul t life." 35 Withou t question, hi s earl y studie s o f th e greenbac k perio d di d star t hi m o n th e roa d o f testin g theoretical proposition s agains t th e facts—i n th e firs t instance , th e quantit y theor y o f money. Bu t I would guess that it was Veblen's limite d but powerful influence at Chicag o that most strongl y lef t it s mark on Mitchell's business-cycl e analysis, o n which be began to focu s i n the perio d 1905-1908 . The Veblenia n stran d i n Mitchell lead s al l the major commentators to spend som e tim e sorting ou t his attitude toward an d the relationship o f his work to conventional economi c theory. On th e on e hand , unlik e som e institutionalist s wh o proudl y se t asid e mainstrea m economics of their day, Mitchell was a serious studen t of economic theory an d lectured a t Columbia Universit y regularl y o n curren t type s o f economi c theory . H e ha d studie d economics fo r a yea r i n German y an d Austria ; an d h e kne w th e literatur e writte n i n German, althoug h Hanse n observe s tha t "on e carrie s awa y th e stron g feelin g tha t th e basic contribution s of thi s grou p o f thinker s [th e Continentals] neve r full y registere d o n Mitchell's mind." 36 Nevertheles s bot h hi s 191 3 Business Cycles an d 192 7 Business Cycles: Th e Problem and Its Setting begi n wit h a review o f busines s cycle theories . On the other hand , his commitment to institutionalism had a dual impact that separated his wor k fro m contemporarie s o f differen t methodologica l faith . First , h e attribute s th e bulk o f Business Cycles —an elegan t boo k o f ove r 60 0 quart o pages—to 37 . . . [m]y conviction tha t th e quickes t wa y to attai n reliable result s i s to tak e great car e i n measurin g th e phenomen a exhibite d b y busines s cycles . . . . Readers wh o loo k ove r th e firs t chapte r wil l fin d tha t man y diverse theorie s about th e cause s o f crise s see m plausibl e whe n considere d i n th e ligh t o f common knowledge . T o determin e whic h o f thes e explanation s ar e reall y valid, i t is necessary t o fin d ou t the regularit y with which each allege d stres s recurs, the scope which each attains. The elements whic h enter into each, an d the consequences wit h which each i s associated. T o make progress towar d the solution o f thes e problem s require s th e collectio n an d analysi s o f elaborat e records o f busines s experienc e i n quantitative form . This wa s th e fait h an d metho d that controlled Mitchell's work an d i t was th e roc k o n which th e Nationa l Burea u of Economi c Researc h wa s t o b e built . But second , Mitchel l accepte d a quit e explici t an d powerfu l se t o f concept s fro m Veblen tha t provide d hi s wor k wit h a centra l focu s an d institutiona l setting , bu t als o

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tended to blind him to perspectives tha t might have led him to link growth and cycles mor e effectively tha n h e did . Hi s Veblenia n strand derives explicitl y from Theory o f Business Enterprise.38 It s flavo r i s capture d i n a passag e lik e this : A busines s enterprise ma y participat e directl y o r indirectl y in the wor k of providing th e natio n wit h usefu l goods , o r i t ma y not . Fo r ther e ar e diver s ways of making money which contribute nothing toward the nation's welfare, and diver s way s which ar e positively detrimenta l t o futur e welfare . But , fo r the understandin g o f prosperit y an d depression , i t i s mor e importan t t o ob serve tha t eve n th e enterprise s whic h ar e mos t indubitabl y makin g usefu l goods d o s o onl y s o fa r a s th e operatio n i s expecte d t o serv e th e primar y business en d o f makin g profits. An y othe r attitude , indeed, i s impracticabl e under th e syste m o f mone y economy . There i s nothin g intrinsicall y wron g o r eve n remarkabl e abou t thi s statement . A s Mitchell observe s i n a footnote : "Practicall y al l th e recen t theorie s res t tacitl y o n thi s basis ['money-making ' o r profit-maximization]. Veblen is explicit on this point."39 And the distinctio n h e draw s fro m Veble n betwee n th e criteri a o f "th e well-bein g o f th e community," requirin g "efficien t industr y and commerce," and the vastly less important criteria fo r "successfu l money-making " is , again , familiar , although no t a s full y devel oped a s i t was , fo r example , b y Marshal l an d Pigou . Wha t thi s Veblenia n stran d doe s supply is a large, never-fulfille d visio n of capturing the dynamics of a " money economy'' and a narrower , mor e conventiona l objectiv e o f temperin g th e amplitud e o f cyclica l fluctuations.40 . . . [T]h e complicate d machiner y o f th e mone y econom y ha s neve r bee n wholly under the control o f its inventors. The working s of the system ar e not fully mastere d eve n b y th e presen t generatio n o f busines s men , an d recur rently the financial machinery inflicts grav e suffering upo n us who use it. .. . [B]ecause ou r theoretica l knowledg e an d ou r practica l skil l ar e deficien t regarding thes e technica l matters , w e cannot maintain prosperity fo r more tha n a fe w year s a t a time . Nevertheless, withi n the past century, we have made incontestable progres s toward master y ove r th e processes o f the money econom y . . . . B y a com bination o f variou s agencie s suc h a s public regulation of th e prospectuse s o f new companies , legislatio n supporte d b y efficien t administratio n agains t fraudulent promotion , mor e rigi d requirements o n the part of stock exchange s regarding th e securitie s admitte d to officia l lists , mor e efficien t agencie s fo r giving investor s information , and more conservativ e polic y on the part o f the banks towar d speculativ e booms , w e hav e learne d t o avoi d certai n o f th e rashest error s committed b y earlier generations . Agai n from har d experience , European bank s a t least hav e learne d method s o f controllin g a crisi s an d preventing i t fro m degeneratin g int o a panic. Th e "integratio n o f industry " has also done something , though less tha n is often claimed, towar d steadyin g the cours e o f busines s bot h b y concentratin g powe r i n th e hand s o f experi enced officials , an d b y moderatin g the extrem e fluctuation s o f prices . Thus, Mitchell—lik e s o man y o f hi s generation—approached cyclica l analysi s a s a by product o f a large r impuls e to explore , i n effect , welfar e economics . The technica l organization of Mitchell' s Business Cycles require s brie f summar y both

Business Cycles an d Growth 28

5

because i t cast a long shadow on subsequent U.S. business cycle research and because it is necessary t o understan d th e unsatisfactor y linkage o f growt h an d cycle s i n Mitchell' s work. After establishin g his theoretical perspective an d his view of the institutiona l settin g of the advance d industria l countrie s (th e Unite d States , England , an d France ) Mitchell' s exposition proceed s i n fou r parts : • Som e 4 5 page s o f busines s annal s coverin g th e perio d 187 3 t o 191 1 reflecting in more systemati c for m th e livel y sense o f th e uniqu e characte r o f eac h cycl e t o b e found i n Robertson' s Study. • Som e 350 pages of well-organized statistica l data, including analyti c discussion of their movement , embracin g commodit y prices , mone y an d rea l wages , interes t rates, interes t rat e an d stoc k prices , serie s reflectin g variations in physica l output and unemployment , dat a o n th e quantit y of mone y and it s velocit y of circulation, and dat a bearin g o n saving , investment , profits, and bankruptcies. « A stylize d analyti c description o f th e cyclica l proces s (o f abou t fift y pages) wit h great emphasis on "Ho w Prosperit y Breeds Crisis," embracing five majo r endoge nous degenerativ e processe s tha t operat e durin g a boom ultimatel y to revers e th e process. • And , finally , reflections o n the meaning of the cyclical process fo r human welfare with specia l emphasis , amon g proposed remedies , o n the creation o f better "busi ness barometers, " a functio n th e NBE R was , i n time , t o fulfil l wit h distinction . The fac t tha t th e analyti c en d produc t o f Mitchell' s effor t wa s th e stylize d analytic description of the cycle (Part III) rather than a neat, highly aggregated theory , focused on a fe w ke y relationships , wa s th e inevitabl e consequence o f hi s immersio n (like Denni s Robertson) i n the business-cycle histor y of the period 1873-1912. 41 " . . . [I] n the real world of businessmen, affairs ar e always undergoing a cumulative change, always passing through som e phas e o f a busines s cycl e int o som e othe r phase . .. . I n fact , i f no t i n theory, a stat e o f chang e i n business conditions i s the onl y 'normal ' state. " Nonetheless, Milto n Friedman's evaluatio n of the theoretical content of Part III is worth noting:42 The business cycl e theor y . . . from Par t III of Mitchell's 191 3 volume contains practically ever y element tha t is significan t i n the busines s cycle theor ies tha t ar e currentl y prominen t [1950] . Her e ar e th e multiplie r process , the acceleratio n principle , th e Pigovia n cycle s o f optimis m an d pessimism , the Marshallian and Hawtreyan drain of cash from th e banking system and the resultant tightenin g of th e mone y market , a decline i n the expecte d yiel d of new investment at the peak that is the counterpart of the Keynesian "collapse of th e margina l efficienc y of capital " excep t tha t i t i s a continuous decline rather tha n a discontinuou s "collapse, " th e Keynesia n changes i n liquidity preference. Here , too , i s an attempt at a reasoned explanatio n and integration of thes e phenomena . Commenting on Friedman's evaluation, T. W . Hutchiso n observes:43 "Whethe r o r not this judgment inclines towards a generous hind-sighted interpretation, it certainly come s very muc h nearer th e trut h tha n doe s th e vie w of Mitchell's work as a methodologically naive mas s o f statistica l raw material. " I agree wit h Friedman and Hutchison on this point. Mitchell studied theory, understood

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it, use d it , an d taught it. Ther e wer e nevertheless, tw o problems embedde d i n Mitchell' s concept o f the relationship betwee n theory and facts. First, h e did not recognize explicitl y that the dat a h e amasse d i n Part II—their groupin g and analysis—alread y reflecte d a set of hypothese s abou t th e natur e of the busines s cycle that deserved mor e carefu l analysi s than hi s one- and one-half-pag e not e towar d the clos e o f the boo k citin g the theoretica l concepts h e had accepted.44 Veblen's "mone y economy" was not a sufficient framewor k for an empirical investigatio n of this kind. Second, th e emphasis on quantitative evidence, in th e for m o f reputabl e statistica l series , tende d t o limi t th e rang e o f hypothese s tha t might be explored. A s we have already noted, bot h characteristics appl y to Kuznets; and they wer e t o remai n typical—.no t universal—limitations in the wor k of th e NBER . The dat a as organized by Mitchell cry out for growth as well as cyclical analysis . The raw data are presented i n tables; and the most important series are plotted in ample charts. Even over quit e short periods, growt h rather than fluctuations strik e the eye (e.g., Figur e 11.1). Moreover , Mitchel l i s quit e consciou s o f th e uniquenes s o f eac h cycl e an d th e changing investment content of each period o f expansion.45 H e is aware that "a declin e of present o r prospectiv e profit s [ca n occur] i n a fe w leadin g branche s o f busines s . . . before tha t declin e ha s becom e general." 46 H e i s als o consciou s tha t th e flo w o f in ventions i s mor e continuou s than the introductio n of innovation s whose introductio n he believed wa s concentrate d i n th e earl y stag e o f cyclica l recovery. 47 Bu t hi s min d wa s focused sharpl y on cycles an d their mitigation. Growth he took for granted lik e almost all of hi s generation . Mitchell's nex t majo r contributio n to business-cycl e analysi s was publishe d 1 4 years later, Business Cycles: The Problem and Its Setting. B y 192 7 NBER had settled down as a well-established institution . It had i n hand a vastly increased number of statistica l series; Willard Thorp ha d expanded th e file s o f business annals from four to seventeen countrie s and publishe d a much-used volume. 48 Abov e all, Mitchell's Prefac e coul d cit e th e staf f support o f abl e associates: Frederic k C . Mills , Willfor d I. King , and Simo n Kuznets, as well a s Thorp, amon g others . In structure , th e ne w stud y was a n updat e of th e 191 3 version:49 I hav e not bee n abl e to devise a new way of conducting the inquir y which seemed bette r tha n th e wa y followe d i n 1913 . My earlie r impression s tha t business cycles consis t of exceedingly complex interaction s among a considerable numbe r of economic processes, tha t to gai n insight into these interac tions on e mus t combin e historica l studie s wit h quantitativ e and qualitativ e analysis, tha t th e phenomen a ar e peculia r t o a certai n for m o f economi c organization, and that understanding of this scheme of institutions is prerequisite to an understanding of cyclical fluctuations—these impressions have been confirmed b y m y effort s t o treat th e subjec t in a simple r fashion . Henc e th e new versio n i s not shorte r o r easie r tha n its predecessor . It summarized some ne w empirical data, discusse d problem s of statistical method, cited a wider array of business-cycle theorists than the 1913 volume, and held out the prospect of

further stud y of "th e Rhyth m of Business Activity." Bu t i t was a disappointing interi m book, wit h none of the sense of the creative vitality and unity of a youngish man's tour de force conveyed by the 1913 study. It left the impression that the study of business cycles was bein g pulle d apart, specialized , and bureaucratized. There was , nevertheless, a mino r but interestin g positiv e change . Liste d i n a rathe r elaborate classificatio n o f business-cycl e theories , (among those "whic h trac e business

Business Cycles an d Growth 28

7

Figure 11.1. Relativ e Productio n o f Pi g Iro n i n the United States , Unite d Kingdom , France , an d Germany, 1890-1909 . [Adapte d fro m Wesle y Clai r Mitchell, Business Cycles (Berkeley : Univer sity o f Californi a Press , 1913) , p . 234. ]

cycles to institutiona l process" ) is : "Innovation s com e i n waves, an d initiat e periods o f activity followe d by crises an d depressions. Josep h Schumpeter , Minnie T. England" 50; and Mitchel l devote s severa l page s t o paraphrasin g theorie s roote d i n "Innovations , Promotion, an d Progress," includin g Schumpeter's. 51 Much more serious , however, i s an extended passage o n secular trends, reflecting quite explicitly the work currently being conducted by Simon Kuznets.52 Mitchell discusses the

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technical problem s o f measuring an d interpreting secular trends; the logi c of retardation; long-wave hypothese s (including Kondratieff's). His exposition leads hi m at last to pos e sharply th e proble m o f relatin g growt h t o cycles. 53 If we embark upon a search fo r causes of secular trends, we must expect t o find no t on e caus e peculia r t o eac h series , bu t a peculia r combination o f a multitude of interrelated causes . Thes e cause s may be classified as (1) causes related t o change s i n th e numbe r o f population , (2 ) cause s relate d t o th e economic efficienc y of the population—it s age, constitution, health, educa tion, technica l knowledg e an d equipment , methods o f cooperation, method s of settlin g conflicts of interest, an d many other matters; (3 ) causes related t o the quantity and quality of th e natura l resources exploite d b y the population. These are, evidently, causes related t o basic growth variables . Mitchel l then goes on: . . . On e se t of questions i s particularly insistent. Is there a definite relation between secula r trend s an d cyclical fluctuations? Are activities characterize d by a rapidly rising trend subject to more frequent, o r more violent, cycles than activities whos e tren d i s neare r th e horizontal ? An d mor e a t large , ca n th e trends o f tim e series , afte r the y hav e bee n measured , b e discarde d a s o f n o further interest ? O r mus t th e trend s themselve s b e brought int o the explana tions o f cyclica l fluctuations , as suggeste d b y thos e theorie s whic h connec t business cycle s wit h "progress" ? Ar e th e trend s themselve s generate d b y cyclical fluctuations . . . ? Whil e thes e question s aris e a t thi s point , the y cannot be answered by any process short of considering the pertinent evidence in detail. Bu t the mere fac t tha t such problems must be faced by the businesscycle theorist suffice s t o show that he cannot imitate the business-cycle statis tician i n merel y eliminatin g secular trends . There th e matte r ende d s o fa r a s Th e Problem an d It s Setting wa s concerned . Th e relation betwee n cycles and growth does not appear i n the final chapte r devoted to NBER "Results an d Plans." 54

Some of Mitchell's Progeny But, i n fact, the NBER did conduct or inspire several studie s relating growth and cycles. First, o f course, wa s Kuznets's Secular Movements discusse d a t some length earlier (pp. 242-246). Four year s later the NBER published Arthu r F. Burns' s Production Trends in the United States since 1870. Burns's Production Trends is one of the major studies produced b y the NBER since its founding i n 1920 . In part, i t is a narrower and deeper study of one phenomenon probe d i n Kuznets's Secular Movements i n Production an d Prices; tha t is , i t examine s sectora l retardation i n 10 4 physical-output serie s in the United State s from the period 1870-188 5 to 1920-1929. 55 Bu t Burn s departe d fro m Kuznets' s method o f fittin g curve s t o serie s over their whole length by measuring trend in terms of overlapping 11 -year segments

designed t o eliminat e conventional business cycle movements . Th e broa d swee p o f th e segments, t o whic h an exponentia l curve i s fitted , constitut e "primary trends " tha t are the basi s fo r measurin g the pac e o f retardation . Lik e Kuznets , Burn s speculates on th e multiple force s contributin g to th e virtuall y universa l fact o f sectora l retardatio n an d concludes wit h a rough delineation of stage s in this process an d their relative duration.56

289

Business Cycles and Growth Table 11.1. Period s o f Rapi d an d Slo w Growth : Unite d States , 1875-1929 General productio n show s exceptionall y Rapid growt h i n

Slow growt h i n

1875-1885 1895-1905 1910-1920

1885-1895 1905-1915 1915-1925

SOURCE: A . F . Burns , Production Trends i n th e United States since 1970, (Ne w York : National Burea u of Economi c Research , 1934) , p . xx .

More significant for th e linkag e of growt h and cycles, Burn s measured fluctuation s i n growth rates aroun d the decelerating primar y trend. He found a pervasive cyclical patter n in th e overshoot s an d undershoot s o f hi s primar y trend s i n bot h individua l productio n series an d i n the productio n indexe s h e wa s prepare d t o examin e wit h appropriat e scep ticism once he had, i n Robertson's phrase, "wallowed " i n the disaggregated series and their measurement . Here , i n Table 11. 1 an d Figure 11.2 , wa s the result: 57 Now, wha t did Burn s mak e o f these laboriousl y achieve d measurements ? H e arrived , essentially, a t three significant conclusions an d posed a n important question. The conclu sions, i n hi s ow n words , wer e th e following: DISPERSION RATE S AN D GROWT H TREND S

[Figure 11.3 ] presents , a t each central decade year , measure s of dispersion of the decade rate s of two groups of production series. .. . I t will be noticed tha t

Figure 11.2. Median s o f Trend-Cycles o f Several Group s of Productio n Series. [Adapte d from A . F. Burns , Production Trends, p . 181. ]

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Figure 11.3. Cycle s o f Dispersion o f Decade Rate s of Production Series Compare d wit h Standar d Trend-Cycle. [Adapte d fro m A . F . Burns , Production Trends, p . 243. ]

the cyclica l movement s o f th e dispersio n measure s trac e ou t pattern s ver y similar t o tha t o f th e standar d trend-cycle . Thi s correspondenc e mean s tha t when the trend s o f production hav e on the whole move d steepl y upward , th e degree o f divergence o f production trend s ha s als o been high ; and that whe n the trend s o f production hav e on the whol e move d onl y moderatel y upward , the degree of divergence o f production trend s has also been onl y moderate. I n fine, th e degree of divergence o f production trends has varied wit h the degree of progressivenes s o f th e economy . DIVERGENCE AN D "NORMAL " GROWTH. 59

A certai n degre e o f tren d divergenc e i s a necessar y conditio n o f smoot h development in a progressive economy; for , in such an economy, the ratio of manufactured product s t o raw material s wil l tend to increase, a s will the ratio of instrumental equipmen t to final consumers ' goods, and of "comforts " an d "luxuries" t o "necessaries. " I n actua l experience, however , th e degre e o f divergence o f productio n trend s wil l b e generall y eithe r mor e o r les s tha n "normal;" . . . Whe n durin g a n upwar d trend-cycl e movemen t th e diver gence exceed s wha t i s "normal " fo r th e time , a strai n wil l develo p i n th e economic system ; thi s is likely to lead t o a general crisis an d to a curtailment in th e rat e o f developmen t o f th e system . Th e uniqu e correspondence, then , between relativel y shar p divergenc e o f productio n trend s an d a n upwar d trend-cycle movemen t i n industr y suggests tha t on e o f the factor s servin g t o terminate a n upwar d trend-cycl e movemen t i s a partia l los s o f industria l balance tha t develop s durin g th e upward movement . . . .Bu t when the divergence o f production trends fall s to a "subnormal " level during a downward trend-cycle movement , i t is practically certain to be symptomatic o f increasin g readjustment ; fo r th e "subnormal " degre e o f di vergence wil l the n deriv e mainl y from th e shar p curtailmen t in th e rate s o f development o f thos e industrie s whic h ha d grow n a t a disproportionatel y rapid rat e durin g the upwar d trend-cycl e movement . . . . Th e uniqu e corre spondence, then , between relatively mild divergence of production trends and a downwar d trend-cycl e movemen t suggest s tha t a restoratio n o f industria l

Business Cycles an d Growth 29

1

balance develop s durin g the downward movement , whic h create s condition s favorable t o (o r permissive of ) th e initiatio n of a ne w upwar d movement. TREND-CYCLES AND BUSINESS CYCLES.60

. . . It is a matter of common knowledge that differences in rates of industrial growth were very considerable during the last decade. Som e industries of large magnitude, suc h as automobiles, rayon, radios, and electrical househol d devices, gre w a t excitingl y rapi d rates ; othe r industries , suc h a s men' s clothing, sole leather, boot s and shoes, certai n knit goods, an d certain lumbe r manufactures, experience d littl e growt h o r actua l decline ; bu t non e o f thes e are include d amon g th e statistica l record s w e hav e analyzed . I t i s highl y probable, then , that the divergence o f production trends during 1920-29 was much greater i n fac t tha n ou r long-ter m serie s suggest . Thi s decad e o f rapi d advance i n productio n an d curiou s contrasts i n rates o f expansion came t o a close wit h wha t i s .. . th e severes t depressio n i n th e histor y o f th e na tion. . . . Apparently , ou r hypothesis i s borne ou t also by the experience o f the las t decade . . . . We ma y therefor e conclud e fro m ou r analysi s o f America n experienc e since 1870 : first , that periods o f sharp advance in the trend of general produc tion, whic h ar e characterize d invariabl y by considerabl e divergenc e i n pro duction trends, have been followed invariably by severe business depressions ; second, tha t mos t o f th e busines s depression s o f marke d severit y hav e bee n preceded b y a sharp advance i n the trend of general production an d consider able divergenc e i n th e trend s o f individua l industries. Clearly, i n these propositions, Burn s made a major contribution to the linking of growth and cyclica l analysis . The y strongl y sugges t that th e dynamic s of the economic syste m generates cycles b y pullin g certai n sector s mor e o r les s strongl y of f optimu m sectora l equilibrium growth paths, with powerful secondary consequence s fo r other sector s an d the aggregate performanc e o f the economy; an d the stronger th e distortion durin g expansio n the stronge r th e reactio n i s likely t o be i n the subsequen t cyclica l downswing . There i s a n engagin g passag e i n Schumpeter' s essa y o n Wesle y Mitchell: 61 ... I shall neve r forget his speechless surpris e when I tried to show him that his great book of 1913 , s o far as the bare bones of its argument are concerned , was a n exercis e i n th e dynami c theor y o f equilibrium. For wha t els e ar e hi s "recurrin g readjustment s o f prices " t o whic h h e returned agai n and again but imperfect movements o f the economic syste m in the directio n o f a stat e o f equilibrium ? I f h e faile d t o avai l himsel f o f th e apparatus o f equilibriu m theory , s o th e (successor s o f the ) builder s o f th e equilibrium theor y faile d t o avai l themselve s o f hi s facts . Unlike Mitchell , Burn s di d conduct—and , u p t o a point , quit e consciously—"a n exercise in the dynami c theor y o f equilibrium." H e clearly pose d bu t did no t pursue the larger questio n raised b y hi s stud y for growth analysis: How shoul d on e define a norma l (or optimum , dynami c equilibrium ) production tren d fo r a sector ? Th e reade r wil l not e that he provides a crisp definition i n two clauses quoted above:62 " . . .eithe r more or less than i s warranted by changes in the technical relations of commodities and in consumer' s habits; mor e o r les s tha n i s necessar y fo r a n uninterrupte d rate o f development , i n th e

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general economy. " Thus , Burns' s highl y discipline d exercis e i n statistica l analysi s le d him directly into—or a t least to the edge of—the camp of those, o f whom Malthus was an early pioneer, who sensed that a loss of "proportion " among dynamic sectors was the key to cyclica l fluctuations . In 193 4 anothe r quite different kin d of study was published b y the NBER whic h cam e sharply to rest o n the question of dynamic balance and its relation t o business cycles : Joh n Maurice Clark' s Strategic Factors i n Business Cycles. 63 A s Note 63 indicates, the tragi c abnormality o f th e depressio n o f th e 1930 s generate d a stud y thu s far untypica l o f th e NBER. Clark' s 23 4 pages d o not contain a single statistical table or chart; althoug h ther e is a n Appendi x focuse d o n aggregat e fluctuation s o f producers' goods , residentia l hous ing, an d automobiles . Th e objec t o f th e stud y wa s explicitl y operationa l rathe r tha n austerely "scientific" ; tha t is, t o find "factor s abou t which something ca n be done, . . . [and] focu s attentio n o n them . . . . 6 4 Clark proceede d b y statin g hi s theoretica l presuppositions ; summarizin g fro m NBE R data conclusions on the timing and amplitude of fluctuations i n a wide range o f variables ; identifying th e genera l an d specia l feature s o f cyclica l movement s i n th e perio d 1922 1929; an d the n a sectio n tha t bear s particularl y o n th e centra l issu e examine d here : "Another Approach : Th e Meanin g an d Requirements o f Balance." Referring t o th e us e o f th e concep t o f "balance " i n a repor t o f th e Committe e o n Recent Economi c Changes , Clar k launche s int o a perceptive discussio n o f th e possibl e meaning an d implication s o f a n econom y movin g forwar d i n dynamic, sectorall y disag gregated "balance"— a kind of rough "movin g equilibrium, " o f the kind Ally n Young had earlie r evoke d an d Burn s ha d suggested: 65 . . . Ca n a conditio n b e conceive d an d describe d whic h woul d deserv e th e name "balance, " i n which population i s increasing, capita l increasin g mor e rapidly, produc t pe r capit a increasin g a t stil l a differen t rate, perhap s i n th e long run intermediate between the other two, technical method s o f productio n changing a s they mus t to utiliz e the increasin g suppl y o f capita l per worker , older method s bein g constantl y rendere d obsolet e (thoug h no t constantl y i n every process a t once), an d new goods being developed a s the consequence of increased spendin g powe r resultin g fro m increase d production ? Thi s i s em phatically no t a stati c condition , an d i t i s on e t o whic h th e conception s o f equilibrium an d balanc e ca n b e applie d onl y i n a special an d limite d sense . The ter m "balance " wa s use d b y th e Committe e o n Recen t Economi c Changes onl y in the sense of a rough approximation, wit h the idea of a ' 'zone of tolerance " beyon d whic h disproportion s becom e serious . Th e questio n remains, however , approximatio n t o what ? Tolerabl e degre e o f departur e from what ? . . . It i s clea r tha t busines s cycle s i n thei r ver y natur e ar e departure s fro m balance i n th e absolut e sense . Clark the n proceede d t o explor e th e followin g criteria fo r balance : • Balanc e in the labo r marke t yieldin g low average unemployment. 66 • " A reasonabl y steady" rat e o f increase i n production. 67 • A balanc e between "saving s an d capital expenditures." 68 • Keepin g withi n reasonabl e bound s "th e tendenc y of credi t expansion to generat e cumulative expansion." 69 • Achievin g an approximat e balance between the rol e of hig h wages , a s a mean s of

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3

maintaining a hig h leve l o f consumer s expenditur e and th e dange r o f excessivel y high wages , a s a cause o f excessiv e unemployment— a dilemm a bes t resolve d b y increases i n labor incom e "i n form s whic h do not constitute a wages-charge upo n the employer' s ac t o f hiring [labor]; " e.g. , vi a profit-sharin g arrangements; 70 « Wit h respec t t o th e inventio n an d marketin g o f ne w consumer s goods , achievin g "an amoun t and distribution of purchasing power as can make the demand effectiv e and assimilate th e new goods approximately as fast a s we gain the power to produce them."71 • Findin g th e right , preferabl y flexibl e formul a fo r hours o f labo r tha t woul d minimize tota l unemployment. 72 • Solving , o n a n eve n wide r basis , th e proble m o f sectora l distortio n Burn s ha d identified i n Production Trends: 73 One essential featur e of balance is that no part of the economic syste m shall be workin g at a rate very much faster or slower than it can continu e without outrunnin g or fallin g behin d it s proper proportio n t o th e rest, a s fixed b y physica l an d economi c forces . Th e rat e o f productio n o f ra w materials shoul d equal the amount consumed i n the production o f finished goods (wit h allowanc e fo r slo w growt h o f stock s a s tota l volum e o f production grows) . An d th e rat e o f productio n o f equipmen t shoul d b e such a s the volume of savings an d the development o f technical method s indicate can be maintained. . . . [T]here are very narrow limits on the rate at whic h existin g capita l ca n b e increase d withou t wastefu l duplicatio n and a defeating o f th e end i n view . . . . The amoun t of consumers ' good s th e marke t ca n b e geare d t o bu y i s elastic, an d w e hav e neve r reache d it s ultimat e limits . But , lik e th e amount of capital w e can man, i t can be increase d onl y a t a limited rate . The marke t wil l bu y a s muc h a s i t ca n produc e i f i t produce s jus t th e commodities wante d by those amon g whom the income is divided, an d if they spend for consumption all the funds no t needed to finance a balanced supply o f capital . Bu t al l thi s takes tim e t o wor k out . • Balanc e betwee n price s an d profit s require s roug h conformit y t o th e followin g rules:74 The idea l conditio n i s on e i n whic h expanding industrie s receive just sufficient profit s to stimulate the growth that will bring productive capaci ty int o balanc e wit h demand ; n o mor e an d n o less . An d contractin g industries shoul d suffe r jus t sufficien t losse s t o bring about a contractio n in the productive capacity engaged i n them adequate to restore th e balance in the other directio n b y causing the least efficien t producer s t o drop out, and other s t o defe r expansio n o r t o contrac t b y failin g t o mak e ful l replacements. On thi s basis, Clar k proceede d t o hi s identification of the operationa l strategi c factor s about whic h "somethin g can be done," with considerable emphasis o n the application of the accelerator , a concep t h e ha d helpe d pioneer , t o automobiles , durable consumers ' goods, an d residentia l construction.75 The notio n tha t th e busines s cycle wa s th e consequenc e of force s tha t systematically deranged balanc e an d proportio n i n th e economi c syste m was , a s w e hav e seen , b y n o means new; but Clark's analysi s of the array of balances that could go awry—and did go grotesquely awr y i n th e 1920 s an d earl y 1930s—wa s more complete than tha t of an y of

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his predecessors. Even mor e important, he tried to make explicit the criteria for dynamic, "tolerable" balanc e i n a n economy's sector s a s it moved throug h time; an d h e built his recommendations fo r action aroun d strategic factors that would hold the economy i n such a rough dynami c equilibrium . I n contrast to the oversimplified macroformulations of the business cycl e tha t progressivel y gaine d vogu e i n th e secon d hal f o f th e 1930s . Clar k redoubtably insiste d o n introducin g explicitly Marshallia n long-period a s wel l a s short period variable s int o hi s analyse s an d proposal s fo r remedy. Two furthe r NBE R studie s should be briefly cited . First , ther e i s Solomon Fabricant' s book, Th e Output o f Manufacturing Industries, 1899-1937., 76 Strictly speaking, as Fabricant mad e clear , thi s book doe s no t belong i n a chapter o n business cycles. 77 I t is mor e purely a study in the sectoral anatomy of growth than, say, Kuznets's Secular Movements or Burns's Production Trends, bot h of which focus substantially on links between sectoral growth pattern s an d cycles . I n fact , Fabricant' s stud y was part o f a substantia l series o f books an d occasiona l paper s generate d b y th e NBE R i n th e are a o f Production , Em ployment, an d Productivity— a serie s mainl y publishe d durin g an d afte r th e Secon d World War . Th e centra l resul t o f Fabricant' s effor t i s capture d i n Tabl e 11.2 . Th e extraordinary difference s in sectoral growt h rates presente d in that table and the comple x interconnections amon g the m ar e analyze d with subtlety. But cyclica l analysi s coul d no t b e wholl y bypasse d becaus e mor e tha n 20 % o f th e period covered consist s of the cycle (peak-to-peak) 1929-1937 . In fact, the first occasion al pape r publishe d b y th e NBE R wa s Fabricant' s analysi s o f tha t cycle , i n term s o f sectoral (a s well a s aggregate ) trend s i n manufacturing output.78 The majo r conclusions of that abnormal cycle—that stil l left 14.3 % unemployed a t its 1937 peak—wer e th e following: • Ther e wa s a modest (abou t 3% ) rise i n total factor y output. « Th e pervasiv e operatio n o f Marshallia n long-perio d force s ove r a relativel y shor t period o f tim e i s suggeste d b y th e following: 79 Even a cursory glance at the table reveals that many industries achieved important ne t gain s i n outpu t durin g thes e trouble d years . O f th e 13 9 industries, 4 2 increase d thei r outpu t one-fift h o r more . Th e outpu t o f another 1 5 industries rose between one-tenth and one-fifth, whil e 17 more made smalle r gains , les s tha n one-tenth. In other words, ove r hal f of the 139 industries increase d thei r outpu t by som e amount , larg e o r small ; 2 had th e sam e outpu t i n 192 9 an d 1937 ; tha t of th e othe r 6 3 declined . » I n term s o f growt h rates: 80 New o r revived industrie s head th e list. Th e liquo r industries shot up , of course , upo n the repea l of prohibition. Als o in the forefron t are suc h obviously ne w industrie s a s mechanica l refrigerators , rayon , washin g machines, an d radios; an d industries producing, i n addition to well-estab lished commodities , ne w product s o r product s fo r whic h deman d ha d recently bee n stimulated , includin g flavorings, glass (beverag e an d foo d containers), chemicals , compresse d an d liquefie d gasses , an d sil k an d rayon goods . . . . Olde r industrie s that canno t be sai d t o hav e reache d maturity also appea r in the uppe r third o f th e list : tin cans, canned fruits , vegetables, an d milk , cigarettes , carbo n black , asbesto s products , an d petroleum refining. Amon g the declining industries at the lower end of the list are charcoal, locomotives, clay products (brick), pianos, carriages and wagons, lumber-mil l products , ice, line n goods , an d cigars.

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Table 11.2. Individua l Manufacturin g Industries , Ranke d Accordin g t o Percentag e Chang e i n Physical Output , 1899-193 7 Percentage change

Industry Automobiles Cigarettes Petroleum refinin g Milk, canne d Beet suga r Hosiery, kni t Cement Fruits an d vegetables , canne d Chemicals, no t elsewhere classified

Ice

Silk an d rayo n good s Pulp Printing and publishing Paper Rice Outerwear, kni t Paints an d varnishe s Coke-oven product s Zinc Liquors, distille d Steel-mill product s Butter Tanning an d dye materials Copper Explosives Wood-distillation product s Fertilizers Blast-furnace product s Cheese Jute good s Wool shodd y

+ 180,10 0 +4,226 + 1,920 + 1,81 0 + 1,68 8 + 1,20 2 + 838 + 792 +741 +668 + 512 + 505 +494 +465 +416 + 393 +391 + 380 + 318 + 315 + 313 + 309 +292 +272 + 267 + 259 +248 + 171 + 158 + 134 + 116

Industry Cotton good s Cane-sugar refinin g Fish, canned Hats, wool-felt Shoes, leather Salt Cane sugar , not elsewhere made Meat packing Cottonseed product s Leather Woolen an d Worsted good s Liquors, mal t Underwear, knit Carpet an d rugs, woo l Lead Cordage an d twin e Hats, fur-fel t Gloves, leathe r Cigars Pianos Tobacco products , othe r Flour Clay products Ships an d boats Cars, railroad , not elsewhere made Lumber-mill products , no t else where classified Turpentine an d rosin Linen good s Locomotives, no t elsewhere made Carriages, wagons , and sleighs

Percentage change + 101 + 101 +96 +90 + 87 + 82 + 67 + 66 +63 +61 +60 + 60 +52 + 52 +51 + 38 +26 + 16 0 -5

-6 -8

-15 -17

-22 -32

-32

-44 -79 -95

SOURCE: Solomo n Fabricant , Th e Output o f Manufacturing Industries, 1899-1937 (Ne w York : NBER , 1940) , p . 89 .

As on e woul d expect , perishabl e good s did better tha n durabl e goods: 81 There are , o f course, man y exceptions , bu t i n general outpu t i n the per ishable goods industrie s increased. Th e semi-durabl e product s industrie s are scattered through the ranks, but most are above the median point. The industry manufacturin g sil k and rayon good s is the highest representative of importance , followe d b y women' s clothing , kni t outerwear , hosiery , woollen an d worste d goods , shoe s an d leather. Cotto n good s an d men's clothing decline d fractionally . Th e tire s an d tubes industr y wa s th e onl y large on e producin g semi-durabl e good s whos e outpu t decline d dras tically. Th e most important durabl e good s industries—agricultural imple ments, steel-mil l products , rail-roa d equipment , automobiles , nonferrou s metals, ship s an d boats, lumbe r mil l products, cement , planin g mil l products, an d locomotives—all decline d i n output. Hardes t hi t were th e indus tries manufacturin g material s use d i n building .

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Fabricant's observation s o n this and other cyclical passages, 82 make his study a usefu l addition t o th e literatur e relatin g growt h an d cycles . A secon d stud y o f thi s era—independen t o f bu t closel y linke d t o th e NBER—als o deserves a word; A. D . Gaye r et al., Th e Growth and Fluctuation o f the British Economy, J790-1850.S3 Completed i n February 1941 , its two volumes were first published in 1953 . Their subtitl e suggests th e larg e purpose s o f th e enterprise : "A n Historical , Statistical , and Theoretica l Stud y of Britain' s Economi c Development. " I includ e referenc e t o thi s stud y for severa l reasons . Th e concep t wa s purel y Arthur Gayer's, an d hi s trul y innovativ e enterpris e deserve s t o b e remembered . Hi s Oxfor d doctoral thesi s (1930) , entitle d "Industria l Fluctuations and Unemployment in England , 1815-1850," converge d wit h late r researc h a t th e NBE R t o sugges t a rathe r romanti c effort t o fulfil l Wesle y Mitchell's grand dream of uniting sophisticated statistica l analysi s with historical, institutional , and theoretical perspectives , fo r a single national economy , over a substantia l period o f time . Ful l o f youthfu l energ y an d methodologica l idealism , Gayer an d his small team produce d a fair workin g approximation of Mitchell's dream . I t reflects accuratel y th e hope s an d aspiration s o f a goo d man y America n an d Britis h business-cycle analyst s of th e 1930s . Growth and cycles wer e explicitly linked from the beginning of the study; but as Anna Jacobson Schwart z and I underline d in ou r 195 2 joint prefatory addendu m (written after Gayer's untimel y death), th e linkage was not, with hindsight, as effective as it might have been. I n the cyclica l history , the growt h content of each boo m i s identified and, indeed , the strand s o f innovationa l change tha t persiste d durin g slumps . I n bot h historica l an d analytic portion s o f th e stud y th e busines s cycle emerge s a s th e for m i n whic h growt h unfolds, wit h the leadin g sector s o f each cycle clearl y identified . On the other hand , th e theoretical portion s of the tex t were focuse d rather mor e on trend-perio d (or long-cycle ) analysis than on growth as it might have been dealt wit h in, say , the 1950 s or 1960s—o r 1980s. The compulsively detailed application of the NBER technique of cyclical and trend analysis di d provide , however , measurement s o f growt h fo r individua l serie s tha t ar e discussed (alon g wit h cyclica l patterns ) i n th e portio n o f th e stud y devote d t o forma l statistical analysis . As note d i n the 197 5 Preface t o the second edition: 84 "Sinc e the 1930s , the historica l study of business cycles has not flourished.'' For good or ill, the Gayer study is something of a period piece. Bu t it remains one of a kind, the product in Gayer's words , of " a clos e harmonious co-operation" i n pursuit of a large vision of how various methods of analysis can b e mad e t o converg e i n th e analysi s of growt h and cycles .

Alvin Hansen (1887-1975) and the Young Paul Samuelson (1915-

)

But thi s chapter should not close wit h a nostalgic referenc e to a kind of analysi s that did not flouris h after 1945 . Mor e appropriat e is an exercise already referred to several times : Paul A . Samuelson' s "Interaction s betwee n Multiplie r Analysi s an d th e Principl e o f Acceleration," publishe d in May 1939 . Again for good or ill, it does indeed foreshadow a great deal of post-World War II macroeconomic analysis, including business-cycle analy-

sis; an d it s elegant four page s ar e suffuse d wit h a talented young man's hop e an d excitement abou t the futur e prospect s fo r mathematica l economic s an d econometrics. Samuelson underline s hi s deb t t o Alvi n Hanse n wh o "suggested " tha t i t migh t b e

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7

Table 11.3. Hansen' s Busines s Cycl e Theory Categories : 1927 /. Th e Capitalistic Economy schools A. Th e capitalisti c system of distribution as cause of th e busines s cycle B. Th e capitalisti c process of productio n as caus e of th e business cycle 1. Inventions , discoveries, an d innovations as impelling factors disturbing th e economi c equilibriu m 2. Fluctuation s i n consumers' demand as impelling factor disturbing the economi c equilibrium //. Th e Exchange Economy school HI. The Money Economy schools A. Th e interrelation s of th e rat e of interest , th e prospectiv e rate of prof it, an d th e pric e level B. Th e interrelation s of cost s an d prices , profit margins , and capitalization SOURCE: Alvi n H . Hansen , Business Cycle Theory, It s Development and Present Status, (Boston: Ginn, 1927 ) p. 10 .

fruitful t o formulat e mathematicall y th e relatio n betwee n th e multiplie r and th e acceler ator, the linkage dramatized sinc e Harrod's Th e Trade Cycle (1936). But , before returning to Samuelson' s tour d e force, Hanse n deserve s a prio r word , fo r hi s contributio n wa s more substantial than the spear-carrier rol e conventional texts sometimes assig n him in the Keynesian Revolution . Hansen bega n i n 192 1 wit h a n analyti c monograp h o n cyclica l fluctuation s i n th e United States , Great Britain , and Germany in the period 1902-1908; 85 and he went on to become, alon g wit h Wesle y Mitchell , th e leadin g business-cycl e analys t in th e Unite d States, with a full comman d of the various types of business-cycle theory generated since , say, th e days o f Henry Thornton and David Ricardo. Hi s classification o f business-cycle theories i n his secon d majo r study (1927) i s indicate d i n Table 11.3. 86 Afte r examinin g analytically thi s arra y o f theories, Hanse n sough t to reconcile the majo r type s o f theor y ("monetary, capital-production , consumer-demand" ) an d t o speculat e temperatel y bu t skeptically o n th e likelihoo d tha t th e busines s cycl e woul d withe r awa y i n a dynami c capitalistic society. 87 In th e presen t contex t a general an d a specifi c poin t shoul d be noted . Hansen' s 192 7 study embrace d th e theorie s tha t looke d o n cycle s a s th e for m growt h assume d i n a n economy subjec t t o rapi d an d discontinuou s technologica l chang e an d capitalis t invest ment methods. Moreover , Hansen' s synthesis includes the mechanisms of what later came to b e know n a s th e multiplie r an d th e accelerator ; tha t is , th e impac t o n incom e an d employment o f changes i n investment, and the disproportionate impac t on the demand for fixed an d working capital of modest change s i n consumer demand. 88 H e cites, fo r example, ho w a 5% increase i n consumer deman d will give rise to a 50% increase in demand for fixe d capita l i f th e depreciatio n rat e o n fixe d capita l i s take n t o b e 10%. 89 Hanse n clearly ha d no difficulty i n absorbing the refinements of Kahn, Keynes, and Harrod of the 1930s; and his encouragement o f Samuelson t o apply his mathematica l virtuousity to the interactions of the multiplier and accelerator i s easily understood. Hansen became in time a majo r Keynesian ; but, lik e th e post-Wicksel l Stockhol m school , h e ha s a legitimate claim to have anticipated a good deal of the analysis and doctrine that evolved from an d in the wak e o f Th e General Theory. Specifically, Samuelso n attributes to Hansen the breaking down of additions to national

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income t o three components: 90 "(1 ) governmen t defici t spending , (2 ) private consump tion expenditur e induce d by previous public expenditure, an d (3 ) induced private invest ment, assume d accordin g t o the familia r acceleratio n principl e t o be proportiona l t o th e time increase o f consumption." Samuelso n then proceeds t o explore th e implications fo r national incom e o f differen t assume d value s fo r th e margina l propensit y t o consum e (which determine s th e multiplier ) an d th e proportionat e relatio n betwee n a n increas e i n consumption and the induced increas e in investment (whic h defines th e accelerator). Afte r first producing a model that exhibits cyclical behavior, he goes on to show more generall y that, dependin g o n th e value s chose n fo r th e margina l propensit y t o consum e an d th e relation betwee n a n increment i n consumption and derived investment , only four types of solution ar e possible. Fo r example, a single expenditure impulse will yield, after a surge , an asymptoti c gradua l approac h t o the original national incom e level ; a constant continu ing leve l o f governmen t expenditur e wil l resul t i n ever-increasing explosive oscillations ; with hig h value s chose n fo r th e margina l propensit y t o consum e an d th e relation , a constant leve l o f governmen t expenditur e wil l caus e a ris e i n nationa l incom e tha t eventually approache s a compound interes t growth rate. Wit h a ful l employmen t ceilin g on th e econom y assume d an d a floo r se t b y zer o ne t investment , thi s kin d o f analysi s evidently could be—and soon was—converted int o a highly aggregated for m of businesscycle analysis. 91 Now, wha t happene d t o growt h i n thi s formulation ? Two things . First , th e ful l em ployment ceilin g tha t reverses th e direction i n which the accelerato r drive s th e econom y was, dynamicall y conceived , a kind of ful l employmen t growt h pat h of total output ; but the implication s o f tha t fac t wer e rarel y take n int o account , an d business-cycle analysi s was, i n fact , treate d i n quasi-short-perio d terms , a s i n Keynes' s General Theory (preceding, p . 279) . Second , perceivin g tha t the grea t Schumpeteria n innovation s wer e left out , th e concep t o f exogenou s (o r autonomous) investment was adde d t o investmen t induced b y the accelerator when the latter was operating positively in a period of cyclical expansion. Thi s procedure—denyin g th e endogenou s characte r o f the great innovations, concealing thei r sectora l character , an d separating growt h fro m cyclica l analysis—wa s a profoundly retrograd e step . Th e painfull y achieve d an d elaborate d insight s o f severa l generations o f economists—on th e Continent, in Britain, and the United States—that th e business cycle wa s the form that growth assumed an d that expansion, crisis, contraction , and revival coul d onl y b e full y understoo d i n disaggregated terms , relate d t o systemati c sectoral distortion s an d their movemen t bac k towar d dynami c sectora l equilibriu m positions never in fact attained—all tha t knowledge and wisdom accumulated by wallowing in the statistica l an d qualitativ e evidenc e an d reflectin g upo n it s meanin g wa s pu t aside . But Samuelso n wa s not primarily interested in the relation between growt h an d cycles . He drew more genera l conclusion s highly appropriate t o his age (24) and the vision of his "sacred decade"—a vision to which he subsequently remained loyal: 92 "Contrar y to the impression commonl y held , mathematica l method s properl y employed , fa r from making economic theor y more abstract, actuall y serve as a powerful liberating device enabling th e entertainment and analysis of ever more realistic an d complicated hypotheses. " To which he added i n a footnote: "I t ma y be mentioned i n passing tha t the formal structur e of our problem i s identica l with th e model sequence s of Lundberg, an d the dynamic theories o f Tinbergen. Th e presen t proble m i s s o simple that it provides a useful introductio n to th e mathematical theor y of th e latter's work. " As Samuelso n wa s late r t o writ e i n honor o f Joe S . Bain , wh o combine d painstakin g empirical research wit h theory: 93 "A s a theorist, like Picasso, there is no afternoon when

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9

I cannot contriv e a new gemlet . Bu t in the stud y of real worl d markets, on e must collect and analyz e dat a fo r year s i n order t o mak e relevan t contributions." Th e proble m Sam uelson doe s no t confron t i s the pie d pipe r effec t o f hi s virtuousity , which helped induc e several generation s o f young economists, wit h less than Picassolike talents, to concentrat e their effort s fruitlessl y on the productio n o f gemlets a t the expense o f "th e stud y of rea l world markets, " pas t an d present . As far as business-cycle analysi s was concerned, thos e drawn to multiplier-accelerato r models did , indeed , produc e theorie s o f cycles . Th e proble m wa s tha t the y bor e littl e relation t o cycles a s they occurred i n the real world . The y recalled th e observation o f the wife o f an American academi c o n a n aspect o f life i n Britain:94 "Englis h women' s shoe s look a s if they had been mad e by someone wh o had often hear d shoe s described , bu t ha d never see n any . . . . "

The Emergence of Econometrics: Frisch and Tinbergen But ther e wer e goo d reason s i n th e lat e 1930 s fo r Samuelson' s hopefu l focu s o n th e potential fruitfulnes s o f mathematica l economic s an d econometrics . Th e Econometri c Society wa s set up in 1930 , unitin g an older generatio n of pioneers (e.g. , Fisher, Schum peter, Frisch ) wit h a widenin g phalan x o f younge r enthusiasts , generatin g b y Januar y 1933 a house organ , Econometrica. Wassil y Leontief cam e to America a t about the sam e time (1931 ) and , afte r a shor t stin t a t th e NBER , wa s har d a t wor k expoundin g input output analysi s at Harvard . And , as note d earlie r (pp . 209ff. ) the emergenc e o f nationa l income accountin g a t abou t th e sam e tim e a s Keynesia n incom e analysi s encourage d a linking of statistics, economi c theory , an d mathematics that Frisch elegantly evoked a s he defined th e missio n o f econometrics: 95 Thus, econometric s i s by n o means the same as economic statistics . No r i s it identical wit h what we call general economi c theory , althoug h a considerabl e portion o f thi s theor y ha s a definitel y quantitativ e character. No r shoul d econometrics b e taken as synonymous with the application of mathematics to economics. Experienc e has shown that each of these three view-points, that of statistics, economi c theory , an d mathematics, i s a necessary, bu t not by itself a sufficient , condition fo r a real understanding of the quantitative relations i n modern economi c life . It is the unification of all three that is powerful. And i t is thi s unificatio n that constitute s econometrics . So far a s this chapter i s concerned, th e major exercise i n econometric analysi s was Ja n Tinbergen's two-volum e League o f Nation s study , Statistical Testing o f Business Cycle Theories.96 Th e stud y i s clearl y a landmar k i n th e evolutio n o f econometri c model building—a majo r post-1945 sport—althoug h i t is at least equall y remembered fo r Keynes's unbridled attack on the first volum e in the Economic Journal fo r September 1939. 97 Keynes's respons e wa s not merely—or wa s hardly at all—as a business-cycle theorist but as a logicia n an d exper t o n th e theor y o f probabilit y sinc e hi s youth . Hi s somewha t sadistic specificatio n of th e inheren t ambiguitie s of multiple-correlatio n analysis (wit h which Tinberge n mainl y agreed ) retain s it s relevance. In hi s firs t volum e Tinbergen sought to identif y b y econometri c method s the determinants of fluctuation s i n three variables: investment (iron an d steel consumption], residen-

300 Growth

Theory Moves t o th e Periphery

tial buildings , an d ne t investmen t in rolling stock. Dat a ar e draw n fro m prewa r France ; pre- an d postwar United Kingdom, Germany, Sweden, and the United States. The second volume aims to "explain " business cycles in the United States for the period 1919-1932 . Conscious o f th e partiall y methodologica l purpos e o f th e exercise , Tinberge n too k pains to explain th e concepts an d methods employed. I n the first volum e the treatment of each variable is broken down in three sections : the relation tested, the statistical material, and results. Th e results were not startling: 98 investment , on "fairl y goo d evidence," was mainly "determined " b y industria l profits earned i n industr y as a whol e som e month s earlier; residential buildin g was determined i n the several countrie s b y variou s combina tions o f rent , buildin g costs , profits , an d numbe r o f house s (i n deviatio n fro m trend ) lagged 3 i years—th e latter variable appearing particularly influential in the United States ; rolling-stock investmen t als o presente d a somewha t confuse d pictur e wit h th e privatel y owned U.S. railway s apparently more responsive to profits, interest rates, an d iron prices as compared to the greater role of the rate of increase of traffic [designate d th e "accelera tion principle" ] i n th e publicl y owned Europea n systems , notabl y that of Germany . In his concluding chapter Tinbergen underlined that definitive "explanations" required that " a complet e system be constructed in which the number of equations should be equal to th e numbe r o f variate s necessar y t o describ e adequatel y th e busines s cycl e mecha nism."99 That wa s the objectiv e o f hi s secon d volume . Although simple by later standards, Tinbergen's construc t of the American economy i s too detaile d fo r descriptio n here . Briefly , h e se t u p group s o f demand , supply , an d income-formation equations . Out of thei r interactio n a set of "direct " and "indirect " relations ar e adduced , buildin g up t o Tinbergen' s assessmen t o f th e categorie s o f business-cycle theorie s se t ou t i n Haberler' s twi n Leagu e o f Nation s study. Tinbergen's majo r conclusion s were th e following: 100 • Short-ter m interes t rates wer e foun d t o have sligh t influenc e on investment , long term rate s a "moderate " influence ; th e monetar y syste m wa s elasti c an d no t a "chief factor " i n fluctuations. 8 Profits , wit h a lag , wer e th e majo r determinan t o f investment ; th e acceleratio n principle wa s no t confirmed. • Th e period of production played a "rather important role" in rising costs during the boom, bu t a s a caus e o f crisi s wa s o f "les s importance. " I n thi s respec t th e behavior o f prices i n th e boo m peakin g i n 192 9 wa s somethin g o f a n exception . Perhaps th e mos t importan t substantive result of the study—stil l o n Tinbergen's min d when he wrot e th e 196 7 "Introduction " to its reprinting—is the apparently large role in the America n busines s cycl e o f th e 1920 s playe d by stock-marke t speculatio n i n 1928 1929—a questio n hi s metho d could pos e bu t no t answer . Looking bac k o n thi s an d othe r pioneerin g econometri c enterprise s 3 0 year s late r Tinbergen said: 101 Some o f the fit s i n our model s neve r became very good, or , i f finally the y had bee n force d int o a high correlation , brok e dow n a few year s later . I a m afraid tha t the firs t subjec t I tackle d i n m y wor k fo r th e Leagu e o f Nations , namely to explain the fluctuation s i n investment activity, never has become a great success . I n the Netherlands Central Planning Bureau we foun d i t safer , after som e years , t o as k industrialist s fo r thei r investmen t programs rathe r than rel y on an econometric explanation. Also government expenditures were

Business Cycles an d C rowth 30

1

among the variables difficul t t o explain. In both cases we may account fo r the lack o f succes s b y the fac t tha t a small number of decision maker s determin e the pictur e an d that henc e rando m deviation s wil l be important. The critica l poin t t o b e noted , however , i s tha t Tinbergen' s model , lik e multiplier accelerator analysis, required a clear break between growth and cyclical analysis. Trend s are eliminated , majo r invention s a s wel l a s publi c policie s ar e regarde d a s exogenou s shocks t o th e system . Tinberge n reflecte d o n th e reason s fo r thi s procedur e i n hi s De cember 196 9 Nobe l lecture: 102 In a mor e genera l wa y man y o f u s kno w that quite a fe w busines s cycl e models wer e "forecasting " th e turning points only after the y had occurred . Ragnar Frisc h wa s quit e right when, a t an earl y stag e o f mode l building , h e introduced random shocks a s a n essentia l elemen t o f th e busines s cycle , leaving th e cumulativ e process betwee n turnin g points rather tha n the latte r themselves a s a thing that really coul d b e explaine d by th e models . From th e perspectiv e o f thi s chapte r th e substitutio n o f "rando m shocks " fo r th e endogenous force s tha t decreed th e cyclica l pat h o f growt h i s much mor e tha n a usefu l technical limitatio n i n mode l building : it breaks th e lin k between growt h an d cycle s o n which an y vali d theory o f cycle s mus t be constructed .

12 Relative Price s

Whereas a n imposin g arra y o f distinguishe d economist s wrestle d wit h th e analysi s o f business cycle s i n the perio d 1870-1939 , onl y a small band examine d th e classi c ques tion: Ho w di d th e prices o f manufacture s move relativ e t o those fo r basic commodities , i.e., th e net barte r term s of trade fo r countries that were primarily exporters o f manufactures and importer s of basi c commodities ? The member s of thi s selec t grou p mainl y addressed thre e problems : • Th e pre-191 4 unfavorabl e movemen t o f th e Britis h term s o f trad e tha t affecte d strongly Keynes' s vie w of the Versaille s Treaty i n The Economic Consequences o f the Peace. * Th e sudden , subsequen t excessivel y favorabl e movemen t o f th e Britis h terms o f trade an d it s rol e i n th e interwa r debate o n Britis h economic policy . 8 The proble m of lon g cycle s in the worl d economy : notably , Kondratieff' s long wave hypothesis ; Colin Clark' s hypothesi s abou t successive "capital-hungry " and capital-sated" periods ; an d th e analysi s of foreig n trad e pric e an d volum e move ments b y Folk e Hilgerd t i n Industrialization an d Foreign Trade. Th e latte r tw o analyses wer e explicitl y linke d b y thei r author s t o relativ e pric e trends : Kondratieff's wa s not, althoug h certain aspects o f it—notably reference to bringing new agricultura l area s int o the worl d economy—len t itself to suc h a linkage . Although ther e wa s a reasonabl e cas e fo r treatin g separatel y th e transfe r proble m (Chapter 9) an d th e term s o f trade , i t is evident tha t a part o f th e argumen t there relate s closely t o th e discussio n her e o f relativ e prices .

British Anxiety about Unfavorable Terms of Trade: 1903-1919 It will be recalle d tha t Marshall wa s extremel y sensitiv e to the impac t o n Britain—and, notably, on the rea l wage s of Britis h labor—of the relative pric e of Britis h imports . On the basis o f Arthur Bowley's data he noted the lif t i n British real wages in the last quarter of the nineteenth century, rooted essentially in cheap food fro m overseas ; and , as early as 1903, h e wa s awar e that the tren d had begu n t o revers e (preceding , pp. 182-184) . No doubt influenced b y Marshall, Keyncs and Robertson took seriousl y the post-190 0 unfavorable shif t i n th e term s o f trade , echoin g a s i t di d pre-181 3 classical economics,

Relative Prices 30

3

with it s anxiety abou t diminishing returns to agriculture. Keyne s published a note o n the subject i n th e Economic Journal i n 191 2 notin g tha t Britai n was £3 7 millio n wors e of f than it would have been i f import and export price s ha d moved equally between 190 0 an d 1911. I t include d th e followin g passage: 1 The deterioration—fro m th e poin t o f vie w o f thi s country—shown above i s due, o f course , t o th e operatio n o f th e la w o f diminishin g returns fo r ra w products which , afte r a temporar y lull , ha s bee n settin g i n sharpl y i n quit e recent years . Ther e i s no w agai n a steady tendenc y for a given unit of manufactured produc t t o purchas e yea r b y yea r a diminishin g quantity o f ra w product. Th e comparative advantage in trade is moving sharply against industrial countries . In his A Study o f Industrial Fluctuations Robertso n explore d fo r several page s variou s consequences o f shifting relative prices for basic commodities, comin g to rest on the same terms o f trad e dat a Keyne s ha d used . H e conclude d forcefull y as follows: 2 The general conclusion to which these figures, taken as a whole, lead is that the normal tendency for the ratio o f exchange to alter against the manufacturing an d i n favou r of th e agricultura l communities was i n force i n the seven ties, wa s suspended i n the eighties an d nineties, and is now once more on the whole triumphing . Thi s i s perhaps th e mos t significan t economic fac t i n th e world to-day . .. . Bu t th e fac t i s clearl y o f secular rathe r tha n cyclica l importance. This preoccupatio n wa s carried ove r directl y by Keynes as a basis fo r Chapter I I of the Economic Consequences o f th e Peace, where, thinkin g again of the prewar movement o f the terms of trade, he wrote: " . . . takin g the world as a whole, ther e was no deficiency of wheat, bu t i n order t o call forth an adequate suppl y it was necessary to offer a higher rea l price"; and , later , i n summing up, h e referred t o "th e increas e i n the real cos t o f food , and the diminishin g respons e of Natur e to any furthe r increase in the populatio n of the world" as one of two fundamental problems o f post-1919 Europe. 3 It was in large part on these analyti c foundations that Keynes contrasted th e precariousness o f western Europe' s economic positio n i n th e worl d wit h th e cavalie r politica l surger y o f th e statesme n o f 1919. In thei r biographie s o f Keynes , neithe r Harro d no r Skidelsk y focu s explicitl y o n hi s pre-1914 convictio n that , afte r bein g fende d of f b y a centur y i n whic h ne w land s wer e brought int o cultivation , tha t ol d devi l Diminishin g Return s wa s a t wor k an d woul d remain a t wor k corrodin g industria l Europe's term s o f trade. 4 Thereby , the y mis s th e drama wit h which Keyne s wa s confronted in the immediate post-war years a s the British terms o f trade move d i n a wholly unexpected favorabl e direction an d oscillated i n a high range down to 193 8 whe n they were over 40% more favorable than in 191 3 (Tabl e 12.1) . There i s something mor e to be said about the Economic Consequences o f the Peace an d Keynes's fals e assumptio n about the postwar prospect s fo r the terms o f trade. Tha t essa y remains a vivi d self-portrai t o f Keynes , wit h virtuall y al l hi s qualitie s o f min d an d character i n play . Ther e is , firs t o f all , th e convergenc e o f a professiona l economist' s analysis, focuse d sharply by a civil servant' s sens e o f the operationa l issues, and a great stylist writin g i n whit e heat, a t his best. Behin d it all is a loyalt y an d commitment to th e best values of pre-1914 Wester n civilization , clearly endangered by the short-sightednes s of its leaders and the mixture of apathy and brutishness among its citizenry, but also hop e

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Table 12.1. Term s of Trade: Unite d Kingdom , 1913-193 8 (1938 = 100 ) 1913 — 1919 1920 1921 1922 1923 1924 1925 1926 1927

70 — 81 88 99 92 90 87 83 85 85

1928 1929 1930 1931 1932 1933 1934 1935 1936 1937 1938

83 83 90 100 100 103 100 99 97 92 100

NOTE: Expor t over impor t prices (average values). SOURCE: Board o f Trade Journal, Augus t 4, 1951 , reprinted i n B. R. Mitchel l an d Phylli s Deane, Abstract o f British Historical Statistics, (Cambridge : at the University Press, 1962) , p. 332.

and a desire t o recapture faith . In evoking Europe befor e the war (Chapter II ) and Europ e after th e treat y (Chapte r VI) , Keyne s move s effortlessl y fro m economi c t o politica l t o social an d psychologica l arguments . He i s addressing himsel f to the fat e o f an intimately interconnected grou p of national societies wit h an essentially common cultural base. An d then ther e ar e hi s unforgettabl e portrait s o f th e leaders—perceptiv e and , t o a degree , bitchy—as h e i s drive n on , i n frustratio n and fury , b y a sens e o f th e ga p betwee n th e statesmanship require d an d th e pedestrian, parochia l politic s shapin g the outcome . Finally there i s Keynes, th e probability theorist, wit h an observation that bears directly on hi s term s o f trad e erro r an d his brisk , unembarrasse d adjustmen t to it: 5 We cannot expect t o legislate for a generation or more. Th e secular changes in man's economi c conditio n an d th e liabilit y of human forecast t o erro r ar e as likely to lead to mistake in one direction a s in another. W e cannot as reasonable me n do better tha n base ou r policy o n the evidence w e have and adapt it to th e fiv e o r ten year s ove r whic h we may suppos e ourselve s t o hav e som e measure o f prevision ; an d w e ar e no t a t faul t i f w e leav e o n on e sid e th e extreme chance s of human existence and of revolutionary changes in the orde r of Natur e o r o f man' s relation s t o her .

Keynes and Robertson on the Interwar Terms of Trade: Un Embarras de Richesse In 1919-1920 the high price of British coal exports cushioned the terms of trade agains t the high pric e of food and raw material imports ; in the general pric e collapse o f 192 1 th e fall i n Britain' s impor t price s substantiall y exceeded tha t o f it s expor t price s includin g coal, an d the term s o f trade stoo d 41 % highe r in that yea r than in 1913 . I n the period o f relative worl d recover y dow n t o 192 9 th e term s o f trad e fel l somewhat ; but , a t thei r interwar trough , th e term s of trad e wer e stil l almos t 20 % mor e favorabl e tha n i n 1913 . It wa s i n the cours e o f a protracted debat e wit h Willia m Beveridge (o n the Economic Consequences thesi s tha t th e worl d face d Malthusia n populatio n pressure o n th e foo d

Relative Prices 30

5

supply), that Keynes confronted the fact tha t his projection into the postwar period of the 1900-1913 trend ha d been wrong . He , rathe r tha n Beveridge, note d tha t the volume o f manufactured export s give n for a uniform quantit y of food imports had falle n from 9 7 in 1913 to 77 in 1922 , reflectin g a "vas t improvement" i n the terms of trade position, thu s defined.6 Thi s change , however , wa s accompanie d b y a "disastrou s fallin g of f i n th e volume o f British exports." In a typically swift adjustmen t to new circumstances Keyne s then bridged th e divers e movement s o f th e term s o f trade , prewa r an d postwar , wit h a concept tha t would define Britain's difficultie s i n both cases: "W e ar e no longer abl e t o sell a growin g volum e o f manufacture d goods (o r a volume increasin g i n proportio n t o population) a t a better rea l pric e i n terms o f food." 7 With a general recognitio n of what had happened to the postwar terms of trade, interes t among economists tende d t o concentrate o n how th e British economy shoul d reac t t o its sudden, an d rathe r embarrassing , increas e i n real wealth . In hi s "Reply " t o Beveridg e Keynes discussed the probable elasticity of demand for British exports, concludin g that an attempt t o restore their volume, an d thus to eliminate unemployment in the export industries, migh t involv e a sufficiently serious deterioratio n i n the terms of trade to cause a fall in real wages, a view symmetrica l with his conclusions o n the German reparations transfe r problem.8 Robertso n continue d thi s phase o f the discussion b y defining three alternativ e methods o f adjustment : " a contrive d fal l i n th e rati o o f interchange" , a s Keyne s ha d proposed; a shifting o f labor from expor t industries to production fo r the home market; o r an increas e i n capital exports. 9 On the whol e he leane d t o stimulus to the home market . In the course of his exposition Robertso n underline d the critical role i n the outcome of an economy' s capacit y t o shif t it s resource s rapidl y fro m on e secto r an d occupatio n t o another:10 The general conclusio n is that if a country's resources in capital and labour were completel y mobil e betwee n differen t occupations , a n improvemen t i n the ratio of interchange would be an unmixed blessing, even though it led to a reduction i n th e volum e both o f export s an d imports . I f w e coul d costlessl y erect a vast sausage-machin e whic h would grind shipyard s int o cottages an d cotton-spinners int o plasterers, w e should be wise to do so. I am not sure that even a s it is we ought not, s o far as labour is concerned, t o take a leaf ou t of Germany's book, an d make a far more decisive move in that direction than we have ye t done . The argument evokes somethin g of Hume's commende d respons e of an "industrious " nation t o an up-and-comin g challenger a s well as the situatio n faced by Western Europ e and th e Unite d State s i n the 1980 s a s they confronte d a major technological revolution , progressively heightene d competitio n with Japan, and an enlarging band of new industrial powers. And , indeed , Robertson , i n hi s furthe r probin g reflection s o n a n appropriat e response t o the embarrassment o f excessively favorabl e terms of trade, conclude s wit h a prescient passag e o n th e possibl e narrowin g o f th e ga p betwee n ric h an d aspirin g countries:11 If at some future time the terms of trade swing agains t us, i t is likely to be as part of a more far-reaching change—namely, a partial closing of those gaps in th e comparativ e capacitie s o f differen t countrie s fo r followin g differen t pursuits on which the advantages of international trade depend. If that occurs, it wil l stil l b e tru e that England will hav e to adap t her econom y to a smaller

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volume o f expor t trad e tha n sh e ha s been used t o i n the past—not, a s a t the present moment, because she is getting her imports so cheaply, but for the less agreeable reason that the circumstances in which it paid the world to let her be its worksho p wil l hav e partially passe d away. The adjustmen t actually made i n 193 1 by the Britis h government contained, i n effect , elements o f all three of Robertson's thre e alternatives; that is, Britain , in effect, devalue d the pound , stimulate d th e domesti c marke t (fo r example , b y measure s t o encourag e housing construction) , an d acte d t o encourag e capita l export s withi n the Empire . Wit h respect to capital exports, it is of interest that Robertson regarded the m as a rather specia l sort of short-run stimulant to the British export industries. He did not attempt to determin e whether th e cause s fo r th e favourabl e shif t wer e likel y t o persis t o r whethe r capita l exports, in their long-run effects, migh t be so directed a s to cushion the British economy against a time of highe r relativ e impor t prices. O n the whole , contemporar y economist s tended t o regard th e term s o f trad e positio n durin g the interwa r years a s i f that positio n were likel y to persist . Polic y discussio n was addresse d mainl y to the mos t appropriat e form an d mean s o f adjustmen t to it. Pulling back from the role of terms of trade analyses in the effort o f Britain to cope with the interwar pathology i n the world economy , two aspects o f this stor y are worth noting . First Keyne s an d Robertson wer e both conscious that they were evokin g an old classical doctrine whe n they viewed with alarm the unfavorable pre-1914 movement in the terms of trade, but they did not review the historical oscillations of relative prices and the terms of trade over the previous century, nor explore the corrective mechanism that had operated in the past or ask whether that mechanism might again operate. When the pre-1914 tren d was unfavorable, the y assumed, implicitl y at least, tha t trend woul d continue into the indefi nite future . Whe n th e interwa r trend wa s favorabl e the y generall y assume d tha t circumstance would persist ove r the time period relevant to current policy. The y di d not follow Marshall who , i n givin g writte n testimon y o n "Fisca l Polic y o f Internationa l Trade " (1908) devote d mor e tha n fiv e page s t o "whea t price s i n Englan d sinc e 1820," 12 an d sought systematicall y t o put hi s conclusion s i n suc h a long historical perspective . Second, i n a manner somewha t evocativ e of the international debt crisis of the 1980s , Britain learne d somethin g o f a lesso n abou t th e intens e interdependenc e o f th e worl d economy. Th e negative impact on Britain's overseas expor t markets of excessively favor able term s o f trade wa s a puzzlement mainstrea m economists had no t generally contem plated before ; an d the y di d no t tur n their mind s to i t again unti l the Unite d State s o f th e 1980s so behaved a s to generate a dollar som e 30 % overvalued, which damped domesti c inflation a t hom e whil e contributing to a radical los s i n U.S . expor t markets .

Three Longer Perspectives: Kondratieff, Colin Clark, and Hilgerdt From a quite differen t perspectiv e an d an unexpected quarter—th e Sovie t Union—a n historical analysi s emerge d durin g the interwa r year s reachin g bac k fro m th e 1920 s t o 1790: N. D . Kondratieff' s definition an d discussion of long waves. Although he acknowledged two Dutc h predecessors, Kondratief f i s properly regarded as the father of the notion that capitalist economies ar e subjec t t o cycle s some 5 0 years in length. 13 H e established an empirical case by finding two and one-half cycles in a number of price, wage, interestrate, an d other value-affecte d series, wit h trough s around 1790 , 1844-1851 , an d 1890 -

Relative Prices 30

7

1896, an d peaks a t 1810-1817 , 1870-1875 , an d 1914-1920. Production dat a were both sparse an d recalcitran t whe n se t int o thi s cyclica l mold . Nevertheless , Kondratief f be lieved tha t long-ru n cycles i n outpu t accompanie d hi s cycle s i n price s an d othe r valu e data. Hi s imag e wa s one of a dynamic world economy movin g forward i n long price and output oscillation s aroun d a more o r les s stabl e upwar d trend in production. Kondratieff di d no t attemp t directl y t o provid e a theor y o f th e lon g cycle , bu t h e counterattacked critic s wh o asserte d tha t th e phenomen a h e wa s examinin g reflecte d exogenous forces : change s i n technology , war s an d revolutions , th e bringin g o f ne w countries into the world economy, an d fluctuations i n gold production. His counterattac k asserted tha t non e o f thes e phenomen a coul d b e properl y regarde d a s exogenous t o th e workings o f a worl d capitalis t system, 14 bu t h e di d no t rende r the m endogenous . H e implied that a coherent explanatio n must exist; but, in his own phrase, h e never developed "an appropriat e theory of long waves.'' I t is fair to say that his major net contribution was dual: to demonstrate long-perio d movements (or cycles) in prices, interest rates, and other value series , an d t o pos e fo r other s t o contemplat e hi s empirica l assertion s tha t th e upswings of his cycles tende d t o contain more years of (conventional) cyclical prosperit y than th e downswings ; tha t agricultura l depressions accompanie d th e downswings ; tha t large number s o f inventions and discoveries wer e made in the downswings to be applie d fully i n th e upswings ; tha t th e beginning s o f th e upswing s were accompanie d b y bot h expanded gol d productio n an d th e effectiv e absorptio n o f ne w area s int o th e worl d economy; an d that the latte r phase of the upswing s brought with the m "th e mos t disas trous an d extensiv e war s an d revolutions. " Abov e all , wha t Kondratief f di d wa s t o dramatize, i n th e mos t vivi d an d persuasiv e o f hi s charts , th e tw o an d a hal f cycle s between 178 9 an d 192 0 i n commodit y price s (Figur e 12.1) . One o f the mos t importan t consequences o f Kondratieff's work was, o f course, tha t it stimulated Schumpeter , i n hi s Business Cycles, t o tr y t o lin k hi s earlie r innovationa l

Figure 12.1. Inde x Number s o f Commodit y Prices , 1780-1922 : England , Unite d States , an d France (1901-191 0 = 100) . [Adapte d from N . D . Kondratieff , "Th e Lon g Wave s i n Economic Life," Review o f Economic Statistics, vol . 17 , No. 6 (November 1935), p . 106. ]

308 Growth

Theory Moves t o th e Periphery

model t o th e patter n o f pric e an d interest-rat e cycle s Kondratief f isolate d (preceding , p. 240) . As this summary indicates, Kondratief f addressed himsel f to overall price indexes , not relative pric e movements . Nevertheles s tw o student s of lon g cycles—W. Arthu r Lewi s and I—hav e conclude d tha t the phenomena Kondratief f identified are to be explained i n terms of periods o f relative shortage and relative abundance of agricultural and other basic commodities, yieldin g movement s i n relative prices, th e price level , interes t rates, etc. 15 In fac t I would argue tha t of the possible force s cited b y Kondratieff, only relative pric e movements, thu s conceived , fi t th e timin g of Kondratieff' s waves an d cove r th e whol e period fro m 179 0 to , say , th e lat e 1980s . From th e present perspective , however , Kondratieff' s achievement was to assert firmly that long waves were to be regarded a s one aspect of the process o f capitalist developmen t itself. Colin Clark's observation s o n the terms of trade are also set in an historical context, in a rather remarkabl e chapte r i n hi s National Income an d Outlay, "Th e Rat e o f Economi c Progress."16 Clark's poin t of departure appears to have been his ex post measurement of the extent to which Britain , i n th e interwa r period, ha d dissipate d th e potentia l advantage s accruin g from highl y favorable terms o f trad e i n a hig h average leve l o f unemployment . Afte r a somewhat schemati c summar y of partia l historica l evidence, h e advance s a Doctrin e o f Economic Indigestion: 17 "Durin g th e period whe n potentialities o f real incom e produc tion ar e rapidly increasing , eithe r through a genuine increas e i n productivity, or through an improvement i n the terms of trade, i t seems inevitable that a large part of this improve ment shoul d b e waste d i n th e for m o f unemployment. " Thi s notio n appear s later , wit h acknowledgments t o D. H. Robertson's testimony before the Macmillan Committee, a s an ad ho c historica l hypothesis ; namely , that modern economi c histor y has been marke d b y successive capital-hungr y an d capital-sated periods. 18 Specifically, Clar k broke the post-1870 perio d int o the following intervals: 1870-1876: low unemployment , risin g retai l prices , apparen t prosperity , lo w rat e o f productivit y increase;19 1877-1885 : fallin g price s an d interes t rates , favorabl e term s o f trade , bu t productivity gain s cancele d i n par t b y highe r unemployment ; an d 1900-1913 : risin g prices, stagnan t rea l wages , stagnan t productivity , bu t lo w unemployment . Evidently , Clark interprete d th e interwa r year s as an extreme versio n of the obverse o f 1900-1913 ; that is, a period i n which a high rate of productivity increase and favorable terms of trade were dissipate d i n unemployment , notably in the expor t industries. Clark's expositio n wa s frankly exploratory ; h e pointed to certain anomalies in the story; and his historical data were incomplete and , in some cases, debatable. Th e major missin g element i n hi s pattern , however , i s th e rol e o f capita l exports . Th e period s o f intens e capital export s (e.g. , 1871-1873 , 1911-1913 ) wer e marke d b y inflationar y pressures , retardation i n productivity and real wage increases, an d low unemployment. Thus the link Clark faile d to make was between high and low relative prices for basic commodities an d the usual (not universal) fluctuations in the flows of capital to basic commodity-producin g regions. Folke Hilgerdt added a useful dimensio n to the analysis of relative prices by calculating the connection between trends in relative price trends and trends in the relative volume of manufactured an d primar y good s i n worl d trad e (Figur e 12.2) . I n a worl d i n whic h manufactured export s wer e heavil y concentrate d in highl y industrialize d countries, primary export s i n les s develope d countries , the elegan t symmetry of Figur e 12. 2 dow n to

Relative Prices

309

Figure 12.2. Relativ e Price Movement s an d World Trade, 1876-188 0 to 1972 . A. Quantu m index of worl d trad e i n manufacture d good s a s percentag e o f tha t i n primar y goods. B . Pric e inde x o f manufactured good s a s percentag e o f tha t fo r primar y goods . [Adapte d fro m Folk e Hilgerdt , Industrialization an d Foreign Trade, p . 18 , update d fro m United Nations Statistical Yearbooks, various years. ]

1951 i s almos t tautological ; tha t is , a shif t i n relativ e price s i n favo r o f manufacture s would, othe r thing s remainin g equal , requir e a larger volum e of primary product s t o b e exchanged fo r a given volum e o f manufacture d products. Tabl e 12. 2 exhibit s th e actua l proportioning o f trade betwee n th e "highl y industrialized " an d "othe r countries." Hil gerdt commente d a s follows , noting , i n effect , tha t othe r thing s did no t alway s remai n equal:21 It would be erroneous t o assum e tha t the failure of the quantum of trade i n manufactured good s t o keep pace with that i n primary products has been du e simply and directly to the fact that, as the terms o f trade changed in favour of industrial countries , the y could acquir e a given quantity of primar y product s in exchange fo r the export of a declining quantity of manufactured goods. The relative decline i n manufactured goods during the 1890' s . . . was due in part to a reduction i n th e import s o f these good s int o certai n relativel y advance d industrial countries, suc h as the United States, Franc e an d Italy, that resulted from th e increas e i n tarif f protectio n abou t 1890 . I n th e earl y 1930' s th e exchange o f manufactured goods among industrial countries again declined a s a resul t o f impor t barriers , whic h thi s tim e too k th e for m o f quantitativ e controls rathe r tha n of tariffs . On bot h occasions barrier s wer e raise d afte r a fall i n prices that ha d rendered barte r term s mor e "favourable " t o industrial countries, owin g to the tendency o f primary products t o change more rapidly in pric e tha n manufacture d goods. I included the post-1950 movemen t of the two curves in Figure 12.2 to indicate that, for a sustained period, (say 195 1 -1971), once again other things did not remain equal.22 That is, ther e wa s a larg e relativ e increas e i n trad e i n manufacture d goods amon g advance d

310 Growth

Theory Moves t o th e Periphery Table 12.2. Worl d Trad e i n 1935 , in Ol d U.S . Gold Dollar s (Billions ) Imports

I. Highl y industrialize d countries Infra-trade Trade with Group II

Primary products

Manufactured articles

1.7

1.4 0.2 1.6

Primary products

Manufactured articles

3.1 4.3 7.4

1.7 0.7

1.3 2.5 3.8

3.0 3.2 6.2

2.0

0.4 2.6 3.0

1.6 3.4 5.0

0.9 3.6 4.5

0.4 0.2 0.6

1.3 3.8 5.1

7.8

4.6

12.4

6.9

4.4

4.1

5.8 II. Other countries: es: Intra-trade Trade with Group I World

Exports

1.2 0.8

Total

2.4

Total

11.3

NOTE: The figure s i n this table have been adjusted s o as to represent "frontier values" (imports c.i.f. an d exports f.o.b. ) in the case o f al l countries . Thi s involve d a n additio n t o recorde d worl d import s o f 0.2 an d t o recorde d worl d export s o f 0.1. The countrie s include d i n Grou p I are : Austria , Belgium , Czechoslovakia , France , Germany , Italy , Japan , Netherlands , Sweden, Switzerland , Unite d Kingdom , Unite d States . SOURCE: Industrialization an d Foreign Trade, p . 19 .

industrial countrie s a s wel l a s a ris e i n th e rol e o f suc h countrie s as exporter s o f basi c commodities. In passing, i t is wort h notin g that th e issu e of relative prices wa s a domestic a s well a s international issu e durin g th e interwa r years , th e foundatio n fo r whic h i s suggeste d i n Figure 12.3 , whic h presents bot h the British terms of trade and the U.S. far m parit y ratio. Their roughl y invers e movemen t i s apparent .

Figure 12.3. Th e Relationshi p between the British Terms of Trade and the U.S. Agricultural Parity Ratio. [Adapte d fro m C . H . Feinstein , "Statistica l Table s o f Nationa l Income , an d Outpu t o f th e U.K., 1855-1965, " 1972 , p. T139 . U.S. Department o f Commerce , Historical Statistics o f th e United States: Colonial Times t o 1970, Part 1 , 1971 , pp. 488-489. ]

Relative Prices 31

1

A Conclusion Relative pric e movement s i n th e perio d 1870-193 9 clearl y generate d problem s tha t captured th e attentio n o f severa l majo r economist s o f th e period , jus t a s larg e Britis h pre-1914 exports o f capital an d the debat e o n the reparations-transfer problem generate d studies bearin g on the determinants of the terms o f trade. Keyne s and Robertson focuse d on the believed implication s of both unfavorable and favorable terms of trade movement s for th e Britis h econom y an d short-ru n Britis h economic policy , a s well a s (i n Keynes' s case) for postwar policy toward Germany. Colin Clark looked a bit further bac k i n history to illuminat e thre e tren d periods i n the terms o f trade (roughl y 1873-1896 ; 1896-1920 ; and 1920-mid-1930s) . H e probe d imaginativel y but indecisivel y a t possibl e link s be tween terms o f trade, productivity , unemployment, and capital-requirement trends. Folk e Hilgerdt measure d an d analyze d relativ e pric e movement s i n relatio n t o th e relativ e volumes of manufactured and primary goods entering international trade. Kondratief f put effectively o n th e agend a th e possibl e reasons fo r long waves i n prices an d other value dominated serie s reachin g back to 1790 . H e perceived thes e cycles ought to be treated as an aspect o f the growth process; bu t never made a satisfactory linkage. The other analyses of cyclica l movement s i n relativ e price s suffere d th e sam e basi c weaknes s a s mos t pre-1939 business-cycle analyses ; that is, the y did not begin with a sufficiently disaggre gated, dynami c model o f growth and then account for the systematic deviations o f actual from dynami c equilibriu m sectora l capacity . I t wa s thes e deviation s tha t yielde d suc cessive phase s o f distortio n i n relative prices and , thus , the terms o f trade. 23

13 Stages o f and Limit s t o Growth

The availabl e analyti c literature on the early stages o f development i s much thinner in the pre-1939 perio d tha n i t shoul d be . Th e impor t substitutio n takeoff s o f Argentin a an d Brazil bega n i n th e 1930s , i n constructiv e respons e t o th e devastatio n o f thei r expor t earning capacity ; an d Mexico complete d it s preconditions fo r takeoff, afte r th e end o f its bloody civi l war, in the period 1920-1940 . Ther e wer e significan t parallel development s elsewhere i n Lati n America . Th e takeof f o f Turke y als o occurre d i n the 1930 s afte r th e rather tortured emergenc e o f a nation state committed to modernization i n the wake of the dismemberment o f th e Ottoma n Empire . Ther e wer e als o importan t development s else where shor t o f takeoff , includin g India and China; although they wer e overshadowe d b y political and , in the latte r case , militar y events . Meanwhile, close r t o th e cente r o f socia l scienc e theorizing , Easter n Europ e move d forward unevenl y befor e 191 4 and continue d it s modernization , despit e th e depressin g impact o f interwa r circumstances i n Western Europ e an d the world econom y a s a whole . There was , nevertheless, somewha t mor e systemati c reflectio n o n th e developmen t process i n th e 1870-193 9 perio d tha n mos t analyse s suggest. 1 But , still, th e literatur e conventionally availabl e i s meager a s compared, fo r example , wit h tha t o n th e busines s cycle. Thi s i s th e cas e fo r thre e reasons . First , th e economist s o f th e Unite d States , Western an d Central Europ e wh o dominated th e formal literature of economics were , wit h one notable exception (i.e. , Marshall), a rather parochial crew obsessed wit h the problems of thei r ow n tim e an d place. Second, thos e actuall y engage d i n th e earl y stage s o f modernizatio n i n developin g countries wer e too busy to reflect analytically on what they were doing and to set out their conclusions i n a conventional way . For example , Rau l Prebisch, on e o f the firs t econo mists fro m a developin g regio n t o fin d hi s voice , ha d thi s to sa y i n retrospect: 2 When I starte d m y lif e a s a youn g economis t an d professo r durin g th e 1920s, I was a firm believe r i n neoclassical theories . However , th e first grea t crisis o f capitalism—th e world Depression—prompte d i n me seriou s doubt s regarding thes e beliefs . . . . During thos e hecti c year s o f th e Depressio n I ha d som e influenc e o n th e economic polic y o f m y country , Argentina , firs t a s Unde r Secretar y o f Fi nance an d late r wit h th e Centra l Bank . Durin g th e 1930 s I recommende d

Stages o f an d Limits t o Growth 31

3

orthodox anti-inflationar y measures to eliminate the fiscal deficit and suppress inflationary tendencies , bu t at the same time I departed fro m orthodox y when I ha d t o fac e a seriou s balanc e o f payment s disequilibrium and advocate d a resolute industrializatio n policy a s wel l as other measure s t o thi s end. My duties during this period di d not permit me to devote time to theoretical activities. Bu t after I left thes e responsibilities in the early 1940s , I spent some years tryin g t o derive som e theoretica l view s fro m m y experience . Third, ther e wa s an abiding proble m tha t persisted int o the post-194 5 year s whe n the analysis of economic developmen t became fashionable. The serious study of development requires th e systemati c blendin g o f economi c an d noneconomi c analysis . I n th e perio d 1870-1939, when economics becam e a professional and specialized academi c discipline , not man y mainstrea m economist s wer e willin g and abl e to wor k on a multidimensional social scienc e basis, i n conformity with the olde r traditio n of politica l economy . Still, I woul d gues s w e coul d fin d a large r bod y o f analyti c reflectio n i n an d o n th e developing region s tha n we hav e yet mobilize d i f we wer e t o di g deeper i n governmen t archives an d local journals, a s well as into the archive s of the colonial powers . Unfortunately, tha t wa s a task I could no t undertak e as part o f the present enterprise . I shall, therefore, confin e this chapter to five easily accessible approache s t o the stage s of an d limit s to growt h a s conceived i n the period 1870-1939 : • Coli n Clark' s trul y pioneerin g Conditions o f Economic Progress. • Th e country studie s o f Vera Anstey (India) and R. H . Tawne y (China), alon g with Lillian Knowles' s observation s o n development s i n the Britis h Empire . • W . G . Hoffmann' s highl y original Growth o f Industrial Economies. • Folk e Hilgerdt' s rathe r strikin g generalization s o n th e developmen t proces s i n Industrialization and Foreign Trade. • Reflection s o n th e limit s to growt h stirre d b y the Grea t Depressio n o f the 1930s : notably thos e o f Hanse n an d Schumpeter .

The Conditions of Economic Progress Although Colin Clark's titl e derives from Marshall, 3 i t was rather remarkable that a study of th e condition s o f economi c progres s shoul d hav e bee n writte n b y a n Englishman , caught up in the intractable problems of his country in the 1930s , focusing, apparently, on the laborious refinement of national income calculations and their analytic applications. In the course o f planning this chapter I wrote and asked Clar k ho w it happened. Hi s beguiling repl y (1 0 June, 1986) : The first begettin g o f the idea of Conditions of Economic Progress cam e in 1935.1 was engaged t o be married, an d my fiancee had just told me, in a good natured tone , tha t I wa s leadin g rathe r a n idl e life . O n a bright sunn y after noon, unseasonabl e fo r th e tim e of yea r (March) , I canoed ou t o n th e Rive r Cam, tie d up under a tree, an d sketched th e whole outline of the book i n less than a n hour. In Pioneers i n Development, Clar k explained some of the other strands that bore on his unorthodox interest. 4 Amon g them were two connections that drew him into the problems of India : The experience s ther e of Austin an d Joan Robinso n in 1926-1928 , whic h they

314 Growth

Theory Moves t o th e Periphery

conveyed wit h enthusias m t o thei r Cambridg e colleague s o n thei r return; 5 an d Clark' s supervision of a brilliant Indian student (V.K.R. V. Rao) in writing his thesis The National Income o f British India, 1931-1932. Clark' s interes t wa s broadene d b y a comparativ e study, begu n i n 1935 , o f agricultura l output i n developing countries. The Conditions fo r Economic Progress wa s firs t publishe d i n 194 0 an d then , thor oughly rewritten, in 1951 . I t is the study that laid the foundations for the post-1945 studie s of Kuznets, Hollis Chenery, an d others who aimed to measure an d compare the structural characteristics o f economie s a t different level s of real incom e per capit a either ove r lon g periods o f tim e or , i n cross-section , a t a given tim e interval . Although th e 194 0 editio n contain s somewha t les s statistica l dat a tha n it s 195 1 suc cessor, it is totally a product of the period w e are now examining rather than the post-194 5 years deal t wit h in Par t Three ; an d i t contain s certai n feature s tha t on e ca n regre t wer e dropped fro m th e secon d editio n including , notably, a vivi d an d usefu l "Summar y an d Conclusions," a chapter o n the terms o f trade i n relation to growth, an d an effort t o shif t multiplier an d accelerato r analysi s fro m a short - t o a long-run basis.6 The hear t o f Clark' s technica l analysi s i n bot h edition s consiste d i n thes e majo r features. • Rea l incom e an d it s components ar e defined i n terms o f a standard "internationa l unit" (I.U.) consisting of the amount of goods and services that could be purchased for $ 1 in the United States over the average of the decade 1925-1934 . This permitted bot h systemati c internationa l comparison and , even , a bold effor t t o calculat e global produc t an d incom e distributio n by countrie s at differen t averag e level s of real income . • Clark' s basi c disaggregation was in terms o f primary (agriculture, etc.), secondar y (manufacturing), an d tertiar y (service ) sectors . H e examine d relative productivity and manpower allocations among the three sectors at different level s of real income , and th e changin g proportion s fo r particula r countrie s wit h th e passag e o f time , changing technology, an d the rise i n real incom e pe r capita. Hi s analyses were th e forerunners o f both comparativ e cross-section an d country studies of the post-194 5 period. • He grapple d suggestivel y but indecisivel y wit h the problem of measurin g and assessing th e rol e o f capita l i n economi c progress ; th e distributio n o f income s o f individuals; changes in patterns o f consumption a t different incom e levels ; an d th e rate o f populatio n increas e i n relation t o nationa l income growt h rates . As Clark' s acknowledgment s an d reference s mak e clear , h e ha d a goo d dea l o f dat a available for mobilization by the second hal f of the 1930s , but his assembly of the material and organizatio n o f it around a coherent an d principled se t of questions was an authentic path-breaking enterprise . Som e o f hi s conclusion s hav e bee n altere d a s mor e dat a hav e become available ; som e o f hi s analyti c passage s ar e debatable ; an d I , a t least , woul d question th e adequac y o f rea l incom e pe r capit a a s a sufficien t measur e o f degre e o f development an d stage of growth. But The Conditions o f Economic Progress i s one of the few book s tha t virtually created a new branc h o f economic analysis , despit e Clark's self denying assessmen t tha t som e o f hi s principa l conclusion s wer e foreshadowe d b y Si r William Petty, 7 t o whos e nam e he migh t hav e adde d thos e o f Ada m Smit h an d Alfre d Marshall.

Stages o f an d Limits t o Growth 31

5

Anstey, Tawney, and Knowles I ha d somethin g t o sa y abou t Ver a Anstey's interwa r study of Indi a (first edition , 1929 ) and R. H . Tawney' s o f China (1932 ) in the course o f the brief account of the evolution of demographic analysi s in Chapter 7 (preceding, pp . 206-208). They are both distinguished studies o f developmen t problem s an d prospects se t i n a view o f whol e societies , wort h reading mor e than a half century after they were written, although analyses of Indian and Chinese developmen t hav e sinc e become cottag e industries . At th e tim e thes e analyse s wer e conducte d bot h India an d China were i n the comple x transitional stag e I cal l th e precondition s fo r takeoff . The y containe d element s o f a modern econom y an d relativel y smal l group s o f (mainly ) men knowledgeabl e abou t Western method s o f organization, an d for one reason or another, motivated to expand the modern center s o f activity . I n Anstey' s phrase , "|t]h e educate d English-speakin g Indians . . . for m a thin articulate layer covering the surf ace of the whole of Indian society."8 A simila r relativel y smal l catalyti c grou p existed i n Chinese society . Th e two economie s contained railwa y systems , cotto n textil e mills , iron and steel, engineering, and chemica l plants, amon g others . Bu t thes e enclave s wer e embedde d i n societie s stil l essentiall y traditional wit h the roun d o f lif e o f mos t huma n beings untouched—o r onl y marginally touched—by moder n activitie s an d attitudes. Anstey used explicitly the rough analogy of mediaeval Wester n Europ e t o illuminat e the settin g fro m whic h a moder n Indi a woul d have t o evolve . Sh e pointe d to , amon g othe r feature s o f Indian life , th e pervasive influ ence o f religion ; th e absenc e o f th e ide a o f progress ; th e natur e o f th e shar p socia l divisions; th e subordinatio n o f th e individua l to th e group ; th e predominanc e o f self sufficient agriculture ; th e pervasiv e rol e o f guilds . I n bot h countries , th e focusin g o f political lif e o n th e task s o f developmen t wa s inhibite d by th e existenc e o f problem s o f evident higher priority: in India's case, the achievement of independence; in China's case, a mor e equitabl e balanc e wit h intrusiv e external powers , th e buildin g of a vita l centra l government, an d th e settlemen t o f th e civi l war tha t existed from , a t least, 1927 . The counterpoin t betwee n powerfu l ol d strand s o f religion , culture , socia l structure , and politica l behavio r an d the tasks o f modernization i s the central them e of both books , which end b y arguing that economic developmen t ca n only proceed successfull y as thes e noneconomic obstacle s ar e overcome , includin g thos e tha t decre e excessiv e rate s o f population increase . The bul k o f Anstey' s tex t i s devote d t o th e moder n economi c enclave s withi n Indian society, t o recen t trend s an d policies , an d prospects . I t i s a prototyp e o f th e kin d o f country stud y the Worl d Ban k was t o conduct o n a large scale, startin g about a quarter century later . Bu t it s linkin g of th e technica l economi c analysi s with th e noneconomi c forces a t wor k i s unforced , uninhibited , and mor e effectiv e tha n i n mos t highl y profes sional economi c developmen t studie s o f a late r time . Whe n sh e comes , i n th e end , t o identify th e majo r "obstacle s t o a grea t forwar d movement " i n th e economy , sh e ob serves tha t non e i s t o b e sough t "i n th e material , technica l sphere , bu t i n the spher e o f social organization. " Sh e defines th e "thre e fundamenta l obstacles " a s "th e tendenc y towards a n excessiv e increase i n population, the uneconomi c outlook of the people , an d the lac k o f co-operatio n betwee n th e governmen t and th e governed." 9 Tawney's stud y o f Chin a (Land an d Labour i n China) i s bot h narrowe r and broade r than Anstey's . Les s tha n two-fifth s a s long, i t focuses, a s its title suggests, primaril y on

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Theory Moves t o th e Periphery

the agricultura l secto r an d rura l life . I t wa s originall y writte n a s a memorandu m fo r a conference o f th e Institut e o f Pacifi c Relation s hel d a t Shangha i i n Novembe r 1931 , whose organizers had the wit to enlist one of the great analysts of Europe's transition from mediaeval t o moder n life . Hi s discriminatin g analogie s wit h strands o f Europea n experi ence and, even more, his underlining of what in China was unique, provide the framework for th e book . As fo r analogies , ther e ar e passages lik e this: 10 . . . [T]he disorder s o f Chines e agricultur e . . . are acut e i n degree but [i n part] no t uniqu e i n kind . The y ar e on e specie s o f a genu s whic h ha s bee n widely diffused, an d which is characteristic, no t of this nation or that, but of a particular phas e o f economi c civilisation . Th e persistenc e o f a n empirica l technique base d o n venerabl e usag e an d imperviou s to science ; th e meagr e output o f foodstuff s whic h tha t techniqu e produced; th e wast e o f tim e an d labour throug h th e fragmentatio n o f holdings ; th e profit s wrun g fro m th e cultivator by middleman , usure r an d landlord; the absenc e o f mean s of com munication and the intolerable condition of such as existed; the narrow margin separating th e mass of the population from actua l starvation and the periodica l recurrence o f local famines—such phenomena, i f exception be made of a few favoured regions , wer e until recently the commonplaces of western economi c life sinc e me n firs t reflecte d o n it. .. . The force s which shifted th e scene in the course of the last century need n o lengthy explanation. The novelt y of the age wa s the application of science t o the productiv e arts . The bulk of Tawney's tex t explores the possible relevanc e to China of remedies applie d elsewhere: i n communications ; scienc e an d education ; cooperativ e organizations ; lan d tenure; drought an d flood control; reduce d birthrate s and migration; and the development of moder n industry , to whic h a chapter i s devoted. Technically , Tawne y concludes tha t the "fundamenta l economi c need s o f Chin a . . . are, i n order o f thei r importance: 11 (i) a n improvemen t i n th e mean s o f communication , b y th e extensio n o f roads, and , a s circumstance s allow , o f railways ; (ii) th e improvemen t o f agriculture, o n th e side , no t onl y o f productiv e methods , bu t o f finance , marketing, an d lan d tenure; (Hi) th e development , wit h adequate safeguards, of machin e industry , and it s extensio n beyond th e smal l number of area s i n which a t presen t i t i s concentrated . Neithe r politica l stabilit y no r economi c progress, however , wil l b e achieve d automatically . But h e argue s tha t politics ha s priorit y over economics : 12 They [th e Chinese ] mus t create a stabl e an d unifie d political system, i n th e absence o f whic h i t i s idl e t o tal k eithe r o f nationa l independenc e o r o f economic reconstruction. .. . H e [a Western observer ] hears much of China united under the Nationalist Government. The n h e takes a map, goe s throug h the province s on e b y one , mark s wit h a pencil thos e wher e th e authorit y of Nanking i s effective , thos e wher e i t i s nominal , thos e wher e i t i s openl y defied. Hi s perspectiv e changes . Th e capita l dwindle s t o a cit y effectivel y governing, perhaps , si x o r seve n provinces out o f thirt y i n a continent partly

Stages o f an d Limits t o Growth 31

7

friendly, partl y indifferent , partl y hostile. I t is Franc e i n the twelft h century, on a scal e immensel y greater—Paris an d th e H e de France , a littl e circle of light, i n on e corner , and , fo r th e rest , a welte r o f liberties. Like Anstey , Tawne y turn s fo r analog y t o "mediaeva l Christendom " t o evok e th e underlying structur e o f institution s and concept s tha t would have t o chang e i f a moder n China were to emerge. Bu t his operational focu s remains on:13 "[t]h e first problem . . . ; To creat e an efficien t syste m of government; " and he link s tha t critica l objectiv e to development o f a more moder n an d effectiv e educationa l system . His fina l chapte r i s addressed t o "Educatio n an d Politics" a s the critical determinants of th e outcome ; an d t o hi s fina l eloquen t judgment tha t th e Chines e themselve s mus t reconcile the imperatives of modernization with the continuity of their culture—one of the wisest observation s t o b e foun d i n development literature. 14 Much tal k o f th e Westernisatio n o f Chin a i s remot e fro m real ities. . . . [T]h e imitatio n of America or Europe, which has profoundly influenced Chines e education, offer s n o solution of the deeper problems of China. It was a necessary stag e i n her evolution; till she knew of the West, she could not full y kno w herself . . . . [T ] hough a natio n ma y borro w it s tool s fro m abroad, fo r th e energ y t o handl e the m i t mus t look within . Erquickung has t d u nich t gewonnen, Wenn si e dir nich t aus eigne r Seel e quillt.* It i s i n hersel f alone , i n he r ow n historica l culture , rediscovere d an d rein terpreted i n th e ligh t o f he r moder n requirements , tha t Chin a wil l fin d th e dynamic which she needs. Th e most fundamental achievements of her revolution ar e stil l t o come . Th e proble m i s t o translate politica l rejuvenation into the practica l term s o f socia l institutions , and t o buil d wit h a moder n tech nique, bu t o n Chines e foundations . I t i s t o he r school s an d universitie s that she mus t loo k fo r th e builders. Lillian Knowles' s Economic Development o f th e British Overseas Empire i s a quit e different kin d of book. 15 I t i s primarily a stud y of th e tropica l region s o f th e empire, 16 reflecting Knowles' s pionee r teachin g a t the London School o f Economics of a course on economic developmen t o f th e Britis h Empire require d fo r th e Bachelo r o f Commerc e degree. A s compared wit h the work of Anstey and Tawney, i t is rather more a history of imperial polic y tha n a n analysi s o f developmen t problem s an d prospects; althoug h bot h strands ar e explored . Inevitably , i t covers a wider range o f circumstance s i n les s detail . There is , als o perhap s inevitably , an elemen t o f wonderment—eve n glorification—a t "the underlyin g romance of the new British tropical empire. . . ," Britain' s role as "th e great civilizer , th e bringe r o f la w an d order" an d shoc k absorbe r betwee n th e "world desire fo r produce an d sal e an d th e primitiv e races. . . ," 17 It contains, however , importan t analytic insights; for example, the systematic impact on colonial polic y o f changin g technology , includin g th e capacit y t o suppres s slavery . I t deals in a forthright way with the "underlyin g commercialis m of the British empire" but also th e ris e i n priorit y o f "th e nativ e interest " an d a "sens e o f responsibilit y for th e *"One doe s no t achiev e rejuvenation unles s i t arises fro m one' s ow n soul."

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indigenous inhabitants . . . . "I8 An d lik e he r tw o contemporarie s a t LSE , sh e evoke s Europe's transitio n fro m mediaeva l time s t o illuminat e the historica l passag e t o b e ob served in the tropical empire an d reflects: 19 "Whe n one looks back in English history and sees ho w civilize d person s [e.g. , Roma n occupiers ] mus t have regarde d u s abou t 1,90 0 years ag o on e nee d no t despai r of th e tropics." It is also worth noting that there were British writers who peered beneat h the surface of modernization unde r colonialis m an d capture d wit h sensibilit y and compassio n th e am bivalence o f bot h side s amon g thos e caugh t up i n the process ; e.g. , E . M . Forste r an d Joyce Gary , th e latte r fo r som e tim e a colonial civi l servant i n West Africa . Passage T o India an d Mr . Johnson belon g wit h th e literatur e o f modernizatio n alon g wit h mor e conventional texts .

Walther Hoffmann Hoffmann's Th e Growth o f Industrial Economies wa s published firs t i n German i n 193 1 but did not become widely accessible in the West unti l published i n translation i n 1958. 20 Hoffmann doe s no t explai n full y ho w h e cam e t o writ e thi s highl y original boo k bu t h e suggests i t arose from an effort t o resolve th e clash o f two perspectives o n the accelerated industrialization outside Europe during the First World War. On e view was that the "war babies" woul d be endangered b y "th e reviva l of European competitio n afte r 1918" ; the other, that the spread o f industry beyond Europe wa s similar to its earlier diffusio n withi n Europe, tha t th e latecomer s ha d th e "advantag e o f th e prio r experienc e o f Europea n countries," an d thei r tendenc y towar d industria l self-sufficiency woul d reduc e export s "of som e type s o f Europea n manufactures." 21 T o ge t a t thes e matter s Hoffman n pro ceeded i n a straightforward , orderl y manner . Firs t h e define s th e determinant s o f th e overall growt h o f th e econom y wit h his ow n versio n o f a basic growt h equation: 22 In eac h country , . . . there ar e considerabl e variation s i n th e rate s o f growth o f th e thre e mai n sector s o f the economy—th e primary , the second ary, an d th e tertiar y industries*—an d o f th e rate s o f growt h o f particula r industries within thes e three sectors . Thes e differences have been du e largely to the interplay of the following factors: (i ) the relative amount s of the factor s of production (natura l resources, capita l stock, labou r force), (ii ) the locatio n of th e productive resource s i n relation t o home an d foreign markets, (iii ) the level o f technologica l development , an d (iv) factors of a non-economic char acter suc h a s th e skil l o f entrepreneurs , th e taste s o f consumers , an d th e political an d socia l structur e o f th e countr y concerned . Thes e factor s deter mine the growth o f a national econom y a s a whole and of its various sectors . During th e course o f economic developmen t thes e factors , however, ar e to a large exten t th e resul t o f economi c growth . Hoffmann the n narrows hi s focu s to structural changes withi n the industrial sector tha t are "th e resul t o f differen t rate s o f growt h o f variou s branche s o f manufacture " an d asserts tha t there are striking similarities in patterns of industrialization among countries in the proces s o f growth. 23 *This i s Coli n Clark' s terminology .

Stages of an d Limits t o Growth 31

9

Specifically h e find s th e following: 24 . . . [T]h e structure o f th e manufacturin g sector of the econom y ha s always followed a unifor m pattern . Th e food , textile , leathe r an d furnitur e indus tries—which w e defin e a s "consumer-good s industries"—alway s develo p first durin g th e proces s o f industrialization . But th e metal-working , vehicle building, engineerin g an d chemica l industries—th e "capital-good s indus tries"—soon develop faste r than the first group . This can be seen throughout the proces s o f industrialization . . . . For th e purposes o f our analysi s w e have divided this gradual process into the followin g fou r stages : • Stag e I has a ratio o f 5 (± 1): 1 • Stag e I I has a ratio o f 2.5 ( ± 1) : 1 • Stag e II I has a ratio of 1 (±0.5): 1 • Th e fourt h stag e ha s a stil l lowe r ratio . . . . The mai n purpos e o f thi s boo k i s t o sho w tha t thes e stage s o f economi c development ca n b e identifie d for al l free economies . Hoffmann the n test s hi s centra l hypothesi s abou t industria l structure wit h respec t t o countries a t similar stage s o f growth at different time periods. Thi s lead s hi m to identify the period s whe n moder n industrializatio n began i n various countries. 25 Afte r a knowledgeable discussion , focused rather sharply on cotton textiles, h e groups these beginnings in four periods: 1770-182 0 (Britain, Switzerland, United States); 1821-186 0 (Continen tal Western an d Central Europ e plu s Russia); 1861-189 0 (Italy , Netherlands, Denmark, Greece, Japan, Canada) ; post-189 1 (Hungary , India, Sout h Africa , Latin America, Australia, Ne w Zealand, an d China). Thes e dates ar e generally earlier than my takeoff dates. Hoffmann i s conten t wit h a moder n textil e industry . M y criteri a fo r takeof f ar e mor e complex an d represent progres s alread y achieve d ove r a wider front . I n only a few case s was the rise of a modern textil e industry a sufficiently large an d powerful phenomenon t o fulfill m y criteri a fo r takeoff . Bu t Hoffmann' s date s ar e solidl y base d fo r hi s narrowe r purposes. By seizin g o n an d pursuin g a measurabl e ratio—th e proportio n o f valu e adde d i n a selected group of consumers' good s industrie s relative to a similar group of capital good s industries—Hoffmann produce d a n origina l morpholog y o f growt h i n fou r stage s and, along th e way , arrayed a wide spectru m o f countrie s wit h respect t o th e timin g o f thei r entrance int o industrialization . Hi s wor k i n this area—generally ignore d i n the literatur e on development—clearl y belong s amon g th e authenti c pioneering efforts .

Hilgerdt As a by-produc t o f it s mai n purpos e (preceding , pp . 308-310) , Industrialization an d Foreign Trade generate d tw o chapter s tha t constitute not only a kind of brief manua l on the tasks of industrialization in a developing country but also a sophisticated general essay on developmen t an d development policy. 26 Hilgerdt' s analysis draws on a wide range of contemporary an d historica l experience of countries at different stage s of modernization, but distinguishes his cases, i n particular, with respect to population density; initial income

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per capita; size of country and its domestic market ; climate and health of population; scale of installed infrastructure ; availability of domestic and foreign capital; determinants o f th e dynamic relationship between rates o f growth o f population and industry; and the role of tariff policy . The flavo r of Hilgerdt' s analysi s is capture d i n these extract s fro m hi s "Summar y o f Findings:"27 14. .. . [Distinctio n ha d t o be mad e betwee n nonindustria l countries i n which th e populatio n i s relativel y spars e i n relatio n t o availabl e natura l re sources, an d thos e i n which i t i s relativel y dense . 15. In the sparsely populated countrie s the economy is frequently commercialized t o a considerable exten t even befor e industrialization , for exportabl e surpluses o f primary products ar e likely to be relatively great an d hence als o the import of manufactured articles. The early growth of foreign trade in these countries [is ] . . . likel y to facilitat e thei r industrialization. 16. The densel y populate d countries , whic h occupy abou t three-fourths of their population i n agriculture, ar e usually handicapped b y poverty, lo w pro ductivity o f labou r an d a n old-fashione d an d iner t socia l organiza tion. . . . Their industrializatio n would require, amon g other things, a radical change in social values an d administration, reorganization and rationalization of agriculture . 17. Industria l developmen t i n countrie s wit h a relativel y smal l popula tion . . . presents a special difficult y o n account of the fact tha t the domestic market i n these countrie s i s no t larg e enoug h to absor b th e production o n a n industrial scal e o f man y manufactured articles. 18. Particularl y durin g it s earl y stages , industria l development i n densel y populated countrie s ma y b e facilitate d i f th e industr y establishe d i s de centralized an d th e scal e o f productio n relativel y small . . . . 19. In densely populated countrie s a successful programme of industrialization migh t hav e t o b e combine d wit h measure s intende d t o chec k excessiv e population growth . 20. I n thes e countries , i t i s imperativ e tha t th e existin g natura l resources should be exhausted as little as possible before progressive industrialization i s undertaken. . . . 21. Th e influ x o f foreign capital i s of great importanc e for the developmen t of externa l trad e an d o f publi c utilitie s whic h ar e prerequisite s fo r indus trialization. Bu t experienc e show s that onl y limite d amount s o f suc h capita l are likel y to b e availabl e fo r buildin g up a manufacturin g industry. Hence, domestic saving s mus t usually supply th e bul k of th e industria l capital. Th e possibility o f raisin g suc h capita l .. . i s greate r tha n i t ma y appea r a t firs t sight. 22. Tarif f protectio n canno t nowaday s be relie d upo n a s th e onl y o r chie f means t o bring about industrialization . A successfu l industrialization scheme must usuall y include a broa d programm e o f socia l rejuvenation , o f hygieni c improvement, o f genera l an d technica l education, of agricultura l reform an d of investmen t in transportation , power generatio n and othe r utilities . Hilgcrdt evidentl y anticipated a goo d dea l i n th e postwa r prescriptiv e literatur e o n development.

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1

Reflections on the Limits to Growth: Hansen versus Schumpeter There are, essentially , thre e kinds of perspectives o n the limits to growth: one focused on diminishing return s an d relativel y risin g prices fo r basi c commodities ; a second , o n a possible failur e o f th e economi c syste m t o generat e sufficientl y hig h level s o f effectiv e demand t o avoid abnormall y high and protracted unemployment ; an d a third, o n the nee d to restrain growth in order t o elevate the quality of life. T o these we can add Schumpeter' s vision o f a clas h betwee n th e dynamic s o f democrac y an d th e imperative s o f viabl e capitalism. The first follows quite closely th e rhythm of Kondratieff cycles whe n defined in phases of relativ e shortag e an d abundanc e o f basi c commodities. 28 Th e interval s o f greates t anxiety abou t diminishin g return s t o productio n o f basi c commoditie s hav e bee n th e pre-1813 concern o f Malthus and Ricardo with the pressure of population increase on the food suppl y and its consequences fo r the prospects fo r growth and real income per capita ; anxieties abou t food, cotton, an d coal at various times in the period from th e mid- 1840s to 1873, includin g W. S . Jevons's reluctan t conclusion that "ou r motio n must be reduced to rest" becaus e th e 3i%-per-annu m rat e o f increas e i n British coal consumptio n could not be supporte d fro m thick , accessible , high-productivit y seams; 29 an d th e reflection s o f Keynes an d Robertso n o n th e large r meanin g o f th e pre-191 4 Europea n term s o f trade . Parallel anxietie s aros e i n 1945-195 1 an d 1965-1980—again , i n respons e t o relativ e price movement s and , i n th e latte r case , evidenc e o f gatherin g pressur e o f populatio n increase an d accelerate d industrializatio n on the physical environment. Concern wit h high and apparently chroni c unemployment and slow growth led some to propose radica l change s i n publi c policy . Thi s wa s th e contex t i n whic h Malthu s an d Ricardo debate d durin g th e wors t phase s o f structura l adjustmen t afte r 1815 ; th e acut e depressions of the early and late 1840 s stirre d the Chartists (as well as monetary and othe r reformers) t o intens e activit y i n Britain , a s wel l a s th e Socialist s o n th e Continent ; bimetallists emerge d i n th e Britai n o f th e mid-1 8 80s an d th e Unite d State s o f th e mid-1890s; an d advocates o f strong Keynesian remedies asserte d themselves i n the 1930s . The outcom e o f th e uneas e o f th e 1980 s i n th e Atlanti c worl d i s stil l t o defin e itsel f i n political terms . No such stately rhyth m is to be discerned wit h respect t o those wh o have advocated fo r positive reason s limit s to growth, although from J. S . Mill to Dennis Meadows their views have bee n linke d ofte n t o anxiet y abou t resource s an d th e environmen t i n a regim e o f progressive industria l expansion . Here th e focu s i s a particula r phas e o f th e secon d typ e o f anxiety—th e heightene d concern wit h "secula r stagnation" tha t followed the sharp recession o f 1937-1938 after a cyclical upswin g tha t ha d faile d t o brin g th e economie s o f Wester n Europ e (excep t Germany) an d Nort h Americ a bac k t o ful l employment . Alternativ e perspective s ar e provided b y Alvi n Hansen's Presidentia l Addres s a t the fifty-firs t meetin g o f the Ameri can Economi c Association , Decembe r 28 , 1938 , entitle d "Economi c Progres s an d Declining Populatio n Growth," 30 an d Schumpeter' s quit e explicitl y different vie w o f th e meaning o f "th e disappointin g Juglar." 31 Hansen perceived clearl y that to grapple effectively wit h the problem of secular stagnation h e ha d t o brin g together th e tool s o f bot h growt h analysis an d Keynesia n short-run income analysis , or, i n Hansen's vocabulary, "structura l change" an d "fluctuations." 32

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Tersely summarized , Hansen' s thesi s wa s th e following . 1. The 1930 s represented a new era, no t yet definable: "W e ar e passing, s o to speak , over a divid e whic h separate s th e grea t er a o f growt h an d expansio n o f th e nine teenth centur y fro m a n era which no man, unwilling to embark o n pure conjecture , can ye t characteriz e wit h clarity o r precision." 33 2. "Overwhelmingl y significant " wa s the decline b y one-half o f the increase i n U.S . population i n the 1930 s a s opposed to the rate of increase in the 1920 s an d pre-1914 (preceding, p . 201). 34 3. Takin g a positiv e Smithia n rathe r tha n negativ e Malthusia n vie w o f th e rol e o f population increas e i n economi c growth , ther e ar e tw o additiona l "constituen t elements o f economic progres s .. . (a ) inventions, (b) the discovery an d development of anew territory and new resources. . . . Each of these [includin g population increase] i n turn, severall y an d i n combination, ha s opene d investmen t outlets and caused a rapid growt h o f capital formation." 35 4. Sinc e the late nineteent h centur y a group of economists hav e elaborated "th e thesi s that economi c fluctuation s ar e essentiall y a functio n o f economi c progress." 36 Wicksell, Spiethoff , Schumpeter , Cassel , an d Robertso n le d th e way. 5. I n th e nineteent h centur y "investmen t outlet s wer e numerou s an d alluring. " Th e business cycle wa s par excellence th e problem o f that century. Now we suffer fro m "secular stagnation—sic k recoverie s whic h di e i n thei r infanc y an d depression s which fee d o n themselve s an d leav e a har d an d seemingl y immovabl e cor e o f unemployment. . . [, ] th e main problem o f our times. . . ," 37 6. Th e fal l i n th e rat e o f populatio n increas e has reduce d th e deman d fo r investmen t and thus contributed t o chronic unemploymen t by cutting requirements fo r housing, utilities, an d manufacture d consume r goods . Roug h estimate s sugges t tha t i n th e last hal f o f th e nineteent h centur y th e growt h o f populatio n wa s responsibl e fo r about 40% o f the tota l volum e of capital formatio n in Western Europe , 60 % i n th e United States. 38 7. Th e proportio n o f ne w capita l create d i n the nineteent h centur y as a direct conse quence o f the opening u p of new territory canno t be even approximately estimated . But perhaps one-fourt h o f total Britis h capita l formatio n went abroad befor e 1914 , one-seventh for France. Th e prospects i n the twentieth century for such stimulus are narrow; an d ther e i s als o no t muc h stimulu s t o b e expecte d fro m th e likel y indus trialization o f Russia , Easter n Europe , China , and th e Orient. 39 8. "Thu s th e outlets fo r new investment are rapidly narrowing down t o those create d by the progress of technology." W e need a n acceleration i n the rate o f progress o f science an d technology . W e nee d th e creatio n o f larg e ne w industries ; bu t tha t process is "discontinuous , lumpy , and jerky," as D. H. Robertso n ha s said. "An d when giant new industries have spent their force [e.g. , railroads , moto r cars] i t may take a long tim e before somethin g else of equal magnitude emerges. I n fact nothin g has emerge d i n th e decad e i n whic h w e ar e no w living . Thi s basi c fact , togethe r with th e virtua l cessatio n o f publi c investmen t b y stat e an d loca l governmenta l bodies . . . explain s in large measure the necessary rise in federal expenditures." 40 9. Certai n institutiona l an d marke t rigiditie s reduc e th e potentia l contribution o f ne w technology t o enlarged investment and th e reduction of unemployment. 41 But pro gress i n reducin g these barrier s cannot substitute fo r actio n o n th e centra l requirement: large-scal e governmenta l action to stimulat e consumption and public invest-

Stages o f an d Limits t o Growth 32

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ment o n th e scal e necessar y t o avoi d intolerabl e level s o f unemploymen t an d declines i n rea l income . Hansen estimate d curren t ful l employmen t nationa l incom e a t $8 0 billion , sug gested strong governmen t actio n shoul d i t fall "materiall y below" $65 billion, and commended a ' 'tapering off ' o f government stimulus at about $70 billion to avoid inflationary pressures. 42 10. The pursuit of such a policy, Hansen recognized, pose d majo r questions that economists a s o f 193 9 coul d no t answer. 43 H e pointed , i n particular , t o th e fac t tha t government measure s t o stimulat e consumption an d public investmen t would con front no t only political difficulties bu t also might diminish the incentives for private investment i n variou s ways . H e concluded : "Th e grea t transition , inciden t t o a rapid declin e i n populatio n growt h an d it s impac t upo n capita l formatio n an d th e workability o f a system o f tree enterprise, call s fo r high scientifi c adventur e alon g all th e front s represente d b y th e socia l scienc e disciplines. " Given th e great globa l boom of the 1950 s and 1960s , some of Hansen's analysi s seems quaint and off the mark; and, evidently, h e did not perceive th e extraordinary interdepen dence tha t woul d evolv e i n th e fou r post-194 5 decade s betwee n th e advance d industria l and developing regions . Bu t his argument remains a rare bringing together o f growth and short-run incom e analysis—multiplier , accelerator, an d all. I t also, of course, captures a perspective widel y share d a s the Secon d Worl d Wa r brok e out . But i t was not shared by Joseph Schumpeter , who devoted th e final chapte r of Business Cycles t o specifying the area an d character o f his disagreement, a view later elaborated i n his Capitalism, Socialism an d Democracy. 44 Schumpeter's thesi s was , i n the end, simpl e enough: 45 " . . . Th e balloon shriveled , not from cause s inheren t to its structure [as Hansen argued] but because th e air was being sucked ou t o f it"—by th e psychologica l impac t o n American capitalists , an d their will ingness to invest, of various New Deal policies an d the hostile atmosphere the y created. I n short, Schumpete r wa s prepare d t o argu e tha t Hansen' s fina l questio n abou t th e com patibility o f a vigorou s competitiv e capitalis m an d a n activ e i f selectiv e interventionis t government o f th e kin d commende d b y Hanse n had alread y bee n answere d negatively . Schumpeter's conclusio n i s les s importan t tha n ho w h e mad e hi s case ; fo r h e wov e together no t only growth an d short-run analysi s but also the sociology an d psychology o f capitalism. 1. Focusing lik e Hansen on invention and innovation, Schumpeter viewed the 1930 s as a phase (lik e the 1880s ) in which the economy i s carried forwar d by the diffusion o f the increasingl y matur e bu t stil l vigorousl y unfoldin g technologie s o f it s lon g Kondratieff cycle : i n thi s case , electricity , moto r vehicles , an d chemicals. 46 H e concluded hi s interpretatio n o f this Kondratieff downswing in terms quit e different from Hansen's: 47 Having thu s satisfie d ourselve s tha t th e processe s whic h i n th e pas t used to carry prosperities hav e not been absent in the present instance, w e have establishe d a right t o spea k o f a Juglar prosperit y an d to infe r fro m experience tha t it would have asserted itsel f withou t an y external impulse being imparte d t o th e syste m b y governmen t expenditur e o r an y othe r factor. I n particular , ther e i s nothin g t o indicat e tha t objectiv e oppor tunities were smalle r or capitalist motivation weaker than they had been, say, i n 1925 . Th e proble m why tha t prosperity wa s s o weak, and wh y i t

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should hav e bee n followe d b y s o sever e a slum p no w emerge s i n it s proper setting . 2. Afte r reviewin g variou s monetar y an d fisca l development s h e conclude s tha t th e government's rol e wa s " . . . singularl y infelicitous—it s high-wate r mar k cam e exactly at the time when the economic process could most easily have done without it an d it s cessation exactl y a t th e tim e when the economi c proces s wa s i n it s mos t sensitive phase." 48 Bu t he argues infelicit y o f fisca l and monetary polic y does not account fo r th e severit y o f th e recessio n o f 1937-1938 . 3. Afte r reviewing Hansen' s thesi s i n typically judicious style , Schumpete r identifie s two further areas of agreement wit h the secular stagnation doctrine: "[S]ometim e in the futur e investmen t opportunities ma y vanish;" an d the y migh t vanish "throug h saturation."49 Thi s permit s hi m t o isolat e lucidl y hi s are a o f disagreemen t b y questioning50 . . . th e relevance o f those [long-run ] considerations fo r the diagnosis of the situatio n o f 1938 . . . . We ar e les s tha n te n year s remove d fro m a s vigorous a prosperity as was ever witnessed and from a depression proba bly due , i n the main, t o the pace o f preceding "progress . . . . " [I] t did not diffe r i n characte r fro m th e comparabl e Jugla r prosperitie s o f th e preceding Kondratief f downgrades , an d therefor e doe s no t indicat e an y fundamental chang e i n the workin g o f the capitalis t organism . . . . . . . [But ] capitalis m produce s b y it s mer e workin g a socia l atmo sphere—a mora l code , i f the reader prefer—tha t i s hostile t o it , an d this atmosphere, i n turn , produce s policie s whic h d o no t allo w i t t o func tion. . . . Thi s i s what , t o a certai n exten t an d presumabl y no t ye t fo r good ha s happene d i n thi s country. 5. Schumpeter , no w free d t o expoun d hi s ow n thesis , argue d tha t i t wa s th e sudde n change i n policy an d attitude of the government toward American private capitalism that produced th e radical inhibitio n of investment . Change s i n tax, labor , utilities , and antimonopoly policy , which Schumpeter reviewed , explain part of the problem, because the y "tende d t o reinforc e eac h other." 51 Thei r combine d effec t wa s en hanced by the suddenness o f the change in 1933 and the manner of administration of the ne w measures . 6. Thus , Schumpete r concludes: 52 " . . . [TJher e should not be left muc h doubt a s to the adequac y o f th e factor s externa l t o ou r proces s t o accoun t bot h fo r th e disap pointing feature s i n th e curren t Juglar and fo r th e weaknes s o f the respons e o f th e system to government expenditure , i n particular for the failure o f the latter t o affec t investment an d employmen t mor e tha n i t did. " In a fina l footnot e Schumpete r prepare s th e wa y fo r hi s nex t boo k (an d foreshadow s something o f th e rational e for th e enormou s deficit s of th e Reaga n Administration): 53 . . . [T]h e patter n resultin g from the action o f inhibiting factors would in all respects be similar to the pattern envisage d b y the saving-investment theory; it would display the same lac k of resilience and the same tendency towards sub normal quasi-equilibria ; in particular, it would always produce o r reproduc e extensive unemployment . Therefore , governmen t spendin g woul d .. . al ways sugges t itsel f as a remed y fo r shortru n difficulties eac h applicatio n of which would impose, under penalty of breakdown, the application of the next

Stages o f an d Limits t o Growth 32

5

dose. Fea r o f suc h breakdown s ma y i n the end becom e th e dominant motive even amon g thos e wh o o n principl e ar e mos t strongl y opposed t o spendin g policies.

Two Perspectives on 1870-1939: A Coda for Part II Pigou, quit e as sensitive to the grave issues posed b y the apparent secular stagnatio n of the 1930s a s Hanse n an d Schumpeter , manage d a somewhat longe r an d mor e philosophica l perspective. I n 193 9 h e delivere d a presidentia l addres s o f char m an d nostalgi a t o th e Royal Economi c Associatio n entitle d "Lookin g Bac k fro m 1939 . "54 H e identifie d a considerable serie s of changes sinc e he was a Cambridge undergraduat e 40 years earlier ; for example , th e two-edge d triumph s of the motorcar an d airplane; th e changed statu s of women an d revolutio n i n thei r mountain-climbin g garments; a n enormou s expansio n i n the numbe r of professionally traine d economists , wit h a strong suggestio n tha t diminishing return s ha d operate d severel y o n thei r quality . H e coul d nam e onl y eigh t "leadin g economists" o f hi s undergraduat e days , includin g Marshal l an d Edgeworth . H e the n asks:55 What i s the most important difference? There nee d be little doubt about th e answer. Economist s the n ha d grow n u p in , an d thei r whol e experienc e wa s confined to , a worl d which , a s regard s politic s an d economic s alike , wa s reasonably stable . . . . [T]h e basi c change s wer e gradua l an d slow-working . There were no catastrophes. Ho w different i s the experience o f economists to day! Th e 191 4 War , wit h it s aftermat h o f ruin ; th e perio d o f unbalance d Budgets an d astronomica l inflations ; th e slo w readjustment ; th e terribl e re lapse o f th e grea t depressio n an d th e politica l tension s tha t accompanie d it ! This fundamenta l differenc e o f experience is , I think, largely accountable fo r the differenc e i n th e wa y i n which the ol d generatio n o f economist s an d th e new approach thei r problems. Inevitabl y now the short run presents itself with far greate r urgenc y relatively to the long run than it did then. The economist s from, say , 189 0 t o 191 0 di d not , o f course, ignor e problem s o f transition o r the grea t evil s o f fluctuatin g employment. But , relatively t o th e underlyin g forces b y whic h production an d distributio n are governed , thes e thing s too k second place . .. . I n a perio d whe n ou r mind s ar e attune d t o sudde n an d violent changes , a different viewpoin t is natural. In calm weather i t is prope r to recko n th e cours e o f a shi p without muc h regar d fo r th e waves . Bu t i n a storm th e waves ma y be everything. Th e problems o f transition are the urgent problems. For , i f the y ar e no t solved , wha t happen s i s no t transition , bu t catastrophe; th e lon g ru n neve r comes . Pigou's evocatio n o f th e terribl e urgenc y an d uniquenes s o f th e sequenc e o f interwa r problems help s explai n the limited attention to economic growt h in that period. I n a sens e Pigou wa s offerin g a rational e fo r Keynes' s dictu m tha t i n th e [Marshallian ] lon g ru n we're al l dead. A s for 187 0 to 1914 , growth was pretty much taken for granted i n the then advanced industria l region s o f th e world . Growt h wa s par t o f th e stable , slow-changing world in which Pigou matured; and, against that assumed background, he could devote his

326 Growth

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talents t o essentiall y margina l improvement s i n welfar e an d th e mitigatio n of th e trad e cycle. Looking bac k fro m th e 1980s , wha t i s surprisin g i s ho w man y o f th e fundamenta l insights an d method s o n whic h post-194 5 growt h analysi s o f variou s kind s wa s base d were generated i n the two quite different setting s on either side of the 191 4 watershed: in demography; th e analysis of investment an d technology; the business cycle; relative pric e trends; an d th e stage s o f an d limit s t o growth . Moreover , th e qualit y o f th e majo r contributions t o growt h analysis—direc t an d oblique—was , lik e th e giant s o f Pigou' s youth, high : Marshal l stil l an d Robertson ; Spiethof f an d Schumpeter ; Coli n Clar k an d Kuznets; Arthu r F . Burn s an d Fabricant ; Anste y an d Tawney ; Bickerdik e an d Harrod ; Hoffmann an d Hilgerdt ; and , i n thei r way , Cassel , J . B . Clark , J . M . Clark , Fisher , Wicksell, an d Allyn Young. And then Keynes and Hansen articulating the case for secular stagnation b y linkin g rather classica l growt h analysis, dominated by diminishing returns, to th e ne w incom e analysis , generatin g i n response , ou t o f Schumpeter' s deepl y roote d central Europea n pessimism , a n eve n gloomie r Hegelia n prospect . Part Thre e demonstrates tha t growth analysis did not dominate mainstream economic s in th e fou r decade s afte r 1945 ; bu t growt h wa s directly addresse d b y larg e number s o f analysts i n way s clearl y foreshadowe d i n th e 7 0 pre-193 9 years , despit e th e interwa r compulsion t o focu s o n th e shor t run .

Ill GROWTH ANALYSI S POST-1945 : A THREE-RIN G CIRCU S

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14 Introduction

In turning now to the period 1945-198 8 the challenges diffe r fro m thos e of Part II. Lik e all growt h curves , th e professiona l fiel d o f economics , afte r furthe r expansion , decele rated i n the Atlantic World; i t generated al l manner of specialized sports ; its focus shifted in respons e t o the unexpected , uniquel y high, and relatively stead y growt h of the 1950 s and 1960s , an d shifted again , reluctantly and awkwardly, to try to deal with the inelegant turbulence induce d b y th e tw o oi l shock s betwee n 197 3 and 1981 , and to th e relativel y slow averag e growt h an d hig h unemploymen t rates, deficits , an d debt s o f 1982-1989 . This time growth analysis moved back on stage from the wings. But it did not return in the spaciou s classi c mold o f the 18t h and 19t h centuries. W e ar e dealing here with thre e areas o f growt h analysis , al l with roots i n the inter-wa r period: • forma l growt h model s i n the styl e crystallize d by Harro d i n 1939; • statistica l analyse s o f comparative growth patterns at different level s of real incom e per capita , o f the kin d pioneered b y Coli n Clark ; • developmen t theor y comprisin g a wid e rang e of les s methodologicall y rigi d approaches t o th e analysi s o f growt h i n les s develope d countries , foreshadowed , among others , b y Anstey , Tawney , an d Hilgerdt . There wa s som e interactio n amon g thes e thre e line s o f endeavor , althoug h thei r practi tioners mainl y pursue d thei r insight s an d conducte d thei r debate s i n separat e terrains . I shoul d not e parenthetically that one majo r study of growth i n this period transcend s these categories ; tha t is , Ingva r Svennilson' s Growth an d Stagnation i n th e European Economy, publishe d i n Geneva in 1954 by the United Nations Economic Commission fo r Europe. I t i s quit e fre e o f an y o f th e post-194 5 theoretica l o r methodologica l fads . It s theoretical structur e consciously unites macro- and sectoral analysi s with full awareness of the achievements o f and unresolved difficultie s encountere d by Marshall, Cassel, Schum peter, Wicksell , Keynes , an d Harrod. Th e autho r refuse s to separat e th e lon g an d shor t periods an d weaves togethe r cyclica l an d trend analysis . H e devotes detaile d attentio n to technological chang e i n the ke y sector s an d to the cause s an d impact o f shift s i n relativ e prices an d the terms o f trade. Bu t his study was essentially unique. The focus, therefore , must be on those wh o dominated growth analysis in the first fou r decades afte r the Secon d World War. Although growt h analysi s was distinctl y more i n vogu e i n post-194 5 tha n pre-1939 , only one typ e of growth analysis wa s part of mainstream economics as i t defined itsel f i n the wak e of th e Secon d Worl d War; that is, th e forma l growt h model. It s highl y aggre -

330 Introduction

gated form , elaborate d i n mathematica l terms , an d it s clea r link s t o othe r branche s o f macroeconomic theory , mad e i t natural for neo-Keynesian s t o ente r growt h analysi s vi a the Harrod route . Th e other two types of growth analysis had little interest for mainstream economists o f th e immediat e postwa r generation . With some exaggeration, i t is fair to say that the tone of mainstream economics wa s set , the major problems defined , and the method laid down by Paul Samuelson's Foundations of Economic Analysis mor e than b y an y othe r singl e book. 1 It s firs t draf t wo n th e David A. Well s priz e a t Harvar d i n 1941 ; bu t mos t o f th e materia l date s bac k t o 193 7 whe n Samuelson was 22 years old. A part of the vision he defined for himself and his generatio n was explicitl y directe d agains t Alfred Marshall. 2 ... I hav e com e t o fee l tha t Marshall' s dictu m tha t "i t seem s doubtfu l whether anyon e spend s hi s tim e wel l i n reading length y translations o f eco nomic doctrine s int o mathematics , tha t hav e no t bee n mad e b y himself " should be exactly reversed. Th e laborious literar y working over of essentially simple mathematica l concept s suc h a s i s characteristi c o f muc h o f moder n economic theor y is not only unrewarding from the standpoint of advancing the science, bu t involve s a s wel l menta l gymnastic s o f a peculiarl y deprave d type. . . . It i s certainl y true , notabl y i n th e writing s o f Marshall , tha t economist s have mad e us e o f biologica l a s wel l a s o f mechanica l analogies , i n whic h evolution an d organi c growt h i s used a s the antithesi s to statica l equilibrium analysis. I n genera l th e result s see m t o hav e bee n disappointing ; viz. , th e haziness involve d i n Marshall' s treatmen t o f decreasin g cost . Samuelson proceeded , o n the basis of his vision, to publish in 194 8 th e first editio n of his textbook, Economics, which, in effect, supersede d J . S . Mill's an d Marshall's Principles and, i n it s variou s edition s (and , i n time , imitators) , constitute d th e fourt h dominatin g economics textboo k i n the Anglo-Saxo n world—an d beyond—startin g wit h The Wealth of Nations. Samuelson wa s correct to choose Marshal l as an antagonist; but he did not, a t this earl y stage o f hi s caree r a t least , full y gras p Marshall' s position . Ther e wa s muc h mor e t o Marshall's stricture s o n the adequacy o f mathematics as a language for political econom y than Samuelson's brie f critique would suggest. Marshall was a trained mathematician who regarded th e language o f mathematics as a valuable but limited too l incapable o f gripping either th e ful l rang e o f variable s relevan t t o economi c analysi s o r th e grea t issue s o f political econom y tha t always transcend economics i n the narrow sense. Marshal l di d not harbor a "depraved " masochistic tast e fo r translating easy , luci d mathematical formula tions int o English prose . H e simpl y di d no t regard mathematic s a s an adequate languag e because h e di d no t believ e economics coul d be embraced i n "simpl e mathematical con cepts." H e wrote prose in order to capture the full complexit y of his insights. A s for the case o f decreasin g cost , i t i s tru e Marshal l neve r solve d th e proble m neatl y i n mathe matical terms ; but , almost a century later, "moder n economic theory" has still no t found such a satisfactory solution . This is because a solution involves the Schumpeter Problem: the proble m o f large , discontinuous , but endogenou s innovation fro m whic h contemporary mainstrea m economics ha s retreate d b y on e abstract , evasive devic e o r another. But, t o hi s credit , Samuelso n wa s no t primaril y intereste d in launchin g a wa r abou t method. Hi s objec t wa s to demonstrate the positive and exciting potentialities, as he sa w them, o f applying rigorou s mathematica l methods to th e bod y of economic theor y a s his

Growth Analysis Post-194 5 33

1

generation inherite d it : the theory of consumers' behavior ; of the firm; of welfare econom ics; o f busines s cycles . Thus, althoug h Samuelson' s substantiv e interest s an d technica l contribution s i n eco nomics wer e wide, the banner he raised, reflectin g and greatly reinforcing the bias of two post-1945 generations , wa s not inscribed, like those of his great predecessors, wit h a large principle o r objectiv e o f politica l economy , bu t wit h the singl e word: math . H e define d himself unambiguousl y i n th e lin e runnin g fro m Walra s throug h Paret o t o Frisc h an d others wh o accepte d th e disciplin e an d revele d i n th e eleganc e o f livin g b y J . Willar d Gibbs's dictu m (o n th e titl e page o f Foundations): "Mathematic s i s a language." Sam uelson wa s quit e aware tha t Marshall (an d Hicks) belonge d i n this array of mathematica l literates; bu t the y mad e hi m a bi t uneasy—almos t traitor s t o thei r class—b y "keepin g formidable mathematica l analysi s belo w th e surfac e o f thing s an d locke d u p i n appendices. . . ." 3 Two operationa l principle s wer e lai d dow n b y Samuelso n t o guid e mathematicall y articulated economic theory , given unity as "th e stud y of maximizing behavior." First, i n addition to definitions , al l propositions mus t be articulated in terms of rules of behavior , parameters, an d initia l conditions tha t govern th e variables that concern the practitioner . Second, havin g me t thes e conditions , th e objectiv e o f economi c theory , whethe r i n th e form o f comparativ e static s o r dynamics , i s t o determin e "ho w ou r variable s chang e qualitatively or quantitatively with changes i n explicit data. Thus, w e introduce explicitly into our syste m certai n dat a in the form of parameters, whic h in changing, cause shift s i n our functiona l relations." 4 Wha t Samuelso n sough t t o expos e an d elaborat e wer e th e "striking forma l similarities " underlyin g "seemingl y divers e fields—productio n eco nomics, consumers ' behavior , internationa l trade, public finance, business cycles, incom e analysis. . . . "5 H e di d s o b y explorin g variou s facet s o f th e metho d o f comparativ e statics, the n movin g ove r vi a th e bridg e o f th e correspondence principl e to comparativ e dynamics.6 Th e Foundations conclude s wit h high hopes: 7 "Th e furthe r developmen t o f analytical economics alon g the lines of comparative dynamic s must rest with the future. I t is t o b e hope d tha t i t wil l ai d i n th e attac k upo n diverse problems—fro m th e trivia l behavior of a single small commodity, to the fluctuation s of important components of the business cycle , an d eve n t o th e majesti c problem s o f economic development. " One can not avoid sympath y with the young Samuelson's ambitiou s agenda for mathe matics as a language; but the outcome also suggests regret that he and his followers did not take Franci s Baco n mor e seriously: "I t canno t b e that axioms establishe d b y argumenta tion can suffic e fo r the discovery o f new works, for the subtlety of nature exceedeth man y times over the subtlety of argument." But here the relevant question i s narrower: How , in fact, di d mainstrea m economist s addres s themselve s "t o th e majesti c problem s o f eco nomic development " ove r th e pas t fou r decades ? In providin g a respons e t o tha t questio n an d then examinin g th e othe r tw o post-194 5 schools o f growt h analysi s define d here , m y limite d objective s wil l b e these : First , t o suggest i n broad term s ho w eac h typ e of growth analysis evolved i n the past two genera tions, includin g it s link s t o event s an d circumstance s i n th e worl d economy , bu t wit h special emphasi s o n how i t dealt with—or faile d to deal with—each o f the dimensions of growth analysi s identified throughout this boo k a s critical ; second, t o assess th e specia l strengths an d deficiencie s of eac h approach.

15 Formal Model s of Economi c Growth : Rise an d Subsidenc e

A Half-Serious Statistical Note There i s a certain shapelines s to the stor y of forma l growth modelin g over the pas t halfcentury o r so . I t take s it s star t wit h Harrod' s 193 9 Essay i n Dynamic Theory, get s a second-stage booste r wit h Domar's article s o f 1946-1947, ' bu t generates n o large-scal e controversy o r momentu m unti l three paper s ar e publishe d i n th e mid-1950 s b y Tobin , Solow, an d Swan. Thes e challeng e the knife's-edge instability of the initial formulations and launc h th e er a o f neoclassica l a s oppose d t o Harrod-Domar models. 2 The n th e fu n begins. Lik e business opportunists of lesser enterpris e and imagination "swarming" into a ne w secto r i n th e wak e o f thre e Schumpeteria n innovativ e heroe s wh o demonstrat e profitability, th e volume of talent allocated to formal growth modeling builds up to a peak in, say , 1965-1966 ; althoug h as early a s December 1964 , Hah n an d Matthews, i n their majestic surve y (see Not e 4) announced " . . . t h e point of diminishing returns may have been reached." A subsidence follows into the 1970s . Al l passion is not quite spent; but it gradually became clea r that about all the insight likely to be extracted from the exploratio n of an d debat e abou t neoclassica l growt h model s ha d bee n accomplished . Figur e 15.1 , whose constructio n is explaine d in Not e 3, capture s the ris e and subsidenc e of forma l growth modelin g ove r th e period fro m the late 1930 s t o the early 1970s. 3 An interesting aspect of the Jones bibliography used to construct Figure 15. 1 is that almost half the items for th e perio d 1969-197 3 ar e retrospectiv e studies , textbooks , o r collection s o f docu ments coverin g a fiel d whos e contour s an d limit s appea r t o hav e bee n prett y wel l de fined.4 Th e interest s o f student s wh o wis h to lear n about modern forma l growth model s have been well served. I t is, therefore, unnecessary here to provide a full summar y of how the growth-mode l literatur e evolve d betwee n 193 9 an d th e earl y 1970s . Severa l o f th e works cite d i n Not e 4 constitut e o r contai n excellen t summaries ; e.g. , Hah n an d Mat thews, Jones , Sen , Wan , an d Solow's 197 0 growt h lectures . The expositio n proceeds, then , in fou r stages : • A n evocatio n of th e settin g in th e worl d economy i n whic h growt h model s wer e produced an d th e impac t o n the m o f th e large r environment . • A stylize d accoun t of th e characteristic s of th e majo r type s of growt h models .

Formal Models of Economic Growth

333

Figure 15.1. Bibliographica l Reference s t o Forma l Growt h Model s 1936-1973 . Adapte d fro m Hywel Jones, An Introduction t o Modern Theories of Economic Growth, (New York: McGraw-Hill, 1975), pp . 241-250 . A brie f surve y of th e exten t t o whic h the majo r model s deal t wit h the ke y growt h variables use d throughou t thi s study. An assessmen t o f th e achievement s an d deficiencie s o f th e growth-mode l caper .

Growth Models in Three Phases of the World Economy The stat e o f th e worl d econom y helpe d shap e th e evolutio n o f forma l growt h models i n three fairl y distinc t periods. First , prewar and immediate postwar concern wit h the recurrence o f dee p depressio n strongl y influence d bot h Harro d an d Doma r and , on e ca n assume, rendere d acceptabl e and prima facie realisti c model s with built-in possibilities fo r extreme instability . In his 193 9 article , whe n Harrod drew policy conclusions, virtually all assumed th e economi c syste m wa s vulnerabl e either t o lapsin g int o a slum p before ful l employment i s reache d i n th e precedin g boo m (a s i n 1937-1938 ) o r t o chroni c hig h unemployment due to a decline i n the rate o f growth of population or a rise in the saving s rate o r a tendency o f technologica l chang e t o b e capital-saving. 5 I n his 194 8 Towards a Dynamic Economics Harro d discusse s som e positiv e postwar developments , bu t both hi s short-run an d long-run prescriptions ar e still rooted i n the interwar pessimism tha t shape d his system . Similarly , Domar' s 194 6 Econometrica articl e reflecte d th e then-curren t consensus amon g mos t economists tha t the postwar world economy would soon laps e int o depression unles s rathe r heroi c countermeasure s wer e undertake n b y th e publi c au thorities.6 He is concerned explicitl y wit h Hansen-type secular stagnatio n where "spon taneous" investmen t (induce d by change s in technology , tastes , discoverie s of new resources, etc. ) i s insufficien t t o maintai n ful l employmen t vi a th e multiplier ; that is , th e total employmen t generate d b y a give n increas e i n investment . Doma r proposes , there fore, tha t the growt h o f incomes b e guaranteed b y public authorities o n a scale such that the volum e of total investment required for ful l employmen t is generated vi a th e acceler ator; tha t is , th e increas e i n investmen t generated b y a give n increas e in income. But, o f course , th e worl d economy di d no t laps e int o a great postwar depression and , for a time , the growth-mode l business was a bi t slow. By th e mid-1950s , th e U.S . econom y ha d emerge d wit h vigo r from th e Korea n war ,

334

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post-Marshall-Plan Europe , wit h even greate r vigor , int o the ag e o f privat e automobil e and durabl e consumer s good s o n a mas s basis , an d th e Japanes e economy , fro m a surprising recovery t o an astounding surge of sustained growth. In this setting i t began t o occur t o a numbe r o f economist s tha t th e fragilit y o f growt h i n th e advance d industrial world ma y hav e bee n overdone ; an d several amon g the m explore d force s endogenou s t o the economy tha t might react t o movements awa y from dynami c equilibrium in ways that more or less brought it back to a steady growth path. Thus the neoclassical growt h model s of whic h Tobin , Solow , an d Swa n ar e generall y accounted th e pioneers . These self-correcting, dynamicall y fairly stabl e models wer e explore d an d debated fo r about a decade. The paradigm wa s pretty well exhausted by the time th e world econom y moved, i n 1973-1974 , int o a protracte d phas e o f th e mos t acut e instabilit y sinc e th e 1930s. Moreover , th e force s inducin g this instabilit y were o f a kin d tha t th e Harrod Domar models di d no t take int o account an d for which the neoclassical model s provide d no built-i n correction. Th e palpabl e irrelevanc e o f forma l growt h model s t o th e centra l problems o f th e worl d econom y fro m 197 3 to 198 9 account for the virtual disappearanc e of fresh wor k in this field much as the relatively steady course o f the world economy fro m 1945 t o 197 2 greatl y attenuate d th e allocatio n o f analyti c resource s t o th e stud y o f business cycles .

Growth Models: Variations on a Theme by Harrod-Domar In seekin g t o mov e mainstrea m economic s int o a mol d wher e growt h wa s th e centra l process an d cycle s an d othe r irregularitie s wer e viewe d a s deviations fro m growth , analysts wer e severel y constraine d b y the highly aggregated neo-Keynesia n framework the y took fo r granted and brough t to bear. Her e i t is sufficient briefl y t o characterize th e main strands in the formal growth model literatur e from Harrod's 193 9 article down to the earl y 1970s; and to summarize the efforts of a handful o f those who grappled more directly with the proble m o f relatin g growt h an d cycles . 1. Harrod-Domar: O n th e Edge o f th e Abyss. Thes e model s pos e th e questions : I s steady-state growt h possible ? I f so , wha t are it s characteristics ? What condition s migh t yield instability ? Harro d responde d b y definin g warrante d an d natura l growt h rates , applying to growth the marriage of the multiplier and accelerator on which he had built his 1936 Trade Cycle. Hi s syste m focuse d o n th e difficult y o f keepin g i n harnes s th e warranted (G w) and natura l (G n) rates o f growth . H e thu s builds up t o this definitio n of th e issues tha t concerne d him: 7 " . . . [T]her e ar e tw o distinc t set s o f problem s bot h fo r analysis and policy, namely : (1) the divergence o f Gw fro m G n; and (2) the tendency of G to run away from G w. Th e former i s the problem o f chronic unemployment, the latter th e trade-cycle problem. " Domar worke d ou t independentl y th e proble m o f definin g the inheren t instabilit y of a growing privat e enterpris e econom y i n a somewha t different vocabulary bu t to the sam e effect. Th e equivalen t o f his warranted rat e of growth is G; of the natural growth rate, s . His anxiety, in the end, is the unlikelihood that s will be high enough to match G, i n which case, h e concludes , heroi c compensator y measure s o f publi c polic y wil l b e require d t o elevate s . From th e poin t of vie w of growth theory Doma r stated with lucidity th e forma l gap i n Keynesian analysis : becaus e i t wa s se t u p unde r Marshallian short-perio d assumptions ,

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investment i s treated a s a determinant of the level of income vi a the multiplier, but not in its role i n expanding productiv e capacity . As with the theme of a symphony enunciated at the opening of the first movemen t wit h elegant simplicity , variation s an d eve n contrapunta l themes , no t alway s harmonious , emerged i n response t o the Harrod-Domar analysis. 2. Neoclassical Growth: Stability vi a Factor Substitution. I n 1956 , wit h the publica tion o f th e Solo w an d Swa n papers , th e centra l them e o f on e branc h o f th e growt h modelers turne d fro m a n anxiou s mino r t o a majo r key . Solo w enunciate d th e hopefu l theme a s follows: 8 The characteristi c an d powerfu l conclusio n o f th e Harrod-Doma r lin e of thought i s that even fo r the lon g run the economi c syste m is at best balance d on a knife-edg e o f equilibriu m growth . Wer e th e magnitude s o f th e ke y parameters—the saving s ratio, th e capital-output ratio , th e rate of increase of the labo r force—t o sli p eve r s o slightl y fro m dea d center , th e consequenc e would b e eithe r growin g unemployment or prolonged inflation . . . . But thi s fundamenta l opposition o f warranted an d natural rates turns out in the end to flow fro m th e crucial assumption that production takes place unde r conditions o f fixed proportions. Ther e i s n o possibilit y o f substitutin g labo r for capita l i n production . I f thi s assumptio n i s abandoned , th e knife-edg e notion o f unstable balance seem s t o go wit h it. Indee d i t is hardly surprisin g that suc h a gros s rigidit y i n on e par t o f th e syste m shoul d entai l lac k o f flexibility i n another . . . . The bul k o f thi s pape r i s devote d t o a mode l o f long-ru n growt h whic h accepts al l the Harrod-Doma r assumption s excep t tha t of fixe d proportions . Instead I suppos e tha t the singl e composite commodit y i s produced b y labo r and capita l unde r th e standar d neoclassica l conditions . Without entering into Solow's detailed exposition, hi s assumption of variable proportion s between labo r an d capital combine d wit h neoclassical assumption s abou t the behavior o f competitive markets , permit s hi m to conclude: 9 . . . [W]he n production take s place unde r the usual neoclassical condition s of variabl e proportion s an d constan t return s t o scale , n o simpl e oppositio n between natura l an d warrante d rate s o f growt h i s possible . Ther e ma y no t be—in fac t i n the case o f the Cobb-Dougla s functio n there neve r can be — any knife-edge. Th e system can adjust to any given rate of growth of the labor force, an d eventuall y approac h a stat e o f stead y proportiona l expansion . 3. A Cambridge (England) Response t o Neoclassical Growth Models: Stability vi a Changes i n Income Distribution an d the Saving-Consumption Ratio. Ther e is a consider able array of growth model s i n which an element of stability i s provided b y the difference in the marginal propensit y to consume (an d to save) as between those receiving wages and profits; th e former includin g salaries, th e latter including incomes o f all forms of propert y owners, no t merely entrepreneurs. 10 Shift s i n the overall margina l propensity t o consum e are stabilizin g if th e proportio n o f incom e save d a t th e margi n i s highe r fo r propert y owners than thos e receivin g wage s an d salaries . A s expounde d by Kaldo r (who evolved several version s o f hi s centra l proposition ) th e syste m tende d towar d stabilit y onl y i f initial ful l employmen t wa s assumed.

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The assume d mechanis m o f adjustmen t is simple enough : a tendency o f the syste m t o deviate towar d a higher level of output (caused by, say , an increase in investment) yields a shift t o a n inflationar y increas e i n price s an d profit s an d therefor e i n savings , thu s reducing effectiv e deman d an d pushin g th e syste m bac k towar d ful l employmen t equi librium. A movement i n the other directio n i s symmetrically self-correcting. Thi s i s how Kaldor, a centra l figur e i n thi s versio n o f a neoclassica l growt h model , roote d i n th e Kahn-Keynes consumptio n functio n an d multiplier , describe d ho w th e centra l mecha nism worked:' ' . . . [W]it h th e assumption of "ful l employment " .. . a rise i n investment, and thus in total demand, wil l raise price s and profit margins, and thus reduce real consumption, whils t a fall i n investment, and thus in total demand, cause s a fal l i n prices (relativel y t o the wage level ) an d thereby generates a compen sating ris e i n real consumption . Assumin g flexibl e price s (o r rathe r flexibl e profit margins ) th e syste m i s thu s stabl e a t ful l employment . This approac h t o a stable growt h mode l no t only wen t throug h various modifications , but i t wa s als o th e subjec t of livel y controversy , well-documente d lik e al l othe r dimen sions o f th e growth-modelin g story . Where, then , di d th e role s o f invention , innovation , an d technolog y fi t i n thes e enterprises? 4. Invention, Innovation, an d Technology i n Growth Modeling. Wha t one migh t cal l the mainstream growt h models use d a variety of devices to cope wit h the role of invention, innovation, an d technology . Al l wer e designe d t o evad e Schumpeter' s centra l insight ; namely, hi s assertio n tha t a significan t numbe r o f innovation s ar e large , endogenous , discontinuous, an d hav e thei r initia l impac t o n particula r sectors ; but , i n thei r large r consequences, thes e gran d innovation s affec t no t onl y the structur e of th e econom y a s a whole bu t virtuall y al l o f it s majo r variables ; e.g. , th e rat e o f growt h o f output , th e demand fo r credit , th e pric e level , rea l wages , an d th e profi t rate . Th e majo r growt h modelers fastene d thei r attentio n firmly o n forces makin g for instability or stability in the overall growt h pat h when th e determinant s o f growth wer e define d i n highly aggregate d terms. Th e Schumpete r Proble m wa s bypasse d b y th e followin g major devices : • Assum e n o technical progres s an d treat growt h as a product of an expanding work ing forc e an d capita l stock . • Assum e technical progres s is incremental, exogenous , an d a function o f the passag e of tim e (disembodied) . • Assum e technica l progres s i s embodied i n investment and a function o f the rate of investment—a kin d o f retur n t o Smithia n incrementa l technologica l chang e i n re sponse t o th e expansio n o f th e market. • Assum e al l technica l chang e i s endogenou s bu t incremental , induce d b y facto r prices, cumulativ e experienc e i n production , educatio n an d othe r improvemen t o f human capital , and/o r b y R & D investment. This worl d of incremental technologica l change, exogenous o r endogenous, i s rendere d even mor e manageabl e b y th e generou s us e o f th e assumptio n of neutra l technical pro gress, whic h is usually define d as a n unchanged ratio of th e margina l products of capital and labo r s o lon g as th e overal l capital-labo r proportio n i s constant . Bu t capital-saving and labor-savin g form s o f technica l progres s are , i n som e cases , introduced . This terse evocatio n of the changes rung on formal growth models is incomplete. Bu t I

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judge i t unnecessar y her e t o ge t int o som e o f th e othe r issue s pose d an d debated ; fo r example, th e degree to which capital, onc e made an d installed, i s rigidly fixed o r adjustable (putty-putty , putty-clay , clay-clay), an d the consequent age (or vintage) composi tion of capital goods ; th e introduction, in a stylized way, of a monetary dimension to the growth process ; two-secto r (capita l an d consumers ' goods ) an d maximu m growth rat e (Neumann) models. Th e heart of the mainstream growth-modeling exercise i s best under stood i n th e elegant formulatio n in Solow's 197 0 lectures.12 H e focuse s on three terms : the saving s rat e (s ) 0 ; th e capital-outpu t rati o (v ) 0; an d th e rat e o f growt h of th e labo r force (n). The Harrod-Doma r analysi s asserts , essentially , tha t stead y growt h require s that s = vn and, since each variable is independently determined, that stability condition is likely t o occu r onl y a s "th e meres t fluke. " Th e respons e o f othe r economist s wa s t o generate models i n which the determinants of v and s were defined in ways that tended to bring th e econom y bac k towar d a stead y growt h path. 13 With this general kind of model [Harrod-Domar] there is only one way out of th e box. At leas t on e an d perhaps mor e o f the three number s s, v , an d n must be , no t a give n constant , bu t a variabl e capabl e o f takin g o n a suffi ciently wid e rang e o f values . Tha t woul d b e enoug h t o establis h the bar e possibility o f steady-stat e growth . Somethin g mor e i s needed , however , t o account fo r th e prevalenc e o f stead y o r near-stead y growt h in actua l econo mies. Wha t is needed, ideally , i s some plausibl e mechanism to drive the one or more variables amon g s, v , and n into a configuration in which the HarrodDomar consistency condition is satisfied. One could settle for something less, a rout e b y whic h th e appropriat e change s i n s , v , an d n coul d com e abou t under favourabl e an d not-too-implausibl e circumstances . Which among the three key parameters i s the likeliest candidate for the role of th e variable ? I t i s interesting tha t th e classica l economist s woul d presum ably have agreed firs t o n the one of the three that modern theorists tend to take as th e onl y constant—th e rate o f population growth . Thus, th e exploratio n o f the possibl e self-correctin g characteristic s o f v , i n particular, led t o a sequenc e o f complexitie s tha t wer e sedulousl y explore d i n th e highl y abstrac t world which , as a catalyst , th e Harrod-Doma r mode l brough t int o being; althoug h one aspect o f th e exploratio n o f v led bac k t o incom e distributio n and, by indirection , t o s .

N. Kaldor Not al l growt h analyst s of this period wer e content with such elegan t abstrac t manipulations o f a fe w variables . On e o f th e mos t unusua l exercises b y a model-builde r o f th e 1950s, fo r example , wa s Kaldor' s explici t effor t t o fin d a mod e o f reconciliatio n wit h Schumpeter's innovationa l theory o f growt h an d cycles. 14 Kaldor begin s b y givin g Schumpeter a brisk brush-off: 15 The troubl e wit h Schumpeter' s theor y i s tha t i t i s descriptiv e rathe r tha n analytical. Althoug h it i s eas y enough to se e ho w on e particula r part o f th e story follow s fro m th e precedin g part, it is not possible to make the story as a whole int o a "model " . . . withou t incorporatin g int o i t element s whic h would suffic e b y themselve s t o explai n th e cycle—withou t recours e t o Schumpeter's ow n stag e arm y o f initiator s and imitators , o r eve n th e ver y

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concept o f technica l progress . Fo r th e necessar y "bunching " (i n time ) o f innovating investment , which is essential t o Schumpeter' s theory , canno t b e satisfactorily explaine d withou t bringing the Keynesian multiplier, and som e variant o f the output-investmen t relationshi p [accelerator ] t o one's aid. Indeed, th e developmen t o f trade-cycl e theorie s tha t followe d Keynes ' General Theory ha s proved t o be positively inimical to the idea that cycle and dynamic growt h ar e inherentl y connected analytically—to the idea , tha t is , that the cycle i s a mere by-product of, an d could not occur in the absence of , "progress." Kaldor the n demonstrate s that , wit h appropriate assumptions , a cyclical model wit h a static tren d ca n b e constructed . Recognizin g th e unrealis m o f th e mode l h e goe s o n t o show tha t a trend ca n b e incorporate d i n the model, thu s belying Schumpeter' s growth cycle hypothesis: 16 "I t i s thu s see n tha t al l th e 'dynamic ' model s tha t wer e recentl y presented t o the world .. . ar e all variants of the same thing , and, essentially, al l consist of th e superimpositio n o f a linea r tren d introduce d fro m th e outsid e o n a n otherwis e trendless mode l withou t altering, i n any way, its basic character. " Now Kaldo r leave s th e worl d o f modelin g and begin s t o ge t interesting: 17 . . . Bu t i s thi s situation , fro m a n intellectua l or analytica l point of view , wholly satisfactory ? The tren d itself i s not "explained" ; it is introduced as a datum. Ther e ca n b e n o pretence, therefore , o f thes e theorie s providin g th e basis fo r a theory of economic growth . Yet the very fact tha t different human societies experience suc h very different rate s o f growth—in fact, difference s in rate s o f growt h i n differen t age s o r i n differen t part s o f th e worl d i n th e same ag e ar e on e o f th e mos t strikin g fact s o f history—i n itsel f provide s powerful suppor t fo r the view that technical invention and population growth, the two factors underlying the trend, are not like the weather or the movement of th e seasons , tha t go o n quite independentl y of human action, bu t ar e very much th e outcom e o f socia l processes . On th e basi s o f thi s centra l proposition , Kaldo r argue s tha t th e rate s o f populatio n growth, technica l progress , an d capital accumulation are the consequence o f the relativ e strength o f basi c socia l force s rathe r tha n th e initiatin g causes o f growth ; and 18 [t]he mos t plausibl e answe r t o th e questio n why som e huma n societie s progress s o muc h faste r tha n other s i s t o b e sough t .. . i n huma n attitudes to risk-taking an d money-making . . . . Here a t last we fin d th e inherent link between trend and cycle that we were searching for . For i f th e abov e analysi s i s correct , bot h th e trad e cycl e an d economic growt h ar e th e resultan t o f particula r attitude s o f entrepreneurs — more precisely , o f the volatility of entrepreneurial expectations. . . .Schum peter's hero , th e "innovatin g entrepreneur, " who m w e dismisse d s o summarily and rather contemptuously at the beginning, is found, after all, to have an honourable place, o r even a key role, in the drama—even thoug h we prefer to endo w hi m wit h a rather mor e variegate d character . H e i s a promoter, a speculator, a gambler, the purveyor of economic expansion generally, and not just o f th e "new " technique s of production. Although Kaldor' s technica l analysi s o f economi c growt h suffers , lik e thos e o f th e other mode l builder s o f hi s time , fro m excessiv e aggregation , an d hi s evocatio n o f

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noneconomic force s i s evidently oversimple, th e appearance of such considerations i n the model-building deser t i s somethin g o f a n oasis . This interestin g bu t somewha t untypica l Kaldo r pape r raise s tw o importan t points . First, I would underline a fairly narro w point of theory. Kaldor's earlier wor k on distribution an d hi s cas e fo r th e inheren t stabilit y o f growt h ha d depende d o n change s i n th e Keynesian margina l propensit y t o sav e (consume ) a s real incom e rise s o r falls . Her e h e introduces a somewha t differen t proposition: 19 "Th e re-investmen t o f th e profit s o f business enterpris e alway s ha s been , an d stil l is , th e mai n sourc e o f industria l capita l accumulation. . . . " Thi s i s a n exceedingl y importan t propositio n becaus e th e rat e o f growth o f particula r sector s (an d th e profit s earned) 20 i s ofte n a functio n o f th e rat e a t which ne w technologie s ar e bein g absorbed . Kaldo r di d no t pursu e systematicall y thi s insight perhaps becaus e th e concept o f technological chang e to which he wa s committe d in most o f his work wa s highly aggregated, incremental , embodied i n the level o f investment, an d i t di d no t allo w fo r th e notio n of a technological backlog. 21 Second, i n the mids t o f hi s linkag e o f economi c behavio r t o underlyin g social forces , Kaldor draw s bac k an d enunciate s a self-denyin g ordinance: 22 "Economi c speculatio n here trespasses on the fields o f sociology and social history; an d the most that an economist can say is that there i s nothing in economic analysi s as such which would dispute th e important connection , emphasize d b y economic historian s and sociologists , betwee n th e rise o f Protestant ethni c an d the rise o f Capitalism." This restricte d vie w of the limits of economic analysis , quit e conventiona l amon g mainstrea m economist s o f th e twentiet h century, doe s no t confor m t o th e scop e o f the fiel d a s envisage d i n the lin e fro m Davi d Hume to Alfred Marshall, o r by the two authorities to whom Kaldor refers: Karl Marx and Joseph Schumpeter . Mor e important, this perspective rule s out any serious analysis of the economic developmen t proces s or othe r analyse s of why growt h rate s diffe r amon g national societies ; fo r these questions , virtuall y without exception, involv e noneconomi c variables.

Joan Robinson Joan Robinson wa s uneasy in a different wa y about the mainstream growth models. Ther e is somethin g a t onc e chidin g an d intensel y seriou s abou t her contributio n to th e growt h literature o f the 1950 s an d early 1960s . I t was as if she concluded that the centra l figures in th e exercise—especiall y th e neoclassica l growt h modeler s bu t t o a degre e als o he r friend an d colleagu e Nichola s Kaldor—wer e dealin g rathe r superficiall y with a seriou s subject. I t was not enough to conclude from rathe r simple equations and assumptions tha t capitalism wa s eithe r precariousl y unstabl e or hel d i n relative ful l employmen t by facto r substitution or , even , b y the operation of the Keynesian consumption function i n the fac e of changes i n income distribution. It was as if she said: "Enoug h o f this playfulness; let's get bac k t o firs t principles. " And s o sh e bega n b y arrayin g th e si x fundamenta l variable s judge d relevan t t o th e determination o f th e growt h rat e give n the initia l stock o f capita l goods an d th e stat e o f expectations forme d b y pas t experience: 23 technica l condition s (embracin g th e growt h rate o f th e workin g force , th e industria l arts , an d natura l resources) ; investmen t policy with a n emphasis o n "anima l spirits " evocativ e of Hume , Marx, an d Kcynes; thriftiness conditions, includin g a Keynesia n ex post saving s equa l t o investmen t assumption; the degree o f competition (with ambiguous observations on its relation to the growth rate); the

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wage bargai n (mone y wage s assume d constan t except fo r case s o f acut e labo r shortag e and o f unacceptable inflationar y pressure s o n real wages) ; financial condition s (including the assumption s tha t al l of capita l replacemen t an d muc h o f ne t investment ar e finance d from gros s retaine d profit s an d tha t interes t rate s ar e give n an d partiall y determine d b y balance-of-payments an d exchange-rat e problems) . In a variation on Harrod's distinction between warrante d and natural rates of growth — rooted, respectively , i n the "anima l spirits " of firms and the assumed "technica l condi tions"—Robinson proceed s t o se t ou t he r eigh t well-know n metallic cases , whic h sh e summarizes usefull y a s follows: 24 In golde n age s th e initia l condition s ar e appropriat e t o stead y growth . I n true and limping golden age s th e actual realized growth rate i s limited only by the desire d rate . (I n a tru e golde n age , th e possibl e rat e coincide s wit h th e desired rat e an d nea r ful l employmen t ha s alread y bee n reached. ) I n a re strained golde n age , th e realize d growt h rat e i s limited b y th e possibl e rate , and kep t dow n t o it . I n a leade n ag e th e possibl e rat e i s hel d dow n b y th e realized rate . I n a bastard golden ag e the possible rat e is limited in a differen t way—that is , b y rea l wage s bein g a t th e tolerabl e minimum . Bot h i n a limping golde n ag e and a bastard golden ag e the stock o f capital i n existenc e at an y momen t i s les s tha n sufficien t t o offe r employmen t t o al l availabl e labour. I n the limping golden ag e the stock of equipment is not growing faster for lac k o f "anima l spirits. " I n th e bastar d ag e i t i s no t growin g faste r because i t i s blocked b y th e inflatio n barrier . In platinum ages th e initial conditions d o not permit steady growth an d the rate o f accumulatio n i s acceleratin g o r deceleratin g a s th e cas e ma y be . She then proceeds to state tersely th e general effec t o n the stability of growth models of variations i n thriftines s an d i n th e othe r determinant s o f growt h arraye d earlier . Sh e arrives finall y a t two conclusions: 25 First , al l the growth model s surveyed , includin g her own, are "to o muc h simplified" an d must be "judge d on the a priori plausibility of their assumptions." Second, sh e reaffirms a Keynesian conclusion nearer Harrod-Domar than the neoclassicists: "Ther e is an important difference in emphasis betwee n the m accordin g as they exhibit some kind of inbuilt propensity t o maintain full employmen t over th e long run o r a s they follo w Keynes i n regarding i t as dependent upon enterpris e tha t cannot b e relied upon , unassisted , eithe r t o achiev e stabilit y i n th e shor t ru n o r t o maintai n a n adequate rat e o f growth i n the lon g run. " Robinson was , i n m y view , quit e correc t i n he r stricture s o n th e highl y aggregated , oversimple growt h modelin g o f th e period , an d i n he r judgmen t tha t stead y ful l em ployment growt h wa s a n unlikel y outcom e ove r lon g period s i n a syste m o f privat e investment. O n th e othe r hand , he r analysi s di d no t includ e th e variable s require d t o explain the extraordinary boom of the 1950 s and 1960s ; notably , relative price movements and th e term s o f trade , th e backlo g o f technologie s availabl e t o Wester n Europ e an d Japan, an d th e technologie s tha t emerged fro m inventio n t o innovatio n after 1945 . On e needs a highl y disaggregate d syste m t o com e t o grip s wit h thes e variables : "anima l spirits" is not a macrophenomenon spread evenly across the sectors of the economy; and, as Salte r an d other s hav e demonstrate d (following , pp . 466-469) , technologica l change and th e plowbac k o f retaine d earning s int o plan t an d equipmen t ten d t o b e heavil y concentrated i n relativel y fe w technologicall y dynami c sector s a t an y give n period .

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In short , Robinson' s critiqu e of growth modeling i s an important stran d i n the stor y of that period; but , a s she was to a degree aware , her own overaggregated approac h lef t he r still som e distanc e fro m "reality. "

Solow Incorporates the Demographic Transition Unlike mos t neoclassica l growt h modelers , Solo w di d rende r a mor e o r les s moder n version o f th e demographi c transitio n endogenou s t o hi s system . I n hi s 195 6 Quarterly Journal o f Economics articl e the context is an examination of whether the interest rate and the related saving s ratio migh t be s o driven down by a sustained rise in the capital-labor ratio as to yield a classical stationar y state. Solow points out that the continued rise in the population woul d bring down the capital-labor ratio if net investment stopped fo r a time. He then evokes the following possibility of a kind of Rosenstein -Rodan Big Push (following, p . 409 ) o r Rostovian Takeoff: 26 Suppose, . . . that fo r ver y lo w level s o f incom e pe r hea d th e populatio n tends to decrease; for higher levels of income i t begins to increase; and that for still higher levels o f income the rate of population growth levels off and start s to decline. Th e resul t may be somethin g lik e [Figur e 15.2] . Th e equilibrium capital-labor ratio r, i s stable, but r2 is unstable. The accompanying levels of per capita incom e ca n b e rea d of f fro m th e shap e o f F(r,l). I f th e initia l capital-labor ratio is less than r2, th e system will of itself tend to return to r, . If the initial ratio could someho w be boosted abov e the critical level r 2, a selfsustaining proces s o f increasin g pe r capita incom e woul d b e se t of f (an d population woul d stil l b e growing) . Th e interestin g thin g about thi s cas e i s that i t show s how , i n th e tota l absenc e o f indivisibilities o r o f increasin g

Figure 15.2. Incom e pe r Capit a an d th e Rat e o f Populatio n Increase . [Adapte d fro m Rober t M . Solow, " A Contributio n t o a Theor y o f Growth, " i n A . K . Se n (cd.) , Growth Economics (Harmondsworth, Eng. : Penguin, 1970) , p . 189.]

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returns, a situatio n may stil l arise i n which small-scale capital accumulation only lead s bac k t o stagnatio n bu t a majo r burs t o f investmen t ca n lif t th e system int o a self-generatin g expansio n o f incom e an d capita l pe r head . Thus, unlik e those wh o built their case fo r a surge i n public investment on the inescapabl y larg e scal e o f infrastructur e outlays and th e substantia l indirect stimulus to private investment they provided, Solo w argue s that a jump in the investmen t rate migh t lif t th e aggregat e capital-labo r ratio , thereb y slo w the rat e o f populatio n increase , an d thu s yiel d a n accelerated , sustaine d in crease i n outpu t per capita.

Investment and Technology: The Charles Kennedy-Paul Samuelson Debate and Some Uneasy Asides The inherent limitations o f the mainstream growth models wit h respect t o investment and technology ar e illustrate d b y th e well-know n mutuall y reinforcing exchang e betwee n Charles Kenned y an d Paul Samuelson on the relation of the character of inventions—their degree o f capita l o r labo r bias—t o th e allege d stabilit y of share s o f capita l an d labo r in income distribution. 27 The Kennedy-Samuelso n exchange does , i n a highly abstract way , relate a part of the process o f innovatio n t o th e marke t process . Bu t i t suffer s thre e weaknesses : First , innovation emerges , onc e again , a s a diffuse incrementa l process, wit h no seriou s atten tion devote d t o the relation s amon g science , invention , and innovation , except fo r Sam uelson's observatio n i n " A Theor y of Induced Innovation," tha t after som e major breakthrough, creativ e scientist s hav e a n instinc t a s t o wher e th e nex t promisin g lin e o f inventive activit y lies. 28 Second , th e characte r o f inventio n and innovatio n is dealt wit h only a s i t relate s t o a capital - o r labor-savin g bias , leaving , a s i n othe r analyse s o f thi s type, a critica l unexamine d rol e fo r "exogenou s technica l changes. " Third , th e the oretical conditions fo r approximate long-ru n stability in distributive shares i n a technically advancing econom y wit h th e suppl y o f capita l increasin g faste r tha n the suppl y o f labo r are explore d wit h n o empirica l referenc e t o th e proces s b y whic h tha t (ver y rough ) stability ha s bee n achieved . I n fact , th e tren d i n distributiv e share s ha s varie d signifi cantly—for example , i n Britai n between , say , th e periods 1873-189 6 an d 1896-1914 , and the decisive force at work has been th e trend in the urban cost of living in each period. Nevertheless, i t is the cas e that a good man y economists engage d i n growth modelin g felt uneas y abou t leavin g inventio n exogenou s an d a few , a t least , sough t t o lin k th e generation o f innovations to the institutiona l structur e of the economy. 30 As Karl Shell is reported t o hav e sai d i n openin g th e discussio n o f hi s pape r referre d t o i n Not e 30 : " . . . [I] n order to explain economic developmen t satisfactorily, an endogenous theor y of technical progres s i s required." 31 A s suggeste d earlier , a numbe r o f device s wer e at tempted, includin g the importan t efforts o f Edwin Mansfield to measure th e productivity of R & D a s a n investmen t subsecto r generatin g th e flo w o f innovation s i n a moder n economy.32 Indeed, dissatisfactio n wit h the handlin g o f science , invention , and innovation yielde d a special Internationa l Economic Association Conferenc e in th e early 1970 s on "Scienc e and Technology in Economic Growth."33 The papers had (to this author) an appealing pragmatic quality, relatin g to both advanced and developing countries. O n th e other hand , link s to model building wer e not effectively made ; and E. A . G . Robinson' s reported observatio n i n th e fina l sessio n remain s just: 34 "Professo r Robinso n aske d

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whether ther e wa s somethin g larg e i n th e explanatio n o f economi c growt h whic h ha s defied economists . W e can' t hav e a n amorphou s residua l facto r fo r whic h ther e i s n o explanation, an d yet this is the state in which I find mysel f at the end of the Conference.' ' Chapter 2 0 return s t o this problem.

Growth and Business Cycles: Five Efforts to Go Beyond the Mainstream Consensus In a n engagin g Forewor d t o a 197 0 book o n mathematica l growth model s b y tw o o f hi s former students , Rober t Solo w observes: 35 "I t i s a standar d gambit— I hav e use d i t myself—to describ e a topic a s 'fi t for text book treatment, ' meanin g it is played out, cut and dried.'' Whatever the state of growth models at that time, business-cycle analysis had long sinc e becom e "fi t for tex t boo k treatment " fro m the perspectiv e of mainstrea m economics. In th e 1950s , however , there wer e a t least four distinguishe d consolidating textbooks , each marked by strands of originality. The authors were J. R . Hicks (1950), Alvin Hansen (1951), Jame s Duesenberry (1958), and R. C. O. Matthews (1959).36 In addition, the last NBER effor t a t a gran d business-cycl e synthesis was publishe d a s early a s 1947 : Burns and Mitchell' s Measuring Business Cycles. It may b e usefu l t o summariz e briefly what each o f these five studie s had to say about the relatio n betwee n growt h and cycles . 1. Hicks (1950). Hicks' s Trade Cycle i s a n extraordinarily luci d and elegan t elabora tion of a multiplier-accelerator model wit h a painstaking elaboration of the upper ceilin g and lowe r limits , a s wel l as th e asymmetr y between expansio n and contraction. Growt h enters Hicks' s stor y no t only because, followin g Harrod, h e place s the cycle i n a formal growth settin g but also because he introduces autonomous investment in a quite particular way. Hicks firs t set s ou t t o defin e a conditio n o f dynami c equilibriu m (a ' 'regularly pro gressive economy" ) i n a mode l embracin g bot h induce d an d autonomou s investment . Autonomous investmen t is defined as:37 "Publi c investment, investment which occurs in direct response to inventions, and much of the 'long-range ' investmen t . . . which is only expected t o pa y fo r itsel f ove r a lon g period . . . . " Hick s i s quit e awar e tha t suc h investments ar e unlikel y t o tak e plac e a t a regula r rate . H e nevertheles s set s ou t th e stringent assumption s require d fo r dynami c equilibrium, in a syste m includin g autonomous investment , i n order t o get at "th e crucia l question which a theory o f the cycle has to as k . . . whethe r fluctuation s ar e possible , and , i f so , ho w ar e the y possible , i n th e absence o f exogenous disturbances." 38 Lik e Marx and Schumpeter he also set s out , a s a preliminary benchmark , a stationary-stat e equilibriu m mode l a s " a standar d o f reference."39 Hicks the n move s on , fo r purpose s o f forma l exposition , t o defin e one versio n o f a progressive equilibrium in which the ratio of autonomous investment to output is constant. He the n asks : I n wha t sense i s suc h investmen t autonomous? His answe r is: 40 . . . [A]utonomou s investment really i s autonomou s after all . Th e onl y condition whic h i t mus t satisf y i n orde r fo r th e regularl y progressive equilibrium to be possible, is that i t must expand at a constant rate. Subject to that condition, it s rat e o f growt h an d it s "level " ar e bot h o f the m independen t

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Figure 15.3. Abstrac t Cycle with Constant Rat e of Growth of Autonomous Investment. CODE: FF : Full employmen t ceiling . EE : Equilibriu m path o f output . P 0: Initia l equilibriu m position fro m which outpu t displace d upwar d by a n external disturbance. AA: Pat h o f autonomous investmen t at constant rate . LL : Lowe r equilibriu m line durin g slump , takin g accoun t o f multiplie r effect s o f autonomous investment . [Adapte d fro m J . R . Hicks , A Contribution t o th e Theory o f th e Trade Cycle (Oxford : a t the Clarendo n Press , 1950) , p . 97. ]

variables. I t is the rate of growth of autonomous investment which determine s the equilibriu m rat e o f growt h o f th e whol e system ; an d i t is it s leve l whic h determines th e equilibriu m level o f output . With this formalized definitio n of a regularly progressive econom y i n hand Hicks build s up to his reasonably conventiona l versio n o f a multiplier-accelerator model i n which th e continued upwar d slop e o f autonomou s investmen t sets a limit to the slump and provide s the basi s fo r recover y (Figur e 15.3). 41 Against thi s backgroun d Hick s proceed s t o rela x th e assumptio n o f a constan t rat e o f growth i n autonomou s investmen t an d i n th e ful l employmen t ceiling . Thi s yield s th e pattern i n Figur e 15. 4 o n whic h Hick s comment s a s follows: 42 . . . [T]h e cycle s o f realit y shoul d b e though t o f a s occurrin g agains t th e background of an upward trend i n output . . . ; and while that trend can fairly be regarde d a s bein g supporte d b y a n upwar d tren d i n autonomou s invest ment, nevertheless , th e actual course o f autonomous investmen t cannot possi bly b e s o ver y regular—i t mus t experienc e autonomou s fluctuation s o n it s own account . Thes e fluctuations , and thei r consequences, ar e superimpose d upon th e cycl e whic h w e hav e bee n studying . . . . Fluctuations i n autonomou s investmen t will be reflecte d i n correspondin g fluctuations i n th e equilibriu m lines—both i n th e uppe r equilibriu m line E E

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Figure 15.4. Abstrac t Cycl e wit h Discontinuou s Autonomou s Investment . CODE : A s i n Figur e 15.3. [Adapte d fro m J . R . Hicks , Th e Trade Cycle, p . 121.]

and in the lower equilibrium line LL. Wit h this amendment, the theory stands; it will still be true that the upper equilibrium is unstable, the lower stable. . . . What can we make of this analysis in terms of the focus of this book? First, it represents a serious effort t o relate growth and cyclical analysis and, especially, their interaction: the strength an d cours e o f cycle s i s dependen t i n goo d par t o n th e underlyin g strengt h o f autonomous investment ; bu t a particularly shar p an d stee p cyclica l declin e ca n frustrate for a tim e th e assertio n o f a strong underlyin g upward trend in autonomou s investment. Second, Hick s does , indeed , regar d autonomou s investment as autonomous and in no way induce d by the marke t pressure s or opportunitie s set up by the proces s of growth itself. Lik e most o f the post-1945 mode l builders , Schumpeter' s insight s have no explicit place i n hi s exposition . H e doe s recogniz e th e inheren t discontinuit y o f autonomou s investment, citin g the railroad an d automobile, bu t he does not recognize the endogenous forces tha t generat e majo r invention s and innovations. Third, th e highl y aggregated for m o f Hicks' s mode l i s not a satisfactory structur e fo r linking realistically growth and cycles.43 Specifically that model canno t grip three funda mental empirica l phenomena: 44 • Th e leading direction s of new investment in each boom ca n in large part be relate d to disequilibri a a s between th e optimu m rates o f growth i n certain sector s an d th e levels o f capacit y existin g just prior t o the boom . . . . • Th e persisten t tendenc y fo r th e expansio n i n capacity i n the leadin g sector s t o b e carried too far, yielding, toward the end of the boom, a conscious prospec t of a level of capacit y highe r than that which would be require d in those particular sectors o f the econom y i n term s o f th e optimu m model. • The role of the period of gestation of the leading forms of investment in determining the exten t t o whic h investment distortio n proceeded i n eac h boom.

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Nevertheless, b y taking autonomous investment seriously—as somethin g more tha n a device for simplifying hi s model—Hicks capture s more linkage of growth and cycles than most o f hi s contemporaries . 2. Alvin Hansen (1951). Ther e is a great deal about both growth and cycles in Hansen's Business Cycles and National Income a s well as discussion of various suggested linkages. There ar e section s placin g U.S. post-186 5 cycle s i n their historica l context ; o n building cycles; o n secula r trend s an d busines s cycles ; o n investmen t in th e busines s cycle . Al l contain passage s linkin g growth and cycles. A lengthy review o f business-cycle theories touches o n th e wor k o f economist s wit h important insights into the relatio n o f th e tw o processes. But at only two points do Hansen's own views on this matter break through the eclectic textboo k characte r o f hi s book . First, i n affirmin g th e correctnes s o f Schumpeter' s basi c insight: 45 It is possible t o account fo r cycles i n our system if we assume with Schumpeter tha t thi s innovationa l investment comes i n swarms . Th e [investment ] schedule is deformed t o the right in a burst which begins slowly, then gathers speed, and finally ceases. Consequently, investment rises slowly and declines as al l th e possibilitie s ar e exhauste d an d th e ne w product s com e o n th e market, forcing down prices an d lowering the present values of the remaining possibilities. Thi s process repeats itsel f with only a rough regularity and with a varyin g violence , dependin g o n th e historicall y give n cours e o f tech nological change . Thes e facts must be incorporated i n any cycle theory , an d they ar e vita l becaus e i n thi s wa y w e ma y explai n how , give n a relatively unchanging economic structure and hence mechanism of response, each cycle is a historical individual , very unlike either its predecessors o r its successors . It shoul d b e noted , however , tha t the essentia l explanation of th e cycle , fo r this simple model, lies outside the model—in the Schumpeterian theory of the bunching of investment outlays—and that this theory is difficult t o formulate in econometri c terms . And, again , i n summation: 46 The modern analysi s reveals that, s o long as the economy remains dynamic, s o lon g a s th e requirement s of growt h and progres s cal l for larg e investment outlays, powerful forces will be at work to produce cyclical fluctuations. One cannot , therefore , regar d th e cycl e a s a pathologica l condition . I t i s inherent i n th e natur e of th e moder n dynami c economy. "Built-in " institutional arrangements ca n indeed narro w the limits of oscillation. Bu t only in a measure. A positive counter-cyclical program i s necessary . 3. James Duesenberry (1958). Duesenberry' s textbook , Business Cycles an d Economic Growth, wa s published onl y 7 years afte r Hansen's ; bu t i t reflects a gap o f a ful l generation. Th e autho r is presenting hi s own version o f a neoclassical growt h model and explicitly regard s himsel f i n dialogu e and , t o a degree , i n debat e wit h Harrod , Hicks , Goodwin, Kaldo r e t al . Tougan-Baranowsky , Spiethoff , an d Schumpeter ; Casse l an d Wicksell, Robertso n an d Pigou, Fishe r and Mitchell, all are gone from th e radar screen. Arthur Burns appears only as a critic of a point in Keynes's General Theory. Thi s study is quite consciously part o f th e in-house mainstream growth-modeling debate of the 1950s . Nevertheless, i t deals with two aspects of the relation between growth and cycles worth noting.

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First, Duesenberry designe d a model base d o n a capital-adjustment process rather than a mor e volatil e conventiona l accelerator . I t link s growt h an d cycle s i n way s tha t coul d yield bot h wea k (Hansen ) an d stron g (Hicks ) expansio n an d contractio n phases . Then , using Edwin Frickey's production inde x (1860-1914) and later data , he briskly surveyed American busines s cycle s fro m th e 1870 s t o th e 1950s , i n term s o f tha t distinction. 47 Second, Duesenberry se t up initially a model dependent , lik e most suc h models o f the period, o n fixe d initia l condition s and parameters , designe d t o explor e ke y interaction s among th e variables within that static framework. He then boldly confronted the complex ities i n generatin g a mode l tha t woul d "explai n th e actua l movement s of income:" 48 The occurrenc e o f change s i n th e parameter s wil l graduall y chang e th e characteristic behavio r o f th e system . . . . A complet e analysi s o f economi c histor y would require a n explanation of the paramete r change s themselves . Suc h a n explanation is at least a s impor tant a s a n elucidatio n o f th e consequence s o f th e existenc e o f a give n se t of behavior parameters , bu t i t require s talent s o f a differen t typ e fro m thos e required t o analyz e model s wit h given parameters. Without pretendin g t o creat e a mode l tha t woul d explai n "actua l movement s o f in come" in their full complexity, Duesenberr y make s a valiant effort t o bring his theoretical framework close r t o th e histor y o f America n cyclical fluctuation s in th e post-Civi l Wa r period. I t is sufficient t o note here that this procedure force s him to confront the need fo r defining a multisector equilibrium; 49 and , a s part of that exercise, t o examine "Growin g Industries an d Autonomous Investment." 50 By this route Duesenberry i s brought to deal directly wit h the relatio n betwee n growt h an d cycles: 51 ... T o understand the real world we must take account of changes in production methods , th e developmen t o f ne w products , growt h o f population , an d the openin g u p o f ne w area s o f settlement . Thos e phenomen a influenc e the economic system , bu t thei r occurrenc e i s no t primaril y dependen t o n eco nomic conditions . The y ar e usuall y classifie d as exogenous event s operatin g on th e economi c system . After examinin g i n broad, abstrac t term s th e ne t effec t o n incom e o f variou s types of autonomous investment—includin g the effects o f anticipations , indivisibilities, and lags, he concludes: 52 "Sustaine d growt h i s certainl y possible , bu t i t i s no t likel y t o occu r without th e ai d o f outsid e drivin g forces , suc h a s populatio n growt h an d th e relativel y rapid growt h of certain type s o f capital-intensive industries" [e.g. , railroads , stree t rail roads, telephones , an d electric utilities] . In retrospect an d in the sweep of this survey, Duesenberry's analysi s is of considerabl e interest fo r a point o f substanc e an d a point of method . Hi s determination to narro w th e gap betwee n hi s mode l and , i n effect , economi c history , force s hi m t o disaggregat e investment an d th e proces s o f economi c growt h b y ke y sectors . Second , Duesenberry' s enterprise pushe s hi m towar d wha t migh t be calle d a Marshallia n method . A s h e goe s beyond a simple , conventiona l model—wit h give n initia l conditions, fixe d parameters , and a singl e output—mathematic s become s decreasingl y useful . I n specifyin g th e changed growth circumstances that may have determined the difference betwee n pre-1914 and post-191 8 cycles, h e find s pros e th e require d for m o f exposition. 4. R. C . O. Matthews (1959). Matthews' s textbook in the Cambridge series, Th e Trade Cycle, i s of special interest because he is also the author of a substantial historical study of

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a trad e cycle. 53 Disaggregate d b y sector s i n grea t detail , hi s analysi s o f th e primaril y Anglo-American cycl e o f th e 1830 s is , i n addition , a n accoun t o f growt h i n th e tw o economies ove r a rathe r dramati c decade ; cotto n i s stil l a t th e cente r o f commercial , financial, an d industria l affairs, bu t railroads ar e moving i n from th e wings on both side s of th e Atlantic . An d i n hi s late r tex t Matthew s does , indeed , exhibi t sensitivit y t o th e problem o f growt h i n relatio n to cycles . Somewhat lik e Duesenberry, Matthew s uses a stock-adjustment-multiplier versio n o f a cyclical mechanism . But , a s on e woul d expec t i n a boo k writte n b y a n economist historian, Schumpete r appear s explicitl y in an extended discussio n o f the role o f innovation i n both growt h an d cycles. 54 He confronts the issue of growth as a whole in a penultimate chapter, "Th e Tren d an d the Cycle. " I t i s a n elegan t essa y whos e mai n line s ar e wort h summary . H e state s hi s central them e i n a for m tha t addresse s directl y th e concer n o f thi s chapter: 55 "Th e difficulty o f devising a theoretical apparatu s capabl e o f dealing with both trend an d cycle arises largely becaus e theorie s of the cycle have been mainl y concerned wit h the causes of fluctuations i n effectiv e demand, wherea s i n discussions o f growt h the deman d sid e ha s usually bee n les s emphasise d tha n the suppl y side." Matthews the n identifie s th e ke y analyti c proble m a s requirin g "a n analysi s o f th e demand sid e o f the growth proces s that is consistent with the more familia r [short-period , Keynesian] typ e o f fluctuations i n demand."56 He cites fou r possibl e hypotheses linkin g demand an d supply , adoptin g th e last : • Say' s la w that suppl y create s it s own demand. • Multiplier-accelerato r (or capital-stock adjustment ) systems i n which increases i n income an d investmen t stimulat e eac h othe r a d infinitum. • Expectation s tha t lead entrepreneur s i n a slump to believe that the current condition is transient and that the previous peak will be re-achieved or exceeded, becaus e th e capacity ceilin g ha s bee n lifte d beyon d it s previous level . • Th e adaptatio n o f Keynesia n analysi s to demonstrat e ho w increase s i n population and technica l progres s communicat e themselve s someho w t o aggregate demand: 57 What is required i s to show that population growt h and technical progres s affect th e consumption function and/or the inducement t o invest in such a way a s t o giv e a n upwar d tren d t o demand ; fluctuation s i n in come . . . can the n tak e plac e aroun d a risin g trend . .. . O f thes e tw o effects tha t o n investmen t ma y perhap s b e considere d th e mor e fundamental. . . . . . . [Althoug h there is no guarantee of full employment, ther e is som e guarantee agains t a cumulative increase i n unemployment suc h as woul d result if the natural rate o f growth persistently exceede d the actual rate of growth. From her e o n Matthew s i s bac k i n th e worl d o f highl y aggregate d growt h models , examining differen t allege d adjustmen t mechanism s i n a wa y tha t anticipate s th e late r Hahn-Matthews survey . Bu t h e conclude s wit h a n eviden t sens e o f dissatisfactio n an d awareness tha t there was stil l muc h to be done i n a quite different direction—th e determi nants o f th e rat e o f technica l progress: 58 . . . [PJroblem s o f capita l theor y hav e bee n extensivel y studied b y econo mists, bu t som e doubt s ma y b e fel t abou t thei r practica l importance . Th e reverse i s true of the influences affectin g th e natural rate of growth, especially

Formal Models o f Economic Growth 34

9

the influence s affectin g th e rat e o f technica l progress : thes e ar e o f grea t practical importanc e fo r th e understandin g o f growth , an d possibl y als o fo r the understandin g o f fluctuations , bu t relativel y littl e systemati c wor k ha s been don e o n them . The critica l missin g piec e of the growth-cycl e puzzle here i s that, inherently , cyclical expansions violat e sectora l optimu m level s of capacity o n a scale likel y to lead t o exces s supply for a considerable perio d o f time; that the downturn begins in and spreads fro m th e leading sector s o f th e boom ; bu t tha t th e passag e o f tim e reveal s potentiall y profitabl e avenues o f investmen t i n othe r direction s tha t wil l b e exploite d whe n th e traum a o f financial crisi s has passe d and resource s are disengage d fro m the leadin g sector s of the previous boom . Onl y rarel y are the leadin g sector s of two successiv e boom s the same . What Matthews' s analysi s doe s demonstrate—alon g wit h those o f Hicks , Hansen , an d Duesenberry—is the legitimacy o f Mullineux's reflection o n modern business-cycle mod eling:59 "I t seem s difficul t t o escap e th e conclusio n tha t a ful l theor y o f dynami c eco nomic development, capabl e o f explaining both the cycle and growth and, perhaps, thei r inter-relationships, i s required." 5. Burns and Mitchell (1947). Measuring Business Cycles is , o f course, a quite differ ent kind of book than the others cited here. A s Mitchell's introductio n makes clear, it is an interim summation i n which Burns rather than the elderly Mitchel l is the principal author . About 90% o f the tex t i s devoted t o a n authoritative description of the NBER method of cyclical an d trend analysi s and to reflections on certain technica l problems i n interpreting the results. Moreover , th e work summarized wa s carried out mainly before o r during the Second Worl d War , wel l before post-1945 problem s an d perspectives wer e defined . Th e authors do , however , tes t agains t NBE R dat a certai n hypothese s linkin g conventiona l cycles t o longe r trend s o r aspect s o f growth. Fo r example : • The y tes t a tentativ e 192 6 hypothesi s o f Frederic k C . Mill s tha t th e lengt h o f business cycle s i s relatively lon g i n an early stag e of growth, shortens wit h a phase of rapi d growth , an d lengthen s agai n as th e econom y decelerates . O n th e basi s o f their improved referenc e cycle dates, the y find the hypothesis gets "sligh t support" at best . • Contrar y t o anothe r hypothesis , the y fin d n o significan t change i n th e timin g o r structure o f cycles i n the period 1914-193 3 as compared t o the pre-1914 decades . • The y reaffirm strongly the evidence suggestin g a building cycle of 15-20 years ; but find n o systemati c relatio n betwee n th e amplitud e and duratio n of busines s cycle s and period s o f risin g an d fallin g buildin g trend . 8 The y revie w th e hypotheses o f Kondratieff, Schumpeter , an d Kitchin with respec t to cyclica l behavio r i n variou s time period s wit h indecisiv e results . From th e presen t perspective , th e mos t importan t observatio n t o b e mad e o n thi s volume is that it did not carry forwar d in the direction the NBE R appeare d to have been moving i n the pre-1939 years; that is, n o effort i s made to link systematically growth and cyclical analysi s alon g th e suggestiv e path s earlie r explore d b y Burns , J . M . Clark , Fabricant, an d Kuznets. This large gap is almost certainly the result of the interi m and methodological character of this study, which includes a brief section on "plan s for later work."60 But it should be noted that the focus o f the authors' thought at this time appears to have been conventional business cycle s i n relation to lon g cycles rather than t o the proces s o f growt h itself .

350 Growth

Analysis Post-1945

A Conclusion Growth modeling , i n th e 3 5 year s o r s o surveye d here , attracte d a n extraordinar y con centration o f talent . I t inevitabl y yielde d som e result s o f interes t an d value . Hahn Matthews and Mirrlees hav e sought to specify those positive results. The former team, for example, identif y a s a "decisiv e contributio n . . . the recognitio n tha t investin g an d technical progres s ma y be Siamese twins" yieldin g Kaldor's technical-progres s functio n and Kennet h Arrow' s learnin g process; 61 althoug h tha t recognitio n is , perhaps , les s impressive t o economi c historian s tha n to post-194 5 mainstrea m theorists . Mirrlees , fo r example, generate d a list of eight "use s to which growth model s hav e been put:" 62 as a framework fo r conjectur e abou t history; fo r reflectio n o n th e consequence s o f change i n economic behavio r o r policy ; fo r (sometime s conflicting ) interpretation s o f economi c relations wit h policy implications; to assert ne w propositions o f theoretical significance; to pose inescapable philosophical or value problems; t o illuminate the significance of institutional setting s o n optimu m choice s amon g polic y alternatives ; a s a too l fo r estimatin g parameters a s par t o f th e proces s o f polic y formulation ; and a s a clarifying pedagogica l device. Despite thi s impressiv e arra y o f believe d contribution s i t i s fai r t o sa y that , i n retro spect, the results o f this sustained virtuos o effort hav e been judged b y friendl y observer s to be thin. At the close of their remarkable survey , fo r example, Hah n and Matthews ar e clearly dissatisfied: 63 . . . Nothing i s easier tha n to ring the change s o n mor e an d more compli cated models , withou t bringing in any really new idea s an d without bringing the theor y an y nearer t o castin g light on the cause s o f the wealt h of nations. The problem s pose d ma y wel l hav e intellectua l fascination . Bu t i t i s essen tially a frivolous occupation t o take a chain with links of very uneven strength and devot e one' s energie s t o strengthenin g an d polishin g th e link s tha t ar e already relativel y strong . Sen's conclusio n i s eve n mor e pungent:

64

. . . Interest i n growth [afte r 1945 ] revived at first slowl y and then by leaps and bounds. . . . Growth was everybody's concer n an d it is no wonder that in such a milie u growt h theor y wa s pampere d b y th e attentio n o f economists . With thi s immensel y practica l motivatio n i t woul d hav e bee n natura l fo r growth theory t o take a fairly practice-oriente d shape . This , however , has not happened an d muc h o f moder n growt h theor y i s concerned wit h rather eso teric issues . It s link with public polic y i s often ver y remote. I t is as if a poor man collecte d mone y fo r hi s foo d an d ble w i t al l o n alcohol . There is in the reflective literature on growth modeling a pervasive sens e o f dispropor tion between th e volume of scarce talent invested in the effort an d its yield. Wha t explains this retrospectiv e malaise ? First, th e anxietie s about a recurrenc e o f dee p depressio n underlyin g the knife's-edg e Harrod- Domar model s wer e belied by the course o f the worl d economy after 1945 . Th e subsequent neoclassica l phase o f growt h modeling wa s inspire d by th e relativel y steady and unexpecte d growt h o f th e advance d industria l countrie s afte r immediat e postwa r recovery; but none of the growth models, in fact, illuminate d the causes of the great boom

Formal Models o f Economic Growth 35

1

of th e 1950 s an d 1960s . Tha t boo m wa s roote d i n technologica l an d terms-of-trad e phenomena tha t literall y hav e n o plac e i n th e structur e o f th e model s elaborate d b y th e various contenders. 65 A s fo r entrepreneurship , the y assume d al l profitabl e inventions , whether exogenou s o r endogenous—embodied i n gross investmen t or learnt by doing — were incorporate d promptl y int o the capita l stock . Second, the application o f simple profit maximizatio n to innovation barred th e model ing exercise from th e essential notion of absorptive capacity. It is, o f course, true that the study o f absorptiv e capacit y require s political , social , an d cultura l as wel l a s economi c analysis, as the great classic texts of political economy recognized. This deficiency denied the latter-da y model s relevanc e t o th e developmen t problem s o f Latin America, Africa , the Middle East, an d Asia. As Chapter 1 7 demonstrates, developmen t economic s evolved in a settin g almost—no t quite—independen t o f th e concurren t growth-modelin g effor t that proceede d in an intens e parochia l worl d of its own , in anothe r rin g of the circus . Third, whe n model builders sought to link their analyses to the longer sweep of history, they wer e force d t o asser t questionabl e propositions. 66 A s Hah n an d Matthew s concluded:67 "Th e historica l pattern s o f economi c growt h . . . are to o comple x t o b e de scribable i n term s o f stead y growth. " Asid e fro m th e evidenc e o f history, th e convolu tions o f national economies an d the world economy i n the 1970 s an d 1980 s violated most of th e stylize d fact s tha t mainstrea m growt h economist s assumed , a s wel l a s th e whol e notion o f a stable , self-correctin g growt h path—circumstance s tha t delivered a kind o f coup d e grace t o a fiel d alread y exhibiting , b y th e earl y 1970s , distinc t symptom s o f diminishing returns . All th e participant s i n th e growth-modelin g effor t di d no t accep t a s thei r missio n th e illumination o f th e larg e problem s an d prospect s o f nationa l growth, past , present , o r future. The y entere d th e fiel d t o clarif y certai n mor e limite d professiona l problem s or , perhaps, fo r the simpl e fun of participating in the mos t popular game i n town—a by-no means unworth y motive i n any science , roote d i n the sam e huma n impuls e that explains "clustering" and , therefore, sectora l overshootin g i n investmen t and inventions . And, besides, i t is still too soon to pass fina l judgment on what the enterprise accomplished an d failed t o accomplish . What ca n b e sai d i s that , whateve r it s attractions , forma l growt h modelin g faile d t o dominate the field o f growth analysis , or to illuminate significantly th e political economy of growth in either the advanced industrial or developing countries. The post-1945 saga of growth theory turns, therefore, t o two groups who approached the field wit h different set s of question s somewha t close r t o "th e infinitel y mor e comple x worl d of reality." 68

16 Statistical Analyses of th e Structur e of Growth: from Morpholog y t o Policy—Almos t

The Great Enterprise of Simon Kuznets The years 1955-195 6 represent an important interval in the history of growth analysis. As noted earlier , i t wa s the n tha t Solow , Swan , an d Tobi n launche d thei r neoclassica l models, providin g a third-stag e booste r t o mathematica l growt h analysis . Reflectin g a quite differen t approach , m y takeof f articl e appeare d i n th e Marc h 195 6 issu e o f Th e Economic Journal. Fo r purposes o f this chapter, however, the appropriate bench mark is the October 195 6 issu e of Economic Development an d Cultural Change. I t contained the first o f ten lengthy monograph s by Simon Kuznet s under the rubric: Quantitative Aspects of th e Economic Growth o f Nations. Th e last monograph wa s published in October 1964.' Four major books that built on and extended these monographs followed.2 In addition, the organization that supported Kuznets' s remarkable effor t fro m 194 9 forward (The Committee o n Economi c Growt h o f th e Socia l Scienc e Researc h Council ) helped financ e major studies o f nationa l income an d it s determinant s ove r tim e fo r eleve n countries . There is no authoritative account of how Kuznets came to conceive of and to mount this grand enterprise; but certain elements in the story can be discerned.3 I n terms of Kuznets's own evolution, his post-1945 wor k on growth can, to a degree, b e seen i n continuity with his earlier research , unitin g as it did growth and national-income analysis. Growt h was a central concer n i n his Secular Movements (1930 ) and , whe n drawn into national-income estimation, Kuznet s did not remain a narrow statistician. His instinct and interest wer e to push hi s calculation s bac k i n tim e an d t o explai n the movement s o f th e tim e serie s that emerged. I n tha t sense , Kuznets' s internationa l comparisons o f th e structur e o f growt h follow naturall y fro m hi s national-incom e wor k o n th e Unite d States ; notably , hi s National Product Since 1869 and National Income, A Summary o f Findings (bot h 1946) . Analytically, hi s late r wor k i s clearl y distinguishe d fro m Secular Movements b y hi s systematic exploitatio n o f th e rapi d postwa r extensio n o f mor e o r les s reliabl e national income data , bot h curren t an d i n th e for m o f historica l time series . Th e strength s and weaknesses o f Kuznets' s exercise i n th e comparativ e morphology of economi c growth flow fro m hi s strategic research decision to build o n national-incom e data and the highl y aggregated element s into whic h such data were conventionally decomposed. Although h e envisione d i t whil e stil l i n Washington , Kuznets firml y crystallize d his

Statistical Analyses o f th e Structure o f Growth 35

3

decision t o concentrat e o n growt h analysi s when he returned t o the NBER an d joined i n the intens e immediat e postwa r discussio n of the direction s researc h in tha t institutio n should take . One of the priorit y area s considere d was growt h analysis , wit h Kuznet s assuming leadershi p i n it s advocacy . Aside fro m th e inne r logi c o f Kuznets' s marc h fro m Secular Movements t o th e com parative analysi s o f the structur e o f growth, h e (and some other s a t the NBER) may well have bee n affecte d b y wa r an d immediat e postwa r contac t with part s o f th e worl d neve r before confronted; for example, i n Kuznets's case, China; in Fabricant's, West Africa and Brazil. Bu t Kuznet s los t th e battl e to mak e th e long-ru n contours o f economic growt h a major terrai n o f NBE R effort , perhap s becaus e o f skepticis m amon g som e o f hi s col leagues abou t th e qualit y o f th e dat a likel y t o b e available . Persisting , h e foun d transi tional suppor t fro m Josep h Willett s a t th e Rockefelle r Foundatio n an d the n a n ampl e sustained bas e i n the Committe e o n Economi c Growt h o f th e SSRC. 4 Seve n year s afte r the projec t wa s initiate d i n 194 9 hi s result s bega n t o flo w fro m th e pipeline . Kuznets's majo r conclusion s ma y b e summarize d a s follows: 5 • Tota l product growt h accelerate d as nations entered "moder n economic growth," starting with Great Britai n in the late eighteenth century: the last one and one-half or two centurie s represen t a ne w economi c epoc h a s compared t o th e longe r past . • Wit h the important exception o f Japan, currently, the developed countrie s are all in Europe o r ar e Europea n offshoot s overseas . • Th e currentl y les s develope d countrie s hav e faile d t o ente r th e develope d grou p either becaus e o f th e lo w initia l level s o f thei r pe r capit a produc t (a s they entere d "modern economi c growth" ) o r becaus e o f lo w rate s o f growt h i n pe r capit a product durin g the past centur y or so—or for both reasons. Thei r prospects shoul d not be read off from pre-191 4 Europea n o r Europe-derived experience . [Th e 1960 s revealed mor e case s evokin g the earlier Japanes e experience tha n Kuznets's analysis woul d suggest ; fo r example , India , China , Sout h Korea , Taiwan ; whil e som e Latin American countries an d Turkey had moved into "moder n economic growth " (or takeoff ) earlier. ] • Breakin g ou t productio n an d th e workin g forc e unde r thre e gros s heading s (/ , roughly, industry ; A , roughly , agriculture ; S , services) , Kuznet s emerge s wit h findings mos t o f which had been familia r since, a t least, Coli n Clark' s pathfinding work i n Th e Conditions o f Economic Progress wit h foreshadowing s b y Marshal l (preceding, p . 173) . Durin g moder n growt h th e A secto r decline s i n it s relativ e contribution to product and its call on the working force; the / secto r rises; and the S sector move s les s consistently , showin g a conspicuou s ris e i n produc t shar e i n certain of the richest countries. But the average lower productivity of the S than the / sector yield s a marked increas e i n the proportion o f the labor force in the S sector a t high pe r capit a produc t levels . • The siz e of a countr y has a profoun d effec t on the structur e of its econom y and particularly o n th e degre e t o whic h a countr y wil l b e involve d i n foreig n trade . Large countrie s i n term s o f populatio n trade les s tha n smal l countries. • I n the earl y stages o f growth the rate of savings and capital formatio n a s a percentage o f nationa l income an d produc t rises , bu t afte r reachin g a certai n leve l thos e percentages n o longe r exhibi t an y clea r tren d tha t diverge s significantl y fro m th e rise i n GNP . • Ther e wa s a "U " shap e t o th e wa y th e siz e distributio n o f incom e change d a s

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Analysis Post-1945

average pe r capit a incom e rose , tha t is , inequalit y tended t o increas e i n th e earl y stages o f developmen t an d the n declin e slowl y thereafter . Th e same phenomeno n could b e observe d wit h regional difference s in income. • Al l nations undergoing modern economi c growt h go through what is now referred to as the "demographi c transition"; that is, firs t the crude deat h rate fall s sharpl y and is followed with a considerable lag by a fall i n the birth rate. During this transition, therefore, th e populatio n growt h rat e accelerate s markedly . « Ther e i s som e evidenc e o f lon g swing s i n growt h rate s (ove r a spa n o f som e 2 0 years) i n th e fe w case s wher e continuou s data exis t fo r th e perio d befor e 1914 . • Increase s i n productivit y rather tha n i n pe r capit a ma n hour s o r materia l capita l mainly accoun t fo r the acceleratio n i n product per capit a during modern economi c growth, stemmin g fro m th e enlargin g pool o f scienc e an d technology. • Conventionall y calculated increase s i n product per capita overstat e th e growth rate for thre e reasons : som e item s liste d a s consumptio n should, i n fact , b e debite d a s costs o f urba n industrial life; othe r cost s (fo r example, ai r pollution and noise) are not taken into account; education , to some exten t hard to measure, i s a capital cost as wel l a s a for m o f consumptio n enriching the qualit y o f life . « Contemporar y les s develope d countrie s show a less marke d decline i n th e shar e of the working force in the A sector , wit h given increases in the / secto r and per capita output, tha n historica l dat a woul d suggest ; wherea s th e post-194 5 revolutio n i n agricultural productivit y in the develope d countrie s yields more rapi d decline than expected fo r the working force in agriculture. [Kuznets's data were from th e 1950s . It i s possibl e tha t th e Gree n Revolutio n an d subsequen t improvement s i n agri cultural productivity in important developing countrie s would somewhat alter thes e findings.] In a n accurat e an d candi d statement , i n th e contex t o f a pape r relatin g historica l Japanese dat a t o th e averag e performanc e o f post-194 5 developin g countries, Chener y wrote:6 "Ou r stud y doe s no t ge t a t the mor e basi c determinant s of growth : the leve l of savings, the adoptio n of new technology, the effects o f specific resource endowments , o r the importanc e o f national policies. Thes e factor s only ente r the analysi s by inference. " This observatio n ha s a major , quit e direct bearin g o n Kuznets' s work, o f whic h he wa s quite aware. Kuznet s did not confine himself to reporting the average behavior of growing economies a t differen t level s o f rea l incom e pe r capita . H e analyze d th e fundamental nature of accelerate d moder n growt h itself. He concluded, lik e most analysts , that, at its core, i t wa s cause d b y th e applicatio n o f moder n scientifi c though t an d technolog y t o industry. Lik e Chenery , Kuznet s also regarde d th e measurabl e statistical phenomena h e cited a s evidence o f entrance into moder n growt h a s a result of a deeper process. Thes e secondary, measurabl e phenomen a were , notably , a n accelerate d rat e o f urbanizatio n (which he used to date entrance into modern growth); a sustained and rapid increase in real product pe r capit a usually associated wit h high rates o f population growth ; a shift o f th e working forc e ou t o f agricultur e t o industr y an d services ; enlarge d contact s wit h th e outside world . For the author of Secular Movements, som e 30 years earlier, Kuznets's analytic emphasis o n th e applicatio n of moder n scientifi c though t an d technolog y t o th e econom y i s wholly comprehensible , focuse d a s tha t boo k wa s o n th e sequenc e o f leadin g sector s resulting fro m th e diffusio n o f a successio n o f ne w technologies . Bu t tw o aspect s o f Kuznets's massiv e exercise i n statistica l morpholog y denied him acces s t o wha t h e himself regarde d a s th e centra l forc e a t wor k i n th e stor y of moder n economic growth; i.e..

Statistical Analyses o f th e Structure o f Growth 35

5

science an d technology . First , hi s thre e basi c categorie s (industry , agriculture, an d services) wer e so broad that they could not be directly linked to the introduction and diffusio n of major , particula r technologies . Second , havin g mad e reasonabl y precis e statistica l measurability th e overridin g criterio n fo r hi s work , Kuznet s found i t impossibl e to dea l with technological chang e withi n the framewor k of his enterprise. I n his 197 1 Economic Growth o f Nations, nea r the end o f his most productiv e period, Kuznets , after som e 30 0 pages o f statistica l an d analyti c summary of previou s findings , suddenl y expresse s hi s frustration:7 Since th e hig h an d accelerate d rat e o f technologica l chang e i s a majo r source o f th e hig h rate s o f growt h pe r capit a produc t an d productivit y i n modern time s an d i s als o responsibl e fo r strikin g shifts i n productio n struc ture, i t is frustrating that the availabl e sectora l classification s fail t o separat e new industrie s fro m old , an d distinguis h thos e affecte d b y technologica l innovations. . . . In the following twenty-eight pages, Kuznets illustrates the need for greater disaggrega tion, i f growth i s to be linked to the coming in of new technologies. H e discusses leadin g sectors, old and new, and sets up a highly disaggregated tabl e to capture their evolution in the United State s over the period 1880-1948 . Agains t that background he then outlines a model t o illustrat e the impac t on aggregate growth rates o f new rapid-growth sectors and new products. I t is a joy t o be back with the author of Secular Movements an d to observ e his sensitiv e appreciatio n o f th e innovationa l process hithert o maske d b y hi s overridin g preoccupation wit h large nationa l income aggregates an d the three categorie s o f produc tion h e derive d fro m Coli n Clark . But, i n fact , Kuznet s was neve r abl e to resolv e hi s fundamenta l dilemma : h e define d modern growt h i n terms of the effective absorptio n o f new technologies; bu t he measure d it i n term s o f produc t pe r capita , a quit e different , obliquel y relate d variable . An d hi s successors i n comparative statistical growth analysis, productive in many ways, were also not abl e t o break ou t of this prison o f their ow n construction, althoug h sectoral-develop ment planners an d growth accountant s engineere d a partial escap e (following , pp. 359 362).

Chenery et al. In his 198 1 critical survey of international quantitative comparisons, Perkin s characterizes the second post-Kuznets phase as "more data and disaggregation," Clearly , Hollis Chenery wa s it s centra l figure. 8 I woul d distinguis h hi s wor k fro m Kuznets' s o n somewha t different grounds . Kuznet s wa s overwhelmingl y concerne d wit h th e morpholog y o f growth i n Wester n Europe , Nort h America , Russia , Japan, an d Australasia , basin g hi s analysis on the longest tim e series available, notably national income data. In my vocabulary h e contrive d a kind o f highly aggregated statistica l history of th e countrie s that had graduated int o takeoff before 1914 . Chenery's primar y (by no means exclusive) concern was contemporar y developin g countries and, ultimately, wha t statistica l analysis coul d provide i n th e wa y o f broa d guidanc e for developmen t policy. 9 A s Perkin s suggests, Chenery ha d mor e dat a available : th e extraordinar y gathering o f post-194 5 statistical series b y th e Unite d Nations, th e Worl d Bank , an d othe r specialize d agencies. O f th e nature of the case the time series availabl e were usually short . Chenery's primary method

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in mobilizin g an d analyzin g the dat a was, perforce , cross-sectional , usuall y drawing o n the averag e behavior o f countrie s a t different levels o f real incom e pe r capit a durin g the 1950s an d 1960s . In his leadin g essa y i n the Chenery festschrift, Edwar d S . Maso n state s wit h his usual capacity fo r terse , definitiv e summar y th e thre e centra l issue s i n th e analysi s o f development:10 . . . [T]h e exten t t o whic h uniformitie s amon g countrie s ca n b e dis cerned. . . . Whether, i f suc h uniformitie s are discovered , the y confor m t o the pattern s tha t characterize d growt h i n th e now-develope d coun tries. . . . Whether, unifor m or not , th e developmen t proces s i n LDC's ca n be usefull y attacke d wit h the tool s shape d i n the analysi s of growth i n devel oped countries . Chener y has made large contributions to the discussions of all these questions . Perhap s hi s larges t contributio n has been i n his examination of uniformities. With respec t t o uniformities , hi s 197 5 Patterns o f Development, 1950-1970, writte n with Moises Syrquin, perhap s best captures his method and achievement. Chenery moved beyond i n several major subsequen t publications ; an d Table 16. 1 (p. 360 ) is , i n effect, a summary o f hi s 198 6 findings . His cross-sectiona l metho d differ s fro m Kuznets' s compariso n o f lon g historica l tim e series i n several respects . Chener y an d Syrqui n use correlation analysi s to establish their average patterns (o r "stylized facts"); disaggregate systematicall y a bit beyond Kuznets's strictly economi c categories ; an d helpfull y includ e severa l socia l categories , notabl y education an d th e demographi c transition. Chenery wen t further in three majo r directions. First , i n a n articl e writte n with Lanc e Taylor, h e disaggregated industrie s into "early , middle, and late."11 These three roughly approximate th e sequenc e o f leadin g sector s tha t characterize m y takeoff , driv e t o tech nological maturity , and high mass consumption, as well as Walther Hoffmann's industria l stages. Second , Chener y gav e a grea t dea l mor e attentio n t o trad e an d capita l flow s (including foreig n aid ) tha n Kuznet s an d define d categorie s fo r developin g countrie s according t o the relative scal e an d composition of their foreign trade. Third , Chener y had the advantage o f having worked intensivel y on the problems of particular countries, e.g. , Italy, Japan , Pakistan , Israel . H e wa s a substantial figure in policy-oriented developmen t analysis fro m th e lat e 1950 s forward . H e understoo d bette r tha n som e th e ga p betwee n average behavio r (an d average deviations ) derived fro m correlatio n analysi s and the kind of data uniqu e to time and place require d to render responsible polic y recommendations . Analytically, h e consciousl y sough t t o combin e th e virtue s o f historica l an d cross-sec tional analysi s with a sense o f the particularity of each case. Fo r example, hi s 196 2 pape r (written with Shuntaro Shishido and Tsunehiko Watanabe) is a systematic analysis of the structure o f th e Japanes e econom y i n 1914 , 1935 , an d 195 4 se t agains t "standard " behavior. Th e Japanes e deviations are, fo r the most part , explaine d i n a persuasive way . As the 1980 s wore on, thos e concerned wit h the statistical measurement of the structure and pattern s o f growt h too k stock . The y were , i n part , respondin g t o criticism s fro m essentially friendl y critics , in part reaching out fo r a new phas e in their working agenda. The most authoritative statement of their past achievements and futur e hope s came appro priately fro m Holli s Chenery. 12 Hi s assessmen t deserves summary . Kuznets's contributio n t o structural analysis is defined a s isolating " a consisten t set of changes in the composition of demand, production, trade, and employment, each reflect-

Statistical Analyses o f th e Structure o f Growth 35

7

ing differen t aspects o f th e shift s i n resourc e allocatio n tha t take plac e a s incom e level s rise."13 He identifie s th e majo r problem s Kuznet s lef t fo r hi s successors : • th e rol e o f trad e an d capita l flow s in development ; • similaritie s an d difference s betwee n cross-countr y an d tim e serie s estimate s o f development patterns ; • th e translation of "speculations as to causal sequences into more formal models and testable hypotheses; " and • fillin g th e ga p lef t b y "th e absenc e o f policy analysis " i n Kuznets's work. Chenery als o note s th e importan t contributio n o f Adelma n an d Morri s i n extendin g structural measurement s t o relation s amon g economic , social , an d politica l aspect s o f development. He goe s o n t o summariz e th e progres s made , i n goo d par t unde r hi s leadership , i n categorizing developmen t pattern s b y for m o f marke t expansion (primary exports, man ufactured consumer s exports , exploitatio n o f domesti c markets) ; modelin g typica l rela tions among ke y development variables ; refinin g the typologies withi n which developin g countries ar e grouped ; th e us e o f modelin g technique s t o com e t o grip s wit h polic y problems wher e "marke t force s ma y no t lea d t o optima l results—a s i n populatio n growth, urbanization , o r incom e distribution." 14 As wa s inevitabl e an d appropriate , thes e line s o f approach , foreshadowe d fo r som e time bu t brough t t o a kind o f climax i n Industrialization an d Growth (1986) , hav e bee n subjected t o wha t migh t be calle d respectfu l criticism . A s earl y a s 197 6 Carlo s Diaz Alejandro argue d that the " . . . searc h for uniform patterns appears to hit sharply diminishing return s outsid e productio n an d consumptio n structures , an d relate d pattern s i n labour allocatio n an d urbanization; " an d h e foun d som e importan t regressio n result s "disappointing."15 Dwight Perkins' s 198 1 pape r expresse d uneasines s ove r a wider range : • Th e relativel y fe w ne w discoverie s o f statistica l uniformitie s i n th e structur e o f growth beyon d thos e establishe d b y Coli n Clar k an d Kuznets. • Th e limited guidanc e to planners provided b y disaggregation int o industrial groups. • Uncertaint y that input-output coefficient s are stable over time and among countrie s at differen t stage s o f growth. • Th e searc h fo r growt h pattern s tha t ar e stabl e ove r tim e and/o r i n cross-sectio n conceals th e exten t t o whic h suc h pattern s wer e determine d b y th e absorptio n o f unique technologica l innovations , not deal t with. • Th e quite appropriate searc h fo r cross-sectional uniformitie s in subgroups o f countries ha s yielde d unsatisfactor y results. • A critica l question : I s i t wis e t o thro w Indi a an d Chin a int o measure s o f averag e behavior, containin g as they do over hal f the population of the world' s developin g countries bu t roote d i n quit e different cultures? • Th e nationa l incom e an d pricin g dat a essentia l fo r Kuznets-Chener y structura l analyses ar e seriousl y flawed , a s demonstrate d b y Kravis' s effort s a t correctio n through relativ e purchasing-powe r analysis. Perkins argue d that refinements in structura l analysi s should enjoy lower priority than improvements i n data; growt h theory and dat a collection an d analysi s shoul d be brought closer together ; and that , somehow a whole range of critically important variables deter -

358 Growth

Analysis Post-1945

mining the growth performance o f countries, now excluded for purposes o f convenience, should b e take n int o account , notably , technologica l chang e an d difference s i n tech nological absorptiv e capacity , th e rol e o f government s an d publi c policy , th e rol e o f institutions, an d th e rol e o f foreig n an d civi l wars . Perkins conclude s a s follows: 16 It is of n o help t o say that these issue s belon g properly withi n the scop e of some othe r disciplin e suc h a s political scienc e o r psycholog y becaus e thes e disciplines aren't dealin g with these issues as they relate to economic develop ment either . Internationa l comparisons o f economic growt h have given u s an important too l t o work with , economic theor y provides u s with specific tool s and a traditio n o f rigorou s analysis , bu t w e als o nee d th e mor e traditiona l skills an d perspectiv e o f th e broad-base d historian . One further commentary shoul d be noted, tha t of Edward S . Maso n i n his essay i n the festschrift i n honor o f Holli s Chenery. 17 Afte r a lucid summar y o f Chenery's objective s and findings , h e concludes: 18 "Th e studie s pay littl e attentio n t o the cultural , political , and administrative elements that also affect development . They are useful, indee d essential, i n bringin g economi c polic y alternative s t o light , bu t the y provid e a n incomplet e picture o f the sources o f and limitations to growth." Maso n the n goes on to illustrate th e centrality o f these noneconomi c variables by comparing th e evolution of post-1945 Egypt and Sout h Korea . The mos t fundamenta l unsolve d economi c proble m i n th e kin d o f analyse s le d b y Chenery i s th e treatmen t o f technologica l change . Her e i s Perkins's observatio n o n th e product o f thre e decade s o f internationa l quantitativ e comparisons. 19 There i s genera l agreemen t tha t technologica l change , broadl y defined , sometimes embodie d i n capita l an d sometime s not , i s th e mai n sourc e o f modern economi c growth . Furthermore , th e accumulate d backlo g o f tech nology ha s muc h to do wit h wh y some o f today's developin g countrie s hav e managed t o gro w s o muc h faste r tha n their Wester n predecessors . An d yet , economists kno w ver y littl e abou t eithe r th e natur e of technologica l innova tion a s i t relate s t o developmen t o r ho w an d wh y innovation s do o r d o no t spread t o othe r nation s i n th e world. It is , I believe , necessar y t o distinguis h in this matte r Kuznets' s position fro m Chen ery's. Kuznet s accepted , ou t o f hi s earl y wor k i n Secular Movements, wha t migh t b e called a Schumpeterian position ; tha t is, moder n economi c growt h was driven forward by the applicatio n o f scienc e t o the economy, th e result being, i n part, a sequence o f large , discontinuous leadin g sectors , eac h subjec t t o retardation. H e regarded hi s later wor k on the structura l characteristic s o f growt h base d o n lon g tim e series 20 a s preliminar y t o a definitive explanatio n o f growth ; bu t h e asserte d ofte n an d withou t ambiguit y tha t h e already kne w it s root cause ; tha t is, th e systemati c applicatio n o f moder n scienc e t o th e production o f goods an d services. An d he was quite capable o f acknowledging his frustra tion tha t comparativ e statistica l morpholog y di d no t com e t o grip s wit h technologica l change and , therefore , hi s drea m coul d no t b e fulfilled . Chenery's wor k was primarily cross-sectional; and he had a strong professional interest in bot h th e structur e of developin g countrie s an d i n developmen t policy. Hi s stud y o f Japan ha d a n historica l dimension , bu t hi s wor k wa s overwhelmingl y focused o n th e

Statistical Analyses o f th e Structure o f Growth 35

9

post-1945 world o f developing countries . H e also acknowledged the introduction of ne w technologies a s fundamenta l to growth , bu t i t wa s natura l that h e shoul d approac h th e problem of technological chang e in a somewhat different wa y than Kuznets. He does so in his "prototype " mode l o f industrializatio n b y subsumin g technologica l chang e i n "growth o f intermediat e demand, " on e o f th e fou r factor s identifie d a s th e sourc e o f increases i n output.21 The other three are: growth of domestic demand; growth of exports; and effect s o f impor t substitution . The "transformation " fro m lowest to highest level of development ca n then be presented, as in Table 16.1 , a s a highly simplified input-output table. In a formal sense , technolog y i s accounted fo r over the transformation, embodied a s it is in the massive increas e in intermediate manufactures. But this captures little of what is involved in measuring and reducing the technological backlog that virtually defines underdevelopment. I t is one more of the considerable arra y of ingenious devices for evading the problem o f accountin g fo r th e generatio n an d diffusio n o f technology.

The Sectoral Planners The ultimat e purpose o f Chenery's cross-sectiona l analyses , definition of types o f devel oping countrie s an d strategies , an d prototype model s o f the transformatio n based o n hi s stylized fact s wa s operational . I n effect , the y wer e designe d t o hel p economi c planner s and othe r official s t o defin e certain broa d developmen t polic y option s b y identifyin g in which categor y thei r countr y belonged; isolatin g thei r deviations fro m averag e behavior ; and decidin g whethe r o r no t the y wishe d t o mov e towar d th e average , sta y wit h thei r existing developmen t pattern , o r pursu e some othe r course . Thi s larg e purpos e i s mos t nearly fulfille d i n his Industrialization an d Growth. I t is a majo r lin k between the struc tural analysi s o f averag e growt h pattern s an d developmen t policy . I shal l discus s it s conclusions, therefore , i n dealing with the policy debate amon g development economist s (following, pp . 422-423) . But i n movin g towar d thi s practica l objective , Chener y himself , an d a goo d man y others, ra n into—an d onl y partiall y escape d from—wha t I shal l cal l th e Gesel l problem.22 Dr. Arnol d Gesell wa s autho r or co-author of well over twenty books o n the development of childre n fro m birt h to 1 0 years. Th e hear t o f his wor k consists in a sequence o f rather detailed portrait s o f average behavior a s children move through their ' 'transformation" wit h time rathe r tha n GN P pe r capit a o n the horizonta l axis. Also , lik e Chenery , Gesell trie d t o fin d intermediat e ground—betwee n uniquenes s and overgenerality—b y defining thre e type s o f growt h patterns. 23 Again , like Chenery, Gesel l was , ultimately , interested i n policy ; tha t is, guidanc e i n child-rearing for parents, teachers , etc . Bu t lik e all serious analysts of growth (an d every parent) Gesell understoo d that , ultimately, each child was unique and his or her individualit y had to be respecte d in applying the lesson s that appeared t o flow fro m hi s portraits of average behavior an d types of growth patterns. The conflic t betwee n th e searc h fo r scientifi c averages an d th e uniquenes s of th e case s imparts a stran d o f uneasines s to hi s work. Something like this sense of the limits of biological generalization has led to substantial literature o f economi c plannin g that applies sophisticate d mathematical and econometri c techniques t o sectora l (an d occasionall y systemwide ) planning i n particula r developing

Table 16.1 . Structura l Chang e durin g the Transformation , Incom e Leve l 5 Compare d wit h Leve l 1 (Percentage of GDP ) Net trad e (T )

Domestic demand (D )

Intermediate deman d (W )

Gross outpu t (X)

a

Value adde d (V )

Initial

Final

Increment

Initial

Final

Increment

Initial

Final

Increment

Initial

Final

Increment

Initial

Final

Increment

Tradables Primary Manufacturing

18 28

4 34

-14 +6

13 -14

—2 0

-15 + 14

14 22

14 51

0 + 29

46 36

16 85

-30 +49

38 15

9 36

-29 +21

Nontradables Social overhea d Services

14 42

20 42

+6 0

0 -1

1 2

+1 +1

5 9

7 10

+2 +1

20 50

28 53

+8 +4

11 36

16 39

+5 +3

102

100

-2

-2

-1

+1

50

82

+32

151

182

+ 3!

100

100

0

Sector

Totalb

NOTE: Perio d 1 is defined b y a GDP leve l o f $140 per capita ; period 5 is define d b y a leve l o f $2,100. °X = D + T + W. b 'Totals may no t add becaus e o f rounding. SOURCE: Hollis Chenery, Sherma n Robinson, and Moshe Syrquin , Industrialization an d Growth: A Comparative Study (New York: Oxfor d University Press, Published for the World Bank, 1986), p . 52 .

Statistical Analyses o f th e Structure o f Growth 36

1

countries with the purpose of generating specific polic y recommendations. 24 Th e system wide plannin g models ar e generally described a s computable genera l equilibriu m (CGE) models. David Kendric k an d Arthu r MacEwa n describ e lucidl y th e purpos e an d structura l character o f plannin g a s opposed t o les s policy-oriente d growt h models: 25 Planning models ar e designed t o stud y the long-term consequence s o f policies affectin g th e allocatio n o f resources , particularl y the divisio n of investment amon g sectors . The y dra w on th e results o f theoretical growt h model s but diffe r fro m the m i n tha t the y (1 ) contai n empirica l estimate s an d ar e solved wit h numerica l methods , (2 ) ar e usuall y disaggregate d int o man y sectors, and (3) involve more complex specification of development processe s and specifi c polic y constraints . Th e ne t effect o f these differences i s to mak e theoretical model s mor e useful fo r studying the general character of growth in an abstrac t settin g an d t o mak e plannin g model s mor e usefu l fo r studyin g more disaggregate d an d complex system s whic h include the instrument s and constraints o f governmen t policy . Planning studies of this type have been made for, among others, th e following developing countries : Egypt , Chile , Greece , India , Israel , Sout h Korea , Mexico , Pakistan , an d Taiwan. I n addition, Lie f Johanse n conducted a methodologically sophisticate d analysi s of Norway. 26 An d thes e method s wer e applie d les s rigorousl y t o characteriz e certai n regional developmen t problems ; fo r example, i n Latin America and Sub-Saharan Africa . From th e perspectiv e o f th e presen t study , policy-oriented growt h modelin g ha s ha d several positiv e characteristics. 27 First , i t has force d analyst s ultimatel y concerned wit h optimum investmen t allocatio n to disaggregate dow n to the level at which new technolo gies ar e introduce d int o th e economy . Analysi s move s ou t o f th e frustratin g worl d o f "primary," "industry, " an d "service" sector s an d into the arena where decision s hav e to be made about whether or when a steel mill or petrochemical plant is to be built and on what scale. An d difficult a s it is (it hasn't go t easier sinc e Marshall's time) analysts have to grappl e wit h increasin g return s an d hav e foun d way s to do so. 28 In general, then , th e imperatives o f investment planning in developing nations—com bined wit h a sense tha t prototype modelin g lef t on e still too far from reality—hav e le d to major advances in dynamic theory, which embrace some aspects of technological change , including significan t aspect s o f th e cas e o f increasin g returns and effort s t o captur e th e dynamic impac t o f technological chang e on the input-outpu t coefficient s i n the majestic tables pioneere d b y Wassil y Leontief . Important limitations , o f course, remain . For example, th e existing pool o f technology is taken a s given . Thes e model s d o no t dea l wit h the dynami c interpla y o f scienc e an d technology. Th e qualit y o f entrepreneurshi p i s eithe r no t deal t wit h o r embrace d i n interesting bu t rathe r abstrac t an d overaggregate d calculation s o f absorptiv e capacity . They d o no t analyz e th e force s tha t caus e leadin g sector s suddenl y t o accelerate . The y take int o account backward an d forward linkage s but the lateral spreadin g effect s tha t go with a fast-moving leading-sector comple x are inadequately measured in present multisectoral models. But , in the long history of economic thought, the planning econometricians are beginning to make a serious dent on some problems lon g se t aside or swept under the rug b y empt y devices o f forma l elegance . As fo r thei r contribution to planning , i t i s too soo n to make a dogmatic judgment, fo r

362 Growth

Analysis Post-1945

the fiel d i s stil l evolving . Davi d Kendrick , a majo r practitioner , cast s u p th e interi m account justly: 29 At least two views may be taken of the usefulness of the present models for economic planning . On e vie w compare s th e presen t model s t o th e mor e disaggregated an d more generall y specifie d models whic h may be built in the future an d t o th e requiremen t o f governmen t plannin g office s fo r highl y disaggregated results . Thi s vie w find s th e presen t model s lackin g and thinks of th e presen t researc h effor t a s a long-ru n effort whic h will eventually pro duce tool s whic h ar e usefu l fo r governmen t polic y analysis . A secon d vie w compares numerica l model s t o othe r method s o f analysi s use d i n makin g economy-wide plannin g decisions and finds tha t the comprehensive natur e of the model s produce s insight s whic h canno t b e obtaine d wit h les s comple x analytical means . The author's presen t opinion i s closer to the first viewpoin t than the secon d in the conviction that the models ar e still more usefu l i n providing insight into how t o buil d better model s tha n the y are i n providin g prescriptions fo r eco nomic policies. Howeve r the models hav e the virtue of forcing the economi c analyst into systematic though t about the problem under study and therein lies one o f thei r mos t usefu l attributes .

A Conclusion By wa y o f conclusio n i t ma y b e usefu l t o sugges t briefl y wha t thes e studie s o f th e morphology o f growth have had to say about the key growth variables tha t have provide d structure t o thi s study .

Basic Growth Equation As Chenery pointed out , the narrowly statistical analysis of structural changes that accom panied increase s i n real GN P per capit a "doe s no t get a t the mor e basi c determinants of growth . . . these factor s onl y ente r b y inference. " I t i s quit e clear, however , tha t th e "inferred factors " ar e thos e b y no w quit e familiar : population an d th e workin g force ; saving-investment; natura l resourc e endowments . T o thes e Chener y adde d "nationa l policies." Th e characte r o f the tripartite sectora l disaggregatio n initiate d by Coli n Clar k made the impact of Engels's La w particularly important, decreeing a s it did a relative shif t of th e workin g forc e fro m agricultur e t o industr y and service s wit h the increas e i n GN P per capita . Rather more than their successors both Colin Clark and Kuznets were led to explore and to speculate abou t aspect s o f growt h no t actuall y measure d i n the data availabl e to them . But i t wa s inheren t i n thei r statistica l approac h t o structura l change tha t the y woul d b e dealing primarily with reflections o f the growth process rathe r than ' 'basic determinants.' '

Population and the Working Force The statistica l approac h t o growt h analysi s ha s brough t into shar p focu s historica l an d cross-sectional data on birth and death rates in relation to GNP per capita, permitting more

Statistical Analyses o f th e Structure o f Growth 36

3

soundly base d analyse s tha n i n th e pas t o f th e demographi c transition . Th e deviation s from averag e behavior, notabl y for birthrates, are , however , substantia l (Figure 20.1). A considerable literatur e ha s evolve d seekin g t o narro w th e rang e o f thes e deviation s b y correlating birthrate s wit h additiona l variables ; e.g. , education , health , urbanization , mobility, incom e distribution. 30 Althoug h thes e analyse s o f fertilit y hav e lef t a grea t many unanswered questions, they represent a rare and important example of the mergin g of economi c an d socia l analysis—a n objective , i n particular, of th e wor k of Irm a Adel man an d Cynthi a Taf t Morris .

Investment and Technology A grea t dea l o f additiona l evidence , bot h historica l and cross-sectional , ha s been gener ated o n th e proportio n o f GN P investe d associate d wit h differen t level s o f incom e pe r capita. It is now clear that, on average, th e investment rate rises in what I would designate as th e takeof f an d driv e to technologica l maturit y and then level s off. 31 On th e rol e o f investmen t in growt h an d th e source s o f investmen t perhaps th e mos t interesting observation s amon g th e growt h morphologists ar e Coli n Clark' s (preceding , pp. 213-214) ; i.e., tha t the rate of capital formation does not uniquely determine the rate of growth an d that a high proportion o f saving-investmen t in plant and equipment results from th e plowbac k o f profit s rathe r tha n a n overal l Keynesia n consumption-saving s function conventionall y conceived. I t is i n th e latte r terms , fo r example , tha t ChenerySyrquin discus s th e theoretica l an d empirica l base s fo r thei r dat a o n "accumulatio n processes.' '32 O n the other hand their mobilization of investment rates, systematic data on flows o f capita l imports , an d allocation s t o investmen t i n educatio n ar e al l extremel y valuable. With respec t t o technologica l change , Coli n Clar k an d Kuznet s underline d tha t th e application o f scienc e t o th e econom y wa s th e foundatio n fo r moder n growth ; bu t a s Kuznets finall y underlined , thei r metho d prove d a n awkwar d instrument fo r grapplin g with thi s crucia l linkage. 33 Analyses o f th e Chener y typ e di d no t appea r a s concerne d wit h th e questio n o f technology. Th e wor d technology, fo r example , appear s onl y onc e i n Chenery-Syrquin' s conclusions alon g wit h tw o othe r exogenou s variables. 34 Bu t Chener y doe s introduc e technology vi a a structura l variable ; i.e. , th e relativ e ris e o f "intermediate " industry , which h e take s t o b e a t the hear t o f th e transformation. In a stud y publishe d a yea r earlie r (1974) , usin g muc h the sam e dat a source s as Chenery-Syrquin, Thorki l Kristense n arrive d a t simila r conclusion s o n th e patter n o f growth rates through time (Tables 16. 2 an d 16.3) ; bu t his linkage to technology is mor e direct tha n Chenery's. 35 Kristensen's fundamenta l propositions bearin g o n th e risin g an d fallin g sequenc e o f growth rate s com e t o this : economi c growt h depend s o n th e rat e o f absorptio n o f th e existing and unfolding stock of relevant knowledge; the rate of absorption depend s o n the availability of both trained men and capital; the reason fo r the accelerated growt h among his middle-incom e countrie s i s tha t the y hav e buil t u p th e stoc k o f traine d manpowe r (including entrepreneurs) to a position where they can accelerat e the rate of absorption of the existing stock of knowledge, so long as they generate at home or acquire from abroa d the requisit e capital to incorporat e that knowledge ; the reaso n fo r th e subsequen t slowdown i n growt h rates i s that the high-incom e countries, having absorbed th e backlo g of existing knowledge, must rely for subsequent growth on the rate at which new knowledge

364

Growth Analysis Post-1945 Table 16.2. Incom e Level s an d Growth Rates, 1960-197 0 Population 1967 (millions)

GNP per capita 1967U.S.$

Average annual growth rat e 1960-1970

3.2% 3.4 3.5 6.5 4.4 2.9 2.6 1.7 3.2%

United States ,670) Group 1 ($1,750-$3,670) Group 2 ($1,000-$1,750) ,750) Group 3 ($700-$ 1,000) 00) Group 4 ($400-$700)) Group 5 ($200-$400)) Group 6 ($100-$200)) Group 7 ($50-$ 100)

1,580

$3,670 3,120 1,490 930 550 270 130 90

World

3,391

$ 61 0

199 307. 238 444 161 299

376

SOURCE: Thorki l Kristensen , Development i n Rich an d Poor Countries .(Ne w York : Praeger, 1974), pp . 156-159 .

is created . H e concludes : "Thus , i f ther e i s somethin g tha t ca n b e calle d th e typica l growth curve for GNP per capita, i t is not an exponential curve but rather an "S"-shape d curve tha t ma y o r ma y no t approac h a n upper limit." 36 On th e basi s o f thi s quantitativ e bu t no t directl y measurabl e hypothesis , Kristense n proceeds to indicate how his "S "-shaped path of technological absorptio n is reflected in a wide range o f more o r less measurabl e economic an d social indicator s that he associate s with real income per capita—for example, the distribution of the working force, urbanization, incom e distribution , foo d an d energ y consumption , healt h services , demographi c variables, education , foreig n trade , an d s o forth. The majo r analyti c differenc e a s betwee n Kristensen' s an d Chenery' s view s o f th e process o f growt h center s o n th e rol e o f technologica l progress : Kristense n regard s th e diffusion o f ol d an d ne w technologica l knowledg e a s fundamenta l to growth . Chener y regards th e progressive absorptio n o f new technologies, a s one moves up the incom e pe r capita ladder, a s a by-product o f the expansion of manufactures of increasing sophistica Table 16.3. Annua l Average Growth Rates per Capita GDP, 1960-197 3 Stage

Per cen t

A. Ol d developed 1. Unite d States 2. Othe r Total B. Newl y developed C. Transitiona l D. Les s develope d Total marke t economie s E. Centrall y planned

3.1 3.7 3.4 7.0 3.9 1.8 2.8 3.6

SOURCK: Holli s Chenery, "Transitional Growt h an d Worl d Industrialization, " pape r presented t o the Nobe l Symposiu m o n th e International Allocatio n o f Economi e Aetivity, Stockholm, Jun e 8-11 , 1976 , Tabl e 2b .

Statistical Analyses o f th e Structure o f Growth 36

5

tion; and this perspective is understandable in cross-section analysis, with a given pool of working technologies assume d to exist accessibly in the old developed countries . From a historical perspective , Kristensen' s emphasi s on the critical role of the diffusion o f technologies throug h time i s more congenia l t o the analysi s that underlies thi s book . The econometri c sectora l planners , o f course , als o approache d technologica l chang e head on ; but a s they moved into the realm of dynamic, multisectoral equilibrium models they confronted problems that, up to the present, hav e required technological change to be introduced exogenously . Business Cycles and Relative Prices Inevitably, studies addressed primaril y to long-term patterns of structural change systematically associate d wit h substantial changes in levels o f GNP per capita have had little to contribute t o th e analysi s o f business cycle s o r changes i n relative prices. The Stages of and Limits to Growth Colin Clark and Kuznets were content to treat growth as a process that, once started, had a number o f identifiabl e structural characteristic s associate d wit h differen t level s o f rea l income per capita. I t was natural that Chenery, buildin g on foundations laid by Clark and Kuznets, dealin g wit h structural change in a large number of countrie s i n cross section , should evolv e hi s ow n conceptio n o f th e stage s o f growt h define d i n term s o f thos e structural changes . Here ar e the essentials o f Chenery's view: 37 1. Stage s ar e defined i n the broad literary terms indicated in Table 16.3 , bu t they ar e rooted i n th e Chenery-Syrqui n dat a o n th e averag e patter n o f th e transitio n se t ou t i n Table 16.1 . The transitio n can b e usefull y divide d int o an earlier an d a later phas e b y measuring th e halfwa y poin t in each developmen t process. Fo r example, o n average, th e shar e o f industr y (manufacturin g plu s construction ) i n GN P increases from an average of 12.5 % fo r underdeveloped countries t o 38% for developed ones . Thi s process i s hal f complete d a t an income level o f about $450 [300 196 7 U.S. $] which is close to the average for all processes. O n the other hand , th e ris e i n th e shar e o f manufacture d exports i n GD P [gros s domestic product ] (from 1. 1 % to 13% ) takes place much later in the transition and i s half completed onl y at an income level of $1000 [625 196 7 U.S. $]. I n the following discussion th e countries that have completed more than half of the normal changes in the structure of production and trade will be classed a s "transitional" an d thos e tha t hav e no t reache d thi s poin t a s "les s developed." By Chenery's reckoning the share of manufacturing i n the "ol d developed " countries for 1973 i s 30.7% ; th e "newl y developed, " 29.6% ; th e "transitional, " 21.7% ; th e "les s developed," 14.4% ; the "centrall y planned, " 39.8% . 2. Th e transitional countries, in turn, ar e grouped in three categories: "large" coun-

366 Growth

Analysis Post-1945

tries, wit h populations o f 1 5 million o r mor e i n 1960 , substantial domestic market s fo r manufactures, an d relatively low ratios of foreign trade to GNP; small countries relativel y specialized i n primar y exports ; smal l countrie s relativel y specialize d i n th e expor t o f manufactured good s an d services . Chenery als o embrace s withi n the transitional category tw o furthe r type s of economie s that exhibit higher growth rate s tha n either the least-developed o r old developed nations: "newly develope d marke t economies " an d "newl y develope d centrall y planned econo mies ." Al l had levels in 1973 of GNP per capita over $ 1000 (196 7 U. S. $) and productive structures mor e o r les s typica l o f tha t rea l incom e level . In thu s definin g th e transitio n process , Chener y embrace s nation s i n subcategorie s containing abou t 52 % o f th e world' s populatio n a s o f 1973 : newly develope d marke t (7%), newl y develope d centrall y planne d (9%) , transitional market economie s (13%) , transitional centrally planned (35%, including China, 23%). The old developed countries

contained onl y 13 % of th e worl d population; the othe r developing countries , 35%. 3. I n an article writte n with Lance Taylor , Chener y moved beyond the criterion o f the aggregate shar e o f GNP generate d b y industr y to the association of GNP pe r capit a with periods of acceleration and deceleration in certain "early, " "middle, " and "late" industry groups. 38 This propositio n i s linked , i n a genera l way , to Chenery' s stage s a s follows : th e "transitional" countrie s ar e in the process o f absorbing th e basic heav y industry sectors (steel, ligh t engineering , chemicals) ; th e "newl y developed, " th e mor e sophisticate d technologies associate d wit h motor vehicle s o n a mas s scale , durabl e consumer goods , heavy engineering , electronics , an d s o on. 39 Lik e virtuall y all post-1960 studies , Chen ery's dat a an d analysi s confir m th e realit y o f th e onc e much-debate d questio n o f a substantial ris e i n th e investmen t rate during take-off. 40 There ar e however , severa l fairl y importan t distinctions worth noting . First, Chener y regards th e progressive absorptio n o f new technologies, a s one moves up the income pe r capita ladder, a s a by-product of the expansion of manufactures o f increasing sophistica tion. Bu t fro m th e historica l perspectiv e o f a developin g countr y strugglin g t o mov e forward (or, even, th e perspective o f an advanced industrial country), the subtly interconnected world o f science an d technology must be regarded a s an economic sector to which investment resource s ar e allocate d an d tha t yields, like an y othe r sector , a conceptually definable, i f difficul t t o measure , rat e o f retur n ove r cost , wit h appropriate lags . One reason fo r underlining the importance of technological generatio n an d diffusio n i s that for two centuries i t was essential i n fending off diminishing returns in agriculture and raw material production , an aspect of the story of growth that falls ou t in a cross-sectiona l view o f th e complacen t 1950 s an d 1960s , whe n th e price s o f basi c commoditie s wer e relatively low . A cross-sectiona l analysi s as of, say , the 1790s , th e 1850s , 1900-1910 , 1945-1951, o r th e mid-1970 s coul d certainl y no t ignor e th e effect s o n incom e an d growth rate s o f relativ e prices ; and , indeed, th e growt h rate s o f th e 1950 s an d 1960 s i n industrial countries an d regions wer e abnormall y high in part because o f favorabl e term s of trad e i n th e for m o f chea p energy , food , an d ra w materials . Second, Chenery' s metho d for capturing technological change within the manufacturing sector, even when disaggregated along Chenery-Taylor lines, misses the dynamics of a successio n o f leadin g secto r complexes , wit h thei r backward , lateral , an d forwar d linkages. The level of disaggregation in Industrialization an d Growth is, a t certain points, more detailed . But, in th e end , the author s acknowledg e their blac k box. 41

Statistical Analyses o f th e Structure o f Growth 36

7

Our empirica l result s o n TF P [Tota l Facto r Productivity ] chang e thu s should not be interpreted a s measuring technical change only in the sense of a shift i n the frontie r of production possibilities because o f the implementatio n of a ne w generatio n o f technica l knowledge. Instead , th e measure s mus t b e interpreted quit e broadly to include such factors as industrial and plant organization, engineerin g know-ho w o r change s i n respons e t o disruption s i n th e production proces s tha t affec t capacit y utilizatio n in the shor t run . Th e mea sures reall y treat production units as a black box. W e measure the inputs and the output s bu t mak e n o rea l attemp t t o describ e exactl y wha t i s goin g o n inside the plant gate. Figurin g out how the black box works is important, bu t it is beyond the scope o f this book. W e seek to delineate th e stylized facts at a fairly aggregat e leve l and will necessarily be modest in our attempts to generalize an d t o discer n causa l links . Both o f these points—th e linkag e o f technological virtuosit y to th e scal e o f manufactures and the black-box approac h t o total factor productivity—relate t o something los t in the statistical morphology of growth: the pain, complexity, and endless creativity inherent in the process o f growth, including the strain, costs, an d exhilaration of shifting fro m on e set of leading sector s t o anothe r as (for the United States) i n the 1840 s (cotto n textiles t o railroads), 1900-191 0 (stee l t o electricity , moto r vehicles , chemicals) , 1975-198 5 (motor vehicles , etc. , t o microelectronics , etc.) . Growth analysi s inherently consists o f suc h successiv e phase s o f irreversible dynamic disequilibrium, each solvin g a problem but creating new problems to solve after, perhaps , a transien t interva l o f relativ e stability . Thi s approximates , I believe , wha t Alber t Hirschman had i n mind i n his view of economic developmen t (following , pp. 390-391) ; what Gesell perceive d i n hi s vie w of human development a s the solvin g of an "endles s succession o f growt h problems" vi a th e pressure s o f disequilibrium; 42 an d i t i s no t fa r from th e chaos theorist' s vie w of the physical world as " a scienc e of process rather than state, o f becomin g rathe r than being . . . [where ] the disorderly behavio r of simple sys tems acte d a s a creativ e proces s [that ] generate d . . . richly organize d patterns , some times stabl e an d sometime unstable . . . ." 43 The practitioner s o f th e craf t o f comparativ e structura l analysi s o f economie s fai l t o capture thi s proces s becaus e th e dynamic model implicit in their chartin g of transforma tion fro m povert y t o affluenc e i s on e o f genera l equilibrium. 44 Analyse s flowing from Colin Clark's pioneerin g effort assert , in effect, tha t growing economies, viewe d in crosssection, alter their structure s and their allocations o f resources i n a roughly uniform way, once they begi n t o mov e forwar d in modern (o r self-sustained) growth . The patter n tha t emerges reaches beyon d conventiona l economi c variable s t o birth rate s an d death rates , educational levels , social welfare allocations, an d income distribution. The average crosssectional patter n is , a s on e woul d expect , subjec t t o considerabl e deviation ; and , a s Chenery's exploratio n o f manufacture - and primary-oriente d smal l countrie s indicates , some of those deviations are systematic. The range of variation within these categories is , however, wide . Bu t what we have here is a rather grand assertion o f the ultimate imperatives o f balance d growt h an d dynami c equilibrium. As Chener y an d Syrqui n correctl y argue , suc h equilibriu m model s ma y wel l suggest "the interdependen t changes in resource allocation which underlie the major development patterns."45 But they do not explain the erratic course economic growth actually assumes;

368 Growth

Analysis Post-1945

and the y ca n onl y reflect rathe r tha n captur e th e substantiall y noneconomic force s tha t initiate moder n economi c growt h an d driv e i t forward.

Noneconomic Factors As noted earlier, a considerable an d wide-ranging effort ha s been made to refine, through statistical analysis , knowledg e of the determinants of birthrates beyon d the broad familia r pattern tha t link s the m inversel y t o incom e pe r capita . Irm a Adelma n an d Cynthi a Taf t Morris hav e pioneered an d applied statistica l methods fo r testing the association betwee n economic growt h an d a wid e rang e o f socia l an d politica l variable s tha t d o no t len d themselves t o straightforwar d time series. 46 The y hav e exhibite d imagination and inge nuity in finding statistical surrogates fo r (or methods fo r rough quantitative ranking of) the following thirtee n sociocultura l an d seventeen politica l indicators fo r which conventional statistical dat a ar e onl y normall y availabl e fo r thre e (exten t of urbanization , of literacy , and th e crud e birthrate): 47 SOCIOCULTURAL INDICATOR S

Size o f th e traditiona l agricultura l secto r Extent o f dualism Extent o f urbanizatio n Importance o f the indigenou s middl e clas s Extent o f socia l mobilit y Extent o f literac y Extent o f mas s communicatio n Degree o f cultura l and ethni c homogeneity Degree o f socia l tensio n Crude fertilit y rat e Degree o f modernizatio n o f outloo k Predominant typ e o f religio n Level o f socioeconomi c developmen t POLITICAL INDICATOR S

Degree o f nationa l integratio n an d sens e o f nationa l unity Degree o f centralizatio n o f politica l powe r Extent o f political participatio n Degree o f freedo m o f politica l oppositio n an d th e pres s Degree o f competitivenes s o f politica l partie s Predominant basi s o f th e politica l part y syste m Strength o f th e labo r movemen t Political strengt h o f th e traditiona l elit e Political strengt h o f th e militar y Political an d socia l influenc e of religiou s organization s Degree o f administrativ e efficienc y Extent o f leadershi p commitmen t t o economi c developmen t Extent o f direc t governmen t economi c activit y Length o f colonia l experienc e Type o f colonia l experienc e Recency o f self-government Extent o f politica l stability

Statistical Analyses o f th e Structure o f Growth 36

9

Such associational analysi s of variables that evidently interact does not lend itself to clearcut analytic o r fine-grained polic y conclusions. It did lead Adelman an d Taft in their study of growt h an d socia l equit y t o a sens e o f shoc k a t th e failur e o f positiv e associatio n between economi c growt h rates, mor e equa l income distribution, an d degree o f politica l participation. The y conclude d tha t ne w economi c an d politica l developmen t strategie s were require d t o fulfil l th e objective s the y judged desirable . Bu t i t di d no t requir e th e elaborate quantitativ e exercise undertake n to com e t o tha t judgment. Put another way , the uniformities in social an d political lif e tha t accompany the devel opment processe s are , at their core, a sequence o f problems solve d by eac h societ y i n its own way. 48 Averagin g thes e solution s b y som e quantitativ e metho d ma y no t b e th e optimum way either to identify th e sequence o f problems or to explain the deviations fro m average behavior. But th e mos t importan t weaknes s o f thi s kind of analysi s is the on e i t share s wit h th e comparative statistica l analysi s of economi c growt h itself ; i.e. , th e metho d inherentl y masks th e dynamic s o f change—what Pau l Rosenstein-Roda n called "th e pursuit curve which show s th e dynami c pat h towar d equilibrium." 49 Fo r example , non e o f thes e analyses captures th e complex forces—of whic h fear of or reaction to external intrusion is the most powerful—whic h led quasi-traditional societies t o accept th e inherently painfu l and contentiou s change s require d t o ente r takeof f o r moder n economi c growth . Non e identifies th e particular group or groups that emerge t o lead th e way. None specifies th e prior historica l experienc e wit h centra l governmen t an d administratio n that helps deter mine the ease or difficulty o f the transition. An d so also with th e interplay o f economic and noneconomi c factor s i n al l subsequen t stages . One shoul d not , however, as k o f a method mor e tha n i t is capable o f accomplishing . The comparative statistica l analysis of growth and development has permitted the system atic organizatio n o f a vas t amoun t o f historica l and cross-sectiona l dat a tha t al l seriou s students of growth will continue to use even i f they must look elsewhere for the dynamics of th e "Transformation. "

Growth Accounting: Edward F. Denison Starting fro m a quite differen t approac h t o technical change an d productivity than Chen ery's "intermediat e production, " Edwar d F . Deniso n o f th e Brooking s Institutio n ha s developed a method fo r analyzin g changes i n the determinant s of growth on th e basi s o f painstaking disaggregation. Hi s method i s incorporated i n six books o f his own (the first published in 1978) plus similar studies by others. Taken all together this literature embrac es recent experienc e in the United States, Canada, Western Europe , Japan , India, and the Republic o f Korea . Denison' s mos t recen t stud y (1985 ) i s of the Unite d State s ove r th e period 1929-1982. 50 Table 16. 4 indicates th e exten t o f Denison's disaggregatio n a s well as his estimat e o f the variou s source s o f America n growt h ove r th e 5 3 years fo r whic h h e has develope d comparable data . Fo r present purposes, th e key variable is quantitatively the most impor tant: "advance s in knowledge." I t covers both technological change and improvements in "managerial an d organizational knowledge."51 Despit e heroic efforts, includin g linkage to the estimates of the productivity of R & D by Edwin Mansfiel d an d others, Denison has thus far been force d to settl e for treating advances in knowledge as a residual.52 Denison provides reasonabl y convincing reasons for believing his residua l i s a fair approximatio n

Table 16.4. Unite d States : Contributions to 1929-198 2 Growth Rates Potential nationa l incom e Per person employe d

Total Whole economy

(1) Growth rat e Percent o f growth rat e All source s Labor inpu t except educatio n Education per worke r Capital Advances i n knowledg e Improved resourc e allocatio n Economies o f scal e Changes i n lega l an d huma n environment Land Irregular factor s Other determinant s

3.2 100 34 13 17 26 8 8 -1 0 0

-5

Actual nationa l incom e

Nonresidential business

(2)

3.1 100 25 16 12 34 1! 11 -2

0 0 T

Whole economy

(3)

1.6 100 -13 26 15 54 16 17 -3 -3 0 -10

Nonresideniial business

(4)

1.7 100 -23 30 10 64 19 20 -4 -4 0

-13

Total Whole economy

(5)

2.9 100 32 14 19 28 8 9 -1 0

-3

-5

Per perso n employe d

Nonresidential business

(6)

2.8 100 20 19 14 39 11 12 -2

0

-5 -8

SOURCE: Edward F. Denison , Trends i n American Economic Growth, 1929-1982. (Washington , D.C. : Th e Brookings Institution , 1985) , p . 30 .

Whole economy

(7) 1.5 100 -12 27 20 55 16 18 -3 -3 -7 -10

Nonresidential business

(8)

1.6 100 -25 34

13 68

18 22 -4 -3 -8 -13

Statistical Analyses o f th e Structure o f Growth 37

1

of improvements i n knowledge fo r the period 1948-1973 ; but he finds th e collapse in the rate o f productivit y increas e afte r 197 3 beyon d th e explanator y power o f hi s analyti c system.53 I find hopefu l Denison's effort—an d those of others similarl y engaged—to break open the variou s blac k boxe s i n whic h moder n theorist s hav e blandl y encase d inventio n and innovation. I suspect, however , that a satisfactory explanation of the pre-1973 a s well as the post-197 3 period require s mor e disaggregatio n tha n Denison' s metho d allows . Fo r example, Deniso n explained th e relatively higher productivity performance of Northwes t Europe tha n th e Unite d State s ove r th e perio d 1950-196 2 primaril y i n term s o f th e components o f economie s o f scale . H e associate s thi s tendenc y wit h large increase s i n output of "income-elasti c consumption components." 54 In all conscience thi s is a rathe r awkward an d muscle-boun d wa y o f sayin g tha t Europe move d towar d U.S . pattern s of consumption; tha t is, towar d th e diffusion t o a higher proportion o f the population of the automobile, durabl e consumers' goods , etc. Vi a backward linkages this process mad e fo r the efficien t larger scal e absorptio n o f familiar technologies earlie r applie d massivel y i n the Unite d States . Th e leadin g secto r complexes , whic h expande d disproportionately , both drew capital on a large scale, includin g a high rate of plowback of profits, and used it with th e greates t relativ e efficiency . Th e accelerato r operate d powerfully ; that is , a n expansion of consumption outlays led to rapid increase s i n investment in the sector s with high incom e elasticit y o f deman d an d i n th e subsector s t o whic h they wer e linked . Pu t another way , Wester n Europ e enjoye d an d exploite d i n thi s perio d a n asse t usuall y associated wit h successfu l developin g countries : a larg e backlo g o f hithert o unapplie d technologies. In the vocabulary of the stages o f economic growth , Wester n Europe came—belatedl y but fully—int o the stag e o f hig h mass-consumption. 55 An analysi s o f th e marke d post-197 3 deceleratio n i n America n productivit y i s no t offered here; but I am confident a persuasive treatment requires a great deal of disaggregation including th e impact of the energy price increases o f the 1970 s o n the leading sectors of the boo m o f the 1950 s an d 1960 s via both income an d price elasticities of demand, a s well a s the emergenc e fro m abou t th e mid-1970 s o f the ne w round of technologies wit h quite uneve n initia l rate s o f diffusio n i n Japan, th e Unite d States , an d Western Europe . In short, growt h accounting is a promising method for studying economic progress; but, like mainstream economic theor y an d the statistical morphology of growth of which it is a branch, i t ha s no t ye t develope d a gri p o n th e proces s b y whic h ne w technologie s ar e generated an d diffused .

A Final Reflection My fina l reflectio n o n thi s admirable , highl y disciplined bod y o f statistica l an d analyti c literature is advanced tentatively because it so patently reflects my own biases an d experience. A s a n economi c historia n I am , b y profession , impresse d wit h the uniquenes s of each stor y of national growth, th e large deviation s from averag e behavior of the data that aim t o defin e uniformities , and th e critica l characte r o f th e residua l blac k boxe s tha t statistical method s o f th e greates t sophisticatio n give littl e promise of penetrating . As a development economist , aske d t o analyz e and prescrib e fo r nation s i n ever y developing region, ove r a perio d o f mor e tha n 3 0 years , I kno w fo r certai n ho w essentia l it i s t o examine the uniqu e characteristics of each case rather than to read off prescriptions fro m

372

Growth Analysis Post-1945

statistical averages. An d a critical part of uniqueness can only be established by a detailed knowledge o f th e developin g nation' s history—political , social , cultural , a s wel l a s economic. What follows? In addition to educating our students in what the statisticians in the Colin Clark tradition can provide, economist s shoul d study and teach the histories o f the major economies. Onc e tha t approac h i s taken , th e kind s o f question s that have trouble d th e friendly critic s of Chenery's wor k become answerable: why Egypt's developmen t perfor mance differ s fro m Sout h Korea's; ho w Mason's "cultural , political , an d administrative elements" ente r int o th e developmen t process; wh y technologica l absorptiv e capacit y differs amon g societie s a t differen t period s o f time ; an d wha t and wh y th e sequenc e of absorption fro m th e technologica l backlo g wa s wha t i t was. Is thi s a n impossibl e dream ? I thin k not . I n Par t Fiv e o f Th e World Economy I tel l tersely the story of twenty economies covering about two-thirds of the world's population as of the mid-1970s, perhap s 80 % of gross globa l product. I have no doubt the job coul d be don e differentl y an d better . Bu t I am sur e i t is not a n exaggeration to asser t tha t it is possible t o ge t t o kno w wel l som e suc h grou p o f countrie s an d thei r developmen t histories. Indeed, i t may well be that, with the passage o f time, the analyti c histories of national growth sponsored o r inspired by Kuznets's SSRC project will be valued at least as highly as the assembly of statistics of average behavior. In any case, I believe i t is only by getting to kno w thes e storie s i n thei r uniquenes s and complexity , includin g the critica l rol e o f noneconomic variables , and the sequence s of increasingl y sophisticate d leadin g sector s through whic h th e majo r specifi c technologie s wer e absorbed , an d thei r changin g relationship t o th e worl d economy, tha t we wil l b e abl e t o round ou t ou r knowledg e o f th e growth process and it s dynamics. Now, i t is true, a s thoughtful scholar s and artists have long reminded us, tha t human beings, as well as countries, are unique; but there ar e many fewer countrie s than men , women , an d children ; and i t i s possible t o ge t t o kno w thos e countries containing the bulk of the world's population like old friends. Suc h knowledge will, I a m confident , tel l u s vastl y mor e tha n al l th e averag e statistica l data, eve n dat a manipulated wit h sophistication , tha t w e ar e likel y to b e abl e to mobilize.

17 Development Economics

To quot e agai n Rober t Solow' s sardoni c bon mo t i n anothe r context , developmen t eco nomics in the first half of the 1980s—like growth modeling and the statistical morpholog y of growth—exhibite d som e o f the signs of "bein g ripe for text book treatment." H . W . Arndt se t the ton e wit h his 197 8 Th e Rise an d Fall o f Economic Growth. ' Dudle y Seer s followed alon g wit h hi s "Th e Birth , Life , an d Deat h o f Developmen t Economics " i n 1979 2 The firs t chapte r i n Albert O. Hirschman' s Essays i n Trespassing (1981 ) i s "Th e Rise an d Declin e o f Developmen t Economics." 3 The Twentieth Century Fund commis sioned I. M. D. Little to review the literature on economic development, yieldin g his 198 2 Economic Development: Theory, Policy, an d International Relations —a kin d of critical memorial service—followe d shortl y by Deepa k Lai' s Th e Poverty o f Development Economics.4 In 198 3 the World Bank, sensing that it stood a t some kind of intellectual as well as policy crossroads , reache d bac k t o evoke fro m te n "pioneer s in development" of the 1950s the stor y o f how their views had emerged, thei r retrospective assessmen t o f them, and ho w the y viewe d developmen t problem s an d polic y a s o f th e earl y 1980s. 5 Th e resultant volume contains a historical survey of the emergence o f development economic s by Gerald Meie r a s well as an analytic postscript (if not post mortem) by Paul Streeten o n "Development Dichotomies." 6 And , i n th e mids t o f thi s sens e tha t momentu m an d direction ha d been lost , W . Arthu r Lewis too k not e an d took stoc k with his usual acute , temperate goo d cheer in a presidential addres s before the American Economic Associatio n on December 29 , 1983 , entitle d "Th e Stat e of Development Theory. " It set the stage as follows:7 However defined , Developmen t Economic s i s sai d t o b e no w i n th e dol drums, afte r a couple o f spirite d decades. I t seems t o be true that the subjec t has bee n deserte d b y America n Ph.D . students . Thei r antenna e tel l the m where to find the best jobs. I n this contest, Developmen t Economics no longer competes. Foreig n ai d has been cut , th e multilateral institutions cannot kee p up wit h th e inflation , and th e For d Foundatio n ha s changed it s priorities . Lewis went on gently to remind American economists that their rapid shifts i n fashion an d priority are not universally shared, and that development economics remain alive and well among third-worl d students. The developmen t economists who emerge d i n the post-194 5 years came at the subject from man y directions. Wha t they share d wa s a concer n for polic y rooted, i n turn , i n a

374 Growth

Analysis Post-1945

mixture of moral commitmen t and what might be called historical excitement at the drama of intensified efforts at modernization that began to unfold i n Asia, the Middle East, Lati n America, an d Africa. To a significan t degree th e policy-oriente d aspect s o f th e wor k of the statistica l mor phologists o f growt h and of th e econometric planner s converged wit h issues o f develop ment policy. An d they were draw n to their work by muc h the sam e motive s as the mor e conventional development economists . Bu t there is a distinction to be drawn. The former group aime d t o establis h wha t particula r methods migh t achiev e i n th e analysi s of an d prescription fo r economic growth . The development economists wer e less inhibited . This does not mean they were free of methodological preconceptions or bias. No one is; and the contrary wa s th e cas e fo r a quit e specifi c reason . Fo r almos t al l th e majo r pioneerin g figures, developmen t economic s wa s a kind of second marriage or a liaison conducted in parallel wit h earlier and sometimes ongoing commitments in other directions. In a natural, even inevitabl e way , thes e earlie r professiona l commitment s an d biase s ar e reflecte d i n their wor k o n development . Nevertheless , thei r approache s t o analysi s an d prescriptio n were more direc t an d less rigidly constrained by loyalty to particular methods of analysis. And the y wer e a variegated lot . The y too k hol d of the elephant a t many different points. But ther e wa s als o a n importan t tim e sequenc e i n th e evolutio n o f developmen t eco nomics; and , a s on e woul d expect i n such a n explicitly policy-oriented field , th e cas t of analysis wa s linke d to event s i n th e activ e world.

Six Phases in Development and Development Policy At some ris k o f oversimplification, I would suggest that the stor y ca n be broken int o six phases. First, wartime planning fo r th e postwar. I n additio n t o Folk e Hilgerdt' s Industrialization an d Foreign Trade, thi s phase yielde d three othe r seriou s studies : Paul Rosenstein-Rodan's 194 3 "Problem s o f Industrializatio n o f Easter n an d Southeaster n Europe"8 arisin g fro m hi s wor k a t Chatha m House ; Eugen e Staley' s 194 4 World Economic Development: Effects o n Advanced Industrial Countries, commissione d b y th e International Labou r Office; 9 an d Kur t Mandelbaum' s (later , Martin ) 194 5 Th e Industrialisation o f Backward Areas, a produc t o f a wide r researc h projec t o n problem s o f international reconstructio n initiate d in Oxford by a Joint Committee o f Nuffield Colleg e and th e Institut e o f Statistics. 10 Rodan' s te n page s remai n a justly famou s pioneerin g contribution to the theory o f development, t o whic h we shall return (following, pp. 408 411). Staley' s substantia l monograph, roote d in a research progra m a t the Fletcher Schoo l of La w an d Diplomac y o n "Th e Economic s o f Transitio n an d Adaptation," remain s a remarkably fres h and germane tract for the 1980 s an d beyond. H e addressed a n importan t part o f his wide-rangin g survey, without reference t o Hume or Adam Smith , to the richcountry-poor-country problem . Hi s objectiv e was , i n th e end , t o defin e policie s tha t would yiel d th e greatest mutual benefit to advance d industria l and developing countries . With the assistance o f economists an d statisticians in the U.S. Departmen t o f Commerce , Staley drove hom e wit h a barrage of historical data the first o f the two basic truths Hume had recognized ; i.e. , growt h in less advance d countries leads to an increased demand for imports fro m mor e advance d countries . H e the n analyze d th e processe s o f industria l adaptation required in both groups of countries. His prescription for an "advance d indus -

Development Economics 37

5

trial country," for example, might come fro m a n enlightened Japanese, U.S. , or Western European polic y statemen t of 1989. 11 The basic principles o f a positive adaptation policy suc h as each advance d industrial countr y migh t appl y to advantag e withi n it s own border s are : 1. T o encourag e expansion of the stronge r an d more promising industries and contraction of the weaker and less promising ones (unless the latter, by drastic enough changes in techniques, can so increase their efficienc y and improv e thei r prospect s a s to cease t o be 'weaker ' industries) . 2. T o assist the transfer of workers and capital from less promising to more promising lines . . . . 3. T o protect persons and communities against serious loss of income and employment arisin g out of a reorientation o f production which is in the social interest , but no t to protect the m agains t the necessity of making adjustments. Mandelbaum's study, like Rodan's essay, takes the "backwar d areas" of Eastern and Southeastern Europ e as its focus; i.e., Bulgaria , Greece, Hungary, Poland, Rumania, and Yugoslavia. Bu t his objective—agai n lik e Rodan's—wa s wider: to us e "thi s corner o f Europe" t o explor e th e pathology o f "populatio n pressure , poverty , an d lack o f industries" whereve r the y might be found. 12 Drawing on relationships roughly established by Colin Clark' s Th e Conditions o f Economic Progress an d usin g a circular flow , Leontie f input-output table, Mandelbau m provided a 5-year industrializatio n plan fo r the region . The pla n include s capita l requirement s fro m domesti c an d foreig n sources , tha t woul d absorb excess population a s measured, notably, by concealed unemploymen t in the countryside. Thi s tour d e force wa s achieve d b y excludin g the proble m o f carryin g ou t th e defined polic y objective; by using Marshallian short-period assumption s (e.g., assuming fixed labo r productivit y an d saving s rate) ; an d b y neglectin g changes i n agriculture . Nevertheless, Mandelbaum' s i s a n interestin g pionee r exercis e i n developmen t planning.13 On a large r stage , th e pressur e o f a handfu l o f developin g countrie s represente d a t Bretton Wood s succeede d i n getting "Development " int o th e nam e and concept o f th e World Bank ; the Food an d Agriculture and International Trade Organization s came int o being wit h an agenda o f interest t o developing countries; and, shortl y after th e war , th e regional economi c commission s for Asi a an d th e Fa r Eas t an d Lati n Americ a wer e se t up.14 Despite thes e institutiona l developments , th e immediat e focu s o f postwa r attentio n among th e advance d industria l countries o f th e Atlanti c wa s Europ e and , fo r economi c policy an d economists , th e recover y o f Europe . Thi s preoccupation wa s resented i n th e developing continents; but large parts of the Middle East and Asia were caught up in civil war (e.g. , China ) an d i n variou s mor e o r les s violen t form s o f disengagemen t fro m colonialism. Meanwhile , Latin America was enjoying a phase of favorable terms of trade and wa s a goo d dea l les s voca l than it was to be afte r th e post-1951 relativ e price shift .

The second phase in the evolution of thought and policy on economic development centers on the hinge period 1948-1949, when the setting for policy and thought swung away from European reconstruction toward th e developing regions. A grou p o f quit e independent situation s an d event s converge d t o heighte n th e priorit y accorde d develop -

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376

ment policy i n the United States an d Western Europ e and to enlarge th e cast of character s engaged i n developmen t analysis : • Wit h th e passage b y the Congress o f the Marshall Pla n legislation i n 194 8 and the German currenc y reform , th e recovery o f Wester n Europ e appeare d assured . Th e Anglo-American airlif t appeare d a viable response t o the Berlin blockade impose d by th e Russian s over th e autum n and winte r o f 1948-1949 . • I n Asia , however , Ma o wa s clearl y o n hi s wa y to victor y i n China , an d guerrilla warfare brok e ou t in Malaya, Burma , th e Philippines, an d Indonesia, addin g to the anxiety create d b y th e wa r i n Indochin a that ha d begu n in 1946. • Meanwhile , Indi a an d Pakista n emerge d a s separat e an d independen t state s wit h development evidentl y hig h o n thei r agendas . • Th e shar p U.S . recession o f 1948-1949 , begu n a t th e clos e o f 1948 , induced a relative decline i n basic commodity prices, sendin g a tremor through Latin America and othe r basi c commodit y exportin g areas . All these strands, taken together, shifted , a s it were, both the demand and supply curves for foreig n aid. Just as the Leagu e o f Nations and International Labor Offic e ha d le d th e way wit h wartim e staf f work , th e Unite d Nation s Genera l Assembly , wit h it s globa l constituency, reflected the interests of the less developed countrie s at this critical juncture. The first response came at a wintry meeting in Paris, at the Palais de Chaillot late in 1948. While on e grou p sough t t o kee p th e Sovie t Unio n an d th e thre e Wester n power s i n negotiation over the Berlin blockade, others, including ardent U.N. secretariat members,

lobbied successfull y for a small technical assistance program. O n January 20, 1949 , out of the same broa d setting , came President Truman' s Poin t Four, th e first America n initiativ e in suppor t o f development , als o a technica l assistanc e program . It s broa d purpose s a s stated i n th e spaciou s languag e o f a n Inaugura l Address , fa r outstrippe d th e limite d proposal itsel f and the still more limited action of the Congress. Bu t it clearly constituted a turning point in Western polic y and had a substantial resonance an d influence. I t was also in thi s turning-poin t phase tha t the Worl d Ban k mad e it s firs t loan s t o developin g coun tries: Chile (1948), Mexico an d Brazil (1949). Th e Colombo Plan , an Australian concep t embraced b y Londo n an d th e Commonwealth , wa s se t i n motio n i n 1950 , providing modest bu t useful measure s o f technical assistanc e to a good man y developing countries . A protracted third phase began when momentum in policy was broken by the outbreak of th e Korean War. That war not only yielded a large increas e i n military expenditures i n the United States but also diverted foreig n ai d toward security as opposed to developmen t purposes fo r the better part of a decade.15 Paradoxically it was in this distorted settin g that the mos t creativ e phas e o f thought abou t developmen t and development polic y began . I t ran throug h th e 1950 s an d ca n b e viewe d a s comprisin g thre e elements : concept s an d debates abou t foreig n ai d policy ; developmen t polic y itself ; an d concept s an d debate s about developmen t theory . The accessio n to power i n China of the Communists in October 194 9 and Mao's lean to-one-side polic y o f close associatio n wit h th e U.S.S.R . focuse d high-leve l thought on the economic as well as military and political aspects of containment, yielding thoughtful speeches b y Secretary o f State Dean Acheson on Asia in January and March 1950 , before the outbrea k o f th e Korea n War . A committe e heade d b y Gordo n Gray , reportin g i n November 1950 , examined sympathetically the cas e fo r developmen t assistance outside the framework of military alliances. Nelson Rockefeller's March 1951 report "Partners in

Progress" focuse d o n Lati n Americ a in simila r terms.16

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7

At the United Nations, a succession o f three expert international committees mad e the case fo r enlarged assistanc e to developing countries: National an d International Measure for Full Employment (1949) , i n whic h development ai d appeare d i n a secondar y role ; Measures for Economic Development o f Under-Developed Countries (1951), providing a head-on cas e fo r greatly enlarge d officia l lendin g to developing countries ; and Measures for International Economic Stability (1951) , focuse d o n the poorer developin g countries , including support for measures to reduce basic commodity price fluctuations a s well as to enlarge capita l flow s fro m abroad. 17 Meanwhile, Raul Prebisch, wh o set up shop for the Economic Commissio n fo r Lati n Americ a i n Santiago , Chile , i n 1950 , ha d foun d hi s distinctive voic e a yea r earlie r i n Th e Economic Development o f Latin America an d It s Principal Problems. 18 Given it s relative importanc e in international development policy in the 1950s—sinc e greatly diminished—the United States was the scene of the crucial debate on assistance to the developing regions . Briefly , from th e beginning to the end of the Eisenhower administration (1953-1961) a running bureaucratic and political battle over development policy occurred.19 I t engage d no t only contesting personalities an d agencies withi n the admin istration but als o the Congress, th e press, a wide array of voluntary associations, and , of course, a livel y segmen t o f th e academi c community . Th e debat e wa s b y n o mean s confined t o Americans. Barbar a Ward and P. T. Bauer , for example, wer e distinguished participants at polar ends of the spectrum. Out of the protracted interaction of these groups came a goo d dea l o f wha t migh t be calle d analytic-polic y literature o f whic h the MI T Center fo r International Studies (CENIS) A Proposal: Key t o an Effective Foreign Policy was one example and Bauer's polemic against development assistanc e to India another. 20 In the latter years of the 1950s , under the impact of a complex set of circumstances, th e policy of the Eisenhower administration, in the grip of Hamletian indecision since 1953 , began t o mov e towar d suppor t fo r enlarge d developmen t assistance . A shif t o f person alities withi n the administration , Sputnik, an initial romantic misinterpretation of Mao's Great Lea p Forward , th e cumulative corrosive effect s o n the developing region s of rela tively falling basi c commodity prices sinc e 1951, the acute discomfiture of Vice Presiden t Nixon on a trip to Latin America, and , perhaps, a t the margin, the long-winded doggedness of the development crusaders—al l playe d a part. But the fact i s that before the third phase ended , wit h the inauguration of John Kennedy, the U.S. Developmen t Loan Fund existed, a s wel l a s th e Worl d Bank' s soft-loa n window, the Internationa l Developmen t Association (IDA) , the Inter-American Developmen t Bank , and World Bank consortia in support o f Indi a an d Pakistan . I n addition , Eisenhower , a s a departin g act , perhap s influenced b y the sight of and his reception in India, on his final trip abroad, sen t a budget to the Congress with a 30% increase in development assistance—an act he had refused for 8 years—easin g Kennedy' s task. 21 I woul d underlin e agai n tha t thoug h th e polic y debat e i n th e Unite d State s an d it s resolution, a s th e decad e cam e t o a clos e an d Kenned y cam e t o power , wa s crucial , neither th e debat e nor the policy outcom e wa s purely American . In fact th e trend o f th e 1950s wa s increasingl y t o engag e Wester n Europ e an d the n Japa n i n developmen t aid . That was , fo r example , on e explici t purpos e o f th e Senat e Resolution s o f 1958-1959 , sponsored b y the n Senato r Joh n Kenned y and hi s Republica n colleague Joh n Sherma n Cooper i n suppor t o f sustaine d developmen t assistanc e t o Indi a an d Pakistan . I t wa s reflective o f the trend and the future tha t the three wise men who were sent out to Asia in 1960 b y th e World Ban k in the wak e of the Kennedy-Cooper Resolutio n were a Briton (Oliver Franks) , a Germa n (Herma n Abs) , an d a n America n (Ala n Sproul) ; and, b y

378 Growth

Analysis Post-1945

common consent , Frank s wa s th e leade r o f th e enterprise . A pioneerin g Worl d Ban k international consortiu m arrangemen t followed . The period of intense policy conflict in Washington, yielding a modest positive result at its close , wa s als o th e perio d o f greates t creativit y i n developmen t theory . Hirschma n notes the element of paradox; fo r development policy an d growth rates accelerated i n the fourth phas e a s the "liveliness " o f developmen t economics diminished: 22 The forties an d especially th e fifties sa w a remarkable outpouring of funda mental idea s an d models whic h were to dominate the new fiel d an d to gener ate controversie s tha t contribute d muc h t o it s liveliness . I n tha t eminentl y "exciting" era, development economic s did much better than the object of its study, th e economi c developmen t of the poorer region s o f the world, locate d primarily i n Asia , Lati n America , an d Africa. The fourth phase —the 1960s —was one of activism, progress, and to a degree, disappointment. Wit h the extensio n of Worl d Ban k consortia arrangements alon g line s of th e initial India n model—th e Allianc e fo r Progres s launche d i n Marc h 196 1 i n suppor t o f Latin American development, the diffuse bu t not trivial initiatives of the United Nations Decade o f Development , and , abov e all , Presiden t Kennedy' s eloquen t advocac y o f support fo r development—there wa s a 27% rise in official developmen t assistanc e b y the OECD countrie s betwee n 196 0 an d 1965 , a 35 % increas e b y th e Unite d States . I n th e second hal f of the decade th e OEC D tota l fel l i n part becaus e o f the impac t on aid of th e war betwee n Indi a an d Pakistan , i n par t becaus e th e intensifie d war i n Southeas t Asi a diverted America n resource s an d attentio n from development , notabl y i n th e Congress . Nevertheless, th e flow o f U.S. ai d to Latin America and growth rates there surged , led by Brazil's recover y fro m th e moras s int o whic h i t ha d falle n earlie r i n th e decade . Th e second hal f o f th e decad e als o sa w sharpl y enlarge d relativ e contribution s b y Wester n Europe an d Japa n a s wel l a s a n increase d rol e fo r th e Worl d Ban k an d th e regiona l development banks . A quite substantial group of the intellectual pioneers o f the 1950 s wer e caught up in the exciting bu t sometime s chastenin g experience o f applyin g their theories withi n national governments, internationa l institutions , advisory missions, etc. The fifth phase began with an intellectual revolt against what might be called the orthodox development position of the 1960s that became apolitical revolt from which the international community has still not recovered. The intellectual revolt too k the form of the "basic-human-needs " strategy . It arose, in turn, from two sources. First , an d most important, because in a good many countries high, overall real growth rates wer e accompanied b y considerable mass poverty, b y unemployment an d partia l unemployment , and b y othe r socia l ills . Second , ther e wa s a stran d within th e "basic-needs " movemen t o f limit s t o growt h doctrine ; tha t t o preserv e th e human habitat, growth must stop, incom e b e redistributed, and real income be stabilize d at a level tha t would provide fo r basic human needs. Ther e was also, sometimes , a touch of romanticism about Mao's Chin a and Castro' s Cub a in the expositio n o f thi s doctrine . One o f th e bes t an d mos t luci d articulation s o f th e basic-need s doctrin e cam e i n response to the report of the Pearson Commission: Partners in Development: Report o f the Commission o n International Development (1969). Tha t report , finance d b y th e Worl d Bank, wa s a n effort t o dramatize the need fo r continuing an d even enlarged development assistance a t a tim e whe n politica l suppor t i n th e advance d industria l countrie s wa s weakening.

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The Pearso n Commission recommende d tha t an average growt h target for the develop ing countrie s o f 6 % b e se t fo r th e 1970s ; officia l developmen t assistanc e be targete d a t 0.7% o f GN P fo r th e advance d industria l countries with 20 % allocate d throug h multi lateral agencies ; an d that the terms of ODA be limited to 2% interest (with a 25-40-year maturity). Th e quantitativ e target percentag e o f GNP wa s twice the curren t level. I n that sense, th e Pearso n Commissio n repor t wa s quit e ambitious. The report was reviewed at an international conference organize d by Columbia Univer sity an d hel d a t Williamsburg an d New York , Februar y 15-21 , 1970 . Thes e gathering s yielded a document called th e Columbia Declaration, whic h captures well the themes and mood o f th e basic-need s doctrine: 23 In incomes , livin g standards , economic an d politica l power , one-thir d o f the worl d ha s i n recen t decade s bee n pullin g steadil y ahead , leavin g th e remainder of mankind in relative poverty, i n many cases t o live without clean water, education , basi c medical facilitie s or adequate housing. Yet with modern technology an d existing productive capacity, none of this need continue if mankind woul d develo p th e wil l an d organizatio n t o us e th e resource s a t hand. . . . [n]e w objectiv e criteri a fo r effectiv e developmen t assistanc e ar e required. . . . Criteria are also needed whic h focus on the living standards of the bottom quarter of each country's population. We also suggest setting up of a special fun d devote d specificall y to the fulfillment o f social objectives in the areas o f education , health , famil y planning , rural an d urba n works housing and othe r relate d socia l programs . . . . Performance criteri a should increasingly focus on income distribution, lan d and ta x reform , ineffectiv e trade an d exchange rate policies , siz e of military expenditures, an d th e promotio n o f socia l justice . . . . International powe r mus t increasingl y be share d democratically ; an d thi s objective ca n onl y b e attaine d b y strengthenin g th e rol e o f institution s in which th e developin g economie s hav e a representative vote. This doctrin e wa s no t ignore d i n th e 1970s . Th e Worl d Bank , fo r example , unde r Robert McNamara' s direction , allocate d increase d resource s fo r socia l purpose s an d conducted sophisticate d analyse s o f th e relationshi p o f povert y an d excessivel y skewe d income distributio n to aggregat e an d sectora l growt h rates. A great dea l o f both povert y and abnormall y skewe d incom e distributio n was , i n fact , linke d t o excessiv e rate s o f population increas e an d inadequat e attentio n o f government s t o agricultur e an d t o th e modernization o f rura l life . Inadequat e ta x collectio n an d th e diversio n of governments ' funds t o a variety of dubious subsidies (thus constraining allocations for health, education, and othe r importan t socia l purposes ) als o playe d a role . Where birthrate s wer e rapidly declining and agricultural productivity and the moderni zation o f rural life take n seriously , the lowest 20% of the population received proportion s of total income comparabl e t o distribution patterns i n advanced industrial countries; e.g., South Kore a an d Taiwan. Despite thes e deepe r force s tha t largel y determined th e socia l outcom e i n developin g nations, th e ris e of th e basic-human-needs doctrine undoubtedly le d to som e reallocation of nationa l an d internationa l development resources and , perhaps equally important , to intensified analyse s of th e anatom y of povert y i n developin g countries . But th e fac t i s tha t durin g th e 1970 s th e government s of th e advance d industria l countries rejected not only the hig h objectives and demand s of the Columbia Declaration

380 Growth

Analysis Post-1945

but also the targets of the Pearson Commission report. The proportion o f collective OEC D GNP allocate d t o ODA remained , essentially , static: it was .34 % i n both 197 0 an d 1979 . This outcome—par t o f th e fift h phase—wa s th e resul t o f a sequenc e o f traumati c events i n th e worl d econom y an d i n North-Sout h politica l relations: • Th e breakdown of the Bretton Woods system followed by the explosion of grain and then oi l prices i n the period 1971-1974 . • Th e consequen t phas e o f stagflatio n i n th e OEC D worl d definitivel y endin g th e protracted boo m o f the 1950 s and 1960s , diverting also the attention of economist s of th e Nort h awa y fro m developmen t t o problems neare r home . • A brie f phas e o f euphori a amon g a good man y economist s an d politicians o f th e South base d o n the hop e tha t the transient success o f OPEC i n diverting enormous resources fro m th e Nort h vi a th e ris e i n th e oi l pric e migh t b e repeate d i n othe r sectors. Thi s reached it s peak i n the April 197 4 cacophonou s special session o f the United Nation s Genera l Assembly . Th e moo d quickl y gave wa y t o sobe r secon d thoughts as it became apparent that the oil-importing countries of the South were the major victim s of hig h oil price s a s wel l a s the shar p depression impose d b y thos e prices o n the North. But this interval left behind its legacy in the form o f heightened emphasis o n th e Ne w Internationa l Economic Orde r (NIEO) , a n enterpris e whic h proved peculiarl y sterile—eve n counterproductive—ove r th e nex t generatio n o f North-South diplomacy . • Developmen t i n a goo d man y countrie s o f th e Sout h wa s nevertheles s carrie d forward b y thei r ow n resources , supporte d b y continue d purposefu l effort s i n a rather distracted internationa l community by the World Ban k and the Latin Ameri can an d Asia n developmen t banks ; but, even more , b y radically expande d privat e lending b y th e bankin g syste m o f th e Nort h base d o n th e transfe r o f exces s pe trodollars tha t coul d no t b e productivel y investe d i n th e rathe r sluggis h OEC D economies. The sixth phase was launched with the second oil shock of 1979—1980 stemming from the Iranian revolution. Th e excessiv e ris e i n oi l prices an d subsequen t radica l declin e dried u p the flow o f petrodollars a s a basis o f private lendin g to the South ; and the shar p deceleration o f the OEC D economie s an d hig h U.S . interes t rates furthe r attenuate d th e capacity o f som e importan t economie s o f the Sout h t o maintai n import level s consisten t with high growt h rates. I n this setting of chronic crisis fo r some, slo w growth or anxiety for al l but a few others , th e internationa l developmen t polic y agend a wa s dominate d b y unsustainable debts, risin g protectionism i n the OECD countries, an d other urgent specific problems. As Hirschma n an d mos t other s wh o hav e reflecte d o n th e evolutio n o f developmen t theory observed , th e 1970 s and 1980 s di d not generate muc h that was new and vital. Bu t there wer e tw o quite distinct—even conflicting—element s in the literature: a heightened effort b y dependenc y theorists , focuse d o n th e allege d dominanc e o f th e industrialized "core" over the less-developed "periphery, " to drive home their quasi-Marxist proposi tions; an d a progressiv e disabus e wit h centra l economi c plannin g an d a symmetrica l heightening o f respec t fo r th e virtue s o f allocatio n and pricin g via competitiv e markets. The forme r stran d wa s strengthene d b y frustration s o f som e developin g countrie s wit h debt burdens , a s wel l a s slo w growt h and risin g protectionis m in th e OEC D world ; th e latter, b y gatherin g lesson s o f painfu l experienc e i n bot h socialis t an d nonsocialis t societies, a s wel l a s th e palpabl e increas e i n th e difficult y o f plannin g intelligentl y a t th e

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1

Table 17.1. Averag e Performanc e o f Industria l an d Developin g Countries, 1965-198 5 (average annua l percentag e change ) Country grou p 1965-197

3 1973-198

Industrial Countries GDP 4. Inflation rate " 5. Real interest rateb,c Nominal lendin g rate c 5. Developing countries GDP growth Low-income countries Africa 3. Asia 5. Middle-income oi l exporters 7. Middle-income oi l importers Major exporter s of manufacture s 7. Other oil-importin g countries 5. Export growt h 5. Manufactures 11. Primary good s 3. Import growt h 5.

0 1980-198

5

7 2. 1 8.

8 2. 3 -0.

2.5 8 8.

0.7 4 12.

2 3 6.7 0

6.6

5.4

3.3

9 2. 9 5. 1 5.

7 0. 0 7. 8 1.

9 8 4

6 5. 4 4. 0 4. 6 13. 8 1. 8 5.

9 2. 5 1. 6 4. 8 7. 1 1. 9 0.

1 7 1 9 4 9

NOTE: Projecte d growt h rate s ar e base d o n a sampl e of ninet y developin g countries. aIndustrial countries' weighte d GDP deflato r expressed i n U.S. dollars . Inflation i n the United State s i s 3.0% per yea r i n the High cas e an d 5.7 % i n the Lo w case . Bu t fo r the industria l countries as a whole, it is higher i n dollars because of a n assumed depreciation o f th e dolla r betwee n 198 5 an d 1990 . b Average for 6-month U.S. dolla r Eurocurrency rates deflated b y the rate of change in the GDP deflato r of the United States. c Average annua l rate . SOURCE: Worl d Bank , World Development Report, 1986, p . 43 .

national leve l a s many countries move d int o the increasingly diversified and sophisticate d sectors o f th e driv e t o technologica l maturity . Nevertheless , developmen t itsel f di d no t stop. I woul d not e her e thre e powerfu l trends : th e hig h momentu m o f th e 1970 s a s wel l a s 1960s that too k th e mor e advance d developin g countrie s beyond takeof f int o the drive t o technological maturity , ("middl e income " leve l i n Worl d Ban k parlance , Table s 17. 1 and 17.2) ; the dramatic expansion o f technological absorptiv e capacity reflected in data on education (Tabl e 17.3) ; an d the evidently enlarged capacit y o f some developin g countrie s to produc e an d expor t competitivel y increasingl y diversifie d an d sophisticate d manufac tures (Tabl e 17.4) . I n addition, le d by India and China, som e developing countrie s came , at last, t o understand th e critical role of agriculture i n modernization an d radically altere d farm polic y wit h remarkabl y positiv e results . Thes e table s sugges t th e divisio n i n th e developing worl d betwee n countrie s tha t hav e move d beyon d takeof f int o th e driv e t o technological maturit y an d thos e tha t hav e no t ye t mad e i t into takeoff .

Development Pioneers The literatur e o n economi c developmen t tha t burgeoned after 194 5 i s so extensive that, I will take as more or less representative nine of the ten "pioneer s in development" chose n for th e Worl d Bank' s firs t volum e thus entitled.24 Th e arbitrarines s of the Bank' s initia l

v Table 17.2. Growt h o f GDP per Capita , 1965-198 5 (average annua l percentage change ) Country grou p 1965-197

3 1973-198

Industrial countries Developing countrie s Low-income countries Africa Asia Middle-income oi l exporter s Middle-income oi l importer s Major exporter s o f manufactures Other oil-importin g countries

3.7 4.0 3.0 1.2 3.2 4.5 4.5 5.2 2.8

0 1980-198

5

2.1 32 2.7

1.7 1.3 5.2

-0.1

-2.0

3.0 3.1 3.2 3.7 2.1

5.9

-1.1 -0.1 0.2

-0.8

NOTE: Projecte d growt h rate s ar e base d o n a sampl e of ninet y developin g countries. SOURCE: Worl d Bank , World Development Report, 1986, p . 45 .

selection is suggested by the fact that dissatisfaction wit h those left out of the first volume resulted i n a second , featurin g an additiona l five "pioneers. " This mean s tha t I wil l not dea l a t any lengt h (o r at all ) with a good man y economists who contribute d importan t strand s to th e developmen t literature . There was, fo r example, Jaco b Viner , who not only argued, a s might be expected, the fundamental importanc e o f agriculture and foreign trad e in development but also brought to bea r a les s remembere d stran d i n the classics : a passionat e Marshallia n revolt agains t poverty includin g th e memorabl e statement : "Th e firs t requirement s fo r hig h labou r productivity unde r moder n condition s ar e tha t th e masse s o f th e populatio n shal l b e literate, healthy , an d sufficiently wel l fed to be strong and energetic."25 On trade there is also the wor k of Hl a Myint arguing elegantly fo r the importance of exports o n "ven t for Table 17.3. Secondar y an d Highe r Educatio n in Developin g Nations: 1960 an d 198 2 Number enrolle d i n Numbe secondary schoo l a s educatio percentage o f ag e group populatio

1960 198 Low-Income Economies 15 India 2 China —

% 30 03 3

2 196

r enrolled i n higher n a s percentag e o f n aged 20-2 4

0 198

%3 05 5—

%4 9 1

2 %

Lower-Middle-lncome Economies 1

03

54

1

0

Upper-Middle-Income Economies 2 Republic o f Kore a 2 Brazil 1 Mexico 1 Argentina 2 Hong Kon g 2 Singapore 3

05 78 13 15 35 06 26

15 96 22 44 91 75 61

1 2. 1 1 42 1 0I

4 4 2 5 5 1 I

Industrial Market Economies 64

% 85

% 16

SOURCE: World Bank Development Report, 1984, pp . 266-267 , an d 1986 , pp . 236-237.

% 37

%

Table 17.4. Change in Trade in Developing Countries, 1965-198 5 (averag e annual percentage change)

Country grou p Developing countrie s Low-income countrie s Africa Asia Middle-income oil exporters Middle-income oi l importer s Major exporter s o f manufac tures Other oil-importin g countrie s

1965-1973

1973-1980

1980-1985

1965-1973

1973-1980

5.0 1.9 4.6 0.6

4.6

11.6 2.3 5.4

9.2

1.3 6.8 0.0 9.0 10.6

4.1 5.0 -1.5 6.6 1.2 5.6 5.9

10.7 15.5 15.6

13.8 8.3 2.0 8.7 8.0 15.3 15.9

2.4

3.5

4.3

14.8

9.1

4.3 7.1

5.4

Exports o f primar y : goods

Exports o f manufacture s

Exports o f good s

2.0

1980-1985

1965-1973

7.0

3.8 1.6 4.5 -0.6 4.2 3.8 5.5

13.0

1.2

7.9 7.4

-2.1

7.8

15.4

7.4

1973-1980

Imports of goods

1980-1985

1965-1973

1973-1980

1980-1985

5.9 6.1 2.1

3.3 3.8

-0.1 2.8 3.6

5.8 0.8 3.4 -0.5 3.7 8.0 9.6

4.8

0.9 5.9 -3.0 8.2 -2.0 0.9 1.1

2.4

1.4

3.6

4.3

0.0

1.1 3.6 1.2 5.2 -0.4

1.4

3.1 -1.5 5.4

7.7

9.1 4.7

NOTE: Historica l growt h rate s o f volum e o f internationa l trad e reflec t revision s i n the nomina l trad e figures , a s wel l a s revisions i n the methodolog y o f calculatin g trad e deflators . SOURCE: Worl d Bank , World Development Report, 1986, pp. 48-49 .

384

Growth Analysis Post-1945

surplus" rather tha n comparative-costs grounds. 26 The n ther e was Ragnar Nurkse's cas e for balance d growt h rooted i n J. S . Mill' s interpretatio n o f Say's Law. 27 J. R . Hicks' s A Theory o f Economic History i n a different way als o deal s wit h how traditiona l societie s become modern, usin g the primal case o f Great Britain . In firs t approximatio n h e make s the transition from handicraft to modern manufactures with a comfortable mainstream (but also Marxist ) economist' s distinction . He argue s tha t it i s the ris e i n the relativ e impor tance o f fixe d relativ e t o workin g capita l an d th e increase d rang e o f th e forme r whic h defines "th e chang e w e ar e considering." 28 Bu t h e the n bring s himsel f u p short: 29 "Surely there i s something more. " It turns out to be science . Th e fou r bes t page s i n the book (i n m y view ) the n follo w a s a first-rat e mainstrea m theoris t wrestle s wit h th e problem mos t o f them ignore : th e links between science , invention , and innovation . The result i s indecisiv e an d no t wholl y convincing . Bu t i t i s a memorabl e moment . There were , o f course, a good man y others wit h distinctive things to say. The objectiv e point t o be made her e i s that the author's—an d n o doubt the reader's—consciousness o f what i s lef t ou t o f thi s portio n o f th e boo k reflect s a fac t o f som e significance : th e flowering o f theories o f development i n the 1950 s an d 1960 s yielde d the riches t bod y o f growth literatur e sinc e th e eighteenth century . Although th e nin e officially but arbitraril y chose n "pioneers " d o no t represen t a ful l spectrum, the y constitut e a reasonabl e sample . Tabl e 17.5 , presente d i n th e sam e onl y semi-serious moo d as Table 1.1 , suggest s a few limited aspects o f their professional lives . Table 17.5. Nin e "Pioneers o f Development "

Name

Date o f firs t Date o f publicatio n on birth developmen t

P. T . Baue r

Colin Clar k 190 Albert O . Hirschma n 191

1915

5 5

1946

1940a 1958b

W. Arthu r Lewi s

1915

1944

Gunnar Myrda l Raul Prebisc h

1898 1901

1955 195 l d

Paul N . Rosenstein Rodan Hans Singe r

1902

1943

1910

1949

Jan Tinberge n

1903

1958

Pre-Development interest s Rubber industr y in Southeast Asi a an d organiza tion o f trad e i n British West Africa . National incom e estimate s Postwar reconstructio n o f Western Europ e History o f worl d econom y since 1870 c Welfare Economic s Neoclassical economic s Conventional economi c the ory U.K. distresse d areas , 1930s; welfar e economic s Econometrics; Economi c planning i n postwa r Eu ropee

Developing countrie s o f influence Malaya an d Wes t Afric a

India (1928 ) Colombia (1952-1956 ) Jamaica an d Caribbea n India Argentina an d Lati n America Eastern an d Southeaster n Europe Northeast Brazil India (1951) ; Turkey, Egyp t

"Conditions o f Economic Progress writte n 1935-1939 . b Interest begin s a s resul t o f 195 1 conference . c Concurrent wit h developmen t interests d Advocated Argentin e industrializatio n a s Unde r Secretary of Finance , 193 0 1932 , otherwise "firm believe r in neoclassical theories." Developmen t views first publishe d i n 1950-195 1 ECI- A studies . e Development interes t foreshadowed by 194 2 paper o n tren d movements.

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5

Table 17. 5 underline s a fe w characteristics , o f uneve n importance , perhap s wort h noting: • Coli n Clark is the only economist born in Great Britain; although at least four other s were strongl y influence d by British economists an d economics o f the 1930s . Ther e is n o America n amon g th e nine. • O n the whole, developmen t economic s wa s not the central interes t of the members of th e grou p i n Schumpeter' s critica l third , "sacre d decade" ; althoug h Arthu r Lewis, wit h his 194 4 economi c pla n for Jamaica, i s an exception an d Peter Bauer comes clos e with his Colonia l Offic e studie s of the rubber industr y in Malaya and trade i n Britis h West Afric a begu n in the 1940s . • I n virtually every case, on e can trace a strand of continuity between each pioneer' s later perspectiv e o n developmen t an d hi s prio r professiona l interest , hi s initia l experience i n particula r developing countries , o r both. • Withou t exceptio n th e problem s directl y observe d i n th e developin g countrie s of initial interest wer e those o f preconditions for takeof f o r of takeoff itself . This fac t left definabl e mark s on th e pioneers ' variou s development theories ; bu t severa l o f those wh o staye d wit h the fiel d o f development economic s generate d proposition s relating t o th e post-takeof f stage—th e driv e t o technological maturity . Against thi s general background , note s follo w o n each o f th e pioneers in alphabetica l order. Becaus e hi s approac h t o developmen t wa s mor e general , cover s mor e variables , and is more explicitl y grounded in classical growt h theory an d economic history , Arthur Lewis is treated a t somewhat greater length than the others. But in all cases, th e purpose is not t o writ e a definitive scholarly essay . I t is , first , t o evok e somethin g of each econo mist's uniqu e approach t o development, an d to indicate briefly a view of his contribution from m y ow n quit e arbitrar y perspective .

P. T. Bauer The lin k between a formative experience i n developing regions an d subsequent development doctrine i s nowhere more luci d than in the case o f Peter Bauer. He observed closel y and over substantial periods o f time the positive effects o n the real income of the inhabitants o f rubbe r growin g in Malaya an d the raising of cocoa an d other cash crops i n Wes t Africa. H e observe d als o th e flexibility and resilience o f the trading networks tha t oper ated i n those places. Al l this pu t him in head-on oppositio n t o what he regarded a s "th e tenets o f the developmen t orthodox y o f the 1950s, " whic h he defines a s follows: 30 External trade i s at best ineffective for the economic advanc e of less devel oped countries (LDCs) , an d more ofte n i t is damaging. Instead , th e advanc e of LDC s depend s o n ampl e supplies o f capita l t o provide fo r infrastructure, for th e rapid growt h o f manufacturin g industry , and fo r the modernizatio n o f their economies an d societies. The capital required cannot be generated i n the LDCs themselve s becaus e o f th e inflexibl e and inexorabl e constraint o f lo w incomes (th e viciou s circl e o f povert y an d stagnation) , reinforce d b y th e international demonstratio n effect , an d b y th e lac k o f privatel y profitabl e investment opportunitie s in poor countries with thei r inherently limited local markets. Genera l backwardness , economi c unresponsiveness , an d lac k o f enterprise ar e well-nigh universal within the less developed world . Therefore,

386 Growth

Analysis Post-1945

if significan t economi c advanc e i s t o b e achieved , government s hav e a n indispensable a s well a s a comprehensive rol e i n carrying throug h the critica l and large-scal e change s necessar y t o break dow n th e formidable obstacles t o growth an d t o initiat e and sustai n the growt h process . By this route, going to war against his private definition of orthodoxy, Baue r became an ardent polemicist : first , i n an assault on th e marketin g boards o f the lat e Britis h colonia l era in West Afric a taken over by the postcolonial governments . H e regarded thes e board s as instruments of taxation to finance graft an d low-productivity government expenditures. He the n move d o n t o becom e th e leadin g intellectua l opponen t o f foreig n ai d an d o f virtually any public intervention in the market process, eve n wit h respect t o limitation of family size . In conducting hi s polemics, Bauer' s metho d ha s been t o isolate hi s targets b y name, if possible, an d to go after them hamme r and tongs, usin g where available, selected quota tions that incorporate th e offending view s in their most egregious an d attackable form. He developed a galler y o f favorit e villains : Kwame Nkruma h (fo r hi s feckles s an d wastre l economic policies) ; Juliu s Nyerere (fo r hi s creatio n o f a low-productivit y collectivize d agriculture); Professo r P . C . Mahalanobi s and the India n Second Five-Yea r Pla n (fo r its exaggerated emphasi s on expansion of the capital goods industries) ; perhaps above all, the designers an d supporter s o f th e Ne w Internationa l Economic Order , whic h incorporate s just abou t all the major economic an d political doctrines and attitudes that Bauer despises . I should not e that among his villains are the "MI T developmen t economists," of whom I was on e i n th e 1950s ; an d h e i s quit e correc t i n hi s judgmen t tha t althoug h w e als o disagreed wit h most o f hi s othe r villains , our imag e o f th e developmen t proces s an d a n appropriate developmen t polic y differe d substantiall y fro m his . High-value plantatio n agricultur e i n Malay a an d Wes t Afric a wa s not , o f course , a sufficient bas e fo r generalizing a satisfactory theory of and program for development. Bu t there are , evidently , seriou s an d correc t insight s in th e Baue r position; fo r example , th e shrewd an d quic k responsivenes s o f farmer s t o incentive s an d disincentives , the superi ority o f competitiv e privat e ove r publi c tradin g systems . And , lik e a numbe r o f hi s contemporaries, h e cam e increasingl y t o appreciat e th e tendenc y o f politic s an d powe r in developin g (a s i n developed ) countrie s t o enjo y highe r priority tha n economi c prog ress. As a development theorist , Baue r exhibited an awarenes s o f two kinds of complexity : the complexity o f interactions within the economic system , and the complexity of interactions among th e economic, social, an d political sectors of society. An d there are asides in his wor k tha t reflec t a n awarenes s o f th e powe r o f tribe , race , caste , an d cultur e i n economic arrangements , notabl y in dealing wit h Afric a an d India. Hi s knowledge o f th e other developin g region s appear s thin . But Bauer never organized hi s more subtl e perceptions about societie s a s a whole and related the m systematicall y t o the economic process . There is a gap between the market economist and the wider but somewhat casual commen tator o n th e huma n condition . I n th e end , Baue r seeme d mos t comfortabl e a s th e neo classical gadfl y on the rump of what he regarded a s the international liberal establishment. As I wrote on another occasion:31 "I f Professo r Baue r did not exist i t would have bee n useful t o inven t him . . . . Surely , issue s a s inherentl y comple x a s growt h theory an d policy, a s ramifie d i n thei r linkag e t o politics , an d a s emotionall y charged , neede d a devil's advocate. " O n th e othe r hand , h e faile d t o tak e adequatel y int o accoun t th e extremely larg e an d inescapabl e rol e o f th e stat e i n earl y phase s o f developmen t i n

Development Economics 38

7

providing infrastructur e investment an d a rapidl y expandin g educational system ; i n en couraging enlarge d agricultura l outpu t an d foreig n exchange ; an d i n stimulatin g th e emergence o f a competen t corp s o f private industrial entrepreneurs. Colin Clark I have alread y note d th e oblique an d somewhat casua l way Colin Clark move d fro m hi s absorbing wor k o n Britis h nationa l incom e statistic s t o pic k u p an d carr y forwar d Marshall's unfulfille d drea m with his Conditions of Economic Progress (1940, 1951) . Hi s first pre-1939 vicarious acquaintance with the problems of a developing country was with India (vi a Austi n and Joan Robinson an d V. K . R . V . Rao) ; an d his first direct, on-the ground experienc e wa s als o wit h India, a s h e responde d i n 194 7 t o a n invitatio n of th e Indian Planning Commission to report on that country's prospects fo r economic develop ment. Hi s subsequen t direct knowledg e wa s almos t wholl y derived fro m visit s t o India and othe r countrie s o f th e subcontinent. As i n hi s wor k o n nationa l income , Clark' s controllin g objectiv e a s a developmen t economist wa s to enlarge an d classify empirical knowledge. 32 I n fact, h e took th e some what eccentri c vie w tha t "ther e i s roo m fo r tw o o r thre e economi c theorist s i n eac h generation, no t more. " Thi s inne r commitmen t evidentl y di d no t preven t Clar k fro m producing theoretical and speculative hypotheses about the determinants of the investment rate, th e cause s o f busines s cycles , an d trend s i n relative prices an d the term s o f trade . Similarly, despite the extraordinary energy and labor required to assemble, render roughly comparable, an d analyz e i n forma l statistica l term s th e dat a incorporate d i n th e tw o editions o f the Conditions o f Economic Progress, Clark generated original , often contro versial propositions abou t development. I n his own way he was as much of a dissenter as , say, th e self-proclaime d dissenter , Alber t Hirschman . Clark di d not construct a general theory of economic growt h and development. I t was not his style . Bu t it would not be difficult t o link the following five substantiv e propositions int o a reasonabl y coheren t an d unifie d theoretica l framework. 1. Increasing returns an d th e public-sector role i n development. Coli n Clar k wa s rooted i n Pigou's welfar e economics , base d i n turn on Marshallian analysis. Ou t o f that tradition came , fo r example , G . T . Jones' s excellen t 193 3 study , Increasing Return, 33 with which Clark ha d a n important editorial connection. Thus , i t was natural for Clark to argue a point tha t als o figure d significantly in the germina l proposition s o f Paul Rosen stein-Rodan; namely, tha t the existence o f increasing returns may compromise th e universal cas e fo r competitiv e privat e capitalis m i n bot h foreig n an d domesti c economi c policy.34 What break s dow n th e laissez-faire argumen t is that economic fac t which has also been one of the principal sources of the world's enrichment—namely the existenc e o f Increasin g Returns . . . . With Increasing Returns a valid case may arise for economic nationalism or protectionism. . . . [U)nder certain circumstance s a country can enrich itself by interferin g wit h th e laissez-faire flo w o f internationa l trad e i n orde r t o build u p increasing-returns industries. . . . There i s no case for introducing public ownership or control into industries where competition is already functioning freel y withou t causing the majorit y of businesse s to operate below average cost unless we have good grounds for

388 Growth

Analysis Post-1945

believing tha t markedl y increasin g return s coul d b e obtaine d b y organisin g businesses o n a scal e s o larg e a s to be beyon d th e reac h o f an y conceivabl e competitive enterprise . 2. Agriculture an d Industry i n Economic Development. Clark , mor e tha n mos t o f th e pioneers, ha d a livel y sense o f wha t agriculture was al l about . Hi s comparative stud y of agriculture i n developing region s bega n a s early a s 193 5 an d continue d over th e nex t 2 0 years an d beyond . I n hi s Pioneers essay , fo r example , h e quote s with evident relis h th e rather surprisin g view s o f Mahatm a Gandhi: 35 Gandhi (nobod y wil l believ e this ) prove d t o b e a convince d free-marke t economist, strongl y critical o f th e price controls , rationing , an d compulsory purchase o f far m crop s whic h th e Nehr u governmen t wa s the n introducing . The righ t solution , h e said , wa s t o rais e th e pric e o f food , the n everyon e would have to work harder. Th e source of India's trouble s was that the peopl e were thoroughl y idle . Clark als o attack s the views of those wh o misread th e operational meanin g of the declining proportion o f the working force in agriculture with a rise in per capita incom e to mean that the expansion of industrial employment (and neglect o f agriculture) "would automatically enrich the country. " 36 An d in further thinly disguised attack on the Indian scientisteconomic planne r o f the 1950s , P . C . Mahalanobis , h e observed, whe n his opinion wa s sought, tha t th e questio n o f whethe r Indi a shoul d expan d it s stee l capacit y wa s " a problem i n comparative religion." 37 Clark' s positiv e view , whic h had evolved i n quasimathematical form by the early 1960s , was that improvements in agricultural productivity were a necessary conditio n fo r industria l development. 38 Both internationa l comparisons an d time series indicate d that a rising propor tion of the labor force i n nonfarm occupations was only possible if agricultural productivity no t onl y rose , bu t ros e a t a n increasin g pace . . . . Th e onl y exceptions wer e whe n a developin g countr y coul d produc e wha t we labele d "food substitutes"—minera l o r fores t products , o r occasionall y manufac tures, whic h coul d b e exporte d t o worl d markets—an d woul d brin g in foo d imports whic h could partiall y substitut e for th e productivity of th e country' s own agriculture . . . . Yo u canno t emplo y a n industria l populatio n i f yo u cannot feed them. In addition, economic developmen t necessitates a n increasing volum e o f import s (thoug h man y planner s see m t o hav e neglecte d thi s issue). Thes e hav e t o b e pai d for , an d i n mos t developin g countrie s (apar t from th e exception s mentione d above ) th e onl y possibl e export s ar e agri cultural products . 3. Idle Agricultural Labor. On e o f Clark' s mos t iconoclasti c view s wa s tha t i n low productivity agricultura l countries ther e was , excep t seasonally , n o surplu s labor. Wit h respect t o China , fo r example , th e dat a showe d th e norma l situatio n wa s on e o f labo r shortage excep t fo r th e col d month s o f Decembe r an d January: 39 "Afte r all , t o pu t i t simply, if you are going to cultivate a country the size of China with hand hoes—very fe w draft animal s and stil l fewe r tractor s wer e available—yo u are goin g to need th e labo r of something lik e 600 million people." H e cites the cost t o production and collection of the harvest by diversion of farm labo r to industrial activity in the Great Leap Forward of 195 8 as a dramati c demonstration o f a widesprea d fallacy .

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4. Th e Maximum Rate o f Increase i n Nonfarm Employment. On e engagin g charac teristic o f Coli n Clark' s professiona l performanc e is th e eas e wit h whic h he underlines prior error . H e estimate d i n th e earl y 1950s , fo r example , primaril y o n th e basi s o f historical dat a o n Japan , tha t th e maximu m sustainabl e rat e o f increas e i n nonfar m employment wa s 4% per annum. He later pointed out that the estimate proved "muc h too cautious," citin g a stead y 8 % rate i n the Republi c o f Korea. 40 5. Population. Perhap s the most controversial of Clark's positions is the view to which he cam e i n th e post-194 5 year s tha t a hig h rat e o f populatio n growt h coul d b e advan tageous t o the rate of growth in the real incom e per capita in a developing country. I n the 1940 editio n o f Th e Conditions o f Economic Progress hi s vie w wa s tha t a hig h rat e o f population increas e wa s "disadvantageous " i n a poo r agricultura l country. 41 I n th e course o f the 1950 s he came to see some advantages in a high rate of population increase , no doub t enjoyin g yet anothe r assaul t o n the conventiona l wisdom: 42 Nearly everyone then, as indeed most people now , tended to regard population growt h as an adverse factor. .. . A fundamental assault on this position was first mad e by Everett Hagen at the 195 3 conference of the Association for Research o n Incom e an d Wealth . . . . Internationa l comparison s indicate d that geographical density of population on the one hand, and its rate of growth on th e other , bot h tende d substantiall y t o reduc e per-hea d capita l requirements. . . . Hagen made a further importan t point. Rapidly growing population has the effect, t o use his curious phrase, o f "absolving " the country from th e consequences of errors i n investment. . . . But with growing population a mistaken piece o f physica l investmen t i s muc h mor e likel y t o fin d a n alternativ e us e than in a stat e of stationar y population . Colin Clar k will be primarily remembered, a s he would probably wish , for his extraor dinarily bold, resourceful , an d industrious pioneering in both national income and growth analysis, the bulk of which was ' 'left entirel y to the unaided efforts o f a single individual with a number of duties to perform, the only clerical assistanc e available being that which he cared t o pay himself." 43 A polar opposit e t o the postwar mainstream economists, h e remained loya l t o Franci s Bacon' s dictu m o n th e titl e pag e o f th e firs t editio n o f Th e Conditions o f Economic Progress: "I t canno t be that axiom s establishe d b y argumentation can suffic e fo r the discovery o f new works, for the subtlety of nature exceedeth man y times over the subtlety of argument.'' Bu t his work was no body of shapeless empiricism . The question s h e aske d o f the dat a arose directl y fro m th e lin e of Marshall and Pigou — and Keyne s a s well , wh o "i n revivin g th e Malthus-Ricard o controvers y calle d i n th e nineteenth centur y to redress th e balance of the twentieth." 44 But his revolt extende d t o Adam Smith as well as Ricardo. I n Clark's view, they had, between them, "twiste d out of shape" the fiel d of economics tha t "wa s starte d on the right lines by Gregory Kin g and Sir William Petty at the time of that astonishing flowering of the English scientific spirit in the later seventeent h century." 45 It is certainly with the great political arithmeticians that Colin Clark belongs. An d like them, his objective was large and practical:46 "T o fin d th e conditions unde r which we ca n hop e for th e greates t degree o f economic progress i n the future." Bu t i n pursuin g this objective , h e understoo d a s a welfar e economis t i n th e Cambridge tradition not only the complexities of measurement that he confronted bu t also the inescapabl e hierarchy of values—philosophica l and religious, ethical and political— that frame d an d properl y controlled welfar e consideration s in al l societies. 47

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Albert Hirschman Hirschman, i n the first Worl d Ban k Pioneers volume , proclaim s himself a dissenter. Hi s essay i s entitle d " A Dissenter' s Confession : 'Th e Strategy of Economi c Development ' Revisited." Hi s stanc e se t m e t o reviewin g the othe r nin e essays i n the volume . I n on e sense o r another , al l his co-authors of the major essay s also regar d themselve s as dissenters. It is, therefore , importan t to define precisely against what Hirschman thought he was dissenting. Hi s ow n descriptio n i s th e following: 48 I .. . sa w myself a s a rebel agains t authority, as a second-generation dissenter fro m th e proposition s that , whil e being themselve s nove l an d hetero dox, wer e rapidl y shapin g u p i n th e 1950 s a s a new orthodox y o n th e prob lems o f development . . . . Viewe d i n perspective , m y dissent , howeve r strong, was in the natur e of a demurrer within a general movemen t of idea s attempting t o establis h developmen t economic s a s a new fiel d o f studie s and knowledge. M y proposition s wer e a t least a s distant fro m th e ol d orthodox y (later called neoclassica l economics ) a s fro m th e new. But wha t wa s th e "ne w orthodoxy?" I t turned out t o be th e guidance h e received fro m World Ban k headquarter s whe n h e firs t wen t t o Colombia , wher e h e wa s Financia l Adviser t o th e Plannin g Board an d then privat e consultant in 1952-1956: 49 . . . [W)or d soo n cam e fro m Worl d Ban k headquarters that I was principally expected t o take , a s soo n a s possible , th e initiativ e i n formulatin g som e ambitious economi c developmen t pla n that woul d spell ou t investment , do mestic savings , growth , an d foreig n ai d target s fo r th e Colombia n econom y over the next few years. Al l of this was alleged t o be quite simple for expert s mastering th e ne w programmin g technique : apparentl y ther e no w existe d adequate knowledge , eve n withou t close stud y of loca l surroundings , o f th e likely ranges o f savings and capital-output ratios, an d those estimates, joine d to th e country' s lates t nationa l incom e an d balanc e o f payment s accounts , would yield all the key figures needed . I resisted being relegated to this sort of programming activity . In on e sense , then , Hirschman' s dissen t fall s int o th e classi c mol d o f a man i n the fiel d reacting agains t instruction s from th e ill-informed , insensitive center—on e o f th e trul y eternal aspect s o f bureaucrati c history. 30 The substanc e o f Hirschman' s dissentin g doctrin e i s familia r and , in th e end , quite simple—by n o means a demerit. He perceived tha t what might be regarded a s elements of irrationality o r distortio n (o r lac k o f balance ) i n a developin g econom y migh t se t u p powerful incentive s t o solv e problems , thu s contributin g elements o f rationalit y t o th e growth process . I n retrospec t h e cite d thes e example s o f th e mechanis m o f hi s ow n version o f th e invisibl e hand. 51 • Shortage s an d bottlenecks; • Capital-intensiv e industria l processe s i n a n apparentl y labor-surplu s economy; • pressure s o n decisio n maker s induce d by inflatio n an d balance-of-payments deficits ;

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• pressure s o n those responsibl e fo r maintenance o f a high-technology but potentially life-threatenin g for m o f transpor t (aircraft ) versus , say , roa d transport. • pressure s se t up by a commitment to produce a finished product to generate domesti c input s (backwar d linkages) . All thi s le d t o the definitio n o f a Hirschman strategy , whic h he set s ou t a s follows: 52 I no w searche d fo r a general economi c principl e tha t woul d tie the m (an d several relate d propositions ) together . To thi s end , I suggeste d tha t under developed countrie s nee d specia l "pressur e mechanisms " o r "pacin g de vices" to bring forth thei r potential. I n my most general formulatio n I wrote : "development depend s no t s o muc h o n findin g optima l combination s fo r given resource s an d factors o f production a s on calling forth and enlisting fo r development purpose s resource s an d abilitie s tha t ar e hidden , scattered , o r badly utilized " (Strategy, p . 5) . Hirschman exhibit s a n admirabl e sensitivit y t o th e questio n inevitabl y posed b y hi s elevation o f the virtues and "hidde n rationality" of imbalance and distortion: 53 "Woul d you actuall y advocat e unbalance d growth , capital-intensiv e investment, inflation, and so on? Th e honest , i f a bit unsatisfactor y answer mus t be : yes , bu t o f cours e withi n som e fairly stric t limits. There i s no doubt that the unbalanced growth strategy can be overdone , with dire consequences . . . . But is it not unreasonable to ask the inventor of the internal combustion engin e t o com e u p immediatel y wit h a desig n fo r pollutio n contro l an d airbags?" Perhaps. Bu t i t is not unreasonabl e to as k a n advocate o f unbalanced growth to define his notio n o f th e balanc e fro m whic h h e counsel s deviation . Fro m Malthu s t o Arthu r Burns an d J . M . Clark , i n the 1930s , thoughtfu l analyst s hav e see n economie s movin g through time , i n a quit e errati c unbalance d way , marke d b y lac k o f balanc e amon g th e sectors, these imbalances bot h driving the economy forwar d and, when excessive, settin g in motion correctiv e responses . Bu t Clark goes on to define 7 criteria for dynamic balanc e in th e contex t o f business-cycle analysis . Hirschma n confine s himself t o implyin g that a dynamic pattern o f sectoral balanc e exists that would assert itself , through both visible and invisible hands , i n th e fac e o f imbalance: 54 "Becaus e o f th e interdependenc e o f th e economy i n the input-output sense , th e expansion o f one sector o r subsector ahea d o f the other coul d be relied o n to set forces i n motion (relativ e pric e changes and public policie s in respons e t o complaint s abou t shortages ) tha t woul d ten d t o eliminat e th e initia l imbalance." The fac t i s that , i n evokin g hi s instruction s fro m Worl d Ban k headquarter s an d th e major battl e h e fough t "against th e the n widel y allege d nee d fo r a 'balanced ' o r 'bi g push' industrializatio n effort, " Hirschma n (like Bauer) is indulging in caricature. (I t was quite possibl y Pau l Rosenstein-Rodan , the n a substantial figur e a t the World Bank , wh o sent the offending headquarters cabl e to the understandably resentful adviser in Bogota). I have never known a serious developmen t planne r who didn't understand that a 5-year pla n had t o b e revise d ever y yea r a t leas t i n the ligh t o f unexpecte d distortion s an d reveale d possibilities an d wh o di d no t liv e by th e Chines e expressio n o f th e concep t o f crisi s a s embracing the characters for both danger and opportunity. Further, a good dea l of Rosenstein-Rodan's doctrin e was based o n solid empirical evidence; i.e., that a high proportion

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of tota l investmen t i n a developin g countr y goe s t o infrastructur e (say, 35%) , muc h o f which i s i n larg e discontinuou s unit s (e.g., powe r plants , irrigatio n projects, ports ) be yond th e capacit y o f domesti c privat e sector s t o finance ; and , a s Ada m Smit h argued , these hav e important diffuse external-econom y effect s whic h make them profitable for " a great society " i f no t fo r th e privat e investor . There i s a n elemen t o f rediscoverin g th e whee l i n Hirschman' s shoc k a t findin g tha t history doe s no t mov e forwar d alon g smoot h path s wit h al l sector s i n dynami c equi librium. H e exhibit s littl e knowledg e o f th e extensiv e literatur e on unbalance d growt h reaching bac k to Malthu s at least . But neve r mind . Lik e Bauer—bu t i n a quit e differen t way—Hirschman' s stanc e o f dissent, evidently comfortable and stimulating for him, proved fruitful . Sinc e th e flower ing o f developmen t economic s wa s concurren t wit h th e heyda y o f Harrod-Doma r an d neoclassical growt h models , Hirschman' s writing s wer e a n importan t reminde r o f th e rather attractiv e ineleganc e o f men an d women performing as social animals . Indeed , a s Hirschman reache d fo r his own paradigm, h e might well, wit h appropriate modification , have adopted Gesell's, who found i n his insights into human disequilibrium also a bias for hope (preceding , p . 359) .

W. Arthur Lewis Arthur Lewis i s unique among our nine pioneers i n two majo r respects : economi c devel opment wa s hi s firs t love , th e centra l interes t o f hi s sacre d decade; an d h e consciousl y approached th e problem o f growth i n the spiri t of the classics fro m Ada m Smith t o J. S . Mill. A s he makes quit e clear, th e two major concepts associate d wit h his name ar e both rooted i n th e classics : th e anatom y o f growt h wit h unlimite d supplie s o f labor , an d th e fundamental rol e o f increased agricultura l productivity in the process o f industrialization. The openin g sentenc e o f hi s "Economi c Developmen t wit h Unlimite d Supplie s o f La bour" i s wort h recalling. 55 "Thi s essa y i s writte n i n the classica l tradition , makin g th e classical assumption , an d askin g the classica l question. " Lewis became a development economis t in his twenties. His first publication, a t the age of 29, was ' 'An Economic Pla n for Jamaica.' '56 Severa l othe r operational studie s focused on the Caribbea n followed , an d then i n 195 1 his evidently substantial contribution t o the collective United Nation s document, Measures for th e Economic Development o f UnderDeveloped Countries. 57 But Lewis' s interest s transcende d development . Althoug h h e neve r los t hi s concer n with development polic y and , indeed , his loyalty to the Caribbean, h e was a well-trained economist o f wid e interest s an d wit h more knowledg e o f th e histor y o f doctrin e an d o f economic histor y than all but a few of his contemporaries. Thre e o f his books are , i n fact, concerned primaril y wit h advance d industria l countries. 58 Hi s approac h t o growt h an d development thus combined broadly based scholarship and the operational concern o f one who wishe d t o assis t th e aspirin g nations of th e postwar world. Lewi s pu t i t wel l i n th e Preface t o hi s Theory o f Economic Growth: 59 "I t i s partl y irrepressibl e curiosit y an d partly th e practica l need s o f contemporar y policy-maker s tha t hav e drive n m e t o rang e over thi s enormou s area . . . . Curiosit y demand s a philosophica l enquiry int o th e pro cesses o f huma n history, whil e practica l nee d demand s a handboo k o f thing s t o do. " It is wholly understandable that Lewis has written a chapter for a handbook on development economic s summarizin g how fa r forward , by standard s of the 1980s , th e fiel d wa s taken fro m Ada m Smit h t o J . S . Mill. 60

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Lewis i s als o uniqu e among th e developmen t economist s discusse d i n this chapte r i n another respect: his Economic Growth is the only study that touches on all the key growth variables. I t may , therefore , b e usefu l t o indicat e briefly ho w they are introduced . A. Population an d th e Working Force. Chapte r V I o f Economic Growth i s entitle d "Population an d Resources." I t contains a sensitive analysi s of th e shap e o f the demo graphic transition in the post-1945 developin g world, with comparative references reach ing bac k t o Malthus. 61 Virtuall y all th e comple x force s makin g fo r a n invers e relatio n between incom e pe r capit a an d the birthrate are set out with considerable emphasi s o n a demographic variabl e judged critica l sinc e Adam Smith at least—the role o f education . He then moves on to consider the balance between population and resources in the various regions o f th e worl d an d th e changin g occupational structur e of th e working force. Th e latter passage close s on a theme, roote d i n the physiocrats an d the British classics, which runs, fro m beginning to end , throug h Lewis's wor k (a s well a s Colin Clark's) ; i.e. , th e centrality o f a hig h rate o f productivit y increas e i n agricultur e to a hig h overall rat e o f growth:62 "Th e transfe r fro m agricultur e to othe r occupation s whic h occur s wit h eco nomic growt h i s th e resul t an d no t th e caus e o f growth . Fo r i t t o tak e plac e withou t embarrassment there must be either increasing productivity i n agriculture, or else increasing export s o f non-agricultura l commodities." Forces determining the quality of the working force are dealt with elsewhere: th e will and abilit y to work in Chapter I I ("The Wil l to Economize"); the role o f incentives and disincentives i n Chapter III ("Economi c Institutions") ; th e differin g aptitude s fo r disciplined industria l work among societies and as between rural and urban folk i n Chapter IV , ("Knowledge"). Educatio n i s deal t with , i n on e for m o r another , i n virtuall y ever y chapter, reflectin g Lewis's judgmen t on it s critical functio n i n the developmen t proces s from primar y school s t o universities. 63 B. Capital an d Technology. Th e structur e o f Economic Growth i s shape d b y thi s proposition:64 "Th e proximat e cause s o f economic growt h are the effor t t o economize , the accumulation o f knowledge, and the accumulation of capital." Technology i s treated in Chapte r I V ("Knowledge") , capita l i n the followin g chapter of that title. In dealin g wit h knowledg e Lewi s sharpl y distinguishe s pur e science , technica l re search, development, an d production. He also examines the forces making for the rapid or sluggish diffusio n o f new , commerciall y viabl e technologies , takin g the stor y fro m an cient Greec e an d China , throug h the Renaissance , dow n t o Britai n of th e earl y 1950s . Under eac h o f hi s heading s h e examine s majo r difference s betwee n th e situatio n i n advanced industria l an d developin g countrie s an d th e consequen t difference s i n thei r appropriate priorities . Lewis's sectio n o n knowledge closes wit h a passage i n praise of competition as a goad to innovatio n evocative o f J. S . Mil l and Alfre d Marshall: 65 Indeed commercia l lif e itsel f wil l probabl y be mor e vigorous in countries where public administratio n is decentralized an d democratic, where th e peo ple ar e use d t o managin g thei r ow n affair s a t ever y level , fro m th e villag e upward, tha n i n countrie s wher e politica l powe r i s veste d i n a n oligarchy . This i s als o on e o f th e greates t argument s fo r competition , whic h similarl y diffuses decisio n makin g and administrativ e experience i n economic life . Chapter V ("Capital" ) i s the locu s o f on e o f Lewis' s bes t know n formulation s foreshadowed earlie r b y Pau l Rosenstein-Roda n (following, p . 409): 66 "Al l th e countrie s which are now relatively developed have at some time in the past gone through a period of

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rapid acceleration , i n the cours e o f whic h their rate o f annua l net investmen t has move d from 5 percen t o r les s t o 1 2 percent o r more . Tha t i s wha t w e mea n b y a n Industria l Revolution." Lewis arrive d a t thi s judgmen t b y startin g wit h measurement s b y Coli n Clar k an d Kuznets of average and margina l capital-income ratios. Afte r considerin g i n some detai l hypotheses abou t difference s i n thos e ratio s b y majo r sector , i n advance d industria l and developing countries , h e opte d fo r a n averag e margina l rati o betwee n 3 an d 4 t o 1 for both. Takin g Indi a as a n example , wher e th e ne t investmen t rate i n the earl y 1950 s wa s perhaps 4 % o r 5 % o f nationa l incom e an d rea l incom e pe r capit a virtually stagnant , h e concluded tha t t o achiev e a l1/2% to 2 % increas e i n th e standar d o f livin g a 12 % ne t investment rat e woul d b e necessary— a figur e achieved roun d abou t 1960. 67 As a development planne r as well as a macro-economist, Lewi s then disaggregates th e allocation o f investment b y roughly averaging the data fro m advance d industria l countries where gros s investmen t wa s typicall y 20% o f GNP. 68 Housing abou Public work s an d utilitie s abou Manufacturing an d agricultur e abou Other commerc e abou

t2 t3 t3 t1

5 pe r cen t 5 per cen t 0 pe r cen t 0 per cen t 100 per cen t

After weighin g eac h categor y (includin g stocks) i n developin g a s oppose d t o advance d industrial countries , h e concludes: 69 The great importanc e of construction i s not generally realized; many people think o f capita l formatio n mainly in term s o f installin g machinery, whil e in truth it consists to a greater extent of building structures of one sort or another; civil engineerin g i s th e ke y industr y i n capita l formation , wit h mechanica l engineering followin g some distanc e behind . Thi s ha s it s corollaries. On e is the point we have already mad e that, given finance, the real bottleneck which holds u p a rapi d acceleratio n o f investmen t i s th e capacit y o f th e buildin g industry t o exten d itself . Anothe r corollar y i s tha t i n th e earlie r stage s o f economic developmen t th e greates t nee d fo r capita l i s fo r publi c work s an d public utilities , whic h i n thes e day s ar e no t directl y ope n t o privat e foreig n investors; s o privat e foreig n investmen t is of limite d relevance t o the capita l needs o f th e les s develope d countries . Against thi s background , Lewi s the n explore s th e source s o f savings , concludin g i n classical styl e tha t profi t i s the mos t important: 70 This mean s tha t th e fundamenta l explanatio n o f an y "industria l revolu tion," tha t i s to say, of an y sudde n acceleratio n o f the rate of capital forma tion, i s a sudden increase in the opportunities for making money; whether the new opportunitie s ar e ne w inventions , o r institutiona l changes whic h mak e possible th e exploitatio n of existin g possibilities . If th e proces s o f convertin g an economy fro m a 5 to a 1 2 per cen t saver is essentially dependen t upon the ris e of profits relativel y t o nationa l income , it follows tha t the correc t explanatio n of wh y poor countries save so little is not because the y are poor , bu t becaus e their capitalisti c sector s ar e s o small.

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Thus, th e rise in the investment rate in Lewis's Industria l Revolution, as in my takeoff, is a reflection o f a deeper process, o f which I would rate th e rapid absorptio n o f hithertounapplied technologie s th e mos t important . Lewi s goe s o n t o examin e othe r source s o f savings; notably , force d saving s vi a inflation , publi c borrowing , taxation , an d foreig n borrowing. C. Business Cycles. Lewi s ha s writte n extensivel y abou t busines s cycle s i n othe r studies;71 bu t Economic Growth contain s a few pages tha t capture lucidly two of his basic hypotheses. First, th e rol e o f th e "irregularit y o f innovation " i n determinin g th e volatilit y o f investment.72 H e view s growt h a s rooted i n a sequenc e o f innovationa l leading sectors . The pat h o f each follows , broadly , a logistic curv e of acceleratio n an d deceleration, bu t since investor s canno t kno w tha t pat h e x ante, the y systematically overshoot an d under shoot, impartin g t o the economic syste m as a whole powerful successive impulse s towar d expansion an d contraction. Thus , having quite explicitly set aside the then-popular macro growth models , Lewi s bring s growt h an d cycles togethe r alon g line s of Schumpeter an d the earl y wor k o f Kuznets . Second, investment in housing. Lewi s systematically emphasize s the surprisingly large proportion o f investment i n all societies that goes to housing construction; an d houses ar e long-lived. Despit e fairl y fir m knowledg e o f th e rat e o f famil y formation over , say , th e next decade , investmen t i n housin g does no t proceed smoothly . Thi s volatilit y explain s not merel y th e lon g (say , 20-years ) housin g cycl e bu t als o th e tendenc y o f stron g an d weak majo r cycle s t o follo w on e anothe r i n sequence: 73 A slum p which occurs a t a time when house-building or some majo r innovation i s i n ful l spat e doe s no t becom e serious , an d doe s no t las t long . Whereas a slump which occurs durin g the off-period of the buildin g cycle, o r just afte r a major innovatio n has reached on e of it s peaks (e.g . moto r car s i n the U.S.A . i n 1929 ) ma y b e o f seriou s magnitud e and lon g duration . Sinc e building averages 2 5 per cent of gross investment , and has a cycle o f eightee n to twenty years, i t is not surprising that decades o f prosperity ten d to alternat e with decade s o f slowe r growth . D. Relative Prices. Agai n lik e Colin Clark , Arthu r Lewis ha s done som e o f his mos t original wor k o n th e cours e an d impac t o f shiftin g trend s i n the term s o f trad e fo r bot h advanced industria l an d developin g countries. 74 I n fact, hi s strong emphasi s o n the nee d to striv e fo r "balance d development " come s mainl y to res t o n effort s t o approximat e optimum growt h paths i n agricultural and industrial sectors, thu s damping, at least, term s of trade fluctuation that have subjected a good man y developing countrie s to severe socia l and politica l a s wel l a s economi c strains. 75 Thi s relationshi p bear s o n Lewis' s heav y emphasis o n th e nee d t o rais e agricultura l productivity. 76 Thus, a s wit h business cycles , Lewi s sa w relative price trend s a s a product o f growt h itself unde r circumstance s wher e uncertaint y abou t th e future yielde d systematicall y irra tional expectation s an d overshooting o f optimu m sectora l path s i n agricultural a s well a s industrial production. 77 E. Stages o f and Limits t o Growth. Lik e the eight other pioneers o f the 1950 s consid ered here , Lewis' s eye s wer e mainl y fastene d operationally on countries striving t o enter or transi t thei r industria l revolution ; Kuznet s woul d vie w a s aimin g t o begi n o r carr y forward i n modern growth ; and I would judge to be i n the precondition s for takeof f or i n takeoff.

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Since Lewis's direc t knowledge wa s primarily of the Caribbean, Africa, an d India, his recommendations a s of the early 1950 s ar e addressed overwhelmingl y to problems a t the lower stage s o f growth. Ther e ar e some but not many references t o Latin America, wher e the takeoffs of Argentina and Brazil began in the mid-1930s, Mexico's round about 1940 . But, as an economist wh o took history seriously, and evokes i t often i n expounding his theory o f growth , Lewi s twic e uses a concept o f stages . His firs t applicatio n i s wit h respect t o th e growt h of knowledge. 78 . . . [I] n considering th e growt h of knowledge one mus t distinguish three eras, th e pre-literate, th e era of writing without scientific method, and the era of scientifi c method . I n the sam e way w e must distinguish between societie s according t o whether they are illiterate, and according to whether their culture and philosoph y ar e imbue d wit h the scientifi c outlook. Lewis divide s th e thir d stag e int o tw o parts : a lon g period , beginnin g in th e Renais sance, whe n scientifi c knowledg e i s progressively enlarge d bu t i s not linke d directl y t o invention:79 The fac t i s tha t th e grea t invention s o f th e eighteent h an d th e nineteent h centuries . . . wer e all invented by practical peopl e wh o knew no science, or very little . I t i s onl y i n th e twentiet h centur y that a scientifi c educatio n ha s become essentia l for the would-be inventor, o r that the discoveries o f scienc e have becom e th e majo r sourc e o f furthe r technologica l progress . He the n discusse s a t som e lengt h th e organize d clos e linkag e of basi c scienc e an d in vention i n th e twentiet h century. Lewis's second evocation o f stages i s in a rarely examined subject, the relation betwee n aggression an d stag e o f growth . I n th e followin g passag e h e recognize s th e dangerou s "middle" year s i n the lif e o f growin g economies: 80 If ther e i s an y connectio n betwee n dream s o f glor y an d th e stag e o f eco nomic development , i t i s foun d i n th e 'middle ' stage s o f economi c growth . The riches t countrie s ten d t o b e peaceful , enjoyin g wha t the y have , an d envying none; and the poorest countrie s are too lethargic an d disorganized fo r war. . . . The countrie s whic h ar e dangerous t o world peace ar e more ofte n those which think they have a great future ahea d of them than those which are able t o glorif y thei r grea t past . An d s o th e militar y leadershi p o f th e worl d tends to pass from one country to another in much the same wa y as leadershi p in internationa l trad e passes, and possibly for reasons of the sam e sort . . . . As oppose d t o hi s rathe r thi n treatmen t o f stages , Lewi s provide s a quit e complet e discussion o f th e limit s to growt h i n bot h it s secula r stagnatio n and resource-limitatio n versions.81 I n a philosophi c moo d evocativ e o f Davi d Hume , h e als o provide s i n th e following passage s a usefu l summar y of wha t he ha s t o say: 82 There ar e thu s man y pit s int o whic h a countr y ma y fall , a s a resul t o f prolonged growth : i t ma y wear y o f materia l things , it s entrepreneur s ma y behave les s competitively , its publi c may creat e barrier s to change, th e dis tribution o f incom e ma y alte r unfavourably , i t ma y exhaus t it s natura l resources, i t ma y los e it s plac e i n internationa l trade , o r i t ma y ru n ou t o f innovations. I n addition , it ma y b e a victi m o f natura l disaster , or i t ma y b e

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ruined b y war , b y civil strife o r by misgovernment . None of these is inevitable. . . . Bu t th e expectatio n tha t a lon g perio d o f growt h i s i n du e cours e succeeded b y slowe r growth , by stagnation , o r even b y decline seem s fairl y well supported b y the littl e we know of the economic history of the past fou r thousand years . But h e goe s o n t o leav e huma n beings an d thei r societies a route of escap e fro m thi s Toynbeeian prospect : "I t i s possibl e fo r a natio n t o tak e a ne w tur n i f i t i s fortunat e enough to have the right leadership at the right time. In the last analysis history is only the record o f ho w individual s respon d t o th e challeng e o f thei r times . Al l nation s hav e opportunities whic h the y ma y gras p i f onl y the y ca n summo n u p th e courag e an d th e will." F. Noneconomic Factors. On e of the characteristics of the nine pioneers is that they all had som e operationa l experienc e i n formulating, administering, or advisin g on develop ment policy . I t wil l b e recalled , fo r example, tha t Arthur Lewis's earlies t wor k wa s o n practical problem s o f development in Jamaica and Puerto Rico; and, from 195 7 forward, he spen t hal f hi s time in administration, including several Unite d Nations posts; 4 year s (1970-1974) a s president o f th e Caribbea n Developmen t Bank . In general, thi s kind of practical experience did not prevent the pioneers from develop ing strong, sometime s oversimplifie d analytic and/or policy propositions about develop ment. The y quit e often appea r to have lived by their own versions o f Keynes's dictum: 83 "Words ough t to be a little wild, for they are an assault of thought upon the unthinking. But whe n th e seat s o f power an d authorit y have been attained , ther e shoul d b e n o mor e poetic licence . . . . When a doctrinaire proceeds t o action , he must , s o to speak , forge t his doctrine. Fo r those who in action remember the letter will probably lose what they are seeking." In thi s respect, Arthu r Lewis is , onc e again , somethin g o f a n exception . I n bot h hi s technical analyse s as an economist and in his effort s to place developmen t economics in its large r huma n an d societa l setting , he exhibits an ability to understand with sympathy and to take into account a wide spectrum of views without losing the capacity t o emerg e with a lucid, distinctiv e view of his own . I n this respect, ther e i s in Lewis somethin g of J. S . Mill : a disciplined staf f office r i n the London headquarter s o f the East Indi a Com pany; a n economis t dealin g sympatheticall y wit h the wor k o f his predecessors an d con temporaries; but , i n th e end , capabl e o f formulatin g distinctive an d origina l economi c propositions. Behind Lewis' s temperat e approac h t o developmen t economic s an d policy i s a lively awareness o f the complexity o f human motivation and of the profound differences among societies an d their cultures. More than almost all of his contemporaries, h e was prepare d not onl y to rea d beyon d th e conventiona l range o f economic s bu t als o t o reflect o n an d bring to bear insight s from history, sociology, an d anthropology. 84 Here , fo r example, i s a statemen t o f his approac h t o development economic s capturin g both th e breadth o f his view an d hi s sens e o f th e limit s of th e possible. 85 The most difficul t proble m .. . i s to explain wh y people hol d th e beliefs they do. Economi c growt h depends on attitudes to work, to wealth, to thrift , to having children, to invention, to strangers, to adventure, and so on, an d all these attitude s flow from dee p spring s in the huma n mind. There hav e been attempts to explain why these attitudes vary fro m on e community t o another. One ca n loo k t o difference s i n religion , bu t thi s i s merel y t o restate th e

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problem. . . . Th e experience d sociologis t know s tha t thes e question s ar e unanswerable, certainl y in our presen t stat e of knowledge, an d probabl y fo r all time . . . . It does no t follow tha t we shoul d cease to try to understand socia l change ; man bein g a curious animal, i t is beyond our natur e to cease t o try to understand. What follows is that we should be modest i n our claims, an d recogniz e how tentativ e i s an y hypothesi s whic h w e clai m t o bas e upo n th e stud y o f history. This was the spirit in which Lewis explored in the first 16 3 pages of his Economic Growth the noneconomic variables—"Th e Will to Economize" and "Economi c Institutions" — that underli e th e expansio n (o r failur e t o expand ) of outpu t per hea d o f population. Lewis's sens e o f th e huma n conditio n als o pervade s hi s effor t t o answe r a questio n usually taken for granted, "I s Economi c Growth Desirable?" He begins, typically, with a proposition abou t th e complexit y o f huma n beings: 86 "Whe n growt h begins , w e ar e enthusiastic fo r it ; bu t afte r a whil e i t palls . W e begi n t o lon g fo r stability ; w e rejec t materialism an d return to spiritual preoccupations; and so on. Thu s socia l attitude s alter nate betwee n favourin g growth, an d reacting against it, an d social institutions alter i n the same way. " H e then goe s o n t o state th e cas e fo r growth: 87 The cas e for economic growt h is that it gives ma n greater contro l ove r hi s environment, an d thereb y increase s hi s freedom . We ca n se e thi s firs t i n man' s relation s wit h nature. A t primitiv e levels , man ha s t o struggl e fo r subsistence . . . . Economi c growt h enable s hi m t o escape fro m thi s servitude. Economic growt h als o give s u s freedo m t o choos e greate r leisure . . . . Also, i t i s economi c growt h whic h permits u s t o hav e mor e services , a s well a s mor e good s o r leisure . . . . The raisin g of livin g standards over th e past centur y ha s widene d the opportunit y to appreciat e an d practise th e arts , without necessaril y affectin g th e qualit y o f th e bes t ar t on e wa y o r th e other. . . . Relativel y fa r mor e peopl e hea r th e wor k o f th e bes t composer s today than heard the work of Mozart or of Bach in their own times, or saw the work o f Rembrand t or El Greco . Women benefit from these changes even more than men. . . . [F]or wome n to debat e th e desirabilit y o f economi c growt h i s t o debat e whethe r women should have the chance to cease to be beasts of burden, and to join the human race. Economic growt h als o permits mankind to indulge in the luxury of greate r humanitarianism. . . . Economic growth may be particularly important to societies wher e political aspirations ar e currentl y i n exces s o f resources , sinc e growt h ma y forestal l what migh t otherwis e prov e t o b e unbearable socia l tension . Reviewing th e variou s argument s against growth, h e strike s a typically well-balanced view:88 Three conclusion s follo w fro m thi s analysis . First, som e o f th e allege d costs o f economi c growt h are no t necessar y consequences of growth at all— the uglines s o f town s o r th e impoverishmen t of th e workin g classes , fo r instance. Secondly , som e o f th e allege d evil s ar e no t i n fac t intrinsicall y

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evil—the growth of individualism, or of reasoning, or of towns, for example . As i n al l huma n life , suc h thing s ca n b e take n t o excess , bu t the y ar e no t intrinsically an y les s desirabl e tha n thei r opposites . Fro m thi s i t follows , however, thirdly , tha t th e rat e o f economi c growt h ca n b e to o hig h fo r th e health o f society . As o f 198 4 Lewis' s vie w o f th e balanc e sheet , quit e unlike , say , Myrdal' s o r Pre bisch's, remaine d temperatel y positive. 89 Taken a s a group, government s o f les s developed countrie s (LDCs) have , in fact , passe d reasonabl e tests . Ther e ar e fou r time s a s man y childre n i n school a s ther e wer e i n 1950 . Th e infan t mortalit y rate ha s falle n by three quarters. Th e multiplicatio n o f hospital beds, villag e water pipes, all-seaso n village roads, an d other mass services i s faster than at any period in the history of the countrie s now developed. Muc h of the disillusionmen t with the results of th e pas t thre e decade s originate s wit h people wh o d o no t understan d th e importance o f th e socia l wage , wh o have no idea wha t the conditions of th e masses wer e lik e i n 1950 , o r wh o have forgotte n th e exten t t o whic h LD C peoples liv e i n semi-ari d land s fo r whic h w e hav e ye t t o mak e th e tech nological breakthrough .

Gunnar Myrdal Three strand s distinguis h Gunna r Myrdal' s wor k o n development . First , a matte r o f philosophy. Hi s first postdoctoral book (1930 ) wa s The Political Element i n the Development o f Economic Theory. 90 I n i t h e argue d a basi c them e tha t remaine d centra l t o hi s work throughout hi s life; namely, that "th e developmen t of economic theor y from earlies t time . . . had been distorte d b y the biases o f the time." 91 Bu t he soon wen t beyond tha t proposition:92 I foun d by furthe r stud y . . . that value premises wer e neede d alread y fo r establishing fact s an d no t onl y fo r drawin g polic y conclusions . . . . Th e analysis o f the doctrinal developmen t of economic theor y fro m earlies t time , and the way it had been distorted by the biases of time, still stands. I had only to add my new insight s that economic theory ca n never be neutral and, in the positivist sense , "objective. " This judgmen t ha d th e salutar y effec t o f makin g Myrda l sensitiv e t o hi s ow n valu e premises an d systematicall y explicit i n sharin g them wit h hi s readers . Second, h e cam e relativel y lat e i n lif e t o developmen t economic s an d carried ove r t o that terrain values , technical judgments, and analytic methods h e had evolved i n dealing with Swedish (and, generally, Western European) problems of the 1930s and with the race problem i n America. 93 Third, Myrda l share d i n heightened for m a characteristic o f virtually all the pioneers : the stanc e o f a dissenter . Whethe r this is, i n Myrdal's case , a matte r of innat e temperament, th e imprin t on hi s follower s of tha t supcrdissenter Knut Wicksell , o r a necessary concomitant o f creativity , or al l th e above , i s for others to assess . But , even i n his mos t self-disciplined moment s as a United Nations official o f modest power dealing successfully o n delicate , comple x matters with foreig n minister s of sovereig n states, Myrdal never

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wholly lost the qualities of the brilliant enfant terrible who descended o n Stockholm fro m Dalecarlia t o epater the local bourgeoisie. Against th e Stream i s an apt title for a collection of his essays. Fo r others, o f course, Myrdal' s advocac y of planning, Rosenstein-Rodan's "big push, " and a large role for governments in the development proces s represente d th e orthodoxy o r conventiona l wisdo m fro m whic h they dissented. Myrdal's positiv e developmen t doctrin e too k it s start fro m a proposition centra l to his rationale for the Swedish welfare state; namely, that movement toward equality of income within nation s wholl y converge d wit h th e requirement s fo r a hig h rat e o f economi c growth:94 In the 1920 s an d 1930s, .. . I held the view that an equalization in favor of the lower-incom e strat a wa s als o a productiv e investmen t i n th e qualit y of people an d their productivity . .. . I t seemed clea r tha t incom e equalizatio n would hav e a n even greate r effec t i n this direction fo r underdeveloped countries, wher e the masses of people are suffering fro m ver y severe consumptio n deficiencies i n regard t o nutrition , housing, an d everythin g else. . . . In underdevelope d countrie s suc h a redistribution of incom e cannot, how ever, b e carried ou t by taxing the rich an d transferring money to the poor vi a social securit y schemes an d other such measures to raise their levels of living. The poor ar e so overwhelmingly many, an d the wealth y s o relatively few — and tax evasion amon g the m so common. Wha t is needed i n order to raise the miserable livin g level s o f th e poo r masse s i s instea d radica l institutiona l reforms. Thes e woul d serv e th e doubl e purpos e o f greater equalit y and eco nomic growth . Th e tw o goal s ar e inextricably joined . This wa s th e centra l them e o f hi s three-volume Asian Drama. 95 In method , a s Myrda l notes , Asian Drama wa s a kin d o f "replic a o f a n American Dilemma." 96 Lik e the latter study , Asian Drama, primarily an analysis of India, sees the tasks o f developmen t a s on e o f supplantin g a viciou s wit h a benign , self-reinforcin g process. The turnaround requires positive , simultaneou s action in a number of sectors of the society , notabl y population policy , landownershi p and tenancy, public health, educa tion, an d politics ; i n al l case s radica l institutiona l change i s necessary . Th e America n Creed i s the positive driving engine of "circula r and cumulative causation" in the case of An American Dilemma, notabl y th e ultimat e commitmen t of America n societ y t o striv e toward equalit y o f opportunity . Th e emergin g consensu s i n th e developin g region s o n "the modernizatio n ideal s as epitomized i n the desirability of development" drive s Asian Drama wit h it s assertio n o f th e happ y convergenc e o f movemen t towar d equalit y o f income an d high growt h rates. 97 Evidently th e metho d of Asian Drama i s also simila r to Myrdal's stil l earlier approac h to th e prewa r populatio n proble m i n Swede n (preceding , pp . 199-200) . I n hi s 193 8 Godkin Lecture s h e als o too k a subjec t normall y treate d b y economist s i n primaril y economic term s (i.e. , th e concept o f an optimum population); shifted th e argument to the social an d institutiona l determinants of the siz e an d quality of the population; an d ende d with a powerfu l reinforcin g cas e fo r a welfar e stat e includin g a radica l shif t i n incom e distribution. The continuit y of incom e redistributio n in Myrdal' s work emerge s onc e agai n i n hi s (1970) Th e Challenge o f World Poverty. 98 Arisin g fro m thre e lecture s delivered a t th e Johns Hopkin s Schoo l o f Advance d Internationa l Studie s (SAIS) , Th e Challenge, i n effect, summarize s Asian Drama and , i n th e word s o f it s subtitle , present s " A Worl d

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Anti-Poverty Program i n Outline." Its positive argument, extending the argument for the national welfar e stat e t o th e internationa l community, i s tha t foreig n ai d shoul d b e ex panded; and a series o f measures shoul d be taken that would strip both public and private lending t o developin g nation s of wha t Myrdal regarded a s their overbearin g powe r con tent. H e advocated , fo r example , increase d us e o f multilatera l aid, privat e managemen t contracts wit h a terminal date , an d U.S. governmenta l and World Bank collaboration i n nationalizing U.S . privat e investment s i n Lati n America . Ai d shoul d b e granted a t low concessionary interes t rates to avoid the buildup of debt burdens. The political rationale in advanced industria l societies fo r enlarged ai d should be moral rathe r than either long-ru n or short-run self-interest. " The enlarged Swedis h aid program i s presented a s (almost) a prototype o f thi s approach ; th e ai d progra m an d othe r U.S . relation s wit h developin g countries a s a demonstration o f all that required "purging." 100 " . . . In the future, w e should try to move toward a common recognition of aid to underdeveloped countrie s as a collective responsibilit y for the developed countries , th e burden of which should be shared in a n agree d fai r way , amounting to an approach t o a system o f international taxation." The SAI S lecture s wer e delivere d i n 196 9 i n th e disabuse d fift h stag e o f th e globa l environment o f developmen t policy . I t i s i n man y way s a polemic agains t U.S . polic y across a broad front , includin g its policy i n Southeas t Asia . Myrdal then turned his attention to other problems. H e was induced to write again about development polic y i n the early 1980 s by the World Bank' s request t o write a chapter fo r the Pioneers volume . It s closing sections , whil e les s enflamed , reflec t a n eve n wide r disabuse tha n Th e Challenge. Th e immediat e settin g i s th e worldwid e depressio n o f 1979-1982, when progress cease d or reversed i n a good many developing countries under the combine d impac t o f reduce d deman d fro m th e advance d industria l countries , th e second oi l price jump, increase d deb t burdens as global interest rate s rose sharply , and a cutback i n privat e lending . Myrda l responde d b y urgin g tha t ai d b e confine d t o basi c needs (t o increas e foo d production , improv e wate r supply , sanitation , schooling , an d family limitation) ; and that aid be bilateral. Ai d for large-scal e industria l projects shoul d be discontinued. And , i n a remarkable reversal: 101 "Th e aid-givin g governments shoul d insist upo n effectivel y controlling th e us e o f ai d i n underdeveloped countries. " These recommendations wer e not merely a reaction t o the human (or basic needs) crisi s in th e developin g region s o f that period bu t als o a reflection of profound disappointment with the character o f the governments that had emerged i n many developing countries: 102 In the underdeveloped countrie s government s are everywhere in the hands of upper-class elites , even in countries that are not under military dictatorship. It is with the governments i n power that al l business deals hav e to be negoti ated an d concluded . An d i t i s wit h them tha t eve n ai d matter s hav e t o b e settled. I t ha s bee n pointe d ou t tha t a s a resul t poo r peopl e i n develope d countries ar e taxed t o "aid " ric h peopl e i n underdeveloped countries. " He comments withou t enthusiasm on the two Brandt Commission reports (o f 198 0 an d 1983) an d concludes wit h the following acerbic view of the New International Economi c Order:103 More recentl y the underdevelope d countries have raised their protest an d demanded a 'ne w internationa l economi c order.' On e worl d conference afte r another ha s bee n convene d to conside r that demand. Although th e developed countries are not prepared to make any substantial

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concessions i n their economi c relation s wit h underdeveloped countries , the y generally sho w thei r politeness b y never askin g whether th e underdevelope d countries d o no t nee d a ne w order a t home . . . . [T]he underdevelope d countrie s have, I believe, turne d demands fo r a new economic worl d orde r int o a sort o f alib i for no t reforming the way i n which they ar e governed . An y concession s the y migh t wi n at these conference s ar e very small compared with wha t the y shoul d be able to win both economically and sociall y b y th e interna l reform s I hav e emphasize d i n thi s paper.'' I would guess that Myrdal's condemnatio n o f the politics and politicians of the developing countrie s reflect s no t merel y hi s ow n observation s bu t also , i n part, th e frustration s experienced b y the excellent ban d of Swedish ai d administrators in carrying out the rathe r gallant unilatera l enlargemen t o f thei r country' s contributio n t o officia l developmen t assistance.104 Lik e man y others , the y foun d themselve s often , notabl y i n th e poores t developing countries , u p against the following question: How in good conscienc e ca n we allocate Swedish resource s t o programs tha t are certain to fail, despit e our aid, because of unwise loca l policie s o r corruption ? But there i s a larger issu e involved that we shall see again, i n somewhat different form , in th e five-stag e pilgrimag e o f Rau l Prebisch . Wha t ca n b e realisticall y expecte d o f th e political proces s i n developin g countries ? A t on e poin t i n hi s Pioneers essa y Myrda l evokes th e hope s stirre d b y hi s visi t t o post-liberation India , le d by Jawaharla l Nehru : a leader wishing to move ' 'in the right direction of democracy an d equalization''; a virtually uncorrupt civil service, at least at the higher levels, and good relation s with Britain and the world communit y generally . Soo n ther e wa s a Plannin g Commissio n an d a Firs t Five Year Pla n a s wel l a s project s fo r lan d an d educationa l reform . Fo r a goo d Norther n European Socia l Democra t o f th e earl y postwa r years , i t wa s a heartwarming scene . When Myrda l returne d to India late i n 195 7 t o begin work o n Asian Drama h e found a great dea l t o deplore : a n ailin g an d discourage d leader ; littl e i f an y progres s towar d equality o f opportunity o r more equa l income distribution; political power i n the hands of the rich; littl e progres s towar d land redistribution ; a spread o f corruption to higher level s of government; a general lack of social discipline . All this lay behind the large message o f Asian Drama tha t th e refor m o f India' s "sof t state " wa s th e necessar y conditio n fo r economic progress . It will be recalled that , i n the late 1950s , Mao's China, includin g the 195 8 Grea t Lea p Forward, capture d th e imaginatio n of man y Wester n intellectual s wh o had no t carefull y followed th e evolution of affairs o n the mainland since 1949 . Myrda l was not exempt: 105 Mao is , i n th e firs t place , th e founde r o f a positiv e mora l philosophy , embracing al l socia l relations . Unde r th e ver y singula r circumstance s tha t have existe d i n Chin a fo r man y decade s . . . an d workin g withi n equall y singular nationa l tradition s i n Chin a sinc e centuries , h e ha s succeede d i n molding hi s very larg e natio n to become a "ne w people, " divergin g i n their patterns o f livin g an d workin g fro m ol d Chin a and , o f course , fro m othe r nations. . . . Also included fin Mao's mora l doctrine] were certai n general line s for economic developmen t planning, which fitte d condition s in China and—after many trial s an d errors—hav e ha d considerabl e success . The y ar e withou t doubt intellectuall y superio r t o th e plannin g directive s o f othe r ver y poor , underdeveloped countries .

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I woul d gues s tha t th e contras t between wha t he perceive d i n Indi a an d thi s somewha t romantic vie w o f Mao's harde r stat e affecte d Myrdal's judgment on th e former . But th e fundamenta l problem Myrda l confronted, common t o all nine o f the pioneer s briefly examine d here, i s that there existed n o accepted theor y of political development t o accompany, frame , suffuse , o r dominate theories of economic development; and there is , in th e end , n o wa y t o leav e politic s out o f economic development . There i s inevitably , therefore, i n Myrdal's disabus e somethin g o f a paraphrase of th e famous questio n i n My Fair Lady: "Wh y can' t thes e peopl e behav e like Swedes? " Pu t more seriously , Myrdal' s perceptio n wa s correc t tha t th e Wester n ideolog y an d valu e system o f modernizatio n hav e suffuse d muc h o f th e developin g world , bu t i t doe s no t dominate i n an y simpl e overridin g way . I t interact s wit h strand s o f xenophobi c na tionalism, painful memorie s of relative inferiority, regional, tribal, and religious enmities, struggles fo r personal power , gree d fo r money, an d deeply ingraine d social an d politica l patterns tha t d o no t necessaril y converg e an d ofte n conflic t wit h th e imperative s o f modernization.106 I t i s th e complexit y o f thi s heritag e and , abov e all , th e overridin g power o f nationalism that belied Myrdal' s initia l hypothesis that it was no t only morall y correct bu t realisti c t o carr y ove r to . the globa l community—t o internationalize—th e values and politics of domestic welfare states in advanced industrial societies.The stor y of the developing regions since the Second World War evokes much more of the tortured and violent stor y o f early modern Europe from, say , the fifteenth t o the eighteenth centuries, than th e straightforwar d working out o f the valu e system of modernization. But when all this is taken into account Myrdal has the right proudly to affirm i n the end, in a somewhat Marshallian mood, the positive operational role of philosophic idealism for which h e stoo d fo r a storm y half-century. 107 The ideal is also a living force in our society and it is, therefore, part of the social realit y we are studying . . . . The idea l works through people's valuations, thei r political attitudes. Whether we can hope for a gradual attainment of th e ideal , an d wit h wha t spee d an d t o wha t degree , depend s i n grea t measure upo n ho w strongl y entrenched th e idea l become s i n thi s spher e o f human valuations . . . . People's strivin g are, indeed , amon g th e mos t importan t socia l fact s an d they largel y determin e th e cours e o f history. Myrdal's wor k ca n be—and ha s been—criticized o n a number of grounds ; for exam ple, hi s unshakable pessimism in the face of a great deal of social and economic progres s since 195 0 in the developing regions ; his overestimate of the potentialities of planning and underestimate o f th e positiv e socia l a s wel l a s economi c use s o f th e competitiv e pric e system; an d hi s failur e to perceiv e th e possibilit y of export-oriente d development . But Myrdal's contribution to development economics doe s not lie in how one strikes the balance i n debate o n these an d simila r issues. I t lies i n his insistenc e that the process of modernization b e viewe d a s th e performanc e o f a whol e societ y an d whol e people , no t merely it s economy an d economic man . Raul Prebisch Among the pioneers, Prebisc h simplified th e task of analysis for his readers by setting out his essay in precisely th e way the editors requested; that is, th e origins of his analytic and

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policy view s of the 1950 s and thei r subsequent evolution down to the 1980s . The title of his chapter : "Fiv e Stage s i n My Thinking on Development." Prebisch's fiv e stage s confor m roughl y to the six stages delineated a t the beginning of this chapter . I n effec t h e combine s m y las t tw o stage s (th e 1970 s an d 1980s ) i n a somewhat cataclysmi c critiqu e o f "periphera l capitalism. " Prebisch, b y his own account, began as a neoclassical theorist drawn into politics whe n still unde r 30 . A s unde r secretar y o f Financ e i n th e governmen t of Argentin a i n 1930 1932 and later at the Central Bank, his orthodoxy was shaken by the radical decline in the volume an d price s o f Argentin e exports. I n a settin g o f acut e shortag e o f foreig n ex change, h e came to advocate " a resolut e industrialization policy" and was "converted to protectionism."108 These pragmatic conclusions were, in Prebisch's view , essential back ground t o hi s firs t stag e (1943-1949) , when , i n relativ e tranquility , he develope d a coherent rational e fo r hi s doctrin e o f industrializatio n via impor t substitution . Bu t thi s familiar doctrine , wit h it s asymmetrical assumption s about the relativ e elasticitie s of th e demand for exports an d imports of developing countries and its believed long-ru n degen erative relativ e pric e tren d fo r basic commodities , wa s roote d i n an effor t t o answe r two deeper question s tha t h e ha d generalize d out o f hi s experienc e wit h the intens e crisis o f Argentina i n the 1930s: 109 "Wh y wa s i t necessary fo r the stat e to play a n active rol e i n development? Wh y wa s i t that policies formulate d at the center coul d not b e followed at the periphery?" The secon d turning-poin t stage b y my reckoning—1949-1950—turned ou t also t o be Prebisch's. Wit h his doctrine now coherently formulated, he assumed in 1949 responsibility a s executive secretary fo r the United Nations Economic Commissio n fo r Latin Amer ica (ECLA), se t up in Santiago, Chile . Th e first 2 years (1949-1951) were not propitious for Prebisch' s doctrine . Th e Lati n American terms o f trade (196 3 = 100 ) stoo d a t 70 in 1938, 10 0 in 1948 , an d 12 4 in 1951 , a t the Korean Wa r peak. (Excludin g petroleum, th e figures were , respectively , 67 , 98 , an d 134. ) Their subsequent subsidence to figures a bit above th e 194 8 leve l was , indeed , painfu l an d evoke d memorie s o f th e 1930 s i n Lati n America an d elsewhere amon g exporters o f basic commodities. Prebisc h summarize d his initial vie w in thes e terms: 110 My diagnosi s o f th e situatio n o f th e countrie s o f Lati n America was con structed o n the basis of my criticism of the pattern of outward-oriented development, whic h I considere d t o b e incapabl e o f permittin g the ful l develop ment o f thos e countries . M y propose d developmen t polic y wa s oriente d toward th e establishment o f a new pattern o f development whic h would make it possible t o overcome th e limitations of the previous pattern. This new form of development woul d have industrializations as its main objective. In reality, my polic y proposa l sough t t o provid e theoretica l justificatio n for th e industrialization polic y whic h was alread y being followed (especially b y the larg e countries o f Lati n America), t o encourag e th e others to follow i t too, an d t o provide al l o f the m wit h a n orderly strateg y for carryin g this out. But a s th e 1950 s wor e on , i t becam e clea r tha t th e expansio n of th e initia l group o f import substitutio n sector s wa s deceleratin g quite rapidly. 111 Th e nationa l markets were relatively smal l in a good man y Lati n America n countries, and ther e were distortion s of policy a s well . Despit e thes e and othe r problems of Lati n America n development in th e 1950s, th e technologica l absorptive capacity of th e regio n wa s rising . Th e thre e major countries, especially, were beginning to move into a range of more diversified industries

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that marke d th e driv e t o technologica l maturity . Moreover, i n it s fina l fe w years , th e Eisenhower Administration , against much initial inner resistance, shifte d it s stance toward development assistanc e a s oppose d t o merel y economi c suppor t o f militar y allies; an d before lon g th e Kenned y administratio n was installe d wit h a stil l more positiv e postur e towards th e developin g regions . Prebisch evoke s th e emergin g mixtur e of problem s an d possibilitie s tha t shape d hi s third stage—th e lat e 1950 s an d earl y 1960s: 112 . . . [T]h e reconstructio n o f the world econom y ha d been complete d wit h the reorganizatio n o f th e internationa l system o f trad e an d payment s to im prove its efficiency. New trade possibilities wer e visualized for the periphery, and I advocate d a policy t o stimulat e exports of manufacture s to the center s and to strengthen trad e relations within the periphery. M y reasoning was that industrialization ha d bee n asymmetrical , sinc e i t wa s base d o n impor t sub stitution throug h protectio n withou t corresponding promotio n o f export s o f manufactures. Protectio n shoul d be matched with selective export subsidies in order to face cost differentials wit h the centers. Furthermore, industria l policy had been improvised , principall y to counteract th e effects o f a cyclical fal l i n exports. I t wa s necessar y t o introduc e rationalit y and correc t exaggeration s and abuse s b y reducing duties. Excessiv e dutie s not onl y distorted industria l production bu t als o ha d advers e effect s o n export s o f primar y products. Reflections o f this kind—plus an increased sensitivity to skewed income distribution in developing regions—suffuse d Prebisch' s wor k i n the globa l aren a provide d b y hi s rol e as secretary-genera l o f th e Unite d Nation s Conferenc e o n Trad e an d Developmen t (UNCTAD). I n thi s fourt h stag e (1964-1969) , Prebisc h sough t t o enlarg e th e flow s of exports t o th e develope d fro m th e developin g regions , an d th e flow s o f capita l an d technology i n the other direction. Tw o majo r instruments he sough t to have installed fo r this purpose wer e generalize d trad e preferences fo r developing countrie s and commodit y price agreements that would reduce price fluctuation s and , on average, improve the terms of trade for exporters. Prebisc h looke d bac k at this phase of his work with frustration and disappointment.113 " . . . I did not succeed: clea r proof tha t the North was not willing to act no r wa s th e Sout h incline d t o engag e i n th e ver y seriou s structura l transformations needed t o pave th e wa y for developmen t an d socia l equity. " His final, fifth stag e embraces th e post-1973 decade with its two oil price jumps and the severe 1979-198 2 depression . H e regarde d thi s perio d a s th e secon d grea t crisi s o f capitalism of the twentieth century. The politico-economic doctrine that emerged fro m his reflections i s a weavin g together o f neo-Marxist , Leninist , an d Schumpeteria n strands . But, jus t a s hi s impor t substitutio n industrializatio n mode l o f th e 1950 s wa s a gran d generalization o f the pragmatic response o f Argentina (Brazil and Mexico) to the foreign exchange catastroph e o f the earl y 1930s , Prebisch' s sombe r prognosi s of the mid-1970 s and earl y 1980 s reflecte d th e "frustration s o f th e las t decad e i n Chil e an d Argentina. . . ," 114 His argument begins by broadening his old basic concept of the center and the periphery in tw o respects : t o embrac e th e failur e o f technolog y generated i n th e cente r t o sprea d rapidly t o th e periphery because th e latter' s role was "mainl y restricte d to the supply of primary products"; 115 an d t o characteriz e the elite s of th e peripher y as imitator s of th e centers i n "technologie s an d lif e styles" ; "idea s an d ideologies:" 116 Against thi s backgroun d h e shift s hi s argumen t to th e dispositio n o f "th e economi c

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surplus. . . ."H e argue s thi s surplu s i s no t use d a s i t shoul d b e t o financ e productiv e investment. I t i s dissipated i n thre e directions : imitative hig h livin g of the socia l elite ; • increasin g demand s o f th e stat e du e t o it s "spuriou s absorption " o f unemployed manpowe r i n activitie s o f lo w o r ni l productivity ; and • pressur e fo r redistributio n o f incom e fro m a n increasingl y skille d an d assertive workin g force i n the form of claim s for bot h higher wages an d increased socia l services . The upsho t i s a n inflationar y crisis becaus e th e monetar y authorities ar e face d wit h a choice of imposing depression o r conniving at inflation. They generally choose the latter. This leads to the kind of political crise s tha t Chile, Argentina , and other Latin American countries experience d i n th e las t generatio n i n whic h the "democrati c proces s devour s itself" an d soldier s mov e eagerl y o r reluctantly, into the presidential palaces: 117 The other wa y to stop the spiral i s to control wages and salaries by govern ment interventio n an d le t prices attai n their "proper " level . I n othe r terms , this involve s restorin g th e surplu s t o th e detrimen t o f th e labo r force . . . . The stat e i s then required t o use force to overcome th e political strengt h of the labor unions and the masses. Conside r th e paradox: the use of force by the state is justified by invoking the principle tha t the state should not intervene in the economy ! Economi c liberalis m i s strongly proclaime d a t the tremendou s social and political cost of destroying political liberalism, if we interpret these concepts i n thei r origina l philosophi c unity . After arguin g that the dominant groups are interested i n only the maintenance of control over th e surplu s for their own excessiv e consumptio n Prebisch's remed y is: 118 The transformatio n o f th e syste m seem s t o m e inevitabl e i f w e ar e t o combine developmen t wit h social equit y and political advance. However, th e most widel y disseminate d doctrina l option s d o not appear t o be o f much us e for guiding this transformation. .. . I therefore believe that the time has come to searc h fo r a synthesis o f both socialis m an d genuine economic liberalism , and thereb y restor e tha t essentia l philosophi c unit y o f economi c liberalism , with politica l liberalism . . . . Socialism i s necessar y t o ensur e th e 'socia l use ' o f th e surplus . . . . [EJconomic liberalism i s necessary insofar as individual decisions t o produce and consum e shoul d be lef t t o th e market . Internationally, h e argues , i n particular , fo r reform s i n th e cente r tha t woul d enlarg e export earnings by the periphery and, more generally, for policies whic h would exploit the potentialities tha t flo w fro m long-ru n commo n interests: 119 We nee d a policy inspire d wit h a long-term visio n on bot h sides . Bu t th e long ter m start s no w wit h regar d t o enlightene d polic y actio n involvin g a series o f agree d convergen t measures . Th e center s an d th e peripher y ar e losing a great opportunity. Nothing important is being done to meet a tremendous historical responsibility with far-reaching economic, social , and political consequences fo r th e whol e world!

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In castin g u p th e account s o n Prebisch' s contributio n t o developmen t analysi s an d policy, i t is not difficult t o identify limitations , false leads, an d even errors, a s do the tw o distinguished commentator s i n th e Pioneers volum e (Alber t Fishlo w an d Jagdis h N . Bhagwati). Fo r example , a n import-substitutio n strategy wa s just abou t th e onl y optio n open i n the 1930s , but , a s som e o f th e countries o f Eas t Asia demonstrated, th e poten tialities fo r expanding exports other than basic commodities in the 1950s , 1960s , an d even in th e somewha t pathologica l 1970 s an d 1980s , prove d muc h greate r tha n Prebisch' s analysis woul d suggest . Fo r example , a s acknowledge d leade r o f UNCTA D h e fel t impelled t o enunciate doctrines and policies, roote d i n his perceptions of Latin America n problems. H e sough t to apply these t o the extraordinarily wide spectrum of what we call developing countries . Th e typica l problem s o f Africa , th e Middl e East , an d Asi a diffe r from thos e of Latin America. 12° Even more important, the problems within these regions , including Lati n America , differe d greatl y fro m countr y to country . In seekin g commo n ground amon g hi s heterogeneou s UNCTA D constituency , Prebisc h wa s pressed b y cir cumstances t o move toward a stance of confrontation and a heightening of arguments that blamed th e problem s o f developing region s o n the policies o f advance d industrial countries, pas t and present. Th e New International Economic Order (NIEO) strategy within the United Nations inherite d an d sharpened this rhetorically confrontationa l strategy. It s cost proved severe . The advanced industria l countries proved quit e capable offending off this kind o f pressure . And , withi n developin g countries , a ga p opene d u p betwee n thos e conducting rhetorica l exercise s an d draftin g empt y resolution s i n larg e internationa l gatherings an d those seriousl y a t work on the domestic and international tasks of development. Th e coalition s supportin g foreig n aid in the parliaments of the advance d industria l countries—and th e America n Congress—were , i n al l conscience , rathe r fragile . The y were no t strengthene d b y th e UNCTA D and NIEO strategy . But ther e i s a quit e differen t wa y t o regar d Prebisch' s contributio n t o developmen t thought and policy . It is suggeste d by a comment, in passing, of Bhagwati: 121 . . . [F]o r m y generation o f economists i n the developing countries , preeminence of Raul Prebisch i n a field of obvious importance was a major source of inspiration. T o se e that one' s ow n can be innovative, ingenious , an d impor tant is always, and was then especially, a matter of considerable psychologi cal significance . For , amon g th e colonia l attitude s whic h afflicte d ou r so cieties in those days was the belief that fundamental thinking required that one belong t o th e center , no t th e periphery , i n Rau l Prebisch' s splendi d termi nology. Prebisc h an d Lewis, amon g a few key figures, helped t o shatter that myth decisively . Prebisch wa s a sophisticate d man . Those , lik e myself , wh o deal t wit h hi m profes sionally (a s wel l a s a friend an d fello w crusade r fo r development) , kne w tha t he under stood fully tha t development wa s primarily a domestic task fo r each nationa l society; that the majo r impediment s la y i n th e history , culture , an d institution s o f th e developin g nations themselves; an d that the so-called core countries could only help at the margin.122 He also knew enoug h of history to understand that, in fact, "peripheral " countrie s wer e not doomed t o perpetual second-class status. Suc h knowledge did not, however, ameliorate th e pai n o f dependenc e i n th e shor t run. Thus, Prebisch' s Hamiltonia n stance gave effective psychologica l an d politica l expressio n t o th e frustration s an d resentment s o f latecomers confrontin g fro m da y t o day th e ofte n callou s policies o f the mor e advanced.

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Paul N. Rosenstein-Rodan No seriou s lis t of authenti c developmen t pioneer s coul d b e draw n u p withou t including Paul Rodan. H e was one of the remarkable ban d of young economists wh o made their way to Britai n fro m centra l an d Easter n Europ e durin g th e interwa r years, greatl y enrichin g university life , notabl y i n London, bu t als o i n the world o f political econom y i n general . Rodan taugh t a t Universit y College o f th e Universit y o f Londo n fro m 193 0 to 1947. Although a British citize n from the ag e of 28, he , lik e Schumpeter, neve r los t wholly — indeed, the y cultivated—th e styl e o f thei r studen t year s i n Vienna. Rodan's famou s first articl e on Eastern Europe was published in 1943 , whe n he was 41. But fro m tha t period until his death mor e tha n 40 years later , h e focused hi s professiona l life wit h singula r dedicatio n o n th e theor y an d practic e an d teachin g o f developmen t economics. Looking bac k we tend to see the early work of economists—including our own work — with a hindsight shaped b y later debates , events , an d intellectua l developments. I t may , therefore, b e useful t o begin with a short summary of what Rodan's 194 3 paper wa s in fact about. Foreshadowin g muc h that was distinctive in his work of the 1960 s atM.I.T., it is a quantitative outlin e o f a 10-yea r postwa r pla n t o lif t th e growt h rat e i n Easter n an d Southeastern Europ e fro m virtua l stagnatio n t o ove r 4 % b y a combinatio n o f increase d domestic savings , capita l investmen t fro m abroad , Germa n reparation s i n kind , an d emigration, thu s full y employin g (40%-50%, i n industry) a working force initiall y characterized b y substantial unemployment and partial unemployment. Here ar e the essential s of Rodan' s pla n wit h it s rather interestin g arithmeti c provide d i n ou r notes. 123 The aim of industrialization in international depressed areas i s to produce a structural equilibriu m i n th e worl d econom y b y creatin g productiv e em ployment fo r the agraria n exces s population . I t may be assumed that creditor countries wil l no t b e willin g t o ente r int o commitment s fo r mor e tha n te n years. How muc h can be achieved i n that period, an d what is the rough orde r of magnitud e o f th e capita l required ? . . . Even i f we take account o f the gradually rising national income, rate s of savings beginning with 8 percent and leading at the end of a ten-year perio d to 1 5 percent would seem t o represent th e maximum one can plan for. Assum ing a nationa l incom e risin g annuall y by 4 percent , an d a n averag e rat e o f investment o f 1 2 per cent , th e interna l capita l suppl y woul d onl y amount t o 3,000 million. .. . A t best 70-80 per cent of the unemployed worker s coul d be employed . I t follow s tha t emigratio n wil l still have t o supplemen t indus trialization. Beside s that , however, Germa n reparation s in the form of capital equipment migh t provid e on e par t o f th e capita l of the E.E.I.T . [Eas t Euro pean Investmen t Trust] . . . . German y ca n increas e he r consumptio n abov e the war-time standard , an d transfer reparations i n natura representin g 25-5 0 per cen t o f wha t sh e use d t o spen d o n armaments. The followin g points ar e wort h notin g abou t thi s precocious exercise : • Whil e buildin g hi s calculation s aroun d a shif t o f labor from rura l unemployment an d partia l employment to ful l employmen t (a kind o f transfe r of Keynesia n concept s t o development ) Roda n als o employ s a Harro d capital-output ratio. 124

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• Roda n disaggregates capita l requirements per employed worker by sector and, by implication, foreshadows his later concern wit h sectoral capitaloutput ratios . • H e applies to development economics the Keynesian notion of a marginal rate o f savin g risin g wit h income per capita . • H e anticipate s Arthu r Lewis' s ris e i n th e investmen t rat e durin g th e transition with his estimate of the maximum possible rise in the domesti c saving rate ove r 1 0 years fro m 8 % to 15 % (gross), wit h important addi tional resource s require d from abroa d t o roun d out hi s ful l employmen t target. Behind thi s imaginativ e i f primitiv e outline o f a pla n la y fou r conceptua l "innova tions," reflectin g flaw s i n the workin g of privat e markets , which , i n retrospect, Roda n defined a s follows: a concern wit h disguised unemployment (or excess population ) in the countryside; an elevation of Marshall's "pecuniary " external economies, yielding economies o f scale ; a n emphasi s o n th e indispensabl e rol e o f larg e block s o f infrastructur e investment a s a necessar y foundatio n for profitabl e industrialization ; and a heightene d emphasis on "technologica l external economies," notably public investment in education and training . Taken all together, the reality of these forms of market failure constituted Rodan's cas e for planning the kind of "Bi g Push " he envisaged as necessary to lift a relatively stagnant underdeveloped countr y int o sustaine d growth: 125 The marke t mechanis m doe s no t realiz e th e "optimum " eithe r i n on e nation or between nations because it relies on such unrealistic assumptions as linear homogeneous productio n functions, n o increasing returns or economies of scal e o r o f agglomeration , an d n o phenomeno n o f minimu m quantum or threshold. Thi s obscures th e natur e of the development proces s an d the risks involved. Nothin g i n theolog y o r technolog y ordain s tha t Go d create d th e world conve x downwards . Rodan recognized th e theoretical legitimacy of posing the question (as Kenneth Arrow did) whethe r perfec t futur e market s fo r commoditie s an d service s migh t mitigat e o r eliminate thes e marke t failures. 126 Hi s response: 127 In terms of contemporary theory, the essence of the 194 3 article may seem to res t o n th e basi c question whether perfect futur e market s can exis t for al l the commoditie s i n th e contex t o f a futur e whic h i s bot h open-ende d an d uncertain. Althoug h I recognized tha t futur e market s and futur e price s coul d provide necessar y additiona l signalin g devices , I state d tha t "I t i s a moo t point whethe r perfect futur e market s fo r al l goods ca n exist . [My ] suspicion (without proof) is that they cannot exist for the same reasons for which perfect foresight i s impossible . I n reality the y certainl y d o not exist." Rodan develope d an d refine d thes e proposition s i n th e cours e o f hi s researc h an d writing but, above all, as an adviser on development policy and plans. At the World Bank (1947-1953) h e wa s assistan t directo r o f th e Economic s Departmen t an d hea d o f th e Economic Advisor y Staff. Hi s majo r enterpris e was a stubborn crusade, ultimately quite successful, t o shif t Worl d Ban k lendin g from a projec t t o a progra m basis. A t M.I.T . (1953-1968) h e carrie d forwar d work on Italy , India , an d Chile . H e wa s als o a majo r

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figure i n th e crusad e o f the Cente r fo r International Studies, le d by Ma x F. Millikan , t o shift U.S . polic y t o large-scal e sustaine d suppor t fo r development. 128 H e wa s amon g those wh o contribute d substantiall y t o th e suppor t o f the n Senato r Joh n F . Kennedy' s effort (jointl y with Senato r Joh n Sherma n Cooper ) t o se t in motio n consortiu m arrange ments in support of Indian and Pakistani development plans. H e also played a n importan t role i n layin g th e foundation s i n th e 1950 s fo r wha t wa s t o becom e th e Allianc e fo r Progress. Aside fro m hi s analyti c skills and cumulativ e experience, Roda n brough t to these an d other enterprise s tw o distinctiv e qualities , on e narrow , th e othe r broad . First , skil l i n translating a polic y proposal—an d it s analyti c underpinnings—int o rough bu t usefu l quantitative terms, muc h as he did in his 194 3 article on Eastern Europe. H e took the lead, for example, i n designing the quantitative appendix for A Proposal (1957) , wit h its rough calculations of necessary development aid levels; and he later refined these estimates for a major 196 1 articl e i n Th e Review o f Economic Statistics. 129 Second, h e contributed i n a major way to the creation in the 1950 s of a consensus among the development economists of th e Nort h an d Sout h o n th e analyti c principle s tha t shoul d underli e a much enlarge d international effor t an d o n ho w suc h effor t shoul d be organized . Rodan' s effectivenes s derived fro m a specia l mixtur e of qualitie s and attributes : his eviden t total dedicatio n t o development; hi s statur e a s a n acknowledge d pioneer ; hi s war m an d livel y personality; even hi s British citizenship at a time when the weight of American power was somewhat burdensome. Lookin g back , th e existenc e o f tha t consensu s wa s a remarkable achieve ment o f th e period; an d th e lac k of suc h a consensus on where t o go fro m here , a major weakness i n North-South relation s o f the 1980s . Rodan returns in his Pioneers essa y to the failure of one of his most cherished hopes . I t was t o leav e i n th e hand s o f a kin d o f Internationa l Suprem e Cour t o f developmen t economists th e arbitratio n o f difference s amon g creditor s an d recipient s concernin g th e appropriate volum e and conditions for aid. The "Committe e of Nine" i n the Alliance for Progress wa s a firs t effor t i n thi s direction , destroye d b y wha t Roda n regarde d a s a " 'trahiso n de s clercs'—that is , the sabotage of the Alliance for Progress by both the U.S. and Latin American bureaucracies." 130 Rodan's final observation on the concept i s worth recording:131 . . . [T]h e ver y discussio n by a credit-givin g country of wha t the receivin g country shoul d d o invariabl y raises objection s tha t the latter' s nationa l sov ereignty i s being infringe d upon . Unde r such circumstances, the discussion is either incomplet e an d no t explicitl y articulate d o r i t i s boun d t o giv e ris e t o mutual recrimination . The only way out of this vicious circle is to establish a committee, which is not appointed b y and not responsible to either creditor or debtor governments , to mak e a n independen t evaluatio n o f nationa l developmen t effor t an d a consequent recommendatio n o f th e amoun t o f ai d t o b e allocated . .. . I t should evolve into a de facto ' 'International Court of Economic Justice''. . . . Today w e have competence, finance, and no democracy i n the international banks—and democrac y an d n o financ e i n th e Unite d Nations* . . . . Th e Committee of IX of the Alliance for Progress wa s an attempt to apply such an international arbitration . It faile d becaus e of sabotag e o n bot h sides , bu t al l *As occasionally , Rodan's delight i n a bo n mo t her e straine d reality . On e country-on e vot e i n th e Unite d Nations Genera l Assembl y can hardl y b e regarde d as a "democratic " procedure.

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great idea s firs t fail . Al l progress i s firs t proclaimed t o b e impossibl e bu t i s then realized . Looking backward and forward, Rodan's final reflections, like those of a good many of his fello w pioneers , concer n th e large r tha n initiall y expected rol e o f "non-economic " factors an d objectives: 132 After som e fou r decade s o f concerted attentio n to the challenge of develop ment, w e might ask how much economics ca n explain. Economic theor y can determine the necessary, thoug h not the sufficient , condition s of growth. Th e so-called noneconomi c factor s account for the gap between the necessary an d the sufficient . . . . Data mus t . . . cover no t onl y availabl e materia l an d huma n resources , technological possibilities , an d psychological preferences but also attitudes of mind an d th e abilit y to chang e them . A goo d par t o f the last-name d factors (social attitudes ) are unknown rather than given quantities, so that the data are never available . An d th e objective s ar e largely subconscious—neithe r quit e given no r quit e unknown . Like Myrdal an d others, Roda n expressed hi s disappointments an d regarded th e earl y 1980s a s a period when " . . . developmen t i s now passing through a low point."133 But to th e en d (lik e Arthu r Lewis) h e refused t o abando n hi s fait h i n the ultimat e triump h of the sens e o f huma n communit y that suffuse d hi s commitment t o development. 134 The origina l philosophy o f ai d i s stil l correct , an d presen t cynic s ar e no t justified. . . . The increase in life expectancy , th e fall i n infant mortality , the rates o f growth , th e achievement s i n an y numbe r of developin g countries — nobody at the end of the Second World War would have expected s o much. A billion peopl e ar e stil l hungry , bu t i t woul d no w b e 2 billio n withou t th e achievements tha t have been made . What go t lost , however , i n th e 1970 s wa s internationa l solidarity . Th e objective o f international full employmen t disappeared i n cynicism after Viet nam. Th e transitio n from th e national welfare stat e t o the internationa l level must stil l b e made . . . . Genera l cynicis m i s a t leas t a s unrealisti c a s naiv e idealism. W e kno w wha t has t o b e done—w e hav e t o mobiliz e th e wil l t o do it . Rodan's lucid , principle d cas e fo r developmen t planning , roote d i n fou r specifie d failures of the competitive market process, move d to the center of the protracted debat e on the appropriat e role , i f any , an d appropriat e limit s o f plannin g i n th e transitio n fro m relative stagnatio n to sustaine d growth. The debat e di d not always match the orderlines s and precisio n o f Rodan's argumen t or meet it head on; but, in building his case, on those requirements o f " a grea t society " that "could never repay the expense t o any individual or small number of individuals," Rodan linked his advocacy of planning and, indeed, hi s view o f developmen t economic s i n th e early , critica l stage s o f growt h firml y t o th e classical tradition . H. W. Singer Like a number of his fellow pioneers, Hans Singer did his first professional work on acute problems of interwar Europe—in his case, on areas in Britain experiencing particularly

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high an d protracte d unemployment . And, agai n like a number of his fellows, h e carrie d over int o developmen t polic y no t only the lesson s h e dre w fro m a n immersion i n chronically depresse d area s bu t als o th e ideolog y o f th e welfar e stat e tha t th e pathologica l interwar experienc e helpe d greatl y t o strengthen . I n hi s essa y fo r th e Pioneers volume , Singer traces hi s intellectua l roots to Keynes, Beveridge , an d Schumpete r of what might be calle d th e firs t moder n generatio n (al l bor n i n th e earl y 1880s ) an d t o Coli n Clark , Rosenstein-Rodan, Balogh , an d Myrdal of the second (born about the turn of the century). Singer, bor n i n 1910 , rathe r belong s wit h Bauer, Hirschman , and Lewis (al l 1915 ) wh o might be regarde d a s part o f a third. Singer's best-know n contribution t o development economic s is , o f course, hi s analysis of the terms of trade for developing countries incorporated i n two papers published i n the turning-point period (1949-1950). 135 Singer provides a detailed accoun t of the influences that led him t o focus on the long-run course o f relative prices an d the relative gain s fro m trade o f advance d industria l an d developin g countries. 136 Bu t hi s underlying , large r interest wa s "distributiv e justice": 137 While mainstrea m economic s concentrate d o n the problem o f allocativ e effi ciency (wher e comparativ e advantag e rule d supreme) , m y interes t wa s fro m the beginnin g mor e i n th e directio n o f distributiv e justice , o r rathe r dis tributive efficienc y a s I sa w i t a s a followe r o f Alfre d Marshall , R . H . Tawney, an d Willia m Beveridge . Thi s reflecte d a past concer n wit h unem ployment an d th e welfar e state , an d foreshadowe d a futur e interes t i n basi c needs an d problem s o f children . Thus, Singer , too , i s a dissenter of one school just as, say , Bauer and Little are dissenters of a counter-school . Looking back on his views of the 1950s , Singer conducts his defense on both technical and internationa l welfare economic grounds . H e depends heavily on an article (1980 ) b y J. Spraos ; his projections, on measurements that exclude oil prices an d assume the decline in th e relativ e price s o f basi c commoditie s o f th e mid-1980 s wil l continue. 138 In his commentar y in Pioneers, Bel a Balassa , i n my view authoritatively refutes Sing er's technica l argument ; an d Lewis, i n his essay , replie s tersel y t o the Prebisch-Singe r terms o f trad e perspective , alon g line s I fin d conclusive. 139 Moreover , i n commendin g import-substitution industrialization , Singe r faile d t o tak e int o accoun t th e resultan t egregious domesti c term s o f trad e whic h resulted fro m excessivel y hig h prices o f man ufactures, exploitatio n of farmers on behalf of more politically volatile urban populations, and neglect o f agricultural productivity—factors Prebisch came to appreciate only after a great dea l of damag e was done . The reversa l of thes e distortions , requirin g a shif t of domestic term s of trade in favor of agriculture as well as encouragement for manufactured exports produce d wit h greate r efficiency , ha s prove d a politicall y difficult—eve n ex plosive—process i n a good man y countries.140 Singer als o fail s t o consider m y own and Lewis's argument s fo r th e clos e interdependenc e o f agricultura l an d industria l development. Singer's secon d lin e o f defense , pu t bluntly , i s that , whil e nois y Unite d Nation s agitation for various devices to improve the terms of trade for developing countries did not yield significan t results , the y wer e a usefu l backgroun d t o th e effor t t o generat e a n institution tha t would enlarge th e flo w o f sof t loan s to developin g regions. This argumen t is developed a s followed: Singe r first list s five line s of action that might mitigate o r revers e worsenin g term s o f trade: 141 "changin g th e underlyin g oargainin g

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relations," for example, b y "pressur e on multinationals and disseminating hig h productivity technologies;" enlarging "intra-LD C trad e and intra-LDC investment"; autarchica l import substitutio n delinkin g developin g countrie s fro m trad e wit h advance d industria l countries; expanding manufactured exports; increasing the volume of primary commodity exports an d thus improving the income terms o f trade (export revenue divided b y impor t prices). He emerge s wit h trade pessimis m on all counts. Thi s leave s him wit h the ques tion: "Ai d not trade?"142 Singer the n argue s tha t th e agitatio n of the "wil d men" in the United Nations Secre tariat fo r th e Specia l Unite d Nation s Fun d fo r Economi c Developmen t (SUNFED)— a proposed instrumen t for dispensing soft loans—playe d a n important part in preparing th e way fo r acceptanc e o f th e Worl d Bank' s Internationa l Developmen t Associatio n (IDA) . There is an element o f truth in this assertion , althoug h the process tha t yielded ID A an d other institution s an d policies tha t enlarged developmen t ai d i n the lat e 1950 s wa s vastl y more comple x tha n Singe r suggests. 143 In a sense , al l th e pioneers , withou t exception , fel t the y wer e engage d i n battl e o n behalf o f the underdogs o f this world,—i.e., th e men, women, and children of countrie s that wer e latecomers—tha t di d no t ge t int o takeof f unti l th e 1930 s or , indeed , wer e struggling to get into takeoff or in its early phases in the 1950s . The y were sore beset with acute politica l an d social a s well a s economic problem s a t a time whe n Western Europ e and Japan, to the surprise of the bulk of the economics profession, wit h the help of a bit of American pum p priming, had move d int o the most rapi d growth phase o f their histories ; and a United States, it s economy rejuvenated by war, moved on to new levels of affluenc e in a world economy i n which the dollar wa s the international currency an d the America n capital market was the uncontested center of global finance . The biases of Singer moving, as it were, fro m th e distressed area s o f Britain to the distressed area s of the world are not difficult t o understand with sympathy. And the atmosphere of the United Nations, with its politics i n nonsecurity matters run on the basis of one country-one vote, heightene d thos e biases. Against this background it was natural for Singer to think of his mission in terms of " a global welfar e state": 144 "A s par t o f m y concern wit h unemployment problems, I fel t involved i n th e developmen t o f a socia l welfar e stat e immediatel y afte r th e war . . . . Obviously, a partisan o f th e social welfar e stat e woul d be attracte d b y th e though t and possibilities o f a global welfar e state represented b y th e United Nations in those hopefu l first days of naive utopianism.'' T o one degree o r another, explicitly or implicitly, most— not all—the pioneers though t in some such terms. Ther e was a strand of legitimacy in this perspective becaus e th e religion s an d culture s o f Wester n societie s wer e roote d i n th e ultimate brotherhood o f man. Indeed, th e language of the United Nations Charter reflecte d this stran d i n reality. I t would be a naive cynicism wholly to deny the importance o f this fact amon g th e motive s tha t move d th e parliamentar y bodie s o f advance d industria l countries, le t alon e th e motive s o f me n an d wome n wh o committe d a part o f thei r live s and professiona l career s t o th e caus e o f development. An d a t leas t sinc e Davi d Hum e there wa s also the proposition tha t an extra dollar of income for the poor adde d mor e than it too k awa y fro m th e rich . But ther e wer e tw o importan t limitations that ha d t o be respecte d i f these elements in the equation were to be kept in proper proportion. First, for good or ill, the United Nations was a n organization of sovereig n nations, no t a global government. Ultimate sovereignty was jealousl y guarde d b y al l members , perhap s mos t jealousl y b y th e government s of developing countries , man y freshl y emerge d fro m colonialism . Thi s mean t tha t onl y

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partnerships, a s Paul Roda n pointe d out , woul d work; and partnerships deman d consen sus.145 Charter s o f right s an d duties , i n whic h all th e right s ar e allocate d t o developin g countries, dutie s t o advance d industria l countries , prove d i n thes e circumstance s unhelpful. Second—and i n m y vie w mor e important—th e welfare-state analog y wa s technicall y misleading. I t encourage d th e vie w that successfu l development hinge d o n a n adequat e flow o f transfer payments fro m th e rich to the poor. Thus , recommended targets wer e se t in various international reports for foreign ai d levels as a proportion o f GNP i n advance d industrial countries . Bu t th e proximat e objectiv e o f internationa l developmen t polic y is not income redistribution: it is to induce growth and development among the latecomers to modernization. Somethin g approximatin g incom e redistribution occur s becaus e th e nor mal rate o f growth i n and beyond takeoff is higher for a developing country, with a larg e unexploited backlo g o f technolog y t o absorb , tha n fo r a n advance d industria l country. Foreign aid can certainly help if it is used well, but the correct criterion for aid (aside from humanitarian assistance at times of famine or other suc h transient crises) is an economy's capacity t o absor b externa l resource s i n highl y productiv e uses . Thi s implie s highl y productive us e o f domesti c resources , becaus e foreig n ai d ha s alway s bee n a modest , marginal accretion o f resources. Agai n to quote Rodan:146 " . . . The basic purpose of aid is to catalyze additional national effort i n developing countries. . . . Aid should continu e to a poin t a t whic h a satisfactor y rat e o f growt h ca n b e achieve d o n a self-sustainin g basis." This perspective ca n be justified i n terms of a partnership with common interests . Th e outcome would not be a fixed proportion o f GNP in transfer payments to the poor from th e rich bu t a declining flo w a s one countr y after anothe r moved int o self-sustaining growth and cam e t o generat e it s capita l requirements fro m it s ow n resource s plu s conventional private borrowin g fro m abroad .

Jan Tinbergen In hi s commen t o n Tinbergen' s essa y i n th e Pioneers volume , Michae l Brun o focuse s sharply o n th e former' s mos t distinctiv e contribution ; tha t is , th e conversio n o f th e econometric plannin g techniques he pioneere d i n th e postwa r Dutc h government t o th e planning of development—a conversion crystallize d in his 195 8 Th e Design o f Development.147 Althoug h he ha d visite d Indi a i n 1951 , i t wa s no t unti l 1955 , whe n Tinbergen was 5 2 year s old , tha t h e wa s free d o f hi s governmenta l responsibilitie s an d abl e t o concentrate o n problem s o f development. On e sense s i n Tinbergen's Pioneers essa y th e moral a s wel l a s intellectua l satisfaction h e derive d fro m thi s midlif e commitment. H e notes tha t h e cam e t o economic s fro m physic s i n 192 0 t o struggl e agains t th e evi l o f poverty. H e ha d see n o n hi s 195 1 tri p t o Indi a poverty fa r wors e an d mor e widesprea d than any he had observe d i n Europe. On e ca n understand the fulfillmen t h e derived fro m his bein g abl e t o tur n wholeheartedl y i n th e mid-1950 s fro m a n increasingl y affluen t Europe t o th e challeng e o f developmen t an d hi s joinin g th e rapidl y enlargin g ban d o f development economists , including thos e h e generousl y describes a s hi s teachers . The y include, incidentally , three of his fellow pioneers : Raul Prebisch, Paul Rosenstein-Rodan, and Han s Singer. As note d earlier (pp. 300-301) , Tinberge n himself, a s well as Michae l Bruno , under-

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lines th e frailt y o f forma l econometri c method s whe n applie d t o polic y problems ; an d these line s fro m Th e Design o f Development belon g o n ever y planner' s wall: 148 It mus t firs t b e mad e clea r that programming is not a n alternative to common sense ; i t cannot replace common sens e and it should not. It does supple ment it, particularl y with regard to the orders of magnitude of the phenomena involved. I n the design o f development all information and all methods available should be put to use. Thi s seems th e more desirable sinc e information of the traditional type , th e usual statistics, is often insufficien t an d inconsistent. What distinguishes Tinbergen's reflection s on his experience as a development economist i s wel l capture d i n th e titl e o f hi s Pioneers essay , writte n whe n he wa s abou t 80 : "Development Cooperatio n a s a Learnin g Process. " T o captur e th e authenti c and rar e openness o f min d hi s essay reflects , i t is usefu l t o g o back t o his firs t ventur e in growt h analysis writte n i n Hollan d durin g the Germa n occupatio n an d publishe d i n 1942. 149 I t will b e recalle d that , i n hi s pre-193 9 wor k o n busines s cycles , Tinbergen ha d sharpl y distinguished cycle s fro m trends , regardin g th e latte r essentiall y a s exogenou s phe nomena. I n hi s 194 2 pape r o n trends , h e virtuall y reverses th e procedure , abstractin g trends fro m cycles . H e regard s thi s procedur e a s legitimat e s o lon g a s th e "periodi c [cyclical] components " o f movemen t i n th e syste m ar e dampe d i n suc h a wa y tha t th e measured trend forms the '"center of gravity' of the short-term components" or '"gener al tendency ' o f th e tota l movement " o f th e system. 150 Against th e backgroun d of thi s formal separatio n h e state s hi s purpose: 151 The purpos e o f a theor y o f tren d movement s i s t o investigat e economi c movements extending over decades o r even centuries. Such a theory must not overlook th e developmen t o f population , capita l etc. , i n fac t i t mus t mak e these th e specia l subjec t o f it s analysis . It s centra l proble m ma y b e briefl y expressed i n the following question: how do production, employment, livin g standards an d other factors chang e under the influence o f population growth, technical developmen t an d capita l formation? After dismissing as an unsatisfactory basi s for such an aggregated statemen t of the task the work o f Kuznet s (Secular Movements), Car l Snyde r (o n busines s cycles), Erns t Wage mann (on long waves), and Walther Hoffmann (o n stages), he takes his start by combining Cassel's "uniforml y progressing economy" with Paul Douglas's production function. He emerges wit h a quite straightforward version of the classi c growt h equation: where u = tota l outpu t of good s an d services ; e t = a productivity facto r increasin g wit h time; i.e. , "technica l development " ax = labor ; Kl~K = capital; and ' ~x constan t under the Douglas assumptio n of a linear homogeneous productio n function. H e allows for the possibility of introducing land as a variabl e independen t o f capital . Dougla s establishe d tha t X approximated | ; bu t Tinbergen questione d Douglas' s assumptio n tha t labo r an d capita l wer e completel y substitutable. With this and some other modifications i n his growth equation, Tinbergen proceeded t o calculate over the period 1870-1914, for Germany, Great Britain, France, and the United States, comparative measures of wage flexibility; annual growth rates for total population,

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working population, rea l wages , production , and capital (includin g land); growth rates in labor productivit y an d overal l "efficiency, " an d capita l intensity . Perhap s th e mos t interesting o f thes e calculation s i s hi s effor t t o "explain " th e increas e i n productio n in terms o f th e increas e i n inputs (capital an d population) versus increase s i n efficiency. 152 I evoke thi s bold, highly experimental exercis e in comparative aggregate growt h analysis not only because it was Tinbergen's poin t of departure fro m cycle s to growth but als o because i t makes mor e vivid the reality of "th e learnin g process" he evokes i n the title to his Pioneers essay . H e specifies , i n particular , th e followin g "shift s fro m les s t o mor e satisfactory approaches " t o development: 153 . . . [FJro m the creatio n an d transfe r of physical capita l t o tha t o f human capital; fro m foreign , capital-intensiv e technologie s t o appropriate , o r adapted, les s capital-intensiv e technologies , whic h i n man y case s implie s a shif t from larg e t o smalle r projects; an d fro m employmen t creation i n cities t o it s creation i n village s o r smal l towns . I als o discusse d a shif t fro m externa l (intergovernmental) t o interna l policies and , somewha t related , fro m pater nalism t o self-reliance . Although no t formall y liste d b y Tinberge n i n hi s summation , I woul d ad d a furthe r "shift" tha t he does, indeed, discuss ; i.e., th e need to link a broad general framework for planning to that "ne w industry : project appraisal." 154 Tinbergen describes i n theory and, to a degree, in practice th e conventional intellectual framework for project appraisal ; i.e. , the measuremen t o f presen t valu e fo r al l futur e yields . Thi s demande d estimate s o f th e project's constructio n cos t an d time , o f annua l yield s an d ofte n (fo r market s i n dis equilibrium) estimate s o f shado w price s a s well . H e note s tha t th e appropriat e tim e discount—the valu e o f presen t ove r futur e good s an d services—i s th e mos t difficul t variable o f al l to estimate , usuall y requiring, i n th e end , intuitiv e judgment o r politica l compromises. But somethin g importan t i s missin g here : th e criteri a fo r secto r rathe r tha n projec t appraisal. Theoreticall y establishin g the highest present valu e for all future yield s should settle th e optima l sectora l a s wel l a s project allocation . Th e ne t margina l rate o f retur n ought t o b e equa l i n al l sectors . But , i n fact , wher e privat e market s d o no t rule , th e allocation process is and should be fought out in developing countries i n terms of sectora l (or regional ) rathe r tha n merel y projec t terms ; e.g. , road s versu s electri c powe r versu s agriculture versus education versu s port development. Wher e these choices do not merely reflect the relative power of contending political interests, they imply an optimum sectora l pattern of development. Whethe r a sector i s below or above its optimum dynamic path at a particular perio d o f tim e (and , therefore , facin g a curren t o r foreseeabl e bottlenec k o r experiencing substantia l exces s capacity ) profoundl y affect s th e proces s o f projec t appraisal.155 What mark s Tinbergen' s retrospectiv e evaluatio n o f hi s learnin g proces s i s th e eas e with which he came t o appreciate th e rough-and-ready wa y development plannin g had to proceed i n real life . Ther e i s no impuls e to impose o n a complex an d opaqu e reality hi s virtuosity i n econometri c techniques: 156 Choosing concret e figure s fo r eac h o f th e concept s implie d a lo t o f ar bitrariness, an d strivin g fo r a n "optimal " polic y neede d a numbe r of heroi c guesses. A logical start was, of course, to observe the recent past and then opt

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for a somewhat highe r figure. In practice, the narrowest of all the bottlenecks often determine d it s actual dimension . I n man y of the leas t develope d coun tries thi s wa s th e absorptiv e capacit y (tha t is , th e numbe r o f sufficientl y concrete blueprint s fo r projects) ; fo r man y o f th e mor e develope d countrie s the bottleneck wa s th e donor' s willingnes s to supply capital. Bu t all sorts o f other bottleneck s tur n u p durin g th e executio n o f a give n project : materia l supplies, certai n type s o f skille d worker s (fro m manua l to managerial) , an d various bureaucrati c shortcomings . A simila r pragmatic balance emerges i n Tinbergen's discussio n of the appropriate rol e of the public and private sectors in developing countries . I n his 195 8 Design o f Development, fo r example, he argues that the line between private and public activity be drawn on the basis of the latter performing only where the former fails, afte r publi c encouragement, to fulfil l a n essentia l developmen t function. 157 H e identifies , withi n thi s rubric , th e following essentia l tasks: 158 (i) t o creat e an d maintai n healthy monetary conditions; (ii) t o regulate the degrees of activity so as to avoid mass unemployment; (iii) t o correct extreme inequalities i n incom e distribution ; and (iv) t o supplement private activity i n certai n basi c field s wher e fo r on e reason o r anothe r tha t activit y fall s shor t o f meetin g legitimat e requirements. On top o f these administrative , supervisor y an d supplementary tasks there is scop e fo r som e direct participation o f th e publi c secto r i n production . This i s tru e o f sector s s o fundamenta l to th e country' s existenc e tha t direc t control is needed, sectors safeguarding the country's security such as a system of floo d contro l an d militar y defens e works . Looking bac k i n hi s Pioneers essay , h e add s two furthe r empirica l observations : i n th e Netherlands, a t least , th e relativ e performanc e of publi c an d private industrie s was pri marily a function of the quality of management rather than the type of ownership; and that in Turke y publi c ownershi p cam e abou t i n a goo d man y industrie s becaus e th e privat e sector simpl y coul d no t raise th e requisit e capital. 159 Tinbergen's sturd y good sense and priority for relevance over elegance is well captured by Ben t Hansen: 161 For him the basic economic problems to be tackled hav e been s o many and so large tha t frontal attacks on a broad scal e by means of crude methods loo k much mor e rewardin g tha n intensiv e studies o f smal l isolate d problem s b y means o f highl y refine d methods . I n th e childhoo d o f th e automobil e th e French enginee r Panhar d onc e commente d upo n the newl y invented manual (unsynchronized) gear box: "I t i s brutal, but it works." Although brutality is the las t thin g one woul d associat e wit h Tinbergen, Panhard' s commen t cer tainly applie s t o Tinbergen's economi c methods . Behind Tinbergen' s mixtur e o f technologica l virtuosit y an d commo n sense , ar e qualities o f humor , proportion, an d awarenes s of th e complexitie s of th e huma n condition—all capture d wit h rar e cando r an d lac k o f pretensio n i n hi s "M y Lif e Philosophy."161

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Two Conclusions about Development Policy: Time and Politics As this review suggests , developmen t economists after th e Second Worl d War , exceptin g Arthur Lewis , di d no t approac h thei r fiel d i n th e fundamenta l manner o f th e classica l economists dow n to J. S . Mil l and, I would argue, Alfre d Marshall . Thei r focu s was not the process of economic growt h viewed as a terrain for systematic, genera l analysis . Nor did the y accep t th e agend a o f post-187 0 mainstrea m economic s overwhelmingl y con cerned wit h the workings of advance d industrial market economies tha t had successfully transited takeof f sinc e th e 1780s . The post-1945 developmen t economist s operate d a t the other en d o f th e growt h spectrum . The y wer e concerne d wit h a n operationa l question : How coul d nation s tha t had, fo r whateve r reasons, bee n lef t behin d i n th e previous tw o centuries catch up with the more advanced countries of North America, Europe, an d Asia? More particularly, ho w could they move fro m slow , erratic , uneve n progress t o sustained growth accompanied b y socia l progres s an d a place of dignity on the world scene? Many of the countries wer e newl y independent; virtually all were stirre d with fresh ambitio n as the cours e of th e Secon d Worl d Wa r destroyed o r fatall y weakene d the colonial frame work an d opened u p options hitherto no t judged t o be realistic. Th e questio n was : What should these aspiring countries do? And, in the first instance , this meant: What should the governments o f th e aspirin g latecomers do ? An d what shoul d governments d o tha t were interested an d willin g to help ? The orientatio n o f developmen t theory t o clearl y define d publi c policy issue s was , o f course, firml y i n th e traditio n o f classica l economics . Bu t it s practitioners o f th e 1950 s and 1960 s wer e no t seekin g th e natura l laws for humanity to substitut e for th e arbitrary decisions o f heavy-handed, power-seeking stat e bureaucracies. Shaped b y previous experiences o f interwa r depression an d war, whe n the role of th e state wa s evidently critical , economists—with important exceptions—looked t o public policies as fundamental instruments i n th e developmen t process . And, o f course , the y differed . Lik e virtuall y all it s othe r branche s sinc e Hum e an d Adam Smit h challenged mercantilis t policy , moder n developmen t economics ha s been a quite contentiou s field . O f th e variou s effort s t o defin e th e contendin g partie s Pau l Streeten's i s certainl y th e mos t elaborate. 162 H e begin s wit h th e followin g matrix: 163 Table 17.6. Type s o f Development Theorie s Monoeconomics Asserted Rejecte Mutual benefi t 1

d

f Asserte d Orthodo x economics Developmen t economic s „ . , » „ , . . . , . I Rejecte d Marx ? Neo-Marxis t theories

SOURCE: Pau l Streeten , se e Not e 163 .

Evidently, h e regard s economist s a s spli t tw o ways : o n whethe r o r no t the y believ e common interest s exist between develope d an d developing countries; and on whethe r or not the y judg e a singl e corpu s o f economi c analysi s t o b e adequat e for problem s o f developed an d developin g countries. In elaboratin g th e dua l schis m h e argue s tha t earl y developmen t economists , wh o rejected th e notio n tha t neoclassica l economics sufficed , identifie d specifi c structura l

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problems i n developin g regions , som e o f whic h wer e late r recognize d a s wel l i n th e advanced industria l worl d o f th e 1970 s an d 1980s . Thus , Streete n argues , developmen t economics enriche d mainstream economics an d brought the two fields back towards unit y ("Unity i n Diversity") . He the n canvasse s i n a somewha t cursor y wa y th e arra y o f argument s assertin g a convergence o r conflict of interests between advanced industrial and developing countries and contrast s th e insight s o f economist s wit h thos e o f "cranks , dissidents , 'poets, ' journalists, an d novelists" ("Forma l Versu s Informal Intellectual Sectors"). 164 Against thi s background , th e battl e o n th e central front , alread y introduced , i s elabo rated; tha t is , th e battl e o f neoclassica l economist s versu s th e structuralists . Ia n Littl e defined thes e categorie s a s follows for Streeten:165 " . . . [U]nti l fairly recentl y I see the story as one of a battle between structuralist s who see the world as bounded an d flat, and consisting o f stick-in-the-muds, who have to be drilled—and neoclassicists wh o see it as round an d ful l o f enterprising peopl e who will reorganize themselve s in a fairly effective manner!" Streeten the n introduces two distinctions of his own: (1) between those who see a single obstacle to growth (e.g., lack of incentive to invest) or single objective (e.g. , increase i n GNP) versus thos e "pluralists " wh o see development a s a product of multiple causation and an objective t o be defined i n terms o f multiple values quite possibly differin g amon g societies ("Hedgehog s versu s Foxes") ; an d (2 ) "Linea r versu s Nonlinea r Paradigms " which turn s ou t t o b e hi s curiou s view tha t m y concep t o f stage s o f economi c growt h asserts tha t Germany , Russia , Britain , an d th e contemporar y developin g countrie s fol lowed identical ("Linear") development paths versus Streeten's versio n of the doctrine of dependencia.166 In a subsequen t sectio n ("Bi g versu s Small" ) h e set s P . C . Mahalanobi s of f agains t E. F . Schumacher . Polit e t o both, h e sides nevertheles s i n the end with the former "wit h the major exceptio n bein g hi s neglect o f foreign trade opportunities." 167 Rather surpris ingly he omits Mahalanobis' s lo w priority for agriculture, a target for a good man y of his other critics . Streeten's fina l dichotom y consist s of "Utopian s versu s Pedants." These ar e unnamed and unillustrated; but Streete n urge s that their virtue s be combined. I n fact h e struggles , rather gallantl y i n mos t cases , t o identif y th e virtue s o f eac h approac h an d t o suggest , sometimes incisively , sometime s vaguely , a benign synthesis . Others undertakin g Streeten' s dauntin g task woul d emerge , n o doubt , wit h differen t categories an d biases . I would , i n particular , commen d th e longe r horizo n an d bette r balance of Gerald Meier' s Emerging from Poverty (1988). Bu t Streeten does sugges t quite adequately th e diversit y of th e perspective s brough t t o development economics . I n con cluding this survey of the field m y purpose, therefore , wil l not be to redo hi s essay i n my own fashio n bu t t o plac e th e centra l issue s i n contentio n i n tw o somewha t differen t perspectives tha n i s conventional. Th e firs t concern s time ; the second , politics . I had the privilege o f calling o n two Thai economic planner s at an interval of 22 years. The first visit in October 196 1 was to Dr. Pue y Ungphakorn, who was then not only chief economic planne r i n th e governmen t o f Fiel d Marsha l Sari t Thanarat , bu t dea n o f th e faculty o f Thammasat University, Governor o f the Centra l Bank, and , in the traditio n of W. S . Gilbert' s Poo h Bah , holder of severa l other high posts. Dr . Pue y was on e o f th e ablest development economists and public officials I ever met. We discussed a wide range of issue s bu t cam e t o res t o n th e proble m pose d fo r privat e entrepreneurshi p by th e tradition that well-educated Thais enter the professions or public service rather than posts

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in commerce an d industry. They thus left th e field ope n to overseas Chinese, who , denied access to top political an d social post s i n Thai society , thre w their extraordinary energie s and talents into entrepreneurship i n the manner observed b y Sir William Petty some thre e centuries earlie r a s typical of the "heterodo x party" (preceding , p. 21 1 and note 6). Dr . Puey noted that import-substitution industries were beginning to emerge initiall y to supply the Tha i arme d forces , the n som e o f th e loca l market . Entrepreneurshi p ofte n too k th e form o f somewha t awkwar d "marriages " betwee n politicall y protectiv e Tha i militar y officers an d Chines e businessmen . Aided b y policie s tha t encouraged enlarge d education , agriculture, and increase d pri vate capital imports, a s well as by substantial official developmen t aid , the Thai economy surged forwar d in the next quarter century in an extraordinary way. Real GNP mor e than quadrupled; strongl y encourage d b y a Promotio n o f Industria l Investmen t Act , valu e added i n manufacturing rose from 14 % in 1960 to well over 20% and greatly diversified; a new generatio n o f well-educate d Thai s foun d thei r way int o th e economy . I n th e earl y 1980s Thailan d was weathering the slowdown in the world economy bette r tha n virtually any othe r developin g countr y and rapidly joining th e Fou r Tiger s o f East Asia . When I called on Dr. Sno h Unakul , president o f the Economic Society of Thailand an d secretary-general o f th e Nationa l Economic an d Socia l Developmen t Boar d i n August 1983, h e sai d that , a t thi s stag e o f Thailand' s history , th e tas k o f nationa l plannin g consisted mainl y of standin g back an d lettin g the private secto r d o th e job . The point is so important, in my view, that a second exampl e is justified: the Republic of Korea, th e first o f the developing countries to emerge i n the 1980 s as well on its way to high-tech statu s acros s th e board . Tabl e 17. 7 outline s th e public-polic y strateg y tha t brought Kore a t o its present position. 168 The polic y objective s fo r th e yea r 200 0 ar e se t ou t a s follow s by th e vice-ministe r of Science an d Technology: 169 The governmen t o f Kore a ha s prepare d a long-ter m technolog y develop ment pla n fo r the yea r 2000 . The mai n goa l o f this long-ter m plan i s to rais e Korea n technolog y t o th e level o f th e advance d countrie s by th e targe t year . W e identifie d five majo r technology field s t o achiev e thi s goal effectively. The lis t includes microelectronics, geneti c engineering, a range of industrial technologies, environmenta l protection , an d healt h care . Th e repor t goe s on : Key R & D projects wil l be carefully selected fo r development on the basis of thei r rat e o f retur n o n investment , or feasibilit y based o n Korea n condi tions. Ou r availabl e resource s wil l b e investe d intensivel y i n thes e ke y projects. To suppor t th e developmen t target , R & D investmen t will b e increase d sharply b y th e tur n o f th e century . Th e maste r pla n als o aim s a t recruitin g 150,000 R & D personnel b y the targe t year , 1 0 percent o f whic h will be of project manage r caliber b y internationa l standard. . . . Consequently, th e targe t settin g wil l b e transforme d t o concret e actio n programs of the Five-Year National Economic and Social Development Plans for actua l implementation. Table 17. 7 and th e extende d quotation captur e two essentia l points: the extraordinary transformation o f th e Korean economy in a quarter-century, includin g it s switc h fro m a n

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Table 17.7. Outline of Strategy: South Korea, 1960s-1980s Period

Industrialization

Science an d technology

1960s

1. Develo p import-substitut e industrie s 2. Expan d export-oriente d light industrie s 3. Suppor t producer goods industrie s

1. Buil d S & T infrastructur e 2. Develo p skilled technica l manpower 3. Promot e adoption of transferred technology

1970s

1. Expan d heavy an d chemica l industries 2. Shif t emphasi s from capital-impor t t o technology-import 3. Strengthe n export-oriente d industr y competitiveness

1. Strengthe n S & T educatio n a t universities 2. Promot e assimilation of imported technology i n th e privat e secto r 3. Promot e research applicable to industria l needs

1. Transfor m industrial structur e t o on e o f comparative advantage 2. Expan d technology-intensiv e industr y 3. Encourag e manpower productivity o f in dustries

1. Develo p an d acquir e top-level scientists and engineers 2. Localiz e ke y strategi c technology 3. Promot e industry' s technolog y development

1980s

SOURCE: Korea Business World, Vol . 3, No . 4 , Apri l 1987 , p. 10 .

import-substitution to an export-led growt h pattern; and the extent to which that transformation wa s le d an d guide d by a n activ e governmen t policy. I cite these tales because much of the debate about development economics i s peculiarly static, althoug h the objects of the debate—the developing regions themselves—have been extraordinarily dynamic . Thailand , fo r example , entere d takeof f (mode m growth , it s industrial revolution), i n the 1960s ; and was clearly i n the drive to technological maturity (Lower-Middle-Income country ) in th e 1980s . Mor e tha n a generatio n had passe d wit h those comin g t o responsibility i n the 1980 s quit e used to an environment of rapid growt h and th e voraciou s absorptio n o f th e larg e backlo g o f relevan t technologies . I n 196 0 two percent o f those betwee n th e age s o f 2 0 and 24 were in institutions of higher education; i n 1982 , twenty-tw o percent— a trul y revolutionar y economi c a s wel l a s socia l transformation. The comparabl e statistic s fo r th e Republi c o f Kore a ove r thi s spa n ar e eve n mor e remarkable. I t wa s a n eve n poore r countr y i n 1961 , a t th e tim e o f th e youn g officers ' coup, bu t enjoye d a highe r rea l incom e i n th e mid-1980 s tha n Thailan d (Worl d Ban k Upper-Middle-Income status) . Its proportion o f the relevant age group in higher education was 5% in 1960 , 36 % in 1985— a figur e that compares wit h 22% in the United Kingdom. It is, evidently , wel l on its way to high mass consumption in my vocabulary, statu s as an "industrial marke t economy " i n the vocabular y of the Worl d Bank. Although stil l societies livin g in continuity with their old cultures, Thailand and South Korea o f th e 1980 s ar e differen t countries—economically , socially , an d politically — from thos e of 1961 . And the same can be said of virtually every other developing country although, o f cours e th e storie s o f Thailand , an d Korea , lik e al l others , hav e importan t unique features. Despite palpabl e negative an d even pathologica l features , th e per capita growth rates of developing countries in the 1950 s and 1960 s averaged over twice those of now-advanced industria l countrie s at equivalen t stages. 170 If one accepts, fo r a moment, Ian Little's definition o f the dividing line among development economist s a s betwee n structuralist s an d neoclassicist s th e distinctio n become s

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highly sensitiv e t o time an d the historical stag e o f the economy o r economies on e has in mind. A countr y i n wha t I cal l th e precondition s fo r takeof f (say , Indonesi a a s o f th e 1960s) ma y no t onl y lack, a s di d Thailand , a n indigeneou s cadr e o f entrepreneurs , bu t also hav e a low leve l o f literacy ; a grossly inadequat e secondary an d higher educationa l system; a traditiona l agricultur e essentiall y untouche d b y th e productive method s avail able t o moder n labor-intensiv e farming ; a n infrastructur e incapable o f underpinnin g an efficient nationa l marke t o r a vita l plac e i n th e internationa l economy; a feebl e i f no t obstructive an d corrupt bureaucracy ; and a flow o f public revenues incapabl e o f support ing the minimu m irreducible function s o f government, a s defined, say, b y Adam Smith . The ne t investment rate ma y be 5% or less an d concentrated i n enclaves develope d b y foreign investor s t o expan d ra w materia l exports . I cit e thi s familia r arra y o f th e characteristic s o f underdevelopmen t t o specif y wha t I mean b y "structural " problems , a term ofte n use d ambiguously. A goo d man y developing countrie s were , o f course , furthe r alon g i n th e 1960 s tha n Indonesia. Bu t th e firs t an d obviou s poin t t o b e made—someho w los t i n Little' s struc turalist-versus-neoclassical paradigm—i s tha t a sensible polic y prescription fo r a country will vary greatly wit h its stage of growth: where it stands in the preconditions for takeoff; in takeof f (whic h is alway s a phenomenon limited by sector s and , often , b y regions) ; o r how fa r beyond i n the drive to technological maturity , also a dynamic process tha t take s time. Th e rol e o f th e stat e i s boun d t o b e greate r relativ e t o th e privat e secto r i n th e preconditions fo r takeof f tha n in , say , th e drive t o technological maturity . Afte r all , th e proportion o f investment allocated to infrastructure (excludin g housing) is normally abov e 30% i n al l societies . Th e developmen t theorist s o f th e 1950 s an d 1960 s wer e visiting , staring at, prescribin g fo r societies primarily at the lower end of the growth spectrum. Pu t another way , economie s movin g along wel l i n th e driv e t o technologica l maturit y can , increasingly, b e analyze d an d prescribe d fo r b y th e sam e technique s as those applie d t o more advance d industria l countries—although I would certainly no t qualify neoclassica l economics a s adequat e t o eithe r task . The mos t rigorou s forma l effor t t o resolve th e structuralist-neoclassica l confrontatio n and th e role of export-led versu s import-substitution policies is to be foun d i n Chenery' s Industrialization an d Growth. 171 Usin g an experimental computabl e general equilibrium model (CGE) , Chener y an d hi s colleague s compar e export-oriente d versu s import-sub stitution strategie s fo r stylize d version s o f Korea n developmen t o n th e on e han d an d Mexican an d Turkish development o n the other. An intermediate balanced strategy, mor e or les s illustrate d b y Israel , i s als o explored. 172 On e outcom e i s tha t whil e th e export promotion mode l perform s best , th e result s ar e t o a significan t degre e inconclusiv e be cause th e mode l is , perforce , a highly simplified versio n o f reality. 173 . . . W e focu s o n marke t incentive s an d leav e ou t exogenou s factor s whos e links wit h polic y are onl y imperfectl y understoo d . . . [and ] whic h could . . . onl y be explored b y parametric variation . Thes e element s ar e empirically ver y important. Endogenou s effect s workin g through incentives and market channel s onl y explai n a part o f th e difference s i n performance . Policies designe d t o "ge t th e price s right " ma y b e necessar y t o achieve rapid growt h an d structura l change , bu t a t thi s stag e o f ou r knowledg e w e cannot conclud e that the y suffice . . . . It ma y wel l b e tha t al l th e associate d element s follo w naturall y fro m a policy regime o f sensible incentives in an environment of free markets. How-

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ever, suc h a conclusio n i s certainl y no t obvious , an d examinatio n o f th e experiences o f th e countrie s whic h hav e successfull y pursue d export-le d growth show s that their governments followed active interventionist policies, albeit wit h heavy reliance o n market incentives. Our analysis has little to add to thi s debat e directly , bu t i t doe s sugges t tha t a certai n modest y i n claim s made fo r particula r polic y choice s i s called for . In al l conscience , on e doe s no t require—an d may , indee d b e confuse d by— a CG E model to explain why South Korea has done better than Mexico an d Turkey since the early 1960s. Surely, difference s in cultural attitudes toward education and family planning have been significant ; the relativ e sens e i n which national security an d independenc e ar e see n by the political leadershi p an d the citizens to converge wit h the pace o f development; th e level o f externa l assistanc e pe r capita ; an d other variable s beyond th e reach o f th e CG E model hav e bee n highl y relevan t t o th e outcome . For present purposes , however , th e following speculative dynamic conclusion i s most relevant:174 . . . [T)her e may be a necessary sequenc e fro m growt h dominated by import substitutio n t o a shif t t o manufacturin g exports a s a majo r engine . I t appears tha t a n econom y mus t develo p a certai n industria l bas e an d se t of technical skill s befor e i t ca n pursu e manufacture d exports . . . . Ther e ha s been a sequencin g a t th e sectora l level , wit h impor t substitutio n associate d with lo w TF P [tota l facto r productivity ] growt h rate s followe d i n th e sam e sectors wit h hig h export-le d growt h an d hig h TF P growth . Whethe r thes e observed sequence s ar e necessar y o r no t canno t b e determine d b y ou r data , but the y ar e suggestive . Without question, import substitution was overdone i n a good man y post-1945 develop ing countries. O n the other hand, J. S . Mill's carefull y delimite d case for a transient tarif f remains legitimate , wit h it s luci d Humeia n judgment: "Th e superiorit y o f on e countr y over anothe r i n a branch o f productio n ofte n arise s onl y fro m havin g begun i t sooner." Now for the second observation : th e critical role o f politics in development. Th e fact is that fro m Djakart a throug h Chin a an d th e India n subcontinen t t o Rabat, 175 throughou t Latin America, i n Eastern Europe and the Soviet Union, and, indeed in Western Europe, a consensus ha s emerged tha t the weight of public intervention in the economy ha s becom e excessive an d tha t greate r relianc e shoul d b e place d o n privat e enterpris e an d th e disci pline of competitive markets . I believe it is the scope and consequences of public intervention i n the economie s o f a good man y developin g countrie s tha t mainl y account fo r th e neoclassical attack on the structuralists. And, despite high aggregate growth rates, ther e is surely a great deal that justifies correction. Tak e for example, the following description o f the situatio n i n on e developin g country: 176 The Egyptian econom y bear s the legacy of economic policie s datin g from th e 1950's whic h wer e motivate d b y concer n fo r equit y an d assistanc e t o th e poor. Thes e policie s wer e characterize d b y price regulation , subsidizatio n of consumer goods, a dominant public sector and state control. Subsequently the government has tried to insulat e the averag e citizen from man y of the shocks in the internationa l economy and ha s no t adjuste d price s over the years. . . . [C]onsumers hav e no t face d worl d prices fo r energ y o r man y basi c com modities. Bot h price s an d wage s o f governmen t workers i n particula r have

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been held down significantly. As the gap between the market and the administered price s ha s grown , i t has become mor e an d more difficul t an d costl y t o maintain th e curren t system . This passage applie s to a good man y developing economies i n Asia and Latin America as well as the Middle East. Othe r unresolved problems can be added wit h wide application i n the developing regions ; for example, agonizingl y slow reductions in the birth rate, insuffi cient domestic competitio n behin d excessiv e tarif f barriers , an d the emergence o f "stat e bourgeoisies" ofte n pursuin g interests o f their own that are rarely identica l wit h those of the peopl e a s a whole. 177 The bloate d publi c sector s mus t b e viewe d a s th e outcom e o f a n histori c process. I t resulted fro m th e convergenc e o f what might be calle d technica l economi c an d politica l forces an d certai n strongl y held attitude s i n the developin g countrie s of th e 1950s . On th e economi c side , ther e wa s th e inabilit y t o ear n o r borrow , a t tolerabl e rates , sufficient foreig n exchang e t o avoi d highl y protectionis t impor t substitutio n policies . These le d directl y t o insufficien t competitio n i n domesti c markets , dampin g th e en trepreneurial qualit y o f both th e privat e an d public sectors . Foreig n exchang e rationing was als o a polic y tha t require d larg e powerfu l bureaucracie s t o decid e wha t shoul d b e imported. I n man y countrie s tha t proces s wa s the hear t of wha t passed fo r planning. On the political sid e ther e wa s th e fear o f explosions i n the volatil e citie s an d a decision, i n effect, t o exploi t th e farme r on behal f o f th e urba n population. Thi s had , o f course , th e effect o f reducing incentives i n the agricultura l sector an d slowin g the rate of increase o f agricultural production, forcing increased grai n imports at the expense of capital goods for industry an d transport . With respect t o attitudes, th e 1950 s were times when capitalism was an unpopular word and socialis m a popular wor d i n the developin g regions . Capitalis m wa s associate d wit h colonial o r quasi-colonia l status , representin g a n intrusiv e external power , an d i t wa s systematically represented a s such an d denigrated b y political leaders ove r a wide range . There wa s also considerable sentimenta l appeal in socialism during the 1950s : some of the European social democrati c government s wer e doin g quit e well; Mao' s Grea t Lea p For ward an d Chines e Communis t policy i n genera l generate d a considerable appea l amon g those wh o di d no t investigat e i t to o deeply ; an d eve n Khrushchev' s boas t tha t th e U.S.S.R. woul d soon outstrip the U.S. i n total outpu t had a certain credibility in the late 1950s. T o al l thi s on e ca n ad d tha t man y o f th e emergin g politica l leader s wer e ofte n intellectuals o r soldiers , bot h type s inherentl y suspiciou s o f th e marke t proces s an d inclined, fo r differen t reasons , t o hav e excessiv e fait h i n th e power s o f governmen t administration. It is fair to ask to what extent, i f any, structuralis t development economists bea r som e responsibility fo r thi s outcome. Strippe d o f rhetoric th e charges ca n be reduced t o three: • postwa r "expor t pessimism " an d excessiv e relianc e o n impor t substitution; • inadequat e incentive s an d suppor t fo r agriculture combined wit h exces sive subsidies to maintain low prices for "basi c needs" in the cities; and • excessiv e reliance on government ownership and control of industry and inadequate encouragemen t of domesti c competition an d foreig n privat e investment.

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With respect t o the first charge, it should be recalled that import-substitution policies— if not traced bac k to Alexander Hamilton—were the product of a condition, not a theory; that is , th e Grea t Depressio n o f th e 1930s . Prebisch , traine d a s a classica l economist , supported suc h policies on pragmatic grounds in the face of the overwhelming balance-ofpayments crisis that confronted Argentina and a great many other developing countries of the period . Th e late r homilie s of , say , Jaco b Viner , Gottfried Haberler , o r Pete r Baue r would have sounded hollow, indeed , i n Latin America of the 1930s . Th e ECLA doctrine , which i n familia r pattern turne d ou t t o b e fightin g th e las t war, cam e later . Export pessimism i n the early postwar years was in part the result of a general expecta tion tha t globa l depression wa s likely to recur after a brief restocking boom. Ther e was , moreover, a universal failure among economists to anticipate the pace of the global boom of the 1950 s and 1960s : GD P per capita in the advanced industrial countries in the period 1950—1973 increase d a t a n annua l rate (3.8% ) almos t thre e time s th e highes t previou s sustained rate (1.4% , 1870-1913) . Expor t pessimism suffuse d th e view of prospects fo r certain advanced industrial countries (e.g., Italy , France, Japan) as well as the developing regions i n th e earl y postwa r years . Othe r factor s were , o f course , als o a t work ; fo r example, the judgment that the Soviet Union had managed to develop at a rapid rate on an autarchical basi s and th e shortag e o f foreign exchange. In short , circumstance s an d th e inaccurat e expectation s o f economist s combine d t o preserve or se t in motion postwa r import-substitution programs. Explicit positive profes sional doctrines o f import substitution played a part; but, I would guess, an ancillary role. As Prebisch point s out, his theories simpl y provided a rationale for policies the course of the worl d econom y i n th e 1930 s ha d force d Latin-America n government s t o adopt . A s development economists observe d the perverse influenc e o f the vested interests that grew up aroun d excessiv e tarif f barriers , th e rathe r narrow limit s of impor t substitutio n as an impulse to industrialization, and the structural distortions that were generated (including perverse domesti c term s o f trade), they increasingly advocated remed y in the form of fre e trade areas , commo n markets , an d effort s t o expand manufactured exports. As fo r th e til t o f polic y towar d th e citie s a t th e expens e o f agricultur e and rura l life , development economist s bear little or no blame. They did of course vary in the strength of their protest s agains t thes e distortions , an d Pete r Baue r can argu e legitimatel y tha t h e should hav e been mor e strongl y supporte d by his colleagues in protesting the damage t o agriculture wrought by the African marketing boards. Moreover, most development econ omists di d no t appreciat e full y th e corrosiv e (a s well as positive) consequence s o f U.S . agricultural products supplie d by grant or subsidy under Pubic Law 480. Bu t the relativ e neglect o f agriculture and increasingly onerous subsidies to urban populations surely arose not fro m th e proposition s an d prescription s o f developmen t economists , bu t primaril y from th e politica l lif e o f th e developin g region s an d irrationa l reaction s agains t rea l o r believed distortion s o f th e colonia l (o r quasi-colonial) past. Similarly, th e excessiv e relianc e o n governmen t ownershi p an d control o f industr y is primarily a product of political impulses an d images combined wit h initially weak cadres of privat e entrepreneurs . Subsequently , th e bureaucrati c veste d interest s tha t gre w u p resisted th e kin d of shif t t o privatizatio n the Japanes e pioneered i n the 1880 s wit h such insight an d skill. I express thes e views not to defend th e structuralists against the neoclassicists—whose relative virtues and demerits will gradually be sorted out with the passage of time—but for a large r reason . I n m y judgmen t th e greatest weakness of development economics in the

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1950s an d 1960 s in all its variants was its lack of a solid, analytic political base. Economi c growth i n th e developin g region s fro m Alexande r Hamilton' s 179 1 Essay o n Manufactures forwar d has been i n good part—i n som e cases , wholly— a demand derive d fro m a nationalist determination t o achiev e independence an d dignit y on the worl d scen e i n the face o f remembered externa l intrusions of the past or of intrusions feared in the future. 178 This stran d wa s i n many case s heightene d b y a judgment in th e mind s of responsibl e politicians that their most urgent task was to strengthen in one way or another the usually weak sens e o f nationhood . Thi s ofte n require d a struggl e t o asser t th e powe r o f th e political center over the provinces or tribes; and it tempted a good man y leaders to external adventure o r xenophobi c posture s toward s on e or anothe r majo r power . The proble m wa s brought home t o President Kenned y in conversations wit h Presiden t Sukarno o f Indonesi a i n Apri l an d Septembe r 1961. 179 I n discussion s o n th e forme r occasion Kenned y urge d tha t developmen t b e give n a high priorit y an d offere d t o bac k such a commitmen t wit h U.S . suppor t fo r a Worl d Ban k consortiu m o f th e kin d tha t already existe d fo r India an d Pakistan . Sukarno' s reply : "Developmen t take s to o long . Politics i s everything. Mr. President , giv e me West Irian." For good o r ill, Sukarn o got West Irian; but, wit h Sukarn o replace d b y Suhart o i n 1965 , a n international consortiu m for Indonesi a (Th e Hagu e Club ) was organize d late r i n the 1960s . Kennedy sa w Sukarn o agai n i n Septembe r 1961 . Thi s tim e h e wa s accompanie d b y President Keita o f Mali . Th e occasio n wa s th e visi t o f pair s of leader s fro m developin g countries t o the capitals o f major advance d industria l countries to explain and defend th e resolutions o f the 196 1 Belgrad e conferenc e o f self-defined "neutrals, " who gathered t o assert thei r interest s i n th e fac e o f the U.S.-U.S.S.R . confrontation . Keita, whos e dignit y and candor mad e a favorable impressio n on Kennedy, sough t to explain a shadow from the past on U.S.-Mali relations. President Eisenhower had refused a Mal i reques t fo r a fe w DC- 3 transpor t plane s an d machine-gu n arme d jeeps . Keita subsequently acquired them from Czechoslovakia somewhat strengthening the hand of his left-wing advisers . H e said: " I a m responsible for a piece of real estat e tha t calls itsel f a country. I needed some planes with our flag painted on them and some jeeps fo r our police to giv e a bit o f substanc e to ou r nationhood. " And whe n som e government s turne d wit h highest priority and , even , wit h passion t o development (e.g. , Sout h Korea , Taiwan) , i t was , a s suggeste d earlier , fo r th e Hamil tonian reason: th e requirements for independence and security were perceived to converg e with thos e fo r improve d huma n and socia l welfare . In short , politic s wa s generall y mor e importan t tha n economic s i n th e developin g world; an d th e critica l politica l issue s wer e substantiall y differen t fro m thos e o f th e advanced industria l countries. Here , I believe , i s th e reason fo r the inadequac y of, say , Bauer's ple a tha t aid only be granted to those government s tha t relied o n the market an d thus moved towar d democracy or , say , Myrdal's an d Singer's eas y transfer of the canons of the post-1945 social-democratic welfar e state in Northwestern Europe to the developing world—a vie w tha t Myrda l finall y recanted . I t wil l b e recalle d tha t other s amon g ou r pioneers ende d u p i n puzzlemen t an d disappointmen t a t th e exten t t o whic h politic s frustrated th e economi c developmen t outcome s the y envisaged o r hoped for . I t is appro priate tha t Gerald Meier's fina l chapte r in Emerging from Poverty ("Th e Under-devclop ment o f Economics" ) i s mainl y about politics. The politics of Latin America, whose countries acquired independence about a century and a quarte r befor e 1945 , was , o f course , somewha t differen t fro m tha t o f th e othe r developing region s tha t containe d man y newl y independen t countries. But there , too ,

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political leader s wer e i n a n endles s struggl e agains t fragmentin g regional an d clas s in terests, includin g schism s derive d fro m concept s roote d i n th e Frenc h Revolution . T o establish somehow , i n the face of limited resources, a majority national consensus and the requisite compromise s t o permi t stabl e democrati c rul e was—an d remains—extremel y difficult.180 Prebisch' s ultimate disabuse with the Latin-American political process , doe s not, i n m y view , captur e accuratel y the natur e of th e problem confronte d in that region , nor does the prescription o f his fift h stag e suffice . In an y case , Par t I V survey s the tas k ahea d fo r politica l econom y an d publi c polic y itself, an d th e primac y o f noneconomi c force s an d policies wil l furthe r emerge. 181

18 Rostow's Theor y of Economi c Growt h

Presuppositions The reader o f this book i s no doubt already reasonably clear abou t the biases I bring to the study o f histor y an d economics . Bu t havin g felt fre e t o pass judgment on th e wor k o f a good man y predecessors and contemporaries, i t may be useful t o summarize explicitly, i n a brie f chapter , ho w I loo k a t these matters . This chapte r i s a n exercis e i n summation , no t intellectua l autobiography . Fo r thes e purposes al l the reader needs t o know is that I decided whe n I was 1 7 to combine histor y and economic theor y i n two senses : usin g economic theor y bot h to illuminate economi c history, the n a rather descriptive , institutiona l field; an d to explore th e complex interac tions o f th e econom y wit h the noneconomi c sector s o f society . A s a n academic , thi s i s what I have trie d t o d o eve r since . I should , perhaps , ad d wha t is obvious. Traine d fro m th e beginnin g as a historian a s well a s a n economist, m y sympath y lies wit h Malthus in his assertio n durin g the debat e with Ricardo : "I n politica l econom y th e desir e t o simplif y ha s occasione d a n un willingness t o acknowledg e mor e cause s tha n on e i n th e productio n o f particula r ef fects. . . . The first business of philosophy is to account for things as they are. . . ."Thi s was th e ai m i n m y earl y year-by-year , cycle-by-cycl e studie s o f th e Britis h econom y which covere d ever y yea r fro m 179 0 t o 191 4 excep t 1850-1868 . Thu s m y eviden t sympathy fo r D . H . Robertso n an d others wh o discipline d themselves t o establis h how , with inelegan t interactiv e complexity , an d wit h long - an d short-perio d factor s simul taneously a t work , economi c lif e actuall y unfolded. Because Chapte r 20 and the joint mathematical Appendix, (with Michael Kennedy) will contain furthe r technical an d theoretical materia l reflectin g m y views, th e summar y here will focu s o n certai n broa d characteristic s o f m y perspective .

People, Complexity, and Process My unabashe d delight wit h th e thought , style, an d value s o f Davi d Hum e i s eviden t i n Chapter 2. Quit e particularly the following propositio n is, in my view, the proper starting point fo r an y historian , socia l scientist , novelist, or , indeed , anyon e else dealin g wit h

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human beings: "Thes e principles of human nature, you'll say, are contradictory: But what is man but a heap o f contradictions. " The inescapable complexit y of people and , therefore, societies decrees that the assumption o f maximizin g behavio r i s ofte n misleading. 1 Noneconomi c force s ca n reinforce , dilute, or frustrate economic motives ; for example, th e fear o f external intrusion (as with Alexander Hamilton and the Meiji reformers) can reinforce other impulses to modernize a society jus t a s th e waywar d politic s o f man y developin g countrie s hav e frustrate d th e straightforward triumph of Myrdal's "modernizatio n ideals. " Take another example. The extraordinary an d unpredicte d reviva l o f Wester n Europ e afte r th e Secon d Worl d Wa r cannot be full y understoo d withou t taking into account th e linkage, a s it were, o f grandparents an d grandchildren; that is, me n who knew Europe before 191 4 (e.g., Monnet , De Gasperi, Adenauer , Schuman ) mad e commo n caus e wit h th e arden t youn g technocrat s who emerge d fro m th e war . Th e interwa r generation, burdene d wit h a sens e o f failure , almost droppe d fro m sight . Serious economic theory , history , an d development doctrin e must tak e thi s kin d of complexity—includin g generationa l sequences—int o account . I n combination wit h th e proble m o f increasin g returns , th e rol e o f noneconomi c factor s demands, a s Marshal l perceived , tha t economic s mus t ultimately be a biological rathe r than a neo-Newtonian subject. Thus, an understanding of the process of economic growth is a mor e appropriat e objectiv e tha n a theor y o f economi c growt h i n th e conventiona l sense. I was later to find i n the images of a scientist, Ily a Prigogine, evokin g his view of the physica l world , phrase s tha t captur e quit e precisely m y vie w o f ho w growt h (an d economic history) unfolds 2: "instability, mutation , and diversification, where irreversibl e processes are constantly at work and nonequilibrium is itself a source of dynamic order." These judgment s i n an y case , explai n inter alia th e rathe r restraine d enthusias m o f Chapter 1 5 for Harrod-Domar and neoclassical growt h models a s well as the title o f my Process o f Economic Growth (1952 , 1960) .

A Dynamic Disaggregated Theory of Production The Process o f Economic Growth is the basic statement of the theory I have subsequently elaborated an d applied t o a wide range of historical an d policy problems. I t was a kind of theoretical road ma p I felt impelled to lay out as I settled down to teach economic histor y at M.I.T . i n 1950 . I ha d conclude d b y tha t tim e tha t conventiona l economi c theor y suffered fro m fou r weaknesse s tha t rendere d i t grossl y inadequat e a s a framewor k fo r studying an d teaching th e history of the world econom y a s it had evolved sinc e the mideighteenth century . First , conventiona l theor y provide d n o mechanis m fo r introducin g noneconomic factor s int o th e analysi s o f economi c growt h systematicall y whe n i t wa s quite clear tha t economic growth—notabl y i n its early phase s but, i n fact, throughout — could no t b e understoo d excep t i n terms o f the dynamic s of whol e societies . Second , i t could no t accommodat e withi n its structur e th e process b y whic h major ne w productio n functions were generated and diffused. I t provided no linkage between science, invention , and th e productio n process . Third, mainstrea m theory provide d n o credibl e explanatio n for tren d periods , longer than conventional business cycles, in the prices of basic commodities relative to manufactures. Fourth , i t provide d n o credibl e linkag e o f conventiona l business cycle s t o th e process o f growth . For a historian i t i s palpable that cycles are simpl y th e for m growth

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historically assumed . Th e separatio n o f cycl e an d trend—o f th e Marshallia n shor t fro m the long period—is a n act of intellectual violence that cuts the heart ou t of the problem o f both cycle s an d growth . Bu t i t wil l b e recalle d tha t 195 0 wa s a time whe n mainstrea m business-cycle theorist s wer e ringing the changes on the interaction of the multiplier and the accelerator , thereb y effectivel y separating growth from cycles , relegatin g innovatio n to exogenou s investment . The Process o f Economic Growth responde d t o thes e fou r problem s b y a n extende d consideration o f th e interweavin g o f economi c an d noneconomi c force s centere d o n propensities tha t summarize the effective response of a society to the economic challenge s and possibilitie s i t confronts (Chapters 2 and 3) ; by a n analysi s of th e comple x linkage s among science , invention , an d innovatio n tha t generat e th e flo w o f ne w productio n functions, includin g th e sequenc e o f majestic , innovationa l leadin g sector s tha t dis tinguish moder n economi c growt h fro m al l pas t huma n experience (Chapte r 4) ; an d b y relating busines s cycle s (Chapte r 5 ) an d secula r trend s (Chapte r 6 ) t o th e proces s o f growth thu s conceived . I devote d a good dea l o f space , a s i n Chapter s V an d V I o f m y earlier British Economy o f the Nineteenth Century (1948), to the forces that brought about change i n th e noneconomic framewor k of the economy (i.e. , th e propensities) includin g prior economic change . Th e balance of The Process o f Economic Growth, i n both its firs t and secon d editions , consiste d o f a se t o f illustration s and elaboration s o f thi s wa y o f looking at the growt h process . At its core the process of economic growt h as I conceived i t implied that, within a given (or slowl y changing ) societa l framewor k (th e latte r define d b y th e propensities) , ther e existed a se t o f dynamic , optimum sectora l path s that , i n a rough-and-read y way , a n economy approximate d wit h the passage o f time. The deviations from th e optimum paths were see n a s setting u p relative price an d other incentives that, with varying lags, pulle d the system bac k toward the sectoral optima. More tha n a quarter-century later, i n writing The World Economy: History an d Prospect (1978) , that framework still seemed service able. Thi s i s ho w I define d Th e World Economy's underlyin g theoretical structur e after noting it s continuit y with Th e Process o f Economic Growth: 3 I believe i t is possible t o bring within the structure of a dynamic, disaggre gated theor y th e force s making for population change, a s well as the genera tion of scientific knowledge and invention, and the process o f innovation. It is then possible t o conceive of a dynamic equilibrium path for a peaceful, close d economy an d all its sectors. Thos e overal l and sectoral optimum paths imply that investmen t resource s ar e allocate d t o th e sector s withou t error o r lag , taking int o accoun t changes i n technolog y a s wel l as demand . W e ca n thus formulate abstractl y a disaggregated, movin g rather tha n static, equilibrium. In fact, of course, th e economies w e study were not closed; the y were often at war o r affecte d b y war ; and investmen t was subjec t to systemati c error s an d lags. Moreover , th e comin g o f ne w technologie s an d th e openin g o f ne w sources of food and raw-materials suppl y often too k the form of large, discon tinuous change s i n th e econom y an d it s structure . And , eve n i n th e mos t capitalist of societies, th e economic role of government was significant. What we observe, then , are dynamic, interacting nationa l economies, trying rather clumsily t o approximat e optimum sectoral equilibriu m paths , tendin g successively t o undershoo t and overshoo t thos e paths.

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If these various economies mor e or less regularly absorbed th e technologie s generated b y the world's investmen t in science an d invention, they grew; that is, wit h many irregularities an d vicissitudes, their average incom e pe r capit a tended t o [follow ] .. . a n S-shape d pat h o f acceleratio n an d deceleratio n once take-of f occurred. Tha t process o f growth , accompanie d a s it regularly was by increased urbanization , education, and other social changes, underlie s the demographic transition . Where investment lags were particularly long, a s they hav e historically tended t o be i n expanding output from ne w source s o f food-stuffs an d ra w materials , th e dynamic s o f growt h yielde d th e tren d periods . . . generally marke d b y rathe r massiv e undershootin g an d over shooting of optimum sectoral p a t h s . . . . [Thes e oscillations reflect] my theory o f th e cycle s whic h Kondratief f identifie d bu t fo r whic h h e offere d n o systematic explanation . Whe n th e lag s wer e shorter , an d investmen t error s more quickl y corrected, [conventiona l business cycles] . . . emerged. Whe n national growt h i s analyzed wit h particular attentio n to th e effectiv e absorp tion o f th e lump y sequenc e o f majo r technologies , th e stage s o f growth . . . mov e t o th e cente r o f the stage . Summarizing this perspective i n Pioneers i n Development I concluded:4 "An d s o economies mad e thei r wa y throug h history , overshootin g an d undershootin g thei r optimu m sectoral paths , lik e a drunk going hom e fro m th e loca l pu b on Saturda y night." My comments on the views of others at various points throughout this book sugges t the importance I attach to the concept o f a dynamic disaggregated optimum pattern of growth from whic h deviation s ca n b e assessed ; fo r example , th e respec t expresse d fo r J . M . Clark's extended analysi s of the meaning of "balance " and Arthur Burns's measuremen t of cyclical distortion a s well as my regret tha t Hirschman did not go beyond hi s praise of unbalanced growt h t o develo p th e notio n o f dynamic balanced growt h that he acknowl edged a s a n implici t nor m i n th e cours e o f hi s analysis.

The Emergence of the Stages of Economic Growth As th e precedin g lon g quotatio n make s clear , th e stage s o f economi c growth , fro m m y perspective, constitut e merely one component of the general theoretical framewor k I have devised. Th e firs t virtuall y unnotice d appearanc e o f th e takeof f wa s i n Th e Process; mainly i n Chapte r 4. 5 A s in the present study , th e stage s o f growth ar e dealt wit h ther e along wit h th e limit s t o growth. The takeof f aros e a s an inescapable discontinuit y from m y own research an d the work of my seminar students at M.I.T. as together we turned around in our hands the stories not simply o f Britai n and th e Unite d State s bu t als o o f Belgium , France , Germany , Japan , Sweden, Russia , Italy , Argentina , Brazil, Mexico, Turkey , Canada , Australia , and others. Th e discontinuity wa s inescapable becaus e I began with the proposition tha t modern economic growt h resulte d fro m th e generatio n an d efficien t absorptio n o f increasingl y sophisticated technologies . An d i f one studie s the introductio n into the econom y o f new technologies, one must disaggregate down to the level of the sectors, and sometimes even to particular factories (as with John Cockerill's semina l plant in Belgium), where the new technologies ar e introduced . The discontinuit y induce d in thos e sectors—an d i n related

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sectors—by th e absorption of new technologies i s then obvious; and it is quite possible t o trace out , i n roug h approximatio n a t least , th e consequence s fo r th e aggregat e perfor mance o f th e econom y induce d b y thes e multipl e linkages. By 195 5 I was read y t o writ e an articl e fo r th e Economic Journal o n "Th e Take-Of f into Self-Sustaine d Growth. "

Stages Beyond Takeoff Up to this point I did not attempt to distinguish any stages beyond takeoff and the arrival of self-sustaine d growth . This , fo r example , i s the formulatio n in m y 195 6 article: 6 . . . [T]h e sequenc e o f economic developmen t is taken to consist of thre e periods: a lon g perio d (u p t o a centur y or , conceivably , more ) whe n th e preconditions for takeoff are established; the takeoff itself, defined within two or thre e decades ; an d a long perio d whe n growth becomes norma l and rela tively automatic . Thes e thre e division s would , o f course , no t exclud e th e possibility o f growt h givin g way to secula r stagnatio n or decline in the long term. But tw o furthe r definabl e stage s emerge d withi n th e genera l rubri c o f self-sustaine d growth: th e driv e t o technologica l maturity ; and hig h mass computation. The essentially noneconomi c proces s permitting the drive to technological maturity to happen is , i n antiseptic technica l language , a progressiv e increas e i n technologica l ab sorptive capacity ; tha t is , th e buildu p withi n th e societ y o f scientist s an d engineers , workers an d entrepreneurs , an d foremen an d managers capabl e of absorbing—and moti vated t o absorb—th e backlo g o f relevant, increasingl y sophisticated, hithert o unapplied technologies. Thi s implie s no t onl y a n extensio n o f educatio n a t ever y leve l an d th e emergence o f a wide range of modernized institutions encouraging the process, bu t also a succession o f generation s eac h bor n int o an d takin g for grante d a technologically mor e complex an d diversifie d world . Th e upsho t i s th e progressiv e diffusion , beyon d th e relatively fe w leading sectors o f takeoff (quit e often confine d to one or a few regions), of modern attitude s an d motivation s a s wel l as moder n technologies . High mas s consumptio n relate s no t t o th e buildu p o f a society' s technologica l ab sorptive capacit y bu t t o it s rea l incom e pe r capit a an d ho w me n an d wome n choos e t o spend i t as they become mor e affluent . I n economists' jargo n i t reflects a given phase i n the income elasticit y o f demand; that is, th e phase when people ar e rich enough to spend increases i n incom e o n a famil y automobil e an d th e standar d packag e o f durabl e con sumers' good s scienc e an d technolog y hav e provide d fo r moder n household s i n th e twentieth century . As I elaborated an d refined the processes beyond takeoff, I directed a project and wrote The United States i n the World Arena (1960) , a rather long book focuse d on the interpla y of America n domesti c lif e an d foreig n policy. 7 I t include d a substantia l introductor y historical sectio n coverin g tha t interplay from th e beginning of the American republi c t o 1940 an d use d th e emerging , refine d version o f th e stage s o f economi c growt h t o hel p frame th e analysis. (The other two concepts used fo r that purpose were the nationa l style and th e nationa l interest.) I delivered eight lectures to undergraduates at Cambridge University in the Michaelmas

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term o f 195 8 on "Th e Proces s o f Industrialization," an d I decided t o pack what I had to say abou t th e stage s int o thos e lectures . The lecture s wer e summarize d by the London Economist i n two issues in August 195 9 and published in 196 0 as The Stages of Economic Growth. With some eighteen reprinting s in Englis h an d man y translations , th e boo k goe s o n havin g a livel y caree r o f it s own , making new friends and stirring up controversy 30 years after the lectures wer e delivered. Thus, I conclude d tha t tw o centurie s o f growt h ha d yielde d fiv e stage s i n th e lif e o f modern economies : the traditional society; the preconditions for takeoff; the takeoff itself; the driv e t o maturity ; and th e ag e o f hig h mas s consumption . Beyon d w e ca n detec t elements o f wha t I called , i n Politics an d th e Stages o f Growth (1971) , th e Searc h fo r Quality; bu t i t remain s t o b e see n if , i n th e wak e o f th e turbulen t 1970 s an d 1980s , i t emerges a s a definable stage .

The Stages of Economic Growth as Seen by the Author It may be worth noting where The Stages fits in the elaboration of my own thinking about growth. Positively , i t constituted a method for solving at least ad interim, two fundamental problem s I identified , analyzed , and illustrate d i n Th e Process. First , ho w t o relat e economic an d noneconomi c factor s a s th e proces s o f growt h unfolded . I n larg e socia l science terms , thi s i s th e centra l questio n posed b y Marxis m and explain s i n large par t why I accepte d th e suggestio n o f Economist editor s an d subtitle d th e boo k " A Non Communist Manifesto. " Th e Stages take s th e vie w tha t th e noneconomi c sector s o f society interac t wit h th e economy . The y ar e no t a superstructur e determined simpl y b y technology an d propert y arrangements . Th e secon d proble m I fel t I had move d forwar d was ho w t o us e systematicall y i n th e analysi s o f economi c growt h th e insight s of eco nomic historians—generalize d notabl y b y Schumpeter , th e youn g Kuznets , an d Hoffmann—about the successio n of majo r innovational leading sector s tha t hav e given the period since the last quarter of the eighteenth century a unique place in human history. With respec t t o economi c an d noneconomi c factors , I foun d i t fruitfu l t o focu s suc cessively o n tha t relationshi p i n eac h stag e (traditiona l society , preconditions , takeoff , drive to technological maturity, age of high mass consumption) rather than grapple with it in general. Ever y country is, o f course, unique ; and the relationship i s one of interactio n and i s therefor e immensel y complex . Bu t ther e wer e definabl e pattern s an d recurren t forces; e.g., th e powerful role of xenophobic nationalism in the early stage of moderniza tion stirred b y intrusion or feared intrusion from abroad , an d the assumption of leadership in modernizatio n b y a n intermediat e grou p denie d acces s t o th e to p o f th e traditiona l society but not denied educatio n or money (e.g., the British nonconformists, the samurai, the parsee s i n India) . As fo r technology , th e stage s dow n t o hig h mas s consumptio n constitute d a wa y o f linking th e degre e o f socia l modernizatio n (i n term s o f education , enterprisin g en trepreneurs, nontraditiona l concept s o f family , politics , etc. ) t o a n importan t economi c variable; i.e., technologica l absorptiv e capacity . Stage s wer e thus defined not a s is conventional i n modern economics (e.g., th e World Bank) in terms of real income per capita but in terms of the extent to which a society proved capable of absorbing efficiently (then ) modern technology. This technologica l approach, wit h it s explicit linkage to large , powerfu l leadin g sec -

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tors, als o cu t acros s th e conventiona l approac h t o saving-investmen t incorporate d i n Keynesian analysis . In The Stages th e emphasis is on the importance to capital supply of entrepreneurs wh o plowe d bac k profit s i n the rapidly growing, highl y profitable leading sectors introducing a technology not hitherto efficiently incorporate d i n the economy. For example:8 This vie w of the take-of f is, then , a return to a rather old-fashione d way of looking a t economi c development . Th e take-of f i s define d a s a n industria l revolution, tie d directl y t o radical changes i n methods of production, having their decisiv e consequenc e ove r a relatively short perio d o f time . . . . [T]his argumen t [asserts ] tha t the rapi d growt h o f on e o r mor e ne w man ufacturing sector s i s a powerful and essential engine of economic transformation. It s powe r derive s fro m th e multiplicit y o f it s forms o f impact , whe n a society i s prepare d t o respon d positivel y t o thi s impact . Growt h i n suc h sectors, with new production functions o f high productivity, in itself tend s to raise outpu t pe r head ; i t place s income s i n th e hand s o f me n wh o wil l no t merely sav e a high proportion of an expanding income but who will plough it into highly productiv e investment ; it sets u p a chain of effectiv e deman d fo r other manufacture d products ; i t set s u p a requiremen t fo r enlarge d urba n areas, whos e capita l cost s ma y b e high , bu t whos e populatio n an d marke t organization hel p to make industrialization an on-going process; and , finally , it open s u p a rang e o f externa l econom y effect s which , i n th e end , hel p t o produce new leading sectors whe n the initial impulse of the take-off's leadin g sectors begin s to wane . This was all very well, from m y point of view; but the simple fact i s that I failed almost totally t o mak e m y colleague s se e th e connectio n betwee n Th e Stages an d th e wide r framework o f Th e Process. Summar y Chapte r 2 o f Th e Stages containe d fou r page s (entitled " A Dynami c Theory of Production") explicitly making the linkage that was so clear in my own mind. 9 My colleagues insisted on regarding the rise in the investment rate in the takeoff a s a primal cause in the manner, say, of a Harrod-Domar growth model. As I have noted o n other occasions, a part of the faul t wa s certainly mine.10 I f I had i t to do over again , I woul d stat e emphatically , righ t a t th e beginning , wha t I wrot e i n th e ' 'Introduction and Epilogue'' summarizing the debate on takeoff organized at Konstanz in 1960 b y the International Economi c Association: 11 " . . . Th e emergence o f a rate of net investment sufficien t t o outstrip the rate of increase o f population an d to yield a positive net rat e o f growt h i s a t leas t a s muc h the resul t o f prio r [sectoral ] growt h as a cause of growth." But, as I noted earlier , th e takeoff appeared a t just the time two alternative ways of lookin g a t growt h cam e o n stage : th e neoclassica l growt h model ; an d Kuznets' s massive extension o f Colin Clark' s statistica l approach t o the morphology o f growth. Th e takeoff wa s certainl y no t ignored ; but it s intellectual bone structur e did no t easil y fi t th e other tw o approaches , although , a s I note d a t th e time , i t bor e a famil y relatio n t o Kuznets's earlie r Secular Trends.

The Debate For those who may be interested in the debate on The Stages an d my response to it, Note 12 provides som e references. 12 Here I woul d onl y mak e a fe w simpl e points:

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• A s alread y noted , i n th e cours e o f th e debat e th e concep t o f stage s o f growth wa s almos t totall y separate d fro m th e concep t o f a dynamic , disaggregated genera l theor y o f production fro m whic h it derived an d of which i t was, simply , one component . • A grea t dea l o f th e debate , wit h Simo n Kuznet s leadin g th e attack , centered o n whethe r th e statistica l evidenc e showe d (o r woul d show ) a Rosenstein-Rodan-Lewis-Rostow roug h doubling in the investment rate during takeoff . Dat a no w available , som e 3 0 year s later , indicat e that some suc h statistica l discontinuit y can b e identifie d (following , p. 65 6 note 40) ; an d Kuznets' s dates fo r "th e beginnin g of moder n economi c growth," whe n he published them i n 1971 , closel y approximate d thos e given fo r takeof f i n Th e Stages. 13 • Ther e was also debate at Konstanz—in general and with respect to particular historica l cases—o n a mor e profoun d issue ; i.e. , th e degre e o f aggregation an d disaggregatio n appropriat e t o th e analysi s o f economi c growth. Toward the end of his career, Kuznets, who vigorously made the case fo r aggregatio n a t Konstanz , somewha t softene d hi s vie w i n th e direction o f th e disaggregatio n o f hi s yout h (preceding , pp . 354-355 , following, p . 66 9 note 12 ) and, Francois Crouzet's disaggregated annual production dat a hav e helpe d restor e th e 1840 s a s a ke y phas e o f th e French takeoff , a vie w challenge d a t Konstanz. 14 As Figure 18. 1 suggests—comparin g as it does the Smithian, neoclassical, an d Rosto vian growth models develope d i n the mathematical appendix—my approach t o economi c growth yield s a quite distinctiv e forma l result . But, looking bac k over the 30 years since I defined the stages and their dynamics, I am

Figure 18.1. Annua l GNP Growth Rates overTime in Three Systems (see Appendix, pp. 52 6 ff.) .

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inclined t o conclud e tha t th e attentio n give n t o th e concep t stemme d primaril y fro m it s relevance for many readers to the problems o f development policy and to the prospects for war and peace. Like a good many other theoretical works in economics it was a pamphlet for th e times; perhaps becaus e it was originally delivered a s lectures to undergraduates, i t communicated rather well, an d it arrived at a moment when problems of development an d the Col d Wa r wer e hig h o n the agend a o f public concerns .

Applications in the 1950s: Development Policy The reasonabl y orderl y evolutio n o f th e concep t o f th e stage s fro m Th e Process t o th e Cambridge lecture s wa s conducte d i n counterpoin t t o a protracte d communa l effort , starting i n 1951 , t o generate a theory of development relevan t to the problems o f contemporary Lati n America, Africa , th e Middle East, an d Asia, and, on that basis, to define and crusade fo r a n appropriate polic y o f the advance d industria l countries towards the developing regions.15 Although my research i n the 1950s led to particular views about development policy, an d I spoke an d wrote a good dea l on this matter a s an individual, my mos t useful contribution to policy was, no doubt, as part of the collective effort mobilize d in the 1950s a t the Cente r fo r Internationa l Studies (CENTS ) a t M.I.T . In 195 2 CENIS's work on development began formall y an d included intensive studie s of India , Indonesia , an d Italy . Asid e fro m Ma x Millika n an d me , th e member s o f th e senior staf f engage d o n economic developmen t problem s wer e Everett Hagen , Benjamin Higgins, Wilfred Malenbaum, an d P. N . Rosenstein-Rodan . Roda n had, o f course, bee n at wor k o n developmen t problem s longe r tha n an y of us . W e wer e als o closel y i n touc h with ou r colleagu e Charle s Kindleberger , whos e wid e portfoli o o f interests include d th e field o f economic growt h in both a historical and contemporary context . James E . Cross , Dan Lerner , Ithie l d e Sol a Pool , an d Lucia n Py e contribute d insight s fro m politica l science an d sociology . Younge r economists , includin g George Baldwin , Francis Bator , Richard Eckaus , an d Georg e Rosen , als o go t int o th e act , a s di d a then-junior politica l scientist, Donald Blackmer, an d a remarkable forme r schoolmaster an d novelist, Richar d Hatch, wh o serve d a s critic , editor , an d conscienc e o f CENIS . The mos t complet e synthesi s of ou r collectiv e argumen t wa s incorporate d i n a shor t book entitle d A Proposal: Ke y t o a n Effective Foreign Policy, complete d i n Augus t 1956.16 With som e oversimplification of a reasonably sophisticated exposition , th e argument o f A Proposal ca n b e summarize d a s follows : • Th e forces a t work i n the developing world inherently lent themselves t o instability an d violence : th e tensio n betwee n th e modernizer s an d those still roote d i n the value s and institutions of the traditional society ; strug gles fo r powe r amon g th e modernizers ; variou s potentiall y disruptiv e forces unleashe d by the intense often xenophobi c nationalism that accompanied releas e fro m colonialism ; frustratio n a t th e ofte n slo w pac e o f economic an d social progress ; an d a n urgent desire to assum e a place of dignity an d independenc e o n a crowde d an d contentiou s worl d scene . The competition between communists and noncommunists merely added an extr a dimensio n to an d heightene d these source s of instability . • I t wa s th e interes t o f th e Unite d State s tha t th e developin g societie s evolve towar d modernizatio n rapidl y bu t wit h minimu m violence . A

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concentration of limited talents and resources o n the tasks of moderniza tion rathe r tha n i n externa l adventure s o r violen t interna l struggl e ap peared th e mos t promisin g rout e t o that objective . • Th e United State s coul d contribut e t o that objective most effectivel y by strengthening the hand o f those wh o perceived that serious and sustained economic an d socia l progres s wa s the mos t effectiv e pat h to th e dignit y and independence o n the world scene almos t universally sought; and this support coul d bes t b e accomplishe d b y assurin g tha t th e internationa l community provided sufficien t externa l capita l to match the capacity o f a developing societ y efficientl y t o absorb capital , whil e working via tech nical assistance an d support for education to enlarge absorptive capacity . Thus, ou r basi c argumen t for development assistanc e was , i n the widest sense , politi cal. It was roote d in a judgment abou t the inevitabl y conflictin g force s unleashe d in a society a t an early stage of modernization, an d an assessment of what outsiders wit h only marginal influenc e might usefully d o to tip the balance i n what we judged to be a benign direction. My colleague s accepte d th e legitimacy o f the concept o f stage s o f growth—an accep tance b y n o mean s automati c i n that strong-minde d lot , despit e ou r friendship. The introductio n o f th e stage s int o th e argumen t ha d tw o substantia l politica l an d psychological consequences . In the developin g regions it provide d an operationa l focu s for effort s t o accelerat e economi c growt h tha t wa s manageable , a s i t were , withi n th e lifetime of a human being. If one stared i n the 1950 s a t the gap between incom e per capit a in current prices of , say , $10 0 an d $3000, one could conclude that the task of modernization was hopeless or , a t least, irrelevant to one generation's efforts . I f the task was defined as achieving takeof f an d self-sustained growth, rather than the U.S. leve l o f real incom e per capita, i t was easier to roll up one's sleeves an d go to work in reasonably goo d heart . Takeoff cam e t o be accepte d a s a legitimate operationa l goa l i n a good man y developin g countries. Within hard-presse d parliamentar y bodie s o f th e advance d industria l world , commit ment to sustained development assistanc e wa s easier to achieve i f it was believed suc h aid would leve l of f an d ultimatel y declin e a s takeoff s occurred i n one countr y afte r anothe r and th e bul k o f th e developin g worl d mad e it s wa y t o th e stage s beyond , relyin g in creasingly o n conventiona l source s o f capital . Against thi s backgroun d ou r proposa l consiste d o f a n internationa l pla n t o generat e sufficient resource s t o meet all requirements for external assistance tha t could be justified by absorptiv e capacity . Th e price ta g was estimated at an additional $2.5 billio n to $3. 5 billion a year (abou t $10 billion to $14 billion in 198 7 U.S. dollars) , of which about twothirds wa s judged t o be the n an equitable U.S. share . Administratively i t wa s propose d tha t th e program b e conducte d mainl y b y existin g institutions, bu t that the World Ban k create a special instrumen t "t o coordinat e informa tion, se t th e groun d rules , an d secur e acceptanc e o f th e criteri a fo r th e investmen t program." As for the linkage between economic developmen t and the emergence o f stable politica l democracies, w e may, in retrospect, hav e been a bit too hopeful; althoug h the assertion of the popular impuls e toward democracy in many parts of the world as of 198 9 might well have astonished as well as pleased the crusaders of the 1950s . And, on the whole, we were by n o means naive. One CENIS publication of the 1950 s posed an d answered bluntly th e

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question of linkage: "I s ther e any guarantee tha t the free Asia n nations will emerge fro m rapid economi c growt h politicall y democratic ? N o suc h guarante e ca n b e made . Th e relation betwee n economi c growt h an d politica l democrac y i s no t simpl e an d automatic."17 W e were , however , firml y convince d tha t a concentratio n o f scarc e resources , talents, an d politica l energie s o n th e tas k o f development , undertake n with reasonabl e balance, wa s likely t o maximize the chance that societies woul d move through the modernization proces s with minimum violence and human cost an d yield governments whose policies increasingl y approximate d th e wil l o f th e governed . Early in this book I tried, in setting the stage for Hume and Smith, to evoke the larg e considerations tha t suffuse d thei r work : ho w a combinatio n o f "sympathy, " a s the y defined it , an d ruthless competition migh t heighten the good i n human being s and discipline the evil; how the degradation of poverty might be mitigated; how enlarged affluenc e might be the friend o f civil liberty and a civilizing agent over a wide front i n the domestic life of societies; an d how a wise economic policy might temper the barbarities of mercantilism abroa d a s wel l a s a t home. However th e concept s an d policie s generate d b y th e developmen t crusader s o f th e 1950s an d 1960 s ma y b e judged i n longer perspective , ther e wa s no time in the moder n history o f political econom y whe n its practitioners had a better righ t to feel kinshi p with their classica l progenitors .

Applications in the 1950s: War and Peace I applied th e concept o f stages i n two ways to issues of war and peace. Chapte r 8 of The Stages ("Th e Relativ e Stages-of-Growt h an d Aggression") distinguished three kinds of wars related to the relative degree of technological virtuosity and economic power among societies. First , colonia l war s embracin g conflict s arisin g fro m th e initia l intrusio n of a colonial powe r o n a traditiona l society; fro m effort s o f on e colonia l powe r t o seiz e th e colonial possessio n o f another ; o r fro m th e effor t o f colonia l people s t o asser t thei r independence of the metropolita n power . Thes e wer e war s associated , on the colonia l side, with societies i n the preconditions for takeoff. Second , regiona l aggression, usually limited war s arising from th e exuberance of newl y formed nationa l states as they looked backward to past humiliation and around them at opportunities to assert their nationalism. These were wars initiated by countries quite far along in the preconditions for takeoff (a s in th e case of th e American effor t t o steal Canada i n the Wa r of 1812 ) or in takeoff (lik e Bismarck's German y i n 1864-1871) . Third , struggle s for the Eurasian power balanc e o f which I cited the First and Second World Wars and the Cold War. Here the dangerous age came as nations completing th e drive to technological maturit y were tempted to seize and hold regional hegemonic powe r in Eurasia against others who had come to maturity earlier and appeare d sluggis h an d rip e fo r th e taking. Against this background I asked wha t the prospects were for bringing the Cold War to a peaceful en d i n a chapte r entitle d "Th e Relativ e Stages-of-Growt h an d th e Proble m o f Peace." The central concep t I brought to bear was the diffusion o f power away from bot h Moscow an d Washington— a process I dated fro m 1948 . In th e shor t run , th e diffusio n o f powe r aros e fro m th e parado x tha t nuclea r weapons were rationall y unusable except t o dete r thei r us e b y others , an d therefore , th e propor tionality betwee n industria l powe r an d usabl e militar y powe r ha d bee n violated. 18 ". . . |I] n different way s on different issue s Nehru, Nasser , Ben-Gurion , Adenauer have

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found way s o f exploitin g thi s parado x withi n th e non-Communis t world; an d Ma o an d Gomulka a s wel l a s Tito have don e i t withi n th e Communis t bloc." In th e longe r run , I argued , th e diffusio n o f power would take o n solidity. 19 Just a s th e forwar d marc h o f th e stages-of-growt h i n th e latte r hal f o f th e nineteenth centur y shaped th e world arena of the firs t hal f of the twentieth— bringing Japan , Russia , Germany , France , an d th e Unite d State s int o th e arena as major powers—so sequence s o f change, long at work, and gathering momentum i n th e post-194 5 years , ar e determinin g th e somewha t differen t world aren a no w comin g t o life . For th e centra l fac t abou t th e futur e o f worl d powe r i s the acceleratio n o f the precondition s o r th e beginning s o f take-of f i n th e souther n hal f o f th e world: South-Eas t Asia , th e Middl e East , Africa , an d Lati n America . I n addition, ke y area s i n Eastern Europe (notabl y Yugoslavia and Poland), and , of course , China , ar e hardenin g up , a s thei r take-off s occur . . . . And in Latin American the take-off has been completed i n two major cases (Mexico an d Argentina); and it is under way in others, fo r example, in Brazil and Venezuela . Against thi s backgroun d I argue d tha t th e prospec t fo r Russi a wa s t o se e vas t ne w nations come into the world arena that Russia could not control, an d that its basic national interest, wit h respect to both the new weapons and the rise to maturity of new nations was a defensive interes t essentiall y simila r t o that of the United States, Wester n Europe , an d Japan. I concluded: 20 In the face of the diffusion o f power being brought about by a new series of take-offs, th e Russian national interest shift s closer t o that of the United States and th e West . . . . [I] t i s no t a realisti c optio n t o conceiv e o f a continue d bilateral o r trilatera l worl d o f atomi c power s blockin g th e other s out , bu t continuing th e competitive gam e o f Cold War . . . . The diffusio n o f power ca n be rendered relativel y saf e or very dangerous ; but i t canno t b e prevented . Th e proces s o f growt h an d th e stage s a t whic h various nations now stand rule out equally the notion of an American century, a Germa n century , a Japanese century , o r a Russian century. The rationa l polic y for a nationalisti c Russi a woul d be, then , to exercis e this momen t o f option t o join th e Unite d States i n imposing mutuall y on one another an d on the world th e one thing the world would accept fro m th e tw o Great Powers ; tha t is, a n effectiv e inter-nationa l syste m o f arm s control . I the n turne d to the difficultie s Mosco w confronte d i n accepting thi s visio n an d aske d what we of the West coul d do to bring about what I called th e Great Act of Persuasion: 21 Essentially w e in the non-Communist world must demonstrate thre e things. We must demonstrate tha t we shall not permit them to get far enough ahea d to mak e a temporary militar y resolutio n rational . We mus t demonstrat e tha t th e underdevelope d nations—no w th e mai n focus of Communist hopes—can move successfully throug h the preconditions into a well-establishe d take-of f withi n th e orbi t o f th e democrati c world , resisting th e blandishment s and temptation s o f Communism . This is , I be lieve, th e mos t importan t single ite m o n th e Wester n agenda.

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Analysis Post-1945

And w e must demonstrate t o Russians that there is an interesting and lively alternative fo r Russi a o n th e worl d scen e t o eithe r a n arm s race o r unconditional surrender . But th e grea t ac t o f persuasio n ha s a n extr a dimension : an d tha t extr a dimension i s time . Fo r thi s searchin g proble m o f transformatio n Russian s must solv e fo r themselves ; and i t wil l take tim e fo r the m to d o it . Referring t o Thoma s Mann' s nove l o f th e generations , Buddenbrooks, I evoke d i n analogy th e sequenc e tha t began wit h the old Bolsheviks , moved t o th e young engineer cadres wh o came t o responsibility as Stalin purged his contemporaries, an d hazarded the following abou t the future: 22 . . . [B]u t their children—taking a modern industrial system for granted — are reachin g ou t fo r thing s that the matur e societ y create d b y Stali n cannot supply. Wha t i s i t w e ca n detec t movin g i n Sovie t society ? A n increase d assertion o f th e right of the individua l to dignity and to privacy; an increase d assertion of the dignity of Russia—as a nation and a national culture—on the world scene ; a n increase d assertio n o f th e wil l t o enjo y highe r level s o f consumption, not some time in the future, bu t now; an increased appreciatio n of th e wa y tha t modern scienc e ha s altere d th e proble m o f power, includin g certain ol d an d treasure d militar y maxims, bot h Russia n and Communis t i n their origins. . . . [T]here i s no reason t o believe that these underlyin g trends will automatically work themselves out smoothly and peacefully. On the other hand w e shoul d be aware that th e dynamics of the generation s withi n Soviet society—and notabl y th e trend s i n th e firs t post-maturit y generation—com bined with the diffusion o f power on the world scene, could , in time, solve the problem o f peace , i f the Wes t doe s it s job. Whatever Mikhail Gorbachev's fat e ma y be i n the time ahead, he will be remembere d in par t a s th e "firs t Sovie t leader o f th e firs t post-maturit y generation" (h e wa s bor n i n 1931). An d hi s policie s reflec t a goo d man y o f th e aspiration s foreshadowe d i n th e preceding quotation . The application o f the Stages to the theoretical and policy debate on development i n the 1950s and 1960 s i s one strand in the public record o f those livel y times. The implications of the concept for U.S. policy toward the Soviet Unio n were transmitted as a consultant to the Eisenhowe r administratio n and a workin g membe r of the Kenned y and Johnso n administrations.23

Five Applications for the 1980s and Beyond The ke y question s addresse d t o each growt h theorist, whic h provide bon e structur e and continuity to this study, derive directly fro m Th e Process. Th e continuity carries forwar d into Chapte r 2 0 an d th e mathematica l appendix . An d i t i s als o eviden t i n Chapte r 21 , where I look ahead to the middle of the next century, that the stages of growth remains the matrix 1 use to identify th e five critical futur e problem s confronted b y the human community. Bu t i n th e tim e ahea d i t i s th e driv e to technologica l maturity and it s implications rather tha n the much-debate d takeoff tha t comes t o th e cente r of th e stage .

Development Economics 44

1

Put i n th e for m of question s thos e problem s ca n b e state d quit e simply: • Wil l th e diffusio n o f powe r in conjunction with th e dynamic s of Sovie t society, bot h closel y linke d t o the stage s o f economi c growth , permi t a peaceful resolutio n o f th e Col d War ? • Ca n the world community organize itsel f s o as to absorb peacefully and equitably th e countrie s o f th e Fourt h Graduatin g Clas s (e.g. , China , India, Brazil , Mexico) int o takeoff a s they com e t o technological matu rity (se e Figur e 19.1) ? • Ca n the globa l communit y mount effectiv e policie s t o sustai n a livable physical environment as the enormous populations of the Fourth Graduating Class move to full industrialization ; or will the strains already evident on th e physica l environment yield uncontrollabl e crises ? • Ca n the advance d industria l countries, havin g pretty wel l exploited and taken for granted the blandishments of high mass consumption, maintain, in Hume' s phrase , "industriou s an d civilized " societies?—a n issu e posed i n Th e Stages. 24 • Ca n th e globa l community , includin g the mos t advance d developin g countries, mount patient, supportive policies t o assist effectively the 20% or so of the human race tha t lives i n countries that have not yet success fully complete d th e precondition s an d move d int o takeof f (e.g. , Haiti , Africa sout h o f th e Sahara , Yemen , Afghanistan , Burma , an d a goo d many o f th e Pacifi c islands)? In th e introductio n t o Th e Stages I underline d that i t wa s a theor y abou t economi c growth an d " a highl y partial" theory abou t modern histor y a s a whole. 25 I then quote d Benedetto Croce who wisely observed " . . . [W]hils t it is possible to reduce to general concepts the particular factors of reality which appear i n history .. . i t is not possible t o work u p int o genera l concept s th e singl e comple x whol e forme d b y thes e factors." 26 Returning t o th e initia l them e o f thi s chapter , I a m quit e awar e o f th e limit s an d ar bitrariness of any given set of concepts. Tha t is one among several reasons that intellectual life, lik e othe r huma n pursuits , shoul d b e take n seriousl y bu t no t to o seriously . Th e concepts tha t emerged fro m m y somewha t eccentri c marriag e o f economics an d histor y are valid only to the extent that they prove useful t o others in perceiving and dealing with the elusive patterns o f the past an d in the life aroun d them. But they have proved t o have considerable predictiv e power .

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IV PROBLEMS AN D PROSPECT S

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19 Two Concludin g Questions

Histories o f economic thought and doctrine tend to come to an arbitrary, sometimes eve n an abrup t end . Thi s is , i n a way , inevitable . Suc h studie s are , afte r all , analyzin g the evolution o f a n ongoin g field o f considerabl e vitalit y and contention , whos e continuou s history reache s bac k t o th e seventeent h centur y a t least , wit h mediaeva l an d classica l antecedents a s well. Th e stor y stop s whe n the author decides t o stop, wit h perhaps som e final reflection s o n the sweep of the tale he has told, dependin g on his particular interests and biases . The structur e o f this book suggest s a way of closing out the story as of 1989 , which is equally arbitrar y bu t a bi t unconventional . Th e metho d i s t o confron t tw o questions : "What don't w e know about economic growth? " (Chapte r 20); and "Where are we? (An agenda i n mid-passage.)" (Chapte r 21) . The rationale for this method lies in this book's analytic structure. Parts I, II, an d III are bound togethe r no t merel y b y th e basi c growt h equatio n bu t als o b y a vie w o f th e ke y questions flowin g from i t with which, in my view, a growth theorist must deal. Specifical ly, I have tried to establish how a wide spectrum of theorists have viewed the determinants of: the size and quality of the working force; investment and the generation and absorptio n of technology ; growt h in relatio n t o business cycles ; growt h in relation t o relative pric e trends i n manufactured goods an d basic commodities ; th e stages o f and limits to growth ; and th e rol e o f noneconomi c factors . Thes e heading s reflect , o f course , a perspectiv e elaborated i n what I have published sinc e 193 8 on the subject o f growth and fluctuations. And, although , I hav e trie d i n thi s boo k t o captur e wit h sympath y th e perspective s o f predecessors an d contemporaries , m y ow n poin t o f view has no t merel y show n through but ha s als o bee n occasionall y state d quit e explicitly , includin g Chapte r 1 8 an d th e mathematical appendix . Bu t I als o decide d i t migh t b e usefu l t o defin e som e o f the unsolve d problem s stil l on the technica l agend a of growt h analysis , usin g onc e again the sequenc e o f headings that has provided a bone structur e for this book. That , i n any case , i s th e objectiv e o f Chapte r 20 . But th e boo k ha s bee n boun d together b y anothe r strand . I t argues systematicall y that economists have been profoundly and sometimes permanently marked by the problems of their tim e an d place—notably , but no t exclusively , whe n they were young. This linkag e led m e t o pose th e questions : What is our tim e and place i n terms of th e unfolding proces s o f economi c growt h itself ? Wher e doe s th e huma n rac e stan d i n th e story of growt h as the 1980s—tw o centurie s after th e prima l Britis h takeoff—draws t o a

446

Problems and Prospects

Figure 19.1. Fou r Graduating Classes int o Takeoff: Stage s o f Economi c Growth , Twenty Countries. [Adapte d fro m W . W . Rostow , The World Economy: History an d Prospect (Austin : University o f Texas Press , 1978) , p . 5 1 an d Par t Five. ]

close? What broa d implication s flo w fro m tha t assessment fo r th e disciplin e of politica l economy an d fo r publi c policy? Once th e Britis h demonstrate d tha t inventio n and innovatio n coul d becom e a flo w rather tha n th e sporadi c contribution s o f Ada m Smith' s "philosophers, " skil l i n th e mechanic arts spread rapidly. A second graduating class into takeoff followe d th e uniqu e British exampl e (Figur e 19.1) ; an d a thir d followe d th e second . Eac h grou p move d forward mor e rapidl y afte r takeof f tha n its predecessor becaus e it had a larger backlo g o f technology t o exploit. Th e latecomers close d on the earlier-comers, as those who debate d the matte r i n th e eighteent h centur y though t likely (Tabl e 19.1) . A Fourt h Graduatin g Class has now emerged whose absorption into the world economy and polity is taken to be the centra l feature of th e comin g several generations. For th e centur y 1815-1914 , balanc e of powe r diplomacy permitte d the diffusio n an d redistribution o f industria l power and militar y potentia l withou t majo r war , excepting the

Two Concluding Questions 44

7

Table 19.1 Pe r Capit a Growt h Rates , Takeof f t o 1967 : Fourtee n Countrie s (196 7 U.S.$ )

Takeoff dat e Great Britai n 178 United States * 184 France 183 Germany 185 Sweden 186 Japan 188 Russia-USSR 189 Italy 189 Canada 189 Australia 190 Argentina 193 Brazil* 193 Mexico 194 Turkey 193

Takeoff date

Approximate GNP pe r capita: beginning of takeoff

3 $18 3 45 0 17 0 249(1851 8 23 5 15 0 24 5 30 6 79 1 92 3 41 3 14 0 22 4 17

3 $2,01 1 3,99 3 2,34 ) 2,14 9 3,24 8 (1886) 1,20 6 1,59 0 1,33 6 2,96 3 2,10 8 74 4 32 4 54 1 33

GNP per capita 1965-1969

8 18 5 12 3 13 8 11 49 78 47 37 27 66 13 33 52 13

Number of year s 4 1.31 4 1.7 7 1.9 6 1.8 9 2.6 1 2.5 7 2.4 2 2.0 1 1.8 6 1.2 4 1.7 4 2.4 7 3.3 3 2.02

Annual averag e growth rate % 7 2 7 7 4 6 9 7 6 0 0 5 %

* Regional takeoffs ar e judged to have occurred beginning i n the 1820 s i n Ne w England , an d i n the Sa o Paul o region fro m 1900 t o 1920 . SOURCE: W . W . Rostow , Why the Poor Get Richer and th e Rich Slow Down, (Austin : Universit y o f Texas Press, 1980) , p . 261 an d Appendi x I.

American Civi l Wa r an d th e eve n bloodie r civi l wa r i n Chin a (th e Taipin g Rebellion) , each related , i n different ways , t o th e diffusin g proces s o f technologica l modernization . Part of the price fo r this century of transient relative peace was a phase of colonial rule that generated a considerable explosiv e potentia l release d by the Second Worl d War . But the story sinc e 191 4 ha s been , a t its core, a demonstration o f what a dangerous age comple tion o f the drive t o technological maturit y can be. Loo k back fo r a moment to 187 0 when Bismarck rounded ou t the German Empire with his three small wars. Britain accounted for 32% of the world's industrial production; Germany, 13% ; France, 10% ; Russia, 4%; and across the Atlantic, the United States, 23% . Th e Japanese, onl y 2 years beyond the Meiji Restoration, whe n th e modernizers definitivel y seized power , wer e no t in this company. The German takeof f began i n the 1840s ; the Japanese in the 1880s ; th e Russian, in the 1890s. B y 191 4 German y ha d acquire d al l th e then-existin g majo r technologies , a s ha d Japan an d the Sovie t Unio n by 1941 . Thes e thre e challenger s ha d come, i n my vocabu lary, t o technologica l maturity , which , i n tha t era , require d som e 6 0 year s beyon d th e takeoff. B y 1936-193 8 th e share s o f worl d industria l productio n reflecte d th e relativ e decline of Britain and France, the rise of Russia, and the appearance o f Japan in the arena of power: Britai n had 9% ; Germany, 11% ; France, 5% ; Russia, 19% ; the United States , 32%; Japan , 4% . Worl d Wa r I I cancele d ou t fo r a tim e German y an d Japan , gravel y weakened Britai n an d France, an d left a proud, ambitiou s but war-torn Soviet Unio n and an undamage d Unite d State s economicall y rehabilitate d fro m th e Grea t Depression . There i s a great deal mor e t o the comin g o f the First an d Second Worl d War s an d th e Cold War ; but this relative growth sequence is certainly a fundamental par t of the terrible saga. In the midst of the turmoil of the interwar years and the Cold War, the Fourth Gradual-

448 Problems

an d Prospects

ing Clas s cam e o n stage , embracin g countrie s wit h th e bul k o f th e populatio n o f Lati n America, Asia , and , potentially , the tortured Middl e East. The y are , i n my view, mainly beyond takeoff , i n th e driv e t o technologica l maturity . Growth in these regions is damped by all manner of problems, external or self-inflicted; but the old rule still appears t o hold, tha t those who graduate into takeoff lat e move ahea d faster tha n thei r predecessors ; an d i n Chapte r 2 0 som e quit e specifi c reason s wil l b e adduced tha t sugges t why thi s is likel y to be the cas e in the severa l generation s ahead . The centra l questio n o n th e global agend a is , therefore , ca n w e complete in peace th e continued transformatio n fro m povert y t o affluenc e tha t ha s bee n goin g o n sinc e th e eighteenth century ? In an age where the capacity t o make nuclear weapons i s diffused fa r beyond the present ample number of nuclear weapons powers, a Third World War must be regarded a s a potential definitiv e disaster fo r al l humanity. There are many further questions, no doubt, beyond our capacity now to define, that lie further dow n the road , an d I a m quite conscious o f th e stran d of legitimac y i n Keynes' s dictum, writing as a probability theorist rather than an economist: 1 "Th e inevitabl e never happens. I t i s th e unexpecte d always. " Bu t th e critica l an d central characte r o f th e adjustment t o the rise of the Fourth Graduatin g Class has emerged wit h increasing clarity and insistenc e i n recen t years . Th e firs t approximatio n of a n analysi s of th e adjustment proved t o hav e a good man y dimension s embracin g not merel y th e peaceful defusing of the Col d Wa r betwee n th e Sovie t Unio n an d th e West , bu t also , amon g others , th e reorganization o f th e term s o f domesti c politic s i n th e Atlanti c worl d an d Japan ; th e finding o f regiona l method s fo r regula r cooperatio n amon g th e nation s of Asi a an d th e Pacific, th e Wester n Hemisphere , an d other region s with countries a t differen t stage s o f growth; the definition of new rules of the game for trade and finance under circumstances: (1) wher e n o singl e countr y ha s th e powe r t o lead ; bu t (2 ) al l hav e vita l stake s i n th e viability o f th e system ; an d (3 ) al l must, therefore, assume , dependin g o n thei r stage o f growth an d othe r relevan t circumstances , dutie s a s wel l a s right s wit h respec t t o th e international system . I hav e explore d thes e matter s elsewhere 2 an d I shal l no t repea t i n Chapter 2 1 the detailed argument s found there. Bu t I shall try roughly to measure wher e we ar e i n th e grea t transformatio n that was modestl y gatherin g momentu m i n th e day s when Davi d Hum e an d Ada m Smit h wer e young . Assumin g that, i n th e end , nation s containing th e bul k of th e huma n race will , i n their own ways , tr y to appl y the fruit s o f modern scienc e an d technolog y t o thei r societies , ho w fa r alon g i n th e proces s ar e we ? What problems ar e clearly on the agenda? What kind of wisdom and luck will be require d to ge t u s through t o a time of relativel y universa l affluence without global frustratio n or catastrophe o f on e kin d o r another ? Thes e ar e th e issue s probe d i n Chapte r 21 . The y exhibit strikin g similarit y to, a s well a s star k differences from, thos e tha t concerned th e founding father s o f moder n politica l econom y i n th e eighteent h century . An appendi x follow s that is the resul t of a second collaboratio n betwee n Dr. Michae l Kennedy o f th e Ran d Corporatio n an d myself . Th e firs t presente d variou s view s o f th e Kondratieff cycl e i n mathematical terms, an d analyzed their differences and their relatio n to the flow o f history. 3 Th e success o f that venture led directly t o this appendix, whic h is an attempt to see how much of the bone structur e of the underlying argument of this book could b e capture d i n forma l mathematical terms. Part I I o f th e mathematica l appendi x consist s o f a systemati c compariso n fro m a common analyti c matrix o f thre e growt h theories : a Smithia n preindustrial revolution model; a neoclassical model; and a somewhat simplified versio n of the growth theory that underlies thi s boo k an d include s as endogenou s thre e essentia l feature s o f th e growt h

Two Concluding Questions 44

9

process: th e demographi c transition ; th e bunchin g o f majo r innovation s a t interval s of , say, 5 5 years; an d Kondratief f cycle s i n the generatio n o f supplie s of basi c commoditie s (and i n relativ e prices ) of , say , 4 0 years . (Th e ful l arra y o f distinctiv e assumption s entering int o thi s mode l ar e se t ou t o n p . 543 , following) . Rathe r strikin g difference s emerge in the aggregate growth path s tha t result fro m difference s i n the assumptions tha t underlie thes e thre e models .

20 What Don't W e Know about Economic Growth?

Population and the Working Force With hardly a respectful bow t o Adam Smith, Colin Clar k proudly traces hi s intellectua l ancestry t o "Politica l Arithmetick" : t o John Gaunt , Gregor y King , Willia m Petty , an d others wh o bega n t o measur e th e siz e o f population s an d th e wealt h o f nation s i n th e heated mercantilis t settin g o f th e lat e seventeent h century , thu s launchin g the fiel d o f demography. Bu t despit e a histor y reachin g bac k thre e centuries , despit e th e vita l an d various interest s o f government s i n populatio n data , th e analysi s of populatio n changes remains somewha t elusive , notably , th e determinant s o f fertility . I n dealin g wit h th e demographic transition , fo r example , Chener y an d Syrqui n observed: 1 Given th e crucia l impac t o f populatio n growt h o n th e leve l o f pe r capit a income, i t is important t o show the extent to which the two are related an d to indicate th e linkage s betwee n them . Althoug h these relation s ar e the subject of activ e researc h b y demographer s an d economists , ther e ar e wide area s of disagreement a s t o th e natur e and relativ e importanc e o f th e variou s factor s involved. . . . While th e causes of the world-wide fal l i n death rates ar e well understood , the interrelation s amon g th e socioeconomi c processe s relate d t o fertility — education, health , urbanization , mobility , etc.—ar e stil l subject s o f activ e debate. In analyzin g th e cross-sectiona l dat a available , the y fel l bac k primaril y o n standar d regression analysis . Figur e 20. 1 capture s th e result , wit h th e scatte r provide d fo r birt h rates. The SE E (standar d error ) measurement s indicat e greater deviatio n amon g birt h tha n death rates , an d a n enormou s initia l sprea d amon g birt h rate s narrowin g a s pe r capit a income rises . Amon g riche r countrie s o f th e world , birt h an d deat h rate s appea r t o b e relatively insensitive , after a certai n point , t o level s o f GN P pe r capita. 2 A grea t dea l o f analysi s ha s bee n conducte d t o establis h th e relativ e weigh t o f th e factors determinin g the dispersio n of birth rates at different level s of income, 3 bu t statistical analyse s have not ye t yielde d fir m o r agree d results , and the y hav e been systemat ically awkward in dealing with cultural and religious forces that have clearly helped shape

What Don't W e Know about Economic Growth? 45

1

the outcome i n a good man y cases. Wha t has emerged i s a policy rather tha n an analytic consensus: tha t th e mos t effectiv e program s t o reduc e birt h rate s i n developin g region s have combined determine d publi c education in contraception wit h development program s that yielded no t only rapid growt h but als o enlarged educationa l and health facilitie s and improved incom e distribution . All hand s woul d agre e tha t whil e the existenc e of thi s consensus i s useful, i t leaves a great deal to be learned abou t fertility an d fertility policy, as the vicissitude s wit h famil y plannin g of the India n an d Chinese governments , amon g others, suggest . It i s wort h noting , a s a matte r o f substanc e a s wel l a s paradox , tha t th e curren t conventional wisdo m abou t th e determinants of lower birt h rates i n developing countrie s closely relates to the Myrdal doctrine of the 1930 s for elevating the birth rate; namely, that only wide-rangin g program s o f economi c an d socia l welfar e woul d creat e a settin g i n which Swedis h familie s were likel y to have more children . Th e reason fo r recalling tha t proposition is that the trend i n the net reproduction rate had fallen by the 1970 s below 1. 0 in seventee n advance d industria l countries ; b y 1986 , o f th e ninetee n industria l marke t economies liste d b y th e World Bank , al l but on e (Ireland ) ha d total fertilit y rate s unde r 2.O.4 A figure of 2.1 i s roughly required for long run population stability. From suc h data the World Ban k has provided, unde r stylized arbitrary assumptions, the hypothetical siz e of a stationar y populatio n fo r eac h countr y an d th e assume d dat e a t whic h i t wil l b e reached. Suc h estimates ar e further examine d in Chapter 20. Bu t the fact i s that the 1980 s has see n th e emergence o f the stronges t surg e o f anxiety and analysis of the implication s of population declin e sinc e the 1930s; 5 and the beginning of pronatalist publi c policies i n some advance d industria l countries. For th e momen t i t i s sufficien t t o not e tha t the worl d communit y i s likely t o confron t simultaneously i n the several generation s ahead anxieties centered, in different parts of the world, o n excessiv e increas e an d excessiv e decreas e i n population; tha t th e richnes s o f contemporary statistica l dat a is not yet matched b y firm knowledge of the determinants o f fertility; an d it is likely—perhaps certain—that the old unresolved issue of how to define an optimu m populatio n leve l wil l aris e again , i f i t i s not alread y upo n us. 6

Technology and Investment I begi n wit h a quotatio n that capture s a major theme o f this book: 7 While neoclassica l economi c theor y ha s man y importan t applications , i t i s poorly relate d t o wha t reall y happen s i n th e lon g run . I t suffer s fro m thi s deficiency mainl y because i t makes n o provision fo r changes in technologica l knowledge. . . . [T)echnological change has to be introduced int o the analysis from th e outside. It is assumed, no t explained. Thu s what is certainly on e of th e mos t importan t determinant s o f pric e an d outpu t i n th e lon g ru n i s entirely outsid e th e rang e o f th e theory . One of the major areas where knowledge o f growth is imperfect centers o n technology : its generation , includin g the obliqu e a s wel l a s direc t link s o f scienc e t o invention ; its diffusion an d th e rol e i n tha t proces s o f th e qualit y o f entrepreneurship ; its link s to th e investment proces s a s a whol e and, therefore , t o th e macr o performanc e o f economies; and th e determinant s o f th e pac e a t whic h countrie s which hav e falle n behin d absor b efficiently th e backlo g o f relevan t technologies. A s the reference s suggest in the discus -

Figure 20.1. Demographi c Transition . Scatte r fo r Birt h Rate i n Seventy-Six Countries , 1965 . Sourc e sam e a s for Figur e 7.2 .

Key to Countr y Code s Country

Code

Country

Code

Country

Code

1 . Afghanista n 2. Algeri a 3 . Angol a 4. Argentin a 5 . Australi a 6. Austri a 7. Belgiu m 8. Bolivi a 9. Brazi l 10. Burm a 1 1 . Cambodi a (Khmer ) 12. Cameroo n 13. Canad a 14. Centra l Africa n Republi c 15. Ceylo n (Sr i Lanka ) 16. Cha d 17. Chil e 18. Chin a (Taiwan) 19. Colombi a 20. Cong o (Zaire ) 21. Cost a Ric a 22. Dahome y 23. Denmar k 24. Dominica n Republic 25. Ecuado r 26. E l Salvado r 27. Ethiopi a 28. Finlan d 29 . Franc e 30. German y (West) 31. Ghan a 32. Greec e 33. Guatemal a 34. Guine a

AF AL AN AR AU AUA BE BO BR BA CB CM CAN CA CE CD CH CHA CO CON CR DA DE DO EC ES ET FI FR GE GH GR GU GUI

35. Hait i 36. Hondura s 37. Hon g Kong 38. Indi a 39. Indonesi a 40. Ira n 41. Ira q 42. Irelan d 43. Israe l 44. Ital y 45. Ivory Coast 46. Jamaic a 47. Japa n 48. Jorda n 49. Keny a 50. Kore a (South ) 51. Lebano n 52. Liberi a 53. Liby a 54. Malagas y 55. Malaw i 56. Malaysi a 57. Mal i 58. Mexic o 59. Morocc o 60. Mozambiqu e 61. Netherland s 62. Ne w Zealan d 63. Nicaragu a 64. Nige r 65. Nigeri a 66. Norwa y 67. Pakista n 68. Panam a

HA HO HK IN IND IRN IRQ IRE IS IT IVC JM JA JO KE KO LE LBR LBY MAG MAI MA MLI ME MOR MOZ NE NZ NI NIR NGA NO PAK PAN

69. Papu a 70. Paragua y 71. Per u 72. Philippine s 73. Portuga l 74. Puert o Rico 75. Rhodesi a 76. Saud i Arabi a 77 . Senega l 78. Sierr a Leon e 79. Singapor e 80. Somali a 81. Sout h Afric a 82. Spai n 83. Suda n 84. Swede n 85. Switzerlan d 86. Syri a 87. Tanzani a 88. Thailan d 89. Tog o 90. Tunisi a 91. Turke y 92. Ugand a 93. U.A.R . (Egypt ) 94. Unite d Kingdom 95. U.S.A . 96. Uppe r Volta 97. Urugua y 98. Venezuel a 99. Vietna m (South) 100. Yugoslavi a 101. Zambi a

PNG PA PE PH PO PR RHO SAU SE SL SI SO SA SP

su

SWE SWI SYR TA TH TO TUN TU UG UAR UK USA UV UR VE VN YU ZA

454 Problems

an d Prospects

sion that follows, a good deal of work is going forward on these problems heightened over the pas t decad e b y a n awarenes s tha t th e earl y stag e o f on e o f th e grea t technolog y revolutions o f moder n histor y i s no w underway. 8 Bu t al l hand s concerne d wit h thes e issues would , I suspect , agre e tha t muc h curren t researc h an d analysi s i s exploratory , fragmented, an d no t ye t adequatel y wove n int o th e principa l conventiona l areas o f economic analysis . Th e unfulfille d tas k i n thi s terrain is , therefore , bot h th e integratio n of technological analysi s itsel f and it s linkag e wit h mainstream economics . One o f th e ironie s o f th e stor y tol d i n thi s boo k i s tha t th e formulatio n of margina l analysis roun d abou t 1870 , generally regarded a s a decisive, creativ e breakthrough i n the life of the profession , brok e the rather easy, unembarrasse d linkag e of technological and economic analysi s tha t had existed fo r a century. 9 Hum e and Adam Smith , Malthu s and Ricardo, J. S . Mil l and Marx (educated b y Charles Babbage)—all ha d a good dea l to say about problems pose d by technology i n their time. S o did Marshall, D. H. Robertson, an d Allyn Young ; bu t the y coul d no t fin d a wa y t o reconcil e thei r insight s wit h post-187 0 formal theory . Marshall , abov e all , saw wit h striking clarity th e incompatibilit y o f conventional equilibrium analysis and the rigorous treatment of the case of increasing returns , a conflic t boun d t o aris e i n an y seriou s forma l analysi s o f th e diffusio n o f ne w technologies. I recall thes e efforts t o confront a n exceedingly intractabl e problem at this late stag e of the argument for three reasons. First , th e subsequent history of mainstream economics is, essentially, a stor y o f successiv e evasion s designe d t o protect a method b y avoidin g the problem: t o render innovation exogenous or embody it in gross investment ; to treat it as an incremental consequenc e o f widenin g the marke t o r learnin g b y doing ; to bur y i t i n th e "residual," o r the margina l capital-outpu t ratio , o r "intermediat e production. " Excep t for the handful o f exceptions note d alon g the way, the mainstream literatur e is set out as if Joseph Schumpete r an d th e youn g Simo n Kuznet s o f Secular Movements ha d neve r written.10 Second, Michael Kennedy and I decided tha t if we were to construct for our Appendix an Ada m Smithia n preindustria l revolutio n growt h mode l t o contras t wit h model s o f a modern economy , a central proble m t o b e solve d wa s t o captur e the shif t o f inventions occasionally generate d b y Smith' s "philosophers " an d creativ e machin e maker s int o a flow; fo r tha t i s wha t moder n economi c growt h i s al l about . Third, i n Chapter 21, th e phenomenon defined as The Fourth Industrial Revolution will be seen t o suffuse virtuall y all the major problems th e global community will confront in, say, th e nex t half-century . An d it s fou r majo r dimensions—microelectronics , geneti c engineering, ne w industria l materials , an d lasers—ar e al l subjec t to discontinuou s ne w developments a s wel l a s sustaine d incrementa l progress . The balance o f this section aims , therefore, t o identify th e problems tha t must be solved and th e broa d characteristic s o f a n approac h t o technolog y an d investmen t tha t migh t contribute to bringing back together again the two roads that went their separate ways after 1870. Th e argumen t take s th e for m o f eight relate d propositions . 1. Research an d Development i s a complex interacting spectrum yielding a s a n en d product profitable inventions and innovations. Th e creation an d profitable introduction of a ne w technolog y int o th e econom y i s th e resul t o f a comple x spectru m o f activitie s ranging from basi c science, throug h invention, to the pioneering complex business operations we call innovation that, in turn, i s likely to involv e high-risk finance, labo r training or retraining , an d imaginativ e marketing. Occasionally—for example, Edwi n Land an d the Polaroi d camera—al l thre e activitie s have bee n conducte d b y a singl e person. Bu t

What Don't W e Know about Economic Growth? 45

5

even wit h respect t o the primal invention s of the First Industria l Revolution, eac h o f th e three phase s was , i n itself , no t a n even t but a complex, frustratin g process. 11 As fo r basi c science , a s i t evolved fro m Copernicu s t o Newto n and beyond , it s fields have ha d a lif e o f thei r own , sometime s closel y an d directl y linke d t o th e proces s o f invention, sometime s distan t and oblique. 12 I n different way s neither Schumpeter nor the early Kuznet s were particularl y helpfu l i n making clear th e complexities tha t la y behind one of the former's heroi c innovations or the creation of one of the latter's leading sectors . Schumpeter's reference s t o th e origin s o f invention s wer e candidl y derivative . I t i s th e innovator an d the economic consequence s o f large discontinuous innovations tha t mainly concerned him. 13 Kuznets' s work, of course, contain s many references t o the fundamental rol e o f moder n scienc e i n economic growth ; but h e als o di d no t explor e i n a seriou s way the varying character o f the linkage of science t o invention at different time s and with respect t o different specifi c inventions . For present limite d purposes i t is sufficient t o note that three conceptuall y distinguish able bu t interactin g creativ e activitie s ar e involved i n the R & D spectrum ; that ther e i s still muc h t o b e learne d o f ho w the y relat e t o eac h other ; an d tha t th e linkage s an d interactions have neve r been as close as they ar e in the Fourth Industrial Revolutio n now underway. 2. I t i s useful i f over simplet o regard inventions an d innovations a s made u p o f tw o broad types: incremental an d discontinuous. Ada m Smit h mad e thi s distinction , a s did Schumpeter. Th e latter sharply distinguished technological chang e so small that managers could d o the job, fro m grea t structura l breakthroughs requiring entrepreneurial heroes . In fact he rather overdid this point. Hi s own analysis suggests that one is, in fact, dealing a t a moment o f time , wit h a spectrum o f degree s o f creative entrepreneurshi p amon g sector s and firm s (preceding , pp . 238-239) . Rosenber g take s thi s point head-on. 14 Schumpeter accustome d economist s t o thinkin g o f technica l chang e a s involving major breaks, gian t discontinuities or disruptions with the past. . . . But technologica l chang e i s als o (an d perhap s eve n mor e importantly ) a continuous stream o f innumerable minor adjustments, modifications, and adaptations by skille d personnel, and the technical vitality o f an economy em ploying a machin e technolog y i s criticall y affecte d b y it s capacit y t o mak e these adaptations . Carried alon g by the logic of his argument, Rosenberg, discussing the important pre-Wat t role o f Newcomen' s engine , draw s bac k fro m a reductio a d absurdum an d find s a fai r balance:15 . . . One might almos t b e tempted t o say of James Watt that he was "jus t an improver," althoug h suc h a statemen t woul d b e comparabl e t o sayin g o f Napoleon tha t h e wa s jus t a soldie r o r o f Bac h tha t h e wa s jus t a cour t musician. Tha t i s t o say , Watt' s improvement s o n th e stea m engin e trans formed i t fro m a n instrumen t o f limite d applicabilit y a t location s peculiarl y favored b y access to cheap fuel, t o a generalized power sourc e of much wider significance. There are , i n fact, tw o types of incremental invention an d innovation. First, even with respect t o the greates t an d most powerfu l innovations , an incremental process, involving many hand s an d minds , is almost certain t o have preceded th e critica l breakthrough and continued t o operat e t o refin e th e ne w instrumen t o r metho d a s i t move d alon g it s

456 Problems

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inevitably deceleratin g Kuznetsia n path a s a leadin g sector . But , second , incrementa l invention and innovation go forward every day—probably with less elan—in less rapidly expanding, stagnant , or eve n declining sector s o f a moder n economy . In short, whil e agreeing substantially with the emphasis—from Adam Smith to Nathan Rosenberg—on th e importanc e o f incrementa l technologica l change , I woul d als o re affirm th e legitimac y o f Schumpeter' s dramatizatio n of the thre e grea t industria l revolutions on whic h he focuse d in Business Cycles: tha t of the 1780s , wit h its convergence o f the ne w textil e machinery , Watt's stea m engine , and Cort' s metho d o f fabricating goo d iron wit h coke; the railroad revolution , starting modestly in the 1830 s but helping induce before lon g th e stee l revolutio n to overcome th e high obsolescence rat e of iron rails; and the breakthrough s i n electricity , chemicals , an d th e interna l combustio n engin e roun d about the turn of the century. The fourth , assertin g itself from , say , th e mid-1970s, afte r long incubation , embrace s fou r larg e fields : microelectronics ; geneti c engineering ; th e development o f ne w industria l material s (e.g. , ceramics , optica l fibers, a ne w roun d of plastics); and the laser. Th e process o f incremental refinement goes forward more o r less regularly in these highly diversified areas, punctuated as one would expect in a still-early stage of a technological revolution b y sporadic major breakthroughs, e.g., recen t progress toward superconductivit y a t highe r temperatures . 3. Both types o f R & D—incremental an d discontinuous—are forms o f investment; that is, they represent the current allocation of human talent and other resources to achieve an expected future rate of return over cost that, taking risk and appropriability into account, at least matches allocations i n other directions. A s wis e economist s fro m Hum e t o Keynes hav e observed , investmen t constitutes a creativ e adventur e to whic h people ar e drawn by motives that transcend the conventional profit motive; and this is, perhaps, eve n more true of R & D than more conventional forms of investment. Nevertheless, th e socia l value of inventio n was reflected eve n befor e th e First Industria l Revolution by, say , th e British patent system and various forms of subsidy and reward for invention offered b y the French governmen t in the eighteenth century.16 But it has been only recently that seriou s professional efforts have been made to measure the profitability of investment in R & D as a subsecto r o f th e investmen t proces s i n a moder n economy . Thre e majo r pioneerin g figures associate d wit h thi s effor t ar e Jaco b Schmookler , Edwi n Mansfield , an d Zv i Griliches. Th e deceleratio n o f the American rate of productivity increase since , say , th e mid-1960s—and it s possibl e connectio n wit h a deceleration i n civilia n R & D expendi tures—has enlarge d an d heightene d wor k alon g line s initiate d b y th e thre e pioneers. 17 As Schumpeter perceived , th e extent and manner in which the R & D process relates t o familiar economic incentive s is complex. A t the scientific or research end of the spectru m there has , i n fact, bee n som e debate , wit h Marxists strainin g to embrace eve n Newton' s Principia a s a response t o th e fel t need s o f th e bourgeoisie. 18 The view here is somewhat more complex. In tracing the evolution of growth theories , two contrapuntal strand s became apparent : a n impulse to try to solve the problems o f the active world; and a continuity of concept, debate, an d elaboration i n what might be called the inne r life o f th e discipline . Thi s i s evidently also tru e of the evolutio n of th e natural sciences. Moreover, both the social and natural sciences have been shaped, in part, by the capacity t o measur e and t o calculate , as , fo r example , Keynesia n incom e analysi s was greatly strengthene d b y th e emergenc e o f nationa l income an d produc t calculation s in categories tha t linked concept and numbers. 19 What needs to be emphasized here (and in Chapter 21 ) i s that , wit h th e passag e o f tim e and th e fou r successiv e concentrations of innovations ove r th e pas t tw o centuries , the linkag e o f basi c scienc e t o inventio n and

What Don't W e Know about Economic Growth: 45

7

innovation ha s becom e progressivel y mor e direct . Th e Fourt h Industria l Revolution i s intimately linked t o areas of basic scienc e tha t themselves ar e experiencing revolutionar y change. Th e inventor , innovatin g entrepreneur , an d th e workin g forc e have , fo r tw o centuries, alway s been a team—harmonious, despit e frictions , if innovation was to suc ceed. No w th e scientis t mus t be increasingl y a working member o f that team; an d to be successful the entrepreneu r mus t understan d somethin g of wha t he is about . Ther e are unlikely to be any great breakthrough s i n the times immediately ahead based (lik e Henry Ford's movin g assembl y line ) o n a slaughterhouse. But th e oldes t distinctio n between basi c an d applie d scienc e stil l remains. Whil e im mensely fruitful , i n varying different ways , the socia l profit s generate d b y basic scienc e are hard to predict o r to entrap for the creator. Therefore , a s British scientists argued with Charles I I in 166 1 an d Colbert with Louis XI V on behalf of French scientists , includin g Pascal an d Huygens , a few years later , th e stat e mus t subsidiz e basic scienc e i n it s own interests o n wha t Ada m Smit h wa s late r t o defin e a s "grea t society " grounds . Th e rationale fo r th e Britis h Roya l Societ y an d the Frenc h Academy , reinforce d i n the nine teenth centur y b y Babbag e an d J . S . Mil l amon g others , thu s se t th e patter n fo r publi c subsidy t o basi c researc h tha t continue s dow n to the present . Putting military technology asid e and certain important civil enterprises too uncertain or expensive fo r the private sector to undertake (e.g., fusio n power) , a more easily recogniz able market process has generated the great as well as small inventions of the past severa l centuries. I n a goo d phras e relate d t o Hirschman' s "inducemen t mechanisms, " Rosen berg cite s thre e type s o f "compulsiv e sequences " which , b y posin g sharpl y define d problems, attracte d creativ e talen t to their solution: 20 technical imbalances brought about by disproportionat e progres s i n one phas e o f an interconnecte d economi c process ; labo r strikes o r othe r threat s t o th e continuit y o f production ; an d wartim e shortage s brough t about b y interruptio n o r sharply increase d cost s o f supply . Al l thre e o f thes e forcin g mechanisms operated, o f course, o n profits or expected profits ; but Rosenberg i s assertin g more tha n this obvious linkage. H e is arguing that the channels i n which inventive talent are, i n fact , concentrated , ca n b e powerfull y influence d b y disequilibriu m situation s endogenous t o the unfolding of technology itself , o r exogenous to the economic system . These ar e valuabl e insights ; but i t i s evident tha t there i s stil l muc h to sor t ou t a s w e come increasingly t o treat the whole R & D process a s an endogenous part of the working of moder n economies . 4. Scientific an d inventive as well as entrepreneurial talent tends to cluster; but why? As demand-oriente d macrotheories—Keynesian , monetarist , o r both—demonstrate d their inadequac y fo r analyti c o r prescriptive purpose s i n the 1970 s an d 1980s , ther e wa s something of a revival of interest i n theories o f long cycles, includin g especially, Schum peter's innovationa l versio n o f the Kondratief f cycle . Thi s ha s le d inevitabl y to a reex amination o f Schumpeter' s assertio n tha t majo r innovation s hav e historicall y tende d t o distribute themselve s irregularl y throug h time i n bunches, swarms , o r clusters . The centra l figure s in the revived debat e o n this issue have been Gerhar d Mensch , a n academic figur e i n both German y an d the Unite d States; Christophe r Freeman , wh o ha s led a distinguished tea m o f analysts at the University of Sussex; and a Dutch economist , Alfred Kleinknecht. 21 It shoul d b e sai d righ t of f tha t th e discussio n ha s bee n complicate d becaus e thre e reasonably distinc t definitions o f (a s wel l a s hypothese s about ) clusterin g are involved. First, Schumpete r appeare d t o hav e i n min d in hi s Theory o f Development a pioneering innovational breakthroug h i n a singl e majo r sector , followe d b y a stron g bandwagon

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effect bringin g into that sector a large numbe r of new firms, wit h entrepreneurs o f lesser breed, to exploit th e demonstrated profitabilit y o f the innovation. Second, Mensch, rely ing heavily on the dating of invention and innovation in Jewkes's The Sources o f Invention (1958) argues: 22 (1) that groups (or clusters) of major innovations in different sectors have tended to be set in motion during cyclical depressions, whe n the lag is shortened betwee n invention an d innovation , an d thei r diffusio n account s fo r subsequen t powerfu l booms ; and (2 ) tha t a phas e o f "technologica l stalemate " follow s th e exploitatio n o f thes e innovational clusters unti l depressio n generate s an d unleashes a new batch o f inventions and innovations. After a carefu l an d temperat e analysi s of Mensch' s dat a an d findings , Freeman con cludes a s follows— a vie w I woul d generally support: 23 (0 Basic inventions do show a tendency to cluster at certain periods, including a bi g cluste r i n th e earl y 1930s , bu t thes e cluster s ar e apparentl y no t systematically relate d t o depressions . (ii) Neithe r doe s th e availabl e evidence consistentl y suppor t th e MenschKleinknecht theory of heavy clustering of basic innovations i n periods of deep depression, althoug h ther e i s som e evidenc e o f a cluste r i n th e lat e 1930s . (in) No r doe s i t suppor t th e acceleratio n hypothesi s o f reduced lead-time s for innovation s launche d i n dee p depressions . (iv) Ther e i s howeve r evidenc e o f a falling of f i n basic innovation s at th e tail-end o f lon g booms . (v) Firm s ten d t o reduc e bot h thei r R an d D activitie s and thei r patentin g during th e mor e sever e depressions . Freeman's ow n hypothesis—th e third—link s science , invention , and innovation—a s well a s large discontinuou s and smal l incrementa l innovations—in a somewhat differen t way:24 We ar e intereste d i n "constellations " o f innovation s whic h hav e a rela tionship t o eac h othe r an d no t just i n th e mor e o r les s accidenta l statistica l grouping o f th e innovation s of a particula r yea r o r decade . Th e importan t phenomenon t o elucidat e i f w e ar e t o mak e progres s i n understandin g th e linkages betwee n innovation s an d lon g wave s i s th e birth, growth , maturit y and declin e of industries an d technologies. Th e introductio n o f a major ne w technology int o th e economic syste m can take a matter of decades an d affec t many industrie s bu t th e proces s ha s cyclica l aspect s whic h ca n giv e ris e t o long wav e phenomena . Freeman the n add s a conclusion , bringin g hi m bac k t o Schumpeteria n orthodox y a t least a s o f the latter' s Business Cycles: 25 ... I f the S-curve s wer e randoml y distribute d for a fairl y larg e numbe r of discrete basi c innovations , an d if , too , th e shap e o f the curves varie d quit e a lot, the n ther e migh t b e a serie s o f ripple effect s i n the large r econom y bu t there woul d not hav e t o b e bi g waves . Big wav e effect s coul d arise either if some of these innovation s were very large an d wit h a lon g time spa n in thei r own righ t (e.g., railways ) and/or i f some o f the m wer e interdependen t and interconnecte d for technologica l and social reason s or i f general economic condition s favoure d thei r simultaneous

What Don't W e Know about Economic Growth? 45

9

growth. Thu s w e ar e intereste d i n what we shal l cal l "ne w technolog y sys tems" rather tha n haphazard bunche s of discrete "basi c innovations." Fro m this standpoint , whic h w e believ e wa s essentiall y tha t o f Schumpeter , th e "clusters" o f innovation s are associated wit h a technological web , wit h the growth o f ne w industrie s an d service s involvin g distinc t ne w grouping s o f firms an d with their ow n "subculture " and distinct technology, and with new patterns o f consumer behaviour . Schumpeter spok e o f the firs t Kondratie v as based o n a cluste r o f textil e innovation s an d th e widesprea d application s o f steam powe r i n manufacturing , th e secon d a s th e railwa y an d stee l Kondratiev, an d th e thir d a s base d o n electricity , th e interna l combustio n engine an d the chemical industry . Freeman proceed s the n t o examin e i n som e detai l tw o technologica l system s tha t became o f great importanc e in the world economy afte r th e Second Worl d War: syntheti c materials an d electronics . Out of these and other analyses that are part of the economic historian's lore, three clues emerge, suggesting, perhaps , th e shape of an answer to the question:26 Why should ther e have bee n i n the pas t tw o centurie s fou r cluster s o f majo r technological systems ? The first clue is that the working out and refinement of a given innovational breakthrough i s clearly a long-term process. In Part Fiv e o f my World Economy: History an d Prospect I sought to dramatize th e role of leading-sector complexe s wit h a simple device . I charted the rate of growth of each leading sector , i n a 5-year moving average, agains t the rate o f growth of a n overall industria l production index . Initially , of course, th e growthrate curv e of the leading secto r greatl y exceede d tha t of the industrial index. Afte r a time the rate of growth of the leading sector settled down to (or fell below) the rate of growth of the overal l index . Fo r Grea t Britai n this is roughly ho w lon g i t took: 27 Table 20.1. Approximat e Timing of Leadin g Sectors : Grea t Britain , 1783-197 2

Sector Cotton textile s Pig iro n Railroads Steel Electricity Motor vehicle s

Maximum rat e of expansio n (1)

1780s

1790s 1830sa

1870sb

1900-1910 1900-1910

Estimated tim e sector becam e

leading sector (2)

1780s 1780s 1830s 1870s 1900-1910 1920-1929

Estimated tim e sector ceased (3

) - (2)

to lea d (i

n years ,

1840s 6 1860s 8 1870s 4 1920s 5

0 0 0 0

1960s 4

0

(3) approximate

)

"Figures fo r mileag e adde d i n eac h decad e ar e a s follows: 1825-1830 , 71 ; 1830-1840 , 1,400 ; 1840-1850 , 4,586 ; 1850 1860, .4,493 ; 1870-1880 , 2,001 ; 1880-1890 , 1,718 . b Estimate begin s i n 187 1 wit h 329,000 tons. Maximu m growt h rat e ma y have come earlier, a t very lo w levels o f production. SOURCE: W . W . Rostow , Th e World Economy (Austin : Universit y o f Texa s Press , 1978) , p . 379 .

Freeman chart s the life history of the U.S. plastic s industry suggesting, once again, the stately decelerating rhyth m of th e lif e cycl e of a technological syste m as captured earlier in Kuznets' s Secular Movements (Figur e 20. 3 an d 20.4). Conventiona l business cycle s are the form this long-term process assumed , not the matrix which triggered this proces s into existence .

Figure 20.2. Grea t Britain , 1700-1972 : Relativ e Growt h Rates—Majo r Sector s an d Industria l Productio n (Smoothed) . [Adapte d fro m W . W . Rostow, World Economy: History an d Prospect (Austin : University of Texas Press , 1978) , pp . 376-377. ]

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Figure 20.3. Plastic s Patents, Papers, and U.S. Production (1907-1980). Adapte d from V . Walsh et al., "Trend s i n Invention an d Innovation i n the Chemical Industry," Repor t to Social Science Research Counci l (mimeo) , Scienc e Polic y Researc h Unit , i n C . Freeman , Joh n Clark , an d Lu c Soete, Unemployment an d Technical Innovation (Westport, Conn.: Greenwood Press, 1982), p. 86 .

A second clue is that, as a system approaches its peak, its creative corps bails out first. This is apparent i n Figure 20.3 wher e papers an d patents peak out before production and, even mor e vividly , i n Figur e 20. 4 coverin g th e Japanes e polyme r chemistr y industry : research fund s tur n down first , then , i n order, researc h papers , patents , production, an d researchers. The polymer chemistry departments of universities march implacably on for a time. Th e lif e cycl e of a given technological system (or leading-sector complex) is likely

462

1 2 3 4

Problems and Prospects

Research Papers Published in Foreign Country Research Funds Research Papers Patents

5 Production 6 Researchers 7 Number of Polymer Chemistry Departments in the Japanese Universities

Figure 20.4. Lif e Cycle of Polymer Chemistry and the Number of Polymer Chemistry Departments in Japanese Universities . [Adapted from K. Yamada, ' 'A Study on Time Lag between Life Cycle of a Disciplin e an d Resourc e Allocation, " Research Policy (1982 ) i n Freeman , Unemployment an d Technical Innovation, p . 92. ]

to contai n mor e tha n on e majo r innovationa l breakthrough ; bu t eac h i s likel y t o b e governed by diminishing returns. Creative men and women move to where they perceive the action is . Thus , fo r example, a s the cotton textil e industry settled dow n in the United States of the lat e 1830s , the machin e maker s who supplie d tha t industr y shifte d ove r to building locomotives. T o take a more recen t case, i n writing Getting from Here t o There in the 1970 s I tried t o answe r the question then widely posed: I s human creativity o n the wane?28 Privat e an d public R & D expenditures wer e bein g cut , th e rate o f productivit y increase was rapidly decelerating, an d serious analyst s were, afte r 40 years, raising agai n the specter of secula r stagnation . I finally conclude d tha t we wer e i n transition fro m on e set of leading sector s and technological system s to another and that J. M . Clark' s dictum still held: 29 "Knowledg e is the only instrumen t of production no t subject to diminishing returns." This kin d of switch in the direction of creative effort i n the science-invention-innovation spectru m ca n also, o f course, b e influenced from th e suppl y side by a new scientifi c breakthrough (e.g. , DNA, the laser, the microcomputer) a s well as from the demand side , by th e slowin g dow n o f technologica l momentu m an d interes t i n a n ol d leadin g sector . A third clue is that these clusters of apparently independent technological systems may not b e quite a s independent a s they look. Fo r example , Watt' s stea m engin e prove d essential t o the success o f Cort's iron fabrication process as well as to the ability to mov e cotton factories awa y from waterfalls. For example, the railroad not only set up a Rosen bergian ' 'compulsive sequence'' yieldin g cheap steel and all that followed from i t but also greatly stimulate d th e machiner y an d othe r meta l working industries . Fo r example , th e internal combustion engine represented a bringing together of the chemical and electricity, steel, an d machiner y industries. An d whe n w e gai n bette r perspectiv e o n th e current ,

What Don't W e Know about Economic Growth? 46

3

Fourth Technological Revolution, we may find that at the root of apparently quite separate technological system s i s the impac t o n basic science , i n all its forms, o f the stil l rapidly evolving computer. 30 There i s stil l muc h t o lear n a s researc h break s ope n tha t blac k bo x "technologica l change," bu t i t i s alread y clea r that , whil e th e scal e o f inventio n an d innovatio n i n a modern societ y i s a function o f noneconomic as well as economic variables, the composi tion o f th e strea m o f inventio n an d innovatio n i s substantially determine d b y profi t incentives. Further , i f one assume s tha t the yield o n refinements t o individual inventiv e breakthroughs i s subject to diminishing returns, th e profitability o f concentrating R & D talent i n a given direction wil l gradually diminish. This means the incentive will increas e with the passage of time for R & D talent to be drawn in new directions of more profitable creativity. Som e suc h process may explain why, with appropriate tim e lags , ne w profitable invention s an d innovation s emerge a s old leadin g sectors decelerate . Suc h engage ment an d reengagement i n new direction s is , o f course, simila r to tha t of th e patter n o f investment in general, an d it is one reason for treating basic research, invention , develop ment, an d innovatio n a s part o f the investmen t process . 5. Technology generated b y requirements i n on e sector often found application i n others. Th e notion tha t manufactures would better len d themselves t o technical progres s than woul d th e productio n o f basi c commoditie s i s on e o f th e oldes t i n economics . I t appears, eve n in David Hume's History of England (preceding, pp. 25-26); and it persists through Marshal l to recur in virtually every period of substantial protracted relativ e rise in the price s o f basi c commodities . The tw o points t o be mad e tersely her e are : (a ) s o far as modem histor y is concerne d nature ha s prove d a goo d dea l les s niggardl y tha n man y political economist s though t i t would;31 an d (b) innovations in manufactures have not only had powerful positiv e effect s on basic commodity production but innovations in the latter have also played an important part i n industrial development. Thus , the evolution of technology in the two sectors wa s intimately connected . Th e ne t resul t o f thi s interactio n ha s bee n that , b y an d large , diminishing return s ha s bee n hel d a t bay ; th e globe' s populatio n ha s increase d (sinc e 1750) b y almos t 6 times , industria l production, by , perhaps , 43 0 times, rea l GN P per capita, a s a global average , b y something like 1 0 times. Clearly , in an era when the rate of population increas e i s only slowly decelerating fro m unprecedente d levels , an d the peo ples an d governments o f virtually all of the nations of Latin America, Africa , th e Middl e East, an d Asia are determined t o move forward in industrial growth, the creative interac tion o f foo d an d ra w materia l suppl y on the on e hand an d technology o n the other, wil l have to continue into the future i f large scale Malthusian and/or Ricardian crises ar e to be avoided. A fe w illustrations underline the reality of this useful dynami c interaction betwee n th e two sectors . a. Mining an d Watt's steam engine. Newcomen' s steam engin e had existed sinc e th e beginning of the eighteenth century , a response to the need in Britain to pump water out o f mines . Watt' s mor e efficien t engine , onc e created , foun d man y more use s than initially envisaged (including important manufacturing uses); and its efficiency was incrementall y but rapidl y improved. b. Th e timber price an d iron from coke. Between 1750 and 179 0 the proportion of pig iron made from cok e rose in Britain fro m 5 % to 86% of the total because of the rise in price o f timber and charcoal relative to coal. The process of transformation fro m

464 Problems

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charcoal to coke was completed wit h Henry Cort's metho d for using coke to puddle and rol l iron , permittin g th e concentratio n o f the fabricatio n stage o f the industry. The us e o f th e stea m engin e prove d essentia l to Cort's majo r innovation. c. Cotton machinery, the cotton price, the cotton south—and guns with interchangeable parts. The new cotton textile machinery diffused rapidl y after 1785 , yielding a sixfold increas e i n ra w cotto n import s b y th e en d o f th e century . Th e financia l incentive t o solve th e problem o f removing the seeds fro m U.S . long-stapl e cotto n by machine sharpl y increased. Respondin g to this incentive Eli Whitney created th e cotton gi n i n 1793 . It s use sprea d rapidl y (without the benefit of patent royalties to Whitney), yielding a surge in production in the American South and, tragically, an increased deman d fo r slaves . Bu t Whitney' s faile d effor t t o mas s produc e an d market a piec e o f agricultura l machinery contribute d to hi s subsequen t successful effort t o mas s produce gun s with interchangeable parts . d. Th e railroads, agriculture, an d ra w materials. Th e firs t railroad s were induce d by the profitabilit y o f movin g bulk y ra w material s cheapl y t o factorie s fro m ports : Manchester an d Bosto n i n th e firs t instance . A s th e us e o f th e railwa y spread , however, it became, on a worldwide basis, a principal instrument fo r expanding th e supplies of agricultural products an d raw materials from farms , mines, an d forests. e. Railroads, steel ships, an d freight rates. Th e rapid diffusion o f railroads, notably in the 1840 s an d 1850s , dramatize d th e hig h rat e o f obsolescenc e o f iro n rails . Th e incentive ros e t o fin d a wa y t o produc e cheap , high-qualit y steel. Th e inventor s broke through in the 1860 s an d the steel industry emerged rapidl y in the 1870 s with the railroads thei r major customer. B y the 1880s , a s railway building decelerated , new use s for steel wer e soon foun d i n machinery, bridges, urba n construction, an d shipbuilding. Freigh t rate s i n the mid-1890 s wer e abou t hal f th e leve l o f the earl y 1870s, thu s cheapening fo r Europe the prices of imported agricultura l products and raw materials . The array of complex interaction s between industrial innovation and the supply of basic commodities coul d b e indefinitel y extended; electricity , moder n dair y farming , and th e refrigerator ship ; chemistry , chemica l fertilizer s and pesticides ; th e interna l combustio n engine an d th e tractor ; spac e fligh t an d photovoltaic cells; an d s o on . What on e observes, then , ove r th e pas t tw o centuries ar e invention s and innovations that responded initiall y to an agricultural or raw material requirement (ofte n i n a phase of rising or high relative prices fo r basic commodities), the n finding othe r highly productive industrial o r transpor t uses ; bu t on e als o observe s invention s an d innovation s tha t re sponded initiall y to a profit possibility in industry or transport, the n finding other highly productive use s i n expanding the suppl y of basi c commodities . This reassuring lesson from the past is a useful antidot e to the simpler forms of limits to growth arguments, but it by no means guarantees the completion o f the transformation of the worl d econom y t o ful l modernizatio n withou t further strai n on natura l resources an d the environment . 6. I t i s essential t o find a wa y t o deal systematically with th e phenomenon o f a technological backlog: its size and the circumstances that determine whether and at what pace that backlog can be efficiently absorbed. I n the early post-1948 days of international concern i n th e advance d industria l Nort h for economi c growt h i n th e Sout h one spok e without embarrassment about "underdeveloped" countries . That phrase implied correctly that a pool of technologies existed that could be—but had not yet been—productively and

What Don't W e Know about Economic Growth? 46

5

profitably applie d i n the South; and the task of development in such countries was not only to mak e relevan t technologie s availabl e but to hel p buil d up thei r absorptiv e capacity . The notion that a technological backlo g might exist capable under proper circumstance s of fairly rapid absorption b y latecomers goe s back at least to the eighteenth century debat e on the rich-country-poor-country problem . I n the nineteenth century the rise of Germany and th e Unite d State s vi s a vi s Britai n stirre d considerabl e discussio n o f th e cost s o f pioneering an d the benefit s of latecoming; and , of course, th e twentiet h century relativ e rise o f Russia an d Japan, let alone the ne w giants now stirring in the wings, have driven the point hom e quit e convincingly. Technological backlog s an d thei r absorptio n ar e a n awkwar d subjec t fo r mainstrea m economics fo r thre e reasons . First, the degree of development i s conventionally measured in terms of GNP per capit a (or some such income measure ) rather than in terms of the more correct bu t difficult index : the degre e o f efficien t absorptio n o f th e relevan t poo l o f existin g technologies . An d i t doesn't hel p muc h t o appl y th e Chener y measure : th e relativ e scal e o f intermediat e industrial production. A low figure for that index simply reflects a society's wea k capacit y to absor b th e technologica l backlog . Second, if one leans to the Ian Little view that conventional mainstream economics i s a sufficient intellectua l framewor k fo r analyzin g th e developmen t process , th e proble m disappears: his "enterprisin g people" wil l promptly absor b al l the relevant technologie s from th e existing pool. But, in fact, it' s not quite that easy. Th e build-up of technologica l absorptive capacit y i s a proces s requirin g th e allocatio n o f resource s (fo r example, t o education) jus t a s th e generatio n o f invention s is a n investmen t subsector . Third, i f on e break s ope n ye t anothe r blac k bo x an d ask s what , i n fact , doe s th e technology absorptio n (o r transfer ) process loo k like , on e i s immediatel y i n a worl d o f enterprising buccaneers, intelligenc e agents, itineran t foremen, peripeteti c workers , educational institutions , transnationa l companies, etc. 32 Since , say , an uneasy Frenc h government, sense d tha t a new and dangerou s challeng e was stirrin g in Britai n in the thir d quarter o f th e eighteent h century , se t i n motio n a n enlarge d syste m o f technologica l espionage, and , a bit later, Francis Cabot Lowell stole from the British not only the design of bi g textil e machines bu t als o Mr . Moody , a skille d an d proven foreman , technolog y transfer has been a highly human, institutional enterprise not easily embraced by either the differential calculu s o r Unite d Nations ' resolutions . One o f the difficultie s wit h Schumpeter's formulatio n of the innovatio n process i s that he did not capture sensitively the degree o f creativity involved in successfully transferring to anothe r societ y eve n a technolog y well-prove n i n a differen t setting . Muc h Unite d Nations' rhetoric o n technology transfer also misses this point. The challenge may be less than tha t confronte d b y th e prima l innovator , bu t i t i s no t a simpl e tas k o f replicatio n capable of bein g carrie d ou t by the faceles s manager s o f Schumpeter' s initia l Walrasia n circular-flow system . From, say, the setting up of the first bi g imitative American cotton textile mill in Lowell, Massachusetts , to , say, the successful transfer of wheat strains from Chapingo, Mexico , t o the Punjab , a great dea l o f creative adaptatio n ha s been required . Nevertheless, th e pace of the transfer can be very brisk indeed, as, for example, Taiwa n and Sout h Korea have demonstrated. Wha t are required, above all, are large numbers of literate, well-traine d men an d women , a competen t corp s o f entrepreneurs , government policies designe d t o encourag e th e transfe r o f technologie s fro m abroad , an d sufficien t infrastructure investmen t (in transport, power, etc.) to render the economy a reasonably efficient, interconnecte d market . What is alway s involve d i n a successfu l transfe r i s no t

466 Problems

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merely th e installatio n o f a given technology bu t als o the creation o f surroundin g institutions an d service s (includin g labor-force training ) required fo r the technology syste m (or leading-sector complex ) t o tak e hold . I n som e case s (e.g. , Belgium , France, Germany ) the transfer of th e railroa d yielded a wide-based , diversifie d surg e of industrializatio n in the secon d an d thir d quarter s o f th e nineteent h century . I n Indi a an d China , wher e th e supporting infrastructur e did not exis t or wa s not promptly created, th e spreadin g effect s from railway s wer e muc h mor e limited . I hav e emphasized a t a number of points in this book tha t technological backlog s ca n build up for advanced industria l as well as developing countries. A notable example was the backlo g o f technologie s associate d wit h th e mas s productio n an d diffusio n o f th e automobile an d durabl e consumers ' good s tha t buil t u p fo r Wester n Europ e an d Japan during the interwar years, when the United States moved (until 1929) much more strongly ahead i n thes e directions . Afte r phase s o f postwa r recovery , bot h Wester n Europ e an d Japan wer e abl e voraciousl y t o absor b (an d i n som e cases , refin e an d furthe r develop ) these technologie s becaus e th e supportin g infrastructur e an d incentive s existed o r wer e quickly created . The Sovie t Unio n no w represent s th e mos t dramati c cas e o f a n advance d industria l society confronte d wit h a n immense backlog of unapplied, relevant technologies; and , in terms o f traine d huma n beings alone , i t command s a n objectiv e capacity t o absor b th e backlog an d surge ahea d as , say , Wester n Europ e and Japan did in the post-1945 quartercentury. Whethe r or when this happens depends on political, institutional, and psychological change s withi n Sovie t societ y tha t woul d release it s evidently ample human , scien tific, an d technological potential . This is the issue Gorbachev ha s posed to his peoples and the world . Whethe r hi s vie w o f th e require d change s i s sufficient ; whether , i f i t is , hi s policies wil l prov e acceptabl e t o th e presen t elite ; whethe r th e elite , i f persuaded , ca n carry th e peopl e forwar d effectively—al l this i s stil l t o b e decided . But wha t need s underlinin g here ar e the kind s of deep societa l an d institutional issues ultimately at play i n the process o f technology absorption an d transfer. Of all such issue s in th e contemporar y world , th e mos t important , perhaps, i s the exten t o f secondar y an d higher education. A s the frustrated stor y of Argentine development and the present cu l de sac o f the U.S.S.R . indicate , a strong educationa l base ma y be a necessary bu t i s not a sufficient conditio n fo r rapid absorptio n of the technological backlog . Nevertheless , Tabl e 17.3, th e prelude t o the furthe r consideratio n o f this matte r i n Chapter 21 , suggest s tha t the potential technologica l absorptiv e capacit y o f the developing region s ma y have been radically increased b y the little-noticed educationa l revolution of the past quarter-century. 7. Clarification i s required o n the extent to which the pace of technological absorption determines, directly and indirectly, th e investment rate. On e of the unresolved challenges still befor e economist s i n th e analysi s o f investmen t i s t o reconcil e conventiona l neo Keynesian, highly aggregated treatmen t of the operation o f the consumption function (an d the e x post equality of savin g and investment ) with two soli d piece s o f empirical knowledge: (a ) i n advance d industria l societies u p to 70 % o f industria l investment is finance d from interna l sources: 33 an d (b ) th e rat e o f growth , profits , an d plan t an d equipmen t investment ten d t o b e disproportionatel y hig h i n sector s rapidl y diffusin g a ne w tech nology o r rapidl y absorbin g a hithert o unapplied backlog o f relevan t technology. 34 When surveyin g twentieth-centur y data o n U.S . manufacturin g an d mining , Serge i Dobrovolsky found tha t retained profit plu s depreciation i n fact approximate d total gros s plant an d equipmen t expenditure; but he noted immediatel y that some companie s gener -

What Don't W e Know about Economic Growth? 46

7

ated internal fund s i n excess o f requirements which, in one way or another, helped finance dynamic firm s whic h require d externa l financing. 35 One can go further. Th e rate of growth of the economy as a whole is extremely sensitive to the momentum o f sector s absorbin g new technologies; and , therefore , a t one remove , infrastructure investmen t (usually responsive t o th e increas e o r decreas e i n public reve nues) and residential housing investment (usually responsive to business cycles), may also be substantiall y determine d b y th e pace o f technological absorption . Both thes e way s o f lookin g a t th e consumption-saving-investmen t proble m g o fa r back i n political economy; but they have not yet been brought satisfactorily together. For example, withou t understandin g th e accelerate d increas e i n th e abilit y o f developin g countries to absorb efficiently th e backlog of relevant technologies, one cannot explain the peaking of both investment and growth rates in the drive to technological maturit y (uppermiddle-income countries). 36 Take a narrowe r an d mor e familia r case : the distributio n of investmen t i n relatio n t o technology i n the great postwar Wester n European boom of the 1950 s an d 1960s . M. M . Postan addresse d th e linkage mos t directly. 37 In almost every Europea n country the industries . . . wit h the largest infusio n of capital , wer e th e "modern " o r th e modernize d industries . Th e chemica l and petro-chemicals, plastics , an d man-mad e fibres , develope d a voraciou s appetite fo r ne w capita l a s they gre w an d renewed thei r equipment. Equally voracious fo r capital were th e engineering and metal-working industries, especially thei r newe r branches , suc h a s electro-mechanical , electronic , an d motorcar. Postan the n point s out that investment was low relative to output in an array of large bu t old an d sluggis h industries. The genera l point from whic h the importance of the innovation-plowback lin k derives is th e critica l rol e o f th e pac e o f innovatio n i n determinin g th e overal l rat e o f growth , employment, an d pric e trend s i n a n economy . Her e W . E . G . Salter' s analysi s o f th e dynamic impac t of innovation on the structure and performance of the British economy i s most helpful. 38 H e demonstrates (Tabl e 20.2) that five technologically dynamic industrie s in a sampl e o f twenty-eigh t industrie s account for 79 % o f th e increas e i n output fo r th e

Table 20.2. Change s i n Total Output, Employment, Outpu t per Head, an d Prices, i n Twenty-Eight Industries, Unite d Kingdom , 1924-195 0 1924 = 10 0 (weight base = 1935 ) Output Employmen 1. Al l industrie s i n sampl e 18 2. Excludin g th e fiv e industrie s wit h th e largest increase s i n outpu t 11 3. Excludin g th e te n industrie s wit h th e larg est increase s i n outpu t 10

t pe

Output Ne r head price

t

59

4 19

6 15

8

88

2 14

5 20

9

37

7 13

4 23

6

NOTE: These figure s shoul d no t b e take n a s representativ e of al l industry . SOURCE: W . E . G . Salter , Productivity an d Technical Change (Cambridge : a t the Universit y Press , 1969) , p . 149 .

s

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Table 20.3. Change s i n Share s o f Branche s o f Manufacturin g i n Outpu t and Capita l o f Tota l Manufacturin g Groupe d b y Rapidit y o f Growt h in Initia l Period , Unite d States , 1880-194 8 /. Shares i n value o f output i n 1929 prices (% ) 1880 191

(1) (2

4 (1948

) (3

)

)

Group A . Shar e i n 188 0 o f 0.6 % o r less ; growt h factor , 188 0 t o 1914 , o f 6 o r mor e Total, grou p A 3. 2 13. 0 35. 6 (a) Automobil e subgroup 0. 5 3. 2 19. 4 (b) Othe r 2. 7 9. 8 16. 2 Group B . Shar e i n 188 0 o f mor e tha n 0.6% ; growt h factor, 188 0 to 1914 , o f 6 or mor e Total, grou p B 15. 3 30. 8 26. 3 Group C . Growt h factor , 188 0 t o 1914 , of les s tha n 6 bu t mor e than 3 Total, grou p C 24. 8 25. 9 22.

9

Group D . Laggin g industrie s (all other) ; growt h factor , 188 0 t o 1914 , o f les s tha n 3 56.7 Total, grou p D 15.2 30.3 Growth factor s Total output Group A (a) Automobil e subgroup (b) Othe r Group B Group C Group D

1880 to 1914 4.33 17.59 27.71 15.72 8.72 4.52 2.29

1914 to 1948 3.51 9.61 21.28 5.80 3.00 3.10 1.76

1880 to 1948 15.17 168.77 588.60 91.02 26.08 14.01 4.07

//. Shares in total capital in 7929 prices (% )

1914

(2)

1948

(D 6.0 1.0 5.0

16.2

1880

(3)

Group A (a) Automobil e subgroup (b) Othe r Group B Group C Group D

21.3 29.8 42.9

12.0 33.0 27.7 23.1

39.2 22.6 16.6 26.5 23.2 11.1

Growth factor s Total capita l stock Group A (a) Automobil e subgroup (b) Othe r Group B Group C Group D

1880 to 1914 8.18 22.09 34.36 19.63 12.67 7.60 4.40

1914 to 1948 2.16 5.23 11.62 2.99 1.73 1.81 1.04

1880 to 1948 17.68 115.50 399.57 58.70 21.99 13.76 4.57

4.2

NOTE; The underlying data are from Danie l Creamer, Serge i P. Dobrovolsky , and Israel Borenstein, Capital i n Manufacturing an d Mining: It s Formation an d Financing (Princeton : Princeton University Press fo r th e Nationa l Bureau of Economi c Research , 1960) , tabl e A-10 , pp . 252-258, fo r valu e of output; tabl e A-8 , pp . 241-24 7 fo r tota l capita l (bot h i n 192 9 prices).

What Don't W e Know about Economic Growth? 46

9

period 1924-1950 , and for 53% of the productivity increase. Price s would have been 32% higher withou t the fiv e industries. Salter's i s on e o f th e fe w seriou s effort s t o lin k sectora l chang e brough t abou t b y invention an d innovatio n to aggregate growt h and structure. Another, based on an NBER study, i s contained i n Simon Kuznets' s lat e return to technology o n a disaggregated basi s in hi s 197 1 Economic Growth o f Nations (Tabl e 20.3) . A s i n Salter' s analysi s o f th e British data , th e engin e o f growt h i n Kuznets' s analysis 39 i s clearly i n sector s ... o f quite recent or impending technological changes . This is certainly true of rubbe r product s (increasingl y dominate d b y automobil e tires) , petroleu m (increasingly dominated b y the demand for automobile fuel), an d motor vehi cles—which hav e been combine d int o an automobile subgroup. Bu t it is also true of most of the other branches in A: canned foods, silk and rayon (because of recen t emergenc e of rayon) , chemical fertilizers , chemical s proper , meta l building materials , electrica l machinery , meta l offic e equipment , an d loco motives. O n the other hand , the large but lagging Grou p D includes the older food products , textiles , an d woo d industries , i n whic h an y technologica l innovations mad e ha d to o limite d a n effec t t o induc e averag e growth . Th e second aspec t i s that in 194 8 wel l over a third of the value of product o f tota l manufacturing wa s i n branche s that di d no t exis t i n 1880 , o r wer e s o smal l that the y accounte d i n al l fo r abou t 3 percent o f manufacturin g output. In short , a modern econom y i s no t driven forwar d by som e sor t o f productivity factor operating incrementall y and evenly across the board. I t is driven forward by the comple x direct an d indirec t structura l impac t o f a limite d numbe r o f rapidl y expandin g leadin g sectors within which new technologies ar e being efficiently absorbe d an d diffused. An d it is this process o f technologica l absorptio n tha t substantiall y generates, directl y an d indirectly, th e economy' s flo w o f investmen t vi a th e plowbac k o f profit s fo r plan t an d equipment, enlarge d publi c revenues fo r infrastructure, and enlarged privat e incomes fo r residential housing . Clearly , macroeconomics a s conventionally expounded require s revi sion t o tak e thes e realitie s int o account . 8. W e have no t yet solved th e problem of ho w t o measure employment generated b y a specific technology: The International Standard Industrial Classification versus leadingsector complexes. Economists hav e bee n arguin g about the ne t effec t o n employment o f the introduction of new technolog y sinc e Malthu s and Ricardo debate d th e matter in the post-1815 adjust ment proces s i n Grea t Britain , and , i n th e nex t generation , Mar x seize d o n par t o f Ricardo's argumen t to create his ' 'reserve army of the unemployed.'' Th e coming of what I (not Freeman) regar d a s the Fourth Industrial Revolution since, roughly , the mid-1970s , has brough t thi s ol d debat e aliv e agai n i n a heightene d form . Man y economist s hav e argued tha t the hig h concentratio n o f sophisticate d skill s required i n th e productio n an d use o f computers, th e products o f genetic engineering , etc. , combine d wit h the fac t that they d o not appear to require massiv e infrastructur e investment, like the railroad an d the internal combustio n engine , woul d limi t the scal e o f employment created b y thes e tech nologies; an d tha t the proble m o f employmen t would b e heightene d by th e diffusio n o f robots, assume d b y mos t commentator s to be , o n balance , destructive of jobs. The simpl e point to be mad e in this catalog of ignorance is that statistical data are now organized i n form s tha t mak e it virtually impossibl e to deal systematicall y with issues of this kind . A great deal o f furthe r analysi s and data collection are required to measure the

470 Problems

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size and rat e of growth o f a whole leading-sector complex . W e need no t merely output, employment, an d productivit y dat a fo r fina l outpu t of th e kind provide d b y th e Interna tional Standar d Industria l Classification s bu t als o dat a o n th e whol e arra y o f input s required t o creat e tha t outpu t an d emplo y i t productivel y in th e economy . W e need , i n effect, a highl y disaggregate d annua l input-output matrix . Data ar e collecte d t o answe r specifi c questions ; an d neithe r government s no r main stream economist s hav e been concerne d a t high priority with the macro effects of sectoral complexes incorporating ne w rising or old fading technologies. Thus, conventional instruments and methods fo r measuring economic activit y fail t o provide satisfactory estimate s of the rise and fall o f technologies o n the overall course of the economy and , thereby, fai l to mak e th e sectora l bridg e betwee n conventiona l micro - an d macroanalysis . In th e en d th e challeng e i s t o giv e substanc e t o on e o f th e severa l majo r stil l un developed insight s i n Allyn Young's presidentia l address: 40 . . . The mechanism of increasing returns is not to be discerned adequatel y by observing th e effect s o f variation s i n th e siz e o f a n individua l firm o r o f a particular industry , fo r th e progressiv e divisio n and specializatio n o f indus tries i s a n essentia l par t o f th e proces s b y whic h increasing returns ar e real ized. Wha t i s required i s that industria l operations b e see n a s an interrelate d whole. But to solve the problem on e must add to Young's fina l sentence , whic h is much in the spirit of Leontief, anothe r of Young's insights; namely, that what is required is a "movin g equilibrium," whic h input-outpu t analysi s ha s neve r bee n quit e abl e t o supply.

Relative Prices: Have Kondratieff Cycles Passed into History? This sectio n returns t o one of the oldest question s in political economy: prospect s fo r the prices o f basi c commoditie s relativ e t o manufactures . Earlier observation s bor e o n th e manner i n which the impulses for invention and innovation in the two sectors interacte d in such a way as to hold of f for two centuries a sustained trend toward a relative increase i n basic commodity prices . The only substantial exception is the trend in the relative price of timber, whic h rose quite steadily, inducing an ample supply of substitutes as well as other methods o f timbe r economy. 41 On th e othe r hand , som e historian s interpret th e roug h lon g cycle s i n the pric e level , money wages , an d interest rate s dramatize d b y N. D . Kondratief f as having as their roo t cause period s o f relativ e scarcit y an d therefor e relativ e hig h price s fo r basi c com modities.42 Thes e relativel y hig h price s rendere d profitabl e increase d investmen t i n th e supply o f basic commodities , usuall y involving in the pre-1914 worl d the opening u p of new territories . Th e multipl e lag s embedde d i n thi s process , ofte n requirin g larg e in frastructure investmen t an d flow s o f international capital an d migrants, were longe r than for conventiona l industria l investment. 43 Therefore , investmen t an d basi c commodit y production capacity tended substantially to overshoot their optimum dynamic equilibrium norms, yielding, in the wake of the basic commodity booms, protracte d periods of fallin g or lo w prices. 44 Behind th e questio n of capital movements and price fluctuation s i n foodstuffs an d ra w materials la y deepe r questions : What wer e th e equilibriu m level s o f worl d outpu t fo r

What Don't W e Know about Economic Growth? 47

1

foodstuffs an d the variou s ra w materials ; what determined thes e levels ; and wha t deter mined departure s fro m them ? International capita l movement s did no t generall y launch periods o f expansion i n foodstuff- an d raw-material-producing areas . The y move d i n to exploit an d suppor t wave s o f prosperit y alread y unde r way , triggered b y th e increase d profitability o f expanding output of particular foodstuffs an d raw materials. But they were palpably part of the process of balancing population expansion, urbanization, and the pace of industrializatio n with requisite increase s i n inputs. Changing relative prices wer e thus critical t o the whole clumsy effort t o maintain dynamic sectoral equilibrium in the face of substantial lags . Writing about this sequence in The Process of Economic Growth (completed in October 1951) I raise d th e questio n o f whethe r suc h cycle s woul d persist i n th e future. 45 Afte r noting th e marke d ris e i n the relativ e prices o f basic commoditie s a s between 193 8 and 1948, I observe d tha t i n th e secon d hal f o f th e twentiet h century the respons e "woul d consist less in the opening up of new territories than in the improvement of productivity in existing territories , wit h les s likelihoo d o f substantia l overshooting." I als o note d tha t political forces, conscious of the extraordinarily low prices of the great depression years , were seeking to damp the supply response to relatively high postwar prices and thus avoid overshooting. But I was, a t most, onl y half right . There was , indeed , n o opening u p of majo r new agricultural region s i n respons e t o relativel y high postwa r basic commodit y prices; but there was a powerful surg e in agricultural productivity in North America, Australia, and rapidly reviving Western Europe. There was also the rapid development of the oil reserves of th e Middl e East . As Table 20.4 shows, the surge in agricultural output and exports in North America and Australia was sufficient fo r some time to cover the rising deficits in all the other regions of the world. Meanwhile, as the mass automobile age seized Western Europe and Japan, and consolidated it s dominance over the round of life in North America, the international trade in oi l ros e i n importance ; but , fo r a time, th e contro l ove r oi l outpu t an d price s o f th e international oi l companies , agains t the background of enormou s Middle Eas t reserves, kept th e oil price relatively low . The upshot wa s the classic Fourt h Kondratief f downswing of 1951-197 2 followed by the classi c explosiv e entranc e int o the Fift h Kondratief f upswing of 1972-1974 . Tabl e 20.5 demonstrate s tha t such disproportionately large price increases marked the beginning of three other Kondratieff upswings.46 Fo r present purposes, the relevant questions to be Table 20.4 Th e Changin g Pattern of World Grain Trade Region North America Latin Americ a Western Europe Eastern Europ e an d USSR Africa Asia Australia

1934-1938 1948-1952 (Million Metric Tons) +5 +9 -24 +5 +1 +2 +3

+ 23 +1 -22 — 0 -6 +3

1960

1966

1973 (Prel.) (Fiscal Year)

+ 39 0

+ 59

+ 88 -4

-25

0 -2 -17 +6

+5 -27

-4 -7 -34 +8

-21

-27 -4 -39 +7

SOURCE: Leste r R . Brown , In th e Human Interes t (Ne w York : W. W . Norton , 1974), p , 81 . Base d o n U.S . Departmen t of Agriculture Data . NOTE: Plu s = ne t exports; minu s = ne t imports .

472

Problems and Prospects

Figure 20.5. Relativ e Prices , 1951-1982 . (Perio d characterization s ar e th e author's. ) [Adapte d from Economic Report o f th e President t o th e Congress, February 1983, pp. 227-228. ] answered a s background to Chapter 2 1 are these: will the relative rise in basic commodity prices resume in, say, the early 1990s, after a period of remission in the 1980s, yielding a Kondratieff upswin g of normal length (say 1972-1997)? Will the recent downward trend in th e relativ e price s o f basi c commoditie s continu e yielding , for whateve r reasons, a n abnormally shor t fift h Kondratief f upswing (say, 1973-1981)? Pu t anothe r way , ar e w e already i n the fift h Kondratief f downswing? Or, hav e the forces makin g for more o r les s systematic lon g cycle s i n relativ e price s disappeared—a s I suggeste d wa s possibl e i n 1951—and th e Kondratief f cycle passe d int o history after a run o f abou t tw o centuries ? No one can provide simple , confiden t responses to these questions; but it is possible to suggest som e o f th e ke y variable s that will , i n fact , determin e th e outcom e fo r relativ e prices. The case fo r a resumed relativ e rise in basic commodity prices round about 1990 hinges in goo d par t o n th e futur e cours e o f th e internationa l oil pric e an d it s implication s fo r energy price s i n general . Althoug h th e fift h Kondratief f upswin g was launche d i n De cember 1972 with an explosion in grain prices—and the subsequent course of agricultural prices ha s continue d t o influenc e significantly the cours e o f overal l an d relativ e pric e indexes—oil prices have played since 1973 a role more like grain prices in the pre-1914 world. Moreover , th e continued high energy us e in agriculture has linked to some exten t the trend s i n th e tw o type s o f basi c commodit y prices . But th e cas e fo r a resume d ris e i n th e rea l pric e o f oi l depend s no t o n conventiona l supply-demand analysi s but on an assessment o f OPEC's capacity to maintain production Table 20.5. Shor t Interval s of Disproportionate Price Increase : Great Britain , 1793-191 3

Trend period

Price increas e

Interval

Price increas e

Percentage shor t interval increas e t o trend perio d increas e

1793-1815* 1850-1873 1897-1913

75% 44 37%

1798-1801 1852-1854 1898-1900

44% 31 21%

59% 71 57%

* I 8 I 3 , rathe r than 1815 , is peak year. Rang e t o pea k yea r rathe r tha n 181 5 is measured . SOURCE: B . R . Mitchel l wit h collaboratio n o f Phylli s Deane , Abstract o f British Historical Statistics (Cambridge : at th e University Press , 1971) , pp . 47 0 (Gaye r Domesti c an d Imported Commodities index) an d 472-473 (Rousseaux overal l index) .

What Don't W e Know about Economic Growth? 47

3

discipline withi n the cartel (an d to coordinate polic y wit h non-OPEC oi l producers) unde r circumstances wher e abou t 56% of the world's known oil reserves ar e in the Middle East , of which almost half are in Saudi Arabia, whic h must produce fa r under capacity in order to avoid a deep furthe r declin e i n oil prices. Evidently , as all hands recognize, th e degre e of politica l an d militar y stabilit y i n the regio n i s relevant, too . There ar e also unknown s on the demand side . Fo r example, wil l the increas e i n mile s per gallo n i n automobile s continu e o r simpl y leve l of f a t a higher leve l whe n the auto mobile poo l of the earl y 1970 s i s completely turne d over? Will a high rate o f growth b e resumed i n Latin America and other relatively stagnant developing region s which—give n their energy-intensiv e leadin g sector s and pace of urbanization—have much higher marginal energy-GN P ratios tha n the advance d industria l societies? 47 Whereas th e conventional wisdom is that we shall see some rise in the relative pric e of energy i n the years ahead , predictio n run s in the opposite directio n fo r raw materials. A s this passage i s drafted I have before me the IMF Survey for July 13, 1987, wit h the feature headline: "Sustaine d Pric e Weaknes s Forecas t fo r Non-Fue l Primar y Commodities. " Aside fro m th e protracte d deman d sluggishnes s o f th e worl d economy , ther e i s a soli d supply-side reason : technologica l innovation s i n ne w material s suc h a s optica l fibers , ceramics, an d light , stron g plastics . I f on e stare s onl y a t conventiona l industria l ra w materials on e coul d wel l conclud e w e ar e i n a perio d o f long-ter m declin e i n relativ e prices. O n the othe r hand , th e depreciatio n o f the dollar has had a n inflationary effect i n the shor t ru n tha t helped lea d Th e Economist t o ring a n inflationar y alarm bel l 2 week s after the IMF evaluation. And before indulging in excessive generalizatio n the doubling in the price o f aluminum and surge of copper price s i n 198 7 shoul d be noted, behin d whic h lies a protracted perio d o f subnorma l investmen t in productio n capacity . So fa r a s agriculture i s concerned on e can observ e i n Table 20. 6 a decline durin g the 1960s i n grain stocks, idle U.S. cropland , and proportion o f reserves a s a share of annual production. Thi s erosio n o f exces s reserves— a typica l lat e Kondratief f downswing pro cess—was th e prelude to the grain-price explosion of 1972-1973 as the Russian and other harvests faile d (Fig . 20.6) . The resultant surge of production reflected a new seriousnes s about agricultural production an d productivity in India, China, an d some other developin g countries involvin g improved incentives , increased fertilize r application, and the diffusio n of ne w seeds . Agains t thi s backgroun d th e continue d productivit y rise o f heavily subsi dized agricultura l outpu t i n Wester n Europ e an d Nort h Americ a yielde d unmanageabl e surpluses, bu t in Africa notably, and also in some countries i n other developing region s a s well, pe r capit a grai n production decline d (Fig . 20.7) . Thus, a s with human fertility, agricultural problems an d policies ar e likely to diverge in various part s o f the worl d community in the time ahead ; biotechnolog y i s likely to yield important ne w mean s fo r raisin g agricultural productivity ; an d agricultura l acreag e i s likely to decline.48 And, so vigorous was the response to the global food crisis of the early 1970s that one might well conclude that the system overshot, and , for a while, at least, a period o f relativel y lo w agricultura l prices woul d persist . As with industrial raw materials, however, th e signals ar e mixed; for in Indonesia an d elsewhere i n developing Asi a there ar e signs that the diffusion o f the new rice an d wheat strains may , afte r a time , yiel d a plateau i n production rather tha n a progressiv e expansion—a tendenc y compounde d i n China by th e highe r profitability o f marke t gardening for urba n centers an d rapidly expanding industrial employment in rural industry. Further, the widespread drought of 198 8 brought prospective grain stocks in storage for 198 9 down to les s tha n 6 0 days ' supply , the lowes t leve l sinc e the grai n crisis o f 1973 .

Problems and Prospects

474

Table 20.6. Inde x o f World Foo d Security , 1960-198 6

Year 1960 1965 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986

World carryover stocks

Grain equivalent of idled U.S. cropland (million metric tons)

199 142 165 183 143 148 140 148 201 201 231 207 191

36 70 71 46 78 25 4 3 3 1 22 16 0 0 14 97 33 38 51

227

262 191 240 316 339

Total 235 212 236 229 221 173 144 151 204 202 253 223 191 227 276 288 273 354

390

Share of annual world consumption (days) 103 81 75 71 67 49 43 44 57 55 64 56 56 57 67 67 62 82 87

SOURCES: Carryover stock s an d world consumption derived from U.S . Departmen t of Agriculture (USDA), Foreign Agriculture Circular, FG-5-86 , Ma y 1986 ; idle d croplan d estimate s fro m Orvill e Overboe , USD A Agricultura l Stabilizatio n an d Conversation Service , privat e communication , Jun e 2 , 1986 ; grai n equivalents derived fro m idle d cropland dat a by assuming a yield o f 3.1 metri c ton s pe r hectare. Fro m Leste r R . Brow n et al., State o f th e World, 1987 (New York : W. W . Norto n for the World Watch Institute) , p . 134 .

Figure 20.6. Worl d Whea t an d Ric e Prices, 1960-1973 . Upper left: Worl d Whea t Price, 1960 1973 (Unit Value of U.S. Exports) . Upper right: World Rice Price, 1960-197 3 (Unit Value of U.S. Exports). [Adapte d from Leste r Brown , In the Human Interest, 1974, pp . 55 , 57 , an d 58. Base d on U.S. Departmen t o f Agricultur e data.]

What Don't We Know about Economic Growth?

475

Figure 20.7. Per Capita Grain Production i n Africa an d Latin America , 1950-86 . [Adapte d fro m Lester Brow n e t al, State o f th e World, 1987 (New York: W . W . Norto n fo r th e Worl d Watc h Institute), p . 135.] The midter m prognosi s fo r th e environmen t an d requirement s fo r investmen t i n th e control o f environmenta l degradatio n appea r les s ambiguousl y pessimistic . Th e fou r major dangers appea r t o be: an attenuation of the ozone layer; an elevation of temperature s brought abou t b y excessiv e emission s o f carbo n dioxid e (th e greenhouse effect) , wit h possibly importan t net negative consequences fo r the food supply ; the progressive destruc tion of the forests; and the consequences fo r human beings of increasing concentrations of harmful chemical s i n th e environment , includin g aci d rain . I n n o cas e ha s scientifi c knowledge permitte d fir m prediction s o f the pac e o f deterioratio n o r the timin g of acut e regional o r eve n globa l crises . Nevertheless , eve n temperat e analyse s sugges t tha t ne t deterioration i n the environmen t continues i n all four dimensions. 49 To return to the questions posed earlier, ther e appear to be elements of validity in all the hypotheses defined . A resumed substantia l rise i n the rea l price o f oil coul d produc e a n overall ris e in relative price s an d accelerated overal l inflation . But , until Middle Eas t oi l reserves ar e muc h furthe r draw n down , thi s outcom e i s likel y t o b e th e resul t o f a disciplined cartel action or Middle East crisis rather than the abnormally lagged expansio n of capacity tha t marked th e Kondratieff expansions of the past. Th e second hypothesis — of a foreshortened upswing—ha s a good dea l t o commend it . Th e quadrupling of the oi l price i n 1973-197 4 an d the doublin g agai n i n 1979-198 0 clearly se t in motion extraor dinarily powerfu l effort s a t oi l conservatio n an d a n intensifie d searc h fo r oi l an d othe r energy sources . Combine d wit h the slowdow n o f th e worl d econom y thes e tw o shock s helped t o produce , energ y price s broke , yieldin g fo r mos t o f th e 1980 s a phas e o f relatively chea p oil. Something o f th e sam e i s tru e o f th e suppl y response t o th e grai n price , althoug h it remains t o b e see n i f th e America n drought of 198 8 was a rando m even t or par t o f a n emerging environmenta l trend.

476 Problems

an d Prospects

But, eve n mor e than weather prospects , i t is the dee p involvemen t of governments in policy tha t distinguishe s contemporar y worl d agricultura l market s fro m thos e o f th e pre-1914 world . Agains t the background of widespread anxiet y over the Indian food crisi s of 1965-196 7 and other warnin g events o f the 1960s , agricultura l output surged a s India and Chin a proceeded t o rende r themselves , fo r the tim e being, independent of ne t agri cultural import s b y a t las t accordin g agricultur e the priorit y i t deserved . Politic s an d politicians ar e equall y responsibl e fo r th e curiou s agricultural policies pursue d i n North America, Wester n Europe , and Japan, on the one hand, and the perverse policie s pursued in muc h of Afric a an d th e Sovie t Union , o n th e other. One othe r exogenou s facto r shoul d be noted. Sinc e 198 5 th e devaluation of the dolla r has raised the relative price s of basic commodities denominate d internationally in dollars . The shar p decline i n relative price s fro m 198 1 t o 198 6 bega n t o reverse i n 1987 . The argumen t fo r a requie m for Kondratief f cycles roote d i n relativ e pric e term s i s heightened i f on e move s t o wha t might be calle d th e environmenta l markets. Ther e th e policies o f governments—including allocations of public resources t o research an d pollution control—are, onc e again, likely to prove decisive. At the moment the affluent nation s on both sides of the Atlantic appear to be as profligate i n living off their capital in the form of forests an d waterways as the United States has been in the 1980 s i n sustaining its level of consumptio n by borrowin g abroa d a t the cos t o f it s accumulate d capital stock . I woul d guess that one wil l be able to trac e i n the future, a s in the past, th e impac t of long investment lags on prices and output of basic commodity prices. Afte r all , it required a decade t o open up oil production in the North Sea and the north slope of Alaska. But the role o f governments, whethe r exercised vi a international cartels o r nationally, combine d with th e probably substantia l impact of the new technologies , ha s probably altered onc e and fo r al l th e statel y rhythm of Kondratief f cycles that, interwove n wit h other rhythm s and stochastic events , can be traced quite persuasively from, say , 179 0 to the grain and oil price explosions o f 1972-1975 . I would emphasize, however , tha t I merely suspec t this outcome, as I did in 1951 ; but I am by no means sure and am quite prepared in this matter to accep t Keynes' s dictu m on th e inevitabilit y of the unexpected. By standing back from thi s analysis and viewing it in the long perspective o f history, a few observation s ar e possible . Al l basi c commodit y price s have , o f course , no t move d together.50 Nevertheless, i t is roughly true that from th e late eighteenth century to 1914 , the prices o f basic commodities relative to manufactures were strongly affected by and at times dominated by fluctuations in wheat and other agricultural prices that carried a heavy weight in price indexes and exhibited high volatility. The pathological interwa r years were marked, o f course, b y abnormally lo w basic commodit y prices ove r a wide front , which concealed a progressive ris e in the relative importanc e o f energy price s a s the electricit y revolution mature d an d th e automobil e revolutio n gathere d momentu m an d diffused . From 195 0 t o 197 2 globa l energ y consumptio n increase d a t a n averag e annua l rat e o f 5.3%; 3.4 % pe r capita . Thi s compare s wit h a 3.1 % annua l rate o f increas e i n grai n production.51 I n bot h th e perio d o f relativel y declinin g or lo w basi c commodit y price s (1951-1972) an d o f risin g o r hig h price s (1972-1981) , fluctuation s in energ y price s evidently playe d a n extremely larg e and , a t times, a dominating role . As on e look s ahead , i t ma y b e that , i n successio n t o grai n an d energy , outlay s t o maintain a viable environment—the cost of clean air, clean water, sustainable forests an d arable land, the control of dangerous forms o f pollution, and the avoidance of undesirable changes in climate or levels of radiation—may become, i n effect, th e dominating dimension o f th e relativ e price problem.

What Don't W e Know about Economic Growth? 47

7

Growth and Business Cycles One of the judgments that has palpably shaped the analysis of growth theories in this book is tha t th e busines s cycl e i s th e for m growt h ha s assume d onc e takeof f ha s begun . Certainly th e initiatio n o f th e moder n busines s cycle—wit h it s long-ter m investmen t rhythm of about 9 years—cannot be dated late r than the great British boom that peaked in 1792. Ther e wer e fluctuation s earlier i n th e eighteent h centur y i n whic h wa r an d th e harvest played a large role; and there was also a strand of inventory fluctuations in foreign trade. Fro m 179 2 t o 1914 , however , on e ca n quit e easil y identif y th e leadin g growt h sectors i n national economie s an d the world economy tha t gave a distinctive character t o each boo m a s th e majo r cycle s succeede d eac h othe r i n orderl y processio n i n a worl d economy tha t widened out, over this century and a quarter, to embrace al l the continents and tha t sa w Britai n joined b y th e Unite d States an d Canada, Wester n Europe , Russia , parts o f Easter n Europe , Japan , an d Australia in modern economi c growth . Since the end of the First World War the world economy experienced a series of phases, each quit e differen t from th e others, bu t none constituted a full retur n to the remarkabl y consistent pre-191 4 pattern . • Th e 1920s , wit h inflationles s prosperit y i n th e Unite d State s bu t hig h chroni c unemployment i n much o f Western Europe . • Th e 1930s , whe n the trade an d financial structur e of the world economy fel l apart , leading t o unemploymen t o n a n unexampled scale , followe d b y the recover y tha t peaked i n 193 7 lon g befor e conventiona l ful l employmen t wa s reache d i n mos t countries o f the Atlanti c community . • Th e unique and unanticipated postwar quarter-century, when growth rates per capita in th e advance d industria l countries rose a t almos t thre e time s th e maximu m rat e previously achieved: 52 3.8% fo r 1950-197 3 as compared t o 1.4 % for 1870-1913 , 1.6% for the whole span, 1820-1979 . These were the times when some economist s asked whethe r th e busines s cycl e wa s a reli c o f th e past ; cycle s i n growt h rate s rather tha n employment could b e found i n most advanced industria l countries; an d self-correcting ful l employmen t equilibriu m growth model s wer e i n vogue . • Th e tw o oil-shoc k cycle s o f 1973-1982 , wit h growth rate s i n the developin g re gions quit e wel l maintaine d b y th e recyclin g o f petrodollar s i n th e for m o f loan s from privat e bank s in the advance d industria l countries . • Th e curious an d complex perio d 1983-198 8 marked b y three quite diverse forces : the unintended conversio n o f the American economy t o a massive net debtor posi tion vi a th e impac t o f th e 1981-198 2 ta x cut s i n raisin g th e federa l deficit , th e relative U.S. growth rate, relativ e real interest rates, an d the value of the dollar; th e emergence o n stage i n full forc e of the Fourth Industrial Revolution, with differential rates of diffusion amon g countries and by sectors; th e persistence o f abnormall y high rates of unemployment in Western Europe and, to a somewhat lesser degree, in the United States; virtual stagnation in some developing countrie s and regions, bu t the maintenanc e o f relativel y high growt h rate s i n th e Pacifi c Basi n take n a s a whole. Against thi s backgroun d two observation s ar e wort h making before I comment tentatively o n th e uncertaintie s of th e future .

478 Problems

an d Prospects

The firs t concern s discontinuity . Why did the cyclical regularities o f the pre-1914 er a give way to these fiv e curiousl y dissimilar phases? Th e direct and indirect impac t of two world war s was , o f course , partl y responsible . Bu t technicall y wha t happene d i s that, except for two intervals, th e linkage mechanisms that had kept the pre-1914 economy in harness wer e broke n o r weakened . Ther e were , essentially , three linkages : • Massiv e internationa l trad e conducte d i n relativ e freedom , despit e varyin g tarif f barriers, including , especially , trad e i n certain basi c commoditie s o f heavy weight in virtuall y al l domestic pric e indexe s (e.g. , cotton , wool , an d wheat). • Th e existence o f a network of large capita l markets, among which short-term fund s shifted sensitivel y in response t o interest-rate differential s or other factors determining expectation s o f profit . • Th e commitment of the major banking systems to buy and sell gold at fixed price s and to maintain a gold reserve tha t varied (relative to liabilities) as among the major countries, varie d ove r time within countries, but nevertheless constituted a variable whose chang e affecte d domestic interes t rates , th e supply of credit, an d the rate of expansion o r contractio n o f th e economy . In addition , o f course , ther e wa s considerabl e freedo m to migrate . These ar e the characteristics that , i n a rough-and-ready way, kep t the nationa l econo mies i n step with respect t o the business cycle. Bu t there was also a political assumptio n underlying thi s system ; namely , tha t the citizen s of eac h countr y woul d accept cyclica l depressions a s a fact o f lif e beyon d th e capacit y o f thei r governments to correct . The tw o successfu l post-1914 interval s illustrat e these technica l and political proposi tions: 1925-1929 ; and the years of the Bretton Woods regime, 1945-1971 . The first wa s an interva l of relativ e globa l prosperity , wit h the gol d standar d restored , the volum e of world trade surgin g ahead at almost 7% per annum, underpinned by U.S. capita l export s to German y tha t permitte d reparation s an d war-deb t payment s t o b e made . Th e Grea t Depression destroye d no t only the mechanisms of international order i n the world econo my bu t als o th e wil l o f nationa l polities t o accep t cyclica l depression s passively . The second exception—th e Bretto n Woods system—buil t on the overwhelming immediate postwar relative strengt h of the American economy an d the dollar, gradually erode d between th e lat e 1950 s an d 1971 . I t did no t erode becaus e o f severe depression ; fo r thi s was an era of apparently effortless, chronic , relatively full employment . Nor did it erod e because o f a ris e o f protectionis m o r a breakdow n i n th e mechanism s o f finance . Th e system did call fo r the fixing of exchange rates in terms of the dollar, but formal change s were permitted i n the face of balance of payments crises. Th e external discipline was not onerous. The syste m brok e dow n becaus e a weakenin g in th e U.S . balanc e o f payments , a s Europe and Japan recovered an d improved their competitive positions, rendere d the dollar significantly overvalue d at its Bretton Woods linkage to gold; and the major nations of the world, encourage d b y simplisti c proposition s draw n fro m macroeconomi c theory , pre ferred th e somewhat illusor y freedom of floating exchange rates t o a formal modification of th e Bretto n Wood s syste m i n whic h responsibility woul d be mor e evenl y shared . My secon d commen t concerns a strand of continuity. Althoug h the pre-1914 business cycle has give n way to a scries o f disparate phases, th e fundamental characteristi c of th e investment process tha t underlay the business cycle is still operative; that is, expectations are systematicall y irrational , yieldin g distortion s i n th e inherentl y lagge d proces s o f investment away from it s optimum sectoral paths. Thus, phases in which capacity exceeds

What Don't W e Know about Economic Growth? 47

9

current requirements o r fall s shor t of them follo w eac h other . I t is these lag s an d distor tions that continue t o impart instabilit y to growth patterns and also, i n time, se t in motion corrective forces . As fo r th e old-fashione d busines s cycle , i t appears t o have become s o entangled with the policies of governments that , like the old-fashioned Kondratieff cycle, we may never again se e it in its classic form. Pu t anothe r way, the Keynesian Revolution , in its wides t sense, ma y constitute a permanent loss of innocence in the sense that governments know a great dea l abou t ho w t o manipulat e effectiv e demand ; an d they ar e held accountabl e b y their electorates . Bu t i t does no t follo w tha t al l i s well . Th e profoun d watershed repre sented by the Keynesian Revolutio n has broken the links and disciplines within the world economy tha t acceptanc e o f th e old-fashione d busines s cycl e onc e supplied . Th e gro tesque trad e surpluse s an d deficits , th e unsustainabl e debt burden s that characterize th e world economy as of 198 8 are the product of that de-linkage and undiscipline. There is, of course, n o going back to a time of innocence. I t will, therefore, require increasingly close international cooperatio n an d th e explici t acceptanc e o f ne w internationa l rule s o f th e game t o avoi d breakdown s i n the worl d econom y reminiscen t of cyclica l depression s a t their worst .

The Stages of Economic Growth Countries other than pioneering eighteenth- and early-nineteenth-century Great Britain all faced i n their pretakeoff phase the existence of an unapplied backlog of relevant technologies. Th e stor y o f thei r stage s o f economi c growt h i s th e sag a o f wh y an d ho w the y transformed thei r institution s an d educationa l system s t o buil d u p thei r technologica l absorptive capacit y an d t o brin g efficiently int o their economies , i n a sequenc e o f pro gressively greate r sophistication , th e relevan t technologies availabl e i n the globa l pool . The existenc e o f that poo l explain s why growth rates accelerate d fo r latecomers, a s their technological absorptiv e capacit y increased , exceedin g thos e o f th e early-comers. 53 I n time, i f the process proceeded fa r enough, the latecomers exhauste d what awaited them in the globa l backlo g an d became dependen t on the curren t flow o f new technologie s fro m the globa l R & D process , t o whic h a goo d man y societie s cam e t o contribute . Thei r growth rate s subside d a s they completed th e proces s o f catching up . Looked a t i n thi s way , th e precondition s fo r takeof f constitut e th e perio d o f mos t profound transformatio n for a n initially traditional society. 54 Its political institution s and social structure , a s wel l a s educationa l system , requir e transformatio n befor e th e tech nological backlo g ca n b e absorbe d efficientl y an d regularly . Tha t proces s ha s prove d almost universall y painful . Dependin g o n a goo d man y circumstances , includin g th e character o f the traditional society' s culture , the period of preconditions for takeoff could be lon g o r short . Th e precociou s Japanese , wit h man y advantage s embedde d i n thei r traditional society , move d fro m th e shock of Commodore Perry' s intrusion at the point of cannon o n hi s seve n blac k ship s t o takeof f i n abou t 3 0 year s (say , 1854-1885) . Fo r Mexico the period fro m independenc e to takeoff was about 12 0 years (say, 1820-1940) ; for China , fro m th e Opiu m Wars , abou t 11 0 year s (say , 1842-1952) . Onc e takeof f begins—the beginning s of Kuznet' s moder n growth , Chenery' s transformation 55—the absorption o f technologie s doe s no t procee d painlessl y or , necessarily , swiftly . Th e takeoff i s usually a process confined t o a relatively few sectors and regions. Moreover, as the leadin g sector s decelerate , th e absorptio n o f th e nex t roun d o f mor e sophisticated

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technologies ma y involv e not only widened creative effort bu t further politica l and socia l conflict an d institutiona l change. A t th e en d o f the process—th e driv e t o technologica l maturity—a national society will have absorbed al l the major technologies fro m the global backlog. Fo r th e countrie s whos e takeoff s occurre d befor e 1914 , i t require d somethin g like 40 year s from th e end o f takeoff t o the end of the drive to technological maturity . A few o f th e mos t precociou s performer s fo r th e fourt h graduatin g clas s int o takeoff — notably, Taiwa n an d Sout h Korea—hav e move d mor e briskly. In th e swee p o f thi s boo k an d th e vie w i t suggest s o f futur e prospects , th e larges t problem arisin g from stage s of growth is the adjustmen t o f the early-comers t o takeoff t o the rise of the latest batch of latecomers—notably thos e in Latin America and Asia. I shall consider th e broad policy implications of this process i n Chapter 21. But , having together isolated thi s a s a centra l issue , littl e examine d i n recent times , Michae l Kenned y an d I decided tha t a mode l dramatizin g it s bon e structur e migh t be useful . Kennedy' s exer cise—consistent wit h th e reflection s o n thi s issu e o f Hume , Hilgerdt , an d Staley — appears o n pp. 564-569 , following. The questio n o f th e limit s o f growth , whic h thi s book trace s fo r mor e tha n tw o cen turies, i s als o broadly discusse d i n Chapte r 2 1 a s an issue of policy. Her e i t i s merely necessary t o recall th e rather wide variety of forces envisaged by various economists that might brin g abou t a stationar y state o r secula r stagnation : • Diminishin g returns t o land and natural resources . • A neo-Malthusian population polic y yieldin g as a matter of positive objective high real wage s wit h a n unspoile d physica l environment. • A declin e i n birt h rate s leadin g t o a stagnan t o r declinin g population yieldin g a lowered Keynesia n marginal efficiency of capital and thereby a succession o f progressively weake r busines s expansion s an d deepe r an d mor e protracte d contractions. • A declin e i n th e productivit y o f scienc e an d inventio n yielding a n attenuatio n of profitable outlet s for investmen t and a deceleration o f productivity increase . • Th e Schumpeteria n predictio n tha t th e ris e o f a powerfu l governmen t rol e i n th e economy woul d sap the zeal an d energy of entrepreneurs, reduc e th e absorption of potentially profitabl e innovations , decelerat e th e rat e o f growth , an d ultimately , destroy capitalism .

Noneconomic Factors The greatest o f the unsolved problems in the analysis of economic growt h is how to bring to bear i n a systemati c wa y the inescapable noneconomic dimension s of the problem. I n the subsection s addresse d t o noneconomi c factor s i n th e firs t thre e part s o f th e book , I made n o effor t t o impos e a unifor m patter n o n those subsection s becaus e noneconomi c factors enter into the analysis of economic growt h in quite different ways ; and there i s no agreed conventio n fo r dealin g wit h th e variou s linkages betwee n th e econom y an d th e sectors o f society related to it. I simply focused on the linkages that engaged the interest of the economist s examined. Here, a s th e focu s shift s t o majo r unsolve d problems, I attemp t t o provid e a highe r degree of order, by distinguishing four reasonably distinct dimensions of this large terrain:

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• Th e impact on economic behavio r of noneconomic huma n motives and objectives . • Th e impac t o f economic chang e o n the noneconomic dimension s o f society . • Th e appropriat e rol e o f public polic y i n economic matters . • Th e economy as it relates to the ideal concept of the individual in relation to society.

Noneconomic Motives and Objectives Hume an d Smit h exhibited a lively sens e tha t the economic behavio r o f individuals was often governe d b y noneconomic human motives and objectives; and they also understood that the weaving of such elements into economic analysis had to be quite precise if it were to b e useful . Hume , fo r example , roote d th e impuls e t o inves t i n th e creativ e impuls e within huma n beings rather tha n merely th e profi t motive . Smit h took th e vie w that th e backward sloping suppl y curve for portions of the working force wa s caused by a failure to perceiv e th e ful l rang e o f option s open t o thos e wit h higher incomes— a failur e that might be corrected by expanded popular education. Th e work of both economists i s shot through with this kind of lucid an d relevant linkage from th e motives for having children to th e deficiencie s o f country gentleme n as entrepreneurs . Malthus's observations o n such linkages are mainly confined to his work on population; and there is still less in this vein to be found i n Ricardo. Both, however, saw the education and encouragemen t o f th e workin g forc e t o aspir e t o highe r level s o f rea l incom e a s fundamental t o th e limitatio n of famil y siz e and, i n effect, a s an elevation of th e subsis tence wag e required t o induc e the workin g force t o perpetuat e itself. The linkages o f the economy t o society are less ad hominem, mor e generalize d in Mill and Marx ; althoug h the latter' s imag e o f th e capitalis t possesse d b y th e compulsio n t o accumulate until he destroys the system he made goes beyond the profit motive an d cash nexus. In Marshall , th e ol d classica l traditio n revive s fro m hi s evocatio n o f th e strengt h of family affection s among the motives for saving to his hopes for the civilizing possibilities of Economic Chivalr y among business leaders. An d Schumpeter, too , di d not hesitate t o build hi s cas e fo r th e declin e an d fal l o f capitalism o n the noneconomi c compulsions o f democratic societies . Bu t tha t broad stran d fade s i n mainstrea m economics t o Kaldor' s self-denying ordinance : "Economi c speculation here trespasses o n the fields of sociolog y and socia l history . . . . " Perhaps mos t impressiv e wa s the extent to which the nine pioneers o f development i n Chapter 1 7 ended wit h frustrated reflections—bitter o r philosophical , wrong-heade d o r wise—on the primacy of often disruptiv e noneconomic motive s and aspirations in developing countries , notabl y thos e tha t shaped politics . The grea t unsolve d problem her e i s that posed b y August e Comte: becaus e economi c behavior is embedded in the larger setting and more complex motivations of human beings in society , w e require a general socia l science before adequate economic analysi s can be conducted. Marshal l responded : "I t i s vain to spea k o f the higher authority of a unifie d social science . N o doub t i f tha t existe d Economic s woul d gladl y fin d shelte r unde r it s wing. Bu t i t does no t exist; i t show s no sign s of coming into existence. Ther e i s no us e waiting idl y for it ; w e mus t do wha t we ca n wit h ou r presen t resources." A centur y beyond Marshall we are , i n al l conscience , n o neare r Comte' s visio n of a general social science. The disciplines, self-conscious and increasingly specialized, may, indeed, b e furthe r fro m on e anothe r now tha n then . What, then, ca n on e d o "wit h ou r

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present resources? " I conclude tha t one should tak e th e problem i n all its complexity a s the disciplin e an d brin g t o bea r aroun d i t relevan t insight s fro m whateve r branc h o f knowledge tha t appear s t o hav e somethin g t o offer . Ther e i s littl e t o b e sai d fo r thos e who—as analyst s o r teachers—cu t th e proble m dow n t o th e siz e o f th e metho d o r discipline t o whic h the y ar e committed . Positively , Myrdal' s A n American Dilemma represents a s goo d a n exampl e a s I kno w o f th e acceptanc e o f th e proble m a s th e discipline. The subjec t clearl y belong s i n a chapter entitle d "Wha t Don' t W e Kno w abou t Eco nomic Growth?" The interweaving of economic an d noneconomic factors in the analysis of a given problem i s a difficult art , stil l to be mastered. O n the other hand , it was the art that David Hum e an d Adam Smit h sough t t o practice; Malthu s and, i n the totality o f his performance, als o Ricardo ; and , i n quite differen t ways , J . S . Mil l an d Marx, Marshal l and Schumpeter. Evidently , Arthur Lewis worked i n this tradition as well as Myrdal. I t is important to recall each o f them; fo r none full y solve d th e major problem s h e addressed . But their insights—with respect to economic growt h as it relates to noneconomic forces at work in human beings an d society—ar e a rich an d permanent par t o f the common socia l science heritage; and it is within that broad tradition that furthe r strivin g is likely to yield most fruitfu l results . But , a s I argue d i n Th e Process o f Economic Growth, on e mus t accept, i n consequence , a biologica l theor y o f irreversibl e proces s rathe r tha n a neo Newtonian theor y o f equilibrium. 56

Economic Change and the Noneconomic Dimensions of Society Hume an d Smit h viewe d economi c chang e i n th e direction s the y commende d a s a n essential instrumen t for creating the kind of peaceful, civilize d domestic an d international society they hoped woul d come about . This was not merely a matter, in Smith's phrase, of defining one part of ' 'the system of natural liberty.'' They saw and articulated clearly a set of connection s betwee n a n increas e i n th e wealt h o f nations , the expansio n o f a middl e class, th e strengthenin g of civil an d political freedom, an d the elevation o f the quality as well a s material leve l o f life fo r the workers. Unlik e Marx, but like the later Engels, the y viewed societ y no t simply as a superstructure reflecting the property relations an d institutions flowin g fro m changin g method s o f productio n bu t als o a s caught u p i n a dynami c interacting proces s in which social an d political change , while affected b y the contours of the economy , als o played bac k o n th e economy . Rather more than Hume, Smith perceived tha t some of the social changes brought abou t by a n increas e i n th e wealt h o f nation s wer e no t necessaril y benign . H e evoked , fo r example, th e huma n cost s a s well a s benefits fro m specializatio n o f functio n a s market s expanded. Malthus and Ricardo focuse d befor e 181 2 on a narrower, urgen t problem; th e disheartening pressur e o f expandin g populatio n o n a nationa l agricultura l syste m subjec t t o diminishing returns. They perceived a hopeful outcom e in the possiblity of a self-reinforcing dynamic process in which a rise in wages plu s popular education woul d lead worker s and their wives to decide to have fewer children, and by respecting themselves "obligin g the higher classes to respect them" (Malthus); or, i n Ricardo's phrases "al l lega l means" should b e use d b y "th e friend s o f humanity" t o stimulat e the workers' tast e fo r "com forts an d luxuries." Wit h brightening prospects for the food supply , their attention shifte d

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in th e perio d o f postwa r adjustmen t t o a differen t urgen t problem an d it s remedy , i.e. , industrial unemployment. In Mill and Marx the costs, a s well as benefits, of industrialization are at the center of the stage in broader terms, especially the extent to which progress wa s shared by the urban workers. Th e capitalist system itsel f became th e subject of debate and of net assessment. The debat e continue d i n th e democracie s o f th e advance d industria l countrie s fo r a century; but with the victory of the democratic welfar e state—as cumulativel y envisaged by Mill , Marshal l an d Pigou , wit h th e ful l employmen t addendu m o f Keynes—wha t might be calle d th e mainstrea m political process settle d a t the margi n the pace at which increasing resource s woul d b e allocate d t o rende r industria l societie s mor e humane , offering alon g th e wa y a bette r approximatio n t o equalit y o f opportunit y an d a mor e equitable distributio n o f income . Indeed , i t wa s th e latte r issu e tha t initially stimulate d professional wor k on national income measurement and analysis in the first quarte r of the twentieth century. Meanwhile, th e debate abou t systems was taken up in the third quarter of the twentieth century i n an d wit h respec t t o th e developin g regions : democrac y versu s communism ; capitalism versu s socialism . Muc h o f tha t dialecti c cam e ultimatel y to res t o n anothe r noneconomic dimensio n of the growth process discussed below ; i.e., th e appropriate rol e of publi c polic y i n th e economi c process . Bu t Mill' s "questio n o f labour " ha d it s counterpart in the "basi c needs" debate in development polic y of the 1970s , whic h arose from a sense tha t the palpable overal l progress i n the developing region s o f the previou s generation ha d no t been equitabl y shared . This quic k evocatio n o f some major human and social issue s posed ove r two centuries of growth analysi s leads o n naturally to the great unanswered questions, hal f philosoph ical, hal f pragmatic: Is further economi c growt h a good thing ? If so, ca n it go on without endangering th e huma n habitat ? I f so , fo r ho w lon g an d unde r wha t conditions ? Th e philosophic dimensio n o f the question—again posed b y Mill—will evidently yield differ ent ne t assessment s i n differen t societie s a t differen t stage s o f growth . Th e pragmati c questions ar e upo n us an d ar e likel y to assert themselve s increasingl y in the time ahea d (following, pp . 499-500) .

The Appropriate Role of Public Policy For mor e tha n tw o centurie s th e mos t continuou s subjec t o f debat e i n th e literatur e o f growth analysi s i s the appropriat e rol e o f governmen t i n the economi c process . Under standably, th e term s o f the debat e ten d to follo w th e perceived impac t of growth o n th e wider lif e o f th e society . Thus w e begi n wit h Hume' s an d Smith' s resistanc e t o th e apparatu s o f mercantilis t objectives, policies , an d controls, bu t als o Smith' s definitio n of three substantia l legiti mate areas fo r government action . Within that accepted framework, Malthus and Ricardo , in th e secon d generation , focu s o n the Poor Laws , th e Corn Laws , and , to a degree, on monetary and fiscal policy. Wit h Mill and Marx we find advocate s of alternative routes of transition t o socialis t societies—but socialis t societie s o f quite different character . In the advanced industrial democracies, th e century of expansion of the welfare state— say, 1870 s t o the 1970s—yielde d a n extraordinary widening of Smith's "grea t society" proviso, a widening resisted by some at every step along the way. But the straitened times

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of the 1970 s and 1980 s rather than a shift i n the relative persuasiveness of the debaters se t limits o n an d i n som e case s force d a degree o f retraction i n welfar e allocations . In developmen t economic s an d policy a somewhat parallel debat e proceede d fro m th e 1950s forward: to what extent and for what purposes shoul d public authorities intervene in the economy at early stage s of the development process? Havin g canvassed thi s matter at some lengt h towar d th e clos e o f Chapte r 17 I shal l simpl y note here thre e conclusions . First, th e outcom e i n mos t developin g countrie s wa s initiall y shape d rathe r mor e b y political attitude s an d policie s tha n developmen t theories . Second , th e outcom e prove d sensitive to the setting provided b y the state of the world economy an d by each country' s stage o f growth . Third , th e risin g prestig e o f th e competitiv e marke t i n developin g countries in the 1980' s is, essentially, a pragmatic response to relative success storie s and failures to be observed i n the world economy plus the movement of a good many developing countrie s beyon d takeof f int o the more diversifie d an d technologically sophisticate d stage, th e drive to technological maturity . In that stage the requirements for rapid adjust ment t o th e marke t an d rapi d technologica l obsolescenc e hav e mad e governmen t ownership and operatio n of mean s of productio n peculiarl y inefficient . The appropriat e pat h ahea d i s reasonabl y clea r fo r th e mor e advance d developin g countries i f their debt problems ca n be sharply reduced; but what pattern of public policy is appropriate fo r the older industrialized countries as they confront a sustained period o f revolutionary technological chang e and intensified competition fro m th e emerging indus trial powers? No clear challenging doctrine, let alone political consensus, has yet emerge d in th e OEC D world . Chapte r 2 1 consider s a possible response .

The Individual and Society It i s o n th e questio n o f th e individua l in relatio n t o societ y tha t Mar x i s t o b e mos t fundamentally distinguishe d fro m other s i n th e classica l tradition . B y an d large , tha t tradition wa s committe d t o a societ y tha t provide s "me n th e opportunit y t o tak e int o account th e inevitabl e alternative s pose d b y th e diversit y an d parado x i n thei r ow n natures" suffused b y an "intens e concern for the relationship of a man to himself and the next ma n to him. . . . "57 Operationally , this vision of human beings permitte d to be as autonomous a s the y coul d b e le d t o a profoun d concern fo r mean s rather tha n ends — notably, means that could constrain the powers of the state; e.g., habeas corpus, electora l reform, competitiv e markets , fre e trade. In this perspective the abiding and acknowledged moral problem s posed by the existence of the poor would be solved primarily by increasing the wealth of nations and providing an approximation of equality of opportunity rather than b y th e us e o f th e state' s powe r t o leve l incomes. For Marx, this vision of the appropriate relation of the individual to society was itself to be regarde d a s th e outgrowt h o f "bourgeoi s productio n an d bourgeoi s property" : th e individual could only be correctly define d in his relation to the course of history as driven forward b y dialectica l materialism . Fundamental differences on this matter run through the protracted but sometimes desultory debate since the 1840 s on capitalism versus socialism. It reemerges with considerable vitality i n the developmen t literature with a pragmatic rather than moral or philosophical cast aroun d th e questio n of whic h syste m i s likel y t o d o th e bes t job o f modernizin g a society a t a n earl y stag e o f growth . Bu t tha t pragmati c debat e was , i n it s essence ,

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foreshadowed an d linked to the larger moral issue by J. S. Mill's definition of the decisive consideration: " . . . whic h of the two systems i s consistent wit h the greatest amoun t of liberty an d spontaneity. " On thi s matte r histor y ha s no t rendered a final judgment, bu t believers i n democrac y and competitiv e capitalis m hav e n o grounds fo r despai r a s of 1989 .

21 Where Ar e We? An Agend a in Midpassage

The First Takeoff: The Entrance into Modern Economic Growth In Ada m Smith' s model , a widenin g o f th e marke t leads , afte r a transien t surg e i n productivity an d affluence , t o a surg e i n populatio n and, finally, t o a rathe r miserabl e stationary stat e wit h a minimu m subsistenc e wage . I n Smith' s analysis , majo r tech nological change is possible bu t takes the form of an occasional breakthrough; in the end, however, tha t old devi l Diminishin g Return s prevail s ove r incrementa l productivit y improvement. Michael Kenned y and I were pleased with the simplicity of our perception o f what was required t o convert a n Ada m Smithia n int o a moder n dynami c growth model , wit h an unlimited horizo n o f pe r capit a affluence. 1 On e nee d chang e onl y thre e assumption s (following, pp . 563-564) . First , on e has to assume that the number of Smith's philoso phers and creative toolmakers—and pioneerin g entrepreneurs, as well—grows within the society t o a critical mas s that yields a flow o f major innovations sufficiently productive — if not necessarily smooth—to overcome variou s forms of diminishing returns in manufactures including limitations on the expansion of the market. Second, one has to assume that investment (including R & D) relevant to basic commodity sectors will fend of f diminishing returns i n that sector ; or, mor e formally , tha t "land " wil l grow indefinitely . Third, one ha s t o assum e that , afte r a point , a ris e i n rea l incom e pe r capit a yield s vi a on e economic-social-psychological rout e or another, a decline in birthrates sufficient t o reduce the rate of increase in population permanently below the rate of increase i n output; that is, an increase in output per capita becomes a permanent feature of the system. And, indeed it is historicall y a s wel l a s analyticall y th e cas e tha t th e remova l o f thes e thre e Smithia n barriers i n progressivel y wide r region s o f th e worl d econom y di d clea r th e wa y fo r sustained, i f erratic, growt h sinc e the 1780s . As wit h most mathematica l formulation s in the socia l sciences , thi s one ma y usefull y fasten attentio n on certain key variable s and relationships, but it s simplicity is purchased at a hig h price . Th e dynami c historica l process , stretchin g over thre e centuries , tha t prepared th e wa y fo r and the n yielded this result was exceedingly complex. I t embrace d the interaction of the Commercial Revolution, the Renaissance, the protracted mercantilist struggles o f th e emergin g nation states , and, above all, the Scientific Revolution. Taken

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together, the y se t in motion throughou t Western Europe (and , to a degree, i n the Ameri can colonies ) a fermentatio n tha t change d irreversibl y th e wa y w e vie w ourselve s i n relation t o th e physica l worl d an d t o society . Th e proces s als o se t i n motio n policies , public and private, that , i n effect, created th e preconditions for takeoff; that is, improve ments i n transport an d in agricultural supply to the cities, accelerate d commercia l expan sion an d urbanization , th e refinemen t o f bankin g an d othe r economi c institutions , th e evolution o f increasingl y stron g an d competen t centra l governments , and , then , fro m mid-eighteenth-century Britain , a quit e sudde n surg e i n th e invention s tha t wer e t o emerge a s majo r innovations in the 1780s . In particular, it was the oblique consequences of the Scientific Revolution that impart to this period it s special characte r and explain why, in a good many earlier times and places , phases o f commercial an d urban expansion as well as the bloody competition of sovereign states fo r power an d profi t faile d t o generat e a n industrial revolution.2 A n equivalen t of the Scientific Revolution was the missing ingredient. Thus, without exaggeration, Whitehead could observe o f the sequence from Copernicu s to Newton:3 "Sinc e a babe was born in a manger, i t may be doubted whethe r so great a thing has happened with so little stir."

The Fourth Graduating Class: The Central Phenomenon in the Time Ahead The reason s fo r Britain' s pioneerin g rol e i n convertin g th e widesprea d Europea n an d North America n fermen t o f th e seventeent h an d eighteent h centurie s int o a n industrial revolution ar e stil l debated; althoug h they nee d no t concer n u s here. 4 Bu t clearl y thos e initially beate n ou t o f th e startin g gat e b y Britai n di d no t hav e t o wai t lon g afte r th e coming o f peac e i n 181 5 t o emulat e th e Britis h takeof f i n thei r ow n ways , fo r th e preconditions fo r takeof f wer e fa r advance d i n th e countrie s include d i n th e Secon d Graduating Class o f Figur e 19. 1 t o whic h Belgium shoul d certainl y b e adde d and , per haps, Switzerlan d a s well. The centra l phenomeno n o f th e perio d dow n t o say , 205 0 wil l b e th e comin g t o technological maturity—t o a command over all the then-existing major technologies—o f the Fourt h Graduatin g Clas s incompletel y represente d i n Figur e 19.1. 5 Thi s grou p in cludes Chin a an d India; Mexico, Brazil , Argentin a and perhaps other countrie s o f Lati n America; a considerable grou p of countries i n the Pacific Basin; Turkey; and, potentially, some countrie s o f the Middl e Eas t no w caugh t up i n the tragic pathology o f the region . Here i s ho w I define d th e driv e t o technologica l maturit y in Th e Stages o f Economic Growth.6 After take-of f ther e follows a long interval of sustaine d i f fluctuating progress, a s th e now regularl y growing economy drives t o extend modern tech nology ove r th e whol e fron t o f it s economic activity . Som e 10—20 % o f th e national incom e i s steadil y invested , permittin g outpu t regularl y t o outstri p the increase i n population. Th e make-up of the economy changes unceasingly as techniqu e improves, ne w industrie s accelerate, olde r industrie s level off. The econom y find s it s plac e i n th e internationa l economy: good s formerl y imported ar e produce d a t home; ne w impor t requirements develop, an d new export commoditie s t o matc h them. The societ y make s suc h terms a s it will with the requirement s of moder n efficien t production , balancing off th e ne w

488 Problems

an d Prospects

Table 21.1 . Proportion s o f GD P i n Industry and Manufacturing, by Stages : Worl d Ban k Categories , 198 5 Industry Manufacturin Low Incom e (excludin g India and China ) 19 Lower-Middle Incom e 3 Upper-Middle Incom e 3 Industrial Marke t Economies 3

% 12 21 5 n.a. 62

g 7 3

% *

*Data not systematicall y available. Some significan t individua l 198 5 percentages: Dominican Republic , 19% ; Thailand, 20% ; Peru , 20% ; Turkey , 25% ; Brazil , 26 % (1965) ; Hon g Kong, 24% ; Republi c of Korea , 25% . SOURCE: Worl d Bank , World Development Report, 1987, pp . 206-207 .

against the older value s an d institutions, or revising the latter in such ways as to support rathe r tha n to retard th e growt h process. Some sixt y year s afte r take-of f begin s (say , fort y year s afte r th e en d o f take-off) wha t ma y b e calle d maturit y is generall y attained . Th e economy , focused durin g the take-of f aroun d a relativel y narro w comple x o f industry and technology, ha s extended it s range int o more refine d and technologicall y often mor e comple x processes ; fo r example , ther e ma y b e a shif t i n focu s from th e coal , iron , an d heavy engineering industries of the railway phase t o machine-tools, chemicals , an d electrical equipment . This , fo r example, wa s the transition through which Germany, Britain , France, an d the United State s had passed by the end of the nineteenth century or shortly thereafter. But there are othe r sectora l pattern s whic h hav e bee n followe d i n th e sequenc e fro m take-off t o maturity . . . . A close examination of th e structur e o f the economies o f the Fourth Graduatin g Clas s indicates that its members have moved beyond the usually light industries of the takeoff to diversified metalworking , increasingl y sophisticate d chemicals , and , at least, th e simple r stages o f electronics . Chin a an d Indi a hav e develope d nuclea r weapon s capabilities . Others i n the grou p evidentl y command tha t potential. I n terms o f structur e they tend t o generate ove r 30 % o f GD P i n industry , 20 % o r mor e i n manufacturing. 7 Table 21. 1 exhibits th e Worl d Ban k average s fo r it s stag e categorie s suggestin g th e roug h equiv alence of its middl e incom e countrie s and my concep t of the driv e to technologica l maturity. Between 196 5 an d 198 0 th e middle-incom e countries , take n a s a whole, sustaine d a n astonishing almos t 15 % per annu m increase i n the expor t o f manufactures. 8 Looking t o the future, I am inclined to place eve n more weigh t on the summary data in Table 21. 2 reflectin g th e revolutio n i n secondar y an d highe r educatio n referre d t o i n Chapter 20 (p. 466). T o put these figures in perspective, i t is useful t o recall tha t the 196 0 higher educatio n proportio n fo r Japan wa s 10% , fo r Britain , 9% . These figures suggest a remarkable surg e in technological absorptiv e capacity. Ther e is little doubt , fo r example , tha t Sout h Korea' s extraordinar y drive t o high-tec h status i s rooted i n th e fac t tha t it s 198 4 proportio n i n secondar y school s wa s 91% , i n highe r education, 26% . Thi s compare s wit h 66 % an d 20% , respectively , fo r th e Unite d Kingdom. There has been, moreover, a shift towar d science and engineering in the more advanced

Where Ar e We ? An Agenda i n Midpassage 48

9

Table 21.2. Numbe r Enrolle d i n Schoo l a s Percentag e o f Ag e Group , b y Stages : Worl d Ban k Categories, 196 5 an d 198 4 Secondary educatio n Highe

1965 198 Low Incom e (excludin g Indi a an d China) 9 Lower-Middle Incom e 1 Upper-Middle Incom e 2 Industrial Marke t Economie s 6

2 64 95 39

4 196 31 05 67 02

r education

5 198 3 1 1 13

4 2 5 8

SOURCE: World Bank , World Development Report 1987, pp . 262-263 .

developing countries . I n Mexico , fo r example, th e annua l average increas e i n Mexican graduates i n Natura l Scienc e wa s abou t 3% , i n Engineering , 5% , i n th e perio d 1957 1973. Fro m 197 3 t o 198 1 th e comparabl e figure s were 14 % to 24% , respectively — a n extraordinary almos t fivefol d acceleration . I place specia l emphasi s on technological absorptiv e capacity in looking ahead becaus e the nex t severa l generation s are likel y to be substantially shaped b y the unfoldin g o f the potentialities o f the Fourth Industrial Revolution that moved int o an innovational stage in, roughly, the mid-1970s. Th e pace at which societies in the drive to technological maturit y pick up and apply efficiently th e relevant dimensions of this revolution depends heavily on their technologica l absorptiv e capacity , includin g in that concept no t onl y th e scal e an d quality o f their poo l o f relevant personne l but als o their abilit y to organize and motivate the me n an d wome n i n that pool . But wha t abou t Indi a an d China ? Th e uniquenes s i n scal e o f th e transitio n ahea d envisaged her e surel y stem s fro m th e fac t tha t the Fourth Graduatin g Clas s include s th e two largest populations on earth. Evidently , they remain amon g th e poorest countrie s i n GNP pe r capita : $27 0 (1985 ) fo r India , $31 0 fo r Chin a b y Worl d Ban k calculations. 9 These figures , weighe d dow n by vas t low-productivit y rura l regions , do not correctl y reflect th e absolute scal e and degree o f sophistication of their rather diversified industrial establishments. Eve n then, the proportions o f GDP generated i n industry and manufacturing i n Indi a approximat e th e figure s fo r lower-middle-incom e rathe r tha n low-incom e countries: 27 % an d 17% , respectively . Fo r th e perio d 1984-198 7 th e annua l rat e o f increase o f industrial production averag e 7% . Th e proportions o f the relevant ag e group s in secondar y an d highe r educatio n ar e als o disproportionatel y hig h fo r India' s averag e income pe r capita : 34 % an d 9% . Th e mos t strikin g index o f it s potential technologica l absorptive capacity , however , i s the increase i n its pool o f scientists an d engineers fro m 190,000 i n 196 0 t o 2. 4 millio n i n 1984— a critica l mas s exceede d onl y i n th e Sovie t Union an d the Unite d States . World Ban k estimate s fo r Chines e GD P generate d i n industr y and manufacturin g in 1985 ar e muc h highe r than i n India , althoug h quite possibl y distorte d b y th e still-unre formed Chinese industria l price system: 46% for China, 29%, for India. The percentage of the relevant ag e group in secondary schoo l i s similar to India's (34%) ; but the percentag e for highe r education , se t bac k severel y durin g the Cultura l Revolution, i s muc h lowe r (1%). Th e Chines e authoritie s are , o f course , extremel y consciou s o f thi s setbac k an d seeking t o make up for it, althoug h the tragic confrontation betwee n the citizenry and the government i n June 198 9 may , once again , postpon e the developmen t of an intellectual and technica l base adequat e for China' s full modernization.

490

Problems and Prospects

Even discounting for problems o f educational quality, the potential absorptiv e capacit y for th e new technologies i n the more advanced developing countries is high. Their central problem—like tha t o f most advance d industria l countries—is ho w to make effective the increasingly abundan t scientifi c an d engineerin g skill s the y alread y command . Thi s re quires, i n turn , a n abilit y t o generat e an d maintai n effective , flexible , interactiv e part nerships amon g scientists , engineers , entrepreneurs , an d th e workin g force . I conclude , then , tha t despite curren t sever e vicissitudes , th e developin g countrie s of the Pacific Basi n (including China), India , an d those containing most of the population of Latin America , wil l absor b th e new technologies and , o n balance, mov e rapidly forward over the next several generations . Muc h the same would happen, I believe, i f the Middl e East could fin d it s way from it s chronic, tragic bloodletting t o a twentieth-century version of th e Treat y o f Westphalia . As th e latecomer s continu e t o gai n ground , th e worl d econom y an d polit y fac e a n adjustment familia r i n characte r bu t unprecedente d i n scale . Th e advance d industria l countries (includin g the U.S.S.R . an d Easter n Europe ) no w constitut e about 1. 1 billio n people, or , say , 24% of the world's population. At least 2.6 billion people, or about 55% , live i n countrie s tha t ar e likel y t o acquir e technologica l virtuosit y withi n the nex t half century. Moreover , population , i n th e decade s ahead , wil l increas e mor e rapidl y i n th e latter than the former group. We are talking, then, about a great historica l transformation .

How Far through the Transformation Are We? It i s b y n o mean s certai n tha t th e worl d econom y wil l continu e th e generatio n an d diffusion o f technologica l virtuousit y on a n approximatio n o f th e pattern o f the pas t tw o centuries. Bu t it is useful t o begin by assuming that this process wil l proceed a t a pace and productivity tha t continues to overcome diminishin g returns for the global econom y a s a whole. Cross-sectiona l dat a o n expenditure s i n advance d industria l countrie s d o no t suggest tha t th e huma n rac e face s formidabl e difficultie s spendin g it s incom e a s it s affluence increases . Th e time is not yet in sight when diminishing relative marginal utility for real incom e itself decrees tha t all (or a substantial majority) will be satisfied with their level o f affluence ; an d som e versio n o f J . S . Mill' s quasi-stationar y stat e universall y prevails b y commo n consent . I n fact , a few countries—o r a t leas t thei r governments — may turn their backs on high-technology moder n life, as , to a degree, Burma and Wester n Samoa have done over the past severa l generations . Other s may lack the physical or other capacity t o achiev e takeof f an d self-sustaine d growth . I n addition , growt h coul d b e aborted o r grossl y distorte d b y th e real-enoug h danger s o f nuclea r war ; a mercantilis t fragmentation o f th e worl d econom y generatin g nonnuclea r conflict s a s wel l a s subop timal use of resources; a frustration o f growth by diminishing returns to resources o r acute problems i n th e physica l environment ; an d AID S ha s reminde d humanit y that i t i s stil l potentially vulnerabl e t o epidemic. But , on the assumption of a more benign future , i t is worth askin g ho w fa r forwar d th e worl d econom y i s i n movemen t towar d virtuall y universal affluenc e arbitraril y defined . First, population . Assuming tha t th e demographi c transition maintains the for m i t ha s assumed i n recen t decades , ho w clos e ha s th e huma n rac e com e t o a mor e o r les s stationary globa l population ? Tables 21. 3 an d 21. 4 dramatize a point made i n Chapter 20: th e extraordinar y diver-

Table 21.3. Estimat e o f Populatio n an d Percentage Distributio n by Regio n an d Income Group , 1980-210 0 Population (millions)

Percentage of worl d population

Region

1980

1984

1990

2000

2025

2050

2100

1980

1984

2000

2025

2050

2100

World tota l Less develope d More developed1 Africa total East, West , Sout h North Afric a America tota l Latin America North America Asia tota l East, Southeas t Asia East, Southeas t (excludin g Chin a and Japan) South Asia South Asia (excluding India ) Southwest Asi a Europe total Europe (excludin g U.S.S.R.) Oceania total Oceania (excludin g Australia and Ne w Zealand) By incom e group2 Low Low (excludin g China ) Lower-middle Upper-middle High (oil exporters) Industrial market East Europea n nonmarket

4,435 3,297 1,138 478 369 109 610 356 254 2,575 1,533 436 943 256

5,253 4,048 1,205 652 510 142 720 444 276 3,068 1,754 538 1,183 339 131

6,145 4,882 1,263

9,778 8,398 1,380 2,276 1,898 378 1,179 854 324 5,383 2,600 1,021 2,453 942 330 901 543

10,869 9,462 1,407 2,821 2,381 440 1,244 919 325 5,835 2,696 1,107 2,760 1,128 379 928

6

821 515 29 8

8,297 6,939 1,358 1,631 1,339 292 1,054 731 323 4,698 2,415 874 2,023 715 260 879 540 35 11

100.0 74.3 25.7 10.8 8.3 2.5 13.7 8.0 5.7 58.1 34.6 9.8 21.3 5.8 2.2 16.9 10.9 0.5 0.1

100.0 75.5 24.5 11.4 8.8 2.6 13.8 8.2 5.6 58.2 34.1 10.0 21.8 6.0 2.3 16.1 10.3 0.5 0.1

100.0 79.5 20.5 14.6 11.6 3.0 13.5 8.7 4.8 58.0 32.0 10.5 23.3 7.1 2.7 13.4 8.4 0.5 0.1

100.0 83.6 16.4 19.7 16.1 3.5 12.7 8.8 3.9 56.6 29.1 10.5 24.4 8.6 3.1 10.6 6.5 0.4 0.1

100.0 85.9 14.1 23.3 19.4 3.9 12.1 8.7 3.4 55.0 26.5 10.4 25.1 9.6 3.4 9.2 5.6 0.4 0.1

100.0 87.1 12.9 26.0 21.9 4.1 11.5

749 484 23 5

4,750 3,584 1,166 540 419 121 653 390 263 2,768 1,622 475 1,035 286 111 765 490 24 5

2,189 1,209 642 492 16 718 378

2,362 1,332 708 539 19 732 390

2,632 1,537 820 617 24 753 407

3,110 1,913 1,034 752 34 785 430

4,293 2,883 1,587 1,052 59 831 475

5,101 3,652 2,018 1,253

49.3 27.3 14.5 11.1 0.4 16.2 8.5

49.7 28.0 14.9 11.4 0.4 15.4 8.2

50.6 31.1 16.8 12.2

51.7 34.8 19.1 12.7 0.7 10.0 5.7

52.2 37.4 20.6 12.8 0.8 8.5 5.1

52.6 39.1 21.5 12.6 0.9 7.6 4.8

99

787 499 26

898 714 184 827 535

292

3,570 1,968 644 1,434 439

168

39 14

79

827 500

552

41 15

5,712 4,250 2,339 1,372 95 829

522

0.6

12.8 7.0

8.5

3.0 53.6 24.7 10.2 25.4 10.4 3.5 8.5 5.1 0.4 0.1

'More develope d region s includ e Europe , U.S.S.R. , Nort h Americ a (U.S.A . an d Canada), Australia , New Zealand, an d Japan. Les s developed region s include all the rest o f the world . Income group s criteri a a s o f 198 2 a s indicated i n World Bank , World Development Report 1984 (New York : Oxfor d Universit y Press, 1984) . SOURCE: M y T . Vu , World Population Projections 1984 (Washington, D.C.: Th e World Bank , 1984) , p . xviii .

2

Table 21.4. Estimat e o f Annual Population Increase and Growth Rates by Regio n an d Income Group, 1980-210 0 Annual growt h rate s (percent)

Annual populatio n increas e (millions) Region

1980

1984

2000

2025

2050

2100

1980

1984

2000

2025

2050

2100

World tota l Less develope d More developed 1 Africa tota l East, West , Sout h North Afric a America tota l Latin Americ a North Americ a Asia total East, Southeas t Asi a East, Southeas t (excludin g China an d Japan ) South Asia South Asi a (excludin g India) Southwest Asi a Europe tota l Europe (excludin g U.S.S.R. ) Oceania tota l Oceania (excludin g Australi a an d Ne w Zealand ) By incom e group 2 Low Low (excludin g China ) Lower-middle Upper-middle High (oi l exporters ) Industrial marke t East Europea n nonmarke t

77.4 70.3 7.1 14.4 11.5 2.9 10.6 8.3 2.3 48.1 23.1 9.6 22.3 7.0 2.7 4.0 1.6 0.3 0.1

81.9 75.0 6.9 17.0 13.7 3.3 11.1 8.8 2.3 49.6 22.6 10.2 23.9 8.1 3.1 3.9 1.6 0.3 0.1

93.5 89.2 4.3 27.5 23.0 4.5 10.2 8.9 1.3 52.7 23.5 10.4 25.4 10.9 3.8 2.8 1.3 0.3 0.2

77.6 75.5 2.1 29.4 25.4 4.0 7.3 6.8 0.5 39.1 13.7 8.2 22.0 10.7 3.4 1.7 0.7 0.1 0.1

44.1 43.8 0.3 22.7 19.9 2.8 3.2 3.2 0 17.4 2.4 3.9 12.8 7.9 2.2 0.7 0 0.1 0.1

8.7 8.5 0.2 3.0 2.5 0.5 0.7 0.7 0 5.0 1.4 0.9 3.2 1.2 0.4 0 0 0 0

1.73 2.13 0.64 2.98 3.07 2.61 1.74 2.31 0.92 1.87 1.51 2.18 2.36 2.70 2.81 0.54 0.34 1.32 2.10

1.71 2.07 0.59 3.08 3.20 2.64 1.68 2.23 0.84 1.77 1.38 2.13 2.28 2.78 2.78 0.51 0.33 1.30 2.13

1.51 1.81 0.41 3.03 3.17 2.47 1.24 1.65 0.50 1.47 1.19 1.60 1.76 2.45 2.31 0.37 0.28 1.01 1.99

0.93 1.08 0.17 1.79 1.88 1.38 0.70 0.94 0.18 0.83 0.57 0.93 1.08 1.49 1.31 0.20 0.12 0.57

1.16

0.45 0.52 0.04 0.99 1.04 0.73 0.27 0.37 0 0.32 0.09 0.38 0.52 0.83 0.66 0.08 0 0.23 0.57

0.08 0.09 0.01 0.11 0.11 0.11 0.06 0.08 0 0.09 0.05 0.08 0.12 0.11 0.10 0.01 0 0.03 0.08

42.7 30.1 15.8 11.4 0.7 3.7 3.1

44.4 32.6 17.6 12.4 0.8 3.7 3.0

51.6 39.4 22.5 13.5 1.1 2.7 2.1

43.1 37.4 21.1 10.5 0.8 0.7 1.4

23.4 24.6 13.7 5.7 0.6 0 0.7

5.5 5.1 2.2 0.9 0.1 0 0

1.94 2.46 2.45 2.32 4.60 0.54 0.85

1.86 2.42 2.44 2.28 4.17 0.50 0.77

1.65 2.04 2.16 1.79 3.12 0.36 0.49

1.00 1.29 1.33 1.00 1.53 0.09 0.31

0.46 0.67 0.68 0.46 0.88 0 0.16

0.10 0.12 0.10 0.08 0.11 0 0.02

'Same a s Table 21.3 , p . 491 . Same a s Table 21.3 , p . 491 . SOURCE: Sam e a s Table 21.3 , p . 491 . 2

Where Ar e We ? An Agenda i n Midpassage 49

3

gence i n populatio n prospect s betwee n presentl y les s develope d an d mor e develope d nations.10 The approximat e an d hypothetica l characte r o f thes e estimate s should , o f course , b e underlined. They ar e rooted i n arbitrary assumptions; for example, that populations will, in time, settl e at a stationary level, not progressively decline. The y do not attempt to take into accoun t war , famine , an d plague. The y exploi t pattern s and relationships that hav e some empirica l basi s i n pas t performance ; bu t demography , lik e al l th e othe r socia l sciences, ha s had its surprises despite the comforting abundance of numbers available for manipulation. By these calculations the hypothetical stationary population of the world is 11.2 billion. Population i n th e mor e develope d nation s approximate s constanc y fro m 2025 ; fo r th e presently les s develope d nation s constanc y i s achieve d roun d abou t the yea r 2100 . Th e proportion o f the total population in presently mor e develope d countrie s declines b y half between 198 0 an d 2100: fro m 26 % to 13% . This is a revolutionary shift. Sinc e 165 0 tha t proportion i s estimated to have moved in the range 34%-26%. 11 Th e greatest percentag e increase amon g the presently developin g regions i s calculated fo r East, West, an d South Africa; fro m 8 % to 22%, wit h Nigeria exceedin g 500 million whe n stabilit y i s reached. The peculiarl y powerfu l impac t o f AID S o n part s o f Afric a i s no t take n int o account . The years when the net reproduction rate (NRR) equals 1 come, of course, much earlier [2000-2045] wit h th e interval between tha t date an d a stationary population determine d by prio r populatio n growt h rate s an d th e consequen t ag e structur e o f th e population — formally, b y the tota l fertilit y rat e (TFR ) a t the time the NRR = 1 . What of the prospects for GNP per capita? A good deal evidently depends on the annual average rate s o f growt h assume d fo r eac h stag e o f growt h or leve l o f GN P pe r capita . Table 21.5 provide s estimates o f the length of time required t o achieve U.S . GN P per capita (1985) for four groups of countries, under two patterns of growth rates: the averag e for 1960-1980 ; the lower average s fo r 1965-1985 . The upper-middle-income countrie s achieve curren t U.S . level s o f affluenc e roun d abou t 205 0 depending o n th e patter n o f growth rate s assumed ; th e lower-middle-incom e countries , i n th e fourt h quarte r o f th e next century. India and China take longer, starting as they do from low income levels; but, if they fin d i t politically possibl e t o release th e potentialities o f their private sectors, and use thei r pool s o f scientifi c an d engineerin g manpowe r efficiently , the y ma y achiev e higher growth rates tha n in the past, a s India appears to be doing; and, i n any case, the y are likely by , say , th e middle of the next century to have achieved comman d over al l the then-current technologies . All o f th e presen t middle-incom e countrie s wil l hav e achieve d o r gon e beyon d th e maximum proportion o f manufacturin g in GNP, say , 25 % (Tabl e 21.1) . Only the broadest conclusion s can be drawn from thes e precarious exercises i n projective arithmetic , bu t they ar e no t trivial . • Barrin g majo r catastrophes, th e global populatio n i s likely t o more than double by 2050, wit h marked deceleratio n dow n t o the en d o f the twenty-firs t century . • I f presen t growt h pattern s persist , th e mor e advance d developin g region s wil l achieve o r surpas s presen t U.S . level s o f GNP per capita by th e mid-twenty-firs t century, th e lower-middle-incom e countrie s somewha t late r i n th e century , wit h proportions o f GN P derive d fro m industr y an d manufacturin g a t o r beyon d th e present conventional maxima, giving way to the relative rise in services that appears to characteriz e affluence .

Table 21.5. Rea l pe r Capit a Incom e Projected : Rich , Middling , an d Poo r Countrie s

Type o f Econom y Low-income ($1IO-$390 ) China India Low-middle-income ($420-$1570 ) Upper-middle-income ( $ 1 640-$7420) Industrial marke t ($4290-$16,690 ) United State s

Population mid- 198 5 (millions) 2,439.4 1,040.3 765.1 1,242.1 567.4 737.3 239.3

GNP per capita (1985 U S $ )

270 310

270

820

1,850 11,810 16,690

Percentage of U.S .

Average annua l per capita growth rate (1960-1980)

Average annual per capit a growth rate (1965-1985)

.016 .019 .016 .049 .111 .708 1.000

1.2 NA 1.4 3.8 3.8 3.6 2.3

2.9 4.8

3.1*

2.6 3.3 2.4 1.7

Number o f year s to attai n th e U.S. 198 5 pe r capita using 1960-1980 rate s

Number of year s to attai n the U.S. 198 5 pe r capita usin g 1965-1985 rates

347 NA 298 82 60 11 —

146 87 137 103 69 16 —

*As reporte d b y th e India n Embassy (US ) 1 0 August, 1987 . SOURCE: Calculate d fro m dat a i n World Bank , World Development Report (Ne w York: Oxfor d Universit y Press), 1982 , pp . 110-111 , an d 1987 , pp . 202-203 .

Where Ar e We ? An Agenda i n Midpassage 49

5

• Th e period from th e present to the mid-twenty-first centur y is likely to be the time of th e maximu m strain on resources an d the environment an d the interval o f maximum readjustmen t i n th e locu s o f population , economi c potential , an d politica l stature i n the whol e swee p of th e perio d sinc e th e mid-eighteent h century .

Five Great Issues of Policy If this broad portrai t o f where the worl d economy stand s in terms o f its evolution i s more or less correct , an d if we take as the common objective th e successful transit through the stages o f growt h (o r Chenery' s Transformation) , fiv e massiv e challenge s t o policy—t o the collectiv e goo d sens e o f the huma n race—can b e discerned . First, a peaceful soft landing from th e cold war. 12 Suc h a n outcom e i s conceivabl e because the progressive diffusio n o f economic, political , an d usable military power away from th e Soviet Union (as well as from th e United States) makes the dream o f hegemony in Eurasia, whic h briefly appeare d conceivabl e t o Moscow afte r 1945 , increasingl y unrealistic. The revival of Western Europe and Japan, backed by a United States shake n out of its immediate postwa r sleepwalking by the shocks o f 1947-1950, the Sino-Soviet schism , and then the movement toward technologica l maturit y of the Fourth Graduatin g Class al l contributed t o this outcome , a s did the demonstration, i n Eastern Europ e and elsewhere , that culture , religion , an d nationalis m hav e grea t stayin g powe r eve n i n th e fac e o f obsessive totalitaria n rule . Thes e event s an d processe s hav e bee n heightene d b y pro gressive evidenc e that two of J. S . Mill's judgments were essentially correct. Th e public ownership and operation o f economic units proved to be "hobbling , careless, an d ineffec tive"; and , wit h th e passag e o f time , th e decisio n betwee n socialis m an d capitalis m appeared t o be tipping toward th e latter on the basis of "on e consideration , viz. whic h of the two systems is consistent wit h the greatest amoun t of human liberty and spontaneity." These are societal qualities of peculiar importance in economies o f increasing diversification, drive n forwar d at high rates o f technological obsolescenc e b y rapidly evolving an d linked revolution s i n scienc e an d technology . Competenc e i n mas s productio n o f stan dardized an d relatively stabl e forms of capital goods (e.g. , steel , cement, electricity) doe s not suffice. Th e explicit or implicit assumption that suffused muc h of Western intellectua l life afte r th e First World War—that socialism in one form or another was the wave of the future—appears to be dissipating in the century's fourth quarter as one after another of the more dynamic societies revolts agains t the inefficiencies and inequities of a self-intereste d "state bourgeoisie. " These powerful force s were maske d i n the 1970 s a s the Soviet Union enjoyed signifi cant tactical gain s during a period o f acute American confusion in foreign policy. Bu t in the 1980 s Sovie t authorities, withou t an ideological messag e of resonance, confronte d an increasingly resistan t externa l environment , dominate d b y still-gatherin g force s o f na tionalism. Simultaneously , they confronte d gatherin g long-term domestic pressure s radi cally t o alte r thei r disposition s an d t o mov e th e societ y the y le d towar d wha t the Wes t would recko n a s mor e libera l norms . But i t i s one thin g t o perceive—a s man y Sovie t analyst s do—tha t Eurasian o r globa l hegemony i s a n impossibl e dream. It i s quite another matter to bring the Cold Wa r t o a peaceful resolution . A workin g agend a fo r endin g th e Col d Wa r mus t embrac e thre e critical areas . The first—but no t necessarily the most important—is, of course, the nuclear arms race.

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Here three conditions woul d have to be satisfied: a thoroughly inspected U.S.-U.S.S.R . nuclear balance sufficien t t o guarantee, at lower overall forc e levels , secur e second-strik e capabilities bu t n o capacit y fo r nuclea r blackmail; agreement s o n nuclea r forc e ceiling s with othe r nuclea r weapon s powers ; an d agains t this background , a driv e to implemen t more firmly th e Nonproliferation Treaty. The path of wisdom may alter as R & D unfolds; but I would be skeptical o f solutions that eliminated nuclear weapons, which wholly relied on th e Strategi c Defens e Initiative or totally eliminated elements of SDI as part o f stabl e deterrent systems . Evidently , problem s o f immens e complexit y ar e embedde d i n thes e conditions, eve n under circumstances of maximum goodwill among the parties. The secon d are a woul d be reorganization of NATO and the Warsaw Pact in ways that allowed a n increased scop e for nationa l political freedo m in Eastern Europe an d guaranteed agreed force levels, securel y inspected , for residual NATO and Warsaw Pact forces . The most complex issu e certain to arise is the degree and character of German unity. But the objectiv e ca n b e simpl y stated : th e Sovie t Unio n woul d hav e t o decid e t o accep t a balance o f powe r rathe r tha n a hegemoni c solutio n t o it s legitimat e securit y interes t i n Eastern Europe ; tha t is , a solutio n guaranteein g tha t n o othe r majo r powe r dominates Eastern Europe , rathe r tha n Sovie t dominatio n o f th e region . O n thi s proposition basi c U.S. an d Sovie t interest s firml y overlap . Finally, the third condition: th e settlement of regional conflicts with a cold-war dimension an d the development of new longer-ru n rules of the game. I n the shor t run, intimate Soviet tie s t o Hanoi , Havana , Managua , Kabul, an d othe r region s i n contentio n might provide th e basi s fo r settlement s i n whic h th e existin g governmen t woul d remai n bu t would b e effectivel y confine d withi n it s ow n borde r withou t th e presenc e o f externa l military forces . But , clearly , n o guarantee s ca n b e give n t o Mosco w o r Washington regarding th e long-ter m politica l orientatio n o f th e countrie s concerned . Thi s kin d o f solution would work only if the United States and the Soviet Union agreed that henceforth they would live with outcomes determined by strictly local historical forces—an evidentl y difficult conditio n to accept given habits built up over the past 40 years. The Middle Eas t would, o f course , b e extremel y difficul t t o sor t ou t i n thes e terms , give n th e limite d powers o f the United States an d the Soviet Union in the region. But , as elsewhere, thos e powers woul d b e formidabl e i f roote d i n a joint convictio n tha t th e Col d Wa r wa s n o longer a sensibl e framewor k fo r th e conduc t o f U.S.-U.S.S.R . relation s o r th e super powers' respectiv e relation s wit h others. In al l cases , th e U.S.-U.S.S.R . understanding s woul d b e basi c t o a successfu l out come, bu t th e interest s o f man y othe r state s woul d b e involved . Negotiation s woul d therefore b e complex. Moreover , the outcome would be stable only if new common rule s were established an d validated by the successful experience. Bu t once the expectation was established tha t al l wer e engage d i n transformin g the Col d Wa r int o somethin g mor e desirable, th e process migh t move forwar d quit e briskly. Second, a challenge of equal magnitude will be to absorb the new industrial powers of the Fourth Graduating Class into the world system without major war. A s noted earlier , the achievemen t o f technologica l maturit y by latecomer s ha s prove d t o b e a dangerou s age.13 A sens e o f glorie s denie d b y thei r lat e arriva l a t technologica l virtuousit y ha s tended t o unit e wit h rea l o r believe d opening s fo r expansio n granted b y th e apparen t slackness an d complacenc y o f th e early-comers . The outcom e ha s bee n a grea t dea l of trouble an d tragedy. If th e huma n rac e i s extremel y lucky , nuclea r weapon s ma y continu e t o pla y th e stabilizing role they have played since 1945; that is, they have so raised the potential costs

Where Ar e We ? An Agenda i n Midpassage 49

7

of all-ou t wa r a s t o permi t a n unexpecte d passag e o f mor e tha n fou r decade s withou t military conflict amon g th e nuclear weapon s powers . Ironically , th e existence o f nuclea r weapons has given lesser power s a leverage quit e disproportionate t o their military potential, conventionall y measured . I n a n Inaugura l Lecture a t Oxfor d i n Novembe r 194 6 I remarked:14 "I n a happie r da y student s o f histor y ma y b e entertaine d b y th e iron y o f America's fina l act s in a victorious war, which compromised perhap s fatally the two great props o f military security—distance an d a preponderance o f economic resources." Fro m Korea t o the Persian Gul f to the Caribbean this proposition ha s been validated sinc e 195 0 in circumstance s tha t wer e b y n o mean s entertaining ; tha t is , lesse r power s hav e foun d ways o f pursuin g thei r interest s agains t major nuclea r power s b y technique s difficul t o r costly t o contain. I n the long pull, however, a s new industrial powers emerg e th e nuclear constraint ma y operat e t o th e advantag e o f the older industria l states. Clearly, th e tw o greates t potentia l industria l powers ar e Indi a an d China . Lookin g ahead, th e stability and peace o f Asia and the world will depend heavil y on whether thes e two grea t nation s decid e t o foreg o a phas e o f contentiou s rivalry , lik e th e protracte d historical rivalr y between Franc e an d Germany, an d conclude o n the basis o f history and weaponry an d a n increasingl y crowded aren a o f technologically competen t powers , tha t there ar e mor e realisti c an d rewardin g goal s t o pursu e than regiona l hegemony. 15 Th e prospects ar e no w uncertain . Unde r circumstance s wher e bot h countrie s woul d benefi t greatly fro m cooperation , the y hav e foun d i t impossibl e t o settl e a borde r disput e o f essentially symboli c significanc e an d otherwis e ac t t o pacif y rathe r tha n enflam e th e region. O n th e othe r hand , the y hav e bee n blesse d wit h a more forbiddin g frontier tha n France an d Germany ; an d thei r underlyin g strategic interest s vis-a-vi s th e Sovie t Unio n overlap a good dea l mor e tha n th e rhetoric fro m Ne w Delh i an d Beijing would suggest . But the decisive determinan t of the outcome ma y well prove to be the kind of world the older industria l power s creat e o r fai l t o creat e i n th e decade s ahead , whil e importan t powers o f decisio n stil l li e i n thei r hands . The third challenge, therefore, is whether, in David Hume's evocative phrase, the nations of the Atlantic and Japan, not inconceivably joined at some stage by the Soviet Union, remain ' 'industrious and civilized.'' Thi s book virtually begins and ends (follow ing, p . 569 ) wit h Hume' s treatmen t o f the rich-country-poor-country problem . Hi s pre scription of 175 8 remain s th e most relevant guidance for the passage of the world system down t o th e middl e o f th e nex t century. 16 Nor nee d an y stat e entertain apprehensions , tha t their neighbour s will improve t o suc h a degree i n every ar t and manufacture, a s to have n o deman d from them . Nature , b y givin g a diversity of geniuses, climates , an d soil s t o different nations , has secured thei r mutual intercourse and commerce, as long as they all remain industrious and civilized. Nay, the more the arts increase in any state , th e mor e wil l b e it s demand s fro m it s industriou s neighbours. This thir d tas k ha s severa l dimensions . Th e firs t i s to moun t and sustai n policies tha t bring th e countries o f the Fourth Graduating Clas s int o the world econom y i n a civilize d way. As Hume suggests, ther e are positive advantage s fo r the older industria l states t o be derived fro m th e ris e o f th e latecomers . Give n th e latter' s potentia l fo r rapi d growth , exports t o th e mor e advance d developin g countrie s shoul d b e a leadin g secto r i n th e several generation s ahead—a consideration that bears on an appropriate resolution of debt and trad e imbalanc e problems tha t now bedevi l th e worl d economy . To manage this dynamic process of mutual support and adjustment i n a civilized way to

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the common advantage , globa l rule s o f the game i n trade an d finance will , i n my view , require a sturd y underpinnin g o f regiona l organization. 17 Tha t shoul d b e th e centra l mission fo r an intergovernmental Pacifi c Basi n organization, the subjec t of endless sym posia but virtually total governmental inaction. This is also the next task for the Organization o f America n State s an d th e Inter-America n Developmen t Bank—no t t o tr y ou t o f nostalgia t o recreat e th e ol d Allianc e fo r Progres s bu t t o assur e tha t Lati n an d Nort h America mov e forwar d wit h steady mutua l support as the former makes th e transition to full technologica l maturity , comin g t o grip s alon g th e wa y wit h deb t an d othe r acute , urgent problems . Now wha t abou t remainin g industrious ? The firs t conditio n i s tha t the Unite d States , Western Europe , an d Japan explore the possibilitie s opene d u p by the new technologie s and apply them across the board to basic industries, agriculture, and the services including the containmen t o f environmenta l degradation . Onl y b y s o doin g wil l the y b e abl e t o maintain economie s o f sufficien t productivit y an d flexibility t o suppor t and enlarge thei r affluence i n th e fac e o f th e sustaine d competitiv e tes t ahead . I believ e thi s require s a historic shif t i n th e pattern o f domesti c politics i n the Western World . Th e shif t i s away from a mor e o r les s decorou s struggl e ove r ho w rea l nationa l income , assume d t o b e automatically expanding , shoul d b e distributed . It ca n b e argue d tha t thi s has bee n th e dominant pattern of politics sinc e Bismarck initiated his welfare legislation in the 1870s . The require d shif t i s towar d a cooperativ e effor t tha t embrace s business , labor , an d government, a s well as the scientific , engineering, an d entrepreneurial sector s t o ensure that rea l nationa l incom e i n th e advance d industria l countries continue s to expan d i n an arena increasingl y crowde d wit h technologicall y competent powers . For historical reasons, Japanes e politic s appears, fo r the moment, well oriented fo r the task ahead. Sinc e Commodore Perr y turned up in Tokyo Bay some 13 0 years ago with his squadron o f blac k ships , th e interactio n o f th e externa l worl d wit h Japanese prid e an d ambition ha s yielde d a successio n o f crise s tha t hav e strengthene d th e nation' s sens e of unit y an d commo n purpose ; an d sinc e th e mid-1950 s Japan' s economi c positio n i n the worl d ha s bee n th e focu s o f tha t sentiment . Japan' s challeng e wil l be t o maintai n a sense o f clear, commo n purpos e whe n it shifts , a s i t inevitably must, fro m a n obsessiv e focus o n maximizin g it s expor t surplu s t o a wide r spectru m o f domesti c an d externa l objectives. Th e two Maekawa Report s o f 1986-198 7 outline this process extraordinarily well. But i t i s one thin g fo r a group o f wis e me n t o defin e persuasively ne w direction s fo r Japanese society , a different an d vastly more difficul t matte r to bring about the necessar y changes, i n the face of deeply rooted habit s and vested interests, before Japan and the rest of the world communit y are engulfed in a major corrosive crisis . Suc h a crisis is wholly possible i f th e pac e o f adjustmen t o n trad e an d Thir d Worl d debt s i s no t greatl y accelerated. If a mercantilist fragmentation—likel y to intensify rathe r than end the Cold War and set the newe r agains t th e olde r industria l states—i s t o b e avoided , somethin g ne w an d difficult, bu t no t impossible , wil l b e required . Wester n Europe , Japan , an d th e Unite d States wil l have to generate collectivel y th e leadership non e can now provide alone . Thi s means designing and abiding by new rules of the game for trade, capital movements, and domestic policy in the extraordinarily internationalized economy that has emerged. O n the basis of such rules, they will have to work with each other and with the developing regions to exploi t th e ne w possibilitie s an d mak e th e peacefu l adjustment s cooperatio n coul d render realisti c an d mutuall y profitable . And , I woul d add , a s th e latecomer s mov e

Where Ar e We ? An Agenda i n Midpassage 49

9

forward, the y mus t graduall y assum e a n increasin g degre e o f responsibilit y fo r th e viability of the international system as a whole. The United States grossly faile d this tes t between th e tw o worl d wars—wit h tragi c results . Japa n no w confront s thi s test , an d before lon g s o wil l Sout h Korea , Taiwan , Brazil , an d th e othe r aspiring , fast-movin g latecomers, especiall y Indi a an d China . I n fact , Taiwan , wit h it s fantasti c reserves an d modest externa l indebtedness , alread y confront s the rite o f passage t o responsibility . A final aspect o f the task relates t o diplomacy and military policy rather than econom ics, althoug h success i n its pursuit depends on the effectiveness of the presently advance d nations i n dealin g wit h thei r comple x economi c agenda . Whil e offerin g t o th e newe r industrial state s civilize d economi c relation s an d role s o f increasin g responsibilit y an d authority i n collectiv e enterprises , th e olde r industria l nation s wil l hav e t o maintai n military strength , maximu m unity , an d commo n purpos e i f th e chance s o f a peacefu l transformation ar e t o b e maximized . Th e Secon d Worl d Wa r cam e abou t whe n th e Atlantic worl d los t bot h a grasp on its economic an d social problems an d its unity on the raw issue s o f militar y security . Churchil l was quit e correc t i n callin g th e conflagratio n "the unnecessar y war. " I n seekin g t o avoi d suc h war s i n th e futur e I woul d merel y suggest the possibility—not argue the case—that, contrary t o much current conventional wisdom, close r tie s a s amon g th e Unite d Sates , Wester n Europe , an d Japa n wil l b e required i n th e futur e tha n i n th e pas t o r a t present . Th e Col d Wa r helpe d creat e th e existing networks across the Atlantic and Pacific. An ending of the Cold War by no means guarantees peace . I t could easil y yiel d chao s i f Trans-Atlantic an d Trans-Pacific tie s ar e weakened or broken. Th e movement from Cold War to a reasonably solid institutionalize d peace wil l require grea t sustaine d common effort , The fourth challenge is how to meet the strains on resources and the environment that may be posed by the effort to complete the transformation —or to move virtually all the globe's societies into their ow n versions o f high mass consumption. A s Chapte r 2 0 suggests, n o one can now estimate wit h confidence the degree or generality of the strain s this effor t i s likel y t o entail . Certainly , th e dogmatis m o f th e standar d compute r ru n i n Limits t o Growth—with it s injunction promptly to cease the further diffusio n o f industrial growth or face cataclysm earl y in the twenty-first century—was not well founded in either theory o r the data. 18 But effectiv e criticis m o f th e Limits t o Growth doctrin e di d no t constitut e proo f tha t sustainable growth, o n present patterns , with existing technology, ca n go forward without regional or , possibly , genera l resourc e o r environmenta l crises . Indeed , Sub-Sahara n Africa i s already experiencin g limits-to-growt h crises , an d they have been non e th e les s real becaus e brough t o n substantiall y by unwis e governmental policies . When I surveye d th e prospects fo r continue d growt h a decade ag o whil e completin g The World Economy, I isolated certai n then-unanswerable technical question s that migh t well affect th e outcome; fo r example, th e likelihood o f producing in, say , the first hal f of the twenty-firs t centur y a n essentiall y infinite , nonpollutin g sourc e o f relativel y chea p energy o r the possibility o f drastic changes in the climate via the greenhouse effect . These and othe r larg e question s (e.g. , th e significanc e o f th e attenuatio n o f th e ozon e layer ) remain unanswered . Bu t I concluded then—an d would conclude again—tha t th e critical issues are likely to be decided by national and international policies rather than inexorable laws of nature. That conclusion—if correct—offers only limited comfort, given the long record o f human fallibility an d the tendenc y of governments to awai t acute crisis before acting. Bu t i t offers som e comfort by settin g challenges in technology and policy that do not appear beyond the reach of human performance at its best. Put another way, with a bit

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of luck , ther e i s no reaso n t o judge i t beyond the capacit y o f the human race to struggl e through t o a time when population growt h i n the developing continent s ha s been sharpl y reduced an d adequat e food , shelter , an d clothing , education , an d th e considerabl e amenities a mature industria l civilization can provide ar e available for the overwhelmin g majority o f th e world' s men , women , an d children . There are , evidently , value s t o b e cherishe d beyon d materia l progress : th e joy s o f family, th e arts , religion , an d th e ful l expressio n o f uniqu e personalities . An d thes e deserve cultivation, in th e Sout h a s well as the North , a s governments an d their citizen s struggle throug h th e challengin g agend a o f th e nex t severa l generations . Bu t onl y thos e who d o no t kno w wha t the roun d o f lif e i s lik e i n a n impoverishe d villag e o r a n over crowded urba n slum , whethe r i n eighteenth-century Europe o r contemporary developin g regions, wil l fail t o appreciate ho w materia l progress ha s improved th e quality of life and can continu e t o d o so . Surely there wil l be surprises alon g the way. In the first instance , responses must com e from nationa l societies ; bu t whethe r th e issu e i s a cur e fo r AIDS , o r th e achievemen t of commerciall y viabl e fusio n power , o r preservatio n o f lake s an d forest s b y th e reduc tion o f aci d rain , o r controlling pollutio n in the Mediterranean—the internationa l dimension o f th e tas k o f preservin g th e huma n rac e an d it s habita t wil l remai n critical , in creasingly expensive , an d demandin g intensifie d internationa l cooperation . The fifth challenge centers on policy toward the approximately 20% of the human race that lives in poor countries that have not entered modern or self-sustained growth. 19 Thi s group includes , inter alia, mos t o f Sub-Sahara n Africa , Bangladesh , Burma , Haiti , Yemen, Afghanistan , Vietnam , an d som e o f th e Pacifi c islands . Thi s illustrativ e lis t suggests th e variet y o f circumstance s tha t ma y hav e forestalle d entranc e int o takeoff : historical an d cultura l heritage ; partia l o r tota l rejectio n o f modernit y a s a n objective ; resource limitations ; war; endemic politica l instability ; perverse publi c policies; or varying combination s o f thes e circumstances . The firs t an d most importan t thing to be said about international development polic y in relation t o this array of countries flow s from th e conclusion drawn at the close o f Chapte r 16; namely, that , i n the end , th e analysi s o f growt h mus t com e t o rest o n each society , with al l it s uniqu e features. N o on e ca n stat e wit h confidenc e ho w man y wil l ente r th e Fifth Graduatin g Clas s i n takeoff . Som e ma y tur n a corner fairl y soo n an d mov e ahea d rapidly, a s Sout h Kore a di d i n th e 1960s . Other s ma y b e frustrate d fo r decade s b y problems o f resourc e constraint s and/o r aspect s o f thei r political , social , o r cultura l heritage, and/o r ba d policy . Evidently, th e developmen t problem s o f Sub-Sahara n Afric a ar e currentl y th e mos t challenging, bot h because o f their scale an d because th e popular desir e fo r development , as nearly a s one can judge, appear s authentic . The plight of these aspirin g but frustrated countries wa s mad e vivi d b y a question put t o m e b y a n Africa n agricultura l technician attending a n internationa l cente r i n Indi a wher e I spok e i n 1983 . H e said , i n effect : "Many African countrie s became independen t 20 years ag o but have not entered takeoff. What's wron g with your theory?" When laughter had subsided I discussed the wide range of mainly noneconomic force s tha t have historically determined th e length of the preconditions fo r takeoff ; shor t fo r Japa n (3 2 year s fro m Commodor e Perry' s arrival , onl y 1 7 from th e Meij i Restoration) ; lon g fo r Chin a (11 0 year s fro m th e Opiu m Wars) , eve n longer fo r Mexic o (12 0 year s fro m Independence) . Evidentl y n o unifor m tim e perio d could be defined fo r developing the preconditions for takeoff. I concluded that, basically, the peopl e o f eac h country , suffuse d wit h thei r respectiv e cultural, social , an d political

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1

heritages, woul d determine if , when, and how their entrance into sustained growth would begin; eac h cas e woul d be different ; bu t the advanced countries—especially their development economists—owed th e lagging aspirants more thought and attention than they had been thu s far given plus a good dea l o f patience. The African heritage—includin g strong tribal attachment an d arbitrary boundaries derived from colonial history that violated triba l locations—was likel y to make the interval between independence and takeoff rather lon g but, I woul d guess, shorte r tha n for China o r Mexico . A part of the challenge posed b y these hard cases i s that we economists canno t usefull y come t o grip s wit h the m unles s w e ar e willin g to mak e cultural , social , an d politica l factors—as wel l as history—a living part of our analyses. We paid a price i n our studie s of an d prescription s fo r mor e advance d developin g countrie s whe n we se t these factor s aside, a s we have often done . Bu t still we could find area s of usefulness. Thi s is much less likely t o b e th e cas e i n analyse s o f an d prescription s fo r th e precondition s fo r takeoff . But s o far as development-aid polic y i s concerned, th e major conclusion is that, whil e each country, like each studen t or doctor's patient , is unique, we need, broadly, two types of policy : on e addresse d t o pre-takeof f countries , th e othe r t o countrie s i n th e driv e t o technological maturity . The latte r group of developin g countries has, i n my view , an important role t o play in helping patiently to nurse along those laggard countries that desire to move forward. They are close r t o th e earl y phase s o f developmen t an d shoul d b e abl e t o provid e effectiv e technical assistanc e as, indeed , Taiwa n has done to a number of African countries. The assumption o f tha t responsibility would be easier an d mor e natura l if the regiona l struc tures of the world econom y wer e to be strengthened, each embracin g nations at different stages o f growth . A s indicate d earlier, th e Pacifi c Basi n appears rip e fo r suc h an effort , and th e Wester n Hemispher e rip e fo r a renewed an d heightened collectiv e effort . A s fo r Africa, a parallel regional effort appear s appropriate , wit h Western Europe taking the lead among th e advance d industria l countries, the United States and Japan as junior partners , the World Bank working in collaboration with the African Developmen t Bank. Some such purposeful, collectiv e effor t ma y hav e t o awai t the subsidenc e o f certai n politica l an d diplomatic problems , bu t in terms of the fate o f the men, women, and children of Africa , the effor t i s long overdue .

The Short Run and the Long Run This ters e definition o f a five-point global agenda underlines one of the recurrent theme s of this book, namely , that it is unwise to separate the analysis of the long run and the short run. Growth, cycle, and trend are inextricably interconnected. To take a self-evident case, the tren d relativ e declin e o f basic commodity price s fro m 192 0 t o the mid-1930 s helpe d cause—and was , in turn, exacerbated by—th e damped cyclical expansion to 1929 and the subsequent extreme depression. A s we peer ahead to 2050 and try to define the long-range agenda fro m th e perspective o f 1989 , i t is clear tha t the present interwove n crises o f U.S. deficits, trad e imbalances , burdensom e debts , an d relativ e stagnatio n i n muc h o f th e developing worl d could , i f poorl y handled , mak e constructiv e actio n o n tha t long-run agenda virtually impossible. Such a failure could , by fragmentin g th e alliances across the Atlantic an d Pacific, frustrat e whateve r favorable prospects there may b e fo r a withering away o f th e Col d War ; rende r unlikel y a peacefu l an d collaborativ e adjustmen t to th e strains of the arrival at technological maturity of the Fourth Graduating Class; an d attenu-

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Table 21.6. Rea l GN P Growt h i n Developin g Countrie s [average annua l percen t change ] Region 197 Western Hemispher e 5. Africa 3. Middle Eas t 6. Asia 5.

0 to 198 0 198 8 1. 7 1. 4 -. 2 4.

0 to 1986 1 0 0 4 7

1 Preliminary estimates. SOURCE: Internationa l Monetar y Fund, reproduced i n Economic Report o f th e President (Washington, D.C. : Unite d States Government Printing Office , 1987) , p. 105 .

ate cooperative effort s both to cope with strains on resources an d the environment and to nurture those thu s fa r lef t behin d i n the process o f growth. 20 I evok e these immediat e problems not only because of their influence on the long-run prospect but also because the choice of guiding principles before the major nation states in the short run depends o n the answer to the central question also confronted with respect to the long-run agenda outlined here. The question is: Shall the political process—domesti c and international—recogniz e an d ac t systematicall y on th e interdependencie s tha t hav e grown up in a global community within which power has now so diffused tha t domination by a single nation or coalition i s impossible? The choice i s to build increasingly on thes e interdependencies o r t o permi t ra w nationa l impulses, i n the for m o f intensifie d protectionism, t o render th e world aren a a neomercantilist bear pit. I t is quite possible t o write the scenari o fo r th e nex t severa l generation s eithe r way. It would be inappropriate t o elaborate here a detailed description of a short-term policy to avoi d th e latte r outcome . Bu t its heading s an d principles ca n b e suggested . 1. Concerted measure s by the major economi c power s and international organizations to ease substantially the debt burden of the developing regions. Tabl e 21. 6 reflect s not merely the economic, socia l and political strain experienced i n the 1980 s b y the developing regions, othe r than most o f Asia, but also one major source o f the U.S. trade defici t an d th e sluggishnes s of th e Europea n economies . 2. Concerte d measure s b y the major economic power s and economic organizations to cushion th e internationa l bankin g syste m fro m th e adjustment s required t o eas e those deb t burdens. 3. Measure s t o increas e th e rat e o f growt h i n chronicall y surplu s countries , notabl y Japan an d the Federal Republi c o f Germany, accompanie d b y stron g impor t liber alization measures . Japa n has been moving in these directions to a degree i n partial response t o the recommendations o f the Maekawa Reports, but the FRG has thus far pursued a n exceedingly parochia l policy , inappropriat e to its economic statur e and chronic foreig n exchange surplus. 4. Enlarge d official an d private lending to developing regions, the former by concerted action t o enlarge resource s availabl e t o the Worl d Ban k an d the regional develop ment banks. Capital exports to the United States should be diverted to the developing regions as the U.S . trade deficit an d real interest rates are brought down. In the short run , th e presen t surplu s countrie s bear a special responsibility for suc h lending, notabl y Japan, whic h country , for historica l reasons, i s no t makin g a propor tionate contributio n to it s ow n defense .

Where Ar e We ? An Agenda i n Midpassage 50

3

5. I n this environment , includin g accelerated growt h in Western Europe , Japan , and the developing regions , th e United States ough t to be able to recapture it s capacity to match it s imports wit h exports if the following policies ar e followed: a balanced federal budget , permittin g an easing in monetary policy and interest rates; accelerated applicatio n o f the new technologies; an d a rigorous incomes policy to contain the inflationar y effects o f post-198 5 devaluatio n of th e dollar. 6. Promp t movemen t towar d the definitio n of ne w internationa l rules o f the gam e to supplant th e Bretton Woods syste m that would once again link a nation's domesti c economic polic y to it s international accounts . International concer t i s essential fo r two reasons: becaus e n o single power commands the stature an d resources to lead the international community as the United States briefl y did after the Second Worl d War; and because such concert i s necessary fo r each nationa l leader t o cop e wit h the domesti c veste d interest s likel y to oppos e th e course s o f actio n necessary t o transit th e immediat e crisis . In a study that embraces a good dea l of modern economic history as well as theory it is perhaps worth noting a fairly close analogy out of the common past to the present distorte d state of affairs: th e transfer problems confronted in 1928-1930 by Germany (with respect to reparations), an d Britain and France (wit h respect to war debts), when the flow of U.S. capital wa s diverted from German y to the New York stock market starting in the secon d half o f 1928 . Th e outcom e wa s a cumulativ e breakdown i n th e internationa l trad e an d financial syste m that drove th e depression t o unexampled depths and helped bring on the Second Worl d War . With hindsigh t w e ca n sa y wit h reasonabl e confidenc e tha t this outcome coul d hav e been avoided if in, say , early 1930 , a series of actions were taken quite analogous to those now required : • I f reparations an d war debts [lik e Third World debts ] had been cut down, stretched out, o r cancele d b y internationa l agreement; • I f concerted internationa l action ha d been taken to cushion short-ru n strains in the banking system ; • I f the Unite d States , Britain , France, an d Germany had agree d t o conduc t simultaneously stron g expansionar y fiscal an d monetary policies ; • I f the United States [lik e contemporar y Japan an d the FRG], wit h an exceedingl y strong gold and foreign exchange position, ha d moved toward radically liberalize d trade an d the provisio n o f enlarged capita l exports . The heart o f a solution lay in intensified international cooperation, an d that, of course, didn't happen . Returning t o the grea t unresolved transfer problem o f the 1980s , i t is evident that th e world econom y i s confronted b y th e nee d fo r larg e adjustments . I t woul d be unwis e to underestimate th e scale of the national and international effort required . Bu t it is also easy to overestimate th e magnitude of the challenge the current crisis represents. I t is the lesson of the past half-century that modern economies are extraordinarily resilient i f the politica l leadership an d the citizenry are determined to act; for example, the wartime adjustments of th e Britis h an d America n economies ; th e postwa r recover y o f Wester n Europ e an d Japan includin g their shif t fro m dollar-shortag e t o dollar-surplu s status ; an d th e adjust ment of the highly vulnerable Japanese economy to the two oil shocks of the 1970s . I n the end the adjustments required in the world economy are primarily a matter of politics and

504 Problems

an d Prospects

will, rathe r tha n economics , i n th e narro w sense . This , b y itself , doe s no t mak e thes e adjustments easier . Bu t i t would be a good dea l les s difficul t fo r Japanese politician s t o move mor e rapidl y i n the directio n o f the Maekawa Reports , fo r American politicians t o face u p to balancing th e federa l budget an d other measure s require d t o bring its interna tional account s int o balance , an d fo r Germa n politician s t o launc h a mor e expansionis t policy a t hom e i f thes e an d th e othe r course s o f actio n require d wer e par t o f th e re establishment o f an orderly, discipline d internationa l system than the outcome o f sporadi c bilateral negotiation s i n whic h merel y ra w domesti c specia l interest s an d conventiona l nationalisms wer e i n play . The whol e proces s coul d be ease d if the almos t accidenta l windfal l brough t abou t by measures take n i n 198 3 t o assur e th e viabilit y o f th e America n Socia l Securit y syste m down t o th e middl e o f th e twenty-firs t centur y wer e used , no t onl y a s a t present , a s a means to accelerate th e balancing of the federal budget but increasingly to expand invest ment in research , education , infrastructure , and control o f environmental degradation. 21

A Conclusion: "AH on a Razor's Edge It Stands, either Woeful Ruin or Life"* It is peculiarly appropriate tha t this book come to a close on the choice between nationalis t fragmentation an d human solidarity ; for i n their time David Hum e and Adam Smith sa w the choice i n quite similar terms. Recal l Hume's argumen t for "enlarge d an d benevolen t sentiments" a s th e guid e fo r relation s among natio n states: I shal l therefore ventur e t o acknowledge , that , no t onl y a s a ma n bu t a s a British subject, I pray for the flourishing commerce o f Germany, Spain , Ital y and eve n Franc e itself . I am a t leas t certain , tha t Great Britai n an d all thos e nations, woul d flourish more, di d their sovereign s an d minister s adop t suc h enlarged an d benevolen t sentiment s toward s eac h other . Behind this proposition la y Hume's mor e general perceptio n tha t closely kni t societie s depend ultimatel y for their stability on "sympathy"— a vivid perception o f the emotions , interests, an d view s of th e worl d hel d b y others . Adam Smith , perhap s a shad e mor e disabuse d abou t th e huma n condition an d mor e inclined to rely on "self-love " than "humanity," nevertheless also evoked sympathy as a civilizing force an d railed "ver y violently" against mercantilism, including colonialism: "Commerce," h e wrote , "whic h ough t naturally to b e amon g nations , a s among indi viduals, a bond of union and friendship, has become th e most fertile source of discord an d animosity." And , mor e generally , th e remarkabl e firs t sentenc e o f hi s Theory o f Moral Sentiments: "Ho w selfis h s o eve r ma n ma y b e supposed , ther e ar e evidentl y som e principles i n hi s natur e whic h interes t hi m i n th e fortun e o f others , an d rende r thei r happiness necessar y t o him. . . . " O n suc h principles th e nations wil l hav e t o buil d to come throug h successfully . Hume, Smith , an d others i n the same traditio n di d not succeed i n their own time . Th e endemic Anglo-Frenc h struggl e o f th e eighteent h centur y continued , climaxed b y th e great war of 1793-1815. The American colonies achieved their independence not because the Britis h government accepted th e ne w maxim s of politica l econom y bu t onl y afte r 8 *Homer, Iliad, Boo k X , lin e 173 .

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5

frustrated year s o f bloody conflic t and with essential assistanc e to the United States fro m monarchical, mercantilis t France . Nevertheless, Hum e and Smith left a tradition for political economy that has never been more relevant as the twentieth century moves to a close, and "a ste p away" a new century beckons.22 Looking bac k an d at where w e are, tha t tradition has had its victories, i f not a definitive triumph . Ther e i s i n th e restless , ofte n combative , globa l communit y mor e recognition tha t interdependen t societie s deman d mutua l "sympathy " tha n w e ofte n credit: Th e Worl d Ban k an d IMF ; th e regiona l developmen t banks ; som e $3 0 billio n annually i n officia l developmen t assistance ; spontaneou s outpouring s o f assistanc e throughout the globa l communit y in the fac e of famine and natural disasters, dramatize d in Decembe r 198 8 b y th e globa l respons e t o the Armenia n earthquake . In a quite differen t dimension, ther e wa s "sympathy " to o a s Nikita Khruschev drew back fro m th e hard-knotte d crisi s h e created b y putting missiles and nuclear warheads in Cuba; an d John Kennedy trie d t o make that drawing back a s easy as possible. An d there were other occasions whe n the nuclear Sword of Damocles—the most compelling form of interdependence—helped hol d of f majo r war . These real-enough reflections o f a sense of common humanit y ar e now joined with a resurgent recognition o f another dimension of the classical tradition in political economy : the virtue s o f individua l initiative and competition . I f it were merely a question of long run trend , optimis m woul d be justified. But in a nuclear age the global community must do better than rely on a benign long-run trend. Th e men , women , an d children o f ou r communit y cannot afford a n equivalen t of the Frenc h Revolutionar y and Napoleoni c War s or th e kin d of breakdown of affair s tha t occurred betwee n th e tw o worl d war s o f this century. If we economists ar e to make a maximum contribution to humanity's coming down on the righ t sid e o f th e razor' s edge , I believ e w e woul d d o well—withou t givin g u p th e technical virtuousities we have generated—to buil d on the spacious principled tradition of the classica l economist s wit h which many of the young have lost touch . I n phrases fro m Adam Smith' s earl y Theory o f Moral Sentiments, w e too mus t try—in a post-Cold Wa r world—to hel p rethin k "th e genera l principle s whic h ought to ru n throug h an d be th e foundation o f th e law s o f al l nations. " A s Keyne s onc e reminde d us , w e ar e no t th e trustees of civilization but of the possibility of civilization. In a sense we are jugglers; but like the medieva l Jongleur de Notre Dame,* we mus t mak e sur e we juggl e for larg e purposes.

*Since reading s in elementar y French ma y hav e change d sinc e m y day s i n Ne w Have n Hig h School , th e legend o f L e Jongleur d e Notre Dame i s th e following : A juggler goes t o a chape l t o expres s his religious devotion i n th e onl y wa y h e knows . Alone , befor e a statu e o f th e Virgi n Mary , h e juggle s unti l h e fall s exhausted. Th e statu e come s t o life , step s down fro m it s pedestal , and mop s his brow.

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Appendix: Models o f Economic Growt h MICHAEL KENNED Y AND W.W. ROSTOW

Prefatory Note (WWR) This Appendix i s the result of a collaboration betwee n Michael Kenned y and myself. Dr . Kennedy, no w at the RAND Corporation, i s a quantitative economist wh o is comfortabl e in mathematics . I am merely a reader o f mathematical economic s wit h some capacit y t o pose issues an d roughly outline formal models i n terms capable o f translation int o mathe matical terms . I ha d envisage d fro m th e beginnin g of thi s enterprise a n effor t t o driv e home i n mathematica l term s certai n ke y proposition s i n my view of economic growth . I respected from the beginning of my training as an economist th e power of mathematics a s a device t o dramatize wit h clarity certai n ke y assumption s or relationships, a t the cost of two kind s o f simplification : the eliminatio n o r freezin g o f significan t relevan t variables , and th e treatmen t o f dynamic , nonreversibl e processes , i n constan t disequilibrium , a s if they yielde d equilibrium . I believe economi c growth—lik e other form s o f growth—is a biological process . Scientifically , it yields patterns, lik e chaos theory , rathe r tha n logical equilibrium sequences , lik e Newtonia n physics. Bu t I a m quit e prepare d t o exploi t th e virtues o f mathematica l formulation s so long a s the drasti c simplificatio n of reality the y entail is clearly understoo d an d so long as critically important variables are not eliminated or fixed fo r reasons o f convenience. M y collaboration wit h Kennedy was ultimately mad e possible becaus e hi s view s o n thes e fundamenta l matter s an d min e ar e quit e similar . Although w e collaborate d closel y i n th e evolutio n an d draftin g o f thi s Appendix , th e mathematical expositio n is , o f course , Michae l Kennedy's .

Introduction We procee d b y presentin g a series o f formal models tha t identify thos e ke y assumption s that produce significant , qualitative differences in portrayals of the growth process that are associated wit h different author s o r school s analyze d i n the text . We begi n wit h a single-secto r mode l o f growt h tha t attempt s t o captur e i n analytica l terms th e primar y determinant s of th e growt h proces s a s describe d i n Ada m Smith' s Wealth o f Nations-. Thi s i s followe d b y a comparativ e exercise i n whic h w e develo p successively forma l model s tha t represen t thre e view s o f th e growt h process: th e neo classical model ; th e mode l associate d wit h Rostow' s work ; and the Adam Smith model ,

508 Appendix

this time appearing i n multisectoral form. Thes e thre e models are embedded i n a common multisectoral framewor k s o tha t th e assumption s tha t lea d t o thei r distinctl y differen t results ca n b e clearl y identified . Finally , w e presen t som e result s o f modelin g th e rich country-poor-country relationship ; tha t is, th e dynamic s o f growth an d interactio n i n an international syste m i n whic h differen t countrie s ar e a t differen t level s o f development . This i s the problem firs t explore d b y David Hume , by Folke Hilgerd t an d Eugene Stale y about tw o centurie s later , an d tha t lie s a t th e hear t o f Chapte r 21 .

Appendix Part I: A One-Sector Adam Smith Model of Growth A Verbal Account We begin wit h a verbal accoun t of the Smithia n growth process, an d then proceed with a formal presentatio n o f a one-secto r model . Th e simplicit y o f th e one-secto r approac h enables u s to identify clearl y the key assumption s that drive the model, althoug h Smith' s exposition was , i n fact , quit e disaggregated , a s th e tex t o f Chapte r 2 make s clear . The leve l o f outpu t i n th e Smit h mode l depends , a s i t doe s i n contemporar y growt h analysis, o n input s o f thre e factor s o f production—labor , capital , an d land ; an d o n th e level o f technology. Smit h also took accoun t of certain noneconomic factors ; for example, the degre e o f politica l stability , th e securit y o f privat e property , an d th e rol e o f laws , institutions, an d customs i n determining attitude s toward commerc e an d the socia l statu s of merchants . Thes e ca n b e introduce d int o forma l model s exogenousl y a s factor s tha t frustrate, damp , o r heighte n th e workin g of strictl y economi c variables . At its core, a model of growth representin g a Smithian system must, therefore, accoun t for change s i n supplies of the factor inputs; and it must account as well for the evolution of technology. I n the model presented here , supplies of the factors of production are assume d to evolv e ove r tim e i n th e followin g ways : • Chang e i n the labo r forc e i s determined b y the level o f the real wag e relativ e t o a subsistence wage . I f th e rea l wag e i s abov e th e subsistenc e wage , labo r suppl y i s assumed t o grow ; i f i t i s below , labo r suppl y i s assume d t o fall . Thi s subsistenc e wage ma y be thought of as either a true physiological subsistenc e wage, o r as som e psychological minimu m below whic h worker s choos e no t to expand thei r number s and above which they do. For simplicity, we do not introduce the lags that would, in fact, ente r thi s linkage . • Th e capital stoc k grow s a s a result of net investment. I n this system, onl y owners of capital ar e assumed to invest, and thus to be a source of gross additions to the capital stock. Bot h landlord s an d worker s ar e assume d t o consum e al l o f thei r income . Thus, investmen t i s determined b y the leve l o f profits, whic h i s the incom e o f th e owners o f capital . • I n our mode l th e suppl y o f land i s assume d t o be fixed . Smith' s ful l expositio n i s not that simple . H e devotes considerable spac e to specifying which basic commodi ties ("rud e materials") ar e fixe d i n suppl y an d suggestin g th e degree of elasticit y of suppl y fo r other s wher e increase s i n outpu t ar e judge d possibl e (preceding , p. 40) . Bu t ther e i s no doubt that , on balance , Smit h believe d diminishin g returns applied t o basi c commodities; and tha t diminishin g return s i s buil t int o hi s defini tion o f a country's growth ceiling: th e "ful l complemen t o f riches which the nature

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9

of it s soi l an d climate , an d it s situatio n wit h respec t t o othe r countries , allowe d it t o acquire . . . . " Ther e i s a n implicatio n her e o f a geographica l limi t t o th e profitable expansio n o f the market a s well as diminishing returns to the production of "rud e produce;" in a single-sector mode l the assumption of fixed land is the best analogue t o thi s se t o f assumptions. 1 Withou t violatin g Smith' s analysi s this as sumption give s a somewha t pre-181 3 Malthusia n an d Ricardia n cas t t o ou r one sector exposition . In short, growth of the two nonfixed factors depends on the level of their associated facto r reward. Growt h o f th e labo r forc e depend s explicitl y on th e rea l wage ; growt h o f th e capital stoc k depend s o n th e leve l o f profits , an d thu s o n th e rat e o f retur n t o capital . Three kind s of technologica l progres s ca n b e identifie d i n Smith' s work . First, there is Smith's most famous proposition stated , like the theme of a symphony, in the openin g sentence s o f th e firs t an d secon d chapter s o f Th e Wealth o f Nations: (1 ) th e greatest forc e making for the increase of labor productivity is the division of labor that, in turn, (2) arises fro m a propensity in human nature to truck, barter, and exchange one thing for another . Essentially , Smit h asserts tha t what is now called increasing returns to scale arises fro m th e expansio n of the market ; that is, a n improvement of output per unit input occurs a s th e econom y grow s becaus e ther e ar e increase d opportunitie s fo r divisio n of labor, an d thu s specialization , i n a large r economy . Thi s incrementa l improvement i n productivity accompanyin g specializatio n i s attribute d t o thre e forces : th e worker' s increase i n dexterity ; reduce d wast e o f th e worker' s time ; an d th e encouragemen t o f invention o f machine s t o tak e advantag e o f specializatio n possibilities , includin g th e products o f creativ e machine-builder s "combinin g th e power s o f th e mos t distan t an d dissimilar objects " (preceding , p . 4 1 an d following p. 58 0 n. 98) . The secon d i s les s wel l known, les s discussed , an d rather Schumpeterian ; that is , a n occasional dramatic increase in the state of knowledge, associated with a "philosopher's" [scientist's] discover y o f a ne w produc t o r metho d o f production . There is , thus , i n th e Smithian mode l a n overla y o f irregular , larg e spurt s i n knowledge , derive d fro m th e inventions of philosophers, ato p the regular, small-scale accretion of productivity derived from the specializatio n of function induce d by the expansion of the market and associate d improvement i n the workers ' tools . One can eve n deduc e a third form of technological change . Ther e ar e passages i n The Wealth o f Nations tha t see m t o impl y that ther e ar e incrementa l improvement s i n tech nology associate d wit h a syste m o f specialize d functio n bu t no t directl y linke d t o in creased specializatio n associate d wit h current expansion of the market. Pu t another way, one get s the impressio n that Smith had in mind that specialization o f function yielde d the regular allocatio n o f talen t to th e improvemen t of technolog y a s a habit. Using these assumptions about the development of factor inputs and technology, w e can construct the following verbal portrait of the growth process a s represented by Smith. The economy begin s i n a n "origina l rud e state, " whic h i n today' s term s i s a stationar y equilibrium. In this state the real wage is at the subsistence level; i.e., that level at which the labor force does not change. The rate of profit is at such a level that gross investment is just equal to replacement investment , or depreciation, s o that the capital stock does not change. In addition, the economy is assumed to be below the minimum size at which economies of scale can be exploited. In the absence of any autonomous technical change or expansion of the market (interna l o r external) the economy would stay at this level. 2 In fact, Smit h had the forc e of expansion in foreign trad e primarily i n mind a s an instrument for moving the

510 Appendix

economy awa y from its original rude state. Historically, the commercial revolutio n of the previous tw o and one-half centuries was a powerful living reality to Smith's generation; bu t no technological chang e wrought by philosophers ha d yet been powerful enough to set in motion a sustained movemen t fro m the low-level equilibriu m trap. Theoretically, however , i f eithe r som e incrementa l technica l progres s o r a philoso pher's invention or opening u p of a new market by, say , discovery wer e to occur, causin g an upwar d shif t i n the leve l o f technology, som e economi c growt h would begin. Outpu t would be immediatel y higher , o f course, due t o the higher level of technology actin g on the origina l leve l o f facto r inputs . Factor rewards woul d be highe r a s well , fo r th e sam e reason. Th e labo r forc e woul d gro w du e t o th e highe r rea l wage , an d th e capita l stoc k would gro w du e t o th e highe r leve l o f profits , yielding , i n turn , increase d investment . With th e leve l o f lan d fixed , however , thi s growt h o f labo r an d capita l supplie s woul d begin pushin g th e rea l wag e an d th e rat e o f profi t bac k dow n again , an d thes e facto r rewards woul d continu e t o fal l unti l the y reache d thei r origina l levels . A t th e origina l levels o f facto r rewar d labo r an d capita l supplie s woul d remai n constan t a t thei r ne w higher levels . Ther e ar e mor e worker s an d mor e capital , bu t eac h worke r an d uni t of capital receives th e same reward as before the change in technology. Th e return to land, in contrast, ha s grown fo r two reasons: th e original increase i n technology, and the increas e in th e leve l o f th e othe r tw o factors . Landlord s ar e the onl y ultimate beneficiaries of th e increase in knowledge. Th e assumption that labor and capital grow when their rewards are above th e origina l leve l inexorabl y drive s thei r reward s bac k t o thos e levels . Growt h serves onl y furthe r t o enric h th e landownin g classes . The end resul t of thi s growt h proces s is thu s a new stead y state . Labo r and capita l supplies ar e higher , bu t their reward i s at the origina l level. Lan d supply, a t the origina l level b y assumption , gain s a higher reward . This firs t growth case is the adjustment of the system to a single positive shock, causin g a movement fro m on e static equilibrium position to another. But Smith's analysi s assumes that a t som e point , a s th e econom y grows , i t reache s th e siz e a t whic h a phas e o f increasing return s set s in. Le t us imagine a n economy tha t has just reached that size; i.e. , at a point at which the level of output per unit input would begin to increase, solely du e to specialization, o r the divisio n o f labor, a t any larger size . Th e economy stil l need s some initial exogenou s shoc k t o begi n it s growth , suc h a s th e openin g u p o f trad e wit h th e Western Hemispher e o r the Eas t Indies . Th e growt h proces s o f thi s econom y wil l diffe r from th e on e describe d abov e becaus e o f the specializatio n (an d thus technical improve ment) tha t i s induce d a t larger size s o f th e economy . Labo r an d capital stil l grow whe n their factor rewards ar e above the original level, and this tends to push those rewards bac k down. Bu t counteractin g thi s effec t i s th e increas e i n productivity—outpu t pe r uni t input—that result s fro m th e large r siz e o f th e econom y an d thu s the multipl e effects o f specialization o f function . Thi s tend s t o pus h facto r reward s bac k up . Whic h forc e prevails? I t is evident fro m Smith' s comment s o n the Dutch , British , an d French econo mies, a s wel l a s the Nort h America n colonies , tha t he envisage d tha t increasin g return s might prevail fo r some time. But following his concept of a " full complemen t o f riches,'' we assum e tha t ther e i s i n his syste m a n uppe r limi t to possibilitie s fo r expansio n o f th e market an d specializatio n o f function , an d tha t a t som e siz e o f th e econom y th e phe nomenon o f increasin g returns gives wa y t o diminishin g returns . As a result, wage s and profits ar e still driven back to their original levels, and landlords become the sole beneficiaries o f the prior phase of increasin g returns as well as of the technological progress tha t initiated th e expansion .

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1

We now turn to the formal development of the model. Ou r strategy is to build up to the full-blown mode l throug h a series of simpler models , s o that the important features of the model ar e added on e by one, an d their role i n shaping the ultimate results becomes clear.

Formal Exposition We bega n wit h a model wit h onl y two sectors , capita l an d labor, an d with no technica l progress. W e initiall y focu s o n th e implication s o f th e Smithia n assumptio n tha t th e growth o f facto r supplie s depend s o n th e level s o f facto r rewards. Our initia l point o f departur e i s then the familia r two-factor productio n function . where Y t i s output , K t i s capita l inpu t and L t i s labor input , t refers t o th e tim e period , which w e tak e t o b e a year . F i s assume d t o exhibi t constan t return s t o scale . Facto r rewards ar e assume d t o b e relate d t o facto r input s throug h th e margina l productivit y relations

where w t i s the wage rate, r t i s the gross rat e of return to capital, and FK an d FL represen t partial derivatives . Our assumptio n concernin g capital accumulation is that only owners of capital save. I n particular, th e capita l accumulatio n relations ar e

Here I t i s the leve l o f gross investment , an d s i s the savin g rate of capitalists . Equatio n (AI.4), i n whic h 8 i s th e depreciatio n rate , represent s a one-yea r gestatio n la g o f ne w investment. Equatio n (AI.5) simply says that capitalists inves t a fraction s of their income, their incom e bein g equa l t o th e margina l produc t o f capita l time s th e leve l o f capital . Combining equation s (AI.3 ) t o (AI.5 ) lead s t o the relatio n

which say s tha t the growt h o f th e capita l stoc k depend s on the savin g rate of capitalists , the rate of return to capital, an d the depreciation rate . I n particular, given the saving rat e of capitalists and the depreciation rate , the rate of capital accumulation depends on the rate of retur n t o capital . Th e capita l stoc k wil l increase , sta y constant, o r decrease a s If the rat e o f return t o capital just equals the depreciation rat e divided by th e saving rate, the leve l o f th e capita l stoc k wil l remain constant . Since r t depend s o n K , an d L t, th e familia r capital-labo r diagra m ca n b e use d t o illustrate th e capital-accumulatio n situation. Figur e AI.l show s the capital-labo r space . This space is ordinarily used wit h production isoquants and equal budget lines to illustrate cost-minimizing choice of inputs. Bu t since the rate of return to capital (r t) depends on the level of capital and labor in the economy [equation (AI.3)] each point in this capital-labo r

512 Appendix

Figure ALL Capital-Labo r Space. Figure

Figure AI.3. No-Labor-Growt h Line . Figure

AI.2. No-Capital-Accumulatio n Line .

AI.4. Steadil y Expanding Economy . NOTE: "r = B/s " is the no-capital-accumulation line , " w = w " i s th e no-labor-growt h line.

space will be associated with a given r t. Jus t as one can define productio n isoquants , tha t is, loc i of points a t which outpu t is equal to some constant level , on e can also define rate of retur n isoquants , tha t is , loc i o f point s a t whic h th e rat e o f retur n i s equa l t o som e constant level. In particular, w e can find tha t locus of points at which rt = 8As , or at which the level o f capital stoc k stay s constant. Thi s locus is illustrated in Figure AI.2 . (Sinc e the production functio n i s assume d t o exhibi t constan t return s t o scale , th e leve l o f facto r rewards depends onl y on the ratio of capita l t o labor, so the locus of points at which rt = 8/.? is a ray throug h the origin. ) At any point abov e this "no-capital-accumulation " line , the rat e o f retur n is belo w tha t needed t o maintain the capita l stock , s o th e capita l stoc k falls. A t an y poin t belo w th e line , capita l stoc k rises . Thu s th e dynamic s o f capita l

Models o f Economic Growth 51

3

accumulation move s th e economy towar d th e "no-capital-accumulation " lin e in a direction paralle l t o th e capita l axis . The reade r ca n verif y tha t an increase i n the savings propensity of capitalists shift s th e no-capital-accumulation lin e counterclockwise (up) , a s doe s a Hicks-neutra l increas e i n total facto r productivit y [i.e. , a n upwar d multiplicative shift i n equation (AI.l)] . We nex t assum e tha t change s i n th e labo r forc e ar e determine d b y th e wag e rate . I n particular, w e assum e tha t ther e i s a "subsistence " wage , w , a t whic h th e labo r forc e stays constan t over time , an d that the labor forc e grow s when the wag e i s above w , an d falls whe n th e wag e i s below w . W e represen t labo r forc e growt h as

The functiona l for m ca n remain arbitrar y at this point. Formulation (AI.8 ) was chosen t o be parallel t o equation (AI.6) . Labor forc e growt h ca n b e represente d i n th e capital-labo r grap h i n a wa y precisel y analogous t o th e representatio n o f capita l stoc k growth . Th e locu s o f point s o f capitallabor pairs at which w t = F L (K t, L t) = w is that locus at which labor force growth is zero. Such a "no-labor-growth " lin e is illustrated in Figure AI.3. (Thi s locus i s a ray through the origin fo r the same reason tha t the no-capital-accumulation line was.) At points abov e this no-labor-growth lin e the market wage rate is above the subsistence wage, and thus the labor forc e grows . A t points belo w th e line, the labor forc e shrinks . Thus , th e econom y moves towar d the no-labor-growth lin e in a direction parallel to the labor axis. The reader can verif y tha t a decrease i n the subsistenc e wag e shift s th e no-labor-growt h lin e clock wise (down) , a s does a Hicks-neutra l increas e i n tota l facto r productivity. How doe s th e econom y describe d s o fa r evolv e ove r time ? D o capita l an d labo r approach steady-stat e long-ru n equilibriu m values ? Th e answe r is , i n general , no . I n general, th e econom y wil l b e steadil y growin g o r steadil y shrinking , depending o n th e relative positio n o f th e no-capital-accumulatio n an d no-labor-growt h lines . Th e stead y growth situatio n i s show n i n Figur e AI.4 . Here , th e no-capital-accumulatio n lin e lie s above th e no-labor-growt h line . Th e facto r growt h relations prope l th e economy towar d the northeast, an d it grows withou t bound. If the relative position of the lines is reversed , however, a s i n Figur e AI.5 , th e situatio n i s th e opposite . Her e th e econom y shrink s without boun d towar d th e origin . Th e econom y i s no t sufficientl y productiv e t o allo w factor supplie s t o grow . Only i n th e razor's-edg e cas e of th e tw o line s being coinciden t i s i t possible t o attai n nonzero finit e steady-stat e equilibriu m levels o f capita l an d labor . We no w introduc e th e thir d facto r o f production , land , int o th e model . A s describe d above, w e assum e tha t lan d i s fixe d i n supply . Th e econom y i s assume d t o exhibi t constant return s t o scal e i n th e thre e factor s capital , labor , an d lan d combined . Th e production functio n i s where Nt denotes land. (Given that land is fixed, the economy exhibits diminishing returns in capital and labor combined. Thus this addition to the model might also be interpreted as a generalizatio n o f th e firs t mode l in which the origina l assumption of constant returns is

514 Appendix

replaced b y on e o f diminishin g returns. I n orde r t o distinguis h this model fro m th e firs t model, w e wil l refer t o i t a s a "decreasin g returns " model , an d the firs t a s a "constan t returns" model. ) We agai n assum e margina l produc t pricin g of factor s of productio n s o tha t

where n t i s the ren t on land . Our assumption s concernin g accumulatio n of labo r an d capital ar e th e sam e a s i n th e first model : viz.

Land i s assumed t o be fixe d i n supply, s o N t is an exogenous variabl e i n the system, an d its growt h i s zero . Given N t fixed, equations (AI. 10) and (Al. 11) define wt and rt as functions o f Kt andL t , exactly a s the y di d i n th e constan t return s model . Thus , w e ca n defin e loc i o f constan t wage rate s an d constan t rate s o f return t o capital i n the capital labo r diagram , jus t a s w e did above . Figur e AI. 6 illustrate s a constan t rat e o f retur n locus , whic h is a no-capital accumulation line if the rate of return is chosen equal to 8/s. Thi s no-capital-accumulatio n line i s concav e rathe r tha n linear . A n illustratio n of the concavit y o f th e lin e i s give n i n Figure AI.7 . Tak e a point A on the no-capital-accumulation line, and construct a ray fro m the origin through point A. No w conside r a point B on the ray, chosen northeas t o f poin t A. Poin t B represents a constant percentage increas e in capital and labor from point A. I n a constan t return s world , suc h a constan t percentag e increas e woul d leav e th e rat e o f return unchanged . I n th e situatio n w e ar e considering , however , suc h a chang e i s th e equivalent (fo r r t) o f a decreas e i n th e amoun t o f lan d available . W e assum e tha t a decrease in land available will decrease the marginal return to capital. An increase i n labor will be necessary t o raise the marginal product of capital back to the level tha t prevailed a t point A . (Th e increas e i n labor neede d i s illustrated at point C in Figure AI.7.) Thu s th e no-capital-accumulation line, o r the locus of points at which the marginal return to capita l is constan t a t 8/s , i s a concav e curv e a s illustrate d i n Figure AI.6 . By a similar course of logic the no-labor-growth line, or the locus of points at which the wage rate is constant a t w, ca n be illustrated with a convex line as shown i n Figure AI.8 . The steady-stat e equilibriu m ca n the n b e illustrate d b y combinin g th e no-capital accumulation an d no-labor-growth lines , a s shown in Figure AI.9 . Th e arrows sho w how the factor level s i n the economy wil l evolve i n each region o f the graph. Fo r example, i n region A (above bot h the no-capital-accumulation an d no-labor-growth lines) , capita l will fall an d labo r wil l grow . A s the diagram shows, th e economy move s towar d th e point of intersection of the two lines, which represents the steady-state equilibrium of the economy. This equilibrium is denoted b y factor levels L° and K°. T o repeat, a t this point capital and labor suppl y are such that r = 8/.s and w = w . We pause her e t o show some numerica l results of changes in exogenous parameters o f

Models o f Economic Growth 51

Figure AI.5. Steadil y Contractin g Economy .

Figure AI. 7. Derivatio n o f No-Capital-Ac cumulation Lin e wit h Land Fixed . NOTE: A movemen t fro m A t o B increase s labor an d capita l proportionately . Wit h fixe d land, thi s lowers th e margina l produc t of capital. A n increas e i n labor , represented b y a movement t o point C, i s needed t o restore th e original rat e o f retur n to capital .

5

Figure AI.6. No-Capital-Accumulatio n Line . (Fixed lan d supply. )

Figure AI.8. No-Labor-Growt h Line . (Fixe d land supply. )

this growt h model . W e no w illustrat e the effec t o f tw o kind s o f change : a n increas e i n technical efficiency , an d a n increas e i n lan d supplies . As describe d earlier , th e Smithia n system admit s two kinds of autonomous change i n technical efficiency : incrementa l progress an d th e "philosopher's " leap s in knowledge. The tw o ar e analytically identical, and the effects o f either are illustrated in the followin g exercises. The effec t o f a n increas e i n technica l efficiency i s illustrate d in Figur e AI.10 . [A n increase i n technica l efficienc y i s represente d b y a multiplicativ e upwar d shif t i n th e

516 Appendix

production functio n (AI.9). ] The initia l steady-stat e equilibrium is represented by the nolabor-growth lin e w 0, an d the no-capital-accumulation line r 0. Thes e lea d t o equilibrium levels o f capital an d labo r K ° an d L°. A n increas e i n technica l efficienc y shift s th e no capital-accumulation lin e upwar d (t o r' , fo r example) , an d th e no-labor-growt h lin e outward (t o w' , fo r example) . W e illustrat e the logi c o f thes e shift s fo r th e no-capital accumulation line. By definition, i t is the se t of points for which r = 8/s, an d before th e change in technology the point K° , L ° lay on it. An upward technical shif t (Hick s neutral) will increase the rate of return to capital at factor levels K°, L° . An increase in capital would be necessary t o return capital' s reward to the equilibrium level, S/s . Thu s the no-capital capital-accumulation lin e shifts upward . Similar logic applies to the no-labor-growth line. The ne w steady-stat e equilibriu m o f capita l an d labo r (i.e. , th e level s a t whic h facto r rewards agai n equa l w an d 8/ s s o tha t no furthe r chang e occurs ) wil l b e a t K', L' , th e intersection o f th e ne w no-factor-chang e curves . We now show some numerical results of changes in technical efficiency, base d on some reasonable value s fo r parameter s tha t gover n th e economy . Th e numerica l assumption s that ar e hel d constan t acros s th e result s w e sho w includ e

Here K° an d L 0 ar e the levels of capital an d labor tha t exist in the initial (pre-technicalchange) situation , a s show n i n Figure AI.10 . Th e equilibriu m (no-factor-accumulation ) levels o f th e wag e rat e an d gros s retur n o n capita l ar e 0.5 an d 0.1 , respectively . We sho w result s fo r si x differen t form s o f th e productio n function , equatio n (AI.9) . This productio n functio n i s assume d t o b e of the constant elasticity of substitutio n form, that is , t o hav e th e functiona l for m We sho w result s fo r thre e level s o f th e elasticit y o f substitution ; namely, 0.5, 1.0 , an d 1.5; an d fo r tw o level s o f land' s shar e o f outpu t i n th e initia l equilibriu m situation ; namely, 0. 2 an d 0.4 . Results ar e given i n Table AI . 1. Before discussin g the results, w e briefly describe the dynamics o f th e proces s b y whic h a n increas e i n th e leve l o f technolog y affect s thi s economy. (Th e discussio n refer s t o a 10 % increase i n th e leve l o f technolog y fo r con creteness. Thi s translate s int o an increase of -y in equation (AI . 13) by a factor of 1.1. ) In the initia l equilibrium, the wag e rat e i s w and th e rat e o f retur n is b/s. Afte r technolog y increases 10% , bot h facto r reward s ar e immediatel y increase d 10% . Thi s cause s bot h factors t o grow , t o new level s wher e facto r reward s ar e depressed to the original levels . Land enjoy s a double increase i n its rent level : firs t th e 10 % increase du e t o technology , then additiona l increases du e t o increase s in factor supplies of capital an d labor . Outpu t will gro w bot h a s a resul t o f th e increas e i n technology and th e growt h in factors. Tabl e AI. 1 shows, fo r each of the si x cases, th e increases i n factor supplie s needed to return the factor rewards t o the initia l equilibriu m levels , and the associated increase s in output and

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Figure AI . 9. Steady-Stat e Equilibriu m i n Fixed Lan d Suppl y Case . NOTE: L° , K ° ar e equilibriu m facto r levels . The econom y tend s t o mov e towar d equi librium value s fro m al l fou r region s o f diagram.

Figure AI.10. Effec t o f a n Increas e i n Tech nical Efficiency on Equilibrium Factor Levels. NOTE: K° , L ° ar e initia l equilibriu m facto r levels; w 0 an d r 0 ar e initia l no-factor-chang e lines. w ' andr ' are new no-factor-change lines after increase i n technical efficiency; K' an d L' are new equilibriu m factor levels .

Figure A I . I I . Numerica l Exampl e o f Effec t of Technica l Chang e o n Equilibriu m Facto r Levels. NOTE: a = 0.5 , S N = 0.2 .

Figure AI . 12. Numerica l Exampl e o f Effec t of Technica l Chang e o n Equilibriu m Facto r Levels. NOTE: CT =1.5 , S N = 0.2 .

518 Appendix Table Al. 1. Result s o f Numerical Simulation s 10% Hicks-Neutral Increas e in Technology Percent increas e i n Case

Y

K

L

n

0.5 SN = 0. 2 0.5 SN = 0. 4 (T — 1.0 SN = 0. 2 CT = 1.0 SN = 0. 4 <7 — 1.5 SN = 0. 2
31 18

24 12 61 27

24 12 61

55 26 61 27 70

cr = or =

61 27 111 38

121 45

27 121 45

28

land rent . (I n the Cas e column , a refer s t o elasticity o f substitutio n and S N refers t o th e initial shar e o f lan d i n output. ) Table AI. 1 shows that the new equilibrium levels o f factor supplies , output , and return to lan d wil l be higher , th e highe r i s th e elasticit y of substitution . This situatio n i s illus trated i n Figures AI. 11 and AI. 12, which show the before an d after steady-stat e situation s for elasticities o f substitution 0.5 an d 1.5, respectively. (Land' s initial share is 0.2 in these cases.) A compariso n o f Figure s AI.11 an d AI.1 2 illustrate s clearl y tha t facto r supplie s must grow mor e i n the high-elasticity cas e t o restore initia l factor-rewar d levels than they must i n th e low-elasticit y case . Th e reaso n i s straightforward : Whe n th e elasticit y o f substitution i s relativel y low , relativel y modes t increase s i n facto r supplie s lea d t o rela tively larg e decrease s i n facto r rewards . A t a lo w elasticit y o f substitution , no t muc h increase i n K an d L i s neede d t o pus h facto r reward s dow n 10% , an d thu s back t o thei r initial equilibriu m levels. Thes e numerica l simulations also produce th e result tha t landlords benefi t mos t fro m technica l progres s whe n lan d a s a facto r i s relativel y eas y t o substitute for . Figures AI. 13 and AI. 14 illustrate the cases o f land's initial share, S N, equa l to 0.2 an d 0.4, holdin g elasticit y o f substitutio n constant a t 1. 0 (th e Cobb-Douglas case) . Figur e AI.13 i s simply intermediat e betwee n Figure s A I . I I an d AI.12. Figur e AI.1 4 illustrate s that, for a given technical change, les s increase i s needed i n a factor to reduce it s reward to the original level i f the factor's origina l share in output is lower. This simply says that the lower a factor's shar e i n total output, the less elastic is demand for that factor, an d thus the less o f a n increase i s needed t o reduce th e factor's rewar d to a given level. Thes e results recall Marshall's observatio n tha t low price elasticity of demand will result from either low substitution possibilities o r low budget share. These exercise s i n technical progress for m a useful backgroun d whe n w e extend the model t o the increasing returns world . Another usefu l conceptua l exercis e to undertake with this decreasing return s model i s to increase the supply of land. What occurs in this case? Marginal returns to labor and capital are increase d a t first, causin g supplie s o f these factor s to grow. Give n that factor return s are a function o f the labor-land an d capital-land ratios only, however ( a consequence o f the linea r homogeneit y o f functio n (AI.9 ) i n all three o f it s arguments) , the ne w steady state equilibriu m will b e wher e labor-land an d capital-land ratio s hav e returned to their initial values . Thus , capita l an d labo r wil l gro w just as muc h as lan d did , an d al l facto r rewards will be at the initia l values, including rent. A consideration of the dynamics of the process i s illuminating . A n increas e i n lan d increase s th e retur n t o capita l an d labo r initially, causin g them to grow. Th e retur n t o these factors will b e abov e the equilibrium

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9

return (an d thu s the factor s will continue to grow ) as long a s the factor s ar e applie d les s intensively to land than they were in the initial equilibrium situation. The new equilibrium can only be where the factors capital and labor are applied exactly as intensively to all land as they were in the initial equilibrium, which is the equivalent of a situation where capital and labo r hav e grow n precisel y a s muc h a s lan d has . Th e ne w equilibriu m is simpl y a proportionate expansion o f the old equilibrium, with all factor rewards the same a s in the initial situation . We now introduce the third kind of technical progress, namely increasing returns, to the model. (Thi s model is called an "increasin g returns" model to distinguish it from the firs t two models. ) Ou r basi c notio n o f increasin g return s i s that total facto r productivit y i s a function o f the overall siz e of the economy, du e primarily to the specializatio n o f labor . An increas e i n total facto r productivit y is defined as an upward multiplicative shift i n the general productio n functio n (AI.9) , whic h would be translated into an increase in 7 in the specific functional form of equation (AI. 13). Thus, we can rewrite the general productio n function (AI.9 ) a s where p represent s tota l facto r productivity . Th e precis e definitio n o f th e siz e o f th e economy wil l be lef t unspecifie d for th e moment . The relationshi p betwee n tota l facto r productivit y an d th e siz e o f th e econom y i s postulated t o tak e th e for m shown in Figure AI.15 . Tota l facto r productivity is constan t (at, say , unity ) below som e minimu m critical size of the economy, show n as s 0 i n Figure AI. 15. Below this size, no opportunities for specialization of labor exist. As the econom y moves beyon d thi s size , however , expansio n o f th e marke t present s opportunitie s fo r increased divisio n of labor, s o that total factor productivity increases. A t some larger siz e of the economy, say , s I opportunitie s for further division of labor are exhausted, and the economy's tota l facto r productivit y remains constan t at the highe r plateau. Thi s leve l i s indicated b y th e symbo l p m i n Figur e AI.1 5 ( m fo r maximum) . I f th e econom y grow s beyond thi s point, the additional resources (capital , labor, an d land) will simply duplicate what the existing resources ha d been doing , leadin g to higher output but no productivity change. Thi s contrast s wit h growth of th e econom y betwee n size s s 0 an d S 1, wher e th e expansion o f th e marke t allowe d b y th e additiona l resource s lead s t o increase d oppor tunities for division of labor, and thus to a physical change in the way resources ar e used. We mus t now define th e metric b y which to measure the "size " of the economy. W e choose the size of the capital stock a s this metric, base d on the notion that new capital will embody th e division of labor opportunities. Othe r metrics (such as labor or the production function F( ) itself) are also reasonable, however , and we see no compelling argument for choosing on e ove r th e othe r i n a n aggregat e mode l suc h a s this . W e writ e th e basi c production functio n as

K° an d K l ar e constant s her e tha t define th e range o f increasing returns. There i s a well-know n difficulty i n facto r pricin g i n thi s sort o f model : i f factor s ar e rewarded wit h their marginal products total factor payments will exceed total output. We assume here that land and labor are paid their marginal products, and that capital is paid its

520 Appendix

Figure AI. 13. Numerica l Exampl e o f Effec t of Technica l Chang e o n Equilibriu m Facto r Levels. NOTE: a = 1.0 , S N = 0.2 .

Figure AI.14. Numerica l Exampl e o f Effec t of Technica l Chang e o n Equilibriu m Facto r Levels. NOTE: a = 1.0 , S N = 0.4 .

Figure AI.15. Relatio n Betwee n Siz e o f Economy an d Total Facto r Productivity .

Figure AI . 16. No-Labor-Growt h Line s fo r Two Diminishin g Return s Economies . NOTE: w 0 i s th e no-labor-growt h lin e fo r a n economy i n whic h tota l facto r productivit y equals 1 . w 1 i s no-labor-growt h lin e fo r a n economy i n whic h tota l facto r productivit y equals p m.

"marginal product" ignorin g th e effec t o f capita l o n total facto r productivity . Thu s th e factor rewar d relation s ar e

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521

There ar e tw o reasonabl e justifications for the assumptio n on capital factor pricing. Th e first i s tha t th e effec t o f additiona l capita l o n expandin g th e siz e o f th e marke t i s a n economy wide effect , an d tha t a t th e leve l o f th e individua l enterpris e thi s effec t i s negligible. Tha t is, an y increment an individual enterprise make s to its own capital stoc k has such a small effect o n the overall size of the economy that entrepreneurs simply ignore it. A second justification is that owners of capital are assumed to hire labor and rent land. Competition amon g owner s o f capita l wil l assur e tha t lan d an d labo r ar e pai d thei r marginal products , an d owner s o f capita l wil l receiv e th e residual output . Thi s residua l will indee d b e represente d b y equatio n (AI.17 ) due t o Euler's Law. 3 The capita l accumulatio n an d labo r growt h relation s ar e th e same i n thi s mode l a s previously, an d lan d is again assumed t o b e fixed. How doe s suc h an economy behave? Let u s firs t conside r th e no-labor-growt h line . W e begi n b y considerin g tw o differen t economies: on e i n whic h p i s fixe d (independen t o f K ) a t unity , an d on e i n whic h it i s fixed (independen t o f K) a t pm. Thes e ar e simpl y two case s o f ou r diminishing-returns economies at different level s of technical efficiency, whose characteristics were discussed above. Figur e AI.1 6 show s th e no-labor-growt h line s associate d wit h each o f these two economies, marke d w 0 an d w 1. A t levels of K belo w K° , w 0 wil l als o be the no-laborgrowth lin e i n ou r increasing-return s econom y becaus e a t level s o f K belo w K ° ou r increasing return s economy i s formally identica l to the diminishing-returns economy with total facto r productivity fixe d a t unity. Similarly, at levels o f K above K 1, w 1 wil l be th e no-labor-growth line . At levels of K between K° and K1, th e no-labor-growth lin e will fall between w 0 an d W 1. Thi s i s demonstrate d i n Figur e AI.17 . Choos e a leve l o f capita l between K° and K1, say , K*. A t labor level L°, an d capital level K*, the wage rate equals w ifp = 1 , because this point lies on the line w0. Bu t in the increasing returns economy, p > 1 (since K* > K°), so the marginal product of labor must be above w, and thus labor must be growing. Thus, th e no-labor-growth line for the increasing returns economy must lie to the right of w0 a t capital levels betwee n K° and K1. A simila r argument at the point (K*, L 1) wil l show that the no-labor-growth lin e must lie to the left o f w 1 at capital levels between K ° an d K 1. Thus , w e ca n deriv e th e no-labor-growt h lin e fo r th e increasin g returns economy as shown in Figure AI. 18. Figure AI. 19 shows the no-capital-accumula tion line for the increasing returns economy. I t is derived in precisely the same way as the no-labor-growth line . Our assumption that total factor productivity depends on the level of capital onl y affect s th e derivation of the no-factor-change curves in that the capital axi s is used t o determin e th e segment s o f th e lines ; th e symmetri c natur e o f facto r pricin g assumptions [equation s (AI.16 ) an d (AI.17) ] mean s tha t symmetric techniques t o derive the tw o lines can be employed . This completes the essence of the increasing-returns economy. Suc h an economy has a no-capital-accumulation an d no-labor-growth curve just as the diminishing-returns economy has, and where the y cross will be steady-stat e equilibriu m levels of capital stoc k and the labo r force . Figur e AI.2 0 show s th e intersectio n o f th e no-factor-chang e curve s derived i n Figures AI.1 8 and AI.19, an d thus their determinatio n o f equilibriu m capital and labo r levels. Diminishin g returns (represented b y the fixed stoc k of land) is assume d to prevai l ove r increasin g return s (du e t o th e specializatio n o f labor ) a t hig h level s o f capital becaus e the scop e fo r increasing productivity du e t o increasing th e specialization of labo r i s assume d t o b e finite . An interestin g possibility of multipl e equilibri a arise s in thi s model . Conside r the no labor-growth curve derived in Figure AI.21 and the no-capital-accumulation curve derived i n Figure AI.22. When the two no-factor-change curves are joined in Figure AI.23,

522 Appendix

Figure AI . 17. Th e No-Labor-Growt h Lin e for th e Increasing Return s Economy Mus t Lie between w 0 an d W1 if Capital Stoc k i s between K° and K1.

Figure AI.18. Derivatio n of No-Labor-Growth Line for Increasing Return s Economy .

Figure AI . 19. Derivatio n o f No-Capital-Ac cumulation Lin e fo r Increasin g Return s Economy.

Figure AI.20. Steady-Stat e Equilibriu m in Increasing Return s Case . K' an d L' Ar e Steady State Levels o f Capital an d Labor .

they sho w a n econom y wit h three equilibria . Equilibri a A an d C ar e stable , whil e B i s unstable. A represents a low-level equilibriu m trap of the type often discussed i n develop ment economics. I f the econom y i s nudged upwar d slightl y away fro m equilibriu m A, i t will fal l bac k t o poin t A . Thi s i s because th e econom y i s not yet larg e enoug h t o allo w economies o f scal e t o increas e facto r reward s s o tha t factor s wil l continu e growing. However, i f th e econom y ca n b e increase d t o th e regio n northeas t o f poin t B , th e in creased productivity , and thu s increase d facto r rewards , wil l induc e furthe r capita l an d labor growth to point C. (Dependin g on the precise form o f the function p(K t), economie s with mor e tha n thre e equilibri a can b e constructed.)

Models of Economic Growth

523

Figure A1.21. Derivatio n o f Anothe r No Labor-Growth Lin e for a n Increasin g Return s Economy.

Figure AI. 22. Derivatio n o f Anothe r No Capital-Growth Line for an Increasing Returns Economy.

Figure AI.23. Multipl e Equilibri a Resultin g from th e Combinatio n o f No-Factor-Chang e Lines fro m Figure s AI.21 and AI.22.

Figure AI.24. Transitio n fro m On e Steady State Equilibrium t o Another . NOTE: o - = 0.5 , S N = 0.2 , K° = 300 .

This complete s al l the parts o f our one-sector Ada m Smit h model. W e have illustrate d the implication s o f th e assumptio n tha t facto r supplie s depen d o n facto r rewards , an d shown how the introduction o f the three kinds of technical progress affects the results. W e now illustrate a Smithian growt h sequence , i n which an economy move s fro m a low-leve l steady-state equilibriu m (an "initia l rud e state"), throug h a region o f increasing returns , to a new steady-state equilibriu m where increasing returns have been exhauste d (the point of th e "ful l complemen t o f riches") . This growt h sequenc e i s illustrated in Figure AI.24. I n this economy, capita l an d labo r levels K ° an d L° represen t a steady-state equilibrium, and K° is assumed t o be the point at

524 Appendix

which increasin g return s begi n t o affec t th e economy. (Lettin g N° represen t th e constant level o f land , w e assum e th e followin g relations

This is an economy tha t is sitting in stationary-state equilibrium , but has just come t o the verge o f bein g larg e enoug h t o begi n t o exploi t th e potentia l divisio n of labo r an d thu s economies o f scale. (W e begin the growth story here for convenience. Before an economy reaches the verge of the increasing-returns region, tha t is, whe n it has total capital supply less tha n K° , i t ca n enjo y capita l an d labo r growt h onl y i f som e for m o f autonomou s technical progres s occurs , a s illustrate d i n Figur e AI.10 . W e ca n conceiv e o f suc h a n economy graduall y growin g a s these episode s o f technical chang e occur . W e begi n ou r analysis a t the point where these episodes have just moved th e economy to a capital stoc k level of K 0.) Figur e AI.24 illustrates a case where, if nudged upward away from th e initial equilibrium K°, L° , th e economy wil l grow through the increasing-returns phase to a new plateau a t K 1, L 1. We illustrat e one suc h numerical growth process , usin g the parameters t o characteriz e the economy tha t were use d in the decreasing-returns case . W e choose the case 0 = 0.5 ; SN = 0.2 . (Thi s i s in fact th e case illustrated in Figure AI.24.) W e pick a linear form for p(K)

In words, increasin g return s are presumed t o occur through a region o f almost a doubling of the capital stoc k fro m th e initia l level, and total factor productivity is assumed to reach 50% mor e tha n it s initia l leve l a s a result o f th e capita l stoc k doubling. We mus t als o choos e a functiona l form fo r th e relatio n o f labo r forc e growt h t o th e wage rat e fo r thi s exercise ; w e choos e which say s tha t labor force growth i s proportional to the ratio between th e real wage and the subsistenc e wage . (Th e subsistenc e wag e i s assumed t o be 0.5 , a s given above. ) Table AI. 2 show s th e pat h o f th e econom y fro m th e initia l equilibriu m to th e ne w equilibrium, assuming a 10 % increase i n capital an d labor to get things started. A s shown there an d i n Figure AI.24 , th e highe r steady-stat e equilibriu m is

Models o f Economic Growth 52

5

Table AI.2. Transitio n from On e Stead y Stat e to Anothe r Year Y 0 10

K 0 30

L 0 10

Ren 02

10 11

9 33

6 11

42

30 13

0 35

6 12

23

50 14

7 38

20 12

40 13

60 15 70 17

80 19

90 22

100 24

110 25

120 25

130 25 °° 26

4 34

7 36

5 11

82

9 12

83

9 40 5 43

8 14 5 15

34 44

2 51

1 18

6 46

6 56

2 59

6 61

8 62 0 63

7 13

53

t 0

6

8

0

3

7

1 8

9 16

85

7

0 20

08

1

98

7

4 20

3 20

4 21 7 21

46

68

08 29

9

5

9 0

Capital an d labo r ar e bot h approximatel y twic e their initia l levels, whil e output is about 2.5 time s its initial level. Ren t of land has increased by almost fivefold! (Retur n to capital and wage s ar e a t the no-factor-chang e levels , o f course. ) Th e econom y reache s it s new equilibrium in about the year 100 . Betwee n years 1 and 100 , capita l and labor have grown about 1 % per year , an d total facto r productivity has grown about 0.5% pe r year. During the transitio n t o equilibrium , wage s an d th e retur n t o capita l ar e drive n bac k t o thei r original levels , an d th e ren t o f lan d grow s dramatically , just a s i n th e technologica l increase cas e i n th e diminishing-return s world. In the spiri t o f Adam Smith , w e interpret the new equilibrium (Kl, L 1) a s the point of "full complemen t o f riches" o f th e economy . Figure AI.2 5 show s the tim e pat h of outpu t in this case.

Figure AI.25. Tim e Path o f Outpu t (Y ) durin g Transitio n fro m On e Stead y Stat e t o Another .

526 Appendix

Appendix Part II: Three Models of Economic Growth Compared Introduction In this part of the Appendix we present three formal models of economic growth , in order: a neoclassical model ; a model representing the work of Rostow; and a model i n the Adam Smith tradition . Al l thre e model s ar e embedde d i n a commo n economi c framewor k a s much a s possible, s o that th e ke y assumption s tha t lead t o thei r differen t result s ca n b e clearly differentiated . The firs t mode l i s our versio n o f the neoclassica l model s tha t emerged i n the 1950 s a s an alternativ e t o th e pioneerin g Harrod-Doma r model . A s Chapte r 1 5 makes clear , th e neoclassical mode l wa s explore d i n many variations down t o the earl y 1970s . Like th e predecesso r Harrod-Doma r model , th e neoclassica l growt h model s ha d a completely differen t purpos e tha n Rostow's , whic h w e shortl y examine . Th e Harrod Domar model aimed to explore the inherent stabilit y or instability (o r degree of instability) of growt h i n advance d industria l societies . Th e questio n addresse d wa s whethe r th e mechanisms an d institution s of suc h societies woul d or woul d no t generat e a volum e of expenditures (consumption , investment , an d governmen t expenditure ) sufficien t t o ap proximate relativel y stead y noninflationary full employmen t of the working force; that is, without generating eithe r chronic unemployment or price increases. Th e argument, there fore, cam e t o rest o n the existence and/o r sufficienc y o f real or believed macroeconomi c equilibrating mechanisms ; notably , capital-labo r ratio s o r changin g proportions o f in come spen t o r saved . For those purposes—i n th e midst of the most powerful sustained period o f expansion in the whol e swee p o f moder n economi c history—ther e wa s n o particula r reaso n i n ad vanced industria l countrie s t o explor e th e shap e o f th e demographi c transition . Th e population anxietie s o f the 1930 s wer e forgotten in the midst of the post-1945 baby boom . A wide range o f new inventions were coming forward ripe for innovation, whil e Wester n Europe an d Japa n had , i n addition , quit e larg e technologica l backlog s t o absorb . Th e terms o f trad e shifte d in a radically favorabl e direction fo r the advanced industria l worl d after 1951 . Som e economist s worrie d abou t th e impac t o f thi s tren d o n th e developin g regions. Bu t it is wholly understandable that the mainstrea m economists o f the advance d industrial world , release d fro m fear s o f a retur n t o th e dee p depressio n o f th e 1930s , should hav e constructe d highl y aggregate d model s i n whic h population an d th e flo w o f technology wer e treate d a s exogenou s variable s an d tha t permitted the m t o appl y thei r now highly polished neo-Keynesia n tools o f income analysis to explaining the unexpected stability o f a remarkable boom . The secon d mode l reflect s Rostow' s vie w o f the minimum variables an d relationship s required to capture th e story of economic growt h as well as the processes goin g forward in the contemporar y worl d i n societie s a t differen t stage s o f thei r evolution . Hi s vie w underlies th e structur e an d judgments tha t suffus e thi s book ; an d it s characte r i s mad e explicit i n Chapte r Eighteen . Specifically , it ha s thes e characteristics: • Th e demographi c transitio n is treated a s an endogenous aspect o f the growt h process—a relationshi p recognize d b y a goo d man y analyst s bu t difficul t t o specif y especially becaus e the determinant s of fertilit y rate s ar e no t wel l established.

Models o f Economic Growth 52

7

• Th e whole R & D process i s treated a s endogenous and , essentially , a s a complex investment subsecto r o r grou p of subsectors . • A s in Adam Smith and Schumpeter the distinction is recognized betwee n incremental innovations and large-scale, discontinuou s innovations with significant structural and macroeconomic consequence s fo r the economy. Therefore , a considerable de gree of sectoral disaggregatio n i s required to capture the role of innovation because , in th e firs t instance , innovatio n is inherentl y a sectora l process . • Th e tendenc y fo r majo r innovation s to cluste r i n tim e i s recognize d a s a charac teristic of the history o f the past two centuries. Some insights can be formulated into why thi s tendenc y ha s existe d (preceding , pp . 457-463) ; bu t w e hav e evidentl y more t o learn . • Th e capacity of a society's entrepreneurs t o absorb efficiently potentiall y profitable inventions i s judge d no t onl y a functio n o f prio r investmen t i n educatio n an d training bu t als o o f a society' s institution s an d th e incentive s (o r deterrents ) t o innovation th e societ y provides . I n short , s o fa r a s innovatio n i s concerned , a n exogenous flo w o f technical change tha t is uniformly absorbed does no t suffic e a s an assumption in the analysis of economic growth . Instead, a society's capacit y fo r technological absorptio n mus t be specified . • Linke d t o th e concep t o f absorptiv e capacit y an d it s complex determinant s i s the need to take into account the existence, for some advanced as well as most develop ing societies, of backlogs o f potentially profitable technologies thos e societies have not ye t pu t themselve s int o a position t o absorb . • Th e disproportionate rol e of rapidly expanding leading sectors i n the growth process is take n int o account , includin g th e direc t rol e o f th e plowback o f profit s i n suc h sectors i n determining the scale of plant and equipment expenditures and its indirect role in determining the overall rate of growth and thus infrastructure and residentia l housing investment . • On e must introduce the historical role of short- and medium-run relative pric e trends as between basi c commodities an d manufactures in inducing corrective change s in the directio n o f investmen t yielding , o n one definition, an d with appropriate lags , the phenomenon o f Kondratief f cycles wit h their consequences fo r the price level , interest rates , incom e distribution , an d overal l a s wel l a s sectora l growt h rates . • Th e wide-ranging consequence s o f major innovations in one sector for productivity in others, plus the availability or generation of substitutes, has thus far prevented th e classical prospec t o f long-term relative terms of trade deterioration agains t manufacturing product s (relativ e t o basi c commodities ) fro m assertin g itsel f a s a secula r phenomenon. Pu t anothe r way , ther e i s n o historica l basi s fo r assumin g Ada m Smith's lan d (an input into the production of "rud e produce") any more fixed than the input s int o manufactures ; although Chapte r Twenty-on e argue s tha t excessiv e population an d industria l growth an d improviden t policie s coul d alte r thi s benig n outcome i n the futur e (preceding , pp . 499-500) . • Th e view is accepted tha t business cycles have been the historic form that economic growth assume d fro m th e lat e eighteent h centur y to , say , 1938 ; an d tha t i t i s counterproductive t o separat e growt h an d fluctuation s i n moder n economie s whether th e latte r are regularl y cyclical or not. As argued in Chapter Eightee n this se t of propositions and relationships can be woven into a dynamic disaggregated growth model, fro m whic h flows, inter alia, th e concept of

528 Appendix stages o f economic growt h defined primarily in terms of the degree t o which a society ha s or has not absorbed the available pool of then-existing relevant technologies rathe r than in terms o f rea l incom e pe r capita . The secon d mode l i n this section o f th e Appendi x capture s i n sequence mos t o f thes e characteristics. Wher e a proposition listed above i s not pursued, that fact i s noted and the reason fo r the omission explained . Fo r example, fo r purposes o f simplicity and to dramatize less familiar features of the model w e decided no t to introduce conventional busines s cycles o r inventor y cycles . The largest omission, however , i s the complex interactin g se t of relationships betwee n the economic an d noneconomic dimension s of society. Ou r professions hav e not yet met Comte's challeng e o f a full y integrate d socia l scienc e withi n whic h economics coul d b e one component . W e must , therefore , tr y t o dea l wit h thos e cruciall y importan t rela tionships vi a th e stud y o f problem s specifi c t o tim e an d plac e wher e th e patter n o f interactions ca n be a t least partiall y perceived. O r we can simply introduce noneconomi c factors exogenously a s Adam Smit h did when he asserted tha t China's "ful l complemen t of riches " wa s lowe r tha n i t woul d hav e bee n i f i t di d no t neglec t an d despis e foreig n commerce. Despite their many differences, the Rostovian an d neoclassical model s shar e two characteristics tha t distinguis h the m fro m a Smithia n world : the y bot h produc e risin g rea l wages as a matter of trend; an d they provide roughl y constant long-run returns to land and other natura l resources . W e characteriz e a mode l wit h suc h propertie s a s a mode l o f "modern" economic growth , i n contrast t o a Smithian model of a "primitive " world, t o which w e no w turn . The Smithian , or premodern , worl d is characterize d in the lon g run by constan t rea l wages an d growin g lan d an d othe r natura l resourc e rents , wherea s moder n economi c growth i s characterized b y steadil y growin g real wage s an d a roughly constant retur n t o land an d othe r natura l resources . Ther e ar e thre e ke y difference s betwee n th e kind s of assumptions mad e i n a moder n growt h mode l an d thos e mad e i n a Smithia n growt h model. The y concer n th e availabilit y of lan d (o r natura l resources i n general) ; th e reg ularity o f technical progress ; an d th e relatio n o f growth of the labo r forc e t o the leve l o f real wages . Since w e have built both a modern mode l an d a Smithian model in the sam e economi c framework, w e ca n produc e a mode l representin g eithe r worl d b y simpl y choosin g th e appropriate se t of assumptions . W e ca n als o loo k a t hybrid worlds, whic h contain som e assumptions appropriat e t o eac h approach . Th e concludin g exercis e o f thi s par t o f th e Appendix start s wit h a Smithia n model . W e the n chang e th e ke y assumption s t o thei r modern counterpart s on e at a time. This exercise show s how important each assumption is in determining whethe r the growth process that results is like modern sustained growth, or like th e Smithia n world o f eventua l decreasing return s an d the stationar y state . We begin, now , b y describing th e economic framewor k in which all of the models will be embedded. We then present th e neoclassical mode l first, sinc e its properties shoul d be familiar t o mos t readers . Ou r accoun t o f th e Rosto w an d Smit h model s follows .

Economic Framework of the Models The economy represente d b y the models is assumed to consist of three production sectors: • Primar y

Models o f Economic Growth 52

9

• Industr y « Service s This is a common disaggregation o f economic activit y in growth analysis. The economy i s assumed t o be closed , tha t is , ther e ar e n o exports o r imports . (Som e issue s o f interna tional relation s i n economic growt h wil l be explore d i n the thir d part of the Appendix.) We begi n b y definin g the following variables. I n each definition , the inde x i (an d j , where i t appears ) i s understood t o ru n fro m 1 to 3 . X(i)

Gross output of the ith sector

Y(i) Ne t outpu t of the it h secto r X(i,j) Outpu t of the ith sector use d a s intermediate inpu t to production i n the jth sector . a(i,j) X(i,j)/X(j) ; tha t is , amoun t of secto r i' s produc t use d a s input to secto r j , per uni t output of sector j . L(i) Labo r employed i n the ith sector. K(i) Capita l employe d i n the it h sector . N(i) Lan d employe d i n the ith sector. A(i) A n inde x o f the stat e o f technology i n the it h sector . Production relation s i n th e mode l ar e represente d b y th e followin g equations . Th e input-output coefficient s a(i,j) ar e taken as fixed parameters in any given time period, s o the relatio n betwee n gros s an d intermediat e outpu t can b e writte n as Net output i n each secto r i s simply equal t o gross output of that sector les s us e o f that sector's outpu t a s intermediate input .

The leve l o f gros s outpu t i s determined b y th e inpu t of factors o f production . Thi s i s represented a s where f i is the production function relating inputs of factors of production an d the level of technology t o outpu t in the ith sector . Together , relation s (AII.l ) to (AH.3 ) imply tha t levels o f ne t outpu t ar e determine d b y level s o f facto r inpu t an d technology . ( A non negativity constrain t mus t als o b e pu t o n th e Y(i) t o ensur e economicall y meaningfu l results.) Net outpu t can b e use d fo r eithe r consumptio n o r fo r capita l formatio n (investment) . C(i) i s defined as consumption of net output of sector i . W e assume that only the output of sector 2 (industry) can be used fo r capital formation , or investment, s o the level o f gros s investment can be written simply as /, withou t a sector of origin designation. The sector of destination o f investment , tha t is , th e secto r whos e capita l stoc k i s being buil t up, i s of interest becaus e sector-specifi c capita l stock s ar e argument s i n equatio n (All.3) . Th e following variable s are therefor e defined. C(i) Consumptio n of ne t outpu t o f secto r i , i = 1,3 . / Investmen t in capital stock, composed o f output of sector 2 .

530 Appendix I(j) Investmen t in capital stoc k used in production of sector j's output, j= 1,3 . They ar e related t o each othe r an d to other variable s i n the model throug h the following equations:

The representation o f accumulation of factors of production over time and the course of technical progress ar e generally specific to the individual models. All of the models shar e a basi c representatio n o f capita l formation , however . Fo r thi s dynami c relationshi p a subscript o n variable s t o represen t tim e i s introduced . Th e basi c capita l accumulatio n relation i s This say s tha t capita l stoc k availabl e fo r productio n o f goo d i i n yea r t equal s th e depreciated valu e of the capital stock in place in the previous year, plus gross additions to that stock in the previous year. The parameter 8 represents the depreciation rat e of capital. Equation (AII.8 ) implie s a one-year gestatio n perio d fo r capital . There ar e resource constraint s for labor and land as well, of course. Overal l availability of thes e resource s i s define d b y th e followin g variables. L labo r forc e N availabl e lan d The expression s tha t relate labo r us e an d lan d use t o facto r availability are simpl y

(The equalitie s in relation s (AII.9 ) and (AII.10 ) coul d of cours e be replace d by inequalities i n underemploymen t analyses. ) The relation o f prices an d factor rewards in the model i s now discussed. W e define the following variables . p(i) Pric e o f outpu t o f th e it h secto r q(i) Uni t valu e added o f th e it h secto r w Wag e pai d t o labo r n Ren t o f lan d r Renta l o f capital

Models o f Economic Growth 53

1

By omitting th e i subscript from th e factor returns, we are implicitly assuming that returns to factor s equilibrat e acros s productio n sectors . I n long-ru n analyse s o f th e sor t w e ar e doing, thi s i s reasonable. A simpl e accountin g relatio n amon g th e variable s o f th e mode l i s

This equatio n ca n b e simpl y interprete d a s th e definitio n o f uni t valu e added . Valu e added, i n turn, ca n be broke n dow n int o factor-relate d components . This equatio n ca n be simpl y interpreted a s the definitio n o f the gross retur n to capital. A relation tha t holds tru e when equation (AII.3), the production function , exhibit s constan t returns t o scal e i n L(i), K(i), an d N(i) i s This relatio n i s called th e unit cost function , an d it gives th e lowest unit value added tha t can b e attaine d give n th e facto r price s w , r , an d n . I t i s commonl y referre d t o a s th e "dual" functio n t o the production functio n (AII.3) . W e assume constan t returns to scal e in al l thre e factor s i n th e model s develope d i n thi s Appendix. 4 The following macroeconomic accountin g identities relate al l of the above variables. I n these identities , th e variabl e GN P represent s th e valu e of gros s nationa l product .

If w e no w defin e th e variabl e K (tota l capita l stock ) a s

equation (AII . 14 ) can b e rewritte n mor e simpl y a s

This is the familiar relation tha t the value of net output, or GNP, equals the value of factor inputs. Each o f the three model s we no w present is set into this overall economic framework . The genera l wa y tha t the model s ar e implemented , an d their solution framework, is firs t discussed now . I n an y short-ru n period, whic h w e tak e to be a year, the tota l suppl y of

532 Appendix factors o f productio n an d th e leve l o f technolog y i s fixed . Relation s (AII.l ) t o (AII.3) , (AII.9), (AIL 10), an d (All. 15) define a production possibility frontier ove r net outputs. A set of final deman d relation s mus t be added t o complete th e model. Th e specific form s of the final demand relations ar e different amon g the models, bu t they are all special case s of the followin g genera l equation : Here F(i) i s fina l deman d fo r output of th e i't h sector, p i s the vector containin g the thre e p(i), an d 6 i s som e vecto r o f parameters . F i (. . . ) i s assume d t o b e homogeneou s o f degree zero i n its arguments p, w , r , an d n; that is, i t is assumed no t to display "mone y illusion." Thi s fina l deman d relatio n i s really quit e general. Throug h equatio n (AII . 16), for example , i t include s function s i n whic h deman d depend s o n GNP . Fina l deman d relations i n whic h saving , an d thus investment , depend o n GNP , it s functiona l distribu tion, an d the return t o capital, an d i n which the remainder of incom e is used to purchas e consumption goods, are also subset s of the general relatio n (AIL 17). I n each of the thre e models presente d belo w w e explicitly set out the fina l deman d relations assume d fo r th e model. Equations (AII.l ) t o (AII.3) , (AII.9 ) t o (AII . 15 ) an d (AII . 17) , togethe r wit h th e "supply-equals-demand" relatio n determine th e value s o f al l quantitie s and price s i n an y give n year . (Price s ar e onl y determined u p to a constant of proportionality.) This general equilibrium system is suffi ciently regula r tha t n o existenc e o r multipl e equilibriu m difficultie s hav e bee n encountered. So far we have discussed ho w th e levels of output in the models are determined i n any given year , whe n facto r supplie s an d th e leve l o f technolog y ar e fixed . W e mus t nex t consider ho w factor supplies and the level of technology evolve over time. These relations are quite different amon g th e three models, s o we proceed no w to our discussion o f eac h model.

A. The Neoclassical Model Assumptions. Th e first model we consider is the neoclassical mode l of economic growth. This i s th e mos t commo n framewor k in which growth analysis i s done b y contemporar y mainstream economists. Indeed , ther e are so many exercises done in this tradition that one can hardl y writ e o f th e neoclassica l model . W e therefor e incorporat e a specifi c se t o f assumptions int o th e framewor k develope d i n th e precedin g subsectio n t o produc e a growth mode l i n the neoclassical tradition . W e then perform some numerica l parametri c simulations of the model t o illustrate its basic properties. A s just discussed, ther e ar e two major area s wher e furthe r assumption s must be adde d t o th e basic economic framewor k developed abov e i n orde r t o produc e a specifi c model . Thes e ar e th e fina l deman d relations an d th e evolutio n o f facto r supplie s an d technology . In ou r neoclassica l model , th e nomina l valu e o f savin g is assume d to b e a constant proportion of nominal GNP, and the difference betwee n nominal GNP and nominal saving is assume d t o b e spen t for consumptio n goods. Consumptio n purchase s are assume d to maximize som e underlyin g utilit y function , subjec t t o prices an d tota l expenditure . Let -

Models of Economic Growth

533

ting 0 b e the saving rate, and V the value of consumption expenditures, the final deman d relations ar e

Consumption deman d i s the n determine d throug h solvin g the proble m

where U i s som e utilit y function . Thi s deman d schem e i s consisten t wit h equation s (AII. 17). Tw o differen t example s o f utility functions , an d thus demand patterns, wil l b e given late r i n thi s subsection . There are thre e basi c assumption s concernin g facto r growt h and technology develop ment tha t w e add to the basic economic framewor k t o produce a neoclassical model. • Th e tota l labo r force , L , grow s a t a constant percentag e rat e ever y year . • Th e leve l o f technolog y i n eac h sector , A(i), grow s a t a constan t percentag e rat e every year . • Lan d growt h occur s a t a rate tha t leave s th e rea l leve l o f rent s unchanged . Exposition. W e no w perfor m som e numerica l exercises wit h thi s neoclassica l model . In order t o do this, we must construct a hypothetical economy, whos e course over time we can trac k as we appl y our growt h assumption s to it. We hav e constructe d suc h an economy, an d Table AII.1 shows its structure in the first time period under consideration . The growt h of th e econom y fro m thi s point forward wil l be the subjec t o f ou r analysis. 5 Table AII. l i s cas t i n th e familia r input-outpu t tablea u format . Th e firs t thre e row s show th e tota l use s o f outpu t o f eac h o f th e thre e productio n sectors . Th e firs t thre e columns sho w intermediat e use s o f output , tha t is , use s o f outpu t fo r inpu t int o othe r production sectors . (In the notation used above, the (i, j)th elemen t of the tableau i s X(i,j). ) The nex t tw o column s sho w use s o f the outpu t for consumption an d investment, respec tively. Th e sixt h colum n show s tota l fina l demand , an d i s the su m of columns 4 an d 5 . Finally, th e seventh colum n shows total use of output of a sector, an d corresponds, i n the ith row, t o th e variabl e X(i ) define d above . Table AII.l. Structur e of Economy i n Period On e Deliveries t o Sector

From

sector 1 1 0. 2 15. 3 0. L 12. K 19. N 20. X 50.

2 0 20. 0 0. 0 8. 7 14. 6 114. 0 0. 0 57.

3

C

/

Y

Tota

l

0 0. 0 12. 6 0. 8 22. 5 115. 0 0. 1 48.

0 30. 1 10. 0 40. 5 50. 9 250. 0 20. 6

0 0. 0 20. 0 0.

0 30. 0 30. 0 40.

0 50. 0 57. 0 48.

0 1 6 0 0 0

534 Appendix The column s o f Tabl e AI L 1 show th e input s that g o int o productio n o f th e outpu t of each of the sectors. Eac h of the first thre e columns shows the input of intermediate goods , and the n o f factors of production. Th e last row show s the total value of output of each o f the sectors , whic h is by definitio n equal to the corresponding entr y in the las t colum n of Table AII.l . The price s o f outpu t o f al l sectors, an d th e wag e o f labo r an d th e ren t o f land , ar e defined t o be equal to 1 in the first period. The rental price of capital is defined to be equal to 0.12 . Tota l GN P i s thu s 100.0 . Th e shar e o f labo r i s 0.5 ; o f capital , 0.3 ; an d o f land, 0.2 . The firs t scenari o examine d using the neoclassica l versio n o f the mode l i s a balancedgrowth expansio n of the economy. A balanced-growth path is defined as one i n which all gross an d net levels of output, and all intermediate uses of output, grow at a constant rate (say, g). It follows from thi s that GNP grows at rate g. The level of the capital stock and of land use also gro w a t rate g. Al l prices o f output, and the return to capital and the rent of land, sta y constant. Labo r inpu t grows a t some lowe r rate, say (. Th e difference betwee n g an d l , sa y T, equal to the growth of GNP per worker , i s also equal to the growth o f the wage rate. Sinc e th e growth o f the capital stoc k and the growth of GNP are the same, th e capital-output ratio , sa y k, mus t be a constant. A s stated previously , i n the neoclassica l model considere d her e the ratio of saving to GNP, a , i s constant. A final relatio n implie d by balance d growt h i s

The following numerical assumptions have been introduced into the model to generate a balanced-growth path . • Th e saving rate (0 ) i s 0.20 . • Th e annual depreciatio n rat e (8 ) is 0.03 (i.e. , 3 % per year) . • Th e annua l growth o f the labo r forc e (€ ) is 0.02 an d o f lan d i s 0.05 . • Th e annual rate of growth of technology in each sector i s 0.03. Thi s is the paramete r T, an d i s defined in the model a s the annual percentage change in A(i), equa l fo r all sectors i . • Technica l progres s i s Harro d neutral ; i.e., th e production functio n (AII.3 ) ca n be written a s

We choose Cobb-Dougla s productions in this model, wit h coefficients given by the factor share s o f Tabl e AII.1 . • Input-outpu t coefficient s [i.e. , th e a(i,j)] sta y constan t a t th e level s implie d i n Table AII.l . • Th e proportions o f each o f the three sectors of output in consumption sta y constant at th e level s implie d i n Tabl e AII. l a t al l level s o f income . (Thes e implie d con sumption proportions ar e 0.375, 0.125, an d 0.50 respectively. ) This is equivalent to choosing an y utilit y functio n (AII.21 ) whic h i s homotheti c (i.e. , implie s unitar y income elasticities ) since relativ e prices d o no t change. These assumption s impl y tha t all quantitie s i n th e econom y (i n particular , GNP) wil l grow a t a rate of 5 % per year , except labor , whic h b y assumptio n is growing at 2%. Al l prices sta y constant , excep t th e wag e rate, whic h grow s a t 3 % pe r year .

Models o f Economic Growth 53

5

This balanced-growt h pat h i s illustrate d i n Figur e AII.l . Figur e AII. l i s th e basi c format wit h which the results of this Appendix will be illustrated. Th e top portion o f the figure show s th e growt h path of three ke y quantitie s of the economy: GNP , labo r force , and capital stock . Th e bottom portio n show s the path of three key prices i n the economy : the rea l wage , th e retur n t o capital, an d the rent o f land. Th e figur e cover s 10 0 years of growth, th e basi c tim e perio d ove r whic h results wil l be presented . The results o f a balanced-growth path ar e strikingly dissimilar to historical experienc e with economic developmen t i n that in balanced growt h th e composition o f net output by sector of th e econom y remain s constant . Thi s resul t violate s th e well-establishe d la w of Engel tha t the proportion o f foodstuffs in final consumptio n fall s a s GNP rises. A modification wil l therefor e b e mad e t o th e balanced-growt h neoclassica l mode l s o tha t th e relative proportion s o f th e thre e sector s i n ne t outpu t wil l reflec t th e actua l historica l experience o f development . Thi s modificatio n i s a ne w utilit y functio n (AII.21 ) ove r consumption o f outpu t o f the thre e sectors . I n the balanced-growth cas e th e utilit y func tion was such that the proportions o f the sectors i n consumption were constant at any leve l of total consumption. I n the modified version of the neoclassical model, thes e proportion s are assumed to vary with total consumption as shown in Figure AII.2. I n order t o generat e this result , w e choose th e utilit y functio n

This i s a "movin g fixe d proportions" utilit y functio n i n which consumption ratio s var y with th e leve l o f rea l incom e bu t not , rea l incom e hel d constant , wit h relative prices. 6 Thus, ther e ar e nonunit y income elasticities , bu t n o compensate d pric e effects . If only this change is made to the model, the overall macroeconomi c result s are not too different fro m the balanced-growth case ; rea l GNP i n year 10 0 is about 95 % of balance d growth GNP . Thi s amount s t o a change i n the averag e growt h rate o f abou t one-hal f o f one-tenth of a percent. However , th e distribution of this GNP among factors of production is dramaticall y different : th e ren t o f lan d fall s sharply , t o abou t 25 % o f th e balance d growth level. (Thi s leve l i s reached i n about yea r 50 , an d then levels off. ) This implie s that the 5% growth rate of land is too high for a constant level of rent on land to result. The reason fo r this i s illustrated i n the structur e of the economy hypothesize d i n Table AII. 1. Land is only directly use d in the production of the output of sector 1 , and the Engel curves of Figure AI L 2 show tha t the proportion o f secto r 1 in the economy fall s with economi c growth. (Since there i s intermediate inpu t in the structure of the economy unde r consideration, this does no t prove that demand for land will grow less quickly than GNP as a whole. In the input-output structure of the economy hypothesize d i n Table AI L 1, however, thi s is th e case. ) The econom y jus t describe d violate s ou r neoclassica l premis e tha t th e ren t o f lan d remains constant as development occurs, an d therefore a slightly different econom y wa s constructed. I n it , th e onl y chang e mad e fro m th e econom y just described wa s tha t the supply of land wa s adjuste d until the equilibrium rent turned out to be unity . (Thi s is , o f

536 Appendix

Figure AH.1 . Growt h Pat h o f th e Economy . Balance d growth neoclassica l model .

Figure AII.2 . Share s of the Three Sector s i n Consumption. NOTE: s i = shar e of ith sector in consumption.

Models o f Economic Growth 53

7

Table AII.2 . Structur e o f Econom y i n Perio d 10 0 From sector 1

2

3 L K N X

Deliveries to Secto r 1

2

3

C

0.0 583.3 0.0 42.0 609.5 751.7 1,944.4

1,944.4 0.0 833.3 130.1 9,445.0 0.0 5,555.5

0.0 1,013.0 0.0 164.3 7,950.9 0.0 4,052.1

0.0 2,529.0 3,218.8

/Y 0.0 0. 1,430.1 3,959. 0.0 3,218.

Tota 0 1,944. 2 5,555. 8 4,052.

l 4 5 1 336.4 18,008.8 751.7

course, equivalen t t o makin g the suppl y o f lan d infinitel y elasti c a t a rea l ren t leve l o f unity.) Th e macroeconomi c result s o f thi s econom y ar e show n i n Figur e AII.3 . (Th e results of this model are overlaid on the balanced growth results of Figure AII.1.) They do not diffe r greatl y fro m thos e o f th e econom y o f Figur e AI L 1 in thei r macroeconomi c characteristics. How much of a change in land supply was needed to stabilize the rent of land? Land use in the balanced growt h case grows at 5% per year, of course. Lan d use in the Figure AII.3 case grow s more slowly, at a 4% average annual rate. I t also grows at a nonconstant rate, averaging 3.6% in the firs t 5 0 years, (a s secto r 1 output is diminishing in importanc e i n the economy) , an d 4.7% in the secon d 5 0 (a s sector proportion s stabilize) . An interestin g (an d well-known) poin t abou t th e feasibilit y o f balance d growt h i s illustrated i n these results . I t is not i n general possible t o have all three of: Engel curve s with nonunitar y income elasticities , constan t reward s to factor s of production, and constant growt h rate s o f factor s o f production . Table AII. 2 shows the structure of the neoclassical economy of Figure AII.3 in the year 100. I t should be contrasted wit h Table AII. 1, which shows the structure of the econom y in the first year. I n the 100-yea r history of this economy (illustrated in Figure AII.3), GN P and th e capita l stoc k gro w a t a 4.8% average annua l rate, an d the rea l wag e grow s a t a 2.6% averag e annua l rate. Th e retur n to capita l enjoy s a sligh t increase , fro m 12 % to 14%. Thi s i s because th e sector s tha t grow relatively rapidly are somewhat more capita l intensive tha n secto r 1. 7 The econom y o f Figur e AII. 3 i s th e baselin e fo r excursion s usin g th e neoclassica l model. Fo r convenience , i t is called th e "bas e neoclassical case. " Thes e result s are the background agains t whic h the result s o f simulation s using different paramete r assump tions ar e contrasted . Thes e simulation s are designe d t o illustrat e important properties o f the neoclassical model. 8 Thes e properties are well known; the results are presented here to set th e stag e fo r result s of alternat e modelin g approache s whic h are given later . The firs t se t o f simulation s that is presented illustrate s the effec t o f a change i n labo r supply. I n the base neoclassical case , th e labor forc e grows at a 2% average annua l rate. Figure AII. 4 show s th e result s o f a 1 % growt h rate . (Th e results fro m thi s cas e ar e overlaid o n the base neoclassica l cas e result s fro m Figur e AII.3.) This change leads t o a decrease in the GNP growth rate from 4.8% to 3.9%, and a decrease in the capital growth rate fro m 4.8 % to 4.1%. An increas e in the capital-output rati o in year 10 0 from 2. 5 t o 3.0 result s from this . Th e retur n on lan d fall s steadil y to abou t a quarter of its base-cas e value; th e retur n t o capita l by yea r 10 0 falls fro m 0.1 4 to 0.13. The wag e rate grows a t 2.9% pe r yea r i n this case compare d t o 2.6% in the bas e case .

Appendix

538

Figure All.3. Growt h Pat h o f the Economy . Bas e Neoclassica l Case .

The onl y surprisin g resul t her e i s th e relativel y shar p impac t o n th e retur n t o lan d relative t o th e impac t o n wages an d capital returns. Sinc e th e specifi c functional form of the production function s (AII.3) used in this analysis i s Cobb-Douglas, one might expec t land's shar e i n national outpu t t o remain th e same . Sinc e lan d growth i s unchanged, and GNP i n year 10 0 is about hal f in this case what it was in the base cas e ( a simple resul t of compounding 3.9 % instea d o f 4.8% ove r 10 0 years), this would account fo r a fall of about one-half i n land's return . Instead , th e share of land in GNP falls from about 10 % to about 5%, consisten t wit h the fall o f land's return by three-quarters. Thi s occurs becaus e land is only use d i n production o f output of sector 1 , and the relative pric e o f that sector fall s by about one-hal f betwee n th e bas e simulatio n an d thi s simulation . Th e othe r factor s o f production (capital an d labor) ar e used in all sectors, s o changes in sectoral terms of trad e tend no t to have s o great a n impact on thei r return. Land is in essence doubl y inelastic in supply: i t i s literall y fixed i n tota l supply , an d i t cannot switc h into production o f othe r sectors whe n it s rewar d fall s i n secto r 1 . Sinc e ther e i s n o pric e effec t i n th e utilit y function (AII.24 ) that we hav e chosen, whe n the relative price of secto r 1' s outpu t falls,

Models of Economic Growth

539

there i s no offsetting increase i n consumption. A utility function wit h more substitutability would o f cours e hav e moderate d th e fal l i n lan d rent . We als o carrie d ou t a cas e i n whic h the growt h rat e o f the labo r forc e i s assume d t o increase t o 3% per year. Th e results, a s one would expect, ar e roughly symmetric with the previous case , although somewha t less i n magnitude. Tabl e AII. 3 summarizes the results of th e tw o cases . The nex t exercis e don e wit h th e neoclassica l mode l wa s a variatio n i n th e assume d saving rate. Figur e AII.5 show s the results of an assumed decrease in the saving rate from 20% o f GN P t o 10% . A s on e woul d expect , th e rat e o f growt h o f the capita l stock fall s dramatically i n the earl y years , averagin g less tha n 2% per yea r in the firs t 3 0 years. B y the secon d hal f o f the century , however, th e capita l stock i s again growin g a t nearly 5 % per year . Thi s i s a well-know n resul t o f neoclassica l growt h theory : i n th e lon g run , growth rate s ar e independen t o f savin g rates. I n th e hypothetica l econom y considere d here, th e "lon g run'' fo r a change in saving rates of this magnitude is on the order o f half a century . GN P growt h follow s a simila r pattern ; growt h i s belo w 4 % fo r th e firs t 2 5

Figure AII.4 . Growt h Path of the Economy . One Percen t Labor Force Growth .

540 Appendix Table AII. 3. Result s of Labor Forc e Case s Growth* of

Growth o f Leve labor forc e GN

PK

w

n

1.0 3. 2.0 (bas e case ) 4. 3.0 5.

9 4. 8 4. 5 5.

1 2. 8 2. 3 2.

9 -1. 6 0. 2 1.

K/GN

4 3. 0 2. 2 2.

l of P 0 5 1

*A11 growth figure s i n percent .

years, bu t recovers t o a near 5% level by the end of the period. Th e return to capital rise s dramatically, t o 0.30, i n the firs t 5 0 years, an d stay s at that level throughou t the period . The real retur n to land is depressed t o about a quarter of its base-case level , fo r the sam e reasons tha t depresse d i t i n th e lowe r labor-growt h case . What doe s i t pay this hypothetical economy t o lower it s saving rate? W e can compar e

Figure AII.5 . Growt h Path of th e Economy . Te n Percen t Savin g Rate.

Models o f Economic Growth 54

1

the pat h o f consumptio n i n th e bas e cas e an d i n th e 10 % saving case . Consumptio n is (naturally) initiall y higher i n th e lowe r savin g case , bu t quickl y fall s (b y yea r 15 ) to a lower level than in the base case. Between years 50 and 100 consumption is between 75% and 80 % o f it s base-cas e level s i n th e lowe r savin g case , wherea s i n yea r 1 it i s (b y definition) 12.5 % higher . Thes e result s ar e of interest when we compare the m to anothe r investment option , th e R & D option, i n the Rosto w model . We also considered th e results of an increase in the saving rate, to 30%. Onc e again, the results ar e symmetric wit h the preceding case , althoug h not so large in magnitude. Tabl e AII.4 summarize s th e result s o f th e tw o savin g cases. The fina l neoclassica l cas e examine d i s a "Ricardian " case of no growth in the supply of land . Figur e AII.6 shows the results. Th e initial impacts on GNP and capital stoc k ar e relatively modest, knockin g about half a point off of growth rates in the first 2 5 years. B y the end of the period, the impacts ar e considerably mor e severe ; GN P and capital growt h rates ar e reduced t o about 2.5 % per year. Thu s the GNP and K lines of Figure AII. 6 show the characteristic concav e for m of decreasing growt h rates. Wag e rat e growth is reduce d to less than 1% over the entire period, an d the return to capital is lowered to 0.05. Rent s of course grow dramatically , and the share o f land in GNP in year 100 , whic h is 10 % in the base case , grow s t o 45% . Onc e again , thi s occur s despit e th e Cobb-Dougla s structur e assumed throughou t the economy, and is a result of the fact that land is used in production of th e outpu t o f onl y on e sector , an d tha t deman d fo r tha t sector' s outpu t i s assume d insensitive t o relativ e pric e changes . Indeed , th e relativ e pric e o f thi s sector , secto r 1 , increases b y a facto r o f abou t 3 ove r th e bas e case . Result s o f thi s Ricardia n cas e ar e summarized i n Tabl e AII. 5.

B. The Rostow Model Special Characteristics. Thi s subsection presents a model incorporating major aspects of Rostow's vie w o f th e proces s o f moder n economi c growth . A s alread y noted , i t share s with th e neoclassica l mode l certai n broa d assumption s about th e availabilit y of natura l resources, the flow of technology, and the behavior of population growth when real wages change; bu t the process of growth envisaged is quite different. Continuin g with ou r plan described earlier , w e embody th e Rostow mode l i n the same economi c framewor k as the neoclassical mode l s o that comparisons amon g th e approache s ar e facilitated . W e introduce the differences between the Rostow approach an d the neoclassical approach one at a time a s w e proceed throug h this subsection , an d discuss the implication s of each fo r the interpretation o f moder n economi c growth .

Table AII.4 . Result s of Savin g Rate Cases Level o f Leve saving rat e GN

0.10 4. 0.20 (bas e case) 4. 0.30 5. *A11 growt h figure s i n percent .

Growth* of PK

w

n

3 3. 8 4. 0 5.

5 2. 8 2. 5 2.

2 -1. 6 0. 8 0.

K/GN

2 1. 0 2. 6 3.

l of P 3 5 6

Appendix

542

Figure AII.6 . Growt h Pat h o f th e Economy . Zer o Lan d Growth .

The primar y element s tha t characteriz e th e Rosto w mode l ar e th e following: • Investmen t spending , o r capital formation, depend s o n the level an d rate o f chang e of profit s rathe r tha n o n th e leve l o f GNP . Thi s i s du e t o th e phenomeno n o f reinvestment o f profits . (Thi s relatio n wil l b e see n t o hav e importan t interaction s with th e leadin g secto r structur e of th e econom y whos e descriptio n follows. ) Table AII.5. Result s of No-Land-Growt h Cas e Growth* of Growth o f lan d GN

PK

wn

4.0 (bas e case ) 4. 0.0 3.

8 4. 1 3.

8 2. 3 0.

*All growt h figure s i n percent .

K/GNP 6 0. 8 4.

0 2. 1 2.

Level o f 5 7

Models o f Economic Growth 54

3

• Th e generatio n o f technica l progres s i s essentiall y a n economi c activit y that use s resources rathe r tha n an autonomous proces s actin g exogenously o n the economy . Devotion of resources to the production o f technical advance can be done only at the expense o f a n opportunit y los s o f othe r kind s o f output , an d i s thu s a n activit y analogous t o investment . Th e productivit y o f resource s devote d t o technica l ad vance depends upo n many factors, including the backlog of available technology in the worl d tha t ca n b e adopted , an d th e capacit y o f th e econom y t o absor b ne w technology. Thi s absorptive capacity is in turn a function o f several factors, includ ing previou s investment s i n education , genera l attitude s i n th e manageria l clas s toward innovatio n an d risk, an d the degree t o which public policy an d institutions encourage innovatio n and risk. • Th e overall industrial sector ca n be usefully disaggregate d int o several components. The specifi c sector s associate d wit h each o f th e grea t industria l (or technological ) revolutions ar e include d in a separate component . Thes e sector s includ e the tradi tional leading sector s o f the several industria l revolutions of the past two centuries, as wel l a s th e associate d supportin g sectors , includin g forward , backward , an d lateral linkages . Thes e components ar e characterized b y rate s o f developmen t tha t vary greatly ove r time, an d it is the sum of their individual expansion histories tha t makes u p muc h of th e histor y o f th e advanc e o f th e economy . • Technologica l chang e take s plac e i n both small , incrementa l step s i n virtually all sectors, bu t also i n large, discontinuou s steps, wit h majo r structura l consequences . Our representation o f these majo r technological jumps is associated wit h the industrial disaggregatio n describe d i n th e preceding point. • Th e growt h o f the labo r forc e depend s o n the stag e of the economy. Beginnin g at low level s o f per capit a income , th e rate o f growth of the labo r forc e decrease s a s the real wag e increases. A t some higher level of the real wage the rate of growth of labor stabilizes . Thi s phenomeno n i s ofte n referre d t o a s th e "demographi c transition." • Ne w lan d (agai n interprete d her e t o represen t al l natura l resources ) i s provide d neither autonomously no r smoothly to the economy. Resources mus t be devoted t o the developmen t o f ne w lan d supplies , an d ne w lan d i s ofte n introduce d int o th e world economy i n irregular surges; i.e., i n large units rendered profitable by investment with longer periods of gestation than investment yielding incremental changes in th e capita l stock . Before turnin g to the discussio n o f each o f these aspect s o f the model , w e provid e a n overview o f th e structur e o f th e Rosto w mode l i n the contex t o f th e commo n economi c framework tha t ha s been developed . Th e assumption s tha t mus t be adde d t o that frame work to produce a specific model concern final demand patterns and factor and technolog y accumulation. W e briefl y revie w thos e assumption s mad e fo r th e Rosto w mode l an d contrast them with the corresponding assumption s made for the neoclassical model . I n the Rostow model , w e assum e tha t savin g an d investmen t ar e a functio n o f th e leve l an d growth rat e o f profits , rathe r tha n GN P a s i n th e neoclassica l model . Consumptio n patterns ar e assumed to be th e sam e a s in the base neoclassica l model , incorporatin g the Engel curve s show n i n Figur e AII.2 . Increase s i n technolog y an d i n lan d supplie s ar e assumed to depend on resources devoted to their growth, as well as on exogenous factors, whereas i n ou r neoclassica l framewor k suc h increas e i s totall y exogenous. Labor-forc e growth is constant in our neoclassical framework, wherea s its pace varies with the level of

544

Appendix

Figure AII.7 . Proportio n o f Profi t Investe d a s a Function o f Rat e o f Growt h o f Profits .

economic developmen t i n the Rosto w framework , firs t (i.e. , a t lo w level s o f pe r capit a income) fallin g wit h income , an d the n stabilizing . W e no w tur n t o a discussio n o f th e individual feature s o f th e Rosto w model . Investment a s a Function o f Profit. Investment , or capital formation, is assumed to be a function o f th e leve l an d rat e o f chang e o f profit s i n th e Rosto w mode l rathe r tha n a function o f the level of overall GNP . Th e rationale for this is that the plowback o f profits by busines s firm s into plant and equipment is the major source o f investment funds. Th e amount of investment i s assumed t o depend positivel y o n the rate of growth of profits a s well a s on their level. Ther e ar e two rationales fo r thi s assumption . First , a high rat e of growth o f profits will be a signal to business of increasing future profi t opportunities, an d thus an inducement to invest more. I n addition, if businesses ar e accustomed t o distributing a relativel y fixe d leve l o f profits , i n period s o f hig h growt h highe r proportion s o f profits ca n be retained. W e represent these consideration s b y making investment propor tional to the level of profits, where the proportion depend s o n the rate of growth of profits. The formal representation o f this assumption is a new saving function, replacin g relation s (AII. 19) and (AII.20) . Th e ne w relation s ar e

The proportion o f profit invested , s , i s assumed t o be a function o f the rate o f growth of profits a s show n i n Figur e AII.7 . A t a rate o f growt h o f 5% , th e averag e rat e o f profi t growth i n th e econom y w e hav e constructed , investmen t is 67 % o f profits . Give n tha t profit i s 30% of income in this economy, thi s corresponds t o 20% of GNP invested, an d is thus analogou s t o our base-case neoclassica l assumption . Making investmen t a functio n o f th e rat e o f profi t growt h a s wel l a s o f th e leve l o f profits ha s a n importan t implicatio n fo r th e analysi s o f growth ; namely , a boos t t o th e economy, say , through a major technological breakthrough, wil l in itself rais e the rate of saving an d investmen t for som e perio d o f time. The resul t of the simple substitution of the assumption "saving depends on profits" a s shown i n Figur e AII.7 fo r the assumptio n "savin g i s 20 % o f GNP " i s shown i n Figure AII.8. (Th e stat e o f th e econom y i s assume d t o b e th e sam e i n th e firs t yea r a s i n th e neoclassical case , an d is , therefore , represente d agai n i n Tabl e AII.l. ) Th e bas e neo -

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545

classical cas e i s show n i n soli d lines , an d th e ne w ( / depend s o n profit) cas e show n i n dashed lines . Th e primar y differenc e between th e case s i s the stabilizatio n o f the profi t rate a t the 0.12 leve l (the year 1 level) i n this case, compare d t o the increase of the profi t rate t o th e 0.1 4 rang e i n th e neoclassica l case . Th e explanatio n o f thi s differenc e i s straightforward. Whe n investmen t is a functio n o f profits, a n increas e i n th e profi t rat e will ten d t o extinguis h itself . I f th e profi t rat e rises , profit s rise ; an d a s profit s rise , investment (and investment as a share of GNP) rises. Thus, an increase in the profit rate will lead to an acceleration o f the rate of growth of the capital stock , an d this pushes the profit rate bac k down . Associated wit h thi s increas e i n th e capita l stoc k i s a modestl y highe r rat e o f GN P growth, an d a s a resul t a somewha t highe r leve l o f ren t o n lan d compare d wit h th e neoclassical model. Thes e effects ar e also illustrated in Figure AII.8 . In general, change s i n exogenous variable s sho w a similar impact on growth trends in this case a s they do in the neoclassical model . Tabl e AII.6 shows the effects o f changes in exogenous variable s on the growth rates of key variables in both the case where saving is a

Figure AII..8 . Growt h Pat h o f th e Economy . Investmen t i s a Functio n o f Profits .

546

Appendix Table All.6. Result s o f Changes i n Exogenous Condition s o n Growt h Investment a function o f Case GN

P Profit

Labor grow s 1% : Change i n growth of GNP

s

-0.9 -0.7 +0.3 -1.4

-1.0 -0.8 +0.2 -1.5

n

+0.7 +0.5 -0.4 + 1.2

+ 0.7 + 0.6 -0.5 + 1.2

w n

-0.5 -1.3 -0.4 -1.2

-0.3 -1.0 -0.4 -1.0

+ 0.2 +0.7 +0.2 +0.6

+0.1 +0.6 +0.1 + 0.5

K

w

n

Labor grows 3%: Change i n growt h of GNP

K

w

Saving fall s 50% : Change i n growt h o f GNP K Saving increase s 50% : Change i n growt h of

GNP K

w

n

function o f GNP an d where it is a function o f profits. (Whe n saving is a function o f profit, "saving falls 50%" mean s the graph i n Figure All. 7 shift s downwar d by 0.33; "savin g increases 50% " mean s th e grap h shift s upwar d by 0.33. ) Ther e i s i n fac t a modest bu t discernible patter n t o th e relatio n o f th e change s acros s th e tw o models . I n th e savin g cases, th e profit-related-saving mode l show s somewha t les s chang e i n the variable s be cause (say ) a decrease in the saving rate causes a n increase i n the rate of profit which, by somewhat increasin g th e ratio of investment to GNP, partially offsets the saving rate fall . In the labor-force growt h cases, o n the other hand, the profit-related-saving model show s somewhat mor e change . Thi s i s becaus e (say , i n th e labo r growt h increas e case ) th e increased GN P growt h lead s t o higher profit growth rates, thu s causing a higher propor tion o f profit s t o b e saved , thu s reinforcing the impac t o n growth . Resource Cost of Technical Advance. A second new assumption in the Rostow mode l is tha t technica l advanc e i s no t autonomou s (exogenous) , bu t i s th e resul t o f economi c activity devote d t o it s production . I n thi s model, i t i s assume d tha t a certain portio n o f society's resource s mus t be devote d t o th e productio n o f technica l advance i f an y i s t o occur. Th e activities tha t produce technica l progres s will be loosely referre d t o as the " R & D " sector , bu t the y ar e mean t t o includ e the whol e spectru m o f activitie s tha t ar e necessary bot h (1 ) fo r ne w technolog y to b e developed , an d (2 ) fo r i t t o b e efficientl y incorporated into the general production processes o f the economy. Thus, we distinguish two particula r type s o f activities : first, th e productio n o f invention s themselves ; an d second, th e buildup of absorptiv e capacity and other factors necessary fo r the incorpora-

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tion o f invention s int o the econom y a s efficien t innovations . The secon d typ e i n reality makes the bulk of its contribution with a time lag, but for simplicity all inputs to the R & D sector in this analysis are assumed to have an instantaneous effect o n technical progress. An obvious example of use of inputs to improve absorptive capacity with a lag would be education expenditures . Another factor is assumed t o affect th e rate of technical progress in this model. This is the size of the backlog of existing, bu t not currently utilized, technologies that exist in the world. In any sector, th e country that is currently the most advanced in the world will have no backlog t o draw on; whereas a relatively backward country will have a relatively larg e backlog t o draw on. [Th e size of the backlog fo r any given country, for any given sector i, might b e define d a s th e differenc e betwee n th e A(i) tha t exist s i n th e world' s mos t advanced country , an d th e A(i) tha t exists i n th e countr y in question . Thi s formulation makes clea r tha t n o on e country is necessarily th e worl d leader i n al l sectors. ] Since resources mus t be devoted to the production and absorption of new technology, a fourth secto r mus t be adde d no w to th e Rostow model, namely , the R & D sector . I t is assumed that the annual percentage change in the technological level of the country [i.e., in the A(i)] is related t o th e percentag e of the total of the factors of production labor and capital tha t ar e employe d i n th e R & D sector . I n particular , fo r th e bas e case , i t i s assumed that if 5% of the country's labor and capital are employed in the R & D sector, a technical progress rat e of 3.0% per year occurs. 9 (Thi s is the exogenous rate of technical progress i n the base neoclassical case.) Tha t is, the Rostow model allows the same rate of technical progres s a s the neoclassica l model , bu t a t a price that 5% of K an d L must be employed i n producin g tha t progress. The questio n now arise s a s to how the leve l o f technical progress would change if the level o f resource s devote d t o i t changed. I t i s assumed her e that the output of technical change [defined as the annual growth of the A(i)] i s related to the inputs of resources for its production through a constant elasticity equation. Thi s assumptio n i s primarily mad e for convenience, sinc e elasticitie s hav e clea r intuitiv e interpretations . Figur e AII.9 show s such a function fo r elasticities o f 0.1 an d 0.2. Large r elasticities see m to make technical progress to o cheap .

Figure AII..9 . Relatio n of Technical Chang e t o Resource Inputs.

548 Appendix

Any technica l progres s productio n functio n o f th e sort show n i n Figure AII. 9 depend s also on the available backlog o f technologies. Thi s backlo g i s held constant (an d thus the function i n Figure AII.9 i s assumed stable) in the one country analysis to be carried ou t in this section. I n the third part of this Appendix that deals wit h relations amon g nations, the backlog issu e i s considere d further . One ca n identif y othe r factor s tha t migh t shif t th e technolog y productio n function , which represent s th e efficienc y wit h whic h resources devote d t o technolog y productio n are utilized. I n particular, one aspect of the "absorptiv e capacity" of a nation might be its ability t o translat e capita l an d labo r devote d t o technica l advanc e int o actua l effectiv e technical improvements . B y "effectiv e technica l improvements " w e mea n literall y changes i n th e A(i), th e technica l progres s variable s i n th e economy' s productio n func tions. Factor s influencin g this abilit y might include the effectiveness o f mechanism s that communicate new scientific knowledge t o economic managers , and the factors that affec t the willingness of economic manager s to adopt new techniques. Anecdotal evidence abou t the Sovie t Union , fo r example , indicate s tha t incentive s fo r adoptio n o f ne w technique s are lo w i n that centrall y controlle d economy , an d w e might interpret thi s a s a relativel y low technology production functio n o f the type shown i n Figure AII.9. That is , fo r any given leve l o f resource s use d i n th e R & D sector , a relativel y lo w leve l o f technica l improvement i n th e econom y wil l result du e to th e poor absorptiv e capacity . (Thi s i s of course a different sens e of the term "absorptiv e capacity" than was used when consider ing resource input s into activities such as education that lead t o more technica l progress i n later years. ) An interestin g issu e of GNP accountin g arise s whe n the R & D sector is included in a formal model. I s the production of technical progress considered a final or an intermediat e production activity ? Tha t is , i f resource s ar e transferre d ou t o f sector s 1 through 3 , an d redirected t o th e R & D sector , doe s GN P g o down ? I t i s assumed her e tha t R & D i s a final good , and , thus , tha t the answer t o the immediately precedin g questio n i s no. Thi s decision i s base d o n th e similarit y o f usin g resource s i n th e R & D secto r t o produc e technology t o using resources i n sector 2 to produce capita l stock. Bot h might be consid ered investment activities ; they use resources tha t could be producing consumptio n good s to produce somethin g tha t will increase productiv e capacit y i n the future. (I n current U.S . GNP accounting , privatel y finance d R & D i s not considere d a fina l good. ) Given thi s accountin g assumption , a hypothetica l economy , wit h a give n leve l o f resources i n any given year, wil l have the same GN P in that year regardless o f how much of its resources are devoted t o R & D. (Jus t as an economy's GN P in any given year doe s not change as it transfers resources fro m consumption to investment.) The implications for future years ' GN P ar e substantial , of course . These point s ar e illustrate d wit h a ne w hypothetica l economy . I t i s base d o n th e economy jus t discussed (Figur e AII.8) , bu t a n R & D sector i s added. I t i s first assume d that thi s econom y devote s 5 % o f it s capita l an d labo r t o th e R & D secto r ever y year . Given th e technical progres s production functio n o f Figure AII. 9, th e economy wil l grow just a s did the economy o f Figure AII.8. 10 That is, give n that 5% of capital and labor ar e devoted t o R & D, an d given th e technical progres s productio n functio n o f Figure AII.9 , technology wil l advanc e 3.0% pe r year. The growth of technology and of GNP will be the same as in the preceding case of autonomous technical progress. Th e composition of GN P will b e somewha t different, o f course. Betwee n 4% an d 5% wil l be outpu t o f th e R & D sector, an d th e remainde r will b e consumptio n and investment. What i s th e effec t o f changin g th e amoun t o f resource s devote d t o R & D ? Figur e

Models o f Economic Growth 54

9

AIL 10 illustrates th e effect on non-R & D GNP of increasing the proportion o f resource s devoted to R & D to 10% and 15%, given that the elasticity of the technical progress production functio n i s assumed t o be 0.2. The visual impact is not large, but the numbers are no t negligible . Th e leve l o f non- R & D GNP i s 25 % highe r i n year 10 0 in th e 10 % case, an d 43% higher in the 15 % case. Thes e increment s come a t a cost of about 4% and 8% in year 1 ; the non-R & D GNP lines cross around year 25. The decision a s to which of these lines society should choos e is an intertemporal valuation proble m exactl y equivalen t to th e decisio n o f ho w muc h societ y shoul d save . The analysi s just described wa s repeated assumin g an elasticity of 0.1. The impac t of increasing productio n o f R & D is of course less ; non- R & D GNP is 10 % higher in year 100 in the 10 % case, an d 15 % higher in the 15 % case. Th e crossove r yea r is around 40 . The Role o f Industrial (o r Technological) Revolutions. On e strikin g aspec t o f th e neoclassical mode l i s its generally steady and regular growth patterns. There is none of the historically observe d ris e o f whol e ne w industries , whos e interna l growt h lead s an d dominates the rest of the economy, i n the course of what has come to be called "industria l revolutions." An integral part of Rostow's approac h t o analyzing economic growt h is the prominent rol e o f th e periodi c birth , rapi d expansion , an d gradua l deceleration o f ne w industrial complexe s i n shapin g an d accountin g fo r observe d pattern s o f aggregat e economic growth. 11 We briefl y recoun t her e th e "stylize d facts " o f th e historica l episode s whos e basi c pattern we will attempt to capture in the Rostow model. [The story as a whole is set out in W. W . Rostow , Th e World Economy, History an d Prospect (Universit y of Texas Press , 1978).] W e delineat e fou r historica l periods , beginnin g i n th e lat e eighteent h century , each wit h a simila r overal l economi c growt h pattern . Eac h o f thes e period s last s abou t two-thirds of a century. The periods begi n with the generation from th e R & D sector (on e might loosel y sa y "discovery" ) o f a ne w se t o f products , whic h w e cal l th e "leadin g sector" complexes of the period. These sectors are characterized in the early year s of the period b y ver y rapi d growt h i n output , an d a s the y gro w the y com e t o mak e u p a substantial part of the economy. Towar d the end of the period, thes e sector s slo w down in growth, and the pace of the economy as a whole slows as well. It is not until the advent of a new leading sector , o r one might say until the dawn of a new industrial revolution, tha t growth pick s u p agai n an d th e economi c growt h patter n roughly repeats itself . Th e historical datin g of these periods fo r Great Britain , and their associated leadin g sectors, are: Time span 12 Leading

sectors

I. 1780s-1830 s Cotto

n textiles , Watt's stea m engine, iron fro m cok e 13 II. 1840s-1900 s Railroads, stee l III. 1900s-1960 s Automobile , electricity , chemical s IV. 1970s - Microelectronics , biotechnology , new industrial materials , laser s The las t o f th e revolution s is of cours e stil l underway. 14 The questio n the n arises : ho w shoul d we mode l suc h recurrin g patterns? On e coul d simply vary the rates of technological progress through each period to mimic the observed swells an d ebb s o f growt h rates , bu t thi s seem s a bi t contrived . Disaggregation i s a n attractive route , wit h th e product s associate d wit h eac h industria l revolution combine d into one sector . On e coul d then distinguish five industria l sectors : a "primitive " sector ,

550 Appendix including th e product s generall y existin g before th e firs t industria l revolution, an d fou r additional sectors , each containin g the products associate d wit h one of the four periods i n the preceding list . We could then represent eac h industria l revolution as a period o f rapid growth i n th e technolog y leve l o f th e appropriat e sector . The representatio n o f deman d pattern s the n becomes a n issue . Wha t was th e deman d for computer s i n 1783 ? A simpl e solutio n woul d b e t o impos e Enge l curve s wit h th e property tha t the output of each ne w sector wa s demanded whe n it became available , bu t this is artificial. There presumably was a demand for computational power in 1783 , sinc e there wa s employmen t o f clerks, bu t th e price o f computer s wa s simpl y to o high . (On e might sa y infinite , bu t thi s lead s t o som e arcan e issue s o f jus t wha t a n infinit e pric e means. I t suffices t o stipulate that the price o f the computational power associated wit h a modern compute r wa s mor e tha n anyone could pay.) Ou r approach i s to impos e a stabl e demand functio n ove r time , an d t o represen t th e introductio n o f ne w sector s int o th e economy a s occurrin g du e t o a fallin g suppl y price associate d wit h improving level s o f technological knowledge . Each industria l revolutio n i s the n represente d a s a perio d i n which , du e t o technica l progress in the associate d sector , the pric e of its outpu t fel l to the poin t wher e it was purchased alon g wit h the outputs of the other (previous ) sectors. Th e exogenous changes that led to observed cycle s of economic growth are changes in technology levels that enter the sectora l productio n functions , whil e the parameter s o f the deman d function s ar e sta ble ove r history . Price s ar e no t a t al l stable , o f course , an d i t i s thei r fall , drive n b y sector-specific technica l progress , tha t cause s th e deman d level s fo r th e product s o f th e individual sector s t o ris e throug h th e historica l periods . Industria l revolution s ar e in terpreted a s suppl y driven , an d changin g th e timin g o f th e improvemen t i n technolog y levels woul d simply chang e th e timing of the adven t of the period associate d wit h a new leading sector . We represen t th e deman d patter n fo r th e outpu t o f th e fiv e industria l sectors i n th e following way : Le t th e variable s Z (k) b e th e outpu t o f eac h o f th e sectors , an d le t th e unindexed variabl e Z b e a measur e o f "effectiv e output " o f th e industria l secto r a s a whole.15

We thu s define th e measur e o f "effectiv e output " t o be a constant elasticity o f substitution aggregation o f the outputs of all five sectors . Give n any set of prices for the outputs of the individua l sectors, sa y 11(K), a cost-minimizing purchaser of a bundle of output s will purchase the m i n the proportion s

More generally , give n a budget B to be spent o n the output of these sectors , th e amount s of eac h tha t wil l be purchase d wil l be

Our general approac h to this problem i s then to disaggregate the industrial sector int o five subsectors, an d to represent effective outpu t of the industrial sector as the C.E.S. aggrega -

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1

tion (AII.27) . Thi s mean s literall y tha t w e replac e th e expression s X(2) , Y(2) , X(2,j), C(2), an d / wit h their C.E.S. aggregation s over th e fiv e subsectors . Th e levels o f technology o f fiv e subsector s ca n the n var y independently. Before showin g som e empirica l implication s o f thi s disaggregation , w e discus s th e choice o f the value of the elasticity of substitution. (The elasticity of substitution, defined to be positive , i s related t o th e parameter 0 throug h the relatio n where e i s th e elasticit y o f substitution. ) Clearl y a choic e o f e belo w unit y woul d b e inappropriate, becaus e it implies that the budget share of each subsector woul d increase a s its price increased . Bu t th e whol e point o f this exercis e i s to represen t no t yet invente d goods a s havin g effectively ver y hig h prices, an d effectivel y zer o expenditure . Experi menting with various values of e shows that values of 2 or above lead to results that accor d well wit h the verba l depictio n o f the introductio n of ne w sector s give n above . The specifi c assumption s tha t w e mak e abou t th e rate s o f technica l advanc e o f th e various sectors ove r the long run are shown in Figure AII. 11. This figure shows the level s of the a(k), o r the levels of the states of technology, for each of the industrial subsectors . [We use a(k) t o represent th e levels of technology of the five industria l subsectors; i t is to be distinguished from A(i), th e technical levels of the three major economic sectors. ] Th e 130-year time span represented i n Figure AII.11 is divided into two 65-year periods, eac h representing th e lifetime of one of the great industrial revolutions. (We limit the diagram to tw o period s fo r simplicity. ) The primitive sector, calle d secto r 1 , shows steady tech nical advance a t a rate somewhat below the rate of advance of the economy a s a whole for the entir e tim e period . Th e othe r sector s sho w ver y lo w level s o f technolog y unti l th e advent of their period of advance, an d then they grow rapidly t o catch up with the rest of the economy. Th e timing of Figure AII. 11 shows that the period of rapid advance o f each new technolog y end s 5 5 years afte r it s introduction, after whic h that sector grow s at the same pac e as the other sectors . Figure AII. 1 2 show s th e implication s o f thes e assumption s fo r th e growt h o f th e industrial sector as a whole over two industrial revolution periods. I t shows that output of the industrial sector grow s fastest at the time of introduction of each new technology, an d then taper s of f a s th e ne w technolog y grow s t o maturity . Th e firs t implicatio n o f thi s approach i s that the overal l growt h of the industria l sector i s dependent o n the recurrin g appearances o f ne w industrie s tha t gro w rapidl y a s the y ar e diffuse d throughou t th e economy, an d thu s brin g u p th e leve l o f growt h o f th e secto r a s a whole . I f suc h ne w industries wer e to stop recurring (as appears to happen for the last 1 0 years of each period, the lowest growth years) the n industrial and overall economi c growth would settle int o a lower secula r rate . T o illustrat e this point, Figur e AII. 12 also show s the pat h of growt h that would occur i f the second industria l revolution were not to occur; tha t is, i f the a(3 ) technology level , associate d wit h the second set of new industries, were to not grow fro m its initial lo w level startin g i n year 65 . The assumptio n o f th e Rosto w mode l tha t savin g i s a functio n o f profit s ha s a n interesting interactio n wit h the industrial disaggregation. The rapidly growing industries generate more profit s durin g the early years of each period than they generate investment needs, an d s o serve a s a source o f capita l formation for the economy as a whole. Figure AII. 13 shows , fo r on e industria l revolutio n period, th e tim e pat h o f profit s an d gros s investment deman d i n th e leadin g sector. I t illustrate s tha t th e leadin g sector generate s profits i n excess o f its investment needs, and thus provides investment resources to other

Figure All. 10. Pat h o f Non- R & D GNP. NOTE: Elasticity of technical change with respect t o resourc e inpu t assume d t o b e 0.2.

Figure AII.11 . Technolog y Level s ove Two "Industria l Revolution " Periods .

Figure All. 12. Rat e o f Growth of Industrial Secto r ove r Tw o "In dustrial Revolution " Periods.

r

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sectors o f the economy . Ther e i s thus a secon d rol e o f leadin g sector s i n th e proces s o f growth beyon d bein g a sourc e o f ne w technology ; the y are als o a source o f saving . The Demographic Transition. A s describe d i n th e text , ther e i s substantia l historica l evidence tha t growth o f the labor force i s not independent of wage rates, but that it tends to be negatively related t o wages at low wage levels, an d to become relatively constan t at higher levels. One can introduce a modified labor-growth equatio n int o the model, repre senting the kind of empirical relation shown in Figure 20. 1 i n the main text. I t would say that the growth of the labor forc e in any period i s a function of the real wage prevailing in that period . Figur e AII. 14 shows suc h a relatio n tha t w e incorporat e int o th e model. 16 The Rostow Model Integrated. W e now begin to put together th e pieces o f the Rostow model thu s fa r independentl y presented . W e construc t a scenari o i n whic h th e savin g function o f Figur e AII. 7 i s used , i n whic h technica l progres s occur s i n th e variou s industrial sector s a s i n Figur e AI L 11, an d i n whic h labo r forc e growt h behave s a s i n Figure AII.14 . Th e results, ove r 13 0 years (tw o industrial revolution periods) ar e shown in Figure AII.15 . Result s are shown in growth rates of GNP and GNP per capita. Growt h rates o f GNP sho w a downward very long run trend, due to the falling growth rate of the labor forc e a s real wage s rise . Figur e AII.1 5 als o show s a growth-rate cycl e du e t o th e bunching of innovations in the early years of each industrial revolution. The magnitude of these change s i s less tha n in Figure AIL 12 because we assume that the cycles i n technica l

Figure AII.13. Profit s an d Investmen t i n th e Leading Sector over an "Industrial Revolution" Period. (Inde x Numbers )

Figure AII. 14. Relatio n o f Labor Forc e Growt h t o Rea l Wage.

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Figure AII. 15. Growt h o f GN P an d GN P per Worke r throug h Two Industria l Revolu tions. Demographi c Transitio n fro m Figur e AII. 14 Included .

Figure AII. 16. Availabilit y of Lan d ove r th e Kon dratieff Cycle . (Inde x Numbers )

Figure AII. 17. Growt h o f GN P an d GN P per Worke r throug h Tw o Industria l Revolutions. Demographi c Transitio n fro m Figur e AII. 14 Included . Kondratief f Cycl e fro m Figure AII. 16 Included.

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5

progress occu r onl y i n th e industria l sector; i n th e primar y an d service s sector s stead y technical progres s ove r tim e i s assume d t o occur . GN P per capit a show s th e technica l cycle effect s withou t th e tren d i n labo r forc e growth. The interaction o f the saving function wit h technical progres s occur s i n this simulation. The rati o o f ne t investmen t t o GN P rises by 50 % i n the firs t 2 0 years o f each industria l revolution, fro m 12 % to 18% , du e t o th e dependenc e o f savin g o n profi t growt h rates . The Kondratieff Cycle Added. Rostow' s wor k ha s emphasize d th e lumpines s o f th e accretions o f land (or , mor e generally , natura l resources) t o the economy, an d the role of capital investmen t i n making them productive . W e hav e alread y formulate d a mode l o f this phenomenon. 17 We introduc e thi s phenomenon int o the mode l her e i n a way analogou s t o our earlie r work. W e introduce the factor of production lan d into the economy i n an irregular way, as opposed t o th e smoot h introductio n i n th e neoclassica l mode l tha t stabilize s th e ren t of land. Figur e AII.1 6 show s th e time pat h o f land supply i n both th e smooth cas e (show n here a s 5 % stead y growth) , an d i n the irregula r case , i n whic h lan d supply grow s mor e slowly a t th e beginnin g o f eac h cycl e period , an d mor e rapidl y afterwards . Th e phe nomenon w e ar e tryin g t o captur e i s on e o f exhaustio n o f readil y accessibl e natura l resources early i n the period, leading t o increases i n land rents (natural resource prices i n general), leadin g t o investment s i n ne w source s o f natura l resourc e supply , leadin g eventually t o rapid increase s i n supply. The cycle is assumed t o repeat ever y 4 0 years, a s in ou r earlie r work . Figure AII. 17 shows th e result o f addin g this land suppl y assumption to th e results of Figure AII. 15. A 40-yea r growt h cycl e correspondin g t o natura l resourc e scarcit y i s superimposed o n th e secula r labo r forc e growt h declin e an d th e technica l innovatio n swings associate d wit h the industria l revolutions .

C. Th e Adam Smith Model Revisited The Multisector Framework. I n this subsection the basic economic framework describe d in th e beginnin g o f thi s sectio n i s adapte d t o represen t th e Ada m Smit h model . A one sector version of the Smith model was presented i n the first sectio n o f this Appendix. The version discusse d her e follow s th e genera l multisecto r framewor k use d fo r th e neo classical an d Rosto w models . Th e primar y purpos e o f thi s discussio n i s t o contras t th e Smith model an d the modern models, i n particular, to identify precisel y which changes in assumptions lea d t o th e strikin g change s i n result s betwee n th e tw o kind s o f models . Both the neoclassical an d the Rostow models describe a world whose stylized fact s are those of modern economi c growth ; namely, limited growth of the labor force, more or less regular technical progress , an d growing supplies o f natural resources, al l of which lead t o rising real wages . Hence , thes e model s wil l be referred t o as the "modern " models. Th e Smith model, o n the other hand, leads to substantially different long-ru n behavior than the modern models , an d i t i s this differenc e tha t w e analyz e in this subsection . Method. Th e metho d fo r th e subsectio n wil l be a s follows . The specifi c assumption s that, when incorporated int o the general economic framewor k given previously, lead to a Smithian worl d ar e presented . Th e genera l characte r o f th e result s o f th e mode l usin g these assumption s is described . The n th e specifi c assumption s o f th e Smit h mode l ar e changed, on e b y one, t o the assumption s of th e moder n model , i n order t o illustrat e the importance o f eac h o f th e assumption s in determinin g whether the outcom e o f a n eco nomic growt h process resemble s a modern or a Smithia n world .

556 Appendix

As w e have discusse d before , specifi c assumption s concerning final-deman d patterns, factor accumulation , an d technica l progres s mus t b e adde d t o ou r genera l economi c framework t o produc e a specifi c model . Th e final-deman d relations o f th e Smith mode l are: savin g i s assume d t o b e a functio n o f (specifically , proportiona l to ) th e leve l o f profits. Thi s i s represented b y relation s (AII.25 ) an d (AII.26) , wher e th e paramete r s is taken to be constant. (Thi s is a direct analogue of the assumption made about saving in the one-sector Smit h mode l o f th e firs t section. ) Consumptio n follow s th e Enge l curve s o f Figure AII. 2, whic h are algebraically represente d b y equation (AII. 24). Thi s is the sam e consumption-pattern assumptio n that was made in both the previous models. The assumptions concerning facto r accumulation and technical progress ar e described next. These ar e directly analogous t o the assumptions made in the one-sector mode l o f the first section , so their treatment here is brief. A summary comparison of the assumptions in the Rostow and neoclassical model s i s also given. Labor. Growt h o f the labo r forc e i n the Smit h model i s assumed t o be determined b y the relation o f the real wag e to some reference level o f the real wage . Specifically , when the real wag e i s above thi s reference level , th e labor force is assumed t o grow, an d when the real wage is below the reference level, the labor force falls. (Incidentally , Smit h hoped that the reference wag e would rise with increased educatio n of the labor force [preceding , p. 47]. ) I n the Rostow model , i n contrast, th e rate of growth of the labor force is assume d to depend o n the real wage , bu t in a different fashion . At low levels of the real wage, th e rate o f growt h o f th e labo r forc e depend s negativel y o n th e rea l wage , whil e a t som e higher leve l th e growt h rat e become s constant . I n th e neoclassica l mode l th e rat e o f growth o f th e labo r forc e i s assumed t o be constant, an d independent of othe r economi c variables. The specifi c functiona l for m w e giv e t o th e labo r forc e growt h relatio n i n th e Smit h model fo r numerica l simulation s i s where w is th e referenc e rea l wage . Capital Stock. Th e physical accumulatio n rule for the capital stock , give n as equatio n (AII.8), i s commo n t o al l models . I t is The issu e betwee n models is , then , how is /, o r the level o f investment, determined ? As just discussed , i n the Smith model / i s assumed t o be related t o the level o f profits in the economy. Specifically , i t is assume d tha t / i s proportional t o profits. I n the neoclassica l model, / i s assumed t o be proportional t o GNP. I n the Rostow model , / i s assumed to be determined b y bot h th e leve l an d th e rat e o f growt h o f profits . Land. Lan d i s assumed t o be fixed i n the Smit h model . Lan d i s assumed to grow a t a rate approximatin g th e growth rate of GNP in the neoclassical model . The growth of land in the Rostow mode l i s more irregular , givin g rise to long swings in relative land prices . (The reade r shoul d recal l her e onc e agai n tha t "land " i s a genera l ter m fo r natura l resources, an d s o can represen t agricultura l land , o r mineral - o r energy-bearing proper ties, a s wel l a s criticall y important components of th e physica l environment.) Technological Progress. Ther e ar e thre e form s o f technica l progress include d in th e Smith model. [Th e reader wil l recall that technical progress i s represented a s increases in the A(i ) variable s o f th e model. ] Th e firs t i s increasin g returns t o scale . Du e t o th e advantages of specialization , output pe r uni t o f inpu t wil l b e highe r if the overal l siz e of

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the market is larger. Th e second i s discrete, irregularl y timed, large increases in technical knowledge tha t represent breakthroughs in technology. Thes e hav e been characterized i n the text as the contributions of "philosophers. " Finally, there is "incremental " technical progress, a slow , regula r accretio n o f knowledg e tha t occur s independentl y o f othe r economic conditions . I n the particular model developed in this subsection, the followin g specific assumption s ar e mad e abou t technica l progress : • Incrementa l technical progress is ignored. The general sense of its character is that it is small, an d including it would add little to the overall exposition. (There is a case later i n thi s subsectio n i n whic h regular technical progres s i s adde d t o th e Smit h model; thi s resul t indicate s th e genera l impac t of incrementa l progress. ) • On e large technica l breakthrough, which increase s all technology levels [the A(i)] by 33%, occurs i n the model. How the economy plays itself out after suc h a change is on e subjec t of th e growt h analysis. • Th e level o f returns to scale i s related to the size of the total capital stock, whic h is the index of the size of the market chosen for this exercise. Figur e AIL 18 shows the assumed relation of capital stock to technology levels A(i). I n this formulation there is a maximum level of returns to scale; this represents a n assumed exhaustion of the possibilities fo r increasin g specialization . An importan t summar y observation abou t the Smith system is that there is no continuing engine of regular progress. Return s from specializatio n are finite, an d the intervention of philosophers is not allowed to recur regularly. Therefore, diminishin g returns in one form or anothe r triumph s i n the end. In th e neoclassica l system , b y contrast , technica l progres s i s assume d t o b e ver y regular. It is assumed to occur as a constant percentage increase in the A(i) each year, and to occur autonomously regardless of the state of other economic variables . It is the same in nature a s th e "incremental " technica l progres s o f Smith , bu t it s sens e i s tha t i t i s relatively large, accountin g for i n fact al l the technical progress o f the economy. 18 I n the modern world, this implies annual increases o f the A(i) of between one and about three to four percent. Thes e autonomous increases in the state of technology in neoclassical theory

Figure AII. 18. Return s t o Scal e i n the Smit h Model .

558 Appendix

can be identified with the "residual " factor in empirical growth accounting. This residual factor ha s bee n discusse d i n th e wor k o f Deniso n an d hi s associates . It is important to note that a series of "philosophical" (i.e., scientific) breakthroughs in a Smithia n model coul d lea d t o precisel y th e sam e long-ru n effect s o n technolog y a s a neoclassical patter n o f stead y progress . Th e neoclassica l an d Smithia n "philosophical " increases i n technology share the characteristic that they are completely exogenous to their models, and their average impact on the level of technology is only a function of their size and frequency . A Smithia n technica l breakthroug h o f 33 % ever y 1 5 years woul d hav e exactly the same long-run effect o n technology as a neoclassical annua l technical progres s rate of 2%. Th e pattern of the former woul d of course b e steplike rathe r than smooth, bu t in 10 0 years the difference in technology between these two worlds would be small. Thus, it is the characterization of the breakthroughs of the philosophers o f Smith as nonrecurring that differentiate s them fro m th e neoclassica l representatio n o f technica l progress , no t their size . In th e Rosto w syste m th e leve l o f technica l progres s depend s o n tw o factors , on e autonomous to the economic system and one endogenous to it. Th e autonomous factor is the backlog o f the technological advance s availabl e t o a given economy. 19 Thi s backlo g would b e literall y zer o fo r th e mos t technicall y advance d countr y i n th e world , an d relatively hig h for relativel y backwar d countries . (Th e existenc e o f multiple sectors im plies tha t no on e country migh t be unambiguously the "mos t advanced." ) The endoge nous facto r is the level o f resources devote d t o advancing technology, whic h we loosel y call resources employe d in the R & D sector. Both these factors have a positive effect o n technical progress . Fo r an y give n backlo g (includin g zero) , th e highe r th e leve l o f re sources devote d to R & D, th e higher the level of technical advance. B y the same token, for an y given leve l o f resources devote d t o R & D, th e higher the available backlog, th e faster th e rat e o f technica l advance . Manipulation o f th e Model. I n summary , th e assumption s tha t characterize the Ada m Smith mode l ar e these : • Change s i n th e labo r forc e depen d o n th e rea l wage . I f i t i s abov e th e referenc e level, th e labo r forc e grows; an d i f i t i s below th e referenc e level , th e labo r forc e declines. • Saving i s proportional t o th e leve l o f profits. 8 Lan d i s fixed. • Return s to scale increas e with the size of the market, as indexed by the level of the capital stock , u p t o a maximu m level. Discret e technica l jumps o f th e "philoso pher" kin d are allowed. Specific numerica l values t o characteriz e th e Smithia n economy mus t b e chosen . T o facilitate comparisons , th e conditio n o f the econom y i n yea r 1 is chosen t o replicat e th e year 1 condition o f the earlier models , a s shown in Table AII.l. Table AII. 7 shows som e summary characteristic s o f th e econom y i n yea r 1 . For the Smith calculations, th e reference real wage is chosen t o be 1.00 ; i.e. , i f the real wage does not increase fro m it s year 1 level, the labor force will not grow. The fixed leve l of lan d i s chose n t o b e 20.0 , th e yea r 1 level. A s show n in Figur e AII. 18, increasing returns to scale are assumed to begin at a capital stock level of 250, the year 1 level. Thus, we assum e that in year 1 the econom y is just large enough to begin to take advantage of the increase d specialization that large r siz e wil l allow . We firs t as k whethe r a stead y state can obtai n in this economy. I f th e model excludes

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Table AH . 7. Summar y Characteristic s o f the Econom y i n Year 1

GNP = 100. 0 Factor

Factor suppl y

Factor price

Share i n GN P

Labor Capital Land

50.0 250.0 20.0

1.00 0.12 1.00

0.50 0.30 0.20

both discrete "philosophical " jump shifts i n the level of technology and the phenomenon of increasin g return s t o scal e (i.e. , i f i t literall y assume s n o technical progress) , the n a steady stat e wil l exis t i f savin g i s jus t enoug h t o replac e depreciatin g capital . I f th e proportion o f profit s use d fo r capita l formatio n i s 0.25 , savin g wil l b e equa l t o th e depreciation o f capital, an d a steady state will occur.20 (Since gross profits are 30, saving will be 7.5. Sinc e th e capital stock i s 250, an d the depreciation rate is 0.03, th e demand for replacemen t capita l i s also 7.5 . Thus , a steady stat e obtains. ) Such a steady stat e i s illustrated i n Figure AIL 19. It is not very interesting . Before going on to the full-blown Smithia n model, w e examine an instructive excursion from the steady-state case. The assumption of absolute technical stagnation is maintained, and th e onl y chang e fro m th e steady-stat e cas e i s that the proportion o f profit s save d i s increased t o 0.67.21 The results are shown in Figure AII.20 , overlai d on the steady-stat e results. The economy begin s growing at li%-2 % rate for the first thir d of the century. This is due to two factors. Th e capital stock is growing because of the increase i n investment. As the capita l stoc k grows , th e wag e o f labo r i s drive n abov e th e referenc e level , an d th e labor forc e als o grows. Growt h of the labor force increases the profitability of the capita l stock, an d thi s furthe r fuels investmen t an d capital formation . The expansio n canno t b e continually sustained , however , becaus e th e growt h o f th e labo r forc e drives th e wag e back t o unity , and thi s put s a brak e o n furthe r labo r forc e growth . Th e las t hal f o f th e century approaches the steady stat e once again, but a t higher levels of capital, labor , and GNP. For the century as a whole, GNP grows at an average annual rate of 0.9%, a s does labor. Capita l grows at 1.7% , which leads to a capital-output ratio in the last year of 4.9 , almost doubl e th e yea r 1 value. The histor y o f facto r reward s ove r th e centur y parallels th e growt h stor y tol d above . The rea l wag e increase s slightly , the n i s pushe d bac k towar d unity . Th e ren t o n lan d grows a t 1.2 % a year, sinc e land supplies ar e fixed whil e capital and labor are growing. The retur n t o capital fall s fro m 0.1 2 t o 0.05 du e to th e increase i n capital intensity . What is the overall message o f this scenario? A n increase in saving, or reinvestment, i n the econom y doe s no t lea d t o sustaine d growth . Technolog y an d lan d ar e fixe d b y assumption, an d growth i n labor extinguishe s itself by driving the wage rate back to the subsistence level . Owner s o f lan d ar e th e onl y beneficiarie s o f thi s activity . Thi s i s a theme tha t is repeate d i n the Ada m Smith model . The Ada m Smit h bas e cas e i s presente d now . Tw o kind s o f technica l chang e ar e included i n it ; namely , increasing returns to scal e an d a n exogenous , quantum jump i n technology that occurs just after th e first period. [This jump is assumed to increase all the A(i) parameter s b y 33%. ] Th e proportio n o f profi t save d i s assume d to b e 0.2 5 i n th e Adam Smit h bas e case . Thus , i n th e absenc e o f th e "philosopher's " contributio n in the beginnin g of th e histor y describe d here , thi s Smithia n econom y would be mire d i n

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Figure All.19. Growt h Pat h o f the Economy. (A . Smit h Model) Stead y State . the steady state . Th e Smit h bas e cas e shows , then , ho w th e econom y respond s t o th e upward jump i n technical proficiency bestowe d upo n i t by the philosopher. It s respons e reflects th e interpla y o f the ke y factors i n the Smithia n world; namely, fixe d land ; labor that grow s whe n th e wag e grow s beyon d th e subsistenc e level ; increasin g return s fo r a finite rang e o f th e siz e o f th e economy ; an d reinvestmen t o f a fixe d portio n o f profits . Figure AII.21 shows the results of this base case. (The y are superimposed o n the results of the steady modern growt h cas e fro m Figure AII.8; comparisons betwee n the cases will be noted below. ) GNP grows sharply in the first 40 years or so, a t an average rate of ove r 6%. Thi s i s due to fou r causes: 1. Th e jump in technology tha t occurs just afte r th e firs t year , a n exogenous increas e due t o th e inventio n of som e "philosopher. " 2. Th e increas e i n capita l stoc k tha t occur s whe n profit s rise , (an d thu s investment rises), du e t o th e increas e i n the leve l of technology. 3. Th e increas e i n th e productivit y of input s tha t occur s whe n the capita l stoc k in creases, whic h represents a widening of the market that allows increased specialization.

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4. Th e growt h i n th e labo r forc e tha t occur s whe n th e wag e rat e rise s abov e th e subsistence level , whic h is als o cause d b y the increas e i n technology . The econom y slow s towar d the middle of the period, an d approximate s a steady stat e again in the last quarter century. Growth comes to a halt because the philosopher does not regularly repeat his inventiv e contribution to knowledge; because specialization an d thus increasing return s ar e playe d out ; becaus e labo r forc e growt h ha s drive n th e rea l wag e back t o the subsistenc e level , s o labor grow s no more; and because capita l has grown to the point at which 25% of profits approximates replacement investment , so capital grows no more . The time path of factor rewards in Figure AII.21 is informative. The real wage initially blips up , bu t the induced labor force growth forces i t back down. The profit rate rises to about 0.30 a s a result of the improved technology and the increase in the labor force , bu t with investmen t a functio n o f profits , thi s drives u p the capita l stock , whic h eventually pushes the profit rate back down. Only the rent of land steadily rises, because land is fixed

Figure All.20. Growt h Pat h o f th e Economy . (A . Smit h Model) 67% of Profit Invested .

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Appendix

Figure AII.21. Growt h Pat h o f th e Economy. (A . Smit h Model) A . Smit h Bas e Case . and al l othe r factor s ar e growing . Th e compariso n o f th e steady-growt h case i n Figur e AII.21 with the Adam Smith case is informative in this regard. Rents in the Adam Smit h case approximat e wage s in the moder n growth case, an d wages in the Adam Smith case approximate rent s i n the moder n growt h case. Thus th e full-blow n Ada m Smit h case , wit h it s philosopher' s interventio n an d it s increasing returns , i s no t especiall y differen t i n kin d fro m th e cas e o f Figur e All.20 , which merely had an increase i n saving. The wage of the workers never permanently rises above the subsistence level, an d the landlords reap the benefit of any increase in either the size o r th e productivit y o f th e economy . Since thes e result s ar e s o strikingl y different fro m thos e o f th e moder n model , th e question arises a s to exactly which assumptions of the Smith model lead to the stagnation of th e incom e o f th e workers , an d th e stead y increas e i n wealt h o f th e landlords , an d which changes in them will lead to the reversed results of the modern model. We carry out a series o f exercises in which the assumptions of the Smith model are transformed into the

Models o f Economic Growth 56

3

assumptions o f the modern model , s o that the importance of the various assumptions can be identified . Three difference s i n assumption s will be explored . The y are : Smith model Modern

model

Labor forc e grow s whe n wage Labo r forc e grow s a t 2% is abov e unity . regardles s o f wage. Land i s fixed . Lan d grows a t 4% . Technical progres s i s the "philo - Technolog y grow s regularly sopher's" contribution, an d (a t 3.0% i n this case). (finite) increasin g returns.

Conclusion: Three Necessary Conditions for Sustained Growth Table All8 show s some summar y results o f differences i n assumptions. I t indicates that no on e chang e i n a singl e assumptio n ca n produc e a resul t i n whic h real wage s gro w significantly ove r the century. I f the technology or land assumptions are relaxed (that is , replaced wit h the moder n counterpar t assumptions) , the assumptio n that the labo r forc e grows wheneve r the wage is above the subsistence leve l inexorably drives the wage bac k down. Whe n a 2% average labo r forc e growth rate is imposed, th e wage does ris e i n the middle part of the century, peaking at a level of 1.7 5 in the fortieth year. However, a t this point technolog y ha s hit it s maximum, and GNP growt h starts fallin g markedly , t o just over the 1 % range. I n fact, (as Table All8 indicates ) overall GNP growth over the entire century is only 2.3%, an d with 2% labor force growth, this leaves little room for increase s in th e rea l wage . Give n tha t lan d i s no t growin g a t all, rent s absor b a larg e par t o f th e increase i n GNP, an d the real wage falls to near its original level by the end of the period. (A simulation wa s don e i n which the labor force was kept constant in a Smith model. I n Table AII.8. Alternat e Growt h Cases i n the A . Smit h Framework Case Wag A. Smit h base cas e 1.0 2% labo r growt h 1.1 4% land growt h 1.2 Regular technical progres s 1.1 4% lan d growth , regula r 1.4 technical progres s 2% labo r growth , regula r 2.0 technical progres s 2% labo r growth , 4% land 3.5 growth All thre e abov e measure s 7.8 All thre e above , plu s 67% 12.1 saving o f profit s (the modern stead y growth case)

100-Year 100-Yea e (Growth

) Ren

r 100-Yea t (Growth

) Profi

r GN t Growt

P h

1 0. 7 0. 5 0. 2 0. 1 0.

0 17. 1 12. 2 5. 1 52. 3 26.

0 3. 3 2. 2 1. 9 4. 7 3.

1 0.1 8 0.1 8 0.3 5 0.2 7 0.5

7 2. 9 2. 7 6. 7 3. 4 7.

5 3 2 6 6

2 0.

7 26.

8 3.

7 0.2

5 2.

9

0 1.

3 0.

1 -2.

7 0.2

1 3.

3

4 2. 0 2.

1 0. 7 1.

3 -1. 3 0.

2 0.3 3 0.1

1 4. 2 4.

3 9

NOTE: "100-year wage" is wage rate in year 100 . (Wag e rate in year 1 is 1.00. ) "Growth" i s average annual growth rate. Ren t figures ar e analogous . (Ren t i n yea r 1 is 1.00) . Profi t rat e i n yea r 1 is 0.12 .

564 Appendix this case, th e real wag e gre w 1 % per yea r o n average ove r th e entire period . Th e rent of land gre w abou t th e sam e rate , s o the tw o absolutel y limite d factor s i n this case equally divided th e increas e i n GNP, whic h wa s als o abou t 1%. ) Thus, changing only one assumption in the Smith model canno t get labor an increase in its reward. Nex t a set of simulations were don e i n which two assumption s at a time wer e changed. Thes e ar e also summarized in Table AIl8. A s might be guessed fro m th e results of changin g jus t technolog y an d jus t land , changin g thes e tw o togethe r doe s littl e fo r labor. Thi s i s agai n becaus e labor' s assume d behavio r o f increasin g itsel f an y tim e it s reward increase s ultimatel y drives it s reward bac k to the no-growth level . Th e tw o case s in whic h labor' s growt h i s limite d t o 2 % an d anothe r assumptio n i s relaxe d begi n t o produce som e meaningfu l growth in the real wage . Regula r technical progress alon g with 2% labor growt h lets the real wag e rise 0.7%, althoug h landlords get the bulk of the GNP increase i n thi s case . Addin g 4 % lan d growt h t o 2 % labo r growt h permit s th e wag e t o grow 1.3 % pe r yea r o n averag e ove r th e century . Th e grea t bul k o f thi s wag e growt h occurs i n the early part of the period, however . (Average wage growth is 2.4% for the first 40 years, 0.6% thereafter. ) Thi s i s of course becaus e technology is increasing durin g this early par t o f th e century , an d ha s becom e stagnan t afte r that . Ther e wil l b e onl y ver y minor rea l wag e gain s afte r th e en d o f th e centur y i n thi s case . Thus th e conclusio n i s reache d tha t an y on e o f th e Smithia n assumptions i s sufficien t drastically t o reduc e th e rea l wag e prospects fo r labor . Tabl e AI L 8 shows tha t whe n all three assumption s are relaxed, a familiar modern growth path is established. Indeed , i f all three assumption s are changed to their modern counterparts, an d the proportion o f profit s assumed t o b e save d i s increase d fro m 25 % t o 67% , exactl y th e moder n stead y growt h picture o f Figur e AII. 8 results . Thus , th e Smit h mode l ha s bee n transforme d int o th e modern mode l wit h thes e fou r changes i n the structur e o f assumptions . If a mode l is to avoi d the gloom y prospec t of relativel y stagnan t rea l wages , it must incorporate thre e crucial features o f the modern economy : restrain t on labor force growth , regular increas e i n technology, an d regular increase i n land supplies. 22 A violation of any one o f thes e assumption s lead s u s t o a worl d mor e lik e th e stagnatin g long-ru n wag e picture o f th e primitiv e world tha n th e regularl y progressing wag e resul t o f th e moder n model.

Appendix Part III: A Rich-Country-Poor-Country Model The Framework This fina l part of the Appendix presents a model of two countries growing, but at differen t stages of growth, defined in terms of technological sophistication, capita l per worker, an d real incom e per worker. I t aims to show how their trade an d technology transfe r relation s affect thei r absolute an d relative rate s of economic growth . Th e two countries include d i n the mode l represen t a rich an d a poor country i n the sense o f Hume (preceding, pp . 26 31). Th e model i s meant to illustrate hi s points abou t how "civilized " relations betwee n the two could make each better off, if they both remain "industrious. " I t also captures the problem examine d during the Secon d Worl d Wa r by Hilgerdt and Stale y (preceding, pp . 374-375). Much o f thi s discussio n i s simpl y a n exampl e of th e well-know n mode l o f trad e an d comparative advantage . Th e example s wil l illustrat e som e propertie s o f tha t mode l tha t

Models o f Economic Growth 56

5

relate to the relative "richness " an d "poorness " o f the two countries. Th e technology transfer aspect s o f th e mode l embod y som e o f th e determinant s o f technica l progres s discussed previousl y i n th e secon d subsectio n o f Par t II ; namely , resource s input s int o technology productio n an d absorptive capacity , an d the size of the technological backlog for th e les s technicall y advance d country . Our discussio n o f the model begin s wit h the stati c relations ; tha t is , wit h the relation s that determine th e equilibrium values of the variables of the model in any single year. W e choose the familiar two-country, two-good, two-facto r framework in which to work. Thi s framework wa s chose n rathe r tha n a mor e comple x one , suc h a s the on e i n th e secon d subsection, becaus e al l th e essentia l result s ca n b e show n i n it . W e firs t defin e th e variables o f interest. Th e index c will run over the two countries ( c = 1,2 ) and the index j will run over th e two goods (j = 1,2) . The time index is suppressed fo r the moment. Th e variables are : P(j,c) Pric e o f goo d j i n countr y c . Q(j,c) Productio n o f good; in country c . C(j,c) Consumptio n o f good y i n countr y c . l(j,c) Investmen t o f goo d 7 in countr y c. (I t i s assume d tha t onl y goo d 2 i s invested, s o /(l,c) = 0 . L(j,c) Labo r use d i n productio n o f good y i n country c . LS(c) Tota l labo r suppl y availabl e i n country c . K(j,c) Capita l use d i n production o f goo d j i n country c , KS(c) Tota l capita l suppl y available i n country c . Y(c) Th e nomina l valu e o f GNP i n countr y c . Production relation s ar e th e following . W e assum e Cobb-Dougla s productio n func tions, an d writ e the m a s where the a's ar e the factor shares, and the -y's are the levels of technology. W e will late r characterize th e relativ e poornes s o f a poor countr y both i n terms of its capital stoc k pe r worker and in terms o f its y's . Productio n i n each countr y c is assumed to be at the poin t where th e valu e o f GN P i s maximized ; i.e., a t the point tha t solves th e proble m

This maximizatio n proble m represent s th e resul t o f profit maximizatio n and competitiv e markets i n eac h country , an d parametricall y varyin g (say ) P(l,c ) whil e holdin g P(2,c ) constant trace s ou t th e productio n possibilit y frontie r o f th e country. Demand relation s ar e th e followin g fo r eac h countr y c , wher e V(c) i s th e valu e o f consumption.

566 Appendix

This say s tha t investmen t i s a constan t proportio n o f GNP , an d tha t th e res t o f GN P i s consumed s o as to maximize a Cobb-Douglas utility function wit h share parameter (3(c) .

A Static Solution The solutio n o f th e mode l i s then to fin d price s P(j,c) fo r which demand equals supply. One can derive both an autarkic and a trade solution to the model. Th e autarkic solution is really tw o problems, becaus e i t requires that we fin d th e equilibrium set of prices i n each country. I n eac h country , th e equilibrium prices ar e simpl y thos e fo r which , give n rela tions (AIII.l ) throug h (AIII.8 )

(I.e., suppl y equal s demand. ) Thes e price s i n genera l ar e differen t betwee n th e tw o countries. Th e trad e solutio n i s the set of prices (common betwee n th e two countries) fo r which

These relations , t o repeat, ar e all familiar from th e well-known model o f comparativ e advantage i n internationa l trad e theory . Al l th e usua l caveat s (n o transportatio n costs , shiftable capital , etc. ) ar e appropriate. W e no w show som e quantitative results o f choos ing specific numerical values for the parameters that are meant to illustrate a rich-country poor-country situation . We assume that the a's , B , an d a ar e the same i n the two countries, and that the ratio y(l,c)/y(2,c) i s als o th e same. 23 Thus th e only difference s between th e countries ar e in the level s o f factor availabilit y and in the overall leve l of technical progress, represente d by the ratio of-y i n the rich country to 7 in the poor country, where this ratio is the same in both sector s b y assumption . Table AIII. l show s th e specifi c value s assume d fo r th e parameter s o f th e model . Table AIII. 1. Numerica l Paramete r Value s Parameter Assume a(l,c)* 0.6 a(2,c) 0.3 7(1,1) 1.1 y ( 2 , l ) 0.6 LS(1) 5 KS(l) 25 LS(2) 5 KS(2) 10 o(c) 0.1 B(c) 0.6

d valu e

0 0 0 0

5 5 0 7

5 0

*When 'c ' appear s a s a countr y indicator , th e value s ar e th e sam e fo r bot h countries .

Models of Economic Growth

567

Figure AIII.l, Adjustmen t Neede d b y Larg e Country Whe n Trad e I s Opened . (Percentag e Decrease in Outpu t o f Good 1 )

(Country 1 is the rich country.) Given these values, the relative price of good 1 is 1.0 0 i n the rich country and 0.75 i n the poor country in the autarky case. (Goo d 2' s pric e is taken as the numeraire in the model.) We now open the model to trade, and show the results as a function o f the siz e o f the poo r country , as represented b y the rati o of it s -y's t o the rich country's "y's . (Even i f the ratio of the *y' s is unity, the poor country is still poorer du e t o its lowe r capita l stock. ) Figure AIII. 1 illustrates the decrease tha t Country 1 (the rich country) must make in its production o f goo d 1 when trad e i s opene d up . (Sinc e th e autarki c price o f goo d 1 is higher i n Country 1 than in Country 2, a s a result of trade Countr y 1 will impor t good 1 and expor t goo d 2 . Goo d 2 is interpreted here a s the industria l good, bot h sinc e i t is the investment good, and since it has a higher capital share.) Country 1's decrease i n production of good 1 is a function o f the ' 'poorness'' of Country 2, represented b y the ratio of its •y's to Country 1 's. As can be seen, the less poor (i.e., the larger) Country 2, the larger the adjustment that Country 1 must make. (By the same token, the larger Country 2, the larger Country 1' s gain s fro m trade , althoug h the y ar e neve r mor e tha n 5 % i n rea l income. ) Figure AIII. 1 also shows, however, that if Country 2 is poorer in a different sense , tha t of havin g less capital , Countr y 1' s adjustmen t wil l be larger rather than smaller. Thi s i s because when Country 2 has less capital, its autarkic price for good 1 is lower, and there is more opportunit y fo r trade . (A n equa l multiplicativ e chang e i n bot h "y's , on th e othe r hand, does no t change autarkic prices a t all.) At any rate, Figur e AIII. 1 illustrates in this

Figure AIII.2. Relatio n of Multiplicative Technology Generatio n Improvemen t Facto r t o Backlog.

568 Appendix

simple exampl e th e need fo r "civilize d behavior" on the part of Country 1 in making its adjustments t o trade.

Three Dynamic Solutions We no w tur n to th e dynami c behavior o f th e model . I n orde r t o mak e th e stati c mode l discussed s o fa r dynamic , w e mus t specif y ho w facto r supplies (labo r an d capital ) an d technology grow. Labo r an d capital growt h are straightforward. Labor is simply assumed to grow 1% per yea r in each country. Capital stock is augmented in each country through the relatio n where d is the depreciatio n rate , an d time subscript s ar e added. (Th e depreciatio n rat e i s assumed t o be 3 % i n both countries. ) Thi s accumulatio n relation i s similar to those use d above. W e assume that Country 2' s -y' s are one half those o f Country 1' s in these growt h simulations. Our specificatio n o f technica l progres s i s i n th e sam e framewor k discusse d i n th e Rostow model . Figur e All. 9 there shows the assumed relation between resource input s to the generation o f technica l progress (includin g absorptive capacity), an d actua l technical progress. W e adop t th e sam e kin d o f relatio n fo r Countr y 1 i n thi s subsection . Th e assumed numerical parameters o f the relation ar e different fo r this example; we assume in particular that if 5% of Country 1's capital and labor resources is devoted to the generatio n of technology , the n technica l progres s (Harro d neutral ) of 1 % per yea r wil l result . W e assume an elasticity of 0.4 o f output of technology wit h respect t o inputs of resources. So in equation form, i f Country 1 devotes a percentage a(l) o f its capital and labor resource s to the generation o f technical progress, i t will enjoy (Harrod neutral) technical progress of where h(1 ) is th e rat e o f Harrod-neutra l technica l progres s i n Countr y 1 . Give n tha t technical progress i s Harrod neutra l (labor augmenting), the "y's will grow according to the relation Country 2 i s assume d t o hav e somewha t differen t potentia l fo r generatin g technica l progress. It depends o n the backlog o f technology availabl e for it to absorb fro m Country 1 as well as on the resources it devotes to the process. W e define the backlog available to Country 2 a s where b i s th e backlog . I t i s simpl y define d a s th e percentag e b y whic h Countr y 1' s technology level s excee d Countr y 2's . (B y th e assumption s mad e above , equatio n (AIII.16) wil l give th e sam e result fo r j o f 1 or 2. ) Ou r modelin g assumptio n is that th e higher b, the more effective are resources devote d t o technology generation in Country 2, due t o the large r backlo g o f existin g technology that i t has t o draw on. I n particular , we modify equatio n (AIII. 14) for Countr y 2 b y introducin g a multiplicativ e factor m ; viz.: where m i s define d as a functio n o f b i n Figure AIII.2.

Models o f Economic Growth 56

9

Table AIII.2. Thre e Economi c Growt h Simulations Growth rat e of Case Countr No backlo g phenomeno n 2. a(l) = a(2 ) = 0.0 5 With backlo g 2. aj(l) = a(2 ) = 0.0 5 With backlo g 2. a(l) = 0.10;o(2 ) = 0.0 5

y 1 Countr

y2

0 2.

0

0 2.

5

3 2.6

5

Let u s no w conside r growt h patterns i n this model ; Tabl e AIII. 2 show s the result s of three growth simulations. Case 1 is one in which the backlog phenomenon is assumed not to occur, s o that each countr y has a technology-production function a s shown in equation (AIII.14). Eac h countr y is assume d t o devote 5 % o f it s overal l resource s t o technology production. As Table AIII.2 shows, this leads to growth o f 2% in both countries , an d no closing o f th e ga p between the two . (Th e simulation s shown in Table AIII. 2 wer e don e over 10 0 years.) Cas e 2 is also one i n which each country devotes 5 % of its resources t o knowledge production, an d i n which the backlog phenomeno n is assumed to occur a s in equations (AIII.16) , (AIII.17) , an d Figur e AIII.2 . Countr y 1 still grow s a t 2% , whil e Country 2's growt h has increased to 2.5%. This 0.5% increas e will allow it to catch up to Country 1 in 14 0 years. Cas e 3 is a case i n which the backlo g i s still operative, an d i n which Country 1 increases it s proportion of resources devoted to technology production to 10%. Thi s leads to an increase o f 0.3% i n Country 1's growth rate, and 0.15% i n Country 2's. Th e backlo g phenomeno n ha s transferre d benefits fro m Countr y 1' s productio n of knowledge t o Country 2 . However, i n Case 3 the increase d attentio n in generating and absorbing technology i n Country 1 not onl y increase s it s rat e o f growt h but als o narrow s the rat e o f closur e o f Country 2 on Country 1' s GNP per capita while, nevertheless, raisin g Country 2's growt h rate a s wel l a s Countr y 1's . Thi s provide s concret e meanin g t o Hume' s injunctio n to remain "industrious " as well as "civilized" in the face of the rich-country-poor-countr y problem; tha t is, the bes t a front-runne r can do is to assur e tha t it maximize s its tech nological absorptiv e capacity (education, quality of innovational entrepreneurship, incentives, etc. ) an d brings promptl y an d efficientl y int o it s economy al l the relevan t output generated b y it s own R & D secto r an d the R & D sectors o f others . Thus endet h th e lesso n fo r the United States (an d other advance d industria l countries) for th e 1990 s an d beyond .

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Notes

Chapter 1 1. W. W . Rostow , The Process o f Economic Growth (New York: W. W . Norton , 1952 ; Oxford: at th e Clarendo n Press , 1953 , 1961), pp . 10-11 . 2. Irm a Adelman , Theories o f Economic Growth an d Development (Stanford : Stanfor d University Press , 1961) , especially pp . 8-24 . 3. Warre n Weaver , "Scienc e an d Complexity," American Scientist, Vol . 36 , 1948. 4. J. K. Whitaker (ed.), The Early Economic Writings of Alfred Marshall, 1867-1890, Vol. 1 (London: Macmillan , 1975) , p . 98 . 5. Norman St. John Stevas (ed.), The Collected Works of Walter Bagehot, Vol. II (London: The Economist), p . 339 ; and John Maynard Keynes, Th e General Theory o f Employment, Interest an d Money (London : Macmillan , 1936) , pp. 383-384 . I owe the Bageho t referenc e to C. P. Kind leberger. Informe d of my interest in this human phenomenon, Zhang Ruizhuang, with the aid of his wife She n Xiaol i i n Shanghai , wa s goo d enoug h t o ru n dow n an d mak e th e followin g fres h translation o f a passage fro m Confucius : The Master said, "I' d got the aspiration for learning when 1 was fifteen. A t the age of thirty I was established,* then at forty n o longer bewildered, knowing Providence at fifty, bein g discreet and judicious o n whateve r I hear d a t sixty , neve r behavin g improperl y eve n followin g ever y inclination o f m y ow n a t seventy." (Translation fro m Chapter IV, Par t II , The Practice o f Government, An Interpretation an d Notes o n Lungyu by Yang Bejun [The Chinese Book Company First Press, 1956, Beijing]). *Comment by Zhang Ruizhuang: "To m y understanding, the assertion implies an establishment of both the way of thinking an d als o one' s career. " Josep h Schumpete r refer s casuall y t o Wilhel m Ostwal d a s th e author of the "theor y that thinkers conceive their truly original ideas before they are 30" (History of Economic Analysis, [Ne w York: Oxfor d Universit y Press, 1954] , p. 388n) . A considerable effor t failed t o ru n dow n Ostwald' s origina l reference , whic h Schumpete r di d no t provide . M y learne d colleague Professor Eisi g Silberschlag add s as a kind of inverse example of maturity defined at the age of 30: "St. Jerom e mention s a Jewish tradition that forbids the study of 'th e beginning and the end of the Book of EzekieP befor e the thirtieth year.'' These are the ' 'mystical" passages in the Old Testament. 6. The evidence is to be found in Piero Sraffa an d M. H. Dobb (eds.), The Works and Correspondence o f David Ricardo, Vol . X, Biographical Miscellany (Cambridge : a t th e Universit y Press , 1955), pp . 6-7, 34-37 . 7. Willia m Rober t Scott , Adam Smith a s Student an d Professor (Glasgow : Jackson , So n an d Company, 1937), pp. 55-59, 111-114. See, also, John Rae, Life of Adam Smith (London: Macmillan, 1895), p. 36, who identifies 1749 as the year when Smith drafted a course of lectures in economics advocatin g the "doctrin e o f commercial liberty. " 8. Si r Peter Medawar , Pluto's Republic (Oxford : Oxfor d University Press , 1982) , p. 263 . This passage was also quoted in The New York Times Hook Review, Sunday, June 22, 1986. Schumpeter's characterizatio n of Quesna y is to b e foun d i n History o f Economic Analysis, p . 224.

572 Notes

t o Pages 13-18

Chapter 2 1. The image is from Carl L. Becker , Th e Heavenly City o f th e Eighteenth-Century Philosophers (New Haven : Yal e Universit y Press, 1932) , p . 49 . 2. Ibid., pp . 6-7 . 3. Although written without apology from a strongly held, explicit point of view, Peter Gay's Th e Enlightenment: A n Interpretation. Th e Rise o f Modern Paganism (Ne w York: Knopf , 1967 ) con tains a well-balance d bibliographica l essay , pp . 423-555 . 4. Ibid., p . 3 . 5. Ibid., pp . 401-403 . 6. Loui s E . Loeb , From Descartes t o Hume: Continental Metaphysics an d th e Development o f Modern Philosophy (Ithaca : Cornell Universit y Press, 1981) . See , fo r example , th e discussio n of Hume o n "substance, " pp . 86-109 . 7. J . G . A . Pocock , Th e Machiavellian Moment (Princeton : Princeton University Press, 1975) . See also his "Cambridg e Paradigms and Scotch Philosophers: A Study of the Relations Between the Civic Humanist and the Civil Jurisprudential Interpretation of Eighteenth-Century Social Thought," Chapter 9 in Istvan Hont and Michael Ignatieff (eds.), Wealth and Virtue: The Shaping o f Political Economy i n the Scottish Enlightenment (Cambridge : a t the Universit y Press , 1983) . Thi s volum e resulted fro m a conferenc e inspire d substantiall y by Pocock' s centra l theme. 8. J . G . A . Pocock , Machiavellian Moment, p . 493 . Th e tensio n betwee n thi s concept o f civi c virtue an d Christia n moralit y is set out as follows in Pocock's "Cambridg e Paradigms an d Scotc h Philosophers," p. 236 : ... i t i s worthwhil e t o not e th e importan t tension s betwee n civi c an d Christian morality . Th e citizen (o r 'patriot' ) di d no t forgiv e o r love hi s city's enemies , an d Machiavelli had carried this distinction so far that even the public character o f virtue began to appear morall y ambivalent. In a universe wher e everythin g wa s civic, th e practic e o f religion woul d b e a function o f citizenshi p and ther e woul d b e n o roo m fo r a n autonomou s clergy ; th e possibilit y fascinated post-Purita n Erastians an d deists, bu t such worship might be directed toward s the gods of a classical city rather than th e creato r o f th e civitas Dei. . . . Th e anti-Christia n possibilities laten t in th e civic idea l help accoun t fo r it s rol e i n th e Enlightenment , bu t onl y begi n t o accoun t fo r th e profoun d ambivalences o f th e Enlightenment' s visio n o f th e self .

9. "Cambridg e Paradigm s an d Scotch Philosophers, " p . 240 . 10. Ibid., p . 251 . 11. Ibid., p . 246 . Istva n Hont makes an interesting lin k between Samue l Pufendorf s reconstruction of Grotius's jurisprudence and Adam Smith's theory of commercial societ y in "Th e Languag e of Sociability an d Commerce: Samue l Pufendorf and the Theoretical Foundation s of the Four Stage s Theory," i n Anthon y Pagde n (ed.) , Languages o f Political Theory i n Early Modern Europe (Cambridge: a t th e Universit y Press , 1986) . 12. "Cambridg e Paradigm s an d Scotc h Philosophers, " p . 251 . 13. Heavenly City, pp . 30-31 . 14. At least half of Gay's stud y is concerned wit h the complex relationship, as he sees it, betwee n Christianity an d the Enlightenment ; notably, Chapters 4 t o 7, pp . 207-419 . 15. Ibid., pp . 322-323 . 16. Ibid., pp . 418-419. Gay's Prefac e note s that he "discovered " Hume as an undergraduate in 1944 at the University of Denver and that his work on the Enlightenment dates from that occasion. 17. "Need s and Justice i n the Wealth of Nations: A n Introductory Essay," Chapte r 1 in Wealth and Virtue, p . 7 . Althoug h he does no t deal with Hume, Barry Schwartz captures well the complexity o f Ada m Smith' s vie w o f huma n being s an d th e critica l tempering role o f "love , gratitude , friendship, an d esteem" i n his Th e Battle for Human Nature: Science, Morality, an d Modern Life (New York : W . W . Norton , 1986 ) especially, pp. 57-66 . Schwartz' s is a thoroughgoing study of the gross inadequac y of the psychological assumption s underpinning neoclassical economic theory.

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18. Albert O. Hirschma n has traced ou t an elaborate generalize d version of this proposition fro m St. Augustine to Adam Smith i n The Passions an d the Interests: Political Arguments for Capitalism Before It s Triumph (Princeton : Princeto n University Press, 1977) . Hi s basic argumen t is straightforward enough; namely , that an important strand of thought emerged fro m medieva l origin s asserting that men's wicked or disruptive passions could be tamed by their pursuit of rational self-interest. Hi s thesis is summed up by Montesquieu: "An d i t is fortunate for men to be in a situation which, though their passions may prompt the m to be wicked (mechant) , they have, nevertheless, a n interest i n not being so. " Th e portrai t draw n by Hirschman of post-Platonic though t is of a bipolar clash i n man between passio n an d reason (p . 43) . Reaso n bein g judged an inadequat e counterweight t o passio n (pp. 4 6 an d 73n) , interes t i s wedge d in , notabl y rationa l economi c interest , t o achiev e balance . Thus, capitalis m acquire s a high-level rationale. Wha t is missing in this interesting exercise i s the third strand in , say , Plato , Hume , an d Freud: th e tempering instinct in man to protect th e continuity of the community via reason (i n the full Platoni c sense), "sympathy " as in Hume and Adam Smith, and Freud's super-ego . 19. David Hume , Philosophical Works, T . H . Gree n an d T. H . Grose , eds . (London : Longman s Green, 191 2 ed.) , Vol . Ill , p . 238 . 20. David Hume, Writings o n Economics, edited and introduction by Eugene Rotwein (Madison: University of Wisconsin Press, 1955) , pp. 5 2 and xxii-liii, wher e Rotwein reviews from al l sources Hume's economic psychology . 21. Ibid., especiall y pp . 21-22 . Hume' s view o f the complexity of the human motives enterin g into economic decision s i s echoed by Keynes's dictum: "I f huma n nature felt n o temptation t o take a chance , n o satisfaction (profi t apart ) in constructing a factory, a railway, a mine or a farm, ther e might not be much investment merely a s a result of cold calculation" (General Theory, p . 150) . A s noted i n th e text , Kar l Mar x als o regarde d th e proces s o f investmen t "accumulation " unde r capitalism a s the result o f motives and compulsions transcending the search for profit. Among mor e modern economists, Joa n Robinson i s virtually alone in her effort t o introduce "anima l spirits" into the determinatio n o f investment , quotin g Keynes's us e o f th e phras e i n a contex t muc h lik e tha t quoted above (General Theory, pp . 161-162) . References are to be found i n Joan Robinson, Essays in th e Theory o f Economic Growth (London : Macmillan , 1962) , pp . 36-3 8 an d 87 . 22. E . Rotwei n (ed.) , David Hume, pp . 1 5 and 21-22. For a detailed applicatio n o f the concept of diminishin g relativ e margina l utilit y t o politics , se e W . W . Rostow , Politics an d th e Stages o f Growth (Cambridge : a t the University Press, 1971) , especiall y pp . 7-25 . Fo r the spacious founda tions o f classica l politica l economy , see , especially , Lione l Robbins , Th e Theory o f Economic Policy i n English Classical Political Economy (London : Macmillan , 1952) , especiall y Lectur e I , "The Syste m o f Economic Freedom. " 23. I hav e arbitraril y define d thi s perio d o f crystallizatio n from Hume' s brie f autobiographica l sketch include d i n William Bel l Robertson' s editio n o f Hume's Political Discourses (Londo n an d Felling-on-Tyne: Walte r Scot t Publishing Co., 1906) , pp. xiv-xxii . Th e years indicate d begin with Hume's abandonmen t a t th e ag e o f 2 3 o f th e quie t stud y o f th e classic s i n Edinburg h for a brie f interlude i n Bristol an d then a longer perio d i n France. I t closes wit h the publication of hi s Essays Moral an d Political whe n h e wa s 31 . Th e interva l could , o f course , b e extende d a decade t o th e publication o f hi s Political Discourses, whic h include s the bul k of hi s economic writing . 24. See , fo r example, T . S . Ashton , Economic Fluctuations i n England, 1700-1800 (Oxford: at the Clarendon Press , 1959) , p. 187 . Ashto n provides a useful tabl e exhibiting annually the number of men in the armed forces. Th e peak figure for the War of Spanish Succession (1711 ) was 186,000 ; for th e Wa r o f Austria n Successio n (1746) , 136,000 ; the Seve n Years ' Wa r (1762) , 205,000 ; the American Wa r o f Independence (1782) , 237,000 . The peak leve l during the French Revolutionar y and Napoleonic Wars was approximately 500,000. In the relatively peaceful interva l 1713-173 8 the British arme d force s rarel y exceede d 50,000 . Se e Figure 2.1, this volume. 25. Phylli s Deane, Th e First Industrial Revolution (Cambridge : a t the Universit y Press , 1967) , p. 7 . The British agricultural surplus down to the mid-eighteenth century—in fact, t o the late 1760 s and 1770s—ma y explain, i n part, the limite d impac t of physiocratic doctrines on Hume and Adam

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Smith. Hum e di d no t thin k well o f th e physiocrats , bu t Smit h respecte d th e Frenc h theorist s an d their emphasis o n the importance o f agriculture; but neither Hume nor Smith shared the French vie w that public policy wa s distorted a t the expense o f agriculture. On physiocratic (an d earlier) theorie s of economi c growt h see , fo r example , Josep h Spengle r "Mercantilis t an d Physiocrati c Growt h Theory," Chapte r I i n Ber t Hoselit z (ed.) , Theories o f Economic Growth (Glencoe , 111 : The Fre e Press, 1960) . 26. E . Rotwei n (ed.) , David Hume, p . 112 . 27. Phylli s Deane, First Industrial Revolution, pp . 1 1 and 21-22. Th e rise i n grain prices fro m about mid-century and the shif t o f Britain toward a net grain import position are well established b y reasonably fir m statistics . But the path of agricultural output in the course of the eighteenth century, of real wages, an d the role of agriculture in the protracted dynamic process yielding the takeoff after 1783 ar e stil l th e subjec t o f livel y debate . Tha t debat e i s reviewe d an d som e ne w proposition s asserted i n R . V . Jackson , "Growt h an d Deceleratio n i n Englis h Agriculture , 1660-1790, " Economic History Review, Vol . XXXVII , No . 3 , Augus t 1985 . Briefly , Jackso n argue s tha t .the increase i n agricultura l outpu t dow n t o th e 1740 s wa s greate r tha n Dean e an d Col e allowed , [Phyllis Deane an d W. A . Cole, British Economic Growth, 1688-1959 (2d ed.) (Cambridge : at the University Press, 1967) ] an d the subsequent expansion slower. He argues that the abundance in the first hal f of th e century yielded the population surge in the second hal f at just the time agricultural output decelerated. Hi s conclusion, which is quite consistent with grain price and foreign trade data, is clearly relevan t t o th e shif t fro m complacenc y abou t the food-populatio n balance i n Hum e and Smith t o th e acut e bu t transien t anxiety of pre-1813 Malthu s and Ricard o (p . 351) : Finally, th e major swing s in agricultural outpu t and the population durin g 1660-179 0 are a fittin g backdrop t o th e gloom y scenario s devise d b y Malthu s an d th e classica l economists . Her e i s a sequence in which risin g livin g standard s ar e followed b y accelerated populatio n growt h and , i n the lon g run , b y a lac k o f suppl y respons e i n agriculture . Th e classica l doctrine s o f long-ru n subsistence wages and of diminishing return s i n agriculture impose d b y a fixity o f resources may have turne d ou t t o be a poor guid e t o th e future, bu t the y ar e no t out o f place whe n see n i n th e context o f th e secula r deceleratio n i n Englis h agricultura l outpu t growth , an d o f th e hal f o f a century o f slowl y fallin g level s o f pe r capit a outpu t an d consumptio n o f agricultura l product s identified i n thi s paper .

28. Measure d fro m th e beginnin g o f th e centur y t o th e averag e fo r 1748-1752 , industria l production ros e a t an annual rate of .8% ; the volume of exports at 1.3% ; re-exports, .9% ; imports , .6%. Se e W. W . Rostow , How It All Began (Ne w York : McGraw-Hill, 1975) , p . 43 . 29. Deane an d Cole, op . cit., p . 80 . See also N. F. R. Crafts, "Englis h Economi c Growth in the Eighteenth Century : A Reexaminatio n o f Dean e an d Cole' s Estimates, " Th e Economic History Review, Vol . XXIX , No . 2 , (Ma y 1976) , pp . 226-235 . Crafts ' calculation s woul d questio n th e acceleration of growt h afte r 174 0 exhibite d in the Dean e and Col e figures . Whil e sharin g Crafts ' scepticism o f any eighteenth centur y GNP o r GNP pe r capita calculations, I am inclined to believ e an acceleration o f sorts occurred on the basis of quite firm disaggregate d foreign trade and industrial production series . 30. T . S . Ashton , Th e Industrial Revolution, 1760-1830 (London : Oxfor d Universit y Press , 1948), p . 57 . 31. Ibid., p . 58 . Se e als o W . W . Rostow , Ha w I t Al l Began, pp . 157-160 . Th e numbe r of English patent s grante d i n th e 1750 s wa s 92 , no t muc h abov e th e figur e for th e 1720 s (89) . Th e figure jumped t o 20 5 i n th e 1760 s an d wa s 64 7 fo r the 1790s . 32. E . Rotwei n (ed.) , David Hume, p . 77 . 33. Ibid., pp . 10-11 . 34. Ibid., pp . 11-13 , I n thi s passag e Hum e goes o n t o argu e that dynamic manufacturing an d agricultural sectors generate a surplus that can be diverted by taxation to support military operations "without deprivin g anyone o f th e necessarie s o f life . Th e mor e labour , therefore , i s employed beyond mer e necessaries , the mor e powerfu l i s any state . . . . " (p . 11). 35. Ibid., p . 13 .

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36. Se e W . W . Rostow , How It All Began, p . 181 . 37. E . Rotwei n (ed.) , David Hume, pp . 52-53. 38. Ibid., pp . 4 9 an d 53. 39. Pier o Sraff a an d M . H . Dob b captur e vividl y what Hum e ha d i n min d i n th e following passage contrasting Davi d Ricardo's an d Nathan Rothschild's views of money making and the joys of busines s (Works an d Correspondence o f David Ricardo, Vol . X , Biographical Miscellany, [Cambridge: a t the University Press, 1955] , p . 90) : There could hardl y hav e bee n tw o mor e contrastin g types. I t was i n the making o f money tha t Rothschild foun d th e mai n enjoyment o f life : no t s o muc h prizin g the mone y for wha t it could buy, a s "findin g intens e deligh t i n th e scramblin g an d fighting , th e plottin g an d tricking , b y means of which it was acquired." A story i s told that , whe n someone sai d to him: "I hop e tha t your children ar e not too fond of money and business, to the exclusion of more important things. I am sure you would not wish that," Rothschild replied: " I a m sure I should wish that. I wish them to giv e mind , an d soul , an d heart , an d body, an d everything to business; that i s the wa y to be happy." Ricardo, however , brough t up his sons to be country gentlemen, and as for himself had no craving for the bustle of the City and viewed financial success as a means of retirement into the country, to the quiet pursuit of his ' 'favourite science.'' When he first went to Gatcomb he wrote Malthus: " I believ e tha t i n thi s swee t plac e I shal l no t sig h afte r th e Stoc k Exchang e an d its enjoyments." 40. E . Rotwei n (ed.) , David Hume, p . 48 . 41. Ibid., p . 17 . 42. Ibid., p . 146 . 43. Ibid., pp . 128-129 . I n commenting on this reference A . W . Coat s note s correctl y tha t "i t made littl e o r no impact." 44. Ibid., p . 28 . 45. Ibid. 46. Ibid., p . 24 . 47. Dean e an d Cole, British Economic Growth, p . 263 . 48. E . Rotwei n (ed.) , David Hume, pp . 17-18 . Th e context o f this dictu m i s typical o f both Hume and eighteenth-century Europe . I t occurs i n a passage commenting on the failure of societie s in the tropics, unchallenge d by the necessity t o struggle for food, shelter, an d clothing, to generat e the sophisticate d advance s o f societie s se t i n mor e temperat e climates . 49. Davi d Hume, The History o f England (London : Strahan [printer], 1802) . References to prices are to be found in Vol. II, pp. 36-37, 224-225, 501; Vol. III, pp. 402-403; Vol. IV, pp. 326-329, 446-449; Vol. VI , pp. 23-25, 46-51, 180-183 ; Vol . VII , pp. 328-331. 50. Ibid., Vol . III, pp . 402-40 3 (1508) ; Vol. IV. , p . 32 7 (1549) . 51. E . Rotwei n (ed.) , David Hume, pp . 5-6 . 52. Fo r an account o f the application of this phrase to Hume's analysis of economic developmen t and th e subsequen t controversy , se e Istva n Hont , "Th e 'ric h country-poo r country ' debat e i n Scottish classical politica l economy," i n Hont and Ignatieff (eds.) , Wealth and Virtue, p . 274 , n7 . Hont's essay i s clearly the most sophisticated and illuminating analysis of the debate now available . In the vocabulary of my stages of economic growt h Hume was dealing here with economies a t early and late r stage s o f th e precondition s fo r takeoff . Th e fulles t discussio n of tha t distinctio n is m y Politics an d th e Stages o f Growth, Chapte r 3 , especiall y pp . 54-63 . Ther e ca n be—indeed mus t be—considerable economi c progress in the preconditions stage. Suc h progress is distinguished from the surge i n takeoff by the absorptio n of major new technologies i n one or more sectors generatin g not only high momentum in that sector bu t stron g spreading effects i n sectors linke d to the leading sector (o r sectors), includin g accelerate d urbanization , the criterion Kuznets use d to date the onset of modern economic growth. For the economic dynamics of the preconditions see also The Stages of Economic Growth, Chapte r 3 . 53. Thi s summar y owe s a goo d dea l t o Istvan Hont's account , Hon t an d Ignatieff, Wealth and Virtue, pp . 271-294 .

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54. Smout' s essa y i s Chapter 2 i n Hont an d Ignatieff (eds.) , Wealth and Virtue, pp . 45-72 . A valuable bibliography o n Scottish economic histor y is provided o n p. 45n . and in other footnotes . 55. Ibid., pp . 71-72 . 56. Hon t traces this strand in Western though t back to Aristotle and Machiavelli (ibid., p . 272). 57. E . Rotwei n (ed.) , David Hume, pp . 80-82 . 58. Ibid., pp . 34-35 . 59. Ibid., pp. 190-205 , for textual reflections of the debate, including letters to Lord Kames , the recipient o f communications fro m bot h Hume and Tucker. Also , Istvan Hont, Hont and Ignatieff , Wealth an d Virtue, pp . 275-276. 60. E . Rotwei n (ed.) , David Hume, p . 200. 61. Ibid., pp . 14-15 . Se e also p . 8 0 and Rotwein's discussion , p. cvii i n. 62. Ibid., p . 38 . Se e also his formulation of the same point in a letter to Oswald, pp. 197-198 . 63. Ibid., p . 198. 64. Ibid., pp . 108-109 . 65. Fo r a discussion of the tripartite view of man on which Plato built his Politics an d Freud hi s Civilization an d Its Discontents, se e W. W . Rostow , Politics an d th e Stages o f Growth, pp . 7-1 2 and relate d note s on pp. 361-364 . 66. David Hume, pp . c and cii. 67. Ibid., p . lii. 68. Th e following passage extracte d from ibid., pp . 22-29 , captures Hume's view of the larger human an d socia l benefit s of a prosperous mercantile and manufacturin g economi c system. Another advantag e of industry and of refinements in the mechanical arts, is, that they commonly produce som e refinement s i n the liberal arts; nor can one be carried t o perfection, without being accompanied, i n some degree , wit h the other . The more thes e refine d art s advance , th e mor e sociabl e me n become: no r is it possible, that , when enriched with science, and possessed o f a fund o f conversation, they should be contented t o remain i n solitude, o r liv e with their fellow-citizens i n that distant manner, which i s peculiar t o ignorant an d barbarous nations . The y floc k int o cities; lov e to receive and communicate knowl edge; t o sho w thei r wi t o r thei r breeding ; thei r tast e i n conversatio n o r living , i n clothe s o r furniture. Curiosit y allures th e wise ; vanity the foolish ; an d pleasur e both . Particula r club s an d societies are everywhere formed : Bot h sexes meet i n an easy sociabl e manner : and the tempers of men, a s wel l a s thei r behaviour , refine d apace . S o that , beside th e improvement s whic h the y receive fro m knowledg e an d th e libera l arts, i t i s impossibl e bu t the y must feel a n encrease of humanity, from the very habit of conversing together, and contribute to each other's pleasure and entertainment. Thu s industry, knowledge, an d humanity, ar e linke d togethe r b y an indissolubl e chain, and are found, from experience as well as reason, t o be peculiar to the more polished, and, what ar e commonly denominated , th e mor e luxuriou s ages. . . . But industry, knowledge, and humanity are not advantageous in private life alone: They diffuse their beneficia l influenc e on th e public, and rende r th e governmen t a s grea t an d flourishin g a s they mak e individual s happy an d prosperous . Th e encreas e an d consumptio n o f al l th e commodities, whic h serve t o the ornament and pleasure of life, ar e advantageous to society; because, at the same time that they multiply those innocen t gratifications to individuals, they are a kind of storehouse o f labour , which , i n the exigencie s o f state , ma y b e turne d t o public service . I n a nation, wher e ther e i s n o deman d fo r suc h superfluities , me n sink int o indolence , los e al l enjoyment o f life , an d ar e useless t o th e public, which cannot maintai n or support it s fleets and armies, fro m th e industr y of suc h slothful members. . . . Laws, order , police , discipline ; these can never b e carried t o any degree of perfection, befor e human reason ha s refined itself by exercise, an d by an application to the more vulgar arts, a t least, of commerc e an d manufacture . . . . Knowledge in the arts of government naturally begets mildness and moderation, by instructing men i n th e advantage s of human e maxims above rigou r an d severity , which drive subject s into rebellion, an d mak e th e retur n to submissio n impracticable, b y cutting off al l hopes o f pardon . When th e temper s o f me n ar e softene d a s wel l a s thei r knowledg e improved , thi s humanity appears stil l more conspicuous, and is the chief characteristic which distinguishes a civilized age

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from time s of barbarity and ignorance. Factions ar e then less inveterate, revolutions less tragical, authority les s severe , an d sedition s les s frequent. Eve n foreig n war s abat e of thei r cruelty; and after th e field of battle, wher e honour and interest stee l men against compassion a s well as fear, the combatant s dives t themselve s o f th e brute , an d resume th e man. . . . The libertie s o f England, so far from decayin g since th e improvements in the arts, hav e never flourished s o muc h a s during that period . An d thoug h corruption ma y see m t o encrease o f lat e years; this is chiefly to be ascribe d to our establishe d liberty , whe n our princes hav e found the impossibility o f governin g withou t parliaments, o r o f terrifyin g parliaments by th e phanto m o f prerogative. No t t o mention , tha t thi s corruptio n o r venalit y prevail s muc h mor e amon g th e electors tha n th e elected; an d therefore canno t justly be ascribe d t o an y refinements in luxury. If w e conside r th e matte r in a proper light , w e shall find, tha t a progress i n the art s i s rather favourable t o liberty , and ha s a natural tendency t o preserve, i f not produc e a free government . The lowe r hous e i s the suppor t o f our popular government ; an d al l the worl d acknowledges , that it owed it s chief influence and consideration to the encrease o f commerce, whic h threw such a balanc e o f propert y int o the hand s of the commons . 69. Ada m Smith' s accoun t i s include d i n Willia m Bel l Robertson' s introductio n to Hume' s Political Discourses, pp . xxii-xxvii ; Hume' s "M y Ow n Life, " pp . xiv-xxii . Followin g i s a memorable anecdote, a s reported by Smith, that captures a good deal of Hume's character and style: He said . . . when he was reading a few days before, Lucian' s Dialogues o f the Dead, amon g all the excuses whic h are alleged to Charon for not entering readily into his boat, he could not find one tha t fitte d him : he ha d n o hous e t o finish , h e ha d n o daughte r to provid e for , he ha d n o enemies upo n whom he wished to revenge himself. " I coul d not well imagine," sai d he, "what excuse I coul d mak e t o Charo n i n orde r t o obtai n a littl e delay . I hav e don e everythin g o f consequence whic h I ever mean t to do; an d I could at no time expect to leav e my relations and friends i n a better situatio n tha n that in which I am now lik e to leave them; I therefore hav e all reason t o die contented." He then diverted himsel f with inventing several jocular excuses, whic h he supposed h e might make to Charon, and with imagining the very surly answers which it might suit the character o f Charon to return to them. "Upo n further consideration," said he, " 1 thought I might say to him, good Charon , I have been correcting m y works for a new edition; allow me a little tim e that I ma y se e how th e public receive s th e alterations. " Bu t Charon woul d answer , ' 'When yo u have seen the effect o f these, yo u will be for making other alterations. There will be no en d o f suc h excuses ; so , hones t friend , pleas e ste p int o th e boat." Bu t I migh t still urge , "Have a little patience, goo d Charon; I have been endeavouring to open the eyes of the public. If I liv e a fe w year s longer , I ma y hav e th e satisfactio n o f seein g th e downfal l of som e o f th e prevailing system s of superstition." But Charon woul d then lose all temper an d decency, "Yo u loitering rogue; that will not happen these man y hundred years. D o you fancy I will grant you a lease fo r s o long a term? Ge t int o the boat thi s instant, you lazy, loitering rogue." 70. Fo r a successful effort t o evoke Hume as a human being, see Ernest Campbell Mossner, The Forgotten Hume, l e ba n David (Ne w York: Columbia University Press, 1943) . 71. The quoted phrases are, respectively, from J . Hill Burton, a biographer of Hume (1846), and R. B . Haldane , a biographe r o f Ada m Smit h (1887) , bot h quote d i n W . B . Robertso n (ed. ) "Introduction," Political Discourses, pp . vii i and xi. The ironic streak in Hume and his systematic use o f iron y a s a literar y an d expositiona l device i s full y develope d i n Joh n Vladimir Price, Th e Ironic Hume (Austin : University of Texas Press , 1965) . Price' s study transcends the narrow central theme an d yield s a persuasiv e genera l portrai t of Hum e as a personality. 72. Th e Works and Life o f Walter Bagehot, edite d b y Mrs . Russel l Harrington (London: Long mans Green, 1915) , Vol . VII , p. 8 . T . W . Hutchison , On Revolutions an d Progress i n Economic Knowledge (Cambridge : a t the Universit y Press, 1978) , p . 5 , make s the same point: Smith remaine d a philosophe r fro m th e beginnin g to th e en d o f hi s life . H e woul d neve r have regarded hi s wor k a s a whole , a s primaril y economic o r politica l economics, h e though t of economics a s only one chapter , an d no t th e mos t importan t chapter, in a broad stud y o f society and human progress whic h involved psychology and ethics (in social and individua l terms), law, politics an d th e developmen t o f th e art s an d sciences .

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73. Ada m Smith , Essays (London : Alex Murray , 1869) , pp . 48-49. 74. Ibid., p . 161 . 75. Ibid., p . 163 . Samue l Hollander's referenc e an d discussio n i n his Th e Economics o f Adam Smith (Toronto : Universit y of Toronto Press , 1973) , pp. 248-249 . See , also , Jaco b Viner , "Th e Invisible Han d an d Economi c Man, " Chapte r II I i n The Role o f Providence i n th e Social Order (Philadelphia: America n Philosophica l Society, 1972) , especially pp. 81-84. A further reference is in The Essential Adam Smith (edite d an d with introductor y readings by Robert L . Heilbrone r with the assistanc e o f Laurenc e J . Malone ; Ne w York : W. W . Norton , 1986) , pp . 60-61 . Alber t O . Hirschman in his The Passion an d Interests als o considers a number of examples of the workings of the "invisibl e hand, " a doctrin e tha t evidently relate s t o hi s ow n theor y o f unbalance d growth. William Baumol correctly pointed out to me that Smith's use of the "invisibl e hand " in The Theory of Moral Sentiments i s generally broade r tha n in The Wealth o f Nations; bu t it should be noted that the latter also contain s a phrase suggestin g the "invisibl e hand " i s more widely a t work (p . 423) : ". . . he is in this, as in many other cases, le d by an invisible hand to promote an end which was no part of his intention.'' Like many writers of his time Adam Smith tended to avoid direct reference t o the Deity wit h phrases suc h as "th e Autho r of nature," "th e grea t Directo r of nature," etc . (The Theory o f Moral Sentiments, Dugal d Steward, ed. [London : G. Bell , 1911]), pp. 109-110 . Following is the context o f Smith's us e of the "invisibl e hand " i n Theory o f Moral Sentiments (pp . 264 265). The ric h onl y selec t fro m th e heap wha t i s most preciou s an d agreeable. The y consum e littl e more tha n the poor; an d in spite o f their natural selfishness an d rapacity, thoug h they mean only their ow n conviency , thoug h th e sol e en d whic h the y propos e fro m th e labour s o f al l th e thousands who m the y emplo y b e th e gratification of thei r own vai n and insatiable desires , the y divide wit h the poor th e produce o f all their improvements. The y ar e led by an invisible hand to make nearl y the same distributio n o f the necessaries o f life whic h would hav e been mad e ha d the earth bee n divide d int o equal portion s amon g al l it s inhabitants; and thus , withou t intending it, without knowing it, advanc e th e interest of the society, an d afford mean s t o the multiplication of the species. Whe n providence divide d the earth amon g a few lordly masters, i t neither forgot no r abandoned thos e wh o seeme d t o have bee n lef t ou t i n the partition. These last , too , enjoy thei r share o f all tha t it produces. I n wha t constitutes th e real happiness o f human life , the y are in n o respect inferio r t o thos e wh o woul d see m s o muc h abov e them . I n eas e o f bod y an d peac e o f mind, al l the different rank s of life ar e nearly upon a level, an d the beggar, wh o suns himself b y the sid e o f th e highway , possesse s tha t securit y which kings ar e fightin g for. 76. The ban mot is often attribute d to Walter Bagehot; but he quotes it from an unnamed source in his essa y "Ada m Smit h an d Ou r Moder n Economy, " i n Norma n Steva s (ed.) , Walter Bagehot, Vol. II , p . 177 . 77. See , fo r example, Irm a Adelman, Theories o f Economic Growth and Development, Chapte r 3, "Ada m Smith, " pp . 25-42 ; Joh n R . Hicks , Capital an d Growth (Oxford : a t th e Clarendo n Press, 1965) , pp. 36-42; D. P. O'Brien, Th e Classical Economists (Oxford : at the Clarendon Press, 1975), pp . 206-214 ; W. A . Eltis , "Ada m Smith' s Theor y o f Economic Growth, " i n Andrew S . Skinner and Thomas Wilson (eds.), Essays o n Adam Smith (Oxford : at the Clarendon Press, 1975) , pp. 426-454; Paul A. Samuelson , " A Moder n Theorist's Vindicatio n of Adam Smith," American Economic Review, Vol. 67, No. 1 (February 1977) . A more generalized model embracing th e whole line from Smit h t o Marx is Samuelson's "Th e Canonica l Classical Mode l of Political Economy, " The Journal o f Economic Literature, Vol . XVI , No . 4 (Decembe r 1978) , i n whic h once mor e h e observes: "S o t o speak, withi n every classica l economis t there is to be discerned a modern econo mist tryin g t o b e born. " Samue l Hollande r ha s writte n a lon g commentar y o n "Professo r Sam uelson's Canonical Political Economics," mainly confirmatory i n Journal o f Economic Literature, Vol. XVII I (Jun e 1980) , pp . 559-574 . Whil e emphasizing quite correctly the difficult y o f repre senting accurately Smith's theory of growth i n symbolic terms, due t o ambiguities in his definitio n of key terms, Joseph Spengle r also tries his hand in "Ada m Smith's Theory of Economic Growth " Parts I and II , Th e Southern Economic Journal, Vol . XXV, No. 1 , and Vol . XXVI, No . 2 (April

Notes t o Pages 34-38 57

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and July 1959) . Bringing to bear then contemporary developmen t theory as his matrix, Spengler's analysis o f Smith' s growt h theor y i s mor e elaborat e tha n thos e tha t simpl y appl y th e term s o f Harrod-Domar o r neo-classica l growt h models . T o th e bes t o f m y knowledge , th e firs t effor t t o render Adam Smith's theory of economic growth into mathematical terms was an elegant three-pag e paper of Alain Enthoven's, " A Brie f Summary of Th e Wealth of Nations," writte n for my graduate seminar i n economi c histor y a t M.I.T. i n the autum n of 1954. 78. Smith' s failur e to reflect the arrival of the industrial revolution is the subject of some analysis and speculation . See , for example , R . Koebner , "Ada m Smit h an d th e Industria l Revolution " Economic History Review, Vol . XI, No . 3 (April 1959) , pp . 381-391 ; Charles P . Kindleberger , "The Historica l Background : Ada m Smit h an d th e Industria l Revolution," Chapte r 1 in A . S . Skinner an d Thoma s Wilso n (eds.) , Th e Market an d th e State (Oxford : a t th e Clarendo n Press , 1976), pp. 1-41 , includin g comments by Asa Briggs and R. M. Hartwell; and Hiram Caton, "Th e Pre-Industrial Economic s o f Ada m Smith, " Journal o f Economic History, Vol . 45, No . 4 (December 1985) , pp. 833-853 . For a somewhat more positive view of Adam Smith's awareness of the process o f technologica l change , se e Hollander , Economics o f Adam Smith, pp . 208-217 . Hollander makes clear, however , th e distinction between the kind of incremental technological change that Smith mainly had in mind as a result of the widening of the market and the ' 'radical changes in process" associate d wit h Schumpeteria n innovatio n (p . 212) . He associate s Smith' s failur e t o capture full y th e emerging innovationa l drama to his apparent lack of knowledge of what was going on i n the cotto n industry. 79. Ada m Smith, The Wealth of Nations, edite d by Edwin Cannan, with an introduction by Ma x Lerner (Ne w York: Random House, 1937) , p . 7 . Smith' s ful l expositio n of his central propositio n about th e divisio n o f labo r i s presented , lik e th e them e o f a symphony , i n a sustaine d openin g passage: pp . 3-10 . 80. Smit h (ibid., p . 76 ) asserts that the price of grain was "deare r i n the last century" tha n a t ' 'present,'' and he adduces a table (pp. 256-258) concerning the wheat price in the Windsor Market for th e period 1595-1764 , draw n from Charle s Smith , Tracts on Corn Trade, 1766, pp. 97-102 . Like other such data, it exhibits a trough in the 1740s. I t is a bit surprising that Smith did not update the table beyond 176 4 and thereby missed the rising price trend after mid-century. See, for example, T. S . Ashton , Economic Fluctuations, p . 181. 81. Wealth of Nations, Chapte r VII I ("Of the Wages of Labour"), pp. 64-68, contain s most of Smith's discussio n of th e determinant s of th e siz e of population. 82. Ibid., pp . 6 9 and 81. 83. Edwi n Canna n (ed.), Lectures b y Adam Smith (Oxford : a t the Clarendon Press, 1896) , pp . 255-258. 84. Wealth o f Nations, pp . 81-82 . 85. Ibid., p . 737. For Smith's full expositio n of his views on education, see "O f th e Expence of the Institution s for th e Educatio n o f Youth, " ibid., pp . 716-740 . Fo r a n analyti c dissection o f Smith's view s on education see Margaret G. O'Donnell , Th e Educational Thought of the Classical Political Economists (Lanham , Maryland: University Press o f America, 1985) . 86. Wealth o f Nations, pp . 734-735 . In the progress of the divisio n of labour , th e employment o f the far greater par t o f those wh o live by labour, tha t is, of the great bod y of the people, come s t o be confined to a few very simpl e operations, frequentl y t o on e o r two . But th e understanding s o f th e greate r par t o f me n ar e necessarily forme d b y thei r ordinar y employments . Th e ma n whos e whol e lif e i s spen t i n performing a few simple operations, o f which the effects too are, perhaps, alway s the same, o r very nearly the same, ha s no occasion t o exert his understanding, or to exercise hi s invention in finding out expedient s fo r removin g difficultie s whic h neve r occur . H e naturall y loses, therefore , th e habit of such exertion, an d generally becomes a s stupid and ignorant as it is possible for a human creature to become. Th e torpor of his mind renders him, not only incapable of relishing or bearing a part i n any rational conversation , but of conceiving any generous, noble , or tender sentiment , and consequently o f formin g any just judgment concerning man y even o f th e ordinary duties of

580 Notes

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private life . O f th e grea t an d extensiv e interest s o f hi s countr y h e i s altogethe r incapabl e o f judging; an d unless ver y particula r pains hav e been take n t o render hi m otherwise, h e is equally incapable o f defending hi s country i n war. Th e uniformit y of his stationary lif e naturally corrupts the courag e o f hi s mind , an d make s hi m regar d wit h abhorrenc e th e irregular , uncertain , an d adventurous lif e o f a soldier. I t corrupts even th e activity of his body, an d renders hi m incapabl e of exerting hi s strength with vigour and perseverance, i n any other employment than that to which he has been bred . Hi s dexterity at his own particular trade seems , i n this manner, t o be acquired a t the expenc e o f hi s intellectual , social , an d martia l virtues . Bu t i n every improve d an d civilize d society thi s is the state int o whic h the labouring poor , tha t is, th e great bod y of the people, must necessarily fall , unles s governmen t take s som e pain s to prevent it . 87. Ibid., pp . 314-315 . Fo r a luci d analysi s o f th e complexitie s o f Smith' s distinctio n o f productive fro m unproductiv e labor, see , especially , W . A . Eltis , Adam Smith's Theory, pp . 433 435. On e o f th e bes t contemporar y exposition s o f th e distinctio n betwee n productiv e an d non productive labo r i s in Turgot' s Reflections o n th e Formation an d th e Distribution o f Riches (New York: Augustus Kelley, Reprint s of Economic Classics , 1963) , pp. 1-17 . Turgo t distinguishe d his views fro m physiocrati c dogma, bu t was , essentially , of tha t school. 88. Wealth of Nations, p. 315 . 89. Ibid., Fo r an elaboration o f one interpretation of this aspect of Smith's theory of growth, se e J. R . Hicks , Capital an d Growth, pp . 36-42 . Smith , however, clearl y include d manufacture s as well as agriculture in his plowback model, whic h Hicks does no t recognize (Wealth o f Nations, pp . 316-319). Fo r Ricard o an d th e corn growt h model , se e Chapter 2 , note s 117 , 118 . 90. Wealth o f Nations, p . 326 . 91. Th e characterizatio n is fro m Alexande r Gray, Th e Development o f Economic Doctrine: A n Introductory Survey (London : Longman s Green , 1931) , p. 123 . 92. Wealth o f Nations, p . 242 . 93. Ibid., pp . 321-323 . 94. Ibid., pp . 330-332 . 95. Ibid., p . 326 . 96. Ibid., p . 341 . 97. Ibid., pp . 245-246 . 98. Lectures, pp. 167-168 ; The Wealth of Nations, pp. 9-10. Th e meaning of "philosophers " in Smith's usage , "whos e trade it is not to do anything, but to observe ever y thing," i s suggested b y his listing of their several area s o f specialization (Lectures, p . 168) ; "mechanical , moral , political, chemical." I n Th e Wealth o f Nations Smit h als o allow s fo r creativ e invention s b y specialize d "makers of machines" (p . 10) . In this passage Smith's terse evocation of the creative process is just and memorable : "combinin g togethe r th e powers o f th e mos t distan t an d dissimila r objects. " 99. Th e evidenc e o n thi s perio d i s presente d an d discusse d i n W . W . Rostow , Th e World Economy: History an d Prospect (Austin : University of Texas Press, 1978) , pp. 311-313. See, also , Julian Hoppit, ' 'Financial Crise s i n Eighteenth Centur y England,'' Economic History Review, Vol. XXXIX, No . I , (Februar y 1986) , pp . 39-58. Hoppi t argue s persuasivel y tha t "los s of confidenc e arising fro m th e onse t o r progress o f war " wa s th e primar y caus e o f eighteenth-century financia l crises even afte r 177 0 whe n the private credit structur e had attaine d reasonably matur e statu s (pp . 56-57). 100. Ibid., p . 769 , not e 10 . 101. Wealth o f Nations, p . 406 . Ther e is another passage (ibid., p . 291 ) in which Smith exhibits sensitivity t o the importance o f time lag s i n the credi t process . H e warn s that bankers shoul d len d only fo r moderat e periods o f tim e and , especially , esche w th e financing of fixe d capital : Still les s coul d a bank afford t o advanc e hi m an y considerabl e part of hi s fixed capital; of th e capital whic h th e undertake r o f a n iro n forge , fo r example , employ s i n erectin g hi s forg e an d smelting-house, hi s work-house s and warehouses , the dwelling-houses o f his workmen , &c. ; of the capital which the undertaker of a min e employs i n sinking his shafts , in erecting engines for

Notes t o Pages 42-48 58

1

drawing ou t th e water , i n making roads an d waggon-ways, &c. ; o f the capital which the perso n who undertakes t o improve land employs i n clearing, draining, enclosing, manurin g and ploughing waste and uncultivated fields, in building farm-houses, with all their necessary appendage s o f stables, granaries , &c . Th e return s o f the fixe d capita l are i n almost al l cases muc h slower than those of the circulating capital; and such expences, eve n whe n laid out with the greatest prudence and judgment, ver y seldo m retur n t o the undertake r til l afte r a period of many years, a period b y far to o distan t t o sui t the convenienc y o f a bank.

Time lag s i n the expansio n o f fixed capita l are , o f course, centra l to an y usefu l explanatio n of th e intermediate, 9-yea r busines s cycle . 102. Ibid., pp . 242-243 . 103. Ibid., p . 217 . Smit h actually begins his analysis of basic commodities o n pp. 174-175 ; but he the n break s of f fo r ove r fort y page s i n hi s famou s digression o n th e valu e o f silve r ove r th e previous 4 centuries . 104. Ibid., p . 356 . 105. Ibid., pp . 357-360 . 106. Ibid., p . 358 . 107. Ibid., p . 359 . 108. D. P. O'Brie n comment s on Smith' s dua l vie w of the historica l sequence , attributin g to Hume's influenc e an awareness tha t the requirements of kings had generated urba n concentration s prematurely, i n term s o f Smith' s natura l sequenc e (The Classical Economists, p . 210) . Fo r a n interesting mode l o f physiocrati c doctrin e an d it s implications , see , especially , G . Vaggi , " A Physiocratic Mode l o f Relative Prices and Income Distribution, " Economic Journal, Vol . 95, No . 380, (Decembe r 1985) , pp . 928-947 . 109. Wealth o f Nations, p . lix . 110. Hont's discussion of Smith's views in the debate is to be found i n Hont and Ignatieff (eds. ) Wealth an d Virtue, pp . 298-306 . 111. Wealth of Nations, p . 91 . I n his discussion of levels of real income per capita in relation to rates of growth, Smit h observes: "France , though no doubt a richer country than Scotland , seem s not t o b e going forwar d so fast. I t is a common an d even popular opinion in the country, that it is going backwards ; a n opinio n which , I apprehend , i s ill-founde d even wit h regard t o France , bu t which nobod y ca n possibly entertai n with regard t o Scotland, wh o sees th e country now, an d wh o saw it twenty or thirty years ago." Smit h judged that Scotland was advancing slower than Englan d (ibid., pp . 9 0 an d 189) ; althoug h th e precise period s fo r which he was making the comparisons o f Scotland wit h France an d England are no t specified . 112. Th e quotation s ar e t o b e found , respectively , i n Istva n Hont, Hon t an d Ignatief f (eds.) , Wealth an d Virtue, p . 30 0 (wher e origina l sources ar e provided) , an d Th e Wealth o f Nations, p . 462. I t migh t be note d i n passing that , i n the discussion s within the United States governmen t o n post-1945 economic policy , on e stran d wa s articulated (notabl y by Will Clayton) i n terms almos t identical wit h the secon d quotation . Clayto n argue d tha t th e Unite d States coul d no t liv e in either prosperity o r safet y as the ric h ma n on the hill surrounded by impoverishe d peoples . H e deployed this argumen t agains t thos e wh o asserted , i n a mercantilis t spirit, that United State s assistanc e t o Europe woul d only foster dangerousl y stron g trading rivals. 113. Ibid., pp . 94-95 . 114. Ibid., p . 96 . Hollan d was experiencing the expected declin e in interest rates that, in Smith' s view, ha d th e wholesom e effec t o f drivin g rentiers int o commerce o r manufacture s where profit s were higher than the safe rate of interest. Bu t Holland was not yet experiencing a decline i n wages. 115. Hon t an d Ignatief f (eds.) , Wealth an d Virtue, p . 300 . 116. Wealth o f Nations, pp . 1 4 15 . 117. Ibid., pp . 736-738 . 118. Ibid., pp . 384-385 . 119. Wealth o f Nations, pp . 249-250 . 120. Ibid., p . 651 . I n Politics an d the Stages o f Growth (pp. 11-1 6 an d 361-365, notes 1 , 4, 5 ,

582

Notes to pages 48-52

11, 14 , 16-19 ) I lin k thi s tripartit e approac h t o governmen t to : (1 ) th e Plato-Freu d tripartit e conception o f ma n an d Plato' s "stat e withi n us" ; (2 ) other, simila r tripartite formulations of th e tasks of government; and (3) the tradition in public finance, flowing directly from Smith' s tripartite formulation, whic h divides expenditures under the headings of defense; law, order, an d administration; an d economi c an d socia l services . See , fo r example, Richar d A . Musgrave , Fiscal Systems (New Haven : Yale University Press, 1969) , Table 4-1, pp . 94-95 . 121. D . P . O'Brien , Th e Classical Economists, pp . 206-20 7 an d 275 , usefull y summarize s Smith's views on the legitimate positive functions o f public policy in relation to the economy under his tripartit e breakdown . See als o S . Hollander , Economics o f Adam Smith, pp . 262-267 . 122. Milton Friedman, Adam Smith's Relevance for 1976 (Los Angeles: International Institute for Economic Research , origina l paper 5 , Decembe r 1976) , pp . 11-15 . 123. Wealth of Nations, p . 423 . 124. Vol . II , p . 304 . Se e als o th e referenc e t o thi s passag e i n Lionel Robbins , Th e Theory o f Economic Policy, pp . 112-114 . 125. Wealth o f Nations, p . 308 . Lione l Robbin s comments on thi s passag e i n Th e Theory o f Economic Policy, pp . 30-31 .

Chapter 3 1. Hume's letter is to be found i n John Rae, Life o f Adam Smith (London: Macmillan, 1895) , pp . 286-287. 2. Piero Sraff a an d M. H . Dobb , Works an d Correspondence of David Ricardo, Vol. VI , Letters 1810-1815, (Cambridge : a t the Universit y Press, 1952) , p. xiv . 3. Ibid. Vol . II , Notes o n Malthus's Principles o f Political Economy. 4. Ibid., Vol . I , pp . 5-7 . 5. T . R . Malthus , Principles o f Political Economy, 2 d ed. (Ne w York: Augustus Kelley, 1951), pp. 310-311 . 6. Pier o Sraff a an d M . H . Dobb , Works an d Correspondence: Ricardo, Vol . II , Notes o n Malthus's Principles, p . vii . 7. Keynes's tribute is worth quoting. (Essays inBiography, London : Macmillan, 1933, pp. 133 135): The mos t important influenc e o f his [Malthus's ] late r year s wa s his intimacy wit h Ricardo, of whom h e said : I never love d anybod y ou t of my own family so much. Ou r interchange o f opinion was so unreserved, and the object afte r which w e were both enquiring wa s so entirely the truth, and nothing else , tha t I canno t bu t thin k we soone r or late r mus t hav e agreed . As Mari a Edg e worth, wh o kne w bot h well , wrot e o f them : They hunted together i n search o f Truth, an d huzzaed when they found her, withou t caring who found he r first; and indeed I have seen the m both put their able hands to the windlass to drag he r u p fro m th e botto m o f tha t wel l i n whic h sh e s o strangel y love s t o dwell . The friendship betwee n Malthu s and David Ricard o bega n in June 1811 , whe n Malthu s ' 'took the libert y o f introducin g himself " i n th e hop e "tha t a s we ar e mainly o n th e sam e sid e of th e question, w e might supersed e the necessity o f a long controversy in print respecting th e points in which we differ , b y an amicable discussion i n private.'' I t led to a long intimacy which was neve r broken. Ricard o pai d repeated week-en d visit s to Haileybury ; Malthus seldom cam e t o Londo n without staying, or at least breakfasting, with Ricardo, an d i n later years wa s accustomed t o stay with his famil y at Gatcomb Park . I t is evident that they had th e deepest affectio n an d respec t fo r one another . Th e contrast s betwee n th e intellectua l gifts o f th e two wer e obviou s an d delightful . In economic discussions Ricardo wa s the abstract and a priori theorist, Malthus the inductiv e and

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intuitive investigator wh o hated t o stra y too far from what he could test by reference t o the facts and hi s ow n intuitions .

8. J. A . Schumpeter , History of Economic Analysis (New York: Oxford University Press, 1954) , pp. 472-473. Ricardo evidentl y stirred strong, ambivalent feelings in Schumpeter. He states (ibid., p. 471) tha t Ricardo "ha d n o philosophy at all. . . . Similarly , he had not an inadequate sociology, but none at all." H e asserts tha t Ricardo, like American university students, lacked "th e historica l sense that no amount of factual stud y can give. That is why it is so much easier to make theorists of them tha n economists" (ibid., p . 472 , n . 2) . I n short, Schumpete r regarded Ricard o as the polar opposite of the kin d of economist h e himsel f aimed t o be. O n the othe r hand, Schumpeter praise s Ricardo a s a leader, a syste m builder, a man of integrit y and generosit y (ibid., pp . 473-475) . A footnote t o this passage i n Schumpeter makes clear that he regarded Keyne s also as seized o f "th e Ricardian Vice. " 9. T. R. Malthus, Principles of Political Economy, pp . 4-12. I t should be recalled, however, that it was Malthus, trained in mathematics, wh o foreshadowed quite explicitly the possible relevance of the calculu s t o th e formulatio n o f economi c theor y (J . A . Schumpeter , History o f Economic Analysis, p . 481) . 10. Th e estimat e i s fro m G . Talbo t Griffith , Population Problems i n th e Ag e o f Malthus (Cambridge: at the University Press, 1926) , p. 18 . Griffith's figures for the eighteenth century are given alon g wit h si x other estimate s i n B . R . Mitchell , wit h th e collaboratio n o f Phylli s Deane , Abstract o f British Historical Statistics (Cambridge: at the University Press, 1971) , p. 5 . This array includes Malthus' s estimate s fo r 5-yea r interval s betwee n 178 0 an d 180 0 fro m th e fift h editio n (1817) o f his Essay o n Population. Al l estimates exhibit the post-1780 acceleration bu t diffe r wit h respect t o populatio n growt h rates ove r th e 5-yea r intervals . Th e firs t officia l Britis h censu s wa s taken i n 1801 . 11. Phyllis Deane and W. A. Cole, British Economic Growth, 1688-1959, 2d ed. (Cambridge: at the Universit y Press, 1969) , p . 91 . 12. These movements ca n be traced i n A. D . Gaye r et al., Th e Growth and Fluctuations o f th e British Economy (Oxford : at the Clarendon Press, 1953) : Vol. I, pp. 27-29, 37-38, 50, 54-57, for detailed movements , 1794-1801 ; Vol . II , Chapter s I V and V for tren d movements , 1790-1850 . 13. See , fo r example, ibid., Vol . I , pp . 25-27 . 14. Ibid., Vol . II , Chapter s I , II , an d HI present systematicall y the evidence o n cyclical fluctua tions i n Britai n from 179 0 t o 185 0 an d provid e a theoretical explanatio n of them . 15. See, fo r example, D . P. O'Brien, The Classical Economists (Oxford: a t The Clarendon Press, 1975), pp . 229-232 ; also, th e usefu l revie w i n Henry William Spiegel, Th e Growth o f Economic Thought (Englewoo d Cliffs , N.J. : Prentice-Hall , 1971) , pp . 292-306 , o n "Th e Concer n wit h Demand." 16. See , fo r example , Charle s P . Kindleberger , i n Economics I n th e Long View (eds . C . P . Kindleberger an d Guido di Telia), Vol . 3, (London: Macmillan, 1982), pp . 105-120 . Also Michael D. Bord o an d Ann a J . Schwartz , "Mone y an d Price s i n the Nineteenth Century: An Ol d Debat e Rejoined," Journal o f Economic History, Vol . XL, No. 1 (March 1980), pp. 61-72; and "Mone y and Price s i n th e 19t h Century : Was Thoma s Took e Right?" Explorations i n Economic History, Vol. 18 , No. 2 (April 1981) , pp . 97-127 . Fo r the amiable disagreemen t tha t developed afte r our initial concord o n this matter as collaborators on the Gayer study of 1790-1850 see A. D . Gaye r et al., Growth an d Fluctuation, "Ne w Prefac e (1975), " 2 d ed. (Hassock s nr . Brighton : Harveste r Press, 1975) , pp . v-xiv . 17. Essay o n Population, pp . 309-437 . 18. Ibid., p . 310 . 19. Ibid., p . 360 . Fo r the most recent effort t o capture the distinctive characteristics of Malthus's growth theor y i n a formal model , se e Lilia Costabile and R. E . Rowthorn , "Malthus's Theor y o f Wages an d Growth, " Economic Journal, Vol . 95 , No . 37 8 (Jun e 1985) , pp . 418-435 . A usefu l listing of relevan t reference s is to be foun d on pp. 436-437 . 20. Ibid., pp . 313-314 .

584 Notes

t o Pages 56-62

21. Ibid., pp . 226-227 . 22. Ibid., pp . 224-225. For discussions of a similar lagged interplay between economic an d noneconomic forces , se e Chapte r V I i n th e author' s British Economy o f th e Nineteenth Century (Oxford: a t th e Clarendo n Press , 1948 , reprinte d 198 1 b y Greenwoo d Press , Westport) ; als o Chapter 2 in The Process o f Economic Growth (Oxford : at the Clarendon Press , 1953 , 1960) . Se e also, Alfre d Marshall's doctrine of the interplay of environment and social behavior, preceding, pp . 169-170. 23. Principle o f Population, 6t h ed. , Vol . I I (London : Joh n Murray , 1826) , pp . 355-359 . Margaret G . O'Donnel l comment s o n Malthus's view s o n education, Th e Educational Thought o f the Classical Political Economists, pp . 37-38 , 41 , 74 , 95 , 107 , 119-120 , 145 . 24. Principles o f Political Economy, p . 314 . 25. Th e literatur e on Malthus' s theory o f underconsumptio n (or overproduction) i s voluminous and, i n my view, ofte n inappropriatel y condescending . Fo r example, Harr y G. Johnson , Introduc tion to "Malthu s o n the High Price o f Provisions," reprinte d in The Canadian Journal o f Economics and Political Science, Vol . 15 , No. 2 (May, 1949) , pp . 190-192 ; George J. Stigler , "Sraffa' s Ricardo," American Economic Review, Vol . 43 (September-December 1953) , pp . 591-599. Although less condescending tha n Johnson and Stigler, I would also put Lord Robbins' s brisk charac terization o f Malthus's vie w in this category (The Theory o f Economic Development i n the History of Economic Thought [London : Macmillan , 1968] , pp . 57-60) . 26. Sraff a an d Dobb, Works and Correspondence: Ricardo, Vol . IX, Malthu s to Ricardo, p . 20 , Ricardo's reply , p . 25 . Th e letter s ar e dated, respectively , Jul y 1 6 and July 21 , 1821 . 27. Political Economy, pp . 35 5 and 423-424. Th e quotatio n is from th e latter pages . 28. Se e Gayer e t al, Growth an d Fluctuation, Vol . I , especiall y Chapter II I (1812-1821), pp . 110-170. 29. Ibid., pp . 136-13 7 an d 169-170 . 30. Sraff a an d Dobb, Works an d Correspondence: Ricardo, Vol . II , p . 449 . Ricardo' s note s on the whol e o f this sectio n o f Malthus' s Principles exten d fro m p . 42 1 t o p. 452 . 31. Malthus , Principles, pp . 422-42 3 and 416, respectively . 32. Fo r dat a o n agricultural rents se e pp. 53-5 4 an d note 12 . 33. Principles, p . 418 . 34. Ibid., pp . 431-432 . Se e Thomas Tooke , History o f Prices, (London : Longman, 1838 ) Vol . 1, pp . 1-6 , fo r a luci d statemen t o f hi s genera l perspective ; Vol . 2 , pp . 346-349 , fo r a quit e detailed summar y of his conclusions on the causes o f the period of rising or high prices (1793-1814) and the subsequent protracted phas e of falling or low prices. Fo r Phillip Cagan's vie w that short-run movements in the monetary variables responded t o business conditions, Determinants an d Effects o f Changes i n the Stock o f Money, 1875-1960 (New York: Columbia University Press, 1965) , notably p. 272 . 35. Ibid., p . 432 . 36. Ibid., p . 425 . 37. Ibid. 38. Ibid., pp . 429-430. Fo r Richard Kahn's comment s on the Malthus-Ricardo debat e o n this issue se e Th e Making o f Keynes's General Theory (Cambridge : a t the University Press, 1984 ) pp . 4-7. Kah n modulate s Malthus' s statur e a s a pre-Keynesia n hereti c b y notin g tha t h e begin s b y assuming tha t al l saving s ar e investe d befor e allowin g fo r th e possibility o f idl e capacit y due t o a disproportion betwee n savin g and consumption. He also finds Malthus' s attachment to laissez-faire excessive. 39. See , fo r example , Gaye r e t al., Growth an d Fluctuation, Vol . I , pp . 146-210 . 40. Ibid., Vol . II , pp . 623-627 . Se e also, Dean e an d Cole, British Economic Growth, pp . 80 , 170, an d 172 , fo r roug h calculation s of pre - an d postwa r calculation s o f rea l produc t an d rea l product pe r capita . 41. See , fo r example, discussion , ibid., Vol . II, pp . 532-534 . 42. Malthus' s most extensive and detailed discussion of machinery is in Principles, pp . 351-361.

Notes t o Pages 62-66 58

5

For the emergence an d unfolding of "th e machiner y question'' i n the wake of the Napoleonic wars , see especially Maxin e Berg, Th e Machinery Question and th e Making o f Political Economy, 18151848 (Cambridge : Cambridg e Universit y Press, 1980) . 43. Principles, p . 351 . 44. Ibid., p . 352 . 45. Ibid., p . 354 . 46. Ibid., pp . 356-35 7 an d 360 . 47. Gaye r e t al., Growth an d Fluctuation, Vol . II , pp . 534-540 . 48. Sraff a an d Dobb, Works and Correspondence: Ricardo, Vol . VII, p. 12 0 (January 24, 1817) . Malthus's repl y (2 6 January) i s on pp. 121-124 . 49. Principles, p . 437 . 50. See preceding not e 26 that includes reference to Ricardo's repl y rejecting Malthus's argument and asserting tha t reduced deman d fo r labor "mus t mean a diminished reward for the labourer, and not a diminishe d employmen t o f him. " 51. Stigler' s commen t on hoarding is in "Sraffa' s Ricardo, " p. 596. I n support of his contention, Stigler quotes Malthus (Principles, p . 38 ) as stating that: "No politica l economist of the present day can by saving mean mere hoarding. . . . " Tha t assertion does not rule out hoarding as a process that sterilizes income , a s i n Malthus' s quotatio n give n i n th e tex t (pp . 137-138) . Stigle r i s correct , however, in asserting that Malthus's theory of effective deman d and of the inadequacy of Say's Law did no t depen d o n hoarding . 52. Thoma s Rober t Malthus , First Essay o n Population 1798, wit h note s b y Jame s Bonar , reprinted fo r th e Roya l Economi c Societ y (London : Macmillan , 1926) , p . 284 . Malthu s i s her e contrasting th e "fruga l man " o f Adarn Smith whos e saving "is alway s added to stock" with "th e avaricious ma n o f Mr . Godwin " wh o hoards . Fo r furthe r discussio n o f Malthus' s view s o n th e possibility o f savin g tha t doe s no t yiel d investment , se e H . W . Spiegel , Growth o f Economic Thought, pp . 296-297. See also L. Costabile an d R. E. Rowthorn, Malthus's Theory, p . 423, n . 5 , who revie w th e debat e o n whethe r Malthus di d o r di d no t recogniz e th e possibilit y of a n e x ante inequality betwee n savin g and investmen t and sid e wit h th e forme r view. 53. Sraff a an d Dobb, Works and Correspondence: Ricardo, Vol . VIII , p. 260 . Se e also Georg e Stigler, "Sraffa' s Ricardo, " p . 598 . Th e exten t t o whic h Malthu s accepte d Say' s La w a s opposed t o a Keynesian view of ex ante saving and investment is the central concern o f two articles : B. A . Corry , "Malthu s an d Keynes—A Reconsideration, " Economic Journal, Vol . LXIX , No . 276, (Decembe r 1959) , pp . 717-724 ; an d S . Hollande r "Malthu s an d Keynes : A Note," ibid., Vol. 72 , No . 286 , (Jun e 1962) , pp . 355-359 . 54. Principles, p . 420 . 55. H . W . Spiegel , Growth o f Economic Thought, p . 296 . Th e quotation fro m Malthu s is fro m Principles, pp . 6-7 . Lange' s "optimu m propensit y t o consume " i s se t out in hi s "Th e Rat e o f Interest an d th e Optimu m Propensit y t o Consume, " Economica, Vol . V (Ne w Ser.) , No . 17 , (February 1938) , pp . 12-32 , accessibly reprinte d i n Readings i n Business Cycle Theory, Gottfrie d Haberler (ed.) , (Philadelphia : Blakiston , 1944) , Chapte r 8 . L . Costabil e an d R . E . Rowthorn , Malthus's Theory, pp . 434-435, present an equation for an optimum savings rate that is designed t o define Malthus' s "intermediat e point. " 56. Classical Economists, pp . 230-232 . 57. Fo r a brief evaluation o f the relation between Malthus' s concepts an d business cycle theory , see J. A. Schumpeter , History of Economic Analysis, pp. 738-740 . 58. "Sraffa' s Ricardo, " p . 599 . 59. My view of trend periods (o r Kondratieff cycles) can be traced throug h my books: Th e British Economy o f th e Nineteenth Century, especiall y Chapter 1 ; A. D . Gaye r et al., especiall y Vol . II , Chapters I V and V ; The Process o f Economic Growth, especiall y Part III and Chapters 6, 8 , an d 9 ; The World Economy: History an d Prospect, especiall y Par t III ; Why th e Poor Ge t Richer an d th e Rich Slow Down (Austin : Universit y o f Texa s Press , 1980) , especiall y Chapter s 1 an d 2 ; Th e Barbaric Counter Revolution: Cause and Cure (Austin : Universit y o f Texas Press) , especially pp.

586 Notes

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8-11 an d 62-69 , an d 102-115 , whic h deal s wit h recent phase s o f Kondratief f cycles an d thei r policy implications . W . Arthu r Lewis's vie w is most explicitly stated in his Growth and Fluctuations, 1870-1913 (London : Allen and Unwin , 1978) , especially Chapter 3 . 60. The indexes were calculated by Glen Hueckel, "Wa r an d the British Economy, 1793-1815 : A General Analysis, " Explorations i n Economic History, Vol . 10 , No. 4 (Summer 1973) , p . 388 . For discussion , se e my World Economy: History an d Prospect, pp . 111-115 . 61. Principles, p . 188 . In the first edition of his Essay on Population, Malthu s (pp. 90-91)draws a related bu t no t identica l distinction between foo d an d "wrough t commodities. " A demand fo r these last [manufactures] will not fail t o create them in as great a quantity as they are wanted. Th e demand for foo d ha s by no means th e sam e creativ e power . I n a country wher e all the fertile spot s hav e been seized, hig h offers are necessary t o encourage th e farmer to lay his dressing o n land, from whic h he cannot expect a profitable return for some years. An d before the prospect o f advantag e i s sufficientl y grea t t o encourage thi s sor t o f agricultura l enterprize, an d while the new produce i s rising, great distresses ma y be suffered from the want of it. The deman d for a n increased quantit y of subsistence is , wit h few exceptions, constan t everywhere, ye t we see how slowl y i t i s answere d i n al l thos e countrie s tha t hav e bee n lon g occupied.

62. Principles, p . 288 . 63. Ibid., p . 289 . 64. Ibid. 65. Ibid., pp . 289 , 297 , an d 413-437. 66. Ibid., p . 286 . 67. Ibid., p . 288 . 68. Ibid., p . 280 . 69. Wh y th e Poor Ge t Richer, Chapte r 2. 70. Coli n Clark' s view s ca n be trace d throug h his National Income an d Outlay (London : Macmillan, 1937) , Th e Conditions o f Economic Progress (London : Macmillan , 1940) , an d Th e Economics ofl960 (London : Macmilla n 1942) . 71. Principles, pp . 288-289 . 72. Sraff a an d Dobb , Works and Correspondence: Ricardo, Vol . II, p . 284 . 73. Principles, pp . 281-282 . 74. O n Malthus' s travel s (1802) , see , notably , Patrici a Jame s (ed.) , Th e Travel Diaries o f Thomas Robert Malthus (Cambridge : a t th e Universit y Pres s fo r th e Roya l Economi c Society , 1966). Fo r th e wide r backgroun d of th e firs t an d secon d editions of th e Essay o n Population, se e Patricia James , Population Malthus, Hi s Life an d Times (London : Routledg e an d Kega n Paul , 1979), especiall y pp. 55-115 . 75. Essay o n Population, 2 d ed. (London : J. M . Dent , 1914 , 1952) , Vol . I , pp . 154-163 . 76. Essay o n Population, 1s t ed., pp . 231-239 . 77. Ibid., Vol . II , pp . 79-96 . 78. Population, 2 d ed., Vol . II , p . 79 . 79. Ibid. 80. Ibid., pp . 95-96 . 81. See , notably , Frederi c R . Kolb , "Th e Stationar y Stat e o f Ricard o an d Malthus : Neithe r Pessimistic no r Prophetic," Intermountain Economic Review, Vol . 3 , (1972), pp . 17-30 ; the reinforcing commen t o f M . A . Akhtar , "Th e Stationar y Stat e o f Ricard o an d Malthus : Comment," ibid., Vol . 4 (1973) , pp . 77-79; and Kolb's "Reply, " ibid., p . 80. 82. Ibid., especiall y Kolb's ' 'Reply.'' Eve n so sedulous a scholar as Schumpeter fails to capture the post-1812 transitio n of Malthus and Ricardo to, a t least, quasi-optimisim (History o f Economic nalysis, pp. 270-271). 83. A . D . Gaye r et al., Growth an d Fluctuation, Vol . I , p . 61 . 84. Frederi c Kolb , i n hi s initia l exposition , persuasively offsets relativel y optimistic quotations from Ricardo and Malthus against pessimistic characterizations to be found in various histories of

Notes t o Pages 71-76 58

7

economic thought , bu t al l o f Kolb' s quote d optimisti c reference s ar e draw n fro m writing s in th e period 1815-182 2 ("Stationar y State, " pp . 20-25.) 85. First Essay o n Population 1798, p . 4 . 86. Ibid., p . 11 . 87. Ibid., pp . 63-69 . 88. Essay o n Population, 2 d ed., Vol . I , p . 315 . 89. Patrici a James , Population Malthus, note s (p . 55) : Before considerin g th e first Essay o n Population, mode m reader s must fac e thre e difficulties . The first is the air of unreality that for us, pervade s al l early British works on the subject, sinc e the writers argu e a s if there wer e n o suc h thin g as contraception. Fo r al l practical purpose s thi s wa s truly the case: it simply would not , could not, hav e occurred t o more tha n a handful o f men that contraceptives migh t eve r be i n genera l us e a s a mean s o f controlling th e siz e o f families .

The other two difficulties noted by James are that Malthus was born before the age of specializatio n and mus t no t b e though t o f a s a professiona l economis t o r demographer ; an d a genera l lac k o f reliable statistic s an d "a n attitud e o f min d tha t se t a low valu e o n ascertaine d facts. " 90. Essay o n Population, pp . 226-227 . 91. Dugal d Stewart , "Biographica l an d Critical Memoir s of Adam Smith," Introductio n t o The Theory o f Moral Sentiments (London : G . Bell , 1911) , pp . I x and Ixiv. 92. There is something deepl y understood , and perhaps autobiographical , in this passage fro m the First Essay o n Population (pp . 64-65) : A man of liberal education, bu t with an income only just sufficient t o enable him to associate i n the rank of gentlemen, mus t feel absolutel y certain, tha t if he marries an d has a family, he shall be obliged, i f he mixes a t all in society, t o rank himsel f with moderate farmers , an d the lowe r clas s of tradesmen. Th e woma n that a man of education woul d naturally make the object o f his choice, would be one brought up in the same taste s and sentiments with himself, an d used t o the familiar intercourse o f a society totall y different from that to which she must be reduced b y marriage. Ca n a ma n consen t t o plac e th e objec t o f hi s affectio n i n a situatio n so discordant, probably , t o he r tastes an d inclinations ?

93. Patrici a James , Population Malthus, p. 443 . The characterization is from a letter of William Whewell t o hi s siste r shortl y afte r Malthus' s death . 94. Jame s explore s admirabl y the various facets o f the controversy, ibid., p . 116-159 . Willia m Peterson's study , Malthus (Cambridge , Mass. : Harvar d Universit y Press, 1979) , deal s systemat ically wit h contemporary an d subsequen t controversie s centere d o n Malthus' s view s (o r believe d views) o n population . 95. Sraff a an d Dobb, Works and Correspondence, Vol . X , pp . 1-5 . Th e accoun t i s part o f the brief memoi r o f Davi d Ricardo' s brothe r Moses . 96. Ibid., pp . 4-5 . 97. Ibid. 98. Ibid. 99. Ibid., pp . 36-43 . 100. Ibid., p . 280 , includin g footnote . 101. Ibid., pp . 168-169 . 102. Ibid., p . 171 . 103. Ibid., pp . 67-6 8 an d 104-106 . 104. Ibid., p . 90 ; ful l tex t o f letter , Vol . VI , p . 115 . 105. Fo r example, ibid., Vol . X, pp . 113-11 5 (J. H. Wilkinson ) and 129-132 (Jacob Ricardo) . 106. Ibid., pp . 133-135 . 107. Ibid., p . 113 . 108. Ibid., pp . 119-123 . 109. Ibid., p . 157 .

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110. Ibid., pp . 277-280 . Mar y Ann Carlile an d her husband Richard also impinge on the life of the young John Stuart Mill at this time in his brief phase of open advocac y of birth control. See , fo r example, Michae l St . Joh n Packe, Th e Life o f John Stuart Mill (Ne w York: Macmillan, 1954) , pp . 53-55 and 58. 111. See , fo r example , Sraff a an d Dob b (eds.) , Works an d Correspondence: Ricardo, Vol . V , pp. 112-113 , Ricardo' s statemen t in suppor t o f a refor m bil l defeated on Apri l 18 , 1823 . 112. Ibid., pp . 495-50 3 (Parliamentar y reform) and 504-512 (votin g by ballot). 113. Fo r example , ibid.. Vol . VII , pp . 219-22 1 (1 0 December, 1815) . 114. Ibid., Vol . VI , pp. 343-34 4 (25 December, 1815) . Ricardo then adds, as theorists are wont to do : "Bu t grantin g al l this doe s no t affec t th e theor y of th e bullionists. " 115. Ibid., Vol . I , p . 5 . 116. Fo r Ricardian growt h models , see , especially , Irm a Adelman , Theories, pp . 43-59 ; J. R . Hicks, Capital an d Growth, pp . 42-48; an d D. P . O'Brien , op . cit., pp . 37-45 . 117. I shal l not attemp t to trac e out her e in detai l the cours e of the debat e on Ricardo' s cor n model. I t start s wit h Piero Sraffa' s effor t t o construc t fro m circumstantia l evidence (primaril y in Ricardo's Essay o n Profits) th e existenc e o f a pur e Ricardia n corn mode l i n whic h cor n i s bot h capital (i n the for m of food supplie d t o labor) and output, the profit rate being a fraction of the net difference betwee n th e two , divide d b y output . The fractio n is independent of price o r wage rate s since the numerator and denominator are both reckoned i n corn. (Sraff a an d Dobb (eds.), Works and Correspondence: Ricardo, Vol . I , pp . xxx-xxxiii) . Samue l Hollande r challenge d Sraffa' s recon struction i n "Ricardo' s Analysis of the Profit Rates, 1813-15, " Economica, Vol . 40, (1973) , pp . 260-282; John Eatwell commented on Hollander's paper in "Th e Interpretatio n of Ricardo's Essay on Profits," Economica, Vol. 42, (1975) , pp . 182-18 7 and Hollander replied to Eatwell, "Ricard o and the Corn Profi t Model: Repl y t o Eatwell," ibid., pp . 188-202 . Finally , Terry Peac h provide s strong independen t suppor t fo r th e vie w that the cor n mode l wa s " a figmen t of Sraffa's imagination" i n "Davi d Ricardo' s Earl y Treatmen t o f Profitability : A Ne w Interpretation, " Economic Journal, Vol . 94 , No . 37 6 (December 1984) , pp . 733-751 . O f the formal models cite d i n n. 20 , Adelman builds her model on Ricardo's Principles rathe r than the Essay o n Profits. Hicks , writing initially before Hollander' s challeng e to Sraffa' s interpretation, produces a n elegant diagrammatic version of the com mode l (Capital and Growth, pp . 44-46). D. P . O'Brie n provide s a similar but not identica l diagrammati c mode l (Classical Economists, pp . 38-41) , ignorin g Hollander's 197 3 paper. Fo r Hollander' s late r (1977 ) confrontatio n with Hicks an d the latter' s secon d thoughts , see John Hicks , Classics an d Moderns, Collected Essays o n Economic Theory, Vol . Ill , (Cambridge , Mass.: Harvar d Universit y Press, 1962) , Chapte r 4, pp . 34-59 . 118. Sraff a an d Dobb , Works an d Correspondence: Ricardo, Vol . I , p . xxxii . 119. Reference s wil l be t o th e reproduction in ibid., Vol . IV , pp . 3-41 , includin g the editor's note (pp . 3-8) . 120. Se e A. D . Gaye r etal, Growth an d Fluctuation, pp . 113-115 . 121. Sraff a an d Dobb , Works an d Correspondence: Ricardo, Vol . IV , p . 41 . 122. Ibid., pp . 9-10 . I n his Principles (ibid., Vol . 1 , pp. 5-6) , firs t publishe d in 1817 , Ricard o acknowledges Malthu s a s th e autho r o f th e theor y o f ren t h e bring s to bea r i n makin g his case ; although he differs wit h Malthus on agricultural protection. Ricard o acknowledges Edward West of Oxford a s well as Malthus as virtually simultaneous and independent authors of the correct doctrin e of rent . 123. Ibid., p . 12 . 124. Ibid., pp . 22-23 . 125. Ibid. 126. Ibid., pp . 23-26 . 127. Ibid., p . 9 . 128. Ibid., Vol . 1 , pp . xiii-ix , provide s a detaile d accoun t of th e evolutio n of th e Principles including variations as i t moved from it s first (1817 ) to its second (1819) to its third (1821) edition. 129. Ibid., Vol . IV , p . 23 . D . P . O'Brien , Classical Economists, p . 40 , provide s a diagra m

Notes t o Pages 79-83 58

9

resulting fro m capita l an d populatio n "alternatel y takin g th e lead " a s profit s respon d t o period s when marke t wage s ris e abov e an d fal l bac k t o the subsistenc e level. Th e diagra m i s a variant of W. J . Baumo l i n Economic Dynamics, 2 d ed. (Ne w York: Macmillan, 1959), p . 19 . 130. Ibid., Vol . I , pp . 96-97 . Th e editor s not e a similarit y o f thi s passag e t o on e i n Rober t Torrens's Essay o n the External Corn Trade, p . 68 . 131. Sraff a an d Dobb, ibid., Vol . I , pp . 30-33 . 132. Ibid., pp . 13 1 and 166 . 133. Se e preceding (ibid., Vol . V, p. 122) , Ricardo's famous dictum : ". . .n o on e accumulates but wit h a view t o make hi s accumulation productive. . . . " 134. Ibid., pp . 125-126 . 135. Ibid., p . 126 . 136. Ibid., p . 120 . Se e als o pp . 9 4 an d 132 , wher e "th e extensio n o f foreig n trad e an d th e exploitation o f natura l advantage " join s th e lis t o f factor s helpin g t o sustai n th e profit-savin g process an d thu s the momentu m o f th e economy . 137. Ibid., Chapte r XXXI , "O n Machinery, " pp . 386-397 . For a somewhat disabused discus sion of Ricardo's position , se e Joseph H . Schumpeter , History o f Economic Analysis, pp . 680-687. John Hicks provided a kind of vindication of Ricardo's position in his A Theory o f Economic History (Oxford: a t the University Press, 1969) , pp . 151-15 4 and 168-171. For a meticulous account of the evolution o f Ricardo' s view , se e Samuel Hollander , "Th e Developmen t of Ricardo' s Positio n o n Machinery," History o f Political Economy, Vol . 3, No. 1 (Spring 1971), pp. 105-135 . E. F. Beac h challenges Hicks' s positio n o n Ricard o a s theoreticall y interestin g but historicall y irrelevant, and Hicks replies in The Economic Journal, Vol . 81, No. 32 4 (December 1971) , pp. 916-925 ("Hicks on Ricardo on Machinery" an d "Reply to Professor Beach). D . P. O'Brien , Classical Economists, pp. 224-228 , summarize s the classica l literatur e o n th e machiner y question , providin g a usefu l bibliography, pp . 238-239 . Shlom o Mortal and Patricia Haskell, "Wh y Di d Ricardo (Not) Change His Mind ? O n Mone y an d Machinery, " Economica, Vol . 44 , (1977) , pp . 359-368 , speculat e somewhat playfull y o n why Ricardo recanted o n machinery but not on his equally flawed monetary doctrine. A 198 1 articl e resurrect s Ricard o o n machiner y i n a n interestin g contex t (L . Jonung , "Ricardo o n Machiner y an d th e Presen t Unemployment : A n Unpublishe d Manuscrip t b y Knu t Wicksell" [Economic Journal, Vol . 91, No . 361 (March 1981)], pp. 195-205)..Wicksell , trouble d by th e extraordinaril y hig h level s o f unemploymen t afte r th e Firs t Worl d Wa r i n Sweden an d elsewhere i n Europe , canvasse d variou s remedies i n severa l article s writte n in 1922-1923 . The y mainly advocate d migratio n t o Americ a an d a reduced birthrate . I n the cours e o f his wor k o n thi s problem h e also wrote a short piece criticizing Ricardo's logic . The essence of Wicksell's argumen t was tha t Ricardo di d not tak e int o account th e effects o f the wage reduction that would follow th e introduction of machinery. Over time , the wage reduction woul d lead to the employment of labor in other function s and , i n a dynami c sequence , i t woul d mak e i t possibl e fo r outpu t an d profit s t o increase and wage rates to be restored. H e suggested thi s sequence might provide a way of reducing current unemployment , adding , however , that , i f wage cut s yielde d workers ' incom e belo w th e subsistence level , governmen t migh t subsidiz e workers' incom e unti l the dynamics of the proces s yielded it s benign results . Wicksell submitte d the article early in 192 4 to the editor of the Economic Journal (J . M. Keynes ) who turned it down—an ac t that may well have increased Wicksell's chronic irritation with English economists. Th e amende honorable awaite d the passag e o f 5 7 years . 138. Ibid., pp . 389-392 . 139. Ibid., pp . 390-395 . 140. T . R . Malthus , Principles, pp . 351-354 . 141. Thi s passag e paraphrase s D . P . O'Brien' s usefu l summary , Classical Economists, pp . 226-227. 142. Sraff a an d Dobb , Works an d Correspondence: Ricardo, Vol . 1 , pp. Ivii—Ix , dea l wit h th e transition o f Ricard o to th e "revolutionar y change" o n machiner y an d unemploymen t in th e third edition. Sraff a an d Dob b fin d evidenc e o f th e beginning s o f a shif t i n tw o o f Ricardo' s note s o n

590 Notes

t o Pages 83-90

Malthus's Principles (Vol . II, pp . 234-236 and 237-239). ( I would add note 151 , pp. 237-239, to Sraffa an d Dobb' s note s 14 9 and 15 3 as evidenc e o f th e transition.) 143. T . R . Malthus , Principles, pp . 217-261 , especiall y pp. 236-240 . 144. Ibid., p . 237 . 145. Sraff a an d Dobb , Works an d Correspondence: Ricardo, Vol . II , p . 239 . 146. J . R . Hicks , A Theory o f Economic History, pp . 150-15 4 an d 164-171 . 147. A . D . Gaye r e t al., Growth an d Fluctuation, Vol . I , pp . 169-17 0 (1819-1820) , pp . 208-210 (1822-1826). 148. Ibid., p . 210 . 149. See , fo r example , W . W . Rostow , "Trad e Cycles , Harvests , an d Politics : 1790-1850, " Chapter V in British Economy o f the Nineteenth Century. A n annual social-tension index is present ed o n pp . 123-125 , combinin g trad e fluctuation s wit h fluctuation s i n th e Britis h whea t price . 150. Sraff a an d Dobb , Works an d Correspondence: Ricardo, Vol . I , pp . 265-267 . 151. Withou t pretendin g t o compulsiv e an d complet e scholarshi p o n th e histor y o f economi c thought, an d puttin g aside Malthus' s fragmentar y insights , I a m incline d t o dat e seriou s cyclica l analysis fro m th e publicatio n in 182 3 o f Thomas Tooke' s Thoughts an d Details o n th e High an d Low Prices of the Last Thirty Years. Thoma s Atwood, even earlier (1817-1819) , had couched som e of his argument for a postwar reflationary policy in terms that suggested consciousness of a cyclica l process, a s di d Thoma s Joplin , whos e firs t wor k i n economic s (a s oppose d t o banking ) wa s published i n 1823 . (See , fo r example , Josep h A . Schumpeter , History o f Economic Analysis, pp . 708-715, and Robert G. Link, English Theories of Economic Fluctuations, 1815-1848 (New York: Columbia Universit y Press, 1959) , pp . 6-3 3 (Attwood) , pp. 73-10 2 (Thoma s Joplin) , an d pp . 127-147 (Thoma s Tooke) . 152. A . D . Gaye r e t al., Growth an d Fluctuation, Vol . I , pp . 44-54 . 153. Th e controversy , i n fact , continue s into the present. See , preceding , Malthu s note 16 . 154. Sraff a an d Dobb , Works an d Correspondence: Ricardo, Vol . 1 , pp. 93-94 . 155. Ibid., pp . 80-8 3 an d 120 . 156. Ibid., pp . 80-82 . 157. Ibid., Vol . II , p . 332 . 158. Ibid., p . 337 . 159. Ibid., p . 347 . 160. Ibid., Vol . VI, p. 147 . I owe reference to this point to Irma Adelman, Theories o f Economic Growth, p . 5 4 and not e 39 , p . 151 . 161. Sraff a an d Dobb , Works an d Correspondence: Ricardo, Vol . 1 , p. 395 . 162. Krishn a Chandra Roychowdhury, "Ricard o an d Development Planning," Th e Indian Economic Journal, Vol . 25, No. 1 (1977), pp. 257-264 . This conclusion derives from th e view that, so long a s th e stoc k o f ne w machine s i s bein g buil t up , employmen t wil l expan d i n th e machine building industry . Thi s wil l require additiona l allocations fro m consumption good s t o suppor t th e expanded wor k forc e i n machin e building . Bu t productio n ha s no t ye t bee n augmente d i n th e consumption-goods secto r b y th e expandin g incremen t o f capita l goods . Thus , a n inflationar y impulse is imparted to the economy. Additional domestic or foreign savings are required, therefore , to preserv e th e rea l wag e durin g th e perio d unti l th e incremen t o f ne w machine s come s int o production yieldin g a n increas e i n productivit y and production o f consumer s goods . 163. Sraff a an d Dobb , Works an d Correspondence: Ricardo, Vol . I , pp . 98-100 . 164. Ibid., Vol . VI , pp . 315-316 . 165. Ibid., Vol . IV , p . 179 . Fo r quotations—som e fro m distinguishe d economists—assertin g that Ricard o wa s pessimisti c abou t th e economi c prospect , se e Frederi c R . Kolb , "Stationar y State," pp . 17-20 . 166. Sraff a an d Dobb , Works an d Correspondence: Ricardo, Vol . VII , pp . 16-17 . 167. Ibid., Vol . IV , p . 179 , from Ricardo' s article o n th e fundin g syste m fo r th e Encyclopedia Britannica.

Notes t o Pages 91-94 59

1

Chapter 4 1. One cannot be sure that Mill never read any of Marx's works, for he notes in his autobiography that, in the wake o f the publication of the first edition o f his Principles, i n 1848 , an d of the French Revolution o f tha t year, h e devote d muc h time "t o th e study of the best Socialisti c writer s o n the continent. . . . " (J . S . Mill , Autobiography, wit h a prefac e b y Joh n Jaco b Cos s [Ne w York : Columbia Universit y Press , 1924 , 1944] , p . 164) . But , we have n o evidence tha t the Communist Manifesto cam e to Mill's attention. Professor John M. Robson supplies further elucidation in a letter to th e author : ... I t might be worth mentioning that the question of Mill's command over German is moot, and almost nothin g o f Marx' s appeare d i n Englis h durin g Mills ' lifetime . Thoug h h e say s i n th e Autobiography (normall y very reliabl e a s t o fact ) tha t h e learne d i t by th e Hamiltonia n method (and unde r Sara h Austin' s tutelage h e woul d not b e slack) , an d i n hi s librar y there ar e severa l German volume s (most notably a full se t of Goethe i n quite unreadable type), I have found ver y little evidenc e o f hi s usin g Germa n texts . Th e mos t promisin g evidence, i n th e Principles, i s tarnished b y th e discovery tha t severa l o f th e quote d passage s ar e marke d i n Georg e Grote' s copies of the sources; the marks may of course be Mill's (they are no more tha n marks), but they more probabl y ar e Grote's mad e fo r Mill's guidance .

2. Kar l Marx , Capital (Moscow : Foreig n Language s Publishin g House , 1954) , Vol . I , pp . 610-611, n . 2 ("her d o f vulga r apologists") , an d 518 . Thi s i s th e 188 7 editio n incorporating , however, som e change s mad e b y Engel s in the 189 0 Germa n edition . 3. Fo r Gladstone's characterization o f Mill, see Michael St . Joh n Packe, Th e Life o f John Stuart Mill (New York : Macmillan , 1954) , p . 455 . 4. I shoul d not e immediatel y tha t other s hav e bee n intrigue d b y th e linkage s and difference s between Mil l an d Marx . See , notably , Bel a A . Belass a "Kar l Mar x an d Joh n Stuar t Mill, " Weltwirtschaftliches Archiv, Vol. 83, No. 2 (1959), pp. 147-167 , and Graeme Duncan, Marx and Mill (Cambridge : a t the University Press, 1973) . Belass a argue s persuasively that Marx o n severa l important points was influenced by Mill and "i t i s not inappropriate to speak about Mill's influence on the formation of the Marxian Theory." See , also , Josep h A . Schumpeter , History o f Economic Analysis, (Ne w York : Oxfor d Universit y Press , 1954) , p . 57 4 o n similaritie s betwee n Mill' s Stationary Stat e an d Marx's Communism . 5. M . St . J . Packe , pp . 55-58 , describe s th e inciden t wel l an d it s subsequen t echoe s durin g Mill's lif e and even beyond . See , also , Norma n E. Himes , "Joh n Stuar t Mill's Attitud e Toward s Neo-Malthusianism," Economic History, No . 4 (Supplemen t t o Th e Economic Journal [Januar y 1929]), on which much of Packe's account is based. Se e also Francis E. Mineka, "Joh n Stuart Mill and Neo-Malthusianism , 1873, " Th e Mill News Letter, Vol . VIII , No . 2 , pp . 3-10 . Mineka' s article i s mainl y focuse d o n th e controvers y followin g Mill's death ; bu t n . 1 (p. 8 ) goe s beyon d Hime's article , citin g thre e Mil l letter s o n th e nee d t o contro l populatio n published i n Th e Black Dwarf i n 1823-1824 . Samue l Hollande r include s a brief bu t useful appendi x on Mill's "Attitude s Towards Birt h Control" i n Th e Economics o f John Stuart Mill, (Toronto : Universit y of Toront o Press, 1955) , Vol . II , pp . 968-970 . 6. Charle s Babbage , O n the Economy o f Machinery an d Manufactures (London : Charles Knight, 1841), fourt h editio n enlarged , p . v i (Prefac e t o secon d edition , date d Novembe r 22 , 1832) . 7. History o f Economic Analysis, p . 531 . 8. Autobiography, p . 162 . Mil l her e describe s hi s "thir d period " vie w linke d t o hi s clos e association with Mrs. Harriet Taylor. The two earlier "periods" were his phase of more or less pure Benthamism an d a phase tha t included a reactio n against it. 9. J . S . Mill , "Th e Claim s o f Labor, " i n Dissertations an d Discussions, Vol . I I (Ne w York: Henry Holt , 1882) , p . 261 .

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t o Pages 94-97

10. A good dea l o f Mill's year in France was spen t in continued intense study broadly under the wing of Jeremy Bentham' s brother Sir Samuel: naval architect, mineralogist, explorer, inventor , exBrigadier Genera l i n the army of Catherine the Great, ex-Inspecto r General o f His Majesty's Naval Work. Operationally , Lad y Bentha m directe d Mill' s studie s wit h Si r Samuel' s son , Georg e Bentham, age d 20 , keepin g a stil l close r ey e o n hi s routine , hi s French , etc . Despit e Mill' s continued precocious labors , there were lessons in fencing, riding, and dancing, considerable travel, 6 months in Montpelier tha t Mill remembered a s the happiest time of his youth, friendships made on his own. See , notably , Anna Jean Mill (ed.), John Mill's Boyhood Visit to France, Being a Journal and Notebook Written b y John Stuart Mill i n France, 1820-21 (Toronto : Universit y of Toront o Press, 1960) . Asid e from acquiring a good working knowledge of the French language, this year lef t a permanent residue o f connection with France and French ideas , addin g an important dimension to Mill's life . 11. Autobiography, pp . 19-21 . 12. Ibid., p . 47 . Samue l Hollande r has traced ou t i n grea t detai l Mill' s comple x an d changing views of the utilitarian propositions in Chapter 8 of The Economics o f John Stuart Mill ("On Utilit y and Liberty, " Vol . II , pp . 602-676) . 13. Ibid., p . 61 . Mil l writes o f Ricardo a s follows (p. 38): "M y bein g a n habitual inmate of my father's stud y mad e m e acquainte d wit h th e deares t o f hi s friends , Davi d Ricardo , wh o b y hi s benevolent countenance, an d kindliness of manner, was very attractive to young persons, an d wh o after I became a student of political economy, invited me to his house and to walk with him in order to converse o n the subject." Samue l Hollander (Economics o f John Stuart Mill, Vol . I, pp. 2 6 and 347n.) note s tha t Ricard o di d no t regar d Mill' s initia l publi c appearanc e a s a n economis t a s impressive. 14. Ibid., p . 93 . 15. Ibid., p . 94 . Th e mos t complet e an d persuasive accoun t of Mill' s famous crisis i s John M . Robson's ' 'Mental Crisis and Resolution'', Chapte r 2 in his The Improvement o f Mankind (Toronto : University of Toronto Press , [London : Routledge and Regan Paul], 1968) , pp . 21-49 . For another sensitive well-balanced effort t o reconstruct Mill's crisis and its possible cause s see M. St. J. Packe , Life o f John Stuart Mill, pp . 74-80 . 16. Ibid., p . 96 . 17. Ibid., p . 99 . 18. Ibid., p . 113 . M. St . J . Pack e goes, I believe, a bit too far when he concludes (p. 81) : "H e remained a s h e ha d bee n before , a reformer o f th e world : but h e no w wen t afte r emotio n lik e a n addict afte r drugs. " 19. Ibid., p . 177 . I n this passage Mil l credits Harrie t Taylor wit h keeping this eclectic tendenc y from goin g to o far . 20. History o f Economic Analysis, p . 528 . 21. Fo r a n account o f Mill' s activities while writing The Principles, se e the textual introduction by J. M. Robso n in V. W. Blade n and J. M. Robson (eds.), Principles o f Political Economy b y John Stuart Mill (Toronto: Universit y of Toronto Pres s [London : Routledg e and Kegan Paul], 1965) , pp. Ixv an d Ixvi . Subsequently referre d t o a s The Principles. Als o M. St . J . Packe , Life o f John Stuart Mill, pp . 295-296 . 22. Th e Principles, p . 97 . Se e also, A . D . Gaye r e t al., Growth an d Fluctuation o f th e British Economy, 1790-1850, (Oxford : a t the Clarendon Press , 1953) , pp . 315-31 8 and 331-333. Fo r a thorough accoun t o f Mill's "Transitio n to the Principles" se e Chapter Thre e in Samuel Hollander , The Economics o f John Stuart Mill, Vol . I . 23. A . D . Gaye r e t al., Growth an d Fluctuation, p . 307 . 24. Blade n an d Robso n (eds.) , Th e Principles, p . xcii . 25. Typica l o f th e longevit y o f Mill' s Principles i s th e 189 8 America n (Appleton ) editio n "abridged, wit h critical , bibliographica l and explanator y notes, an d a sketc h o f th e histor y o f political economy " b y J. Laurenc e Laughlin, Professor of Politica l Economy a t the Universit y o f Chicago. Laughli n no t onl y prune d out a goo d dea l o f "Sociolog y an d Socia l Philosophy " bu t

Notes t o Pages 97-10] 59

3

inserted contemporary U . illustrations of Mill's propositions, charts, maps, etc. He also occasionally interpolates views t t differ fro m Mill's . This book happens to be in the family librar y because it wa s use d earl y i n this centur y as a textboo k a t th e Universit y of Chicag o b y m y wife' s father , Milton J. Davies . 26. Quote d M . St . J . Packe , Life o f John Stuart Mill, p . 81 . 27. History o f Economic Analysis, pp . 531-532 . Se e als o Joh n Hicks' s appreciatio n o f Mil l "From Classica l t o Post-Classical : Th e Wor k o f J . S . Mill, " Classics an d Moderns: Collected Essays o n Economic Theory, Vol . Il l (Cambridge , Mass. : Harvar d University Press, 1983) , pp . 60-70. 28. I ow e thi s imag e t o W . H . Auden , who onc e describe d T . S . Elio t no t a s a ma n bu t a s a household: a high church archdeacon, a wise and passionate old peasant grandmother, and a young boy given to slightly malicious practical jokes, all living somehow together (New Yorker, Apri l 23 , 1949). 29. I t should be underlined, of course, tha t this statement of the bureaucrat's creed wa s counterbalanced fo r Mil l by hi s remarkabl e freedo m to engage i n propaganda an d controversy, a s well as exalted intellectua l exercis e o f various kinds (Autobiography, pp . 59-60). Mill's reflections on the disciplines o f bureaucracy recall J . M . Keynes' s observation : Words ought to be a little wild, for they are an assault of thought upon the unthinking. But when th e seats of power and authority have been attained , ther e should b e no more poetic licence. . . .Whe n a doctrinaire proceed s to action, h e must, s o to speak, forge t hi s doctrine. For those who in actio n remember the letter wil l probably los e what the y are seeking. ("Nationa l Self-Sufficiency," Yale Review, xxi i (1933) , p . 755).

30. Principles, p . 154 . 31. Ibid., p . 173 . 32. Ibid., p . 174 . 33. Ibid., p . 177 . 34. Ibid., p . 182 . 35. Ibid., p . 183 . 36. Ibid., p . 184 . 37. Ibid., pp . 186-187 . 38. Ibid., p . 337 . 39. Ibid., p . 415 . 40. Ibid., p . 199 . 41. See , fo r example , Alexande r Gray , Th e Development o f Economic Doctrine, (London : Longmans Green, 1931) , pp. 280-281. But even as thoughtful an d temperate an analyst as Eric Roll writes ( A History o f Economic Thought, 3 d Ed . [Englewoo d Cliffs , N.J. : 1956] , p . 363) : "Th e central propositions o f Mill's theory—thos e relatin g to value and to production—show his endeavor .. . t o cast them in such terms tha t they have no connection with the laws of distribution." Bu t in a vein similar to mine, see , also , Samue l Hollander, The Economics o f John Stuart Mill, Vol . I , pp. 216-22 3 and 246-247. 42. Ibid., p . 159 . 43. Ibid., p . 378 . 44. Ibid. 45. Quoted , Alexander Gray, Development o f Economic Doctrine, p . 279 . Samue l Hollander has called m y attentio n t o th e view s o n populatio n o f Thoma s Chalmer s a s supportiv e o f Malthus , anticipatory o f J. S . Mill . H e summarize s Chalmers i n his Economics o f John Stuart Mill, Vol . I , pp. 58-60 . 46. Ibid., Boo k One , Chapte r X, especiall y pp . 154-159 . 47. Ibid., Boo k Two , Chapter s XI , XII , an d XIII , especiall y pp . 343-360 , 343-360 , an d 367-379. 48. Ibid., Boo k Four, Chapte r VI, especiall y pp. 752-757 .

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t o Pages 101-105

49. Ibid., Boo k Four , Chapte r VII , especially pp . 758-769 . 50. Ibid., Chapte r VI , pp . 756-757 . 51. J . M . Keynes , Essays i n Persuasion (London : Macmillan, 1933) , pp . 358-373 . 52. Principles, pp . 351-352 . 53. Norma n E . Himes , "Attitud e Towar d Neo-Malthusianism, " p . 484 . Speculatin g o n th e reasons fo r Mill's failure to be more outspoke n o n birth control, Hime s evokes th e followin g (pp. 481-483): (1) H e wa s intensel y preoccupie d wit h othe r matters . H e ma y wel l hav e fel t tha t i f h e eve r publicly too k u p suc h a positio n i t woul d hav e neede d muc h explanation in hi s day, when the discussion o f se x matter s wa s studiousl y avoided. (2 ) As matter s stood , hi s relations wit h Mrs. Taylor wer e th e subjec t o f gossip, an d wer e ver y much misunderstood eve n b y members o f hi s family an d b y rathe r intimat e friends . Ha d h e bee n a publi c advocat e o f birth-control , wha t extraordinary credenc e woul d hav e bee n len t t o th e accusation s alread y afloat ! (3 ) A publi c advocacy o f Neo-Malthusianis m would have impeded the realisation of many of the other objec tives an d reform s fo r whic h Mil l care d intensel y i n late r life , e.g. , woman suffrag e an d th e emancipation o f women. (4) Mill had a keen sens e of the delicate; he did not like to offend eve n when he thought he was right. .. . (5 ) I think Mill was definitely i n favour of the artificial check, but I d o no t thin k tha t h e hel d th e opinio n strongly . H e wa s th e revers e o f th e dogmatis t and tended towar d the eclectic. H e was probably aware of certain limitations in the doctrine. .. . (6 ) Moreover, Mil l may have thought that the time had not yet arrived when he could usefully tak e up a firm stan d publicly. I think he realised that after all public opinion had not advanced much since 1823. . . . And would it not have rendered nugator y his promotion of other equally useful ends ? Who ca n sa y tha t such reflection s did no t influenc e Mill?

54. Ibid., p . 477. 55. Ibid., pp . 480-481 . 56. Willia m Petersen , Malthus, p . 19 4 and subsequen t discussion . 57. Norma n E . Himes , "Attitud e Towar d Neo-Malthusianism, " p . 462. 58. Principles, pp . 102-106 . 59. Ibid., pp . 107-111 . 60. Ibid., pp . 112-115 . 61. Ibid., pp . 116-130 . 62. Ibid., pp . 765-766 . 63. Ibid., pp . 769-775 . 64. Ibid., pp . 775-794 . 65. Fo r ful l referenc e to Babbage o n machinery and manufactures, see note 6, thi s chapter. Joh n Rae, Statement o f Some New Principles o n the Subject o f Political Economy, Vol . II of R. Warre n James, John Rae, Political Economist (Toronto : Universit y of Toronto Press , 1965) . Fo r a positive evaluation of Rae's work and J. S . Mill' s role in acknowledging its quality, see J. A . Schumpeter , History o f Economic Analysis, pp . 468-469 . 66. Principles, p . 162. 67. Ibid., pp . 170-172 . 68. Statement o n Some Ne w Principles, pp . 208-264 . 69. Principles, pp . 918-919 . 70. O n th e Economy o f Machinery, p . iii. 71. Babbage , asid e fro m fillin g th e Lucasia n Professorshi p o f Mathematic s a t Cambridg e (1828-1839) played a n important par t i n founding the Astronomica l (1820 ) an d Statistica l (1834 ) societies. H e publishe d paper s o n mathematics , statistics , physics , machin e design, an d geology . 72. Edwar d Baines, History o f Cotton Manufacture (London : Fisher and Jackson, 1835); Andrew Ure, Th e Philosophy o f Manufactures, (London : H . G . Bohn , 1835) . Ure' s 183 5 volume wa s confined t o th e cotto n industry . I t wa s th e produc t of a quarter-century' s teaching i n " a publi c seminary ... to practical men, as well as to youth, the application of mechanical and chemical science t o th e arts . . . . " I t i s analyticall y less sophisticate d than Baines's , le t alon e Babbage' s

Notes t o Pages 105-111 59

5

study, but full of accurate informatio n on the cotton industry. In 1861 P. L . Simmond s published an edition tha t extende d Ure' s analysi s o f cotto n t o 186 0 an d embrace d th e flax , silk , an d woo l industries a s wel l (The Philosophy o f Manufactures [London : H . G . Bonn , 1861] , 3 d Ed.) . 73. A . D . Gaye r etal., Growth an d Fluctuation, Vol . I , pp . 221-222 . 74. Thi s ide a i s developed i n Rae's Ne w Principles Boo k II , Chapte r V , pp . 109-117 . 75. Ibid., Chapte r X , ' 'Of th e Causes of the Progress of Invention, and the Effects Arisin g from It," pp . 109-118 ; Babbage , O n th e Economy o f Machinery, Chapter s XXVI I an d XXX V pp . 260-267 and 334-341. It should be recalled tha t Adam Smith gave some though t to the process of invention (preceding , p . 41) . 76. Principles, p . 969 . 77. Ibid., p . 107 . 78. See , fo r example, A . D . Gaye r et al., Growth and Fluctuation, Vol . I, pp . 295-296 . Als o R. C. O . Matthews , A Study i n Trade Cycle History, Economic Fluctuations in Great Britain 18331842. (Cambridge : a t the Universit y Press, 1954) , p . 32 . 79. Principles, p . 413 . 80. Ibid., pp . 750-751 . 81. J. A . Schumpeter , History ofEconomic Analysis, pp . 571-572. Samue l Hollander has called to m y attentio n passage s i n both Ricard o and J . S . Mil l that, if not exactl y Schumpeterian, mak e clear a n awarenes s tha t profitability and investmen t can b e enlarge d b y technologica l "improve ments." Se e Hollander's Economics o f John Stuart Mill, Vol . I , pp . 2 6 and 428 . 82. See , fo r example , Mill' s referenc e t o Took e i n hi s "Pape r Currenc y an d Commercia l Distress," originall y publishe d i n Parliamentary Review, Session o f 1826 (London : Longman , Rees, Orme , Brown , and Green, 1826) , pp . 630-632, reprinted in Collected Works of John Stuart Mill (J . M . Robson , ed.) , Vol . IV , Essays o n Economics an d Society (Toronto : Universit y of Toronto Press , Routledg e an d Kega n Paul , 1967) , p . 74 . Als o man y reference s t o Took e i n Principles ar e listed , pp . 1150-1152 . Asid e fro m Tooke , Babbag e ha d th e cleares t gras p o n th e cyclical proces s (see , especially , O n th e Economy o f Machinery, Chapte r XXIV , "O n Over manufacturing," pp . 231-241) . Babbage' s vie w i s unique for it s tim e because hi s perspectiv e i s rooted i n th e industria l sector rathe r tha n commodity market s or th e monetar y system. 83. Essays o n Some Unsettled Questions, pp . 47-74. These essay s wer e written in 1829-1830 . 84. "Pape r Currenc y an d Commercia l Distress, " p . 77 . Se e als o J . R . Hicks , Classics an d Moderns, pp . 63-65 . Hick s respectfull y summarize s Mill' s vie w o f commercia l crise s an d th e possibilities o f genera l overproductio n a s elaborated i n Essays o n Some Unsettled Questions. H e does no t refe r t o Mill' s 182 6 essay . 85. "Pape r Currenc y an d Commercial Distress, " pp . 74-76 . 86. Ibid., pp . 75-76 . 87. A . D . Gaye r e t al., Vol . I , pp . 215-216 . 88. Mill , Essays, p . 48 . Fo r Hicks' s analysi s of Mil l o n "gluts, " Classics an d Moderns, pp . 62-64. 89. Mill , Essays, p . 56 . 90. Ibid., pp . 69-74 . 91. Afte r the major cycle peak in 183 6 ther e was a year of acute depression followed by a minor cycle recover y (1836-1838) . Fo r th e subsequen t period o f chroni c idle capacity , unemployment , and socia l difficulty , se e A . D . Gaye r e t at., pp . 276-303 . Joh n Hick s state s (Classics an d Moderns, p. 64) tha t "th e internationalizin g of fluctuations , spreadin g fro m one industrialize d country to another, di d not occur before the end of the nineteenth century." Th e crisis o f 183 6 was clearly an international affair engagin g Britain and the United States, and the severe crisis of 1847 1848 engaged not only Britain and the United States but also Belgium, France, and Germany where railroadization ha d begun. 92. Principles, pp . 542-544 . 93. Ibid., p . 574 . 94. Ibid., p . 576 .

596 Notes

t o Pages 111-117

95. Ibid., pp . 650-651 . 96. Ibid., pp . 741-742 . Se e als o p . 750 , wher e quit e specificall y Mil l cite s "th e railwa y gambling o f 184 4 an d 1845 " a s havin g "save d th e countr y fro m a depressio n o f profit s an d interest." 97. Ibid., p . 174 . 98. Ibid., pp . 176-177 . 99. Ibid., pp . 178-180 . 100. Ibid., pp . 711 , 713-714 . 101. Ibid., p . 185 . 102. Ibid., p . 713 . 103. Ibid., pp . 10-21 . 104. Ibid., pp . 18-21 . 105. Ibid., p . 968 . Also , se e preceding, p . 106. ' 106. Ibid., p . 21 . 107. Ibid., p . 189 . 108. Ibid., p . 705 . Joh n M. Robson , i n The Improvement o f Mankind, note s that Book I V bears, to some controversia l extent , th e mark of Harriet Taylor Mill (pp. 58-61), and that Auguste Comt e influenced Mill , inter alia, wit h hi s distinctio n betwee n Static s an d Dynamics , althoug h Mill' s interpretation differe d fro m Comte' s (pp . 87-100) . 109. Mill , Principles, pp . 706 . 110. Ibid., p . 729 . 111. Ibid., pp . 706-707 . 112. Ibid., pp . 719-732 . 113. Ibid., p . 722 . 114. Ibid., p . 731 . 115. Ibid., pp . 731-732 . 116. Ibid., p . 754 . 117. Ibid., p . 75 4 n.a-a 48 . 118. J . R . Hicks , Classics an d Moderns, p . 68 . 119. Principles, p . 755 . 120. See , fo r example, J . A . Schumpeter , History o f Economic Analysis, pp . 571-572 . Samue l Hollander justl y point s ou t tha t Mil l di d no t wholl y rul e ou t diminishin g return s t o "wholl y o r partially exhaustible " natura l resources suc h a s coa l an d mos t metal s (Economics o f John Stuart Mill, Vol . 1, p. 450) ; an d he was much impressed b y W. S . Jevons, The Coal Question, 2n d editio n (London: Macmillan , 1966) . Fo r a critica l passag e relevan t t o Mills ' stationar y stat e se e pp . 370-376. Hollander concludes , therefore , that (ibid.) "[t]h e full-fledged stationary state—constan t technology, population , an d capita l wit h unchange d wage s an d profi t rates—wa s thu s a n approximation." 121. Se e especially , Hon t an d Ignatieff , Wealth an d Virtue, pp . 1-4 , an d Wealth o f Nations, p. Iviii . Th e ke y passag e i n Smit h is th e following: Among th e savage nation s of hunters an d fishers, every individua l who is able to work, is more or less employed i n useful labour , an d endeavours t o provide, a s well a s he can, th e necessaries and conveniencies of life , for himself , o r suc h of his famil y o r tribe a s are either to o old, o r too young, o r too infir m to go a hunting and fishing. Such nations , however , ar e so miserably poor , that fro m mer e want , the y ar e frequently reduced , or , a t least, thin k themselves reduced , t o th e necessity sometime s of directl y destroying , an d sometimes o f abandoning their infants , their ol d people, an d thos e afflicte d wit h lingering diseases, t o perish wit h hunger, o r to b e devoured b y wild beasts . Amon g civilize d an d thrivin g nations , on th e contrary , thoug h a grea t numbe r o f people d o no t labou r at all , man y of who m consum e th e produc e o f te n times , frequentl y o f a hundred time s more labour than th e greater part of those who work ; yet the produce of the whole labour of the societ y is so great, tha t all ar e ofte n abundantl y supplied , and a workman, even of the lowes t an d poores t order , i f h e i s fruga l an d industrious , may enjo y a greate r shar e o f th e necessaries an d conveniencie s o f lif e tha n i t i s possibl e for an y savag e t o acquire.

Notes t o Pages 118-124

597

122. In American State Papers, Encyclopaedia Britannica (Chicago : Universit y of Chicag o Press, 1952) , p . 271 . 123. Principles, pp . 913-971 . 124. Ibid., p . 963 . 125. Ibid., p. 199 . Th e bulk of Mill's discussion of socialism is to be found on pp. 199-234 . But an importan t additiona l commen t o n socialis m an d competitio n i s on pp . 794-795 . 126. Ibid., p . 202 . 127. Ibid., pp . 204-205 . 128. Ibid., p . 207 . 129. Ibid., pp . 207-208 . 130. Ibid., pp . 208-209 . 131. Ibid., pp . 794-795 . 132. Joa n Robinson , A n Essay o n Marxian Economics (London : Macmillan, 1942) , p . 6 . 133. Rober t C . Tucke r (ed.) , Th e Marx-Engels Reader, 2 d ed . (Ne w York : W . W . Norton , 1978), p . 220 . Th e passage i s from a letter written on March 5 , 1852 , b y Marx to his friend Josep h Weydemeyer, wh o ha d emigrate d fro m German y t o th e Unite d States . 134. Rober t C . Tucke r (ed.) , ibid., pp . 4-5 . Th e passag e i s fro m th e prefac e t o Marx' s A Contribution to the Critique of Political Economy. For an evocatio n of Marx' s transitio n fro m radical Hegelianis m t o political economy, an d Engels's importan t role , see , fo r example, Pete r F . Bell an d Harr y Cleaver , "Marx' s Crisi s Theor y a s a Theor y o f Clas s Struggle, " Research i n Political Economy, Vol . 5 , (1982) , especiall y pp . 195-208 . 135. Marx , i n a speech a t Amsterdam on September 8 , 1872 , reaffirme d that for most countrie s on the Continent "th e leve r of our revolution must be force," bu t a peaceful transition to socialism might tak e plac e i n Britain , the Unite d States , and , perhaps , Holland . Tucker, ibid., p . 523 . 136. Th e first quotatio n is from Th e Manifesto o f th e Communist Party (1848 ) (ibid., p . 491) ; th e second, fro m Critique o f th e Gotha Program (1875 ) (ibid., p . 531) . 137. The adjective s are from this passage in Isaiah Berlin, Karl Marx: His Life and Environment (London: Oxfor d Universit y Press, 1939) , p. 137 : "Fo r Marx , no less tha n for earlier rationalists, man i s potentially wise , creative , an d free. " 138. Ibid., pp . 262-263 . See , also , J . A . Schumpeter , History o f Economic Analysis, p . 387 : " . . . wit h every fact, with every argument that impinged upon him in his reading, h e wrestled with such passionate zes t a s to be incessantl y diverted fro m hi s mai n line o f advance." 139. C . J . S . Sprigge , Karl Marx (London : Duckworth , 1938) , p . 27 . 140. I . Berlin , Marx: Life, p . 33 . Berli n speculate s tentativel y o n th e lin k betwee n Marx' s "smouldering sense of resentment" and his family's ambiguous position a s half-accepted converte d Jews (pp . 25-28) . Berli n describe s th e increased freedo m fo r Jews initiall y granted by Napoleon ; the subsequent retraction; the choice face d by Jews of either returning to the ghetto or converting to Christianity; the decisio n o f Marx' s father , Heinrich , to enter th e Lutheran church i n 1817 , a yea r before th e birth of his so n Karl. Th e elder Mar x found thi s framework for his life congenial ; bu t in 1834 h e confronte d a crisi s o f conscienc e (p . 28) : After hi s baptis m h e adopte d th e Christia n nam e of Heinrich , and educated hi s family a s liberal protestants, faithfu l t o the existing order an d to the reigning King of Prussia. Anxiou s as he was to identify tha t ruler with the ideal prince depicted b y his favourite philosophers, th e repulsive figur e of Frederick William HI defeated eve n hi s loyal imagination. Indeed, th e only occasion o n which this tremulou s an d retiring ma n i s known t o have behave d wit h courage, wa s a public dinne r a t which h e mad e a speech o n th e desirabilit y of moderate socia l an d political reform s worth y of a wise an d benevolen t ruler . Thi s swiftl y dre w upo n hi m th e attentio n o f th e Prussia n Police . Heinrich Mar x a t once retracte d everything , an d convince d everyon e o f hi s complet e harmlessness. I t i s no t improbabl e that this sligh t but humiliatin g contretemps, an d i n particular his father' s crave n an d submissiv e attitude, made a definit e impressio n o n Karl , the n sixtee n years old , an d lef t behin d it a smoulderin g sense o f resentment which later events fanne d int o a flame.

598 Notes

t o Pages 124-129

141. I ow e thi s reference t o Ronal d Hayman . I t i s als o quote d i n Jerrol d Seigel , Marx's Fate (Princeton: Princeto n Universit y Press, 1978) , pp . 36 7 an d 386 . 142. Alvi n Johnson' s autobiograph y (Pioneer's Progress [Ne w York : Vikin g Press , 1952] ; passages her e take n from pp. 282-283 ) contains several furthe r anecdote s on Veblen's affectation. 143. Fo r Schumpeter' s somewha t simila r evaluation, see Ten Great Economists: From Marx t o Keynes (London : Alle n an d Unwin , 1952) , pp . 53-55 . 144. Capital, Vol . I , p . 171 . 145. Fo r example , se e Bel l an d Cleaver, Marx's Crisis Theory, pp . 254-255 . 146. Fo r a presentatio n an d explanatio n o f Marx' s vie w o f th e determinatio n o f wages , se e William J. Baumol , "Classica l Economics: Th e Subsistence Wage an d Demand-Supply Analysis : Marx an d th e Iro n La w o f Wages, " AE A Papers an d Proceedings (Ma y 1983) , pp . 303-308 . 147. I n th e simpl e algebrai c term s Mar x used , th e fal l o f th e rat e o f profit s i s a matte r o f definition, a s follows : Le t V = variabl e capita l (wag e payments) ; C = constan t capita l (plant , machinery, ra w material); S = surplus value (interest, profits, and rent). S/Kis the rate of exploitation. CI V i s th e organi c compositio n o f capital . SI(C + V ) i s th e rat e o f profit . I f th e rat e o f exploitation i s constant as Mar x asserted, an d th e organic composition o f capital i s rising (tha t is, fixed capita l pe r worker i s increasing) the rate of profit must fall. A s indicated elsewhere (pp . 128 129), thi s proposition go t Marx into a dilemma he was never able t o resolve. Th e profit rate coul d fall onl y wit h the increas e i n th e organi c compositio n o f capital i f real wage s rose ; and hi s syste m forbade hi m (o r mad e i t exceedingly difficul t fo r him ) to admi t a rise i n real wages . 148. Fo r a ters e bu t precis e compariso n o f Mar x (a s oppose d t o Ricardo ) o n diminishin g returns—and othe r departure s o f Marx from th e classics—see Nichola s Kaldor, "Alternativ e Theo ries o f Distribution," The Review o f Economic Studies, Vol . XXIII (2), No. 6 1 (1955-1956), pp . 87-88. 149. Perhap s mor e significan t o f Marx' s basi c characte r a s a "cit y boy " wit h virtuall y n o knowledge o f ho w foo d i s produce d i s hi s prais e o f th e bourgeoisi e fo r havin g "rescue d [vi a urbanization] a considerable part o f the population from th e idiocy of rural life" (Rober t C . Tucke r (ed.), Marx-Engels Reader, p . 477) . Fo r my views on some of the consequences o f Marx's myopi a about agriculture, se e "Mar x Was a City Boy or Why Communism May Fail," Harpers Magazine (February 1955) , reprinted as Chapter 3 in my Essays o n a Half-Century (Boulder : Westview Press , 1988). 150. Se e notably, Engels' s letter s to Joseph Bloch , Franz Mehring, and H. Starkenbur g in Robert C. Tucke r (ed.) , Marx-Engels Reader, pp . 760-768. 151. Fro m th e Communist Manifesto, Rober t C . Tucke r (ed.) , Marx-Engels Reader, p . 475 . 152. Capital, Vol . I , p . 632 . 153. Th e comments of Marx and Engels on Malthus are collected i n Ronald L. Mee k (ed.), Marx and Engels o n Malthus (Ne w York: International Publishers, 1954) . Th e description of Malthus as a baboon i s from Th e Grundrisse, i n Robert C . Tucke r (ed.), Marx-Engels Reader, p . 276 . Samue l Hollander ha s written an effective critique of Marx's treatmen t of real wage s i n relation to population: "Mar x an d Malthusianism : Marx's Secula r Pat h o f Wages, " American Economic Review, Vol. 74 , No . 1 (March 1984) , pp . 139-151 . 154. Fro m Engels's Outline of a Critique of Political Economy, in Ronald L. Mee k (ed.) , Marx and Engels o n Malthus, p . 62 . 155. Fro m Engels' s lette r t o Lange , i n ibid., p . 82 . 156. The most extensive—but not the only—debate centering on this issue concerns the so-calle d transformation problem . I t takes its start from th e publication in 189 4 of the first Germa n editio n of the third volume o f Capital, pu t togethe r b y Engels fro m Marx' s notes . Th e book open s wit h fou r chapters o n th e relatio n betwee n surplu s valu e an d profit . Volum e I o f Capital opene d wit h a n exposition o f valu e defined i n terms o f labo r directl y o r indirectl y embodied i n commoditie s with surplus value expressed i n terms of labor units and sometimes, even, hours of work. I n effect, Mar x undertook to transform hi s argument, initially presented in terms of use-value calculated in terms of

Notes t o Pages 129-131 59

9

standard labo r units , into conventiona l market values. The meanin g (and technical correctness) o f this transformatio n ha s bee n discusse d i n a literatur e well reviewed (dow n t o 1971 ) by Pau l A . Samuelson i n "Understandin g th e Marxia n Notion of Exploitation : A Summar y of th e So-Calle d Transformation Proble m Betwee n Marxian Values and Competitiv e Prices," Th e Journal o f Economic Literature, Vol . IX (June 1971), pp . 339-431. One result of the explorations and debates o n this issue is agreement that Marx's initia l Volume I formulation woul d be valid only if capital-labor proportions (th e organic compositio n o f capital ) wer e unifor m throughou t the economy— a mos t unlikely circumstance. Fo r a contrary view, elaborated with erudition and subtlety, but which I fin d unpersuasive, see William J. Baumol, "The Transformation of Values: What Marx 'Really ' Meant : An Interpretation, " Journal o f Economic Literature, Vol . XII (Marc h 1974) , pp . 51-62 . 157. William Fellner, "Marxia n Hypothese s and Observable Trends Under Capitalism: A 'Modernized' Interpretation, " Economic Journal, Vol . LXVII, No. 26 5 (March, 1957) , p . 22 . 158. Joa n Robinson , Essay o n Marxian Economics, pp . 24-25 . 159. Pau l M . Sweezy , Th e Theory o f Capitalist Development (Ne w York : Oxfor d Universit y Press, 1942 ) pp. 128-129 . 160. Pau l A . Samuelson , "Wage s an d Interest : A Moder n Dissectio n o f Marxia n Economi c Models," American Economic Review, Vol . XLVII (December 1957) , p. 892. It should be noted , however, tha t in this and other writing s on Marx, Samuelson scrupulously seeks to isolate wha t he regards a s legitimat e insights in Marx's formulations. 161. Rober t C . Tucke r (ed.) , Marx-Engels Reader, pp . 47 9 and 483. 162. Fo r example , Capital, Vol . 1, p. 645: . . . withi n th e capitalis t syste m al l methods fo r raisin g the socia l productivenes s o f labou r ar e brought abou t at the cost of the individual labourer; all means for the development o f productio n transform themselve s int o mean s o f dominatio n over , an d exploitatio n of , th e producers ; the y mutilate th e laboure r int o a fragmen t of a man, degrade hi m t o th e leve l o f a n appendag e o f a machine, destro y ever y remnan t of charm i n his work an d turn it into a hated toil; the y estrang e from hi m the intellectual potentialitie s o f the labour-process in the sam e proportio n a s science is incorporated i n i t a s a n independen t power ; the y distor t th e condition s unde r whic h h e works , subject hi m durin g th e labour-proces s t o a despotis m th e mor e hatefu l fo r it s meanness ; the y transform hi s lifetim e into working-time , an d drag hi s wif e an d child beneat h th e wheel s o f the Juggernaut o f capital . Bu t al l method s fo r th e productio n o f surplus-valu e ar e a t th e sam e tim e methods o f accumulation ; an d every extensio n o f accumulatio n becomes agai n a mean s fo r th e development o f those methods . It follow s therefor e tha t i n proportio n a s capita l accumulates , th e lo t o f th e labourer , b e hi s payment hig h o r low , must gro w worse . Th e law , finally, tha t always equilibrate s the relativ e surplus-population, o r industrial reserve army , to the extent and energy of accumulation, this law rivets th e labourer t o capital mor e firmly than the wedges of Vulcan did Prometheus to the rock. It establishes a n accumulatio n o f misery , correspondin g wit h accumulation of capital. Accumula tion o f wealt h a t one pole is , therefore , a t the same tim e accumulation of misery, agon y o f toil, slavery, ignorance , brutality , menta l degradation , a t th e opposit e pole , i.e. , on th e sid e o f th e class tha t produce s it s ow n produc t i n the for m o f capital .

163. Ibid., p . 619. 164. Ibid., p . 639. 165. A useful bibliography on the standard-of-living question is to be found i n Phyllis Deane, Th e First Industrial Revolution (Cambridge : a t the University Press, 1967) , pp. 285-286. Some furthe r contributions t o th e debat e are: J. E . Williams , "Th e British Standard of Living, 1750-1850," Economic History Review, Vol. XIX, No . 3 (1966) , pp . 581-589 . G. N . Vo n Tunzelman , "Trend s i n Rea l Wages , 1750-1850 , Revisted, " Economic History Review, 2 d series , Vol . XXXII, No. 1 (February 1979) , pp. 41-45 . Peter H . Linder t an d Jeffre y G . Williamson , "Englis h Workers ' Livin g Standard s During the

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Industrial Revolution: A New Look," Economic History Review, Vol. XXXVI, No. 1 (February 1983) , pp . 1-25 . M. W . Flinn , " A Comment " [o n Lindert an d Williamson, and their reply], Economic History Review, Vol . XXXVII , No . 1 (February, 1984) , pp . 88-94 . L. D . Schwarz , "Th e Standar d of Livin g in the Long Run : London (1700-1860), " Economic Histon'Review, Vol . XXXVIII , No. 1 (February 1985) , pp . 24-41 . 166. Quote d i n Capital, Vol . I , p . 371 , fro m Mill' s Principles, p . 756 . 167. Se e especially , A . D . Gaye r e t al., Growth an d Fluctuation, Vol . II , pp . 939-94 0 an d discussion pp. 949-970. By National Bureau of Economic Research method s the average amplitud e of money wage movement in specific cycles wa s 16.0 for textile wages, 14. 7 for agricultural wages, and 3. 6 fo r Londo n artisans . Th e figur e wa s 33. 2 fo r cos t o f living. 168. Th e livelies t an d mos t sophisticate d exploration of th e Marxia n dilemm a i s Paul A . Sam uelson's Wages an d Interest. Hi s footnote s embrac e th e considerabl e moder n literatur e o n thi s problem. Fo r a later Marxian model of economic growth, see David Laibman, "Towar d a Marxian Model of Economic Growth, " Radical Economics i n American Economic Review (Februar y 1977) , pp. 387-392 . 169. Ibid., p . 895 . 170. Capital, Vol . I , extracted , i n order, fro m pp . 631-633 , 624-628 , 638-640 . 171. Franz M. Oppenheimer called to my attention the following affirmation tha t Marx once visited a German factory but never set foot in a British factory. Ricard Friedenthal, Karl Marx, Sein Leben und Seine Zeit, (Munich : Deutscher Taschen Verlag , 1983) , p . 417: "Mar x hat, was oft berkmerkt worden ist, nie eine englische Fabrik aufgesucht und nureinmal, auf der Badereise nac h Karlsbad, in eine deutsche Fabri k fliichti g hineingeblickt." ("A s ha s been ofte n noted , Mar x neve r visite d an English factory and only once made a casual visit to a German factory in Badereise nea r Karlsbad"). 172. K . Marx , Grundrisse: Foundations o f th e Critique o f Political Economy (i n a rough draft) , translated with a foreword by Martin Nicolaus (London: Allen Lane, 1973) , p. 704. Fo r a somewhat revisionist view, see Donald Mac Kenzie, "Mar x and the Machine," Technology and Culture, Vol . 25, No . 3 (July 1984) , pp . 473-502 . Ma c Kenzi e argues tha t Marx's simple r formulations of the role o f machiner y i n shapin g societ y ar e inadequat e an d tha t a comple x interactio n occurred . Typically, h e i s able t o cite passage s fro m Mar x of bot h types. 173. Capital, Vol . I , pp . 506-507 . 174. See , especially , "Genesi s of the Industria l Capitalist," Chapte r XXX I of Capital, Vol . I , pp. 750-760 . 175. Fo r precise reference s an d discussion, se e W. W . Rostow , How I t All Began (Ne w York: McGraw-Hill, 1975) , pp . 148-15 1 and 251. Thes e passage s an d references includ e G. N . Clark' s reply t o Hessen's interpretatio n o f Newton. This gap in Marxism was not filled unti l B. Hessen , a Soviet historia n of science, delivere d a paper i n London in 1931 . Hessen argued that Newton "wa s the typica l representative o f the risin g bourgeoisie," an d that "th e schem e o f physics was mainly determined b y th e economi c an d technica l task s whic h th e risin g bourgeoisi e raise d t o th e forefront." 176. I t should be noted tha t Marx's fascinatio n with machinery led to considerable discussio n of the inne r logi c an d dynamic s o f wha t h e calle d " a machiner y system" ; tha t is , b y a grou p o f machines systematicall y related t o each other . See , especially , Capital, Vol . I , pp . 378-386 . 177. Fo r an analysis of this characteristic of conventional economic theory , see W. W . Rostow , "Technology an d th e Pric e System, " Chapte r 4 i n Wh y th e Poor Ge t Richer an d th e Rich Slow Down (Austin : University of Texas Press , 1980) . 178. Pau l A . Samuclson , "Marxia n Economic s a s Economics, " American Economic Review, Vol. 57 , No . 2 (Ma y 1967) , reprinte d i n Th e Collected Scientific Papers o f Paul A . Samuelson , edited b y Rober t C . Merto n (Cambridge : M.I.T . Press , 1973) , Vol . 3 , pp . 268-275 . Wassil y Leontief's depression-conditione d evaluation of 193 7 shoul d also be note d ("Th e Significanc e of

Notes t o Pages 137-139 60

1

Marxian Economics fo r Present-Day Economic Theory," American Economic Review (March 193 8 supplement), pp . 5 and 8-9) : However importan t thes e technica l contribution s t o th e progres s o f economi c theory , i n th e present-day appraisal o f Marxian achievement s the y ar e overshadowed b y his brilliant analysis of the long-ru n tendencie s o f th e capitalisti c system . Th e recor d i s indee d impressive : increasin g concentration o f wealth , rapi d eliminatio n o f smal l an d medium-size d enterprise , progressiv e limitation o f competition , incessan t technologica l progres s accompanie d b y th e ever-growin g importance o f fixe d capital , and , las t bu t no t least , th e undiminishin g amplitud e o f recurren t business cycles—a n unsurpasse d serie s o f prognostication s o f fulfilled , agains t whic h moder n economic theor y wit h al l it s refinements ha s littl e to sho w indeed . . . . Marx ha d als o hi s rationa l theories , bu t thes e theorie s i n genera l d o no t hol d water . Thei r inherent weaknes s show s u p a s soo n a s othe r economist s no t endowe d wit h th e exceptionall y realistic sense of th e maste r tr y t o proceed o n th e basi s o f hi s blueprints .

179. See , fo r example , Ernes t Mandel , Late Capitalism, translate d by Joris D e Pre s (London : [Verso Ed.]. 1978) . I reviewed this study in The Journal o f Economic History, Vol . XXXIX, No. 3 (September 1979) , pp . 849-850 . 180. Walte r Ellis , Th e Classical Theory o f Economic Growth (Ne w York: St . Martin' s Press , 1984), p . 306 . 181. See , especially , Capital, Vol . II, Chapter s X X an d XXI, th e latte r unfinished . 182. Ibid. Quesna y is one of the exceedingly few economists for whom Marx expressed virtually unreserved prais e an d respect. O n th e linkag e between Quesnay and Marx's reproductio n model, see, P . Sweezy , Capitalist Development, p . 75 ; al l of the Chapter s V and X; and Appendix A (by Shigeto Tsuru), pp. 365-374, "O n Reproductio n Schemes, Relating Quesnay, Marx and Keynes." For furthe r observation s o n Mar x an d Quesnay , se e J . A . Schumpeter , History o f Economic Analysis, pp . 238-243 , 391 , an d 566, n . 25 . See , also , Quesnay's Tableau Economique, edited , with new material, translations, and notes, by Marguerite Kuczynski and Ronald L. Mee k (London: Macmillan, 1972) . 183. See , fo r example , Pau l M . Sweezy' s discussio n o f Michae l Tugan-Baranowsky , Rosa Luxemburg, Bulgakov , Lenin, an d Ott o Bauer , Capitalist Development, pp . 162-189 ; als o Joa n Robinson, Essay o n Marxian Economics, pp . 57-60 , wh o supplie s he r own version of the theory Marx "intende d t o work out" fro m hi s extended reproductio n system. 184. Pau l A . Samuelson , ("Marxia n Economic s a s Economics"), p . 269 . 185. "Marx' s Crisi s Theory," pp . 191-192 . 186. Isaia h Berlin , Marx: Life p . 215 . Berli n goes o n t o observ e tha t the crisi s o f 185 7 ha d a severe negativ e consequence for Marx: it reduced Engels's income (and thus Marx's) "at a moment when h e coul d leas t affor d it. " 187. P. F. BellandH. Cleaver ("Marx's Crisis Theory," pp. 209-210)note that the first volume of Capital wa s completed befor e th e crisi s of 1866 . The y note also, however , that Marx delivere d two lecture s i n June 186 5 that bear on the cyclical process (published as Wages, Price and Profit). Marx argued strongl y that labor should struggle for higher wages, at a time of prosperity and strong labor marke t leverage , a s i n 1865 , eve n i f succes s shoul d hel p bring on crisis , depression , an d unemployment. 188. W. W . Rostow, World Economy: History and Prospect, (Austin : University of Texas Press, 1978), pp . 31 5 and 324-325. 189. Capital, Vol . I, p. 20 . The reference is to the afterword to the second German edition, dated January 24, 1873 . The monthly cyclical peak for Britain came as early as September 1872. The text of Marx's observatio n follows : The contradiction s inheren t i n th e movemen t o f capitalis t society impres s themselve s upo n th e practical bourgeoi s mos t strikingl y i n th e change s o f th e periodi c cycle, throug h whic h modern industry runs , an d whos e crownin g poin t i s th e universa l crisis . Tha t crisi s i s onc e agai n ap proaching, althoug h a s yet bu t i n it s preliminary stage ; an d b y th e universalit y of it s theatre an d

602 Notes

t o Pages 139-145

the intensity of it s action it will drum dialectics even into the heads of the mushroom-upstarts of the new , holy Prusso-German empire.

190. Isaia h Berlin , Marx: Life, p . 234 . 191. Joan Robinson, Essays o n Marxian Economics, p . 59. On precisely thi s point see also Henry Smith, "Mar x an d th e Trad e Cycle, " Th e Review o f Economic Studies, Vol . IV , No . 3 (June , 1937), pp . 192-204 . 192. Capital, Vol . III, pp . 244-24 5 and 484. Fo r Joan Robinson's discussio n of these passages , Essays o n Marxian Economics, pp . 56-60. Also P. Sweezy, Capitalist Development, pp . 156-189 , and Mauric e Dobb , O n Economic Theory an d Socialism (London : Routledg e an d Kega n Paul , 1955), pp . 197-198 . 193. Capital, Vol . II , p . 410 . 194. Capital, Vol . I, pp . 453-454 . 195. Se e als o Marx' s chronolog y fo r th e cotto n industry , 1845-1865 , Capital, Vol . III, pp . 124-137. 196. Gerhar d Mensch , Stalemate i n Technology: Innovations Overcome Depression (Cambridge , Mass.: Ballinger , 1979 , firs t publishe d in Germa n i n 1975) . 197. Capital, Vol . II , p . 186 . 198. Thoma s Kuczynski , "Marx and Engels o n 'Lon g Waves,' " Institut e of Economic Histor y of the Academ y o f Sciences o f the GDR, Berlin . (Unpublished paper delivere d a t the International Meeting o n Long-Ter m Fluctuation s i n Economi c Growth : Thei r Cause s an d Consequences , Weimar, GDR , Jun e 10-14 , 1985 , sponsore d b y International Institute of Applied Systems Analysis, Laxenberg , Austria. ) 199. Fo r a typically aggressiv e an d abusiv e footnote o f Marx' s o n diminishing returns, focuse d mainly bu t no t exclusively o n J. S . Mill , se e Capital, Vol . I , p . 506 . 200. Grundrisse, p . 107 . Fo r further argumen t along these lines, see pp. 252-253 and 275-278. 201. Fo r references an d discussion of this point, see P. Sweezy , Capitalist Development, p . 67 ; J. A . Schumpeter , Economic Analysis, pp . 56 9 and 647-654. 202. Capital, Vol . I , pp . 504-507 . 203. Capital, Vol.III , pp . 614-813 . Thes e passages dea l wit h rent derived fro m mines , favor ably locate d buildin g sites, etc. , a s wel l as ren t fo r agricultura l land. 204. Ibid., p . 781 . 205. Ibid., p . 643 . 206. Ibid. 207. Ibid., pp . 105-141 . 208. Manifesto o f th e Communist Party i n Rober t C . Tucker , (ed.) , Marx-Engels Reader,

p. 475.

209. Ibid., p . 481 . 210. Pau l Sweezy , Capitalist Development, p . 192 . Fo r a lucid study of Marx's thi n portrait of the breakdow n o f capitalis m and subsequen t efforts t o fil l th e gap , se e F . R . Hansen , Th e Breakdown of Capitalism, A History of the Idea in Western Marxism, 1883-1983 (London: Routledg e and Kegan Paul , 1985) , especiall y (o n Marx) pp . 1-31 . 211. F . Engels , "Socialism : Utopia n an d Scientific," a pamphlet derive d fro m hi s Herr Eugen Duhring' s Revolution i n Science (o r Anti-Duhring), accessibl y reprinte d in Robert C. Tucke r (ed.) , Marx-Engels Reader, p . 713 . 212. Ibid., p . 715 . 213. Marx' s note s ar e t o b e found in Kar l Marx an d Friedrich Engels , Werke, Vol . 1 8 (Berlin: Dietz Verlag , 1962) , pp . 599-642 . Rober t C . Tucke r (ed.) , Marx-Engels Reader, include s brief passages i n English , pp. 542-548 . 214. Rober t C . Tucke r (ed.) , ibid., p . 545 . 215. J . A . Schumpeter , Economic Analysis, p . 392 . 216. Mar x wrote two article s on India , th e first , fro m whic h th e present quotation comes , being

Notes t o Pages 145-153 60

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published o n June 25, 185 3 i n the New York Tribune, reprinte d i n Robert C . Tucke r (ed.) , MarxEngels Reader, p . 653. 217. I . Berlin , Marx: Life, pp . 257-258 . 218. Herber t Dingle , "Copernicu s an d th e Planets, " i n Th e History o f Science, a Symposium (Glencoe, 111. : Fre e Press, 1951) , p . 37 . 219. Georg e Santayana , Character an d Opinion i n the United States (London : Constable, 1920) , pp. 167-168 . The contex t o f the quote d phrases i s the following: . . . human discourse i s intrinsically addressed no t to natural existing things but to ideal essences, poetic o r logica l term s whic h though t ma y define d an d pla y with . Whe n fortun e o r necessit y diverts our attention from this congenial ideal sport t o crude facts and pressing issues , we turn our frail poeti c idea s int o symbol s fo r those terribl e irruptiv e things. In that paper mone y o f our own stamping, the legal tender of the mind, we are obliged to reckon all the movements and values of the world . 220. Rober t C . Tucke r (ed.) , Marx-Engels Reader, p . 489 .

221. Th e Stages o f Economic Growth (Cambridge : a t th e Universit y Press , 1960 , 1971), pp . 149-150. Mar x understoo d wel l th e critica l analyti c importance o f th e questio n o f th e individua l and society . Th e Grundrisse begins , i n fact, wit h thi s issue (pp . 83-85). Marx argue s tha t i n the long swee p o f histor y ma n wa s alway s a dependen t socia l animal , rathe r tha n a n individual — dependent o n family , clan , an d large r units . H e view s th e eighteent h centur y a s a n exceptiona l period whe n "variou s form s o f socia l connectednes s confron t th e individua l a s a mer e mean s towards hi s private purposes, a s an external necessity." He regards this perspective a s inappropriat e in th e inherentl y intensivel y socialize d settin g o f a moder n industria l society , wher e ma n i s "a n animal whic h ca n individuat e itsel f onl y i n the mids t of society. " Wha t Mar x misses her e i s th e insistence o f human beings on asserting in significant ways their uniqueness, despite acceptance — within families an d larger collective units—o f the inescapable discipline s of life a s a social animal , even th e discipline s o f a n industria l society. 222. Quoted , Jerrol d Seigel , Marx's Fate, p . 387. 223. Ibid., pp . 387-389 . I n a considerabl e tour d e force, Seige l trace s th e continuit y i n th e pattern o f Marx' s lif e fro m hi s relation s with his parents, hi s doctoral dissertatio n o n Democritus , his recurrent self-induce d illnesses ["aggression against his own body"], his incapacity to complete Capital a s "realit y faile d t o fulfil l |his ] expectations. " Chapter 5 1. H . W . Arndt : The classical economist s from Ada m Smit h to Ricardo ha d been intensel y interested i n economic growth becaus e the y though t it desirable an d because the y advocated governmen t policie s whic h they believe d would promote it, chiefly policies of laissez-faire, o f less government interference . By th e mid-nineteent h century , thes e policie s ha d bee n substantiall y adopted, wit h spectacula r success. It did not need economists t o advocate materia l progress whic h was conspicuously under way. Instead , economists , apar t fro m pursuin g the scientific tas k of improving and perfecting th e analytical wor k of the classics on the working of a market economy, fel t it increasingly necessar y to direct their attention t o the evils, or at least the blemishes, o f the existing system—inequality i n the distributio n o f incom e an d wealth , the growt h o f monopolie s an d combines , th e trade cycl e and unemployment .

(H. W . Arndt , Th e Rise and Fall o f Economic Growth [Melbourne : Longma n Cheshire, 1978] , p . 14.) Mark Blaug : Whether we loo k at Smith, Ricardo or John Stuart Mill, the economic problem is seen in essence as a contrast between nonaugmentabl e land and augmentable labor, wit h capital subsume d under

604 Note

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the latte r a s stored-u p wealth . Th e functio n o f economi c analysi s i s t o revea l th e effect s o f changes i n th e quantit y an d qualit y o f th e labo r forc e upo n th e rat e o f growt h o f aggregat e output. . . . After 1870 , however , economist s typicall y posited som e give n suppl y o f productiv e factors, determined independentl y b y element s outsid e th e purvie w o f analysis . Th e essenc e o f th e economic proble m wa s to search fo r the conditions under which given productive services wer e allocated wit h optima l results among competin g uses , optima l i n th e sens e o f maximizin g consumers' satisfactions . . . . Fo r the first time , economics trul y became th e science tha t studies the relationship between given ends an d given scarc e mean s tha t have alternative uses. Th e classica l theory o f economic developmen t wa s replace d b y th e concep t o f genera l equilibriu m within an essentially stati c framework.

(Mark Blaug , Economic Theory i n Retrospect [Homewood , Illinois: Richar d D. Irwin , 1968] , pp . 299-300.) Phyllis Deane : . . . [T]h e wor k o f Jevons , Walra s an d Menge r marke d th e beginning s o f a majo r chang e i n economists' view s on th e scop e an d methodolog y o f thei r discipline. . . . The margina l revolution ha d significan t implications for bot h the scop e an d methodolog y o f orthodox economi c theory . Fo r i n providing the theorist with a convenient set of analytica l tools that wer e easil y an d effectivel y applie d ove r a wid e rang e o f use s i t change d th e proble m orientation o f economic orthodox y an d (i n the process thoug h not necessarily b y design) associ ated wit h tha t orthodox y significan t philosophical an d ideologica l tendencies . . . . Within th e conventional assumption s of the marginal analysis it can be logically shown that perfect competi tion lead s t o equimargina l allocatio n of expenditure s and resources .

(Phyllis Deane , Th e Evolution o f Economic Ideas [Cambridge : at the Universit y Press, 1978] , pp . 97-98.) Robert Heilbroner : . . . [T]h e grea t intellectua l bombshell tha t Marx ha d prepare d wen t off i n almos t total silence; instead o f a stor m o f abuse , Mar x me t th e fa r mor e crushin g ignominy of indifference. For economics had ceased to be the proliferation o f world views whic h now in the hands of a philosopher, no w a stockbroker , no w a revolutionar y seemed t o illuminat e th e whol e avenu e down whic h societ y wa s marching . I t becam e instea d the specia l provinc e o f professor s whos e probings wer e mor e i n the natur e of pinpoin t beams tha n th e wid e searching beacons th e earlie r economists ha d throw n ou t ove r th e mist y seas ahead . " . . . [T]h e Victoria n boom gav e ris e to a roster of elucidators, me n who would examine the workings of the system i n greatest detail, but who would no longer ask penetrating questions as to its basic merits or cast troublesom e doubt s ove r it s eventual fate. I n the new professordom, me n like Alfre d Marshall , Stanle y Jevons , Joh n Bate s Clark , Leo n Walras , Taussig , Menger— a whole facult y of economists—took ove r th e mai n line of economic thought . Their contributions were ofte n important , ye t the y wer e no t vital.

(Robert Heilbroner, Th e Worldly Philosophers: Th e Lives, Times, an d Ideas o f the Great Economic Thinkers [Ne w York : Simo n an d Schuster , 1961] , p . 145. ) John Hicks : The sixt y years fro m 187 0 to 193 0 wer e i n Britain the time of the rise o f the Labour Movement ; thus it is not surprisin g that the Britis h post-classics (Marshall , Edgeworth and Pigou i n particular) shoul d hav e ha d labou r problem s ver y muc h o n thei r minds. I t seeme d t o the m tha t their marginal utilit y analysis wa s wel l fitte d t o dea l wit h suc h problems ; nowaday s this ma y see m more doubtful .

(John Hicks, Classics and Moderns, Vol . Ill [Cambridge : Harvard University Press, 1983] , p. 71.) Karl Pribram : Until th e fourt h decade o f th e presen t [twentieth ] century , problem s o f economi c growth wer e ignored b y almos t all post-Ricardian economists . Their theories had bee n buil t aroun d th e prob -

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lems o f pricing and allocatin g scarc e resource s i n an optimal way , an d they remained tru e to the essentially stati c Ricardia n approac h t o economic analysis . . . . The indifference to the problems o f economic growt h shown by the post-Ricardian and marginalist economist s provide s a goo d exampl e fo r th e overwhelmin g influenc e o f methodologica l considerations o n the choice o f scientific problems. N o tools appeared t o be available to analyze long-range developments . Th e economi c movement s whic h were take n int o consideration wer e almost exclusivel y o f th e short-rang e type . . . .

(Karl Pribram , A History o f Economic Reasoning [Baltimore : John Hopkin s Universit y Press , 1983], p . 550. ) Eric Roll : It ha s bee n customar y t o regar d th e change s mad e i n the apparatu s o f economic analysi s i n th e 'seventies a s markin g a complet e revolutio n i n economics. . . One interpretatio n o f th e margina l schoo l ha s proclaime d i t a s th e economic s o f th e rentie r class. I t link s th e developmen t o f a subjective an d "unhistorical " metho d i n economics (whic h takes consumptio n a s its startin g point ) with the ris e of a class o f people wh o liv e by "clippin g coupons." Thi s leisur e class, i t i s said , i s n o longe r a part o f th e process o f productio n an d i s interested exclusivel y i n the disposa l o f th e incom e fro m it s investments , i t i s Veblen's clas s o f absentee owners , an d i t is natural that i t should consider economi c activit y solely from th e point of vie w o f consumption .

(Eric Roll, A History of Economic Thought, 3rf ed. [Englewoo d Cliffs, Ne w Jersey : Prentice-Hall , 1956, 1957] , pp . 368-369. ) Joseph Schumpeter : . . . [I]t was around 187 0 tha t a new interest i n social reform, a new spirit of "historicism, " and a ne w activit y i n th e fiel d o f economi c "theory " bega n t o asser t themselves . . . . [T]her e occurred breaks with tradition as distinct as we can ever expect to observe i n what must always be fundamentally a continuou s process . . . . But al l th e qualification s that ar e necessar y i n orde r t o prevent periodizatio n fro m becomin g misleading—or downrigh t nonsense—should no t blind us to the fact that the period w e are about to discus s [1870-1914 ] actuall y forms a rea l unit , whic h woul d hav e t o b e recognize d quit e irrespective of the claims of expository convenience . Th e breaks wit h tradition around 187 0 wer e meant t o b e breaks b y the men whose name s are associated wit h them: they ma y have looke d t o those me n more abrup t and more importan t tha n they do to the historian, bu t this does not mean that the y wer e wholl y imaginary.

(Joseph A. Schumpeter , History o f Economic Analysis [New York: Oxford University Press, 1954], p. 753. ) Henry Spiegel : Conventional economic s as exemplified b y John Stuar t Mill's writings , against which Marx and his followers launche d thei r attack, did not stand still but underwent during the closing decades o f the nineteenth century a profound transformation often designated a s the "margina l revolution.' ' When thi s revolution had run its course at the turn of the century, both the structure of economic s and it s metho d differe d sharpl y fro m th e politica l economy o f the classics . Th e labo r theor y o f value wa s shed , an d wit h th e hel p o f a ne w unifyin g principl e ther e wa s accomplishe d th e integration o f th e theorie s o f th e consume r an d o f th e firm , a s wel l a s th e integratio n o f th e theories o f valu e an d distribution , whic h ha d bee n onl y loosel y connecte d i n classica l thought. . . . There wa s les s emphasi s o n economic growth , wit h which Adam Smith had bee n so greatl y concerned . Instead , th e attemp t t o locat e equilibriu m positions wa s mad e withi n a framework i n whic h th e tota l quantity of resource s wa s given . Economic s becam e th e scienc e treating o f th e allocatio n of a given quantum of tota l resources, whic h meant that littl e attention continued to be devoted t o the question of how this quantum was determined and how i t could be increased. . . . The economi c discussio n thu s shifte d it s attentio n from tota l quantities to smal l change s i n these totals . On e o f it s central concepts became th e equilibriu m whic h equated certain variables and maximize d others . Sinc e th e equilibriu m wa s primaril y employe d i n microeconomic s an d

606 Notes

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centered aroun d th e consume r an d th e firm , suc h matter s a s th e macroeconomic s o f nationa l income determinatio n and the economics o f growth and development wer e no t among the theme s that ranke d prominentl y i n thi s discussion . The y ha d t o wai t unti l attentio n wa s eventuall y accorded t o the m a s th e twentiet h century progressed .

(Henry William Spiegel, The Growth of Economic Thought [Englewoo d Cliffs, N.J. : Prentice-Hall , 1971], pp . 505-506. ) Although i t does no t lend itself t o summary quotation, perhaps the best evocation o f the turning point of the 1870 s i s the first chapte r i n T. W . Hutchison , A Review o f Economic Doctrines, 18701929 (Oxford : a t th e Clarendo n Press , 1953) : "Politica l Econom y i n Englan d afte r 1870, " pp . 1—31. Se e als o Hutchison' s O n Revolutions an d Progress i n Economic Knowledge, especiall y Chapter 3, "Th e Decline an d Fall of English Classical Political Economy and the Jevonian Revolution," pp. 58-93. Hutchison argues (pp. 92-93) that by overthrowing Ricardian distribution theory the Jevonia n analysi s "opene d up th e whol e questio n o f povert y an d socia l reform, " whil e th e principle o f diminishin g utilit y wa s t o b e evoke d i n suppor t o f progressiv e taxation. 2. Joh n Williams, "Th e Theory o f International Trade Reconsidered, " Economic Journal, Vol. XXXIX, No . 154 , (June 1929) , pp . 195-209 . 3. The adjectives set off by quotation marks are from Joh n F. Kennedy's often repeate d definition of the group that had to be won over by a victorious candidate in an American presidential election . For context , se e m y Diffusion o f Power (Ne w York : Macmillan, 1972) , p . 129. 4. Se e "Explanation s o f th e Grea t Depression, " Chapte r VI I i n m y Essays o n th e British Economy o f th e Nineteenth Century (Oxford : at the Clarendon Press, 1948) , pp . 145-160 . Schumpeter als o deal t wit h th e fallin g pric e tren d i n th e contex t o f hi s analysi s of Kondratief f cycle s (discussed, ibid., pp . 28-30) . Se e also pp. 176-17 8 and 181-182, above. 5. J . M . Keynes , Essays i n Biography, p . 201. 6. Fo r furthe r discussio n in a wider context, se e W. W . Rostow , Th e World Economy: History and Prospect (Austin : Texas Universit y Press, 1978) , pp. 58-6 1 and 729-731 (notes 9-12) . 7. Fo r elaboration , se e ibid., Chapte r 14 , especially pp . 163-178 . 8. See, for example, A . W. Coats, "Th e Origins and Early Development o f the Royal Economi c Society," Economic Journal, Vol. LXXVIII, No. 310 (June 1968), pp. 349-371; and A. W. Coats and S. E . Coats , "Th e Changing Social Compositio n o f the Royal Economic Society , 1890-196 0 and th e Professionalizatio n o f Economics, " British Journal o f Sociology, Vol . 24 (1974) , pp . 165-187. Fo r th e mor e comple x stor y of th e creation of the America n Economic Associatio n an d the conflicts of ideology an d method that marked its early days , se e A. W . Coats , "Th e First Tw o Decades o f th e America n Economi c Association, " American Economic Review, Vol . L, No . 4 (September 1960) , pp . 555-574 . Chapter 6 1. Geral d M . Meie r an d Dudle y Seer s (eds.) , Pioneers i n Development (Ne w York: Oxfor d University Press , 1984) , pp . 229-261. 2. Alfre d Marshall , Principles o f Economics, 8t h ed . (London : Macmillan , 1930), p . 461. 3. Ibid., pp . 805-812 . Se e also Marshall' s treatmen t o f the case o f Exceptional Supply , paras . 8-10, Appendi x J , Money Credit an d Commerce (London : Macmillan , 1903) , pp . 351-356 . 4. J . K . Whitake r (ed.) , Th e Early Economic Writings o f Alfred Marshall, 1867-1890 Vol . I, (London: Macmillan , 1975) , pp . 97-98 . 5. Quote d ibid., p . 84 . Th e contex t i s a letter t o L. C . Colson , writte n in 190 8 or 1909. 6. Principles, pp . x v an d xvii . 7. Early Writings: Marshall, Vol . I, pp . 4-5 . 8. Principles, pp . x-xi. One of the best statements of Marshall's view of mathematics and (unlike Jevons) his determination t o combine formal theor y wit h empirical data and a historical perspective

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is tha t o f G . F . Shove , "Th e Plac e o f Marshall' s Principles i n th e Developmen t o f Economi c Theory," Economic Journal, Vol . LII , No . 20 8 (December 1942) , especiall y pp. 307-309 . 9. J . K . Whitaker , Early Writings: Marshall, pp . 106-107 . 10. See , notably , J . M . Keynes , "Alfre d Marshall , 1842-1924, " i n A . C . Pigo u (ed.) , Memorials o f Alfred Marshall (London : Macmillan, 1925) , pp . 9-11 . I t i s perhaps appropriat e to note that, while the seriousness o f Marshall's moral commitments was unquestionable, he lacked a sense o f humo r i n matter s o f moralit y an d coul d b e sententious . See , especially , hi s nephew' s testimony, Claude W. Guillebaud, "Som e Personal Reminiscense s of Alfred Marshall," History of Political Economy, Vol . 3 , No . 1 (Spring 1971) , especiall y pp . 2-4 . 11. Clark Kerr, Marshall, Marx, an d Modern Times (Cambridge: at the University Press, 1969) , p. 7 . 12. Quoted , J . M . Keynes , "Marshall, " p . 9 . 13. Quoted , ibid., p . 10 . 14. Quoted , ibid. 15. J. K . Whitaker, Early Writings: Marshall, Vol . I, p. 8 . The phrase is used in a letter to James Ward, th e Cambridg e psychologist . 16. Quote d i n Ro y Harrod , Th e Life o f John Maynard Keynes (Ne w York : Harcour t Brace , 1951), pp . 193-194 . 17. Principles, pp . ix , xiii , an d xiv. Modern scienc e i s less confident that nature never makes a jump. See , fo r example, Jame s Gleick , Chaos: Making a Science (Ne w York: Viking, 1987) , pp . 160-174, o n "phas e transitions" an d other discontinuities . 18. Early Writings: Marshall, Vol . 2 , p . 352 . 19. Lione l Robbins , Th e Theory o f Economic Development i n the History o f Economic Thought (London: Macmillan , 1968) , p . 17 . 20. J. M . Keynes , "Marshall, " pp . 18-21 . 21. Early Writings: Marshall, p . 306 . 22. Whitaker' s summar y i s a t ibid., pp . 305-309 ; Marshall' s tex t pp . 309-316 . Whitake r elaborated hi s analysis of Marshall's though t at this early, formative period (probabl y 1881-1882 ) in "Alfre d Marshall : the Years 187 7 to 1885," History o f Political Economy, Vol . 4 (Spring 1972) , and "Th e Marshallia n System in 1881: Distribution and Growth," Economic Journal, Vol . 84, No. 333 (March 1974) . Fo r a rare reference t o Marshall's early version of a neoclassical growt h model, see Sukahamo y Chakravarty , Alternative Approaches t o a Theory o f Economic Growth: Marx, Marshall an d Schumpeter (Calcutta : Longman, 1980) , pp . 8-11 . Th e following equation s are fro m Marshall's tex t i n Whitaker, ibid., pp . 309-316 . If g be the gros s real incom e of the country, n the numbe r and e the averag e efficienc y of the workers in it, w the amount o f wealth i n it, F the fertility of its natural resources above and belo w the surface o f the ground (thi s fertility being regarde d a s itself a product o f the extent, th e average richness and the convenience of situation of these resources), A the state of the arts of production , and S th e stat e o f publi c security , the n w e have :

If s be the net incomes available fo r saving,/2(e) the average necessarie s of a population whos e average efficienc y i s e , [and ] 7 * th e taxe s tha t hav e t o b e pai d fo r th e maintenanc e o f publi c security, [w e have] :

Since w is the wealt h o f th e countr y therefor e dw/dt i s the rat e o f saving . [If ] D i s the rat e o f discount a t which people on the average discount futur e enjoyments , A' th e strength of the family affections, an d ( ' is th e rat e o f interest , then :

608 Notes

t o Pages 165-171

If £ b e th e evenness o f distribution of incomes, [then] :

E may perhaps be regarded provisionally as measured by the ratio which the aggregate of the incomes bear s t o th e su m o f th e difference s betwee n eac h individua l income an d th e mea n income: i t depends s o largel y on causes which are not properly economi c that i n this stage a t all events i t mus t b e accepte d b y th e economis t a s a n ultimat e fac t fro m th e statisticia n o r th e historian. 23. Ibid., pp . 309-312 .

24. Ibid., p . 309. 25. Principles, p . 203. 26. Ibid., p . 322. 27. Ibid., p . 223. 28. Ibid., pp . 136-137 . 29. Ibid., p . 321n . 30. Marshall consistently draws a distinction between material progress (or rate of real earnings) and standar d of life , whic h implies "a n increas e o f intelligenc e and energy an d self-respect" (for example, ibid., p . 688) . H e argue s tha t a n increas e i n th e latter wil l yield a rise i n "th e national dividend" a s wel l a s a rise i n real wages . 31. Ibid., pp . 714-715 . 32. Ibid., p. 722. 33. Ibid., p . xxxii . 34. Ibid., pp . 173-219 . T o a degree, thes e passage s ar e foreshadowed i n Alfre d Marshall an d Mary Pale y Marshall , Th e Economics o f Industry (London : Macmillan , 1879) , pp . 8-1 2 an d 27-35. Th e treatmen t i n th e Principles i s mor e elaborate , introduce s a muc h wide r rang e o f empirical material , an d i s les s didactic . 35. Principles, p . 173. 36. Ibid., p . 192. 37. Ibid., p . 197. 38. Ibid., p . 201. 39. O n thi s them e Marshal l end s u p (ibid., p . 205 , n. 2 ) wit h a passag e tha t anticipates , t o a degree, bot h J . M . Keynes' s peroratio n t o th e General Theory an d Schumpete r o n earl y an d lat e stages o f innovations . In this connection i t is worth while to notice that the full importanc e of an epoch-making idea is often no t perceive d i n th e generation in which it is made: it starts the thoughts of the worl d on a new track , bu t th e chang e o f directio n i s no t obvious unti l the turning-poin t has bee n lef t som e way behind . I n th e sam e wa y th e mechanica l inventions of ever y ag e ar e ap t t o b e underrate d relatively t o thos e o f earlie r times . Fo r a ne w discover y i s seldo m full y effectiv e fo r practica l purposes til l man y mino r improvement s an d subsidiar y discoverie s hav e gathere d themselve s around it : an invention that makes an epoch i s very often a generation olde r than the epoch which it makes. Thu s it is that each generation seem s to be chiefly occupied in working out the thoughts of th e precedin g one ; while th e ful l importanc e o f it s ow n thought s is a s ye t no t clearl y seen .

40. Ibid., p . 212. 41. Ibid., pp . 217-218 . 42. Ibid., p . 180n. 43. Ibid., pp . 31 4 an d 317. 44. Ibid., p . 151 , n. 2 , Marshall notes that "mos t of the migrations of which history tells" wer e caused by diminishing returns, beginning with Abraham's departure described thus in Gen. 13:6:

Notes t o Pages 171-178 60

9

"The lan d was not able to bear them, that they might dwell together; for their substance was great , so that they coul d no t dwel l together." 45. Ibid., p . 153 . 46. Ibid., pp . 229-230 . 47. Ibid., pp . 232-233 . 48. Ibid., p . 236 . 49. Ibid., pp . 298-300 . Buddenbrooks, publishe d i n 1901 , i s o f abou t th e sam e vintag e a s Marshall's Principles, althoug h there is no suggestion of any influence running from on e book to the other. Moder n industr y was, however , a n old-enough phenomenon in Germany as well a s Britain for a generationa l cycl e t o be noted . 50. Ibid., p . 304 . 51. Ibid., p . 27 7 n. 1 . 52. Ibid., pp . 274-277 . 53. Ibid., pp . 315-316 . 54. Ibid., p . xiii . 55. I n Principles Marshal l refer s bac k an d quote s fro m th e busines s cycl e passag e i n Th e Economics o f Industry o n pp . 711-712 , includin g the not e tha t begins on the forme r page; i n hi s submission to the Royal Commission o n The Depression o f Trade and Industry, he again quotes the critical passag e (Official Papers b y Alfred Marshall, J . M . Keyne s [ed.] , [London ; Macmillan , 1926], pp. 7-9 ; an d in Money, Credit, an d Commerce, pp . 247-251). The passage doe s not appear in Industry an d Trade (London: Macmillan, 1919; reprinted New York: Augustus M. Kelley , 1970 , Reprints o f Economi c Classics) . 56. For comment s on Mil l in relatio n to Marshall' s vie w of the busines s cycle , see J. A. Schumpeter, History o f Economic Analysis, p . 747. Fo r a detailed account and analysis of the major cycle 1868-1879 , se e W. W . Rostow , British Trade Fluctuations, 1868-1896 (Ne w York : Arn o Press, 1981 ) (194 0 doctora l thesis) , pp. 15-176 . 57. Economics o f Industry, pp . 152-155 . 58. Ibid., pp . 155-167 . 59. Ibid., pp . 156-157 . 60. Se e W. W . Rostow , British Trade Fluctuations, 1868-1896, pp. 165-18 0 and 542-566 for relevant dat a an d analysis. 61. Economics o f Industry, pp . 162-163 . 62. Ibid., pp . 165-167 . 63. Ibid., p . 155n . 64. J . M . Keyne s (ed.) , Official Papers, especiall y pp . 90-101 . 65. Ibid., pp . 98-101 . 66. Principles, pp . 711-712 . 67. Money, Credit, an d Commerce, pp . 238-253 . 68. A . C . Pigo u (ed.) , Memorials o f Alfred Marshall, pp . 60-65 . 69. History o f Economic Analysis, p . 747 . Bu t see also Schumpeter' s mor e substantive observation in his Ten Great Economists tha t is similar to my conclusion that Marshall failed to translate the insights o f hi s aggregat e growt h mode l an d thos e o f Boo k I V int o a growt h concep t capabl e o f linkage t o hi s concep t o f th e busines s cycle. Schumpete r point s to Boo k V I rather tha n Boo k I V (p. 106) : Well, I suppose we have got to recognize a third type of theory [in addition to partial and general static equilibriu m analysis]—in m y own worksho p it is called "aggregative. " Of course, h e did not lin k up his treatment of such aggregativ e quantities with money. Hi s failure to do so, i n spite of hi s many an d important discoverie s i n monetary theory .. . i s perhaps the only fundamental criticism tha t 1 should leve l agains t him. Bu t really , i f one start s fro m partia l analysis an d the n wishes to say something about the economic proces s a s a whole, is it not natural that , despairing of th e possibilitie s of th e unwield y idea o f genera l equilibrium, one shoul d turn to aggregative

610 Notes

t o Pages 178-180

theory? And would no t then the theory o f money automatically come in , t o use Mrs. Robinson's phrase, a s th e theor y o f tota l outpu t and employment? 70. Principles, pp . 31 7 and 342-343. Se e also references o n pp. 342-350 , 377 , and 459-460. 71. Marshal l had , in fact , formulate d th e concep t o f Norma l Valu e a s determined b y Norma l Expenses of productio n in the lat e 1870s . His passag e on the busines s cycle in The Economics of Industry conclude s a s follow s (pp. 166-167): When th e wage s o f an y clas s o f labourer s hav e bee n raise d b y a ris e i n th e pric e o f th e commodity produce d b y them, th e rapidity wit h which an additional supply of labour comes into the trade depends o n the relation i n which these wage s stand to those of other trades. I f the wages in this trade are abnormally hig h relatively to others, th e rise is likely to attract so much additional labour, a s to prevent th e upward movement o f wages fro m goin g very far, and to make them fal l fast an d fa r when th e time of depression comes . O n the other hand, if , befor e th e rise came , th e wages wer e belo w their Normal level relatively to other trades, th e rise may go on for a long tim e without bringin g i n muc h additiona l labour , an d whateve r ris e i s gaine d wil l probabl y b e maintained. Thus we see how th e Law that Normal value is determined by Normal Expense s o f productio n is consistent wit h the fact that market fluctuation s o f value are the cause an d not the consequenc e of marke t fluctuation s o f Expense s o f production. I f Ricard o an d Mil l had take n mor e pain s t o make clea r th e distinction s betwee n th e theor y o f Normal valu e and tha t o f Market value , ther e could no t hav e bee n a s muc h controvers y a s ther e ha s bee n o n th e questio n whethe r valu e i s governed b y Expense s o f production , o r Expense s o f production b y value. 72. General Theory, p . 292 . For discussio n i n th e contex t o f th e post-187 3 price decline , se e W. W . Rostow , British Economy o f the Nineteenth Century (Oxford : at the Clarendon Press , 1948) , pp. 61-63 . 73. Ibid., pp . 295-296 . Keyne s the n modifie s th e underlyin g assumptions , concludin g les s sharply (ibid., p . 296): Thus w e mus t firs t conside r th e effec t o f change s i n th e quantit y of mone y o n th e quantit y of effective demand ; an d th e increas e i n effectiv e deman d will , generall y speaking , spen d itsel f partly i n increasin g th e quantit y of employmen t an d partl y i n raisin g th e leve l o f prices . Thu s instead o f constant prices i n conditions of unemployment, and of prices rising i n proportion t o the quantity of mone y i n conditions of ful l employment , w e have in fact a condition of prices risin g gradually a s employment increases . Here, i n fact , i s ho w production , prices , an d unemploymen t move d i n th e upswin g 1868-1873 , conforming rathe r wel l t o Keynes' s stylize d cas e o f risin g output-fallin g unemployment-stati c prices followe d b y almos t pur e price inflation . N.I Movemen t o f Major Variables , U.K. , 1868-1873 Capital goo cIs Consumer s good s Unemploymen t Genera l production prices percentage production

1868 1869

1870 1871 1872 1873

43.4 47.9 49.8 51.2 55.3 55.3

60.7 58.1 63.5 69.2 68.8 68.8

6.75% 5.95 3.75 1.65

.95

1.15

132 131 128

133 145 148

NOTE: 1900=100 excep t where otherwis e indicated. SOURCE; W . W . Rostow , British Trade Fluctuations, 1868-1896, p . 70 ; sources specifie d , pp. 7 13.

Notes t o Pages 180-187

611

74. Te n Great Economists, p . 104 . 75. Thes e point s are elaborated i n W. W . Rostow , British Trade Fluctuations, 1868-1896, pp . 422-430, an d als o i n British Economy o f th e Nineteenth Century, pp . 151-154 . 76. Official Papers, p . 5 . 77. Ibid., pp . 5-6 . 78. Ibid., p . 126 . 79. These four points are elaborated ibid., pp . 127-131 . Marshall's view on the long-term rate of interest wa s tha t a declin e ha d bee n cause d b y " a thinnin g out o f th e fiel d fo r th e investmen t of capital relativel y t o th e suppl y of capital. " (Ibid., p . 130) . 80. Ibid., p . 128 . 81. The annual average percentage rate of growth of Gross Domestic Product per man-year in the U.K. wa s 1.2 % for the period 1873-189 9 (R. C. O. Matthews , C. H . Feinstein, an d J. C. Odling Smee, British Economic Growth, 1856-1873 [Stanford : Stanfor d University Press, 1982] , p . 31) . The rat e o f growt h of rea l wage s a s calculate d i n Bowley' s tabl e quote d b y Marshal l (p . 411 ) i s 2.4% fo r the period 1864-187 3 to 1884-1893 . 82. Official Papers, p . 287 . 83. B . R . Mitchel l wit h the collaboration o f Phyllis Deane, Abstract o f British Historical Statistics (Cambridge: a t the Universit y Press, 1971) , p . 489 . 84. Historical Statistics of the United States: ColonialTimes t o 1970, Vol. I, (Washington, D.C.: U.S. Departmen t o f Commerce, 1975) , pp . 200-201 . 85. C . H . Feinstein , Statistical Tables of National Income, Expenditure, an d Output of the U.K., 1855-1965 (Cambridge : a t the Universit y Press, 1976) , Tabl e 65 , p . T140 . 86. Principles, pp . 672-673 . 87. Official Papers, pp . 366-420. The paper includes (pp. 394-395) a terse and precise summa ry of the six major arguments for British protectionism that Marshall systematically but temperately refutes. 88. Ibid., pp . 383-384 . See also Marshall's understanding in this period (1907) of the decelerat ing effec t o n Britis h rea l wage s o f capita l export s designe d t o expan d foo d an d ra w material s production (Memorials, p . 324) : Wages i n Britai n ar e no w bu t ver y littl e affecte d b y th e rat e o f growt h o f populatio n an d th e pressure on the means of subsistence. The restraining forces whic h prevents their rise from being even faste r tha n i t is , i s th e fact that countries whos e larg e expanse offer s ver y hig h returns o n investments i n railways, i n building , i n developin g mine s an d ne w agricultura l lan d ca n outbi d British enterpris e i n th e deman d fo r Capital .

89. Ibid., p . 402 . 90. Industry an d Trade, p . 7 . 91. Economics o f Industry, pp . 43-48 . 92. Ibid., p . 47 . 93. Principles, p . 738 . 94. Ibid., pp . 743-744 . 95. Ibid., p . 747n . 96. Ibid., p . 775 . 97. Industry an d Trade, pp . 681-699 . 98. Economics o f Industry, pp . 27-31 . 99. Ibid., pp . 60-61 . 100. Ibid., pp . 187-190 . 101. Fo r example, Principles, pp . 173-18 0 (population and population doctrine); pp. 220-22 6 (the growt h of wealth in the course of the stages of growth); pp. 267-277 (the evolution of industrial organization); pp. 582-58 7 (attitude s toward and doctrines concerning interest); and pp. 637-645 (land tenure) .

612 Notes

t o Pages 187-193

102. Industry an d Trade, Chapter s 1II-V , pp . 32-106 . 103. Ibid., p . 104 . 104. Ibid., pp . 95-98 . 105. Ibid., p . 98 . 106. Ibid., pp . 99-102 . 107. Ibid., pp . 102-103 . 108. Ibid., pp . 104-10 5 and 157-159 . 109. Ibid., pp . 161-162 . 110. Memorials, pp . 11-12 . 111. Ibid., p . 12 . 112. Ibid., pp . 41-46 . 113. Ibid., p . 43 . 114. Ibid., pp . 45-46. 115. "Th e Presen t Positio n o f Economics" (1885) , Marshall's inaugural lecture as professor a t Cambridge, Memorials, pp . 163-164 . 116. Ibid., p . 155 . 117. Marshal l attributed a good dea l of this parochialism amon g early nineteenth-century econo mists t o Ricard o (ibid., pp . 153-156) . S o far a s Ricardo wa s concerne d th e charg e i s somewha t misdirected. Ricardo' s parochialis m consiste d no t i n extending hi s propositions unthoughtfull y t o other times and societies but in focusing narrowly on certain specific problems confronted by Britain in his time (preceding, p . 88). Bu t it must be allowed that his technique of argument and exposition, via simple , abstract , stron g constructs, len t itself to misinterpretation. It should also b e noted tha t Schumpeter accuse d Marshal l of applyin g t o th e worl d the parochia l value s of a Cambridg e pro fessor (History o f Economic Analysis, p . 129n) . Lik e al l set s o f mora l values , Marshall' s were , indeed, arbitrary ; but the y derive, I believe , fro m a wide r and longe r traditio n than Schumpeter' s observation woul d suggest . 118. History o f Economic Analysis, p . 888 . 119. Fo r example , se e Schumpeter' s comments o n Joh n A . Hobso n an d Beatric e an d Sidne y Webb, ibid., pp . 823-82 4 an d 833 . 120. Memorials, p . 11 . See also pp . 69-7 2 and 82-83. 121. Ibid., p . 162 . 122. Fo r example , ibid., pp . 16 , 20, 34 , an d 156 . 123. Ibid., p . 20 . 124. Ibid., p . 166 . 125. Ibid. 126. Principles, p . 587 . Marshal l goe s o n t o argu e hi s denia l o f th e labo r theor y o f valu e a s follows (ibid.): It i s not tru e tha t the spinnin g o f yar n i n a factory, afte r allowanc e ha s bee n mad e fo r the wear and-tear o f the machinery, is the product o f the labour of the operatives. I t is the product o f thei r labour, togethe r wit h tha t o f th e employe r an d subordinat e managers , an d o f th e capita l em ployed; an d tha t capital itsel f i s the produc t of labou r and waiting : and therefor e th e spinnin g i s the produc t o f labou r o f many kinds , an d o f waiting . If w e admit that it is the produc t o f labou r alone, and not of labour and waiting, we can no doubt be compelled b y inexorable logi c t o admit that there i s no justification for Interest, th e reward of waiting; for the conclusion i s implied in the premiss. Rodbertu s an d Mar x d o indeed boldl y claim th e authority of Ricardo fo r thei r premiss; but i t is really a s opposed to his explicit statemen t and the general teno r of his theory o f value, a s it i s to commo n sense .

127. Memorials, pp . 323-346 . 128. Ibid., p . 173 . 129. Principles, p . 722 .

Notes t o Pages 194-196 61

3

Chapter 7 1. Fo r a n invaluabl e surve y of th e histor y an d curren t state of populatio n studies a s of th e lat e 1950s, se e Philip M . Hause r and Otis Dudley Duncan, The Study o f Population: An Inventory an d Appraisal (Chicago : Universit y of Chicag o Press , 1959) . Reference s t o Joh n Gaunt , hi s achieve ment and influence, are at pp. 124-13 0 and 190 . The Hauser and Duncan volume contains for each chapter a valuable bibliography. 2. Ibid., an d Charle s Henr y Hul l (ed.) , Th e Economic Writings of Si r William Petty, togethe r with th e Observations upon th e Bills o f Mortality More Probably b y Captain John Gaunt (Cambridge: a t the University Press, 1899) , pp . Ixxvii-lxxix . 3. For a full accoun t of Siissmilch, see Frederick S . Crum, "Th e Statistica l Work of Siissmilch, " Publications of the America n Statistica l Association , Vol . VII , New Series , No. 55 (Septembe r 1901), pp . 335-380 . Thi s articl e i s base d o n Crum' s Cornel l doctora l thesis . Se e als o th e vivid evocation of Sussmilch and his pro-natalist doctrines in Theodore M. Porter , The Rise of Statistical Thinking, 1820-1900 (Princeton : Princeton University Press, 1986) , pp. 21-23 . 4. P . M . Hause r an d O. D . Dunca n (eds.), Study o f Population, i n Chapter 6 (Fran k Lorimer , "The Developmen t o f Demography"), pp . 127-128 . 5. Ibid., pp . 141-142 . 6. Ibid., p . 18 1 (Chapte r 7 , Alfre d Sauvy , "Developmen t an d Perspective s o f Demographi c Research i n France"). Se e als o ibid., p . 13 7 (Frank Lorimer) . 7. Ibid., F . Lorimer , "Th e Developmen t o f Demography," p . 137-138 . 8. Ibid., A . Sauvy , "Demographi c Researc h i n France," p . 180 . 9. E . Castelot , "Stationar y Populatio n in France," Economic Journal, Vol . XIV, No. 5 4 (June 1904), pp. 249-253 . Castelo t discusse s briefly pro - and anti-natalist views and policies in various countries. 10. Ibid., p . 250 . Fo r a more recent, detaile d revie w of German strategic hopes an d French an d British anxieties i n this period see Michael S. Teitelbau m an d Jay M. Winter , The Fear of Population Decline (Ne w York : Academi c Press , 1985) , Chapte r 2 , "Demograph y an d Internationa l Politics," pp . 13-44 . 11. E. Castelot , "Stationar y Population, " pp . 252-253 . 12. For a brief discussion an d references, se e W. W . Rostow , The World Economy: History and Prospect, pp . 18-2 0 an d 720. Fo r the international multiplier effects o f this controversy on population research , se e Hauser an d Duncan, Study o f Population, pp . 145-14 6 (Fran k Lorimer) . 13. Imr e Ferenz i (ed.) , International Migrations (Ne w York : Nationa l Burea u o f Economi c Research, 1929) . 14. A. M . Carr-Saunders , World Population: Past Growth and Present Trends (London : Oxford University Press , 1936) . 15. F . Lorimer , i n Hansen an d Duncan , Study o f Population, p . 153 . 16. Hauser an d Duncan (eds.), ibid., i n Chapter 1 4 (Rupert B. Vance , "Th e Developmen t an d Status o f American Demography") , p . 297 . 17. Ibid., p . 291 . Vance's mor e detailed comment on American demography is worth quotation, suggesting bot h th e heightene d urgenc y o f socia l analysi s i n th e Depressio n an d th e comin g t o fruition o f effort s wit h a longer perio d o f gestatio n (ibid., p . 293) : Strangely enough , th e impetu s demograph y neede d t o attain maturit y i n the United State s cam e from th e impact o f the depression. Population a s human resources took its place at the forefront of analysis, and policy-makin g gav e impetu s to the wor k of scholars , governmen t agencies , and foundation programs. Demograph y i n this period reache d a new level of creative scholarship , an d the patter n whic h emerge d mad e distinctiv e contribution s t o analysi s and theory.

18. I n Chapte r 3 2 (Josep h Spengler , "Economic s an d Demography") , i n Hause r and Duncan, Study o f Population, p . 796 .

614 Notes

t o Pages 197-203

19. Not e Schumpeter' s commen t o n thi s period , History o f Economic Analysis, pp . 890 891. 20. Joh n Maynard Keynes, Th e General Theory o f Employment, Interest, an d Money (London : Macmillan, 1936) , p . 318 . M . S . Teitelbau m an d Ja y M . Winter , Fear o f Population Decline, survey othe r strand s in the populatio n debate in Chapte r 3 ("Demograph y and Interna l Politics , 1870-1945"), notabl y concerns wit h eugenics an d the "quality " o f populations. 21. J . M . Keynes , "Som e Economic Consequence s of a Declining Population," Th e Eugenics Review, Vol . XXIX , No . 1 (April 1937) , pp . 13-17 . 22. W . B . Reddaway , Th e Economics o f a Declining Population (London : Alle n an d Unwin, 1946 [2 d impr.]) . 23. Ibid., p . 152 . 24. Ibid. 25. Se e Johanne s Overbeek , "Wicksel l o n Population," Economic Development an d Cultural Change, Vol . 21 , No . 2 (Januar y 1973) , pp . 205-207 . Thre e page s contai n a usefu l accoun t of the origin o f Wicksell's view s on population as an introduction to a translation of a 191 0 speech h e gave i n Th e Hagu e t o a neo-Malthusia n gatherin g o n "Th e Optimu m Population." Overbeek' s translation i s helpfu l becaus e Wicksel l droppe d fro m th e Englis h editio n o f hi s Lectures th e chapter o n populatio n tha t appeare d i n th e firs t tw o Swedis h editions . Thi s i s th e onl y Englis h text o f Wicksell' s views . Fo r brie f observation s o n Wicksel l i n th e cours e o f expoundin g hi s own rathe r gri m vie w o f populatio n prospects , se e R . M . Goodwin , Essays i n Dynamic Economics (London : Macmillan , 1982) , Chapte r 1 4 ["Wicksel l an d th e Malthusia n Catastrophe," pp. 173-182] , originall y publishe d i n Th e Scandinavian Journal o f Economics, 1978) . Se e als o K. Wicksell , "Th e Theor y o f Population , It s Compositio n an d Changes, " i n Gora n Ohlin , Some Unpublished Works (Lund : 1977) . For an authoritativ e essay on Wicksell , includin g reference t o his view s on population, se e Erik Lindah l (ed.), Knu t Wicksell , Selected Papers o n Economic Theory, Reprint s of Classics (Ne w York: Augustus M. Kelley , 1969) , pp. 9-48 . (Lindahl' s Introduction). 26. Introductio n t o Knu t Wicksell , Lectures o n Political Economy, Vo l I , translate d b y E . Classen (Ne w York : Macmillan , 1934) , pp . xl-xii . 21. Ibid., p . 211 . 28. Gunna r Myrdal , Population, A Problem fo r Democracy, Th e Godki n Lectures , 193 8 (Cambridge: Harvar d Universit y Press , 1940) . Alv a Myrdal , Nation an d Family (Ne w York : Harper, 1941) . 29. G. Myrdal, Population, A Problem for Democracy, pp . 26-27. Myrdal asserts that the theory of optimu m populatio n "stand s mainl y as a n excus e for , an d als o a s a n actua l inhibitio n of , th e proper posin g o f th e proble m o f th e economi c effect s o f population changes." 30. Ibid., p . 203 . 31. Alvi n H . Hanse n cite s thes e figure s i n Business Cycles an d National Income (Ne w York: W. W . Norton , 1951) , p . 76 , n.23 . 32. Ibid., pp . 74-76 . I n Hansen's vie w the Second Industria l Revolution centered o n th e rail roads; th e Third , o n th e automobil e (an d relate d sectors) , electricity , th e stree t railroad , an d telephone. 33. A chapter i n T. W . Schult z (ed.), Food for th e World (Chicago : University of Chicago Press, 1976), pp . 36-57 . 34. A . M . Carr-Saunders , World Population (Oxford : a t th e Clarendo n Press , 1936) , pp . 59-128. 35. J . K . Whitake r (ed.) , Th e Early Economic Writings of Alfred Marshall, 1862-1890, Vol . I I (London: Macmillan , 1975 ) p . 311. 36. Ibid., p . 315 . 37. J . B . Clark , Essentials of Economic Theory (Ne w York: Augustus M. Kelley , 1968 ; Reprints of Economi c Classics) , p. 557 .

Notes t o Pages 203-207 61

5

38. Ibid., especiall y pp . 321-335 . 39. Ibid., pp . 335-33 6 (a s follows): The Working of Malthusianism in Short Periods as Contrasted with an Opposite Tendency in Long Ones. Ther e i s littl e doub t tha t b y a lon g cours e o f technica l improvement , increasin g capital, an d risin g wages , th e laborin g clas s o f th e mor e prosperou s countrie s hav e becom e accustomed t o a standard o f living that is generally wel l sustaine d an d in most o f these countrie s tends t o rise. There is also little uncertainty tha t a retarded growt h o f population ha s contribute d somewhat t o this result . On e of the facts whic h Malthus observed is consistent with thi s genera l tendency. Eve n thoug h th e tren d o f th e lin e whic h represent s th e standar d o f livin g b e steadil y upward, the rise of actual wage s ma y proceed unevenly, b y quick forward movement s an d pauses or halts, a s the general stat e o f business i s flourishing o r depressed. In "booming " times wage s rise an d i n har d time s the y fall , thoug h th e upwar d movement s ar e greater tha n th e downwar d ones an d th e tota l resul t i s a gain . Now, suc h a quick ris e i n wages i s followed b y a n increase in the numbe r o f marriages an d a quick fal l i s followed b y a reduction o f the number. The birth rat e is somewhat higher i n the goo d times tha n i t i s i n th e ba d times . Youn g me n wh o hav e a standar d incom e whic h the y nee d t o attain before takin g o n themselves th e care of a wife and children fin d themselves suddenl y i n the receipt o f suc h a n incom e an d marr y accordingly . Ther e i s no t tim e fo r th e standar d itsel f materially to change before thi s quick increase of marriages takes place. . . .

40. Ibid., pp . 33 8 and 317-318. 41. Gusta v Cassel, Th e Theory o f Social Economy (New York: Harcourt Brace, revised fro m th e fifth Germa n edition , translate d b y S. L . Barrow , 1932) , pp. 27-4 1 an d 148-152 . 42. Ibid., pp . 39-40 . 43. Cassel' s furthe r reference s t o population are to be found i n Theory pp . 241-249. This aspec t of Wicksell' s sustaine d polemic begins (p. 241) : "Thi s book contains no chapter on the theory of population—only a couple of pages i n the chapter on wages are devoted to it out of sheer necessi ty—and th e author's ow n view s on the subjec t seem t o be hopelessly vague. " 44. Th e classi c studie s o f busines s cycle s i n relatio n t o marriage , birth , an d deat h rate s are : Dorothy Swaine Thomas, "A n Inde x to British Business Cycles," Journal o f American Statistical Association, Vol . XXI , No . 15 3 (1926); an d (wit h V. L . Galbraith ) "Birt h Rate s an d Inter-war Business Cycles, " ibid., Vol . XXXV I (1941). O n migration , als o b y Thomas , Social an d Economic Aspects o f Swedish Population Movements (Ne w York : Macmillan , 1941) . Walte r W . Willcox (ed.) , International Migrations, Vol . II, Interpretations (Ne w York: National Bureau of Economic Research , 1931) , i s shot through with references to the sensitivit y of migration flows to economic pus h and pull , includin g the rol e of business cycles. Th e chapters , writte n by scholar s from differen t countries , analyz e twenty cases o f significan t migratio n flows . 45. C . Chandrasekaran , "Surve y o f the Status of Demography in India," Chapter 1 2 in Hansen and Duncan , Study o f Population, p . 249 . Censuse s in different part s of India were taken between 1865 an d 1872 . Effort s hav e bee n made to correct th e results in ways that render the m consisten t with th e regula r decennial censuse s beginnin g in 1881 . 46. Ibid., p . 250 . 47. Ibid., p . 251 . 48. Ver a Anstey , Th e Economic Development o f India (London : Longmans, Green , 3 d ed . , 1936). 49. See , especially , ibid., pp . 38-58 and 474-475. 50. Ibid., pp . 39-41 . 51. Ibid., p . 59 . 52. Ibid., p . 474 . 53. See , fo r example , ibid., p . 2 . 54. R . H . Tawney , Land an d Labour i n China (New York: Harcourt Brace, 1932) . 55. Ibid., pp . 103-104 .

616 Notes

t o Pages 208-211

56. L . C . A . Knowles , Th e Economic Development o f th e British Overseas Empire, (London : George Routledge , 1924) .

Chapter 8 1. Sir Josiah Stamp, Th e Statistical Verification o f Social and Economic Theory (London: Oxford University Press , 1927) , Sidne y Ball Lectures Novembe r 5 , 1926 ; Barnet t House Paper s No . 10 , p. 1 . 2. Theodor e M . Porter , Th e Rise o f Statistical Thinking, 1820-1900, especiall y pp . 23-36 . (Princeton: Princeto n Universit y Press, 1986 ) 3. Ibid., p . 31 . 4. Fo r the best reconstruction in modern for m of Gregory King' s social accounts of England and Wales i n 1688 , se e Phyllis Deane an d W. A . Cole , British Economic Growth, 1688-1959, secon d edition (Cambridge : at the Cambridg e Universit y Press , 1969 ) p. 2 and discussion , pp. 1-4 . On Petty, se e Charle s Henr y Hul l (ed. ) Th e Economic Writings o f William Petty (Cambridge : a t th e University Press , 1899) . Th e mos t complete—almos t compulsivel y detailed—history o f nationa l income estimate s i s that of Paul Studenski , The Income o f Nations, Par t One: History (Washingto n Square, N.Y. : Ne w Yor k Universit y Press, 1961) . Studensk i notes (p . 13 ) that Boisguillebert an d Vauban i n France wer e quic k on th e heel s o f Petty an d hi s popularizer , Charles Davenant . 5. C . H . Hull , William Petty, p . Ixi. 6. Ibid., p . 264. Petty' s observation on the "heterodox " in various societies follows : (ibid., pp . 263-264) . . . [I] t i s t o b e observe d tha t Trad e dot h no t (a s som e think ) bes t flouris h unde r Popula r Governments, bu t rathe r tha t Trade i s mos t vigorousl y carrie d on , i n ever y Stat e an d Govern ment, b y th e Heterodo x par t o f th e same , an d such a s profess Opinion s different fro m wha t are publickly established: (that is to say) in India where the Mahometan Religio n is Authorized, there the Banians ar e the most considerable Merchants. In the Turkish Empire the Jews, an d Christians. At Venice, Naples, Legorn, Genoua, undLisbone, Jews, an d Non-Papist Merchant-Strangers: but to be short, in that part o f Europe, wher e the Roman Catholic k Religion now hath, or lately hath had Establishment ; there thre e quarter s of the whol e Trade , is in the hand s of suc h as hav e separated fro m th e Churc h (tha t i s to say ) the Inhabitant s of England, Scotland, an d Ireland, a s also thos e o f th e United Provinces, wit h Denmark, Sueden, an d Norway, togethe r wit h th e Subjects o f th e German Protestan t Princes , an d th e Hans Towns , d o a t thi s da y posses s thre e quarters of the trade of the World; and even in France i t self, the Hugonots ar e proportionably fa r the greatest Traders; No r i s it to be denied bu t that in Ireland, wher e the said Roman Religio n is not Authorized , ther e th e Professor s thereo f hav e a grea t par t o f th e Trade . Fro m whenc e i t follows tha t Trade i s no t fix t t o an y Specie s o f Religion as such ; but rathe r as before hath been said to the Heterodox par t of the whole, the truth wereof appears also in all the particular towns of greatest Trad e i n England. . .

7. See Deane and Cole, British Economic Growth, p . 82. For greater detail, see P. Deane, "Th e Implications o f Earl y Nationa l Incom e Estimate s fo r th e Measuremen t o f Long-Ter m Economi c Growth in the United Kingdom," Economic Development an d Cultural Change, (Novembe r 1955) . 8. Thes e estimates , alon g wit h parallel estimates for British national wealth, are reviewed i n the supplementary microfilmed material (Par t IV. Britis h Basic Statistical Data) to A. D . Gaye r e t al., The Growth and Fluctuation of the British Economy, 1790-1850, (Oxford: at the Clarendon Press , 1953) pp. 705-725. The microfilmed materia l is to be found a t University Microfilms International, 300 N. Zee b Road , An n Arbor , Michigan 48106. 9. Reprinte d in Rober t Giffen , Economic Inquiries an d Studies, Vol . I (London : George Bell , 1904), pp . 382-422 .

Notes t o Pages 211-212 61

7

10. For example, ibid., pp . 419-420 . 11. Michae l G . Mulhall , The Dictionary o f Statistics (London : Georg e Routledge , 1892) , pp . 320-323. Mulhal l als o supplie s wealt h figure s fo r ninetee n Europea n an d fiv e extra-Europea n countries (pp. 589-595). Here is MulhalPs brisk account of his unorthodox but not wholly irrational method o f calculating nationa l earning s (ibid., p . 320) : It i s compiled thus : 9 0 per cent , o f agricultura l values , 9 0 per cent , o f mining , 60 pe r cent , o f manufactures. Transpor t i s computed a t 1 0 per cent , o n th e gros s valu e of agriculture , mining , and manufactures ; house-rent , accordin g t o the assesse d valuatio n or the nearest estimate; com merce, 1 0 per cent , o n import s an d exports ; shipping , 30s . pe r to n yearl y o f carryin g power ; banking, 5 per cent, o n banking power; and furthermore a n allowance of 1 0 per cent, o n the total of th e precedin g eigh t items , t o cove r th e earning s o f domesti c servants , learne d professions , army, police , civi l service , &c . Thi s is , o f course , a conventiona l metho d fo r estimatin g th e earnings o f nations , bu t wil l answer fairl y wel l fo r th e sak e o f comparison .

Later, mor e professiona l nationa l incom e statisticians , includin g Simon Kuznets , hav e generall y come t o respec t Mulhall' s rough-and-read y metho d an d fee l fo r numbers . See , fo r example , th e reference i n Paul Studenski, op . cit., pp . 140-141 . But Mulhall was also capable of serious error . (See, fo r example, m y World Economy: History an d Prospect, [Austin : University of Texas Press , 1978], p . 664. ) Mulhal l did not systematically cite sources for each statistic used; but he supplied an impressive genera l lis t o f reference s a t th e en d o f hi s Dictionary (pp . 618-620) . Mulhal l was a member o f th e Roya l Statistica l Society ; an d i n m y view , a statistician, unorthodo x i n man y respects, bu t farsighte d as well a s compulsively industrious. Except fo r Studenski" s reference, h e appears i n non e o f the historie s o f economic though t or doctrin e known to me; but h e i s memori alized a t the University of Texas at Austin in Project Mulhall, a computerized economic history data base. 12. Ibid., p . 464 . Se e also Mulhall's detailed analysis of the use of steam power in various forms from 184 0 t o 188 8 fo r fiftee n countries , ibid., pp . 554-549 . 13. Ibid., p . 589 . 14. Amon g th e conventiona l historian s o f economi c thought , Eri c Rol l i s virtuall y uniqu e i n treating the emergence o f national income accounting A History o f Economic. Thought (Englewoo d Cliffs, N.J. : Prentice-Hall , 1956) , pp . 509-518) . 15. A . L . Bowley , Wages an d Income i n th e United Kingdom since 1860 (Cambridge : a t th e University Press, 1937) . J . C. Stamp' s majo r independent study was British Incomes and Property: The Application o f Official Statistics t o Economic Problems (London : P . S . King , 1916) . 16. Colin Clark, "Developmen t Economics: The Early Years," in Gerald M. Meier an d Dudley Seers (eds.) , Pioneers i n Development (Ne w York: Oxfor d University Press fo r the World Bank , 1984), p . 59 . 17. A . C . Pigou , Th e Economics o f Welfare (London : Macmillan , firs t publishe d i n 1920) . References ar e to the 4t h (1932 ) ed. ; reprinted i n 197 8 (Ne w York: AM S Press) . 18. Ibid., See , especially , Chapte r IX , whic h begins as follows: In genera l industrialist s ar e interested , no t i n th e social , bu t onl y i n the private , ne t produc t o f their operations. . . . [S]elf-interest wil l tend to bring about equality in the values of the marginal private ne t product s o f resource s investe d i n different ways . Bu t i t will not ten d t o brin g abou t equality i n th e value s o f th e margina l socia l ne t product s excep t whe n margina l privat e ne t product an d marginal socia l ne t products are identical. When ther e is a divergence betwee n thes e two sort s o f margina l ne t products , self-interes t wil l not, therefore , ten d t o mak e th e nationa l dividend a maximum; and , consequently , certai n specifi c act s o f interferenc e wit h normal eco nomic processes may be expected, no t to diminish, but to increase the dividend. It thus becomes important t o inquir e in wha t conditions th e value s of th e socia l ne t produc t an d th e privat e net product o f an y give n (r' h) incremen t of investmen t in an industr y ar e liabl e to diverge from on e another in either direction. There ar e certain general sorts of divergence that arc found even under

618 Notes

t o Pages 212-217

conditions of simple competition, certain additional sorts that may be introduced under conditions of monopolistic competition , an d yet others tha t may be introduced under conditions of bilateral monopoly."

19. See , especially , ibid., Chapter s III-VIII , pp . 31-97 . 20. Coli n Clark , National Income an d Outlay (London : Macmillan, 1937) . 21. Coli n Clark , "Developmen t Economics : Th e Early Years," p . 60 . 22. Th e National Income, 1924-1931 (London : Macmillan , 1932) . 23. Al l fou r o f thes e strand s o f analysi s ar e reflected i n National Income an d Outlay, althoug h Clark's ful l analysi s o f economi c growt h awaited th e publicatio n of Th e Conditions o f Economic Progress (London : Macmillan , 1940 , 1970) . 24. Coli n Clark , National Income an d Outlay, p . 273 . 25. Coli n Clark , "Developmen t Economics : Th e Earl y Years," p . 59 . 26. National Income an d Outlay, p . 272 . 27. Ibid., Chapte r XII , pp. 248-261 . 28. R . F . Kahn , "Th e Relatio n o f Hom e Investmen t to Unemployment, " Economic Journal, Vol. 41 , No . 162 , (Jun e 1931). 29. National Income an d Outlay, pp . 250 , 253-255 . 30. General Theory, se e especially, pp . 52-6 5 and 74-85. 31. See , fo r example , R . F . Harrod , Th e Life o f John Maynard Keynes (Ne w York : Harcourt , Brace, 1951) , pp . 484-503 , which covers th e period dow n through the April 194 1 White Paper on National Income (Analysis o f th e Sources o f Wa r Finance an d Estimate o f th e National Income an d Expenditure i n 1938 an d 1948). Keynes' s Ho w t o Pay for th e Wa r (Ne w York : Harcour t Brace , 1940) argue d tha t half th e required nationa l reduction i n consumption should be brought about by increased taxes , hal f by deferred pay; the increase i n national debt would be liquidated after th e war by a capita l levy ; exemptio n fo r thos e wit h minimu m incomes an d famil y allowances ; furthe r changes i n mone y wages , pensions , etc. , t o b e linke d t o change s i n cos t o f a limite d grou p o f essentials, whic h woul d b e ratione d an d subsidize d i f necessary . Lud o Cuyver s ha s note d th e important rol e o f Erwi n Rothbart h i n developin g th e nationa l income calculation s at th e bas e o f Keynes's argument ("Keynes's Collaboration with Erwin Rothbarth," Economic Journal, Vol . 93, No. 37 1 [September 1983] , pp . 629-636 . Cuyver s argues persuasively that the Keynes-Rothbart h calculations ar e " a tru e 'missin g link ' " betwee n the work of Colin Clark an d the 194 1 contributions o f Meade an d Ston e i n the Treasury . 32. Fo r a contemporary evaluatio n see Nicholas Kaldor, "Th e Whit e Paper o n National Income and Expenditure," Economic Journal, Vol . LI, Nos . 202-203, (June-September 1941) , pp . 181 191. Th e analysi s o f nationa l income an d expenditur e wa s don e primaril y by Richar d Ston e an d James Meade, i n frequent consultatio n with Keynes. The latter's detailed interest in the fine points of nationa l incom e definitio n an d estimatio n at thi s tim e is reflected i n two note s i n the Economic Journal: "Th e Concep t o f Nationa l Income " (Marc h 1940 ) an d "Th e Measuremen t o f Rea l Income" (Marc h an d June-Septembe r 1940)—th e latte r involvin g triangular debate wit h A . L . Bowley an d Coli n Clark. 33. C . K . Hobson , Th e Export o f Capital (London : Constable , 1914) . Douglas' s pape r wa s published i n th e Journal o f Business History, Vol . I I (Augus t 1930), pp . 659-684 . 34. Export o f Capital, especiall y pp . 234-236 . 35. Growth o f Capital, p . 68 4 n. 7 . 36. Ibid., pp . 68 2 an d 684 . 37. Dictionary o f Statistics, p . 322 . Caro l S. Carson ("Th e Histor y of the United States National Income an d Product Accounts: The Development of an Analytic Tool," The Review o f Income an d Wealth, Serie s 21 , No . 2 [June 1975 , p. 153 ] cites estimates of national income by George Tucker published i n 185 5 a s wel l a s 1843 . Fo r a summar y of Tucker' s metho d an d finding , se e Pau l Studenski, op . cit., pp . 129-132 . 38. Ibid., pp . 593-594. Mulhall' s presentation of the census data includes the following imaginative calculation s for th e perio d 1850-188 0

Note t o Page 217 61

9

N.2 Th e Accumulations per U.S. Inhabitan t in 30 Years' Averag e £205 Sterling , or Nearly £7 per Annum, viz.:

Increase, million £

States New Englan d

Middle

South West Union

842

2,749

713

3,287 7,591

Annual accumulatio n per hea d

Annual average, £

Mean population

(£) (s.

28,070,000 91,630,000 23,800,000 109,600,000 253,100,000

3,400,000 9,500,000 11,700,000 12,200,000 36,800,000

8 91 21 9 61

) (c. 4 30 0 0 70

) 0 0

This is a prodigious growt h o f wealth in thirty years, an d without parallel in the history o f the human race . Nevertheles s th e accumulatio n pe r hea d i s less tha n in Australia.

39. Willfor d I . King, The National Income and Its Purchasing Power (New York: NBER, 1930), p. 9 . Se e also citations of Caro l S. Carson , National Income and Product, p. 153 . 40. Caro l S . Carson , "Nationa l Incom e and Product," p . 156 . 41. Solomo n Fabricant , Toward a Firmer Basis o f Economic Policy: Th e Founding o f th e National Bureau of Economic Research (Cambridge, Mass.: NBER, 1983) , p. 5 . Th e stor y o f the invention an d innovation of the NBER , a s told by Fabricant, is worth quoting at length (pp. 3-5) : The crucia l questio n wa s ho w t o attai n objectiv e knowledg e and—als o essential—ho w t o assure that the public woul d accep t i t as objective. Suppose , th e founders reasoned, they were t o form an organization fo r this purpose—one devote d t o the scientific investigatio n o f controverte d social facts an d to the disseminatio n of the findings in a scrupulous manner . Could suc h a union be establishe d unde r a constitutio n an d wit h th e procedure s an d goodwil l tha t woul d hol d i t together whe n inevitable difficulties arose? No less vital: Could financial support fo r its work b e obtained an d retained, althoug h the ai m was to serve only th e general welfare , not to provid e a specific quid pr o qu o i n th e wa y o f busines s servic e o r suppor t fo r particula r views ? I f thes e difficulties coul d be overcome, the enterprise woul d constitute a significant contribution "t o th e working method s o f intelligen t democracy. " What was required? Th e questio n was raised whe n the idea wa s first discussed i n 191 6 b y two men deeply concerne d wit h economic policy , eve n thoug h their views on what it should b e wer e wide apart. One was Malcolm C . Rorty; the other, Nahu m I. Stone . Rort y was an engineer turne d statistician (later , chie f statistician ) i n th e America n Telephon e an d Telegrap h Compan y an d author o f a pionee r contributio n o n "Th e Applicatio n o f th e Theor y o f Probabilit y t o Traffi c Problems." Amon g other things, he was writing a monthly letter o n business condition s fo r his company and was taking an active interest in social and economic problem s generally . Ston e was an economist who had taken th e trouble, whe n he was young, to translate Karl Marx's Critique of Political Economy, whic h he felt mad e a contribution, stil l "timel y an d useful," t o thinking on the free-silver issue that had been disturbing the country for many years. I n 190 4 he had become a tariff exper t fo r wha t wa s the n th e U.S . Departmen t o f Commerc e an d Labo r an d later , chie f statistician o f the U.S . Tarif f Commission . I n 191 6 h e was earning hi s living as an arbitrator o f wage dispute s an d a consultant t o governmental committees . Rorty and Ston e ha d me t the year before, i n 1915 , a t a hearing of the New Yor k State Factor y Investigating Committee . Ston e tol d th e stor y a t the 25t h anniversar y of th e Nationa l Bureau: Having mad e a stud y an d prepare d a repor t fo r th e Committe e o n Minimu m Wag e Legislation, I was testifying befor e the committee in favor of the adoption of such legislatio n by th e Stat e o f Ne w York . Rort y wa s strongl y opposed . Our nex t contac t (o r conflict ) too k plac e acros s th e tabl e o f th e Mayor' s Unemployment Committee i n Ne w Yor k City . .. . I n advocating the expediting of a s many public works projects a s the city could undertake as an alternative or supplement to public soup kitchens, I again clashe d wit h Rorty . H e forme d a definit e impressio n of m e a s a dangerou s radical. In 191 6 Scott Nearing published his pioneer stud y on the distribution of national income. He divide d al l incom e int o service an d propert y incom e an d afte r a n elaborat e analysis of

620

Notes t o Pages 217-220 statistical data , i n whic h he displaye d considerabl e originalit y an d ingenuity , came t o th e conclusion tha t nationa l incom e wa s divided roughl y 50-50 between th e tw o types. Harr y Laidler, a t tha t tim e edito r o f th e Intercollegiate Socialist, a socialisti c monthl y intende d chiefly fo r circulatio n amon g colleg e students , aske d m e t o revie w Nearing' s book . M y review grew int o an article i n which I took Nearing to task for his pseudo-scientific approac h to the subject, an d pointed out several larg e items o f service incom e tha t Nearing ignore d i n his estimate . I arrive d a t th e conclusio n tha t th e divisio n betwee n servic e an d propert y income was approximately i n the ratio of two to one (as the firs t publicatio n of the National Bureau o f Economi c Researc h subsequentl y confirmed) . My articl e i n the Intercollegiate Socialist caugh t the eye o f Malcolm Rorty wh o mad e it his business to follow curren t labor and socialist publications. I n line with his impression an d the characte r o f th e magazine , h e expecte d t o fin d a "re d hot " diatrib e o n th e unjus t distribution o f incom e unde r capitalism . Instead , m y articl e gav e hi m a ne w slan t o n th e "dangerous radical" an d he invite d me to lunc h to talk thing s over. Thi s wa s followe d by several conference s whic h culminated in a warm friendship, although we continued to diffe r strongly o n man y publi c questions . At ou r second meeting, Rort y said : "Her e we are considering a most importan t questio n which deeply affect s th e lives o f every man , woman , and child in this country, and despite a large fun d o f statistica l data , ther e i s n o agreemen t o n th e purel y arithmetica l question o f what part of the national income goe s to each element of society. Woul d it not be a great ste p forward i f w e ha d a n organizatio n tha t devote d itsel f t o fac t findin g o n controversia l eco nomic subject s o f great public interest?" I agreed tha t it would , provide d th e organizatio n could comman d public confidence so its findings were accepted a s conclusive b y all partie s to th e controversy . He assente d t o m y provis o an d aske d fo r suggestions . I sai d th e organizatio n shoul d b e started by a group of well-known economists representin g every schoo l o f economic though t from extrem e conservativ e t o extreme radica l wh o shoul d associat e wit h them representatives of all the important organized interest s in the country: financial, industrial, agricultural, labor, etc . Rorty though t tha t some suc h plan would have to be adopted an d believed h e could rais e the funds . . . . Rort y los t n o tim e i n pushin g toward th e realizatio n o f th e project , whic h filled hi s thought s t o the exclusio n o f everythin g excep t hi s officia l duties . The economist s Rort y firs t approache d wer e Edwi n F . Gay , Wesle y C . Mitchell , an d Joh n R . Commons.

42. Ibid. 43. Income i n the United States, It s Amount an d Distribution, 1909-1919, by Willford I. King , Oswald Knauth, and Frederick R . Macaula y (assiste d b y the Staff o f NBER), edited by Wesley C . Mitchell. Volum e I : Summary (Ne w York : Harcourt , Brace , 1921) ; Volum e II , Detailed Report (New York : NBER , 1922) . 44. National Income an d Outlay, p . VII . 45. Toward a Firmer Basis, p . 14 . 46. Kuznets' s study was published no t by the NBER, where he the n worked , bu t by Houghton Mifflin i n Boston. Th e Hart , Schaffner , an d Mar x Committe e consiste d of Lawrenc e Laughli n of the Universit y o f Chicago, Joh n B. Clar k an d Wesley C . Mitchel l of Columbia, Edwi n F. Ga y of Harvard, an d Theodor e E . Barto n o f Washington , D.C . 47. Ibid., p . 5 . 48. Fo r discussions o f Kuznets's dilemma an d his acknowledgement of it, see , fo r example, m y review o f hi s Economic Growth o f Nations. Total Output and Production Structure (Cambridge , Mass.: The Belknap Press of Harvard University Press, 1971) , in Political Science Quarterly, Vol . LXXXVI, No . 4 (Decembe r 1971) , pp. 654-657 . Kuznets' s discussion of th e problem is on pp . 314-343 o f hi s Economic Growth o f Nations.. 49. Congressional Record, 72 d Cong. , 1s t Session , Vol . LXXV , p . 12285 . Passag e o f th e Resolution i s recorded o n Jun e 13 , 1932 , p . 12749 . 50. S . Fabricant , Toward a Firmer Basis, p . 14 . 51. Caro l S . Carson , "Nationa l Incom e and Product, " p . 156 .

Notes t o Pages 220-226 62

1

52. National Income, 1929-1932 was filed wit h the Senate on January 3, 1934 , by John Dickson, Acting Secretar y o f Commerce (Washington , D.C. : GPO , 1934 , 73 d Cong., Documen t 124) . Fo r acknowledgement o f th e rol e o f Kuznet s and th e NBER , se e p. xi . 53. Th e stor y i s wel l told b y Robert R . Natha n in his "Remark s Intende d fo r Simon Kuznets ' 80th Birthday , Apri l 25 , 1981, " whic h Nathan mad e availabl e t o me . See , als o i n mor e detail , Carol Carson , "Nationa l Incom e an d Product" pp . 156-159 . 54. Caro l S . Carson , "Nationa l Incom e an d Product," p . 163 . 55. Th e mos t complete accoun t of "Th e Feasibilit y Dispute" i s John Brigande, The Feasibility Dispute: Determination o f Wa r Production Objectives for 1942 an d 1943, Committe e o n Publi c Administration Cases , Washington , D.C. , 1950 . Als o Caro l S . Carso n "Nationa l Incom e an d Product," pp. 174-175 . Robert R. Nathan , a major belligerent, summarize s his view of the matter in hi s "Remarks " fo r Kuznet' s eightieth birthday and , mor e formally, in his testimony an d state ment prepare d o n "Worl d War II and the Problems of the 1980s, " Hearin g befor e the Committee on Banking, Finance and Urban Affairs, House of Representatives, Ninety-Sixth Congress, Second

Session, Septembe r 23 , 1980 , Seria l No . 96-66 , (Washington , D.C.: G . P . O. , 1980) , especiall y pp. 5- 7 (testimony) ; pp. 17-1 9 (prepare d statement) . Nathan's prepared statemen t was submitted on behalf o f David Ginzburg and J. Kennet h Galbraith as well as himself. All three of these battle scarred veteran s o f the war economy struggles in Washington sought lessons from thei r experience s that migh t be applie d t o the energ y proble m a s i t appeared i n 1980 . 56. Edwi n R . A . Seligma n (editor-in-chief) , Alvi n Johnso n (associat e editor) ; (Ne w York : Macmillan, 1933) , pp . 205-224 . 57. Ibid., pp . 20 6 and 224 . Chapter 9 1. Euge n V . Bohm-Bawerk , Capital an d Interest: A Critical History o f Economical Theory (William Smart , ed.) , (London : Macmillan , 1890) . Th e Germa n editio n o f Kapital un d Ka pitalizmus wa s firs t publishe d i n 1884 . 2. Fo r an outline an d terse summary of Bohm-Bawerk's interes t theory, se e ibid., pp . 257-25 9 and 421-428 . Th e Positive Theory o f Capital wa s publishe d i n Germa n i n 188 9 an d i n Willia m Smart's Englis h translatio n in 189 1 (Ne w York: G . E . Streehert) . 3. Josep h A. Schumpeter , Ten Great Economists, (London : Alle n and Unwin , 1952 ) p. 176 . 4. Ibid., p . 177 . 5. Th e debate ove r Bohm-Bawerk' s concept o f roundaboutness an d the period of production and its evolutio n i s wel l summarize d i n Mar k Blaug , Economic Theory i n Retrospect (Homewood , Illinois: Richar d D . Irwin , 1981 ) pp . 501-543 . 6. Fo r a n elegant summation , see Irvin g Fisher, Th e Theory o f Interest (Ne w York: Macmillan, 1930) [accessibl y availabl e i n Reprint s o f Economi c Classic s (Ne w York : Augus t M . Kelley , 1961)], p . 451 . 7. W . W . Rostow , British Economy o f th e Nineteenth Century, (Oxford : at the Clarendon Press, 1948) p . 145 . 8. For my comments o n Keynes's interpretatio n of the 1873-1896 price decline i n The Treatise, ibid., pp . 155-157 . 9. Th e Theory o f Interest, Reprint s of Economic Classic s (Ne w York: August M. Kelley , 1961 : original publishe r Ne w York: Macmillan , 1930) , p . 451 . 10. Irving Fisher, The Purchasing Power o f Money (Ne w York: Macmillan, 1926) , pp . 24 2 an d 246-247. I should , perhaps , repor t a n exceedingl y mino r momen t i n th e histor y o f economi c theory. When I was a graduate student at Yale in 1938-1939, Professor Fisher, then retired, invited me to lunch at his home. Afterward s he showed me the annex in which was housed his voluminous historical an d contemporar y files , mainl y o f pric e an d monetar y data , a s wel l a s hi s famou s hydraulic mode l o f th e economy , the n down for repairs . H e finall y cam e t o th e point : i f I would commit my professional research to "tracin g th e gilden strand" through history (that is, the relation

622 Notes

t o Pages 226-228

of gold to prices) h e would bequeath me his files. I greatly respected Professo r Fisher as a theorist then, as I do now, and I sensed a certain sadness that he had not generated at Yale a disciple to carry forward his vision of long-term price analysis. But I had already concluded that the supply of bullion was not a decisive determinant of price trends in history and that the quantity theory of money was a grossly inadequat e instrumen t for pric e analysis . I refused his offe r a s gently as I could . 11. Purchasing Power, pp . 242-245 . 12. Ibid., p . 247 . Fo r Friedman's vie w and my comment on it see my Why the Poor Get Richer and th e Rich Slow Down, (Austin : University of Texas Press , 1980) , pp . 220-232 . 13. Theory o f Interest, Chapte r XVI , pp. 341-355 . 14. Ibid., p . 503 . 15. Knu t Wicksell, Interest an d Prices, translate d fro m th e Germa n b y R . F . Kahn , wit h an introduction by Bertil Ohlin, (London: Macmillan, 1936), pp . 1-7 . Th e preface of the first edition of Interest and Prices is dated 1893 . Myrdal' s lucid definition o f WickselPs "normal or equilibrium rate o f interest " i s th e followin g (Monetary Equilibrium [London : Willia m Hodge , 1938] , pp. 37-38) . Wicksell, a s i s wel l known , define d th e equilibriu m positio n b y specifyin g the leve l o f th e ' 'money rat e of interest" which brings about monetary equilibrium. This equilibrium interest rate Wicksell calls the "norma l rate of interest" and determines it with reference to quantities in three different sphere s o f pric e formation: (1) Productivit y o f th e roundabou t process o f production; (2) Condition s i n the capita l market ; (3) Condition s i n th e commodit y market . The "norma l rat e o f interest " mus t now , accordin g t o Wicksell , (1 ) equa l th e margina l technical productivity of real capital (i.e., the "real" or "natural " rate of interest); (2) equate the supply of and the demand for savings; and, finally (3) guarantee a stable price level , primarily of consumption goods .

Myrdal the n adds : Wicksell assume s tha t these thre e criteri a fo r the normal rate of interes t ar e equivalent—i.e. , never mutuall y inconsistent; bu t he cannot prove it . Hi s formulations are, indeed , too loose and contradictory fo r this purpose. I n the following I will prove that they cannot be identical: Only the first an d the second o f the equilibrium conditions are even consistent; they are interrelated in such a wa y tha t th e firs t i s conditione d b y th e secon d an d otherwis e no t determined . The y bot h correspond t o the mai n argument which is implicit in the whol e theory . Bu t this i s so only after they hav e bee n correcte d i n essential point s and more precisely formulated . Wit h respect t o the commodity marke t however , th e fulfillmen t o f these tw o monetar y equilibriu m relations mean s something quit e differen t fro m a n unchange d price level .

16. Ibid., Chapte r 11 , pp. 165-177 . For a reconsideration of Wicksell's historica l chapter, se e J. R. T . Hughes , "Wicksel l o n the Facts: Price s an d Interest Rates, 184 4 to 1914, " i n J. N . Wolf e (ed.), Value, Capital and Growth, Papers i n Honour o f Sir John Hicks, (Chicago : Aldine Publishing Compan y an d Edinburgh Universit y Press, 1968) , pp . 215-255 . 17. Ibid., pp . 174-175 . 18. Ibid., pp . xxiii-xxv , wher e Wicksell, i n his 189 8 Preface, lucidl y state s hi s purpose. 19. Ibid., especiall y Chapte r 12 , pp. 178-196 . 20. G . Myrdal , Monetary Equilibrium, pp . 178-180 . 21. G . Myrdal , An American Dilemma (Ne w York: Harper an d Brothers, 1944) , especiall y pp . 75-78 an d Appendi x 3 , " A Methodologica l Not e o n th e Principl e of Cumulation, " pp . 1065 1070, wher e Myrdal refers explicitly to his own Monetary Equilibrium and other dynamic economic analyses. 22. Thi s passage i s from a letter Keynes wrote me on February 2, 1940 , a t the time he accepted for publicatio n i n Economic History, a n articl e on theorie s of th e Grea t Depression.

Notes t o Pages 229-232 62

3

23. J . M . Keynes , Th e Economic Consequences of th e Peace (New York: Harcourt, Brace, an d Howe, 1920) , especiall y pp . 22-26 and 229-30. 24. Joh n H. Williams , "Th e Theor y o f International Trade Reconsidered, " Economic Journal, Vol. XXXIX , No. 15 4 (June 1929) , pp . 195-197 . 25. Th e historical studie s of the transfer process, include : John H. Williams , Argentine International Trade under Inconvertible Paper Money (Cambridge : Harvard University Press, 1920) ; Frank D. Graham , "Internationa l Trad e unde r Depreciate d Paper . Th e Unite d States , 1862-79, " Quarterly Journal o f Economics (1922); Jacob Viner, Canada's Balance of International Indebtedness, 1900-1913, (Cambridge, Mass.: Harvard University Press, 1924) ; Gordon Wood, Borrowing and Business i n Australia (Oxford : at the Clarendon Press, 1930) ; Roland Wilson, Capital Imports and the Terms of Trade (Melbourne : Melbourne University Press in associatio n wit h Macmillan, 1931); Harry D. White , The French International Accounts, 1880-1913 (Cambridge , Mass.: Har vard University Press, 1933) ; C. Bresciani-Turroni , Inductive Verification o f the Theory o f International Payments (Egyptia n University Publications of th e Facult y o f Law, No . 1 , Cairo , n . d. — about 1933) . Th e work of A. G . Silverman , as reflected in two articles i n the Review of Economic Statistics ("Monthly Inde x Numbers of British Export and Import Prices, 1880-1913 " [1930 ] pp . 139-148; and "Som e International Trade Factors for Great Britain, 1880-1913 " [1931 ] pp. 114 124), is to be distinguished by the eclectic character of his approach to the terms of trade. Silverman is les s concerne d wit h th e verificatio n o f classica l hypothese s than with a direc t accountin g fo r changes in the terms of trade. Taussig's ow n conclusions are incorporated in his International Trade (New York : Macmillan , 1927. ) 26. Joh n A. Williams , Argentine International Trade, p . 4 . 27. Ibid., p . 27 . 28. Ibid., p . 239 . n . 1 . I n hi s conclusion s Williams notes tha t the associatio n i n conventiona l theory of a depreciated pape r exchange with a "dislocated " exchange does not hold for Argentina, since a gol d exchang e rat e existe d virtuall y throughout the perio d examined . H e als o note s th e emphasis o n the matter i s misguided give n its "incidenta l importance " (ibid., p . 258) . 29. Ibid., pp . 256-257 . 30. Se e Not e 19 , preceding . 31. A . K . Cairncross , Home and Foreign Investment, 1870-1913 (Cambridge : at the University Press, 1953) , p . xiii . Si r Alexande r was goo d enoug h to provid e me wit h a n explanation for hi s interest i n th e transfe r problem i n a letter of 7 April, 1986 : I wish I could ris e to your suggestio n an d produce some esoteric explanation o f my interest in the transfe r proble m i n 1930 . Bu t th e fac t i s tha t i t ha d nothin g t o d o wit h long-ru n growt h initially. M y undergraduat e thesi s i s chiefly concerne d t o turn Taussig's explanations roun d th e other wa y an d show , cas e b y case , tha t investmen t responde d t o the term s o f trad e rathe r tha n pushed them thi s wa y and that. When I got to Cambridge I applied thi s idea t o British experience over a lon g stretc h o f time . I don' t thin k tha t th e wor d "growth " occur s anywher e i n m y dissertation althoug h "development " certainl y does . I moved fro m the transfer problem to the theory of investment as expounded b y Keynes, tryin g to wor k ou t th e relationshi p betwee n hom e an d foreig n investmen t bu t withou t makin g muc h impression o n anybody b y my theoretical chapters . Whe n I began t o dig in to the statistics I found Colin Clar k ver y helpfu l an d he seeme d t o move along muc h th e same intellectua l pat h a s I did, trying t o understan d investmen t i n quantitativ e an d historica l term s instea d o f sinkin g int o a conceptual bog . If you look a t Chapter[s] 2- 4 o f my Home an d Foreign Investment yo u will see that the interes t lies i n fluctuation s rathe r tha n growth , i n th e impac t o f domesti c investmen t o n th e balanc e o f payments, an d in the interconnection betwee n capital movements and labour movements. Chapte r 2 was written in 1934 a t Cambridge an d Chapters 3 and 4 in 1937/8 at Glasgow. They don' t reall y show muc h concer n wit h growth (especiall y a s I wa s alway s inclined to pla y dow n th e rol e o f capital accumulation in growth). M y explicit interest in growth really developed i n the war when I became alive to the ful l significanc e o f technica l change .

624 Notes

t o Pages 232-234

Like Colin Clark , Cairncros s als o became skeptica l tha t the tight linkage between investment rates and growth was justified. The closing paragraph of his postwar paper o n "Th e Plac e o f Capital in Economic Progress " capture s wel l th e emphasi s h e cam e t o plac e o n technolog y as oppose d t o capital inputs , (Economic Progress, Leo n Dupriez (ed.) [Internationa l Economic Association Louvain, Institu t de Recherches Economique s e t Sociales , 1955] , pp . 235-248) : On the whole , ther e i s a greater dange r that th e importanc e o f capital i n relation t o economic progress will be exaggerated than tha t it will be underrated. Ho w many successfu l firms , lookin g back over their history , woul d single out difficulty of access to new capital a s the major obstacle , not to their growth , bu t to the adoption o f the most up-to-date technique ? Ho w many countrie s in the van of technical progres s have foun d themselve s oblige d to borrow abroad ? I t is where ther e has bee n a lag , wher e technica l progres s ha s bee n to o slow , tha t capita l i s calle d upo n t o pu t matters right . N o doub t wher e capita l i s plentiful , mor e risk s ca n b e take n an d development i s speeded-up, so that rapi d developmen t an d rapid accumulatio n g o together. Bu t the most power ful influenc e governin g development , eve n now , i s no t th e rat e o f interes t o r th e abundanc e o f capital; an d th e mos t powerfu l influenc e governin g capita l accumulation , eve n now , i s no t technical progress .

Cairncross's 195 5 pape r ca n la y legitimat e clai m t o statu s amon g th e bette r know n pioneerin g analyses of the role of technological change (as opposed t o capital investment) in economic growth; i.e., Fabrican t (1954) , Abramovit z (1956), an d Solo w (1957) . Se e not e 50 , Chapte r 16 , below . 32. See , fo r example, Home an d Foreign Investment, 1870-1913, pp. 189-194 . 33. Ibid., pp . 65-8 3 and 209-221. 34. Ibid., pp . 84-102 . 35. Ibid., pp . 103-186 . 36. Ibid., pp . 187-208 . 37. Ibid., pp . 189-197 . 38. Ibid., pp . 37-49 . 39. Ibid., pp . 37-64 . 40. Ibid., pp . 222-235 . 41. Lorin g Allen , Opening Doors: Th e Life an d Work o f Schumpeter (unpublished) . Professor Allen wa s kind enough to make availabl e a semi-final draft o f his book fro m whic h I have greatly profited. 42. Josep h A. Schumpeter , The Theory of Economic Development, translate d fro m the Germa n by Redvers Opi e (Cambridge ; Harvar d University Press, 1955) , p . ix , i n the Preface to the English edition. 43. Th e phrase "sacre d decade" appears i n 191 4 and 1921 in obituary essays for Bohm-Bawerk and Menger written by Schumpeter in Zeitschriftfiir Volkswirtschaft, Sozialpolitik und Verwaltung, cited b y Loring Allen , Opening Doors, mss . Chapte r III, p . 7 . 44. Theory o f Economic. Development, Chapte r I , pp . 3-5 6 an d 158-159 . On e hesitate s t o impute motive s i n suc h circumstances , bu t on e feel s tha t Schumpete r wa s payin g respects t o hi s teachers, a s he did explicitly in the essays incorporated in Ten Great Economists; whereas Myrdal, at th e cos t o f partiall y concealin g hi s originality , was underlinin g th e importanc e o f th e Swedis h school an d thereb y strengthenin g his tar t criticis m of th e British economic tradition ; The Englis h schoo l of theorists has only slowl y arrive d a t Wicksell's statemen t o f the problem. Not only Marshall , but also Pigou an d Hawtrey d o not seem to be really familia r wit h Wicksell's work. D . H . Robertson' s significan t littl e book , Banking Policy an d th e Price Level, contain s many o f the ne w ideas, but he, too , obviousl y lack s a thorough knowledg e of the content o f the monetary studie s o f Wicksel l an d hi s pupils , an d he ha s therefor e bee n force d unnecessaril y t o think fo r himself . J . M . Keynes' s new , brilliant , thoug h no t always clear, work , A Treatise o n Money, i s completel y permeate d b y Wicksell' s influence . Nevertheles s Keynes' s wor k too , suffers somewha t fro m the attractiv e Anglo-Saxo n kin d of unnecessary originality , whic h has its roots i n certai n systemati c gap s i n th e knowledg e o f th e Germa n languag e o n th e par t o f th e majority o f Englis h economists .

Notes t o Pages 234-236 62

5

45. O n the whole, Schumpeter leaned to the proposition tha t in one way or another the perceive d possibility o f profi t (i f no t quit e ra w necessity ) wa s th e mothe r o f invention . This ha s bee n th e predominant view among historians of technology; although all agree that the assertion of any singl e overriding rul e pose s complexitie s an d suggest s exceptions. Schumpete r (Business Cycles, [Ne w York: McGraw-Hill , 1939 ] Vol . 1 , p. 85 , note ) allows for the existence of inventions and innovations induce d by necessity; bu t als o for invention s not related t o any particula r requirement o r no t related t o th e requiremen t me t b y th e particula r innovatio n that incorporate s them . Schumpete r states: It might be thought that innovation can never be anythin g else bu t a n effort t o cope wit h a given situation. In a sense this is true. Fo r a given innovation to become possible, ther e must always be some "objectiv e needs" to be satisfied and some "objectiv e conditions" ; but they rarely, if ever, uniquely determine wha t kind of innovation will satisfy them , and as a rule they can be satisfie d in many different ways . Most important of all, they may remain unsatisfied fo r an indefinite time, which show s tha t they are no t themselve s sufficient t o produce a n innovation.

While admitting , o f course , th e possibilit y tha t natur e ma y no t alway s be fruitfu l an d tha t th e form o f th e innovationa l respons e t o a necessity is no t determinabl e ex ante, I woul d continue to attach a considerable formal importance to the link between necessity, invention, and innovation, as I did in The Process o f Economic Growth. The link is judged essential to a formal explanation of the changing character o f investment in the course of growth and from cycl e to cycle. While admitting the possibilit y o f highl y productive sport s an d tota l failur e in meetin g necessities , thi s argument would regar d th e characte r o f th e effor t expende d i n applyin g scienc e t o th e econom y an d th e character o f the potentialities accepted int o the economy as reflecting th e response o f the society t o challenges an d opportunitie s create d b y the proces s o f growt h pressing agains t existing resource s and techniques, revealing themselve s i n profit opportunities. The processes o f scientific endeavour and o f effort s t o see k application s fo r th e econom y ar e thu s viewe d a s a par t o f th e norma l investment process i n the economy. I t is the lack of such an analytic link that gives to Schumpeter' s major innovation s an exogenou s element . 46. Lorin g Alle n points ou t tha t there ar e foreshadowings of The Theory o f Economic Development i n Schumpeter' s firs t boo k Da s Wesen un d de r Hauptinhalt De r Theoretischen Na tionaloekonomie (Munche n and Leipzig: Duncke r and Humbolt, 1908). I n his most vivid comment (pp. 182-183) , Schumpete r argue s tha t statics an d dynamics are completely differen t fields , with different problems , methods , an d subject matter. He notes that his current work is within the terrain of statics; but he concludes: "Dynamic s stil l in its infancy [Anfangen], is a 'Land o f the Future.' " 47. For Loring Allen's judicious evaluation of Marx's influence on Schumpeter, mss. Chapte r V , Opening Doors, pp . 18-19 . Se e also Nathan Rosenberg's excellent "Schumpete r an d Marx: How Common a Vision? " i n Technology an d th e Human Prospect, Essays i n Honour o f Christopher Freeman, Ro y M. MacLeod (ed.) , (Londo n and Wolfeboro, N.H.: Francis Pinter, 1986) , pp. 197 213. Sukhamo y Chakravart y als o discusse s th e Marx-Schumpete r connectio n i n Alternative Ap proaches to A Theory of Economic Growth: Marx, Marshall, and Schumpter, pp. 23-28 (Calcutta : Orien t Longman , 1980) . 48. Economic Development, p . 5 . 49. Ibid., p . 62 . 50. Ibid., pp . 6 1 an d 64 n . 1 . 51. Ibid., pp . 63-64 and 66. Fo r further discussion of the five type s of innovation see pp. 132ff . 52. Ibid., p . 6 3 n. 1. The reference to Marshall is in the later English edition. I t is unclear whether Marshall's bol d confrontatio n of the problem of increasin g returns—and failur e fully to solve it— influenced Schumpeter' s thought when initially formulating Th e Theory o f Economic Development. 53. Ibid., pp . 84-94 . Th e quotatio n in the text is from p . 85 . 54. Ibid., pp . 128-130 . 55. Ibid. , pp. 131ff . an d 197-198 ("clustering"); fo r example, pp. 15 6 and 252-253 ("creativ e destruction").

626 Notes

t o Pages 236-239

56. Fo r example , ibid., p . 154 . 57. Ibid., p . 157 . 58. Ibid. 59. Ibid., p . 158 . 60. Ibid., pp . 183ff . 61. See , especially , p . 191 . 62. Ibid., p . 215 . 63. Ibid., In his Theory of Economic Development Schumpete r accepts fro m Spiethof f that the first moder n Britis h busines s cycl e occurre d i n th e 1820 s (ibid., p . 215) . B y th e tim e h e wrot e Business Cycles h e had conclude d correctly tha t the firs t majo r cycle (Juglar) in Britain peaked i n 1792-1793 (Business Cycles [Ne w York : McGraw-Hill, 1939] , Vol . I , pp . 296-297. ) 64. Ibid., p . 230 . 65. Ibid., p . 23 2 66. Ibid., pp . 232-233 . Schumpete r note s tha t the lengt h o f th e boom i s determine d b y "th e average tim e which must elapse before the new products appear"; an interval jointly determined by the period o f gestation and "th e temp o in which the multitude follow the leaders" in the innovative sectors. 67. Ibid., p . 233 . 68. Ibid., p. 236 . Schumpete r uses the term "normal " her e in a special sense: to abstract from the "abnormal " intrusio n of crisis with its "panic , breakdown of the credi t system, epidemics o f bankruptcies," an d severe unemploymen t (ibid., pp . 23 6 and 249-250). 69. Ibid., pp . 243-245 . 70. Ibid., pp . 249-250 . 71. Ibid., p . 255 . I assum e thi s passag e an d hi s critica l remark s abou t th e countercyclica l ameliorative proposal s "associate d with the names of Keynes, Fisher, an d Hawtrey and the policies of th e Federal Reserve Board" (p . 252 ) wer e inserte d in the secon d Germa n edition o f 192 6 fro m which the English translation of The Theory o f Economic Development wa s made (p. ix) . The third edition wa s merel y a reprint o f the second . 72. See , fo r example , Schumpeter' s somewha t irritate d repl y t o critic s tha t h e neglecte d al l historical factor s of change except "th e individualit y of entrepreneurs" (ibid., p . 6 1 n. 1) . I would guess thi s line of criticism helpe d pus h Schumpeter fro m th e rather stylized but powerful theory of The Theory o f Economic Development int o Business Cycles, wit h its extensive historical sections . 73. Quoted , Alexande r B . Trowbridge , Private Leadership an d Public Service (Washington , D.C.: Nationa l Academ y of Public Administration , 1985) , pp . 14-15 . 74. Business Cycles, Vol . I , p . v . 75. Ibid. 76. Ibid. Tw o examples com e to mind: Adam Smith's Lectures (delivered 1748-1751 ) in relation to Th e Wealth o f Nations (1776) ; an d Kar l Marx's Communist Manifesto (1848 ) i n relation t o th e first volum e o f Capital (1867) . 77. Ibid., pp . 212-21 9 wit h charts o n pp. 213-214 . 78. See , fo r example , Essays i n the British Economy o f th e Nineteenth Century (Oxford: at th e Clarendon Press , 1948) , pp . 28-30 ; A . D . Gaye r e t al., Growth an d Fluctuation o f th e British Economy, 1790-1850 (Oxford : at the Clarendon Press , 1953) , Vol . II, pp . 632-638; my Why the Poor Ge t Richer, pp. 5- 8 an d 76-78. Perhaps th e best review of Schumpeter's Business Cycles is Simon Kuznets' s i n American Economic Review, Vol . 30 , No . 2 (Jun e 1940) , pp . 257-271 . It s substance an d flavo r are captured i n Kuznets' s own summar y (pp. 270-271) : The critical evaluatio n . . , of what appear to be important elements in Professor Schumpeter's conclusions, viewed as a systematic and tested exposition of business cycles, yields disturbingly destructive results . The associatio n between the distributio n o f entrepreneuria l ability an d th e cyclical characte r of economi c activit y needs furthe r proof . Th e theoretica l model o f th e four phase cycl e abou t th e equilibriu m leve l doe s no t yiel d a serviceabl e statistical approach. Th e three-cycle schema and the rather rigid relationship claimed to have been established is without a

Notes t o Pages 239-243 62

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serviceable statistica l procedure. Th e core o f the difficulty seem s to lie in the failure to forge the necessary link s between the primary factors and concepts (entrepreneur, innovation, equilibrium line) an d th e observabl e cyclica l fluctuation s i n economi c activity . And ye t thi s evaluatio n doe s injustic e to th e treatise , fo r i t stresse s th e weaknesse s o f th e discussion an d overlooks almos t completely it s strength. Granted that the book does not present a fully articulate d an d teste d business-cycl e theory ; tha t i t doe s no t actuall y demonstrat e th e intimate connectio n betwee n economi c evolutio n an d busines s cycles ; tha t n o prope r lin k i s established betwee n th e theoretical model an d statistical procedure; tha t historical evidence i s not used i n a fashion that limits the are a o f personal judgment; or tha t th e validit y o f thre e type s of cycles i s not established. Ye t it is a cardinal merit of the treatise that it raises al l these questions; that i t emphasize s th e importanc e o f relatin g th e stud y o f busines s cycle s t o a stud y o f th e underlying long-ter m movements ; that it calls for emphasis on the factors that determine th e rate and tempo o f entrepreneurial activity ; that it demands a statistical procedure base d upon a clearly formulated concep t o f the business cycle; and that it valiantly attempts to use historical evidence . In al l these respect s th e volume s offe r favorabl e contras t wit h many a book publishe d i n recen t years o n business cycles , whethe r o f the type in which abstract reasoning is unsullied by contac t with observabl e realit y o r of th e opposit e categor y i n which mechanical dissectio n o f statistical series i s the su m total o f the author' s achievement . Furthermore, bot h th e summary and the critical discussion abov e necessaril y fai l t o sho w th e achievements of the treatise i n providing illuminatin g interpretations o f historical developments ; incisive comments on the analysis of cyclical fluctuations in various aspects of economic activity ; revealing reference s t o a n extraordinaril y wid e variety of publications in directly an d indirectl y related fields ; thought-provoking judgments concerning the general course of capitalist evolution.

79. Business Cycles, p . 164 . 80. Ibid., p . 164 . 81. Fo r an effort t o demonstrate an d then correct fo r this kind of bias see my British Economy o f the Nineteenth Century, pp . 43-50. 82. Business Cycles, pp . 166-167 . 83. Ibid., pp . 213-21 4 and 1051, wher e the mathematics of the combined curve is specified wit h the Juglar take n a s 9 1/ 2 years , th e Kitchi n at 3 1/ 6 years . 84. Ibid., p . v . I n 194 0 I wa s recruite d b y Professor s Jame s Angel l an d Arthu r D. Gayer , o f Columbia an d Barnard, to reply formally to Schumpeter's expositio n of Business Cycles to the New York Politica l Econom y Club . The y kne w o f m y reservations concernin g Schumpeter' s historica l analysis base d o n a year-by-year, cycle-by-cycl e stud y of the period 1788-191 4 I had conducte d over the previous 5 years. I was urged to respond wit h vigor. Wit h the enthusiasm of a 23-year-old I did. Schumpete r replie d tha t hi s schem a wa s mean t onl y a s a roug h wa y o f lookin g a t history. I ended th e evening regrettin g th e exuberance o f my charge, a s I do 48 years later; for, o n balance , I regar d Schumpete r a s on e o f th e mos t creativ e economist s o f th e twentiet h centur y an d stil l underrated b y mainstrea m economists . 85. Ibid., pp . 319-325 . 86. Th e fina l sectio n o f Business Cycles bear s thi s title, pp . 1011-1050 . 87. Ibid., p . 1037 . 88. Ibid., p . 1050 . 89. Kuznets , bor n i n 1901 , wa s 2 9 whe n Secular Movements wa s published . Prefator y note s indicate tha t it was submitted for the Hart, Schaffner , and Marx prize 2 years earlier an d that he had been a t wor k i n the stud y over th e 3 previous years ; tha t is, sinc e 1925 . 90. Kuznet s (ibid.), pp . 299-300 , include s a brie f paraphras e o f Schumpeter' s developmen t theory i n a section entitle d "Innovations , Progress , an d the Cyclical Fluctuations." H e notes that it is among th e theorie s h e is usin g "a s a point of departure for our reasoning" (ibid., p . 30 0 n. 1) . Schumpeter has numerous references to Kuznets in Business Cycles, mainly , however, with respect to hi s nationa l incom e estimates. 91. Theory o f Economic Development, p . 10 . 92. Ibid., pp . 1-5 .

628 Notes

t o Pages 243-248

93. Ibid., pp . 5 , 6 , an d 9. 94. Schumpeter , Business Cycles, pp . 497-500. There i s a certain grudging character t o Schumpeter's references t o Kuznets on retardation. H e refers to it as an "ol d idea " (ibid., p . 497 , n.2; ) and characterize s Kuznets' s analysis as a "partia l success. " 95. Ibid., p . 329 . Th e context of Kuznets's statement of his grand objective deserve s quotation: One visualize s the dynamic theor y o f economic s arisin g from th e lon g visio n of a statistician and the penetration of a theoretical analyst , framing a complete accoun t of economic realit y as it presents itsel f t o ou r eye . I t wil l giv e u s a complet e accoun t o f wh y an d ho w economi c phe nomena ar e as they are, an d what brought them to the form in which we conceive them . We shal l know no t onl y th e curren t stat e o f economi c reality , but th e mor e o r les s stabl e sequence s an d interrelations whic h underlie its changes. The stability of these interrelations wil l be only relative . The proces s o f long-tim e movemen t woul d see m a condition o f stabilit y of those factor s whic h come prominentl y into play i n th e cyclica l fluctuations . But th e interestin g par t i n the stud y of these conditions woul d be not to show them in their stability, where their composition become s a matter o f conjecture , bu t i n thei r movemen t an d flu x wher e th e hypothese s concernin g thei r mechanism an d forces can b e tested. I f we have a theory of economic change s i n their different, discernible type s w e shal l hav e a complet e an d genera l theor y o f dynamic economics .

96. Ibid., p . 3 . 97. Th e Education o f Henry Adams, wit h an introduction by D. W . Broga n (Boston: Houghton Mifflin, Sentr y Ed. , 1916) , Chapte r XXV , pp. 379-390 . 98. Ibid., pp . 379-383 . 99. Ibid., pp . 383-385 . 100. Thorstei n Veblen , The Instinct o f Workmanship an d th e State o f th e Industrial Arts, 1s t ed. 1914 (Ne w York: The Vikin g Press, 1943) , p . 5 . 101. Thi s them e wa s t o b e systematicall y elaborated i n grea t detai l b y C . E . Ayres . Fo r m y discussion o f thi s perspectiv e an d it s limitation s se e "Technolog y an d th e Pric e System, " i n William Brei t and William Patton Culbertson , Jr. (eds.) , Science and Ceremony, Th e Institutional Economics o f C . E . Ayres (Austin : University o f Texas Press , 1976) , pp . 75-113 . 102. Instinct o f Workmanship, p . 351 . 103. Ibid., p . 354 . 104. Ibid., pp . 96-97 . 105. Ibid., p . 319 . 106. R . F . Harro d "A n Essa y i n Dynamic Theory, " Economic Journal, Vol . XLIX , No . 19 3 (March 1939) , pp . 14-33 . As Harrod notes , this essay move s on from hi s 193 6 Essay o n the Trade Cycle, notabl y the bringing together of the multiplier and the accelerator. I considered seriously also dealing i n thi s sectio n wit h Ally n A . Young' s famou s Presidentia l Addres s t o Sectio n F o f th e British Associatio n fo r th e Advancemen t of Scienc e (Glasgow : Septembe r 10 , 1928 ) published a s "Increasing Return s an d Economi c Progress " (Economic Journal, Vol . XXXVIII , No . 152 , [December 1928] , pp. 527-542) . It does, indeed , dea l with technology and economic growth ; and at one point (p. 535 ) he notes that economic progress could come via the endogenous working of the economic syste m an d "tha t the appropriate conception i s that of a moving equilibrium. . . . " O n the other hand Young confines himself to an emendation of Adam Smith's assertion that the division of labor depend s o n the extent o f the market to include the possibility that the extent o f the marke t depends o n th e divisio n o f labo r an d t o certai n observation s o n th e inadequac y o f Marshall' s handling o f increasin g returns . Youn g doe s no t grappl e wit h Schumpeter' s endogenous , discon tinuous majo r innovations , no r doe s h e tr y t o dea l wit h th e stabilit y o f a consumption-savings model. Fo r furthe r discussion see my Wh y the Poor Ge t Rich, pp . 162-163 . I als o considere d F. P . Ramsey' s equally famous " A Mathematica l Theory o f Saving " which was published in the same issue of The Economic Journal a s Young's address (Vol. XXXVIII, No. 152, [Decembe r 1928], pp. 543-559) . Ramse y earned forward Marshall's speculations of the early 1880's "O n Utilitarianism : A Summu m Bonum" reflectin g issue s posed stil l earlier by Sidgwick and Edgeworth . [For Marshall' s hitherto unpublished not e an d it s setting , see , especially , J . K .

Notes t o Pages 248-249 62

9

Whitaker (ed.), Th e Early Economic Writings o f Alfred Marshall, 1867-1890 (London: Macmillan for th e Roya l Economi c Society , 1975) , Vol . II , pp . 316-325. ] Ramsey' s elegan t pape r pose s important issue s in welfare economics, intergenerationa l equity, and political morality which have been subsequentl y elaborated an d indecisively debated. Ramsey' s analysis does, indeed , relat e th e saving rate to the rate of growth and the pace at which Bliss is approached. Bu t his interests led him explicitly to fix by assumptio n the variables most relevant to economic growth and its stability. His model ma y wel l hav e influence d later growt h mode l builders ; but , fo r purpose s o f thi s book , I concluded Bickerdik e wa s a mor e relevan t predecesso r o f Harrod-Doma r an d thei r successors . 107. Bruc e Dea n Larson , Th e Analysis o f Interests i n th e Economics o f Charles Frederick Bickerdike (doctora l thesis , Chape l Hill : Universit y of Nort h Carolina , 1983) . Se e als o Larson' s "Bickerdike's Life and Work," History o f Political Economy Vol . 19 , No. 2 (Summer 1987) . I am greatly i n Professor Larson' s deb t fo r making available before publication his thesis, his article o n Bickerdike, an d a n unpublishe d note, a s wel l a s fo r criticizin g portion s o f th e manuscrip t of thi s book. Th e majo r Marxist s cite d by Larson ar e Michael Tugan-Baranovsky, Rosa Luxemburg, and Otto Bauer; bu t he notes tha t Karl Kautsky, L. B . Boudin , and Ant. Bannekock also contributed t o the development an d elaboration of Marx's model . I n his authoritative array of pre-1939 expositor s of th e accelerator , Gottfrie d Haberle r add s t o th e list—asid e fro m Aftalion , J . M . Clark , an d Bickerdike—Bouniatian, Carver , Marc o Fanno , Kuznets , Mitchell, Pigou , an d Robertso n (Prosperity an d Depression [Geneva : League o f Nations , 1937] , p . 82) . 108. Pau l Sweezy , Capitalist Development, especiall y pp . 190-213 . B . D . Larson , Analysis o f Interests, p . 16 4 and unpublishe d "Note s o n Earl y Mathematica l Models o f Economi c Growth " (1982). 109. Ther e are no index references t o Bickerdike in the well-known histories of economic theor y of Blaug, Roll , o r Schumpeter; the briefest possible references t o his analysis of the accelerator ar e in Hutchison an d Pribram, an d a similarly terse referenc e t o a refinement of Mill on tariffs an d the terms of trade are in Spiegel. Hansen's earl y study of the business cycle (Business-Cycle Theory, It s Development an d Present Status [Boston : Ginn, 1927]) , writte n closer to the time when Bickerdik e was publishin g regularl y i n Th e Economic Journal, contain s eleve n inde x reference s an d thre e footnote citations . 110. Asid e fro m m y ow n readin g o f Bickerdike' s article s an d reviews , thi s brie f accoun t o f Bickerdike i s base d mainl y on Larson' s work ; but se e also Harol d Pilvin , "C . F . Bickerdik e o n Economic Growth, " Th e Canadian Journal o f Economics an d Political Science, Vol . 20 , No . 2 (May 1954) , pp . 238-242 ; an d Vincen t Tarascio , "Bickerdike' s Monetar y Growt h Theory, " History o f Political Economy, Vol . 12 , No. 2 (Summer 1980) , pp. 161-173 . Here is Larson's mor e complete evaluatio n o f Bickerdike' s contributio n t o economi c thought , full y annotate d i n th e original ("Bickerdike' s Lif e an d Work," History o f Political Economy, Vol . 19 , No. 1 [Summer 1987], pp . 1-21 . Th e followin g quotation i s fro m pp . 1-2.) : Today h e i s bes t know n fo r hi s contributions to internationa l trade, i n which he wa s th e firs t t o employ comparativ e stati c analysis to consider th e welfare implication s of a tariff, an d to deriv e the optimal tariff formula , and growth theory, i n which he was the first to formulate an algebrai c growth mode l an d conside r i t i n relation t o th e mone y supply . Bickerdike's plac e i n the histor y of economic though t would be secure i f he ha d onl y accom plished th e above, bu t he accomplishe d more . Hi s work ha s drawn notice fo r its early use of the acceleration principl e and th e multiplier, and som e o f his papers hav e been reprinte d in recognition o f thei r importanc e fo r publi c finance. Beyond these contribution s are Bickerdike' s gener alized concept of external effects and the theory of local expenditures which he built upon it, and the attention that he gave to the role of expectations in economic affairs . Hi s work also sheds light on th e theor y o f monopolisti c competition . 1 1 1 . A s pur e conjecture , on e ca n surmis e tha t Edgeworth' s deat h i n 1926 , endin g hi s join t editorship o f th e Economic Journal, ma y hav e reduce d Bickerdike' s interes t i n publication . 112. B . D . Larson , "Life an d Work,", p . 1 .

630 Notes

t o Pages 249-254

113. C . F . Bickerdike , " A Non-Monetar y Cause o f Fluctuation s in Employment " Economic Journal, Volum e XXIV, No. 9 5 (Septembe r 1914) , pp . 357-370 . 114. B . D . Larson , "Life an d Work" pp . 5-16 . Bickerdike' s tw o ke y growt h article s ar e "Individual an d Social Interests in Relation to Saving," Economic Journal, Volum e XXXIV, No. 135 (Septembe r 1924) , pp . 408-422 , an d "Savin g an d th e Monetar y System, " ibid., Volum e XXXV, No . 13 9 (September 1925) , pp . 366-378 . 115. " A Non-Monetar y Cause. . . , " p . 357 . 116. Ibid. 117. Ibid., p . 361 . 118. Ibid. 119. Ibid., p . 363 . 120. Ibid., p . 367 . I n a t least on e case a longer view of th e shipbuildin g market led to a rather remarkable convergenc e of self-interest and social interest; that is, the countercyclical method of Sir William Burrel l (1861-1958), a Glasgo w shipowne r that ultimately yielded fo r hi s nativ e city a splendid museu m and ar t collectio n (Richar d Marks, "Si r Willia m Burrell " i n Richard Mark s et al., Th e Burrell Collection [Londo n and Glasgow: Collins, 1983]) , p . 10 : The Burrell brothers undoubtedly had the Midas touch. Georg e kep t abreast of developments in marine engineerin g whil e William specialized i n the commercial side . Thei r fortunes were base d on a steady nerve, foresight and breathtaking boldness. The formula was quite simple. I n times of depression the y woul d order a large numbe r of ship s a t rock-bottom prices , calculatin g that th e vessels would be coming off the stocks whe n the slump was reaching an end. Burrell and Son was then i n a position t o attrac t cargoes becaus e i t had ship s availabl e and coul d undercu t its rivals . Then, afte r several year s of highly profitable trading, the brothers woul d sell the fleet in a boom period an d li e low until the next slump occurred, a t which point the cycle woul d begin again . I t sounds easy, an d Burrell himsel f describe d i t as making money lik e slatestones, bu t none o f th e firm's competitor s wa s bold enoug h to tak e suc h risks. The operatio n wa s repeated twic e on a large scale . I n 1893/ 4 twelve new ships were buil t for the fleet of Burrell and Son at a time when the industry was in a very depressed state . A few years later, advantag e was take n o f th e curren t hig h price s obtainabl e fo r shippin g an d ever y vesse l flying th e Burrel l house flag wa s sold. After going into semiretirement for several years, i n 190 5 William an d Georg e rocke d th e shippin g worl d b y orderin g n o fewe r tha n twenty steamers; a further eigh t were delivered i n 1909/10. After a few years of prosperous tradin g the brothers onc e again decided to capitalize on the rise in the market values of ships, a rise which became dramati c after th e outbrea k o f th e Firs t Worl d War . Betwee n 191 3 an d 191 6 almos t th e entir e flee t wa s sold, includin g vessels whic h were stil l o n th e stocks . Wit h hi s shar e o f th e proceeds shrewdl y invested, William Burrell devoted the remainder of his long life to what became an all-consuming passion, th e amassin g o f a vast ar t collection .

121. " A Non-monetar y caus e . . ." , pp . 369-370 . 122. See B. D. Larson , Analysis of Interests, mss . pp. 104-10 5 and 115-121 . Also , "Lif e and Work" pp. 15-16 . 123. "Individua l an d Socia l Interest i n Relation to Saving, " p . 408 . 124. Ibid., pp . 421-422 . 125. Bickerdike' s brie f summar y of thi s case approximate s m y view o f th e Kondratief f cycle, implying th e existenc e o f a dynami c optimu m sectora l stoc k leve l ("Savin g an d th e Monetar y System"), pp . 372-380 . Se e m y Why the Poor Ge t Rich, Chapter s 1 and 2 . 126. "Savin g an d the Monetar y System, " pp . 377-378 . 127. Essa y by C. F . Bickerdik e in Pollak Prize Essays, Criticisms of Profits, a book by William Trufant Foste r an d Waddil l Catchings (Newton , Mass. : Pollac k Foundation , 1927) , pp . 72-78 , 83-84, 87-88 . 128. Bot h John Hick s an d Nicholas Kaldor recalled Bickerdike's regular attendance at meetings of th e Politica l Econom y Club in London ; but neithe r remembered any specifi c interventions. 129. See , fo r example, B. D . Larson , "Lif e an d Work," pp . 18-19 . 130. "Savin g an d the Monetar y System," pp . 366-367 .

Notes t o Pages 254-258 63

1

131. Economic Journal, Volum e XLIX, No. 19 3 (March 1939), pp. 14-33 . H. Phelps Brown, in a supplementar y not e t o hi s memoria l essa y o n Harro d (Economic Journal, Vol . 91 , No . 361 , [March 1981] , p . 231 ) observe s tha t Eri k Lundberg as wel l a s Gustav Cassel ma y be regarded a s having anticipated , to a degree, Harrod' s growt h equation. 132. R . F . Harrod , Th e Trade Cycle, A n Essay (Oxford : a t th e Clarendo n Press , 1936) . A s Harrod underlines , hi s Trade Cycle i s a post-General Theory study . In hi s biograph y of Keynes , Harrod make s clea r tha t h e kne w th e General Theory intimatel y befor e it s publication : John Maynard Keynes (Ne w York : Harcourt Brace, 1951) , pp. 452-45 3 and 456 . 133. Trade Cycle, p . vii . 134. Harro d initiall y called this link the Relation, bu t abandoned it reluctantly in his "Dynami c Theory" i n favo r of th e inaccurat e but more popula r Accelerator (p . 14n) . 135. Ibid., p . 102 . 136. Ibid. 137. Ibid., p . 104 . 138. Ibid., pp . 60-61 , wher e reference s ar e mad e t o th e view s o f Kuznet s and Schumpeter . 139. Ibid., pp . 102-103 . 140. Ibid., p . 105 . 141. Ibid. 142. "Dynami c Theory, " p . 14 . 143. Ibid., p . 22 . 144. Ibid., p . 14n . 145. P . A . Samuelson , "Interactio n betwee n the Multiplier Analysis and the Principle of Accel eration," Review o f Economic Statistics, Vol . XXXI,(Ma y 1939) , pp . 75-78 . 146. Ibid., p . 16 . 147. Thi s i s no t th e plac e i n ou r stor y t o elaborat e an d defen d thi s obiter dicta. Bu t se e preceeding, p . 231 . Fo r a n earlie r critiqu e o f Harrod' s an d simila r models , se e m y Process o f Economic Growth, Chapter s I V an d V . 148. E. D . Domar, "Expansio n an d Employment," American Economic Review, Vol . 37, No. 1 (March 1947) ; als o "Th e Problem s of Capital Accumulation, " ibid.. Vol . 38 , No . 4 (Decembe r 1948), R . F . Harrod , Towards a Dynamic Economics (London : Macmillan , 1948) . Chapter 10 1. The most complete business-cycl e bibliography covering the period 1870-1939 , of which I am aware, i s to be found i n Gottfried Haberler (ed.), Readings in Business Cycle Theory (Philadelphia : Blakiston, 1944) , pp . 443-487 . The opening sentence s o f D. H . Robertson' s A Study o f Industrial Fluctuations evokes both the scale and diversity of pre-1914 analyses of the business cycle (London: P. S . King , 1915 , reprinte d by the London School o f Economics an d Political Science, Reprint s of Scarce Work s on Political Economy , No . 8 , 1948) , pp . 1-2 : The cause s o f crises and depressions allege d befor e th e various committees of Congress in the eighties amounte d t o som e 18 0 in number, an d included the issu e of free railway passe s an d the withholding o f th e franchis e fro m women . Thi s lis t remaine d undefeated unti l M . Bergman n i n 1895 wa s able to publish an exhaustive discussion i n the German tongu e of 230 separate opinions, arranged i n eight categories. Indeed, th e problem o f industrial fluctuation has exercised th e minds of busines s men , economi c writer s an d practica l reformer s o f al l school s throughou t th e pas t century: an d within the last five years alone six weighty works, varyin g in length from 28 0 to 742 pages, hav e bee n publishe d upon i t in England , Americ a an d France . I n thes e circumstance s it might see m a presumptuous an d superfluou s undertaking to ad d t o a n alread y voluminous literature: nevertheles s I conceiv e tha t no apolog y is needed . For on the one hand, in spite of the obvious futility o f many of the minor explanations that have been given, this does appear to be a case in which, in the deathless words of the Dodo, everybody has wo n an d mus t have prizes . . . .

632 Notes

t o Pages 259-261

I. Ibid., pp . xv i and xvii.

3. Fo r Schumpete r o n Juglar, se e History o f Economic Analysis, (Ne w York: Oxford University Press, 1954) , especiall y pp . 1123-1124 . Th e ful l titl e o f Juglar' s majo r stud y i s De s Crises Commerciales e t Leur Retour Periodique e n France, e n Angleterre, e t au x Etats-Unis (Paris : Librarie Guillaumin , 1860 , 188 9 2 d ed.). Pag e reference s her e wil l be to th e secon d edition . 4. De s Crises Commerciales, pp . v—vi . Juglar' s demographi c studie s wer e publishe d i n 1851-1852. 5. Ibid., p . 558 . Translatio n i s mine. 6. History o f Economic Analysis, p . 1128 . 7. Schumpeter' s business-cycl e analysi s in hi s Theory o f Economic Development (Cambridge : Harvard Universit y Press , 1955) , Chapte r V I contain s a numbe r o f supportiv e reference s t o Spiethoff's views , bu t h e draws (pp. 215-216 ) a lucid line of distinction between his formulation and Spiethoff's. Alvin Hansen argues persuasively that Gustav Cassel's business-cycle theory, to be found i n Book IV o f his Theory o f Social Economy, derive s substantially from Tugan-Baranowsky and Spiethoff ; and , indeed , tha t Spiethof f owe s a goo d dea l t o Tugan-Baranowsk y (A. Hansen , Business Cycles and National Income, [Ne w York: W. W . Norton , 1953]) , pp . 29 2 and 310. Th e following quotatio n is fro m th e latte r page : That Cassel wa s profoundl y influence d b y th e writing s o f Tugan-Baranowsky an d Spiethof f appears plainl y evident , thoug h he fail s t o mentio n either one i n his book. W e ar e reminded o f Tugan-Baranowsky whe n we read that ' 'the movement s of the trade cycle are merely expression s of th e fluctuation s i n th e productio n o f fixe d capital. " Bot h Tugan-Baranowsk y and Spiethof f come to mind when we learn that the "productio n of iron represents th e entire production of fixed capital." Cassel define s periods of boom an d depression precisely as follows: " A perio d o f boom is one of specia l increas e in the production o f fixed capital; a period o f decline or a depression i s one in which this production fall s below the point it had previously reached. " He marks off thes e periods from a chart o f world pig-iron production , whic h reflects, h e believes, th e world produc tion o f fixe d capital . Th e alternatio n betwee n period s o f advanc e an d period s o f declin e i s fundamentally a variation i n the productio n o f fixed capital. Bu t the productio n o f consumptio n goods varie s relativel y littl e in relatio n to th e movement s o f busines s cycles .

Hansen goes o n t o specif y som e origina l feature s o f Cassel' s cyclica l analysis . 8. Th e reference s her e ar e to the Frenc h edition , Le s Crises Industrielles e n Angleterre (Paris : Giard an d Briere , 1913) . 9. Business Cycles an d National Income, pp . 289-290 . Th e hear t o f Tugan-Baranowsky' s exposition o f hi s ow n theor y i s t o b e foun d i n Les Crises Industrielles, Par t II , Chapte r III , "L e Cycle Industrie l e t L'Explicatio n d e l a Periodicit e de s Crises," pp . 247-279 . Th e steam-engin e image i s on p. 273 . 10. Les Crises Industrielles, especiall y pp . 271-277 . II. Althoug h i t does no t bear o n th e mai n them e o f ou r analysi s here , Spiethoff' s background may be worth noting briefly. Born in 1873, h e was led to study business cycles b y a traumatic event in hi s boyhood : hi s father' s fir m i n Westphali a wen t bankrup t i n th e depressio n o f th e 1870s . (Arthur Schweitzer , "Spiethoff' s Theor y o f th e Busines s Cycle," [Laramie : Universit y of Wyo ming Publications , Vo l VIII , No . 1 , April 1 , 1941] , p . 1. ) He studie d under Gustav Schmoller, a leader o f th e Germa n Historica l School , an d Adolp h Wagner , th e statisticia n wh o analyze d th e tendency for the proportion o f national income expended by governments to increase with the rise in income. Leanin g t o Wagner' s (an d Juglar's) more discipline d empiricism , h e se t abou t tryin g to identify an d describ e i n detai l a "typica l cycle " (Musterkreislauf). I n 1902 , a t th e en d o f hi s "sacred decade, " h e enunciate d th e doctrin e o f overproductio n fo r whic h h e i s bes t know n i n "Vorbemcrkungenzueiner Theori e de r Ueberproduktion, " Schmollers Jahrbuecher, Vol . XXVI, No. 2 (1902), pp. 271-305 , where it is noted that the essay was delivered as a lecture on December 17, 1901 , befor e th e Politica l Science Associatio n in Berlin . I n additio n t o Jugla r an d Tugan Baranowsky, h e i s sai d t o hav e bee n influence d b y Euge n Vo n Bergman n (A . Schweitzer , "Spiethoff s Theory," p . 2) :

Notes t o Pages 261-262 63

3

What i s Spiethoff s position i n economics an d his attitud e i n business cycles theory ? W e can answer this by reference t o the writings of three men: Juglar, Bergmann and Tugan-Baranowsky, and consider Spiethoff' s reaction s t o them. A close stud y of Juglar's books reveale d t o Spiethoff that ther e ar e not just irregula r crise s but cycles; ever y upswin g wil l lea d t o a downswing. This important observatio n le d Spiethof f t o th e formulatio n o f hi s "typica l cyclica l pattern. " Bergmann, i n hi s history o f th e theorie s o f crises , trie d t o prove that the Classical theor y coul d only explai n th e partia l crises , bu t tha t general crise s ar e necessaril y i n contradiction t o th e socalled "La w o f the Markets." Spiethoff accepted Bergmann' s explanation, rejected Say' s law of the market s an d conclude d tha t i t wa s impossibl e t o explai n th e busines s cycle s i n term s o f an equilibrium theory . Tugan-Baranowsky , o n the other hand, convinced Spiethoff that a correlate d factual an d theoretical stud y of the business cycle is feasible and will lead to a satisfactory result. Thus we see that Spiethoff come s fro m th e Historical Schoo l an d does not favor the Classical an d Neo-classical theory , ye t in his own investigation he goes far beyond th e boundary of Schmolle r in attemptin g t o giv e a theor y i n whic h th e fact s ar e th e foundatio n fo r th e explanatio n o f th e cycles.

Schweitzer's evaluatio n i s base d o n hi s Speithoffs Konjunkturlehre (Basel : Helbin g an d Lich tenhahn, 1939) . Fo r references t o Bergmann's work , notably his survey of business-cycle theories, see J. A . Schumpeter , History o f Economic Analysis, note s on pp. 739 , 740 , 745 , 1123 , and 1134 . T. W . Hutchison , ( A Review o f Economic Doctrines, 1870-1929 [Oxford: a t the Clarendon Press, 1953], p. 381) , usefull y oversimplifie s the major distinction between Tugan-Baranowsky's emphasis and Spiethoff's: "Spiethoff' s descriptio n o f the cycle is in terms rather of a cycle of investment outlets as contrasted wit h Tugan-Baranowsky's description in terms of a cycle of gradual accumulation an d sudde n exhaustio n an d shortag e o f savings." 12. Th e mos t mature statement of Spiethoff' s overproduction doctrine is in Encyclopedia o f th e Social Sciences, Vol . XI (New York: Macmillan, 1933), pp. 513-517. The article i s reproduced in Alvin H . Hanse n an d Richar d V . Clemence , Readings i n Business Cycles an d National Income, Chapter 9 , pp . 108-115 . 13. Ibid., p . 109 . Th e following passage suggest s how Spiethoff defines his central concept (pp . 109-110): Lack o f balanc e betwee n production an d consumptio n ma y b e caused b y force s operating o n either sid e or on both and resulting in an increase i n production or a decrease i n consumption. O n the productio n sid e ther e ar e thre e chie f set s o f cause s fo r overproduction : first , natura l occur rences suc h a s particularl y goo d crops , eithe r o f ra w material s o r o f foodstuffs , whic h greatl y augment productio n withou t an y widenin g o f th e are a unde r cultivation ; second, technica l in ventions whic h make possibl e increasin g productivity; and third, actual increase o f the means of production—cultivation o f additiona l land, mor e intensiv e exploitation o f natural resources, th e construction o f ne w o r th e enlargemen t o f capacit y o f ol d manufacturin g plants—wit h th e resultant disproportiona l increas e o f output . On th e consumptio n sid e th e cause s o f overproductio n ar e eve n mor e numerous . Changin g fashion . . ..th e effec t o f technical changes .. . a s central heating, for instance, displace d tile d stoves. Again , change s o f localit y ma y affec t consumption . . . . Emigratio n o f con sumers . . . th e transfer of workmen, official s or troops. .. . I n the same wa y the transfer of an industry t o a ne w locatio n ca n caus e a shutdow n o f th e loca l industrie s dependen t upo n it . Furthermore consumptio n ma y fal l of f a s a result o f th e saturatio n of demand .

14. Ibid,, pp . 11 0 and 114 . 15. Ibid., p . 114 . 16. Ibid., p . 113 . 17. J . A . Schumpeter , Theory o f Economic Development, p . 251 . 18. Ibid., pp . 214-216 . Se e als o Hansen' s statemen t o f th e characteristic s o f Schumpeter' s cyclical analysi s that distinguishes him fro m Spiethof f (Business Cycles and National Income, pp . 301-308). Another effort o f this period to link growt h and cycles should be noted: Johan Akerman, Economic Progress an d Economic Crisis (trans . Elizabeth Sprigge and Claude Napier), (London: Macmillan, 1932) , [Swedis h edition, 1931] . Akerman's analysis i s governed by th e judgment that

634 Notes

t o Pages 262-264

economics, i f it was to be useful, ha d to break out of the static mold of Ricardo, Walras, an d Jevons and "combin e th e stud y of condition s o f equilibriu m with that o f the change s wrough t b y time" (pp. 16-17) . 19. As A. Loveday's Preface reports , Haberler's study aros e from a 193 0 resolutio n adopted by the Assembly of the League o f Nations launching an effort "t o co-ordinat e th e analytical work then being don e on the proble m o f the recurrence o f periods o f economic depression " (p . iii) . Th e first stage, represented b y Haberler's study, was meant to identify area s of consensus and differences of opinion abou t th e caus e o f business cycles . The nex t stag e wa s planne d a s a confrontation of the various theories wit h historical facts . Thi s task was undertaken by Jan Tinbergen, Statistical Testing o f Business-Cycle Theories, Volum e I, A Method an d It s Application t o Investment Activity, an d Volum e II, Business Cycles i n th e United States o f America, 1919-1932 (Geneva : Leagu e o f Nations , 1939) . Thes e studie s ar e briefl y considered preceding , pp . 299-301 . 20. Prosperity an d Depression, p . 174 . 21. "Som e Material fora Study of Trade Fluctuations" , Journal o f the Royal Statistical Society, No. 77 , Ne w Series, (Januar y 1914), pp . 159-178 . Robertson's paper was drawn from wor k on his A Study o f Industrial Fluctuations (1915 ) which , in an earlier draft , wo n the Cobden Clu b Prize at Cambridge i n 1913 . Th e Journal articl e is a condensed versio n of his pape r and of the subsequent discussion. 22. T . W . Hutchison , Economic Doctrines, 1870-1919, pp. 379-404 . 23. Ibid., p . 404 . Schumpeter' s mor e direc t dictu m i s (History o f Economic Analysis, pp . 1134-1135): " . . . The essential o f both the methods an d the explanatory principle s tha t serve i n today's business-cycl e analysis , barrin g refinement s o f technique , dat e fro m befor e 1914 . . . . " 24. "Som e Materia l fo r a Study of Trade Fluctuations, " pp . 167-168 . The discussio n o f Robertson' s paper , a s summarized , was generall y supportiv e but restrained . D. A . Thoma s politel y calle d th e paper "exceedingl y interestin g and suggestive," bu t responde d head-on t o Robertson' s suggestio n tha t his (Thomas's ) 190 3 pape r o n investment i n coal pit s ma y have been in error. He also suggested that annual data were inadequate to test Robertson's linkin g of periods o f gestatio n t o cyclica l fluctuations . R . G . Hawtrey' s interventio n eschewe d monetar y matters, bu t covere d th e monetarists' flank s implicitl y by expressing doub t on several ground s that "the harmonics " o f investment , a s shape d b y period s o f gestation , coul d pla y th e larg e rol e i n overall cyclica l fluctuations Robertson attribute d to tha t process. (I t is doubtful that Hawtre y was aware of the rather rude observations in the full text of Robertson's Study on extreme monetarists in general, o n Hawtre y i n particular. ) Flux, a distinguishe d statistician , underline d inadequacies i n Robertson's annua l data , whic h h e ha d alread y acknowledged . Edgewort h conclude d tha t Robertson's idea s wer e more importan t than his data (which Flux had suggested) and characterize d the paper as an exercise i n "[t]ha t fundamental distinction between lon g periods an d short periods which Dr . Marshal l ha d firs t o f al l pointed ou t clearly." 25. Ibid., p . 402 . Sinc e th e tex t wil l dea l wit h Robertson' s monograp h mainl y in term s o f it s relation to growth rather than business-cycle analysis, in the narrower sense , Hutchison' s excellen t summary o f its content s i s worth includin g here (pp . 402-403) : Methodologically i t provide s a synthesi s o f theoretica l analysi s wit h historica l an d statistica l material, . . . Over-investmen t an d capita l shortage , deficienc y o f consumptio n demand , in ventions, error s i n investment , an d cro p fluctuations , ar e al l give n a place , eithe r a s workin g together o r a s alternativ e possibilities i n the variou s phases o f differen t cycles . Robertson's over-investmen t analysi s wa s simila r t o tha t of Spiethoff , bu t i s combine d wit h elements emphasize d b y Aftalion . The virtua l impossibility o f stabl e an d correc t forecast s b y entrepreneurs o f th e margina l utility o f capita l goods, a s contrasted with consumption goods, is emphasized, an d i t i s th e variation s i n thes e forecast s "whic h furnis h th e ke y t o th e mos t important aspects of moder n industrial fluctuations." (p. 157 ) Special stress is laid on the rise in costs a s a factor tending to bring the boom t o an end. An actua l "real" shortag e of consumable goods a s described by Spiethoff .. . i s recognized as a possible ground for the breakdown of an investment boom , bu t i s no t hel d t o b e th e onl y possibl e ground :

Notes t o Pages 264-266 63

5

The relaps e i n constructional industr y i s seen t o be due t o the existence o r imminenc e o f an over-production of instrumental as compared with consumable goods . Whethe r o r not this over-production i s indicate d b y a n actua l shortag e o f consumabl e good s whic h render s i t impossible t o maintai n investmen t o n th e scal e whic h ha s prevaile d durin g th e precedin g years or months, o r whether i t is due to miscalculation o r to the inevitable characteristic s o f modern large-scal e production, it s essential natur e i s the same , a failur e to secure th e bes t conceivable distribution throug h time of a community's consumptio n o f consumable goods , (p. 187. )

Particularly detailed attentio n is given to the role of fluctuations i n crop values in the trade cycle, a subject whic h had bee n muc h studied , bu t wit h highl y ambiguou s and diametricall y conflicting conclusions a s to the processes involved . (Part I, Chapte r 5-7. ) The remedies discussed includ e " a mor e centralized investmen t policy " and Fisher's plan for stabilizing th e general price-level, whic h is approved wit h reservations, . . . Wage reduction s i n the slum p ar e considered t o b e o f ver y doubtfu l aid : It mus t b e remembere d firs t tha t i f the me n ar e employed i n constructional industry , th e demand fo r thei r labour a t such a time i s likely t o be inelastic , an d the aggregate incom e o f members therefor e lessened , eve n thoug h unemploymen t b e avoided , b y th e acceptanc e of lower wages. .. . O n the whole I cannot help feeling, that , i n spite no doubt of errors of judgment, th e trad e union s hav e know n thei r ow n busines s i n thi s matte r bette r tha n i s always admitted , (p . 249 ) "Cordial support " i s give n t o th e public-work s proposa l o f th e Minorit y repor t o f th e Poor La w Commission , an d "Mr . Hawtrey' s attac k upo n th e proposa l scarcel y deserve s formal refutation. " (p . 253. ) Th e final emphasi s o f the book i s somewhat simila r to Schum peter's , being o n the clash of progress and security i n the existing economic order : ' 'What i s meant" i t is asked "b y th e most desirabl e distributio n o f the community's incom e throug h time?" Unde r th e existin g orde r "ou t o f th e welte r o f industria l dislocatio n th e grea t permanent riche s o f th e futur e ar e generated." (p . 254. )

Richard Kahn notes, i n my view correctly, tha t immediately before and, indeed, immediately after the First Worl d Wa r the "thinkin g o f Dennis Robertso n was in advance of that of Keynes . . . . [He] ha d develope d hi s economi c thinkin g well ahea d o f Keynes " (The Making o f th e General Theory, p . 15 , se e als o pp . 4 9 an d 185) . Th e tw o me n collaborate d closel y dow n throug h th e publication o f Th e Treatise o n Money (1930 ) whe n leadershi p shifted , b y mos t evaluations , t o Keynes; althoug h I woul d judg e Robertson' s comman d ove r th e rea l factor s operatin g i n th e economy remaine d superior . Keyne s evidentl y emerge d a s a fa r mor e effectiv e exposito r an d negotiator o f ne w policie s a t home an d abroad . 26. Study, pp . 6 1 and 104-105 . 27. Ibid., pp . ix-x . 28. Study, pp . 211-212 . 29. Ibid., p . 218 . Robertson' s sectio n o n "Gold—Medicine , Poison , an d Intoxicant " (pp . 228-235) remains a useful antidot e against simplistic interpretations of the workings of the mone tary system . 30. Labordere' s essa y firs t appeare d i n La Revue de Paris, Februar y 1 , 1908 , an d was published separately unde r the title Crise Americaine d e 1907 ou Capitaux -reels et Capitaux-apparents. I t is reprinted as an appendix in the reprint of Robertson's Study. Th e quoted sentence in the text is to be found o n p . 1 4 of Labordere's essa y which , along with othe r arguments for overinvestment as the cause o f crises, mad e a sufficien t impressio n o n Keynes for him to present a paper t o the London Political Econom y Club (December 3 , 1912 ) entitled "How Fa r Are Banker s Responsible fo r the Alternations o f Boo m an d Depression? " 31. Study, pp . 239-241 . 32. J . R . Hicks , " A Memoir : Dennis Holme Robertson, 1890-1963," i n Denni s Robertson, Essays i n Money an d Interest (London : Collins, The Fontan a Library , 1966) , pp. 12-13 . 33. Banking Policy and the Price Level, initiall y published by Staples Press, London, appeared in

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a second editio n i n 193 2 later issued in 194 9 as No. 8 in the London School of Economics serie s of reprints o f "scarc e works" (Ne w York : Augustu s M, Kelley) . 34. Fo r a reflectio n o f Robertson' s discomfiture—evidentl y mor e deepl y fel t tha n formall y expressed—with Keynes' s drif t fro m wha t th e forme r regarde d a s thei r basicall y harmoniou s intellectual partnershi p o f the 1920s , se e the 194 9 Preface to Banking Policy, p . xiii . For example : For thes e an d othe r reasons , includin g th e treatmen t b y Pigo u i n hi s Industrial Fluctuations (1927) o f the monetary causes o f changes i n output, it is bound t o remain to me a source of som e bewilderment tha t a t som e tim e i n th e perio d followin g 193 0 th e idea tha t monetar y analy sis .. . i s concerne d wit h th e behaviou r o f outpu t as wel l a s o f price s shoul d apparentl y hav e struck Keynes , o r at any rate the able littl e group who were then advising him, with the force o f a new discovery .

On th e othe r han d se e Richar d Kahn' s well-documente d accoun t o f th e limite d characte r o f th e Keynes-Robertson estrangemen t during Keynes's wor k on The General Theory an d their cheerful, effective, occasionall y playfu l collaboratio n durin g the Secon d Worl d War an d a t Bretton Wood s (The Making o f Keynes' General Theory, pp . 185-188) . 35. Ibid., p . 1 . 36. Ibid., pp . vii-viii . 37. Ibid., p . 5 . 38. Ibid. 39. History o f Economic Analysis, pp . 1127-1128 . 40. Study, pp . 175-187 . 41. Banking Policy, p . 1 1 n. 1 . 42. Ibid., p . 18 . 43. Ibid., p . 39 . 44. Study, pp . xvi-xvii . Robertso n (lik e Davidso n i n Swede n i n respons e t o Wicksell ) wa s conscious that , i n a time of rapid cost-reducin g innovation , the optimum objective of macropolic y might be a falling rathe r than constant price level . I n discussing wage policy in the General Theory, Keynes als o explore d th e cas e o f constan t mone y wage s wit h prices fallin g wit h th e progres s o f technique an d equipment (p. 271) . 45. Study, pp . 241-242 . 46. Ibid., p . 254 . 47. A . C . Pigou , Wealth and Welfare (London : Macmillan , 1912) , Par t IV, pp . 401-486 . John R. Presley , Robertsonian Economics (London : Macmillan, 1978) , provide s th e following account of Pigou' s influenc e on Robertson' s Study (pp . 9-10) : His [Robertson's ] firs t approac h to the stud y of industria l fluctuation had in fac t bee n to sum marise a number o f theories an d to test these agains t empirical evidence . H e wa s diverted fro m this cours e b y A. C . Pigou , wh o wrote: "Yo u hav e collected an astonishing amoun t o f materia l and have mad e commen t o n it in such a way that I feel sure you will eventually make somethin g very goo d indeed . But , o f course , a t present, th e thin g i s mainl y a great mas s o f ra w material . Marshall use d t o instruc t on e tha t th e bones o f a piec e o f work , whic h wa s reall y one' s ow n production, gre w gradually and then the whole thing came togethe r roun d them. Yo u haven't yet got th e bones; yo u haven' t though t through th e material. Th e nex t stag e i s to set and stew o n all these facts and partial explanation s unti l some coherent unit y grows up and the separate fact s fall into their proper place." Whether o r not this advice did provide th e direction fo r his future wor k is difficul t t o determin e i n retrospect; ther e ma y hav e bee n other , unknow n influences; bu t th e approach adopte d by Robertson doe s bea r a striking resemblanc e t o this counsel . Robertso n wa s recommended t o tak e a positive rathe r tha n a critical tin e in his study . I n particular, an d thi s i s very significant , Pigou instructed , though with som e reservation : "Yo u ough t more consistentl y and thoroughl y t o di g dow n behind mone y appearance s t o rea l facts " . . . an d t o "distinguis h more betwee n causes of a general kin d affecting industr y a s a whole and special causes affecting particular industries. "

48. A . C . Pigou , Th e Economics o f Welfare (Macmillan : London , 1920) , (1s t ed.).

Notes t o Pages 270-277 63

7

49. Wealth an d Welfare, p . 447 , n . 1 . See also Robertson's comment , Study, p . ix . 50. Wealth and Welfare, p . 460 , fro m whic h following two sentences in the text are also drawn. 51. Rober t Skidelsky , John Maynard Keynes, Vol . I , Hopes Betrayed, 1883-1920 (London : Macmillan, 1983) , p . 211 . 52. Industrial Fluctuations, p . 22 . 53. Ibid., pp . 35-36 . 54. Ibid., p . 49 . 55. Ibid., pp . 49-50. 56. Ibid., pp . 92-93 . 57. Ibid., p . 9 3 n. 2 carried ove r fro m p . 92 . Chapter 11 I. Fo r a convenient summar y statement se e A Treatise o n Money (London : Macmillan , 1930) , Vol. I , pp . 171-184 . R . F . Harro d (Life o f John Maynard Keynes, [Ne w York: Harcourt Brace , 1951, pp . 407-408]), provides a lucid rational for Keynes's rather curious definitions i n A Treatise: He excluded fro m savin g wha t may be called exces s profit an d did not deduct fro m i t busines s losses. Excess profit i s defined a s such profi t a s causes the producer t o increase output, an d loss is defined a s the difference betwee n what h e actually gets and what he would hav e to get in order to make him willin g no t to decrease output; i f loss in this sense occurs, he decreases his operations in th e nex t round . Thu s i f we ad d excess profit t o saving, w e ge t th e book-keeping identit y tha t investment i s equal t o saving, an d if we deduct realise d loss from saving th e remainder i s equal t o investment. Keynes ' reason for segregating this particular ite m o f income (o r loss) is that it is the dynamic elemen t whic h causes the economy t o move towards expansio n an d inflation o n the one hand o r depressio n an d deflatio n o n th e other. I t seem s quite reasonabl e t o distinguish betwee n savings which aris e in the ordinary pruden t conduc t o f business lif e by an individual or a compan y and thos e saving s whic h ar e windfall , unexpected , an d th e resul t o f a disequilibriu m i n th e economy.

2. A Treatise, Vol . I , p . 258 . 3. Ibid., pp . 282-283 . 4. Ibid., p . 289 . 5. Ibid., p . 291 . 6. Ibid., pp . 294 , 297-298 . 7. Ibid., Vol . II , Boo k VI , "Th e Rat e of Investment and Its Fluctuations," pp . 195-210 . 8. Ibid., pp. 95-96, 100-101 . While Schumpeter no doubt appreciated Keynes' s reference to his work he must have been infuriated by the fact that Keynes quotes "th e convenien t summary" fro m Wesley Mitchell' s Business Cycles, p . 96 , n . 1 , rather tha n the original i n German. 9. Ibid., pp . 162-163 . 10. Ibid., p . 170 . II. Ibid., p . 174 . 12. Ibid., pp . 180-181 . 13. Ibid., pp . 182-184 . 14. Ibid., p . 189 . 15. Ibid., p . 204 . 16. Ibid., pp . 206-207 . 17. Fo r m y firs t exercis e i n this method se e "Explanation s o f th e Grea t Depression, " Chapte r VII i n British Economy o f th e Nineteenth Century, (Oxford : a t the Clarendon Press, 1948) . Harrod (Life o f Keynes, pp . 338-345 ) evokes persuasively the winte r of 1922-192 3 a s th e critical turning point i n Keynes' s evolutio n as h e move d fro m a concer n wit h reparation s to domesti c financial problems. He dramatizes the passage with a note by Keynes in IheNation, July 14, 1923, protesting

a ris e o f th e ban k rat e o n Jul y 7 , a t a tim e o f fallin g price s an d risin g unemployment . It was ,

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presumably, a conscious deflationar y step on the road to the return of sterling to the gold standard at prewar parity . Keynes's "Not e on Finance an d Investment," followe d i n November 192 3 b y his A Tract o n Monetary Reform, se t him on the path that led directly to A Treatise, Th e General Theory, and, indeed—th e Bretto n Wood s institution s and th e Britis h loa n o f 1946 . 19. R . Skidelsky , John Maynard Keynes, (Macmillan : London, 1930 ) Vol . I , p . 214 . 20. R . Harrod , Keynes, p . 451 . Se e also A . C . Pigou , "Joh n Maynar d Keynes, Economist " in memorial statement s fro m Proceeding s o f th e Britis h Academy , 1946, John Maynard Keynes, Baron Keynes ofTilton, 1883-1946, (London : Geoffre y Cumberledge) , p . 19 : After Marshall' s main wor k wa s finished economi c thought on fundamental issue s moved little, at all events in this country. We wer e pedestrian, perhaps a little complacent. Keynes's Treatise on Money and , later, his General Theory brok e resoundingly that dogmatic slumber. Whether in agreement or in disagreement with him, discussion and controversy sprang up and spread over the whole world . Economics and economist s came alive . Th e perio d of tranquillit y wa s ended . A period o f activ e and, so far a s might be, creativ e thought was born. For this the credit is almost wholly du e t o Keynes. Even should all his ow n idea s presently b e rejected—which, o f course, will no t happen—fo r thi s inbreathin g o f th e spiri t h e woul d stil l ran k amon g th e foremost architects o f ou r subject . He had , o f course , a s al l have , th e defect s o f hi s qualities . B y definin g commo n words i n uncommon senses , a s wit h "savings " an d "income, " i n hi s earlie r book , an d "full " em ployment—which wa s compatible with a large volume of unemployment!—in his late r one, he caused muc h confusio n amon g persons less agile-minded than himself. Mayb e too, had he been less ready to hoist the flag of intellectual revolution, stressing agreement more and disagreement less, h e woul d have obviated some misunderstandin g an d som e unfruitfu l debate , thus freein g himself t o produce even more constructive work than h e actually did. But there are two sides to this. Ha d h e acte d so , i n a mor e Marshallia n manner , no t onl y mus t h e hav e proved a les s effective catalyst , bu t also—an d this t o hi m woul d hav e mean t much—hi s influence upo n immediate publi c policy i n thes e time s o f urgenc y mus t inevitabl y hav e bee n far smalle r than it was.

21. General Theory, p . 245 . 22. Davi d Worswick an d James Trevithic k (eds.) , Keynes and the Modern World, Proceedings o f the Keynes Centenary Conference, King's College, Cambridge (Cambridge : Cambridge Universit y Press, 1983) , p . 164 . Thi s poin t i s made als o i n A. C . Pigou , Keynes' General Theory: A Retrospective View (London : Macmillan , 1950) , p . 4 : "Thes e restrictin g assumption s exclud e fro m consideration th e consequence s o f gradual increase i n the stock of capital equipment consequent o n successive investment s mad e ove r a serie s o f years." 23. General Theory, pp . 246-247 . Thi s i s the passage Pigo u isolate d a s containing "Keynes' s main an d ver y importan t contributio n t o economic analysis. " Retrospective View, p . 20 . 24. General Theory, p . 315 . 25. Ibid. 26. Ibid., p . 250 . 27. Ibid., pp . 31 7 and 319-320. 28. Ibid., p . 325 . 29. See , fo r example, ibid., pp . 316 , 322-323 . 30. Ibid., pp . 320-321 . 31. Ibid., pp . 306-309. For Richard Kahn's comments o n the emergence o f the Marshallian long period fo r certai n limite d purpose s i n a boo k overwhelmingl y geare d t o th e shor t perio d se e Th e Making o f th e General Theory, pp . 122-123 . 32. W . W . Rosto w (ed.) , Th e Economics o f Take-off into Sustained Growth, proceeding s o f a conference held by the International Economics Association (New York: St. Martin' s Press , 1963) , pp. xiii-xiv . I mad e thi s observatio n with respec t t o th e concep t o f take-of f i n th e cours e o f th e Konstanz debate : " . . . th e introductio n of a ne w concept—especiall y a ne w term—i s a n ac t of aggression agains t respected colleague s an d friends. " 33. Michae l Kalecki, " A Theor y of the Business Cycle," Review o f Economic Studies, Vol . IV,

Notes t o Pages 282-288 63

9

No. 2 (February 1937) ; Nicholas Kaldor, " A Mode l of the Trade Cycle," Economic Journal, Vol. L, No . 19 7 (Marc h 1940) , accessibl y reprinte d i n Alvi n H. Hanse n an d Richar d V . Clemence , Readings i n Business Cycles and National Income (Ne w York: W. W . Norton , 1953 , Chapte r 23 . Kaldor explicitly relates his cyclical theory to Keynes's General Theory, bu t J. R. Hicks argued that it wa s mor e Robertsonia n tha n Keynesia n ["Th e Monetar y Theor y o f D . H . Robertson, " Economica, Vol . IX , No . 3 3 (Februar y 1942) , p . 55] . Hick s linke d Kaldor' s essa y explicitl y to Robertson's "Industria l Fluctuation s an d th e Natura l Rat e o f Interest, " Chapte r V i n D . H . Robertson, Essays i n Monetary Theory (Londo n and New York : Staples Press, 1940) . 34. J . A . Schumpeter , Te n Great Economists, p . 25 1 an d n. 1 . 35. Ibid., p . 249 . 36. Alvi n H. Hansen , Business Cycles an d National Income, p . 406 . 37. Wesle y Clai r Mitchell , Business Cycles (Berkeley : Universit y o f Californi a Press, 1913) , p. vii . 38. See , fo r example, ibid., pp . 22-26 . 39. Ibid., p . 26 . 40. Ibid., pp . 585-586 . 41. Ibid., p . 398 . 42. Milto n Friedman , "Wesle y Mitchel l a s a Theorist, " Journal o f Political Economy (December 1950) , p . 487 . 43. T . W . Hutchison , A Review o f Economic Doctrines, 1870-1929 (Oxford : at the Clarendo n Press, 1953) , p . 401 . 44. Business Cycles, pp . 578-581 . 45. Fo r example, ibid., pp . 387-42 1 an d 581-583. 46. Ibid., p . 503 . 47. Ibid., pp . 56 7 and 598 . 48. Willar d L . Thorp , Business Annals (Ne w York: NBER, 1926) . Other pre-1927 monograph s published by th e NBER bearing on cyclical fluctuations were: Business Cycles and Unemployment (1923), th e NBER staff an d collaborators; Willfor d I. King , Employment, Hours, an d Earnings i n Prosperity an d Depression, United States, 1920-22 (1923) ; an d Harr y Jerome , Migration an d Business Cycles (1926) . 49. Th e Problem an d Its Setting, p . x . 50. Ibid., p . 50 . Minnie T. England' s work focused on waves of "promotion" ; the degenerativ e forces tha t develop durin g a boom underminin g the expected profit in the sectors unde r promotion; and the mechanis m of crisis . See , for example , her "Economi c Crises, " Journal of Political Economy, (Apri l 1913) , pp . 345-354 ; an d "A n Analysi s of th e Crisi s Cycle, " ibid., (Octobe r 1913), pp . 712-734 . 51. Th e Problem an d Its Setting, pp . 20-23 . 52. Ibid., pp . 213-233 . Mitchell state s (p. 21 3 n. 1) : "So fa r as 1 know, the only one working upon secula r trend s a s a problem i n its own right is Dr. Simo n S. Kuznets . . . . " 53. Ibid., pp. 230-233. The substance and style of this passage suggest s that it may have been, in fact, drafte d b y Kuznets. 54. Thi s chapte r doe s foreshado w th e NBER technique for clearing statistica l series of trend and isolating cyclica l pattern s unique to each serie s (specifi c cycles) an d patterns in relation t o genera l cyclical movement s (referenc e cycles ) (ibid., pp . 472-474) . Thi s is accomplished b y recalculating each statisti c relativ e t o th e tren d averag e fo r th e cycle . Thi s for m o f clearanc e yields , vi a th e sequence o f average standings , a trend measurement. Mitchel l does not deal wit h the potentialities for tren d (i.e. , growth ) measuremen t implici t in this method excep t fo r the following vague reference (p . 474) : "Th e analysi s o f wha t happen s in [cycles ] mus t b e supplemente d b y discussions in which certai n hypotheses ar e teste d wit h respec t t o lon g period s of tim e .. . i n whic h statistical series ar e take n as whole s instead of segments. " 55. Arthu r F. Burn s wa s goo d enoug h to explai n th e interestin g origin s of thi s study in a long telephone conversation wit h th e autho r on Apri l 23, 1986 . H e began in the late 1920 s by studyin g

640 Notes

to Pages 288-292

the relationship between cyclical movements in production and prices in the course of U.S. business cycles. Afte r analyzin g a ne w inde x o f busines s activity, Burns's preliminary conclusions "col lapsed." H e then paused to reflec t on the problem s implicit in an y effort t o measur e the physical volume o f productio n ove r substantia l periods o f time , includin g multiple facets o f th e index number problem . Th e resul t was a classi c articl e "Th e Measuremen t of th e Physica l Volume of Production," Quarterly Journal o f Economics, Vol . XLIV , (February , 1930) , pp . 242-262 . Production Trends reflect s his subsequent acute sensitivity to possible distortions resulting from th e use o f indexe s ove r lon g period s o f time . Th e boo k i s sho t throug h wit h implici t o r explici t references to the QJE article , notably Chapters I, II, and VI. For example, he observe s (p. 256) : " . . . an y so-calle d inde x serie s o f th e physica l volum e of productio n in a changin g economic system i s inherentl y ambiguous. . . ; and tha t ambiguit y i s ap t t o increas e wit h th e lengt h of th e period covered by the index." He the n notes the proposition is given fuller discussio n in the 193 0 article. 56. Production Trends, pp. 172-173 . Burns's analysis of sectoral retardation, which he takes to be generally related to an economy's dynamism , is elaborated in Chapter IV, pp. 96-173 . 57. Ibid., pp . xx , 180-181 . 58. Ibid., pp . 242-243 . 59. Ibid., pp . 244-245 . 60. Ibid., pp . 248-251 . Burn s includes in his exposition the following historica l passage: . . . [T]h e decad e rates furnis h a n instructive tentativ e approach t o the problem . The firs t pea k i n the standar d trend-cycl e an d i n the cycle of divergence i n production trend s comes i n the decad e 1875-85 . I n Apri l 1882 , a severe busines s depression se t in, whic h laste d through Ma y 1885 . . . . The statistica l record in the present cas e i s therefore roughl y consisten t with th e hypothesi s tha t the severit y o f business depression s i s connected wit h the magnitud e of the precedin g secula r advanc e i n genera l productio n an d th e divergenc e i n th e rate s o f secula r advance o f individua l industries. The secon d pea k i n the standar d trend-cycl e o f productio n an d i n th e cycl e o f divergenc e i n production trend s comes in the decade 1895-1905. This decade experienced extraordinaril y rapi d and almost uninterrupted growth. . . . The setbacks i n 190 0 an d 1903-04 are almost impercepti ble i n annua l productio n data, an d ar e of a quite different orde r of magnitude fro m th e decline during th e depressio n o f 1907-08 . Thoug h thi s depression wa s of rather brief duration , running over som e thirtee n month s from June 190 7 throug h Jun e 1908 , i t was of very considerable depth . Again, th e statistica l recor d confirm s th e hypothesi s tha t a sever e depressio n tend s t o follo w a period durin g whic h the secular trend s o f production mov e sharpl y upwar d whil e the divergenc e in th e rate s o f expansio n i s exceptionall y large . . . . The nex t pea k i n th e standar d trend-cycl e come s i n th e decad e 1910-20 . Th e pea k fo r thi s period i s not quite s o significan t as for othe r periods , sinc e a considerable numbe r of individua l industries, especiall y thos e connecte d wit h construction , registere d troughs . A mor e importan t characteristic o f thi s perio d i s th e considerabl e diversit y i n the rate s o f industria l expansion— a natural consequence o f the shifts i n the economy fro m a peace t o a war basis. . . . For the presen t purpose i t suffice s t o stat e tha t th e statistica l evidenc e agai n satisfie s ou r hypothesis ; fo r thi s decade terminate d wit h a crisi s o f extraordinar y severity , th e downtur n lastin g fro m Februar y 1920 t o Septembe r 1921 . The following an d final peak in the standard trend-cycle an d in the cycle of the dispersion i n the rates o f secula r expansio n come s i n 1920-29 . . . . Thoug h w e canno t b e certai n tha t a pea k actually occur s in 1920-29 , the statistic s of production sinc e 192 5 sugges t strongl y that the leve l of th e standar d trend-cycl e fo r the centra l decad e yea r 193 0 wil l compare unfavorabl y wit h that for th e centra l decad e yea r 1925 . . . .

61. Te n Great Economists, p . 24 8 and n. 9 . 62. Production Trends, p . 244 . 63. J . M . Clark' s study was , in fact publishe d by the NBER i n cooperation with the Committee on Recent Economic Changes. It includes an Introduction by the Committee describing its origins in the mids t o f th e initia l post-Worl d Wa r I depressio n o f 1921 ; it s subsequen t evolution including systematic collaboration on " a comprehensiv e fact-and-figure pictur e of the results of the working

Notes t o Pages 292-296 64

1

of economi c force s durin g a majo r busines s cycle. . ." ; it s concentratio n afte r 192 9 o n intense analyses of the pathology of the great depression and, to a degree, a search for remedies. Clark , who participated i n the sessions of the Committee and the presentation of the data by experts, wa s asked to vie w "th e whol e pictur e objectivel y . . . mak e a n appraisa l an d dra w certai n conclusions. " 64. J. M . Clark, Strategic Factors, pp . 5-7. Clark' s effort t o balance theory and induction yields a nic e definitio n o f th e middl e groun d Malthus an d Ricard o sough t vainl y t o establis h i n thei r exchanges o n method (p . 6) : Theoretical studie s giv e u s cause s tha t ar e to o fe w an d to o simple , suc h a s over-production , under-consumption, over-saving , o r failure to distribute t o laborers their whole product o r enoug h of the whol e produc t o f industr y to enable them t o buy the things they have produced . Inductiv e studies, on the other hand, revea l s o many factor s at work, s o completely interrelated , that we are likely t o come to th e conclusio n tha t everythin g i s both caus e an d effect, an d everything i s th e result o f nearly everything else , or that all features of modern industrialism ar e jointly responsibl e for th e busines s cycle. Th e attemp t i n th e presen t stud y i s to stee r a course betwee n thes e tw o extremes, includin g anythin g whic h a well-rounded surve y o f the facts can suggest, bu t selecting those factor s whic h see m t o have th e greates t strategi c importance , i f any can b e picked out. A factor ma y be said to have strategi c importanc e i f it has real power t o control othe r factors, an d to determine th e genera l characte r o f th e result ; an d i t ha s a peculia r strategi c importanc e if , i n addition, we have power to control it; if it is not, lik e the weather, beyond the reach of anything we ca n no w do .

65. Ibid., extracte d fro m pp . 127-131 . Th e phras e "movin g equilibrium " i s fro m Ally n A. Young's "Increasin g Return s and Economi c Progress," Economic Journal, Vol . XXXVIII, No. 152 (December 1928) , p . 535 . 66. Strategic Factors, pp . 131-134 . 67. Ibid., pp . 134-136 . 68. Ibid., pp . 136-137 . 69. Ibid., pp . 138-139 . 70. Ibid., pp . 139-142 . 71. Ibid., pp . 143-144 . 72. Ibid., pp . 144-14 7 73. Ibid., pp . 151-154 . Clar k doe s no t make explici t reference to Burns' s roughly concurrent study. 74. Ibid., p. 155 . I n a final, catchal l section (pp. 155-158) , Clark cites other potential sources of imbalance; e.g., sluggis h adaptation of manpower in agriculture to productivity increases, and tarif f and othe r distortion s o f foreig n trade an d payments. 75. Clark' s initia l exposition of the accelerator i s to be found i n his "Busines s Acceleratio n and the La w o f Demand, " Journal o f Political Economy, Vol . XXV , (Marc h 1917) , pp . 217-235 . 76. Solomo n Fabricant , Th e Output o f Manufacturing Industries, 1899-1937 (Ne w York : NBER, 1940) . 11. Ibid., p . 3 . 78. Solomo n Fabricant , Manufacturing Output, 1929-1937, (Ne w York : NBER , Occasiona l Paper No . 1 : December 1940) . 79. Ibid., p . 6 . 80. Ibid., pp . 9-10 . 81. Ibid., p . 12 . 82. See , fo r example, Manufacturing Output, 1899-1937, pp . 43-46 . 83. Oxford : The Clarendo n Press, 1953 . A second edition was published by the Harvester Pres s (Hassocks nr . Brighton , Sussex) in 1975 . I n additio n to Gayer, authors were W . W . Rosto w and Anna Jacobso n Schwartz , wit h th e assistanc e o f Isaia h Frank . Th e stud y wa s finance d b y th e Columbia University Council for Research in Social Sciences but conducted with the cooperation of Wesley C . Mitchell , Arthur F. Burns , and th e NBE R staff . 84. Ibid., 2 d ed. , p . v .

642 Notes

t o Pages 297-300

85. Alvi n H. Hansen , Cycles o f Prosperity an d Depression i n th e United States, Great Britain and Germany. A Study o f Monthly Data, 1902-1908 (Madison : Universit y o f Wisconsi n Press , 1921). I n hi s late r Business-Cycle Theory, (Not e 86 , following ) Hansen observe s tha t hi s earlie r study wa s mor e "dogmatic " tha n h e ha d becom e b y 1927 . Hi s earl y wor k wa s unabashedl y monetarist: " . . . Th e cycle of prosperity is at bottom a question of money, credit , an d prices. . ., " p. 110 . 86. Alvi n H . Hansen , Business-Cycle Theory, It s Development an d Present Status, (Boston : Ginn, 1927 ) p . 10 . 87. Ibid., pp . 187-206 . 88. Ibid., se e especially pp . 191-196 . 89. Ibid., p . 193 . 90. P . A . Samuelson , "Interaction s betwee n the Multiplier Analysis and the Principle of Acceleration", Review o f Economic Statistics (Ma y 1939) , p . 75 . 91. Fo r a usefu l ters e expositio n o f Samuelson' s an d subsequent multiplier-accelerator model s see, A . W . Mullineux , The Business Cycle after Keynes; (Totowa , Ne w Jersey: Barnes and Noble, 1984). 92. Ibid., p . 78 , includin g Note 1 . 93. P . A . Samuelson , "Foreword, " i n Robert T. Masso n and P. Davi d Quail (eds.) , Essays o n Industrial Organization i n Honor o f Jo e S . Bain (Cambridge , Mass. : Ballinger , 1976) , p . xviii . 94. Margare t Halsey , With Malice Toward Some, (Ne w York : Simon an d Schuster, 1938) , pp . 99-100. 95. Thi s definitio n appears i n the first issu e of Econometrica, Vol . I (Januar y 1933) , p . 2 . Th e large hope s an d enthusiasm that went with the emergence o f econometrics a s an explicitly defined field (an d internationa l fellowship ) i s suggeste d b y th e name s o f som e o f those wh o contribute d papers t o th e firs t issu e o f Econometrica: Joha n Akerman , A . L . Bowley , Alfre d Cowles , III , Mordecai Ezekiel , Irvin g Fisher , Ragna r Frisc h (i n additio n t o hi s openin g "Editorial") , Alvi n Hansen, Harol d Hotelling , Josep h Schumpeter , Ja n Tinbergen . I n addition , a not e o f Alfre d Marshall's wa s published: "Th e Mathematician , a s Seen b y Himself. " 96. Geneva : Leagu e o f Nations , 1939 . Vol . I , A Method an d It s Application t o Investment Activity; Vol . II, Business Cycles i n the United States, 1919-1932. Both works are reproduced i n a single volum e (Ne w York : Agathon , 1968) , wit h a specia l introductio n by Tinbergen . 97. Thi s review , Tinbergen' s reply , an d Keynes' s commen t ar e accessibl y reprinte d i n A. H . Hansen an d R. V . Clemence , Readings, pp . 330-356 . 98. Th e chie f result s ar e summarize d i n Statistical Testing, Vol . I , pp . 49 , 98 , 130 . 99. Ibid., pp . 131-132 . Th e notabl y rigorou s an d self-discipline d Tinberge n coul d no t resist, however, drawin g conclusion s abou t th e Britis h econom y in , fo r example , 188 3 an d 188 7 o n th e basis o f exceedingl y frai l correlations , error s h e coul d hav e avoide d b y "wallowing " a bit, lik e D. H . Robertso n in , fo r example, Th e Economist Annual Reviews fo r the relevant years . 100. Ibid., pp . 184-193 . 101. Ja n Tinbergen , "Th e Us e o f Models : Experience s an d Prospects, " American Economic Review (Specia l Ed. , Decembe r 1981) , p . 1 7 (Nobel Lecture, Decembe r 1969) . Pau l Samuelson' s reflections o n th e yield fro m econometrics i s more bluntl y disappointed ("My Lif e Philosophy, " The American Economist, Vol . XXVI , No. 2 [Fal l 1983] , p . 9.) : Let m e make a confession. Bac k whe n I was 2 0 I could perceiv e th e grea t progress tha t was being made in econometric methods. Eve n without foreseeing the onset of the computer age , wit h its cheapening o f calculations. I expected tha t the new econometrics woul d enable u s to narrow down th e uncertaintie s o f ou r economi c theories . W e woul d b e abl e t o tes t an d rejec t fals e theories. W e woul d be abl e to infe r ne w goo d theories. My confession is that this expectation has not worked out. From several thousands of monthly and quarterly time series, which cover the last few decades or even centuries, it has turned out not to be possible to arrive at a close approximation to indisputable truth. I never ignore econometri c studies, but I have learned from sa d experience to take them with large grains of salt. It takes one

Notes t o Pages 300-303 64

3

econometric study to calibrate another: a priori thought can't do the job. But it seems objectively to b e th e cas e tha t ther e doe s no t accumulat e a convergen t bod y o f econometri c findings , convergent o n a testable truth . For a more favorable assessment of the fruits of econometric and other forms of quantitative analysis see Richard Stone , "Politica l Economy , Economics , and Beyond," Economic Journal, Vol . 90 , No. 36 0 (December 1980) , pp . 719-736 . 102. Ibid., Th e point is driven home in Jan Tinbergen and J. J. Polak , The Dynamics of Business Cycles (Chicago : Universit y of Chicag o Press , 1950) , base d o n Tinbergen' s Economische Be wegingsleer (Amsterdam: North Holland Press, 1942) . Here Tinbergen includes a chapter of fiftee n pages o n "Long-Ru n Developments " anothe r o n "Interruption s an d Sudde n Change s i n Structure," a thir d o n "Th e Proces s o f Long-Ru n Development." Bu t h e regard s cycle s a s "super imposed o n th e genera l long-ru n tendencie s i n th e economy " (p . 60) ; and , i n th e hear t o f hi s analysis, he separates cycle s fro m tren d (p. 159) . Tinberge n reflects at various points an uneasiness at thi s procedure ; an d i n a "Theoretica l Postscript " acknowledge s tha t endogenou s factor s may yield an upturn from depression a s well as growth factors (e.g., " a ne w invention or the opening up of ne w markets, " p . 257) ; bu t th e latte r h e regards a s exogenous. Th e separatio n o f growt h and cyclical analysis remains analytically complete despite the various references to growth in the book.

Chapter 12 1. "Officia l Papers , 'Retur n of Estimated Value of Foreign Trade of United Kingdom at Prices of 1900,' " Th e Economic Journal, Vol . XXII , No. 88 (Dec. 1912) , pp. 628-632. 2. D. H. Robertson, A Study o f Industrial Fluctuations (London: P. S. King 191 5 reprinted by the London Schoo l o f Economics , Reprint s o f Scarc e Work s o n Politica l Economy , No . 8 , 1948 ) p. 16 9 n. 1 . 3. J. M . Keynes , Th e Economic Consequences of the Peace (New York: Harcourt Brace, 1920) , pp. 9-2 6 an d 254-255. Th e followin g passag e (pp . 9-10) , no t onl y capture s th e lin k betwee n Keynes's 191 2 and 191 9 positions on the terms of trade but also the vivid rhetoric of his evocation of economi c history : After 187 0 ther e wa s developed o n a large scale an unprecedented situation , and the economi c condition o f Europ e becam e durin g the nex t fift y year s unstabl e an d peculiar . Th e pressur e o f population o n food , whic h ha d alread y bee n balance d b y th e accessibilit y o f supplie s fro m America, becam e fo r the first tim e in recorded histor y definitely reversed. A s number increased, food wa s actuall y easie r t o secure . Large r proportiona l return s fro m a n increasin g scal e o f production becam e tru e o f agricultur e a s wel l a s industry . Wit h th e growt h o f th e Europea n population ther e were more emigrants on the one hand to till the soil of the new countries, and , on the other, more workme n were availabl e in Europe t o prepare th e industrial products and capital goods whic h wer e t o maintai n th e emigran t populations i n thei r ne w homes , an d t o buil d th e railways an d ships which were to make accessible t o Europe foo d and raw products from distant sources. U p to abou t 190 0 a unit of labo r applie d t o industry yielded year by year a purchasing power ove r a n increasin g quantit y of food . I t i s possibl e tha t abou t the yea r 190 0 thi s proces s began t o be reversed, and a diminishing yield of Nature to man's effort was beginning to reassert itself. Bu t the tendency of cereals t o rise in real cost was balanced by other improvements; and— one o f man y novelties—th e resource s o f tropica l Afric a then fo r the firs t tim e came int o large employ, an d a great traffi c i n oil-seeds bega n to bring to the table of Europe in a new and cheaper form on e o f th e essentia l foodstuff s o f mankind . I n thi s economic Eldorado , i n thi s economi c Utopia, a s th e earlie r economist s woul d hav e deeme d it , mos t of u s were brough t up. That happy age los t sight of a view of th e world which fille d wit h deep-seated melancholy the founders o f our Politica l Economy . Befor e th e eighteenth century mankind entertaine d no false hopes. T o lay the illusions which grew popular at that age's latter end, Malthus disclosed a Devil. For hal f a century all seriou s economical writing s held that Devil in clear prospect. For the nex t half centur y h e wa s chaine d up an d ou t o f sight . No w perhap s we hav e loosed hi m again.

644 Notes

t o Pages 303-308

4. Th e relevant passage s are : R . F . Harrod , John Maynard Keynes (Ne w York: Harcourt Brace , 1951) pp . 280-281 ; Robert Skidelsky , John Maynard Keynes (London : Macmillan , 1983 ) Vol . I , pp. 384-388 . 5. Economic Consequences p . 204 . I woul d not e her e tha t Keynes' s vie w o f th e theor y o f probability woul d cause hi m t o accep t a n erro r o f th e kin d h e mad e withou t excessive brooding . Skidelsky (John Maynard Keynes pp. 390-391 ) comments in this vein on Keynes's response i n the Economic Consequences o f th e Peace t o French critic s o f his estimates o f the Germa n capacit y t o pay reparations : The fac t tha t al l things ar e possible i s n o excuse fo r talkin g foolishly. . . . The fac t tha t w e have n o adequat e knowledg e o f Germany' s capacit y t o pa y ove r a lon g perio d o f year s i s n o justification . . . for th e statemen t tha t sh e can pa y ten thousan d million pounds.

For an effort t o evoke the complex an d rather unusual strands that came together t o form Keynes' s character i n hi s third decade, se e David Felix, "Th e Earl y Keynes : Logician an d Applied Econo mist," Challenge (September-October, 1986) , pp . 51-54. Felix perceives three strands in Keynes: "The Perverse , Th e Practical, Th e Transcendent" (ibid., p . 54) . Felix arrives at this summation by identifying th e followin g specifi c influences : G . E . Moore' s neoplatonis t philosoph y leadin g Keynes to revolt agains t hi s father's commitment to "objective " logi c an d to build his Treatise o n Probability o n Moore' s vie w o f th e primac y o f intuitio n an d subjectivity ; th e disciplin e o f hi s experience in the India Office, and the writing of Indian Currency and Finance; and a willingness to propose at certain critica l moments visionary solutions transcending the disciplined civi l servant h e also could be. Felix's triad evokes something of Auden's young boy, peasant grandmother, and high church official , i n describing T . S . Elio t and my tripartite characterization of J. S . Mil l (precedin g p. 9 7 and p. 591 , not e 28) . 6. Fo r a summar y o f th e Keynes-Beveridg e debat e se e m y Process o f Economic Growth (Oxford, a t the Clarendo n Press , 1953) , pp . 186-188 . 7. " A Repl y to Sir William Beveridge," Economic Journal, Vol . XXXIII, No . 13 2 (December 1923), pp . 476-477 . 8. Ibid., p . 482 . 9. D. H . Robertson , "Not e on the Real Ratio of International Interchange, " Economic Journal, Vol. XXXIV , No . 13 4 (Jun e 1924) , pp . 286-291 , reprinte d i n A . C . Pigo u an d Denni s H . Robertson, Economic Essays an d Addresses (London : P . S . King , 1931) . I t i s i n thi s piec e tha t Robertson teased Keynes for his swift adjustmen t to the favorable shift i n the terms of trade with the phrase: " a rave n no t thus easily t o be balked of his croak." (Pigo u an d Robertson, p . 163) . 10. Pigo u an d Robertson, Economic Essays, pp . 168-169 . 11. Ibid., p . 136 . 12. Official Papers, pp . 380-385 . 13. N. D . Kondratieff , "Th e Lon g Wave s i n Economi c Life, " Review o f Economic Statistics, 17, No. 6 (November 1935) , pp . 105-114. See also George Garvy , " Kondratieff's Theor y of Long Cycles," Review o f Economic Statistics, 25 , No . 4 (Novembe r 1943) , pp . 203-220 ; an d th e discussion o f Kondratieff's views i n Simon Kuznets , Secular Movements i n Production an d Prices (Boston: Houghton Mifflin , 1930) , pp. 263-265. Kondratief f published his views in three version s between 192 2 and 1928 . Hi s concept of capitalist economies oscillating around a long-run dynamicequilibrium positio n cam e t o be regarded, i n Stalin's time, a s anti-Marxist heresy. In 193 0 h e was sent t o a Siberia n priso n cam p where , accordin g t o Solzhenitsyn' s Gulag Archipelago, h e died . Kondratieff i s reported t o be rehabilitated i n the Sovie t Union in 198 7 (Science [ 9 October, 1987] , p. 149) . 14. Kondratieff , "Th e Lon g Wave s in Economic Life," pp . 112-115 . 15. Lewis's views are set out fully i n his Growth and Fluctuations, 1870-1913 (London: George Allen an d Unwin, 1978) . Lewis' s curren t views are foreshadowed in his Economic Survey 19191939, (London : Allen and Unwin , 1949) . For a recent evocation of relative price cycles , see John Levi, "Omen s fro m th e Term s o f Trade—Expectation s abou t th e Nex t Fe w Years, " I n Inter-

Notes t o Pages 308-309 64

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Economics, No . 3 (May-Jun e 1983) , pp . 120-124 . M y view s are t o b e foun d i n Essays o n th e British Economy o f th e Nineteenth Century (Oxford : a t th e Clarendo n Press , 1949) , especiall y Chapters 1 an d I I wher e th e analyse s o f bot h Kondratief f an d Schumpete r ar e discussed . M y subsequent wor k on long cycles ca n be found i n A. D . Gayer , W . W . Rostow , and Anna Jacobson Schwartz, Growth an d Fluctuations o f th e British Economy, 1790-1850 (Oxford: at the Clarendo n Press, 1953) , especiall y Vol . II, Chapter s IV and V; British Trade Fluctuations, 1868-1896 (New York: Arn o Press , 198 1 [actuall y writte n i n 1939-1940]) ; Th e Process o f Economic Growth (Oxford: a t the Clarendon Press , 195 1 an d 1960) , especiall y Part Thre e an d Chapters 6 , 8 , an d 9; The World Economy: History an d Prospect (Austin : University of Texas Press , 1978) , especiall y Part Three; an d Wh y th e Poor Ge t Richer an d th e Rich Slow Down (Austin : University of Texa s Press, 1980) , especially Chapters 1 and 2. Chapte r 1 discusses views of the Kondratieff cycl e othe r than my own. It should be noted that the opening up of new areas with railroads could take place in a period o f fallin g price s fo r mixe d political-economi c reasons ; e.g. , th e Argentin e Pampa s an d Western Canada . Thi s poin t i s discusse d an d illustrate d in "Th e Term s o f Trad e an d Develop ment," m y contributio n t o Perspectives o n Economic Development, essay s i n the honou r of W . Arthur Lewis , edite d b y T . E . Barker , A . S . Downes , an d J . A . Sacke y (Washington , D.C. : University Pres s o f America, 1982) , pp . 256-258 . 16. Coli n Clark , National Income and Outlay (London : Macmillan , 1937 ) Chapte r XIII , pp. 262-273. Th e foundatio n fo r Chapte r XI I i s Chapte r X (pp . 210-235) , whic h i s a pioneerin g reconstruction o f Britis h national incom e statistic s fro m Gregor y Kin g to the 1930s . 17. Ibid., pp . 270-271 . 18. D. H . Robertson' s testimon y (April, 1930 ) befor e the Macmillan Committee on Finance an d Industry (reporte d Jun e 1931 ) i s t o b e foun d i n Pigo u an d Robertson , Economic Essays, pp . 116-138. The Macmillan Committee Report has been reprinted in British Parliamentary Reports o n International Finance, (Ne w York : Arn o Press , 1978) . Clar k almos t certainly foun d Robertson' s testimony suggestive by combining two passages. First , the initial section entitled "Th e Gluttabilit y of Wants," then the section o n the appropriate respons e to a radically favorable shift i n the terms of trade. The firs t passag e argue s tha t it was o f th e natur e of a depression tha t production had exceede d requirements fo r both consumers and capital ("instrumental" ) goods, a t a particular period of time and, therefore , th e vie w tha t th e bankin g system coul d b e conten t wit h supplyin g the legitimat e "needs of trade" was inadequate. I n an economy with an underlying high growth rate, the demands for capita l an d consumers ' good s woul d revive th e economy fairl y soon . Bu t h e adde d (ibid., p . 124): "A t th e present tim e the nee d fo r suc h a policy seem s to me more urgen t than in the typica l slump o f pre-wa r days , . . . with a retarde d rat e o f growt h o f populatio n an d o f world-trade , instrument-gluts are liable to last longer than of old: the tail of one depression, s o to speak, doe s not so easily get bitten off by the head of the next boom.'' Later in his testimony Robertson evoked the swings i n th e term s o f trad e wit h their powerfu l effect s o n British export markets . 19. I n fact, th e year s o n either sid e o f the internationa l crisis year , 1873 , mus t be dealt with in different terms . Afte r 187 3 prices fell , rea l wage s rose , bu t unemploymen t remained lo w du e to a postcrisis buildin g boo m dow n t o 1876 , respondin g t o lowere d interes t rate s a s th e deman d fo r capital export s fel l awa y i n the cit y of Londo n afte r th e cyclical peak . 20. Folk e Hilgerdt , Industrialization an d Foreign Trade, (Ne w York : Leagu e o f Nations , dis tributed b y Columbia Universit y Press, 1945) , pp . 14-20 . 21. Ibid., pp . 1 6 and 18 . 22. Fo r explanatio n see , W . W . Rostow , World Economy, pp . 98-99 . A numbe r of factor s account for th e significan t structura l chang e after 1951 : the diminishing role of the less-develope d nations in the grain trade, whic h cam e to be dominate d by the Unite d States, Canada , an d Australia ; th e extraordinar y rise of trad e in manufactures amon g the indus trialized nation s centered o n automobiles , television sets, an d other paraphernalia of high massconsumption; economie s i n th e us e o f ra w material s in manufacturin g plu s a shif t t o industrial

646 Notes

t o Pages 309-316

sectors using a lower proportion o f raw materials; the increasing role of petroleum in world trade , responding t o demand an d supply conditions somewha t different fro m th e classic circumstance s governing trad e in primary products betwee n industrialized and nonindustrial countries. Between 1938 an d 197 1 trad e i n fuel ros e in volume fro m 7. 2 percen t o f total world trad e to 10. 3 percen t (from 8. 1 percen t t o 9. 7 percen t i n value) . In th e sam e period , trad e i n foo d an d raw material s declined fro m 49. 1 percen t t o 23. 4 percen t i n volum e (fro m 46. 4 percen t t o 22. 9 percen t i n value). Between 197 2 and , say , 1980 , th e patter n o f bot h relativ e price s an d worl d trad e altere d dramatically. The term s of trade shifted sharpl y in favor of oil exporters an d against importers o f both oil and (fo r a time ) food . The trad e amon g industrialize d countries , whos e expansio n dominated the post-1945 world , was constricted b y two recessions whic h also affected the volume and prices of trade in industrial raw materials. The proportion o f world trade conducted by the oil exporters rose to an extraordinary degree. The course of events in 1972-1980, while in many ways unique, bear s a family relatio n t o four previou s period s ove r th e past tw o centuries when majo r changes i n relative prices occurred. I n all these cases, including the most recent experience, thes e shifts in relative price s flowed fro m gros s distortions in the balance between demand s of industry and consumers an d the suppl y of raw material s an d food necessar y t o match them.

23. See , especially , m y Wh y the Poor Ge t Richer, Chapte r 2 .

Chapter 13 1. See for example , Geral d M. Meie r and Dudley Seers (eds.) , Pioneers i n Development, (Ne w York: Oxfor d Universit y Pres s fo r th e Worl d Bank , 1984) , pp . 3-6 , (Geral d M . Meier , "Introduction"). 2. Ibid., p . 175 . In fact, import substitution development doctrines can be traced back to the midnineteenth centur y a t leas t i n Latin America . See , fo r example , Francisc o Calderon , "E l Pensa miento Economico d e Luca s Aleman, " Revista Historia Mexicana, Colegi o d e Mexico , Vol . XXXIV (July 1984) , pp. 435-459. Lucas Aleman wrote hopefully abou t the first industrial fruits of protectionism i n Mexico i n 1845 . Hi s view s sank from vie w i n the subsequen t wave of economi c liberalism to be revived in the depression of the 1930 s and post-World War II development policy. For a survey of Mexican development thought, see Jesus Silva Herzog, El Pensamiento Economico, Social y Politico d e Mexico, 1810-1964 (Mexico : Fond o d e Cultur a Economica, 1974) . 3. J. M. Keyne s reports as follows in the concluding section of his essay on Marshall (Memorial of Alfred Marshall), p . 65 : "Although ol d ag e presses o n me, " h e [Marshall ] wrot e i n the Prefac e t o Money, Credit an d Commerce, " I a m no t withou t hopes tha t som e o f th e notion s whic h I hav e forme d a s t o th e possibilities o f socia l advanc e ma y ye t b e published. " U p t o his las t illness, i n spit e of los s o f memory an d great feeblenes s o f body, h e struggled to piece together on e more volume. It was to have bee n calle d "Progress : It s Economic Conditions. " Bu t the task wa s too great .

4. Pioneers i n Development, pp . 62-65 . 5. The Robinsons went to India on their honeymoon in 192 6 where Austin was tutor to the Crown Prince o f Gwalior . I ca n attest tha t they jointly recalled tha t interva l wit h unabate d enthusiasm a s late a s 1949 . 6. C . Clark , Th e Conditions for Economic Progress (London : Macmillan , 1940) , pp . 1-1 6 ("Summary an d Conclusions"); pp . 448-469, Chapter XIV, "Th e Term s of Exchange"), an d pp. 470-484 (Chapte r XV , "Th e Relatio n Between Investmen t and Income"). 7. Pioneers i n Development, p . 70 . 8. Ver a Anstey , Th e Economic Development o f India (3 d ed., 1936) , p. 3 . 9. Ibid., pp . 47 0 and 473-478. 10. R . H . Tawney , Land an d Labour i n China (New York: Harcour t Brace , 1932) , p. 79 . 11. Ibid., p . 182 .

Notes t o Pages 316-324 64

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12. Ibid., pp . 162-16 3 and 167 . 13. Ibid., p . 169 . 14. Ibid., pp . 193-195 . 15. L . C . A . Knowles , Th e Economic Development o f th e British Overseas Empire (London : George Routledge , 1924) . 16. Ibid., p . viii . 17. Ibid., pp . 510-511 . 18. Ibid. 19. Ibid., p . 509 . 20. Th e 193 1 edition, entitled Stadien und Typen derlndustrialisierung, wa s published in Kiel by the Institut fur Weltwirtschaft of the University of Kiel. The 195 8 edition, The Growth of Industrial Societies, translate d fro m th e German by W. O . Henderson an d W. H . Chaloner , was published in Manchester b y the Mancheste r Universit y Press. 21. Th e Growth of Industrial Economies, pp . xi-xii. There is evidently a family relation between Hoffmann's initia l focus an d Folk e Hilgerdt' s i n Industrialization an d Foreign Trade. 22. Ibid., pp . 1-2 . 23. Ibid., p . 2 . 24. Ibid., pp . 2- 3 an d Chapter I I ("The Proces s o f Industrialization"), pp . 24-41. 25. Ibid., se e especially p. 3 and Chapter III ("The Historica l Phases o f Industrialization"), pp . 42-66. 26. Industrialization an d Foreign Trade, Chapter s II I and IV, pp . 30-75 . Se e also Chapter VI I ("Summary o f Findings), pp . 116-121 . 27. Ibid., pp . 120-121 . 28. For discussion of this linkage, see, for example, W. W. Rostow, Getting from Here to There (New York : McGra w Hill , 1978) , pp . 13-16 . 29. Willia m Stanle y Jevons , Th e Coal Question, 2 d ed . (London : Macmillan , 1866) , p . vii . 30. Hansen' s pape r wa s published in The American Economic Review, Vol . 29 , (Marc h 1939) , No. 1 , Part I, pp . 1-15 . I n 193 8 Hansen also published a more spacious version of his thesis inFull Recovery or Stagnation. 31. Business Cycles, Vol . II , pp . 1011-1050 . 32. Hansen , "Economic Progress", p . 1 . 33. Ibid. 34. Ibid., p . 2 . 35. Ibid., p . 3 . 36. Ibid. 37. Ibid., p . 4 . 38. Ibid., pp . 8-9 . 39. Ibid. 40. Ibid., pp . 9-11 . 41. Ibid., pp . 11-12 . 42. Ibid., pp . 13-14 . 43. Ibid., pp . 1 2 and 15 . 44. Capitalism, Socialism an d Democracy, (Ne w York: Harper an d Row, 1942) . 45. Business Cycles, Vol . II , p . 1050 . 46. Ibid., pp . 1020-1026 . 47. Ibid., p . 1026 . 48. Ibid., p . 1032 . 49. Ibid., pp . 1034-1035 . 50. Ibid., pp . 1036-1038 . 51. Ibid., p . 1045 . 52. Ibid., p . 1050 . 53. Ibid., p . 1050 , n . 1 .

648 Notes

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54. Chapte r 1 i n A . C . Pigou , Essays i n Economics (London : Macmillan , 1952) , pp . 1-9 . (Reprinted fro m Economic Journal, Vol . XLIX , No. 19 4 [June 1939]). 55. Ibid., pp . 3 and 4. Chapter 1 4 1. P. A . Samuelson , Foundations o f Economic Analysis (Cambridge : Harvard University Press, 1947). 2. Ibid., pp . 6 and 311-312. 3. Ibid., p . 141 . Samuelson' s Principles is , i n effect , a n exercis e i n precisel y th e metho d h e attributes t o Marshal l an d Hicks . Fo r a later , somewha t mor e nuance d exposition o f th e rol e o f mathematics i n th e socia l sciences , se e Samuelson' s "Economi c Theor y an d Mathematics—An Appraisal", American Economic Review, Vol . 62, No . 2 , [Ma y 195 2 (Papers an d Proceedings)], pp. 56-73 . 4. Foundations, p . 7 . 5. Ibid., p . 3 . 6. Samuelson defines the correspondence principle as demonstration that the comparative statical behavior of a system is seen to be closely related to its dynamical stability properties (pp. 351-352): The centra l notio n o f comparative dynamics i s simple enough . W e change somethin g (jus t wha t need no t concer n u s a t the moment) , an d w e investigat e th e effec t o f thi s chang e o n th e whol e motion o r behavio r ove r tim e o f th e economi c syste m unde r investigation . I t wil l b e see n tha t comparative static s involves the special case where a "permanent " change is made, and only the effects upo n fina l level s o f stationar y equilibriu m ar e i n question .

Evidently thi s approach approximate s Ricardo's positio n in his debate wit h Malthus. 7. Ibid., p . 355 . Chapter 1 5 1. E. D . Domar , "Capita l Expansion , Rate of Growth, and Employment," Econometrica, Vol . 14 (1946), pp . 137-147 ; an d "Expansio n an d Employment," American Economic Review, Vol . 37, No . 1 (March 1947) , pp . 34-55 . 2. Jame s Tobin, " A Dynami c Aggregative Model," Journal o f Political Economy, Vol . LXIII (April 1955) , pp . 103-115 ; R. M. Solow , " A Contributio n to the Theory of Economic Growth, " Quarterly Journal of Economics, Vol . 70 (Februar y 1956) , pp. 65-94 ; and T. W. Swan , "Eco nomic Growth and Capital Accumulation," Economic Record, Vol . 32 (November 1956), pp . 334 361. A critique of the Harrod model is included in my Process o f Economic Growth (Oxford: at the Clarendon Press , 1953) , pp . 86-96 . Se e als o R. Sato , "Th e Harrod-Doma r Mode l vs . th e Neoclassical Model, " Economic Journal, Vol . LXX1V , No . 29 4 (Jun e 1964) , pp . 380-387 . Sat o argues that the adjustment process assumed in the neoclassical model may be, i n fact, s o slow as to produce Harrod-Domar-styl e instability . 3. Figure 15. 1 was constructed from the 278-item referenc e bibliography in Hywel G. Jones , An Introduction t o Modern Theories of Economic Growth (New York: McGraw-Hill, 1975), pp . 238 247.1 arbitraril y eliminated references not directly related t o the modeling work of recent decades ; e.g., studie s by J. B. and J. M. Clark, Milton Friedman, J. M. Keynes, P. H. Wicksteed, etc . I then arrayed th e remainin g 182 items by yea r of publication . 4. Th e firs t o f suc h survey s come s i n th e mids t of th e mos t intense an d excitin g stage o f th e growth-modeling effor t an d i s somethin g of a classic: F. H . Hah n an d R . C . O . Matthews , "Th e Theory o f Economi c Growth: A Survey, " Economic Journal, Vol . LXX1V, No . 29 6 (Decembe r 1964), pp . 779-902 . Amon g th e later surveys, syntheses, or compendia are E. Burmeiste r and A.

Notes t o Pages 332-339 64

9

R. Dobell , Mathematical Theories o f Economic Growth (Ne w York: Collier-Macmillan , 1970) ; F . H. Hahn , Readings i n th e Theory o f Economic Growth (London : Macmillan , 1971) ; A . K . Se n (ed.), Growth Economics (Harmondsworth, Eng.: Penguin, 1970); K. Shell (ed.), Essays on the Theory o f Optimal Economic Growth (Cambridge : M.I.T . Press , 1967) ; R . M . Solow , Growth Theory: An Exposition (Oxford: Oxford University Press, 1970, 1988 enlarged); J. E. Stiglitz and H. Uzaw a (eds.), Readings i n the Modern Theory o f Economic Growth (Cambridge: M.I.T. Press , 1969); an d H. Y . Wan, Jr., Economic Growth (Ne w York: Harcourt Brace and Jovanovich, 1971). H. G . Jones , Introduction t o Modern Theories, als o belongs , o f course , o n this list . 5. R . F . Harrod , Towards a Dynamic Economics (London : Macmillan , 1948) p. 33 . 6. Domar's 1946 essay is accessibly reprinted in Amartya Sen's Growth Economics, pp. 65-77. Domar's discussio n o f "Guaranteed Growt h of Income" i s on pp. 74-77 . 7. R . F . Harrod , Towards a Dynamic Economics, pp . 81-82. 8. R . M . Solow , " A Mode l o f Growth. " Thi s piece , originall y publishe d i n th e Quarterly Journal o f Economics (1956) , i s accessibly availabl e i n A. Sen , Growth Economics, pp . 161-162 . 9. Ibid., p . 169. 10. Fo r a n exposition o f various version s o f this type of growth model see , for example, F . H . Hahn an d R . C . O . Matthews , "Theor y o f Economi c Growth, " pp . 793-801 ; A. Sen , Growth Economics, pp . 16-1 8 and 79—157; H. Y . Wan, Jr., Economic Growth, pp . 63-93; and H. Jones, Introduction t o Modern Theories, pp . 143-152 . 11. Thi s passag e i s fro m N . Kaldor' s "Alternativ e Theorie s o f Distribution, " Review o f Economic Studies, Vol. 23 (1955-1956), pp. 94-100, accessibly reprinted in A. Sen, Growth Economics. Th e quotatio n is o n p. 8 4 (Sen). Th e roots o f the Cambridg e (England ) point o f vie w can b e discerned in Joan Robinson's critique, "Mr. Harrod's Dynamics," Economic Journal, Vol. LIX, No. 23 3 (March 1949) , pp . 68-85 . 12. Growth Theory, pp. 8-12. For Solow's later reflections on his 1956 model and his Radcliffe Lectures, se e his 198 7 Nobel lecture reprinted in the 198 8 edition of Growth Theory: An Exposition. 13. Ibid., p . 12 . 14. Nicholas Kaldor, "Th e Relation of Economic Growth and Cyclical Fluctuations," Economic Journal, Vol . LXIV, No . 25 3 (Marc h 1954) , pp . 53-71 , originall y delivere d a s a lectur e t o th e Institut d e Scienc e Economique Applique e i n Pari s o n May 23 , 1953. 15. Ibid., pp . 53-54 . 16. Ibid., pp . 61-63 . 17. Ibid., p . 65 . 18. Ibid., pp . 67 , 68-71 . 19. Ibid., p . 66 . 20. See , for example , Lei f Johansen , " A Metho d fo r Separatin g th e Effect s o f Capita l Ac cumulation an d Shift s i n Productio n Function s upo n Growth i n Labou r Productivity," Economic Journal, Vol . XXXI, No . 28 4 (December 1961) , pp . 775-782 . Johansen's analysi s employs data from W. E. G. Sailer' s Productivity and Technical Change (Cambridge : at the Universit y Press , 1960). 21. See , for example, m y discussion (and references) i n "Technolog y an d the Price System" in Why th e Poor Ge t Richer an d the Rich Slow Down, (Austin : University of Texas Press , 1980) , pp . 166-168. 22. "Economi c Growt h and Cyclical Fluctuations," p . 67 . 23. Joan Robinson, Essays in the Theory o f Growth (London: Macmillan, 1962) , p . 34-50. In the most elaborat e examinatio n of Robinson' s growt h system I have come acros s (Economic Growth, pp. 63-82) , Henr y Y . Wa n Jr., points ou t that this fundamental , complex, open-ende d approac h reflects virtuall y al l th e dimensions of "th e panoramic vista o f the Robinsonia n World" : One ca n understan d Mrs . Robinson's vie w bette r b y considerin g th e source s o f he r theory . From Mar x sh e obtaine d th e schem a o f "expande d reproduction " whic h ma y b e trace d al l th e way to Quesnay. Mar x has a two-sector (tw o department) mode l complete wit h the resource flow s

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in th e economy. Followin g Marx , Mrs. Robinson' s theor y also takes account of the incentive t o invest. Marx regards the impulse to accumulate as inherent in the capitalist system . Fro m Keynes, Mrs. Robinso n inherite d the "incom e theory" approach , includin g concepts suc h as "effectiv e demand," "inflationar y gap, " "hoarding, " etc.; the "anima l spirit " explanation of investment which regard s th e readiness fo r risk-takin g as more important than profit calculations i n investment decisions; and what later became known as the Kalecki saving function: capitalist s save all and worker s spen d all . To Keynes , thi s latter feature justified capitalis m a s a mean s o f speed y accumulation. Fro m Harro d sh e receive d th e concept s o f balance d growt h an d Harrod-neutra l technical progress . Beside s these , th e long-run/short-ru n dichotomy o f Marshall , th e capita l theory o f Wicksell , an d th e heterogenou s capita l good s mode l o f Sraff a al l contribut e t o th e panoramic vist a o f th e Robinsonia n world.

24. Joa n Robinson, Theory o f Economic Growth, p . 59 . 25. Ibid., p . 98 . 26. R. M . Solow, " A Contributio n to a Theory o f Growth," i n A. Sen , Growth Economics, pp . 188-189. For a more complex argument, with a family relation to Solow's, see Harvey Leibenstein , "Population Growth and the Take-off Hypothesis" and "Technical Progress, th e Production Function, and Development," in W. W . Rostow(ed.) , The Economics of Take-off into Sustained Growth (London: Macmillan, 1963), pp. 170-200 . For discussion of such models, see , notably, F. H. Hahn and R. C . O . Matthews , "Theor y o f Economic Growth," pp . 835-836 . 27. Charle s Kennedy , "Induce d Bia s in Innovation and the Theory o f Distribution," Economic Journal, Vol . 7 4 (Septembe r 1964) , pp . 541-547 ; Pau l A . Samuelson , " A Theor y o f Induce d Innovation alon g Kennedy-Weisacke r Lines, " Review o f Economics an d Statistics, Vol . 4 7 (November 1965) , pp . 343-356; Charles Kennedy, "Samuelson on Induced Innovation," an d Paul A. Samuelson' s "Rejoinder, " Revie w of Economics and Statistics, Vol . 48 (November 1966), pp . 442-448. 28. P . A . Samuelson , " A Theor y o f Induced Innovation, " pp . 353-355 . 29. Se e W. W . Rostow , British Economy o f th e Nineteenth Century (Oxford: Clarendo n Press , 1948), Chapte r 4 , "Investmen t an d Real Wages, 1973-86, " an d the Appendix, "Mr . Kaleck i on the Distributio n of Income, 1880-1913. " 30. See , fo r example, Kar l Shell , "Inventiv e Activity, Industria l Organization, and Economi c Growth," Chapte r 4 i n James A. Mirrlee s an d N . H . Ster n (eds.) , Models o f Economic Growth, Proceedings o f a conference o f th e Internationa l Economic Associatio n (Ne w York: Joh n Wiley , 1973), pp . 77-96. For a later Solow reevaluatio n see his "Secon d Thoughts on Growth Theory," Chapter 1 in Alfred Steinherr an d Daniel Weiserbs (eds. ) Employment an d Growth: Issues for th e 1980s (Dordrecht: Kluwe r Academic Publishers , 1987) , pp . 13-45 . 31. Ibid., p . 97 . 32. See , fo r example , E . Mansfield , "Rate s o f Retur n fro m Industria l Research an d Develop ment," American Economic Review, Vol . 55 , No . 2 (May 1965) , pp . 310-322 . 33. B . R . William s (ed.) , Science an d Technology i n Economic Growth (London : Macmillan , 1973). Thi s volum e i s a repor t o f a conferenc e hel d b y th e Internationa l Economic Association . 34. Ibid., p . xi . 35. Edwi n Burmeister and A. Rodne y Dobell, Mathematical Theories, p . vii . Solo w goe s o n to deny that formal growth models had run their course an d were pretty well "playe d out. " I would judge, wit h hindsight, that, as of 1970 , whe n Burmeister and Dobell's book was published, the field was close r t o that stag e tha n Solow the n thought. 36. J. R. Hicks , A Contribution to the Theory o f the Trade Cycle (Oxford : at the Clarendon Press , 1950); Alvi n Hansen, Business Cycles an d National Income (Ne w York: W . W . Norton , 1951) ; James B . Duesenberry , Business Cycles and Economic Growth (New York: McGraw-Hill, 1958) ; R. C. O. Matthews, The Trade Cycle (Cambridge: at the University Press, 1959). Significantly, all but Hicks' s stud y ar e explicitl y textbooks . Hicks presents hi s contributio n a s a synthesi s built on three "progenitors" : Keynes , J . M . Clark , an d Harrod . But , i t als o bear s a famil y relatio n t o Marx's an d Schumpetcr' s dynamic growth formulations, althoug h Hicks might b e surprise d at the

Notes t o Pages 343-351 65

1

suggestion. I would underline that these studie s were by no means the only efforts o f the period t o grapple with the problem of trends (or growth) and cycles, to cite only three: R. M. Goodwin, "Th e Problem o f Tren d an d Cycles, " Yorkshire Bulletin o f Economic an d Social Research, Vol . 5 (August 1953) , pp . 89-97 : William Fellner, Trends and Cycles in Economic Activity (Ne w York: Henry Holt , 1956) ; Arthur Smithies, "Economi c Fluctuations and Growth," Econometrica, Vol . 25, No . 1 (January 1957) , pp . 1-52 . 37. J . R . Hicks , Th e Trade Cycle, p . 59 . 38. Ibid., p . 63 . 39. Ibid., pp . 56-57 . 40. Ibid., pp . 60-61. 41. Ibid., p . 97 . 42. Hicks' s figur e is a t ibid., p . 121 ; his commen t an d elaboration are on pp. 120-123 . 43. Thes e point s ar e elaborated i n W. W . Rostow , "Som e Notes o n Mr. Hick s an d History," American Economic Review, Vol . XLI , No . 3 (June 1951) , pp. 316-324 . 44. Ibid., pp . 319-321 . 45. A . Hansen , Business Cycles and National Income, p . 446 . 46. Ibid., p . 497 . 47. J . S . Duesenberry , Business Cycles, pp . 281-294 . 48. Ibid., pp . 199-201 . 49. Ibid., p . 222 . 50. Ibid., pp . 225-239 . 51. Ibid., p . 225 . 52. Ibid., p . 239 . 53. R. C. O . Matthews, A Study i n Trade-Cycle History, Economic Fluctuations in Great Britain 1833-1842 (Cambridge : a t the Universit y Press, 1954) . 54. Th e Trade Cycle, pp . 68-84 . Matthews' s revie w articl e indicate s th e substantia l area o f agreement (as well as some disagreement) with Duesenberry ("Duesenberry on Growth and Fluctuations," Economic Journal, Vol . LXIX , No . 27 6 [December 1959] , pp . 749-765) . 55. Ibid., pp . 227-228 . 56. Ibid., p . 228 . 57. Ibid., pp . 233-235 . 58. Ibid., pp . 253-254 . 59. A . W. Mullineux , The Business Cycle after Keynes: A Contemporary Analysis (Totowa, New Jersey: Barne s an d Noble, 1984) , p . 89 . 60. Burn s an d Mitchell, Measuring Business Cycles, pp . 464-465 . 61. Hah n an d Matthews, Economic Growth: A Survey, pp . 888-889 . 62. Introductio n to Mirrlee s an d Ster n (eds.) , Models o f Economic Growth, pp . xii-xvi . 63. Hah n an d Matthews, Economic Growth: A Survey, p . 890 . 64. Sen , (ed. ) Growth Economics, p . 9. The quotations cited here reflect a general unease among the mode l builder s themselves . See , fo r example , "Th e Summar y of th e Fina l Discussion " i n Mirrlees an d Stern (eds.) , pp . 361-367 . D. H . Robertson' s typicall y lighthearted bu t sharp-edge d comment in the 196 0 Marshall Lecture is worth noting (Growth, Wages and Money, Cambridge : at the Universit y Press , 1961 , p . 4.) : . . . [I] n this matter of growth theory I have fallen to o far behind. And anyway you need no help from me . Rumou r has i t that there is not one of yo u wh o could not, in his or her firs t o r a t latest second year , tackl e undaunted such a question as this: "Compar e and contrast the growth models of Harrod , Domar , J . Robinson , Kaldo r Mar k I , Kaldo r Mar k II , Kaldo r Mar k III , Hahn , Matthews, Goodwin , Champernowne, Hicks, Little , Duesenberry , Tobin, Fellner , Solo w an d Swan. Whic h seems t o yo u th e bigges t nonsense, and why? "

65. I elaborate this theme in "The World Economy Since 1945: A Stylized Historical Analysis," Economic History Review, Vol . XXXVIII, No. 2 (May 1985) , pp. 252-275 . 66. N. Kaldor, "Capital Accumulation and Economic Growth," in F. A. Lutz and D. C. Hague

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(eds.), Th e Theory o f Capital (London: Macmillan , 1965) , pp . 178-179 . Fo r example, i n a heroi c effort t o render hi s mode l relevan t to the moder n histor y of advanced industria l countries, Kaldo r adduced si x "stylize d facts" : (1) The continue d growt h in the aggregat e volum e of productio n and in the productivit y of labour a t a stead y tren d rate ; n o recorde d tendenc y fo r a falling rat e o f growt h o f productivity. (2) A continue d increas e i n the amoun t of capital per worker , whateve r statistical measure of "capital" i s chosen i n this connection . (3) A steady rate of profit on capital, at least in the "developed' ' capitalist societies; this rate of profit bein g substantially higher than the "pure " long-term rate of interest as shown by the yield of giltedge d bonds . . . . (4) Steady capital-outpu t ratio s over lon g periods; a t least there are no clear long-term trends , either risin g o r falling . . . . (5) A hig h correlation betwee n th e shar e o f profit s i n incom e an d th e shar e o f investmen t in output; a stead y shar e o f profit s (an d o f wages ) i n societie s and/o r i n period s i n whic h th e investment coefficien t (th e share o f investmen t i n output ) is constant. . . . (6) Finally, there are appreciable differences in the rate of growth of labour productivity and of total outpu t in differen t societies . . . .

Of thes e proposition s (6 ) i s unambiguously true for advance d industria l societies onc e takeof f ha s begun, bu t a s Kaldo r wa s explicitly aware , hi s mode l (an d others ) di d little o r nothin g t o explai n growth differential s i n differen t societies ; (1 ) an d (2 ) ar e true , althoug h th e rate s o f growt h an d increase ar e no t steady ; (3 ) an d (4 ) ar e no t true ; (5 ) implies a questionable analyti c linkage. 67. Hah n an d Matthews, "Economi c Growth : A Survey", p . 890 . 68. Ibid., p . 889 .

Chapter 16 1. Th e title s o f Kuznets' s monograph s follow : Quantitative Aspects o f th e Economic Growth of Nations: I. Level s an d Variabilit y of Rate s o f Growth II. Industria l Distribution of Nationa l Product an d Labo r Forc e III. Industria l Distributio n of Incom e an d Labo r Forc e b y States , Unite d States, 1919-192 1 to 1955 IV. Distributio n of Nationa l Incom e b y Facto r Share s V. Capita l Formatio n Proportions : Internationa l Comparison s fo r Recent Year s VI. Long-Ter m Trend s i n Capital Formatio n Proportion s VII. Th e Shar e an d Structur e of Consumption VIII. Distributio n o f Incom e b y Siz e IX. Leve l an d Structur e o f Foreig n Trade : Comparison s for Recen t Year s X. Leve l an d Structur e of Foreig n Trade : Long-Ter m Trend s These studie s wer e publishe d successivel y i n th e followin g issues of Economic Development an d Cultural Change, Vol . 5 (October 1956) ; Vol. 5 (Jul y 195 7 Suppl.) ; Vol. 7 (April 1959 , Par t II) ; Vol. 8 (Jul y 1960 , Par t II) ; Vol . 9 (Jul y 1961 , Par t II) ; Vol . 1 0 (January 1962 , Par t II) ; Vol . 1 1 (January 1963 , Par t II) ; Vol. 1 5 (October 1967 , Par t IV). 2. Simo n Kuznets , Economic Growth and Structure (Ne w York: W. W . Norton , 1965) ; Modern Economic Growth: Rate Structure an d Spread (Ne w Haven : Yal e Universit y Press , 1966) ; Economic Growth o f Nations: Total Output an d Production Structure (Cambridge : Th e Belkna p Press o f Harvard University Press, 1971) ; and Population, Capital, and Growth (New York: W. W . Norton, 1973) . 3. I n constructin g this accoun t I wa s greatl y assiste d b y conversation s with tw o o f Kuznets' s friends an d colleagues : Mose s Abramovit z an d Solomo n Fabricant . The y bear , o f course , n o responsibility fo r th e conclusion s I have drawn .

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4. O n Kuznets's death in July 198 3 the SSRC published a note summarizing his long and fruitfu l connection with that foundation, whic h is worth quoting at length given the strategic importance of Kuznets's role a s chairman of th e SSRC Committee on Economic Growth. (Items, Socia l Science Research Council , Vol. 39, No . 3 [September 1985], pp . 49-50. ) Mr. Kuznet s becam e a n activ e participan t i n Counci l activitie s soo n afte r i t wa s founde d i n 1923 an d immediately after he received a Ph.D. i n economics fro m Columbi a University in 1926 . He wa s a research fello w of th e Counci l in 1925-26 , th e firs t yea r o f the Council' s fellowshi p program, devotin g himsel f to research o n secula r movement s in production an d prices. Fo r six years, 1938-43 , h e wa s a membe r o f th e Council' s boar d o f directors , designate d b y th e American Economi c Association , an d h e continued to participate i n variou s Counci l activities . His major contribution to the Council's program wa s as chairman of the Committee on Economi c Growth throughou t its 2 0 years o f existence, 1949-1968 . ... A substantia l portio n o f his researc h wa s develope d i n collaboration wit h an d wit h the support o f the Committee o n Economic Growth , which had its origins in a memorandum that he submitted t o th e Counci l i n 1948 . I n it , Mr . Kuznet s proposed : ... a committe e fo r th e purpos e o f explorin g possibl e direction s o f stud y o f economi c growth, th e latte r defined a s long-ter m increas e (o r decline ) i n magnitud e and change s i n structure o f large r socia l unit s (nation-state primarily). The ai m o f suc h exploratio n i s t o establish how fruitful empirica l study of economic growth ca n best be planned; and, in areas in whic h th e groundwor k i s no t read y fo r empirica l studies , t o stimulat e thinkin g an d discussion leadin g towar d formulatio n of th e necessar y intellectua l framework.* - Mr. Kuznet s urged tha t th e committe e concern itsel f not onl y with economic studie s but als o with factor s affectin g economi c growt h suc h a s scienc e an d technology , natura l resources , th e efficiency o f the state, and other social mechanisms, cultures, and social structures. He noted that the committe e shoul d includ e members fro m a variet y o f discipline s othe r tha n economics . In th e tw o decade s tha t followe d appointmen t o f th e committee , majo r studie s of long-ter m economic growth wer e initiate d in Australia, Canada, Denmark, France, Germany , Italy, Japan, the Netherlands, Norway , Sweden , an d the United Kingdom. Mr. Kuznet s and other scholars i n the field used these studies in comparative analyse s o f economic growt h and in strengthening the empirical foundatio n fo r theoretica l an d polic y analysis . Mr. Kuznet s guide d an d inspired a great deal of the committee's work . H e visited economist s abroad an d a t home t o recrui t thei r interes t i n the committee' s plans , advise d th e ofte n nascen t attempts a t empirical study , and maintaine d an overarching strateg y of research plannin g and of communication amon g scholars . Fe w committee s i n th e Council' s histor y hav e had a chairma n who worke d wit h suc h dedicatio n an d suc h skil l i n joinin g th e effort s o f many , ofte n quit e disparate, scholars . Member s o f th e Committe e o n Economi c Growt h hav e testifie d tha t thei r greatest reward s cam e fro m thei r associatio n wit h th e committee' s chairman . In addition to his central role in the work of the Committee on Economic Growth , Mr. Kuznets helped t o organiz e th e wor k o f th e Council' s Committe e o n th e Econom y o f China , whic h constituted in many senses a special case in the analysis of problems of economic growth . He was chairman o f thi s committee throughou t its existence, 196 1 t o 1970 .

5. Kuznet s himsel f provide s severa l summarie s o f hi s majo r finding s a t differen t level s o f generality; for example, in his Economic Growth of Nations, i n considerable detail (pp. 303-314), and in Population, Capital, an d Growth, pp. 165-18 4 (Kuznets's 197 1 Nobel Lecture), at a higher level of abstraction. See also Dwight Perkins, "Three Decades of International Quantitative Comparison," paper prepared for the eightieth birthday of Simon Kuznets, 198 2 (unpublished), pp. 4-7 , who defines eight "importan t discoveries that have stood up well over time." Perkins's "discov eries" includ e a fe w b y Kuznets' s disciple s using hi s methods. I hav e her e combined in the text items from m y own selectiv e list in the review of Kuznets's Economic Growth of Nations (Political Science Quarterly [Decembe r 1971], pp . 654-657 ) wit h Perkins's . *Social Scienc e Researc h Council, Committee on Problems and Policy, Minutes of the meeting of January 8 , 1949, Appendi x 1, "Memorandu m on Setting up of a Social Science Research Council Committee on a Study of Economic Growth, " prepare d b y Simo n Kuznets , Decembe r 8, 1948 .

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6. Holli s B . Chenery , Shuntar o Shishido , and Tsunehiko Watanabe, "Th e Patter n of Japanese Growth, 1914-1954, " Econometrica, Vol . 30, No. 1 (January 1962) , pp. 98-139 . 7. Economic Growth o f Nations, p . 315 . On e o f Kuznets' s fina l scientifi c paper s i s focuse d substantially o n th e sam e theme ; i.e. , th e centralit y of technologica l innovatio n and it s structural sequences: "Drivin g Forces o f Economic Growth : What Can We Learn from History? " in Herbert Giersch (ed.) , Towards an Explanation o f Economic Growth (Tubingen: J. C . B. Mohr , 1981) , pp . 37-58. Thi s pape r wa s presente d a t a 198 0 symposiu m a t th e Institu t fur Weltwirtschaft , Kiel . 8. Chenery' s principal publication s ar e the following: With Tsunehik o Watanabe , "Internationa l Comparison s o f th e Structur e o f Production, " Econometrica, Vol . 2 6 (October 1958) , pp . 487-521 . With Pau l G . Clark , Interindustry Economics (Ne w York: John Wile y an d Sons , 1959) . "Patterns of Industrial Growth," American Economic Review, Vol . 50, No. 4(September 1960) , pp. 624-654 . With Lanc e J . Taylor , "Developmen t Pattern s Amon g Countrie s an d ove r Time, " Review o f Economics an d Statistics, Vol . 5 0 (November 1968) , pp . 391-416 . With M . S . Ahluwalia , C . L . G . Bell , J . H . Duloy , an d R. Jolly , Redistribution with Growth (London: Oxfor d Universit y Press, 1974) . With Moshe Syrquin , Patterns o f Development, 1950-1970 (London : Oxford University Press, 1975). With Sherma n Robinso n and Moshe Syrqui n (with contributions by Gershon Feder, Yuj i Kubo, Jeffrey Lewis , Jaim e d e Melo , an d Miek o Nishimizu ) Industrialization an d Growth (Ne w York: Oxford Universit y Press fo r th e Worl d Bank , 1986). 9. A complete bibliograph y of Chenery's publications (1949-1981) is to be found i n the volume organized i n his honor: Moshe Syrquin , Lance Taylor, Larr y E. Westpha l (eds.), Economic Structure and Performance (Ne w York: Academic Press, 1984) , pp. xxi-xxvi. Perkins' s paper contains a selected lis t of Chenery's majo r publications bearing most directly on the quantitative comparative analysis o f structura l chang e i n th e cours e o f moder n economi c growth . Se e also , th e excellen t general economi c growt h bibliography i n Industrialization an d Growth, includin g Chenery items , pp. 361-377 . 10. Syrquin , Taylor, an d Westphal (eds.) , Economic Structure, p . 3 . 11. "Developmen t Patterns: Among Countries and Over Time.'' Chenery' s "Pattern s of Industrial Growth" foreshadowe d t o a degree th e conclusions of the later (1968 ) articl e (197 1 ed.) , pp . 230-234. 12. "Structura l Transformation : A Program of Research," Developmen t Discussion Pape r No . 323 (Cambridge : Harvar d Institute for International Development, Jun e 1986) . 13. Ibid., p . 5 . 14. Ibid., p . 22 . 15. Economic Journal, Vol . 86 , No. 34 2 (June 1976), pp. 401-403, in a review o f Chenery and Syrquin, Patterns o f Development, 1950-1970. 16. Perkins, "Thre e Decades", p . 36 . 17. "Th e Chener y Analysi s and Some Other Considerations," i n Syrquin, Taylor, and Westphal (eds.), Economic Structure, pp . 3-21 . I shoul d perhaps not e tha t I, lik e Chenery , ha d the grea t privilege o f both working closely wit h Mason and being also the target of quite sharp criticism in a festschrift. 18. Ibid., p . 7 . 19. Perkins "Thre e Decades", p . 35 . 20. Kuznet s o n on e occasio n di d presen t a cross-sectiona l analysi s a s o f 1958 , embracin g countries from unde r $100 U.S. (1958) per capita to over $1000 (Modern Economic Growth Rate, Structure, an d Spread), pp . 402-408 . 21. Chener y usefull y summarize s hi s metho d in "Structura l Transformation, " pp . 13-18 . Fo r

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greater detail se e Structural Change and Development Policy, Chapte r 3 and Industrialization and Growth, especiall y Chapter s 2 and 3. 22. Th e study, which I shall use to illustrate the Gesell problem, i s Arnold Gesell and Francis L . Ilg, i n collaboratio n wit h Janet Learne d an d Loui s B . Ames , Infant an d Child i n th e Culture of Today, Th e Guidance o f Development i n Home an d Nursery School (Ne w York: Harper , 1943) . 23. Ibid., especiall y "Th e Individualit y of Growth Patterns," pp . 43-46. 24. Davi d Kendric k assemble d 11 7 references i n hi s (unpublished ) handbook, Mathematical Methods i n Economic Planning. Amon g the m the following ar e representative . Adelman, I . (ed.) . Practical Approaches t o Development Planning: Korea's Second Five-Year Plan (Baltimore : Joh n Hopkin s Universit y Press, 1969) . Adelman, Irma , an d Eri k Thorbeck e (eds.) . Th e Theory an d Design o f Economic Development (Baltimore: Joh n Hopkin s Universit y Press, 1966) . Bowles, Samuel , an d Davi d Kendrick , i n collaboration wit h Lanc e Taylo r an d Mar c Roberts . Notes an d Problems i n Microeconomic Theory (Chicago : Markham Publishin g Co., 1970) . Brown, M . O n th e Theory an d Measurement o f Technological Change (London: Cambridge a t the Universit y Press , 1966) . Chakravarty, S . Capital and Development Planning (Cambridge : M.I.T . Press , 1969) . Chenery, Holli s B. (ed.) . Studies in Development Planning (Cambridge : Harvar d Universit y Press, 1970) . Johansen, Lief . A Multisectoral Study o f Economic Growth (Amsterdam: North Holland Publishing Co. , 1964) . Kendrick, Davi d A. , Programming Investment i n th e Process Industries (Cambridge : M.I.T . Press, 1967) . Malinvaud, E., an d M. O . L . Bachrach . Activity Analysis in the Theory o f Growth and Planning (London: Macmillan ; an d New York : St . Martin' s Press , 1967 ) Sen, Amarty a Kumar . Choice of Techniques (Oxford : Basil Blackwell , 1960) . Sengupta, Jat i K. , an d Kar l A. Fox . Optimizing Techniques i n Quantitative Economic Models (Amsterdam: Nort h Hollan d Press , 1969) . Shell, Kar l (ed.), Essays on the Theory o f Optimal Economic Growth, (Cambridge: M.I.T. Press, 1967). Westphal, Larr y E. , " A Dynami c Multi-Sectoral Programming Mode l Featurin g Economies o f Scale: Planning Investment in Petrochemical an d Steel i n Korea," unpublishe d Ph.D. thesis , Department o f Economics , Harvar d University , Cambridge , Mass . (Jun e 1968) . 25. Introductio n t o H. B . Chener y (ed.) , Studies i n Development Planning, p . 7 . 26. Lie f Johansen , A Multisectoral Study. 27. Fo r an earlier analysis and assessment o f this branch of modeling, se e my Why The Poor Get Richer an d th e Rich Slow Down (Austin : Universit y of Texas Press , 1980 ) pp . 183-185 . 28. See , fo r example , H . M . Markowit z an d A . S . Manne , "O n th e Solutio n o f Discret e Programming Problems," Econometrica, Vol . 25, No. 1 (January 1957) , pp. 19ff. , an d application of thi s metho d t o th e stee l industr y i n David Kendrick , Programming Investment i n th e Process Industries. 29. Mathematical Methods i n Economic Planning, pp . 11-12 . 30. Fo r discussion an d bibliography, se e H. Chener y an d M. Syrquin , Patterns o f Development, 1950-1970, pp. 56-63; see also my World Economy: History and Prospect, (Austin : University of Texas Press , 1978 ) pp. 39-4 2 and 726-727. 31. Fo r a mobilizatio n o f th e existin g historica l an d cross-sectiona l dat a o n thi s point an d a n analysis of reasons for this pattern, see my Why the Poor Get Richer, Chapte r 6, especially pp. 267 281. 32. Patterns o f Development, 1950-1970, pp . 23-25 . 33. S . Kuznets , Economic Growth o f Nations, pp . 314-384 .

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34. Patterns o f Development, 1950-1970 , pp . 135-136 . 35. Thorki l Kristensen , Development i n Rich an d Poor Countries (New York: Praeger , 1974) , pp. 156-159 . 36. Ibid., p . 29 . 37. H . B . Chenery , "Transitiona l Growth an d World Industrialization, " pp . 5-6 . 38. H . B . Chener y an d L . Taylor , "Developmen t Patterns : Amon g Countrie s ove r Time, " Review o f Economic Statistics, Vol . 50 . No . 4 (Novembe r 1968 ) pp . 391-416 . 39. Chener y explicitl y link s hi s "earl y industries " t o m y leadin g sector s i n takeof f i n hi s "Patterns of Industrial Growth," p. 651. I n the conclusion to Patterns of Development, 1950-1970 he note s (p . 136n) : "Althoug h thi s formulation ha s som e element s i n commo n wit h Rostow' s (1956) 'Take-of f w e have shown that the periods of more rapid change occur at different level s of income for different processe s an d vary with the strategy being followed." Ther e i s nothing in the Stages of Economic Growth that would deny the possibility of surges in growth rates in post-takeoff stages o r th e possible influenc e of growt h strategies on growt h rates. O n the contrary . 40. Fo r summar y o f post-196 0 evidence , se e Stages o f Economic Growth, 2 d ed . (1971) , Appendix B, pp . 233-235. It might also be noted that, after a fashion, Kuznet s quietly capitulated on thi s poin t i n hi s 197 1 Economic Growth o f Nations (pp . 61-65) . H e observe d tha t historica l evidence suggeste d a premodern growt h net investment rate of 5% or 6%; a characteristic termina l figure of 15% . Although Kuznets was inclined to suggest a long, gradual rise in the investment rate, detailed historica l an d cross-sectional dat a suggest s a sharp initial rise (covering , i n my view, the drive t o technologica l maturit y a s well a s takeoff ) followe d b y a marke d deceleration . I n th e Chenery-Syrquin analysis, the deceleration come s after $300 (1964) per capita. (Patterns of Development, 1950-1970, p . 20. ) Fo r Chenery' s lates t investment-rat e dat a associate d wit h initial , intermediate, an d fina l position s i n the "Transformation " se e Industrialization an d Growth, pp . 49-52. 41. Industrialization an d Growth, p . 288 . 42. See , especially , Infant an d Child i n the Culture of Today, pp . 45 , 293 , 354 . 43. Jame s Gleich, Chaos: Making a New Science (New York: Viking, 1987) , pp . 5 and 43. I n a quite limite d analogy—th e rise of foreigners i n British economic, intellectual , and political life — Sir Jame s Goldsmith , th e Anglo-Frenc h financier , observes: "Dynamis m i s usually th e resul t of disequilibrium." (The Economist [2 4 Dec., 1988- 6 January , 1989], "Ne w Blood, " p . 73. ) 44. H . B . Chener y an d M. Syrquin , Patterns o f Development, p . 10 : "Since we are concerne d with interrelated change s in the structure of the whole economy, th e model implicit in our analysis is one of general equilibrium. " 45. Ibid. 46. See, especially , I . Adelman and C. T. Morris, Society, Politics, and Economic Development, rev. ed . (Baltimore : Joh n Hopkin s Press , 1971) ; an d Economic Growth an d Social Equity i n Developing Countries (Stanford : Stanford Universit y Press, 1973) . 47. Economic Growth and Social Equity, pp . 15-16 . 48. M y Politics an d th e Stages o f Growth (Cambridge : a t th e Universit y Press , 1971 ) i s a n exercise i n this approach t o relating economi c an d political development . 49. P . Rosenstein-Rodan , "Natur a Faci t Saltum," i n Gerald M. Meier and Dudley Seers (eds.) , Pioneers i n Development, (Ne w York: Oxford University Press for the World Bank, 1984) , p. 208 . In a not e Roda n explain s the concep t o f "th e pursui t curve" an d it s origin a s follows : A dog pursues a hare, without anticipation , alon g th e shortest distance at which h e sees him (a straight line) . Meanwhil e th e har e run s fro m point 1 to point 2 . Whe n th e dog sees him again i n this ne w position he again runs alon g the shortest distanc e ( a straight line ) i n which h e sees him. Meanwhile th e hare runs to point 3, and so on. Th e line along which the dog runs is what we want to explain . I t i s determine d b y a straight-lin e distanc e whereve r th e do g see s th e hare . Th e overwhelming majorit y o f th e point s o f th e pursui t curv e ar e disequilibriu m points. I t ma y b e called "stat e o f equilibrium " i f th e do g ultimatel y catche s th e hare . (Pareto ha d mentione d i t bu t neve r worke d i t out.)

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50. Edwar d F. Denison , Trends in American Economic Growth, 1 929-1 982 (Washington D.C.: The Brooking s Institution , 1985) . Th e wor k o f Denison , Joh n Kendrick , an d other s i n growt h accounting ha s a considerabl e intellectua l background includin g the following : J . Schmookler , "The Changin g Efficiency o f th e American Economy, 186 9 t o 1938, " Review o f Economics an d Statistics (Augus t 1952), pp . 214-213; S. Fabricant, "Economi c Progress and Economic Change" in 36th Annual Report, (Ne w York : NBER , 1954) ; A . Cairncross, "Th e Plac e o f Capita l i n Economic Progress, " in Economic Progress, Leo n H. Dupriez , ed. (Louvain : Institut de Recherches Economique s et Sociales, 1955 ) pp. 235-248 , (1955) ; M . Abramovitz , "Resource s and Output in the United States since 1870, " American Economic Review, Proceedings, Vol . 46 (May 1956); an d R. M . Solow , "Technica l Change and the Aggregate Productio n Function," Review of Economics an d Statistics, Vol . 3 9 (Augus t 1957) . Se e also , a critica l respons e t o emphasi s o n technology rather than total physical inputs as the source of productivity increase, D. W . Jorgenso n andZ. Griliches , "Th e Explanatio n of Productivity Change," Review of Economic Studies, Vol . 34 (July 1967) . 51. Ibid., p . 28 . 52. See , especially , ibid., pp . 27-32 , includin g notes o n Edwin Mansfield an d others. 53. Ibid., pp . 29-30 . 54. Edwar d F. Denison , Why Growth Rates Differ (Washington , D.C.: The Brooking s Institution, 1967) , pp . 301-302 . 55. For a more complete analysi s of comparative U.S.-Western European-Japanese growth rates in this period, se e my World Economy: History and Prospect, Chapte r 17 . On Europe, se e notably M. M . Postan' s admirabl y disaggregated treatmen t of new consumption patterns, technology , and investment: A n Economic History o f Western Europe, 1945-1964 (London : Methuen , 1967) , especially Chapter s 5 , 6 , 8 , an d 11 . Chapter 1 7 1. Th e ful l referenc e t o Arndt' s volum e is Th e Rise an d Fall o f Economic Growth, A Study i n Contemporary Thought (Sydney : Longma n Cheshire, 1978) . Thi s stud y i s mainl y addresse d t o disabuse wit h growt h i n advance d industria l countries; bu t it s argumen t is evidentl y relevan t t o development economic s a s well . 2. I n Development an d Change, Vol . 10 , No. 3 (July 1979) , pp . 707-718 . 3. The ful l titl e of Hirschman's book is Essays in Trespassing: Economics to Politics and Beyond (Cambridge: a t th e Universit y Press, 1981) . Hi s firs t chapte r wa s originall y delivere d a t a sym posium o n Lati n Americ a i n 1980 . 4. Little' s stud y wa s publishe d b y Basi c Books , Ne w York , 1982 . Lai' s Th e Poverty o f "Development Economics" wa s initially published b y the Institute of Economic Affairs, London , in Augus t 1983 an d republishe d i n Cambridge : Harvar d Universit y Press, 1985 . 5. Geral d M . Meie r an d Dudle y Seer s (eds. ) Pioneers i n Development (Ne w York : Oxfor d University Pres s fo r the Worl d Bank , 1984) . 6. Meier' s historica l introduction , "Th e Formativ e Period, " i s a t ibid., pp . 3-22 ; Streeten' s postscript, pp . 337-361 . The essays b y each o f the "pioneers " are followed by critical commen taries b y on e o r tw o younge r commentators . Meie r ha s subsequentl y writte n a mor e spaciou s analytic account of the evolution of development theory including his own policy recommendations, Emerging from Poverty: The Economics That Really Matters (Ne w Yor k and Oxford : Oxfor d University Press, 1984) . 7. American Economic Review, Vol . 74, No . 1 (March 1984), p. 1 . For another measured but by no mean s complacen t assessmen t se e A. K . Sen , "Development : Whic h Way Now?" Economic Journal, Vol . 93 , No . 37 2 (Decembe r 1983) , pp . 745-762 . Professo r Claudi a Goldin tell s me, however, that as of the autum n of 198 7 she detects a revival of interest in development economics, and m y vie w i s ou t o f date.

658

Notes to Pages 374–385

8. Economic Journal, Vol . 111, Nos. 210-211 (June-September 1943) , pp . 202-211 . 9. Montreal : Internationa l Labou r Office , 1944 . 10. Oxford : Basi l Blackwel l (Institut e of Statistic s Monograp h No . 2 ) 1945. 11. World Economic Development, pp . 185-186 . 12. Industrialisation o f Backward Areas, p . iii. 13. Mandelbau m (ibid., p . 5 , n . 6 ) note s an d draws dat a fro m Si r P. Thakurda s an d others , A Plan o f Economic Development o f India (London : Penguin , 1944) . H e als o note s amon g earl y planning studie s A. Bonne , Th e Economic Development o f the Middle East: An Outline of Planned Reconstruction (London : Kega n Paul , 1945) . 14. Gerald M. Meier an d Dudley Seer s (eds.) , Pioneers in Development, pp . 8-10. Se e also, my United States i n th e World Arena (Ne w York: Harper , 1960) , pp . 133-139 ; an d Eisenhower, Kennedy, an d Foreign Aid (Austin : University of Texas Press , 1985) , pp . 70-80. On the origins of the Unite d Nation s regiona l economi c commissions , se e m y Th e Division o f Europe after World War II : 1946 (Austin: University o f Texas Press , 1981) , pp . 70-75 . 15. Fo r data an d discussion, se e my Eisenhower, Kennedy, an d Foreign Aid, pp. 80-83 . 16. The title of the report o f the Gordon Gray Commission is Report to the President o n Foreign Economic Policies (Washington , D.C.: G.P.O., 1950) ; o f th e Rockefelle r Report , U.S . International Developmen t Advisor y Board , Partners i n Progress: A Report t o President Truman (New York: Simon and Schuster, 1951) . Acheson' s speeche s dealin g with foreign aid in Asia are summarized accessibl y i n McGeorg e Bund y (ed.) , Th e Pattern o f Responsibility (Boston : Houghto n Mifflin, 1952) , pp . 171-200 . 17. For a more complete summar y of these reports and authors, see Gerald M. Meier and Dudley Seers (eds. ) Pioneers i n Development, pp . 11-13 . 18. Ne w York : United Nations , 1950. 19. Eisenhower, Kennedy, an d Foreign Ai d is , essentially , a book abou t th e multidimensiona l debate o n developmen t polic y o f the 1950s . 20. A Proposal (Ne w York: Harper, 1957 ) was written by Max F. Millikan and me, i n collabora tion with Paul Rosenstein-Rodan an d eleven other member s of the CENIS staff . Bauer' s stud y was United States Ai d an d Indian Development (Washington , D.C. : American Enterpris e Institute , November 1959) . 21. See , for example, Eisenhower, Kennedy, an d Foreign Aid, Chapters 9 and 10 . 22. Essays i n Trespassing, p . 1 . 23. Barbara Ward , J. D . Runnalls , and Lenore d'Anjou (eds.), Th e Widening Gap: Development in the 1970's (New York: Columbia University Press, 1971), pp. 11-13. For a more professional pro-basic-human-needs study about a decade later, se e Paul Streeten et al., First Things First (New York: Oxfor d Universit y Press fo r th e Worl d Bank , 1981) . 24. Althoug h honored t o have been included amon g the ten, I shall deal wit h m y own views in Chapters 18-2 1 an d the joint Appendi x wit h Michae l Kennedy . 25. Jaco b Viner , International Trade an d Economic Development (Oxford : a t th e Clarendo n Press, 1953) p. 100. This passage is included in the chapter from Viner's volume reprinted in A. N. Agarwala and S. P. Sing h (eds.), The Economics ofUnderdevelopment (Ne w York: Oxford University Press , 1963) , p . 17 . 26. "Th e 'Classic ' Theor y o f Internationa l Trad e an d th e Underdevelope d Countries, " Economic Journal, Vol . 68, No . 27 0 (June 1958) , pp . 317-337 . 27. See , Nurkse' s "Som e Internationa l Aspect s o f th e Proble m o f Economi c Development " American Economic Review, Vol. 42, No . 2 (May 1952 , Papers an d Proceedings), pp . 571-583 ; also, more generally , Equilibrium Growth in the World Economy, (Cambridge : Harvar d University Press, 1961) . 28. J . R . Hicks , A Theory o f Economic History (Oxford : Oxfor d Universit y Press , 1969 ) pp. 142-143. 29. Ibid., p . 145. 30. Pioneers, pp. 27-28 .

Notes t o Pages 386-392 65

9

31. From m y review of Bauer's Equality, Th e Third World an d Economic Delusion (Cambridge : Harvard Universit y Press, 1981) , published in Transaction!Society, Vol . 20, No . 1 (November/ December 1982) , pp . 88-89 . Thi s revie w contains a specificatio n of m y area s o f agreemen t an d disagreement wit h Bauer, whic h does no t belon g i n this chapter. 32. Pioneers, p . 60. Se e also Clark's attac k on English economists as excessively speculative and theoretical i n th e Prefac e t o th e 194 0 edition o f Th e Conditions o f Economic Progress (p . vii). 33. G . T . Jones , Increasing Return, (Cambridge : a t th e Universit y Press 1933) . Coli n Clar k edited Jones' s boo k fo r publicatio n afte r th e latter' s prematur e death . See , The Conditions o f Economic Progress (1940) , pp . 29If f and 340-341. 34. Conditions o f Economic Progress (1951) , pp . viii-xiii . 35. Pioneers, p . 63 . 36. Ibid., p . 64 . 37. Ibid. 38. Ibid., pp . 76-77 . 39. Ibid., p . 65 . 40. Ibid., p . 73 . 41. Conditions o f Economic Progress, p . 6 . 42. Pioneers, pp . 75-76 . 43. Conditions o f Economic Progress (1940) , p . ix . 44. Ibid., p . ix . 45. Ibid. 46. Ibid., p . vii. 47. See , especially Conditions o f Economic Progress (1951) , pp . 1-5 . 48. Pioneers, p . 87 . 49. Ibid., p . 90 . 50. Fo r a more subtl e interpretation o f Hirschman's dissen t as a protracted fight against "vulga r recipes imposed o n the weak or the vanquished" se e Carlos Dia z Alejandro, ibid., pp . 112-113 . 51. Ibid., pp . 91-110 . Although a study that stands on its own feet, Hirschman' s The Passions and th e Interests i s clearly relate d t o hi s theory o f unbalanced growth with its "remarkabl e unintended effects. " See , notably, in The Passions an d the Interests, pp . 130-131 , fo r echoes o f his development theor y earlie r formulated. 52. Pioneers, p . 94 . 53. I bid., pp . 9 2 and 96. 54. Ibid., p . 105. 55. Manchester School (May 1954), accessibly reprinted in A. N. Agarwala and S. P. Singh, The Economics o f Underdevelopment, p . 400. 56. Agenda, Vol . 3, No . 4 (Novembe r 1944) . 57. On the Caribbean, Lewis published "Industrialization of Puerto Rico," Caribbean Economic Review (Decembe r 1949) , an d the more general Industrial Development in the Caribbean (Port-auSpain, Trinidad : Caribbea n Commission , 1949) . Lewis' s colleague s i n writin g th e 195 1 United Nations report o n development were : Albert o Baltia Cortez (Chile) , D. R . Gadgi l (India), George Hakim (Lebanon) , an d T. W . Schult z (Unite d States). 58. Th e books referre d t o are Economic Survey, 1919-1939 (London : Allen and Unwin, 1949) which include s som e material s o n developin g countries , notabl y the impac t o n the m of interwa r terms of trade movements; The Principles of Economic Planning (London: Allen and Unwin, 1949) concerned primaril y with planning in advanced industria l countries, although it includes an appen dix "O n Plannin g i n Backwar d Countries" ; an d Overhead Costs (London : Alle n an d Unwin, 1949), a collection of essays mainly addressed to problems of monopolistic competition in advanced industrial countries . 59. I t shoul d be note d tha t Lewis was no t alon e i n Londo n academi c life i n hi s concer n wit h economic development. Among others, Paul Rosenstein-Rodan was there, as well as Kurt Martin, R. H . Tawney , Ver a Anstey, Eileen Power , an d Michael Postan.

660 Notes

t o Pages 392-398

60. "Th e Root s o f Developmen t Theory," Chapte r 2 i n H. B . Chener y an d T. N . Srinivasa n (eds.), Handbook o f Development Economics, Vol . I . (Amsterdam : Nort h Holland Press , 1968) . 61. Economic Growth, pp . 304-319 . 62. Ibid., p . 340 . 63. Ibid., p . 183 . 64. Ibid., p . 164 . 65. Ibid., p . 200 . 66. Ibid., p. 208. 1 late r used a similar formulation in my takeoff article and have often referred to such a n increas e i n investmen t a s "pur e Arthu r Lewis behavior. " I confes s tha t i t wa s onl y i n writing this book and re-reading afresh Pau l Rodan's pioneering article on Southeastern Europe that I discovere d h e originate d th e concept . I suspect I picked i t up a s part of the M.I.T. developmen t economists' conventiona l wisdo m i n th e earl y 1950s . Fo r m y expressio n o f som e regre t a t th e preeminence accorde d thi s featur e o f takeoff , se e Pioneers, pp . 234-23 6 an d pp . 433-434 , preceding. 67. World Development Report, 1983, p . 156 . 68. Economic Growth, p . 210 . Th e most detailed estimates of the distribution of investment and of sectoral , margina l capital-outpu t ratio s tha t I' m awar e o f ar e thos e o f Pau l Rodan. The y wer e reproduced o n a faded old-fashione d mimeographed shee t an d are unpublished so far a s I know. I include also the estimates i n Chenery, Industrialization an d Growth, p . 49 . (Se e Table s N.3 , N.4 , N.5.) 69. Ibid., p . 213 . 70. Ibid., pp . 233-235 . 71. Lewi s deal s wit h interwar cycles i n Economic Survey and , mor e systematically , i n Growth and Fluctuations (London : Alle n and Unwin, 1978) . 72. Economic Growth, pp. 284-286 . Lewi s cite s thre e othe r factor s tha t hel p determin e the unsteadiness of investment: th e flexibility of bank credit, th e unstable relation betwee n investment and th e growt h of income , an d change s i n the distributio n of income . 73. Ibid., p . 286 . 74. See , notably , Economic Survey. 75. See , fo r example, Economic Growth, pp . 289-292 . 76. Ibid., p . 279 . 77. Lewi s an d I are the major proponent s of the notion that the price, money-wage, an d interestrate phenomena identifie d by Kondratieff as subject to long cycles are to be explained by successiv e trend periods i n the intersectoral term s of trade between basic commodities an d manufactures. See, for example , Lewis' s Growth an d Fluctuations, pp . 69-93 . 78. Economic Growth, p . 165 . 79. Ibid., p . 169 . Fo r emphasis on the important oblique rather than direct linkage of science an d invention in the eighteenth an d nineteenth centuries, see my How It All Began (New York: McGraw Hill, 1975) , especiall y Chapter s 1 and 4 . 80. Ibid., p . 371 . Fo r a somewha t differen t bu t no t inconsisten t discussion o f thi s subject , se e Chapter 8 , "Relativ e Stage s o f Growt h an d Aggression, " i n m y Stages o f Economic Growth. 81. O n both types of secular stagnation , see Lewis's Economic Growth, pp . 292-302 and 408 415, th e latte r a catalog o f nin e way s in which the policie s o f governments ma y retard economi c growth. Ther e i s som e discussio n o f th e possibilitie s o f secula r stagnatio n i n a sectio n entitle d "Institutional Change, " pp. 145-162 . 82. .Ibid., pp . 302 , 415 , 418 . 83. J . M . Keynes , "Nationa l Self-Sufficiency, " Yale Review, Vol . XXI I (1933) , p . 755 . 84. See , fo r example, th e bibliography at the close of the Introduction to Economic Growth, pp . 21-22. Thi s and Lewis's other bibliographical note s at the end of chapters are a vivid reminder of how limited—bu t still rich—th e literature on developmen t was i n the earl y 1950s . 85. Ibid., pp . 14-16 . 86. Ibid., p . 159 . Fo r a more general application to politics of this doctrine—rooted i n Plato' s

Table N.3. Distributio n o f Investment in Underdeveloped (A ) and Developed (B ) Countrie s (A)

Sector !. 1 . Socia l overhea d capita! 2. Educatio n 3. Housin g II. Agricultur e 1. "Old " 2. "New " 3. X III. Industr y 1 . Heav y 2. Ligh t 3. Handicraft s 4. Constructio n residua l 5. X IV. Service s Aggregate margina l capitaloutput ratio

Percent o f total investment 34.0% 1.0 24.0

Sectoral capita l output rati o 8: 1 10: 1 10 : 1

(B)

Contribution to outpu t

Percent o f total investment

4.25 0.1 2.4

32.0% 1.5 24.0

7' 1 8: 1 10 : 1

4.6 0.2 2.4

Sectoral capita l output rati o

Contribution to output

7.5 3.0

1.33 : 1 6: 1

5.6 0.5 1.5

4.5 2.0

1.7 : 1 5: 1

2.6 0.4

7.5 8.5 1.5

4.5 : 1 2.5 : 1 1.2 : 1

1.7 3.4 1.25 1.5

8.5 9.5 i.O

4.25 : 1 2.25 : 1 1.5 : 1

13.0%

1.1 : 1

11.8 34.00

17.0%

1.5 : 1

2.0 4.2 0.7 1.8 2.5 11.4 32.8

100 : 34.0 = 2. 9

SOURCE: Pau l Rosenstein-Rodan (n o othe r source) .

100 : 32.8 = 3. 0

Table N.4. Standar d Solutio n t o th e Cross-Country Model , Incom e Leve l 5 ($2100/1970/per capita) , (dollar s pe r capita ) Domestic fina l deman d Sector Primary 1. Agricultur e 2. Minin g Subtotal" Manufacturing 3. Foo d 4. Consume r good s 5. Produce r good s 6. Machiner y Subtotal" Nontradables 7. Socia l overhea d 8. Service s Total" Percentage o f tota l fi nal deman d

Consumption

Investment

Percentage o f total investmen t Governmen

t

Total deman d

64 19 83

0 0 0

4 4 8

68 23 91

186 202 104 15 507

0 0 0 172 172

19 15 6 44

205 217 110 191 723

115 549 1,254 59

283 25 480 23

6 0 8 18

424 874 2,112 100

36% 4

59 2 5 30 100% 37

NOTE: aTotals may no t add because o f rounding . SOURCE: Hollis Chenery et at., Industrialization and Growth (Ne w York: Oxford Universit y Pres s for th e Worl d Bank, 1986) , p . 5 1 (Worl d Bank Data) .

Percentage of total deman d

3% 1 4 10 10 5 9 34 20 42 100%

Table N.5. Standar d Solutio n t o the Cross-Country Model,Incom e leve l 1 ($140/1970/per capita ) (dollar s pe r capita ) Domestic fina l deman d Sector Primary I. Agricultur e 2. Minin g Subtotal" Manufacturing 3. Foo d 4. Consume r goods 5. Produce r good s 6. Machiner y Subtotal" Nontradables 7. Socia l overhea d 8. Service s TotalPercentage o f tota l fi nal deman d

Percentage of total investmen t Governmen

Consumption

Investment

25.5

0

26.0

0 0 0

0.5 0.5 1.0

15 11 3 0 29

0 0 0 7 7

1 0 0

7 41 102 71

12 1 21 15

NOTE: a Totals ma y not ad d becaus e o f rounding . SOURCE: Holli s Chener y e t al., Industrialization an d Growth (Worl d Ban k Data) , p . 49 .

33% 1

57 1 51 95% 2

t

2 6 0

14

Total deman d

Percentage of total deman d

26 1 270

18% 0 18

16 11 3 8 38

11 8 2 6 27

20 58 143 100

14 40

100%

664 Notes

t o Pages 398-405

Republic—see m y Politics an d th e Stages o f Growth (Cambridge : a t the University Press, 1971) , pp. 8-1 6 an d 248-250. 87. Economic Growth, pp . 421-423 . 88. Ibid., pp . 429-430 . 89. Pioneers, p . 132. 90. Thi s study was first published in Sweden in 1930, in English in 1958 (London: Routledge and Kegan Paul) . 91. Gunna r Myrdal , Against th e Stream: Critical Essays o n Economics (Ne w York: Pantheo n Books, 1972) , p . vi . Myrda l begins by paraphrasing his earlier study . 92. Ibid. 93. Myrda l note s tha t hi s direc t introductio n t o developmen t problem s aros e fro m hi s wor k (1947-1957) a s executiv e secretar y o f th e Unite d Nation s Economi c Commissio n fo r Europ e (ECE). U.N. regional economic commissions for the Far East (ECAFE) and Latin America (ECLA) were promptly create d in its wake. Myrdal established fraternal relations wit h those institutions and traveled extensivel y i n Asi a an d th e Middl e East . Hi s firs t reflection s on developmen t wer e published in 1956 when Myrdal was 58: An International Economy: Problems and Prospects, stemmin g from a lecture at Columbia University in May 1954 on the occasion of the University's bicentennial; and Economic Theory an d Underdeveloped Regions, derive d fro m lecture s at the Centra l Ban k of Egypt in 1956 , and published separatel y the next year. The forme r views the worl d economy as a whole fro m th e perspectiv e o f "integration" ; bu t roughl y two-third s o f th e tex t i s devote d t o development problems . Th e latte r is wholl y addressed t o development. 94. Pioneers, p . 154. 95. Asian Drama: A n Inquiry into th e Poverty o f Nations (Ne w York: Pantheon, 1968) . 96. Pioneers, p . 153. 97. Asian Drama, p . 153 6 (Vol. 3). 98. Th e Challenge o f World Poverty, A World Anti-Poverty Program i n Outline (Ne w York: Pantheon Books , 1970) . 99. Th e Challenge, p . 365. 100. Ibid. 101. Pioneers, p . 162 . 102. Ibid. 103. Ibid., pp . 164-165 . 104. Fro m a figure of . 19% of GNP Swede n raised it s level of official developmen t assistance to a peak of 1.02 % in 1982. The figur e fo r 1985, .85%, wa s exceeded onl y by the Netherlands. World Development Report, 1986 (New York: Oxford University Press for the World Bank, 1986) , Tabl e 20, p . 218. 105. Against th e Stream, p . 312. 106. Fo r furthe r discussio n o f th e comple x politic s of modernization , see preceding , pp . 418 427. 107. International Economy, p . ix . 108. Pioneers, pp . 17 5 and 178. 109. Ibid., p . 176 . Prebisch's summary of his doctrine is lucid as well as authoritative (ibid., pp . 176-180). 110. Ibid., p . 177 . 111. See , for example, m y World Economy, pp . 381-283 , for a consideration o f reasons fo r this phenomenon. 112. Pioneers, p . 181. 113. Ibid., p . 183. 114. The reference here is from Alber t Fishlow's commentary on Prebisch's essay, ibid., p . 196. Prebisch wa s provide d a base fo r his analyse s in this final phas e of his lif e b y hi s editorship o f th e CEPAL Review. Hi s majo r publication s of thi s perio d ar e listed , ibid., p . 18 3 n. 6 . 115. Ibid., p . 184.

Notes t o Pages 405-408 66

5

116. Ibid. 117. Ibid., pp . 188-189 . 118. Ibid., p . 191. 119. Ibid. 120. Fo r a n acute critique of Prebisch o n this and other points see, for example, M. J . Flanders , "Prebisch o n Protectionism : A n Evaluation, " Economic Journal, Vol . LXXIV, No . 29 4 (Jun e 1964), pp . 305-326 . 121. Pioneers, p . 197. 122. M y closest professional dealings with Prebisch too k place when he was Director-General o f UNCTAD an d I chairma n o f th e Polic y Plannin g Counci l a t th e Stat e Department . I n a privat e conversation I recal l questionin g whethe r generalize d preference s woul d constitut e a powerfu l enough forc e t o overcom e th e ba d habit s buil t u p i n th e phas e o f excessivel y protecte d import substitution industrializatio n i n Lati n America . H e agree d tha t significan t domesti c change s o f attitude an d policy woul d be required t o generate greatl y enlarged export s of competitive, diversi fied manufacture s an d doubte d tha t generalize d preference s woul d b e accepte d b y th e OEC D countries; bu t he thought the pressure exerted on them via UNCTAD would lead to enlarged foreign aid. I said I thought his strategy, in the old British phrase, was "too clever by half," bu t wished him well. 123. "Problem s of Industrialization" a s reprinted in A. N . Agarwala and S. P. Sing h (eds.), The Economics ofUnderdevelopment pp . 254-255 . The exposition of the EEIT (East European Investment Trust ) i s a rough approximatio n o f the kin d of enterprise int o which the Worl d Ban k was t o evolve (ibid., p . 254): The Institutiona l implementatio n o f thi s programm e mus t b e lef t ove r t o anothe r occasion . It s main outlines are: At least 5 0 percent o f the capital required mus t be supplied internally. "Creditor" ' and ' 'debtor'' countries acquire each 50 percent share s o f a trust formed of all the industries to b e create d i n th e region . The y wil l plan an d procee d a s busines s partners wit h Governmen t representatives o n the board. Th e creditors acquire shares in the trust which are redeemable afte r twenty year s a t 1 0 percent abov e parit y if an averag e dividen d service o f 41/2 percent a t leas t ha s been maintaine d in the past. A n average dividend service o f 3 per cent is guaranteed by Governments o n th e share s subscribe d i n thei r countries . Privat e investment s i n Easter n an d South Eastern Europ e requirin g foreign credits ar e licensed. Share s ma y be acquired by contributions in natura: fo r instance , th e establishmen t o f branc h factories. Guarantee s of nondiscriminatio n i n the interna l taxatio n polic y wil l be obtaine d fro m Easter n Europea n authorities. " Industrial employment ha s to be found for (a) 20 million of the agrarian excess populatio n + (b) 7-8 millio n = 40-5 0 per cent of the increase i n population durin g the next decade (assuming that 50-60 per cent will be absorbed by agriculture) = 2 8 million people = 9 million active men and 3 million activ e women = 1 2 millio n workers. U p to 2 million workers ca n be employed i n idle capacity. Capita l has to be found fo r 10 million workers. Since the available capital i s scarce, labour-intensive—i.e., ligh t industries—wil l prevail . Accordin g t o suc h statistic s a s ar e avail able, th e followin g classificatio n o f industrie s is proposed : (1 ) ligh t industries—capital equip ment pe r head £100-£400; (2 ) medium industries—capita l equipment per head £400-£800; (3 ) heavy industries—capital equipmen t per head £800-£I ,500. Since some heavy industries canno t be avoided, le t us assume that £300-£350 per head will be required, including housing, commu nications an d public utilities. That amount s to £3,000 million, to which has to be added £1,800 million o n maintenanc e of ol d an d ne w capita l fo r te n years , givin g a tota l o f £4,800 million . Eastern Europ e would hav e to supply at least 5 0 percent—i.e., £2,40 0 million. Another £1,200 million o f capital wil l be necessary fo r the improvemen t o f agriculture, o f which we assume that the bul k would hav e t o be provided internally, 1 so that Eastern an d Southeastern Europ e woul d have t o suppl y £3,60 0 millio n capita l internall y between , say , 1945 and 1956. 2 Since it s total income i s £2,000 millio n per annum , tha t woul d represent a rat e of investmen t of 1 8 per cen t (equal t o tha t of Russia) . 'A smal l par t of i t ma y b e borrowe d fro m abroad , but i n this case i n th e for m o f bon d credit. The immediat e transition period o f th e first tw o years afte r th e wa r i s not include d i n these calculations, so that d e facto i t i s a twelv e years plan, no t a ten-year s plan. 2

666 Notes

t o Pages 408-412

124. I n a footnote to his articl e in Pioneers (p. 207) , Roda n cites a s "importan t predecessors of the theor y o f development Harrod-Domar , Joa n Robinson , Keynes , an d Colin Clark." 125. Pioneers, p . 209 . 126. Se e Kennet h J . Arrow , "Limite d Knowledg e an d Economi c Analysis, " American Economic Review, Vol . 64 , No. 1 (March 1974) , pp . 1-10 . Arro w concluded that the imperfection of investment market s was , essentially , irremediable . Fo r discussio n i n th e contex t o f T . N . Sri nivasan's repl y t o Pete r Bauer , se e Pioneers, pp . 54-55 . Also , Sikhamo y Chakravarty , "Pau l Rosenstein-Rodan: a n Appreciation," World Development, Vol . 11 , No . 1 (January 1983) . 127. Pioneers, p . 210 . Roda n quote s her e fro m a paper o f the M.I.T . Cente r fo r Internationa l Studies, prepare d fo r the Specia l Committe e t o Study the Foreig n Ai d Program, Th e Objectives of U.S. Economic Assistance Programs (Washington , D.C.: Governmen t Printing Office, 1957) , p . 70. 128. See , fo r example, m y reference s i n Pioneers, pp . 240-24 5 an d in Eisenhower, Kennedy, and Foreign Aid, pp . 41-50 . 129. Ma x F. Millika n and W. W . Rosto w with the collaboration of P. N . Rosenstein-Roda n and others, A Proposal: Key to an Effective Foreign Policy (New York: Harper, 1957) , "Appendix : Th e Estimation o f Capital Requirement s for Development," pp. 153-170 . Rodan's articl e wa s "Inter national Aid for Underdeveloped Countries, " Th e Review o f Economics and Statistics, Vol . XLIII, No. 2 (May 1961) , pp . 107-138 . 130. Pioneers, p . 212 . Havin g observe d wit h sympath y an d closel y th e experimen t wit h th e Committee o f Nine, I fee l impelle d t o report tha t its failure, i n my view, was fo r somewha t mor e complex reason s tha n the instinctiv e antagonis m of entrenched Lati n America n an d U.S . bureau crats. Th e Nin e prove d t o b e a rathe r contentiou s egocentri c group . The y migh t have bee n kni t together unde r Rodan's leadershi p i f other legitimate claim s upo n his time and presence i n Washington were not so pressing. Th e Nine overlapped wit h and were finally supersede d by CIAP (InterAmerican Committe e on the Alliance for Progress) a group of seven Latin-American members (als o government officials) , plu s a Latin-America n Chairma n (Carlo s San z d e Santamaria ) plu s on e member (not representative ) fro m th e Unite d States. Fo r a time , befor e it s dissolution , th e Nin e advised CIAP . Th e America n Congres s stipulate d that Alliance for Progress loan s had to be mad e on th e basi s o f CIA P recommendations . Unfortunately , i n m y view , th e CIA P machiner y pro gressively weakene d i n the latte r year s of th e 1960s . 131. Ibid., pp . 218-219 . 132. Ibid., pp . 219-220 . 133. Ibid., p . 220 . 134. Ibid., pp . 220-221 . 135. Singer's two basic papers were: "Relativ e Prices of Exports and Imports of Underdeveloped Countries" (Ne w York: United Nations, Department of Economic Affairs, No . 1949 , II, B.3) ; and "Distribution o f th e Gain s Betwee n Investin g an d Borrowin g Countries," American Economic Review, Papers an d Proceedings (Ma y 1950) . 136. Pioneers, pp . 279-280 . Singe r cites , fro m differen t perspectives , th e wor k o f Keynes , Meade, Hilgerdt , Car l Majo r Wright , and Gunnar Myrdal. H e later (p . 285 ) note s tha t he carrie d over into international economic relations Schumpeter' s notio n that the innovation of new technolo gies carried wit h it quasi-monopolistic profits . 137. Ibid., p . 280 , tex t an d Note 13 . 138. Pioneers, especiall y pp . 282-283 and 288-293. Spraos's articl e is "Th e Statistica l Debat e on th e Ne t Barte r Term s o f Trad e betwee n Primar y Commoditie s an d Manufactures, " Economic Journal, Vol . 9 0 (Marc h 1980) . 139. Ibid., pp . 123-12 4 (Lewis ) and pp. 304-31 1 (Balassa) . 140. I shoul d not e tha t Singe r (ibid., p . 288 ) doe s acknowledg e that: "Wit h th e benefi t o f hindsight .. . I woul d agre e tha t th e limits o f th e ISI [Impor t Substitution Industrialization ] were not full y realized. "

Notes t o Pages 412-419 66

7

141. Ibid., pp . 293-295 . 142. Ibid., pp . 296ff . 143. See , fo r example, m y Eisenhower, Kennedy, an d Foreign Aid, especiall y Chapters 8-10 . 144. Pioneers, p . 276 . 145. Pioneers, pp . 220-221 . 146. Ibid., pp . 218 , 217 . 147. Jan Tinbergen, Th e Design of Development (Baltimore : Johns Hopkins University Press, fo r the International Development Institute of the World Bank, 1958). For a more general evaluation of Tinbergen's career , see , notably , Bert Hansen, "Ja n Tinbergen . An Appraisal of his Contributions to Economics," Swedish Journal o f Economics (1969), pp. 325-336 . 148. Design o f Development, pp . 9-10 . Bruno' s commentar y on Tinberge n a s a development economist i s i n Pioneers, pp . 332-334 . 149. Firs t publishe d a s "Zu r Theori e de r Langfrisrige n Wirtschaftentwicklung, " Weltwirtschaftliches Archiv, Vol . 5 5 (1942) , pp . 511-549 . Translate d and reprinted a s "O n th e Theory o f Trend Movements, " i n L. H . Klassen , L. M . Koyck , and H. J . Witteree n (eds.) , Ja n Tinbergen: Selected Papers (Amsterdam : North Holland Press, 1959) , pp . 182-221 . 150. L . H . Klasse n et al. (eds.) , p. 189 . 151. Ibid., p . 183 . 152. Her e i s Tinbergen's late r account o f his assumption s in this exercise (Pioneers, p . 316) : Production, an d hence real income , wa s assumed t o depend o n the supply of labor and of capital . The relationshi p determinin g productio n wa s assume d t o b e a Cobb-Dougla s functio n wit h disembodied exponentia l technologica l development ; th e exponent s o f labo r an d capita l wer e three-fourths an d one-fourth respectively . Th e suppl y elasticity of capital with regard t o its price (interest) was assumed t o be zero; labor suppl y was given values ranging from -1 t o infinity. The supply o f labo r wa s als o assume d t o depend proportionall y o n population , itself growin g expo nentially. Capita l formatio n wa s taken to be a fixed proportion o f real income. Othe r assumption s with regar d t o the suppl y elasticit y o f capital an d the developmen t o f population over tim e wer e considered. Fo r th e centra l cas e describe d i n th e precedin g sentence s tw o mai n result s wer e offered: (1 ) th e tim e shap e o f productio n an d (2 ) th e growth rates , fo r th e middl e o f the perio d considered, o f capital , labor , an d produc t fo r fou r differen t value s o f labo r suppl y elasticity . The whol e exercis e wa s mean t a s a supplemen t t o busines s cycl e theor y an d wa s typicall y inspired b y th e situation i n developed countrie s an d by the absence o f massive unemploymen t in the phas e o f prosperity .

153. Ibid., p . 330 . 154. Ibid., p . 320 . 155. Ther e i s discussio n o f th e sectora l structur e of plannin g that borders o n thi s poin t in Th e Design o f Development, pp . 47-4 9 and 81-84; but I, a t least, d o not regard i t as adequate. 156. Pioneers, p . 320 . 157. Th e Design o f Development, pp . 63-67 . 158. Ibid., p . 65 . Tinberge n notes (Pioneers, p. 325 , n . 19 ) that his citing of Dutch government financing o f the steel industry sufficiently disturbe d the president of the World Bank (Eugene Black) to postpone publicatio n of hi s monograp h for severa l years . 159. Pioneers, pp . 325—326 . Tinberge n fail s t o not e tha t a s th e privat e secto r generate d a n enlarged corp s o f vigorous entrepreneur s i n Turkey some initiall y government owned plants wer e sold off , a procedure als o followed in Japan, beginning in the 1880s . 160. "Ja n Tinbergen : A n Appraisal," p . 331 . 161. Ja n Tinbergen , "M y Lif e Philosophy, " Th e American Economist, Vol . XXVIII , No. 2 (1934), pp . 5-8 . 162. Pau l Streeten, "Postscript : Developmen t Dichotomies," Pioneers, pp . 337-361 . 163. Ibid., p . 338 . 164. Ibid., p . 342 .

668 Notes

t o Pages 419-425

165. Ibid., p . 345 . Th e distinctio n has been elaborate d i n I. M . D . Little , Economic Development. 166. Th e editor o f Pioneers, G . M. Meier, aske d me to reply to Streeten's dependencia doctrine, which I did, ibid., pp . 250-253 . A reading o f The Stages o f Growth, detailin g the multiple routes to, through , an d beyon d takeoff , an d Par t V o f Th e World Economy, shoul d dispe l th e (t o me ) incomprehensible notio n tha t nations have passed throug h identical development experiences. But, as note d above , developmen t economists , peculiarl y draw n t o posture s o f "dissent, " ten d t o conduct thei r controversies agains t caricature stra w men. 167. Ibid., p . 257 . 168. Kwo n Won-Ki, Vice Minister of Science and Technology, "Scienc e and Technology Vital to Nation' s Modernization, " Korea Business World, Vol . 3 , No . 4 (Apri l 1987) , p . 10 . O n th e essential catalyti c rol e o f th e Sout h Korea n bureacrac y i n tha t country' s remarkabl e post-wa r economic developmen t see the short but authoritative essay by Lee Hahn-Been, "Korean Development: Lessons, Problems, an d Prospects," Chapter 8 in his The Age o f the Common Man i n Korea, (Seoul: Ba k Youn g Sa, 1987) , pp . 258-267 . 169. Ibid., p . 11 . 170. Se e m y Wh y the Poor Ge t Richer, especiall y pp . 268-271 , Table s 6- 7 an d 6-8 . 171. Holli s Chenery , Sherma n Robinson , an d Mosh e Syrquin , Industrialization an d Growth (New York : Oxfor d Universit y Press, 1986) . Se e especiall y Chapte r 1 1 ("Alternative Route s t o Development") and 1 2 ("Growth and Structure: A Synthesis"). Fo r important underlying data and analysis see also Chapter 6 ("Trade Strategies and Growth Episodes") and Chapter 7 ("Interdependence an d Industrial Structure") . 172. Th e computable genera l equilibriu m (CGE) models , pioneere d b y Johansen, ar e describe d by Chener y (ibid., p . 314 ) a s follows: In th e developmen t literature , CGE model s trac e thei r lineage back t o the multisector inputoutput model s widel y applie d t o problem s o f plannin g i n developin g countrie s i n th e 1960s . While firmly base d on the foundation of Walrasian general equilibrium theory, CGE models ca n also be seen as a logical culminatio n of a trend in the literature on planning models t o add mor e and more substitutability and nonlinearity to the basic input-output model. The models tend to be highly nonlinear—t o hav e neoclassica l productio n and expenditure functions—and to incorpo rate a variet y o f substitutio n possibilities i n production, demand, and trade. CGE model s applie d t o develope d countrie s hav e generall y staye d relativel y clos e t o th e Walrasian paradigm . I n application s t o developin g countries, however , mos t researcher s hav e introduced certain structuralist features into CGE models to capture the stylized facts characteriz ing thes e countries .

173. Ibid., pp . 339-34 0 and 358-359. 174. Ibid., p . 358 . Fo r a simila r conclusio n se e Martin Fransman , Technology an d Economic Development (Brighton : Wheatshea f Books , 1986) , especiall y Chapte r 8 , "Infants , Export s an d Technical Progress, " pp . 75-93. 175.I cit e Djakarta to Rabat because, durin g a year off from Jul y 1983 to July 1984, m y wife and I spen t th e first 4 i month s travelin g through the Pacific t o Asia and the Middl e East . I n virtually every on e o f th e doze n developin g countrie s w e visite d (includin g both Chin a an d India) , hig h officials wer e attempting t o focu s thei r citizen s o n th e nee d t o reduce th e role o f government an d expand th e scop e o f privat e enterprise i n the economy . Th e firs t suc h country was Indonesia; th e last, Morocco . 176. Thi s passage comes from a n unclassified U.S . governmen t document written by an anonymous U.S. public servant. I quoted it in a lecture at the National Bank of Egypt in November 1983 (Prospects for the World Economy). 177. The phras e is quoted i n William P. Glade , "Economi c Policy-making and the Structures of

Notes t o Pages 425-436 66

9

Corporation i n Latin America," (Offprin t Serie s No. 208 , Institute of Latin American Studies, The University o f Texa s a t Austin , 1981) . 178. See , especially , m y Stages o f Economic Growth, especiall y pp . 26-30 ; Politics an d th e Stages o f Growth, especially , Chapter s 3 and 4, als o Pioneers, pp . 232-233 . 179. Fo r a more complete account see my Diffusion o f Power (New York: Macmillan, 1972), pp . 192-196. 180. Fo r a n elaboratio n o f thi s argumen t se e m y Politics an d th e Stages o f Growth, pp . 289-295. 181. A s this book was being put to bed, the Winter 1989 edition of Daedalus arrived, " A Worl d to Make: Developmen t i n Perspective" (Vol . 118 , No. 1) . It is a wide-ranging review and critique of post-1945 development theor y and practice in which some 38 scholars participated. A good many drew policy conclusions in their papers or discussion. For our present purposes, i t is relevant to note that, from beginnin g to end, the volume is shot through with reflections—in many moods—on th e inescapable, ofte n overriding , ofte n distorting , occasionall y reinforcing , role o f politic s i n th e development proces s o f the pas t four decades. Chapter 18 1. See , i n particular , Politics an d th e Stages o f Growth, (Cambridge : a t th e Universit y Press, 1971), pp . 7-16 . fo r a n elaboratio n o f som e implication s of the tripartit e vie w of huma n beings including the relevance to individual and collective behavior of the economist's principl e of diminishing relativ e margina l utility. 2. Th e phrase s ar e fro m Professo r Prigogine' s "Orde r ou t o f Chaos," a n unpublishe d public lecture delivered a t the Universit y of Texas a t Austin, November 18 , 1977 , o n the occasion o f the announcement o f hi s Nobel Priz e Award. 3. The World Economy: History and Prospect (Austin: University of Texas Press, 1978) , pp. xi xli. 4. Pioneers i n Development, Geral d M . Meie r an d Dudle y Seer s (eds. ) (Ne w York : Oxfor d University Pres s fo r the Worl d Bank , 1984) , p . 238 . 5. Th e Process o f Economic Growth, (Oxford : at the Clarendon Press, 1953 , 1960) , pp . 17 , 71 , 103-108. 6. Economic Journal, Vol . LXVI , No . 2 6 (March 1956) , pp . 25-48 . 7. Th e United States i n the World Arena (Ne w York : Harper an d Row, 1960) . 8. The Stages of Economic Growth, (Cambridge: at the University Press, 1960 , 1971 ) pp. 57-58. 9. Ibid., pp . 12-16 . 10. Pioneers, pp . 234-237 . 11. W . W . Rosto w (ed.) , Th e Economics o f Take-off into Sustained Growth (Ne w York : St . Martin's Press , 1963) , p . 16 . 12. See , especially , ibid., pp . xiii-xxv i an d Chapte r 1 , pp . 1-21 ; Th e Stages o f Economic Growth, 2 d ed., 1971 , Appendi x B , pp . 172-241 ; Th e World Economy, pp . 778-779 ; Pioneers, pp. 234-23 8 and 250-253. 13. Th e World Economy, pp . 778-779 , wher e th e tw o set s o f date s ar e give n an d mino r differences discussed , includin g the cas e o f Japan , where we wer e both a bit early. 14. For the relevance of Crouzet's wor k to this issue see Stages, 2 d ed., p. 214. 1 should add that David H . Pinkney' s Decisive Years in France, 1840-1847 (Princeton: Princeton University Press, 1986) make s the case, mainly in prose, fo r the critical importance of the 1840 s in French modernization mor e effectivel y than eithe r Crouzet' s o r my statistics. 15. Thi s collectiv e adventur e is describe d a t som e lengt h i n m y Eisenhower, Kennedy, an d Foreign Aid (Austin : University of Texas Press, 1985) , Chapters 3 and 4; and in my essay "Devel opment: The Political Economy of the Marshallian Long Period," i n Gerald M. Meie r and Dudley Seers (eds.) , Pioneers, especiall y pp. 240-247 .

670 Notes

t o Pages 437-451

16. Ne w York : Harper , 1957 . 17. An American Policy in Asia, (Technology Press of M.I.T. and John Wiley, 1955) , p. 50. The palpable lac k o f automati c short-ru n linkag e between rea l incom e pe r capit a an d th e capacit y t o sustain democrac y wa s on e facto r tha t le d m e t o writ e Politics an d th e Stages o f Growth (Cambridge: a t th e University Press, 1971) . 18. Stages, p . 125 . 19. Ibid., pp . 126-127 . 20. Ibid., p . 130 . 21. Ibid., pp . 133-134 . 22. Ibid., p . 135 . 23. There were some reflections of these lines of thought in, for example, President Eisenhower' s peroration o f hi s tal k befor e th e Unite d Nation s Genera l Assembl y o n Augus t 13 , 1958 , an d President Johnson' s tal k wit h Prim e Ministe r Kosygi n i n Glassbor o o n Jun e 23 , 196 7 (se e m y Diffusion o f Power, [Ne w York : Macmillan , 1972] , p . 390) . I also ha d a n occasion t o asser t m y view o f th e relatio n o f th e diffusio n o f powe r t o peac e i n Moscow , a t a Pugwash conferenc e i n November-December 1960 . Fo r th e settin g an d relevan t tex t se e m y Essays o n a Half-Century (Westview: Boulder : Colo. , 1988 ) pp . 58-5 9 an d 158-159. 24. See , especially , Th e Stages, pp . 90-9 2 and pp. 165-167 . 25. Ibid., p . 1 . 26. Ibid.; Th e quotation is from Croce's Historical Materialism and the Economics o f Karl Marx, tr. C . M . Meredit h (London : Alle n an d Unwin, 1922) , pp . 3-4 . Chapter 19 1. Milo Keynes , Essays o n John Maynard Keynes (Cambridge : a t the Universit y Press, 1975) , p. 3 . Th e quotatio n i s fro m a lette r o f Augus t 26, 1938 , t o Kingsle y Martin , edito r o f Th e Ne w Statesman andNation. Th e text is to be found i n Donald Moggeridge (ed.), The Collected Writings of John Maynard Keynes, Vol . XXVIII. , Social, Political, an d Literary Writings (Londo n and Basingstoke : Macmilla n an d Cambridg e Universit y Press, fo r th e Roya l Economi c Society , 1982). 2. Rich Countries and Poor Countries: Reflections from the Past, Lessons for the Future (Boulder, Colo. : Westview, 1987) . 3. See , Wh y th e Poor Ge t Richer an d th e Rich Slow Down (Austin : Universit y of Texas Press , 1980), Chapte r 1 .

Chapter 20 1. Holli s Chener y an d Mosh e Syrquin , Patterns o f Development, 1950-1970, (Ne w York : Oxford Universit y Pres s for th e World Bank , 1975) , p . 56 . 2. Th e World Economy: History an d Prospect (Austin : University of Texas Press , 1978) , p . 1 7 3. For discussion and bibliographical references, ibid., pp . 38-44 and related note s o n pp. 726 727. Als o se e th e demographi c reference s i n Chener y an d Syrquin' s excellen t bibliography , Patterns o f Development, pp . 215-222 . 4. World Development Report 1988 (Ne w York : Oxfor d Universit y Press for the Worl d Bank , 1988) Tabl e 28 , p . 277 . Bot h th e ne t reproduction rat e an d the total fertilit y rat e ar e designed t o foreshadow futur e populatio n trends an d levels . The y ar e define d a s follow s b y th e Worl d Ban k (ibid., p . 301) ; The ne t reproduction rate (NRR ) indicates th e numbe r of daughters a newborn gir l wil l bear during he r lifetime , assumin g fixed age-specifi c fertilit y an d mortalit y rates . Th e NR R thu s

Notes t o Pages 451-454 67

1

measures th e exten t t o whic h a cohor t o f newbor n girl s wil l reproduc e themselve s unde r given schedules o f fertility and mortality. An NRR of 1 indicates that fertility i s at replacement level: at this rate child-bearin g women , o n average , bea r only enough daughter s to replace themselve s i n the population . The total fertility rate represent s th e number of children that would be born pe r woman, i f she were to live to the end of her child-bearing years an d bear children at each age in accordance wit h prevailing age-specifi c fertilit y rates .

5. See , for example , Joh n C. Caldwell , The Theory o f Fertility Decline (Ne w York: Academi c Press, 1982) ; Michae l S . Teitelbau m an d Ja y M . Winter , Fear o f Population Decline (Orlando : Academic Press, 1985) ; and Ben J. Wattenberg, Th e Birth Dearth (New York: Pharos, 1987) . Also , Sidney L . Jones , "Demographi c Trend s i n America : Squarin g the Populatio n Pyramid, " Forum Report (Washington , D.C.: The Washington Forum, Septembe r 30 , 1987) . Jones analyzes in som e delail th e implication s fo r th e economy , socia l security , elc. , of apparen t trend s inth e siz e an d struclure o f the America n populatio n dow n t o 2050. 6. See , fo r example , Julia n L . Simon , Theory o f Population an d Economic Growth (Oxford : Basil Blackwell, 1986) , Chapter 7, "Th e Optimum Rale of Population Growth," Gunter Steinmann and Julia n L . Simon , pp . 15-139 . Thi s boo k i s distinguishe d b y it s sophisticate d linkag e o f population growt h to technological change . 7. Jaco b Schmookler , Patents, Invention, an d Economic Change edite d b y Zv i Griliche s an d Leonid Hurwicz , (Cambridge : Harvar d University Press, 1972) , p . 70 . 8. Th e bibliographical reference s a l the close o f each chapte r o f Paul Stoneman's Th e Economic Analysis o f Technological Change (Oxford : Oxford University Press, 1983) , provid e a useful sens e of th e scal e an d direction s o f recen t analyti c wor k o n th e economic s o f technologica l change . Stoneman's boo k i s a valuabl e stocktakin g a s o f th e earl y 1980s . T o Stoneman' s bibliograph y should b e added Burto n H. Klein , who has done interesting work onthe economi c delerminanls of technological change ; e.g. , Prices, Wages, an d Business Cycles: A Dynamic Theory (Elmsford , N. Y.: Pergamon Press , 1984) . Klein evokesthe "hidde n foot" (i.e., the intensity of competition i n a given sector ) as a supplement t o Ihe profil blandishment s of the hidden hand as a determinant of pace of technologica l diffusion . A n earlier seriou s effor t t o reconcile the processes of invention and innovation wit h neoclassical mainstrea m economic s i s William D. Nordhaus , Invention, Growth, and Welfare, A Theoretical Treatment o f Technological Change (Cambridge : Th e M.I.T . Press , 1969). A ful l bibliograph y a s o f th e lat e 1960 s i s o n pp . 155-164 . O n pp . 55-59 , Nordhau s underlines th e thre e critica l unrealisti c assumption s require d t o conduc t hi s enterprise : certainty , nonincreasing returns to scale, an d perfect competition . O f equal unreality is the assumption that the product o f R & D (productivit y improvin g technica l knowledge ) i s incremental . Technology ha s bee n a area o f analysis where economi c historian s an d economists focusin g on technological chang e hav e no t manage d ver y wel l t o communicat e i n mutually reinforcing ways . For a lucid statemen t o f Ih e inevitable clash betwee n technologica l analysi s an d neoclassical economics—and th e inescapable nee d to evoke history—see Paul A. David, Technical Choice Innovation and Economic Growth (Cambridge : Cambridg e Universit y Press, 1975) , "Introduction : Tech nology, Histor y an d Growth, " pp . 1-16 . Fo r a n effor t t o bridg e th e ga p betwee n mainstrea m economics an d economi c history , includin g considerable discussio n o f problem s pose d b y tech nology, se e William N. Parke r (ed.) Economic History an d the Modern Economist (Oxford : Blackwell, 1986) . 9. Thi s i s th e centra l them e o f my "Technolog y an d th e Economic Theorist, " a n unpublished paper presente d to a conference i n honor of David Landes's sixty-fift h birthday , hel d August 30 September 4 , 1987 , at th e Vill a Serbelloni , Bellagio, Lake Como . 10. Fo r a critiqu e of mainstrea m economics i n much the sam e spiri t a s tha t whic h suffuses thi s book, se e R . R . Nelso n an d S . G . Winter , "Neoclassica l v . Evolutionar y Theorie s o f Economi c Growth: Critique and Prospectus," Economic Journal, Vol. 84, No. 336 (December 1974), pp.

672 Notes

t o Pages 454-456

886-905. Fo r th e ful l arra y o f restrictin g assumption s required t o dea l wit h invention using neoclassical tools , se e William D. Nordhaus , Invention, Growth, an d Welfare, p . 27 . Afte r devotin g a chapter t o efforts t o relax these assumption , Nordhaus concludes (p . 59): "The problems w e have raised i n this section ar e clearly important and cannot be assumed away if it is to be hoped that the results ca n b e applie d t o rea l markets . However , a complet e discussio n an d resolutio n o f th e problems i s no t withi n the scop e o f thi s study." 11. For a n exploratio n o f these complexities , se e Chapte r 4 ("Science , Invention , and Innovation") i n m y How I t All Began, (Ne w York : McGraw-Hill , 1975) . 12. For discussion of the links of science to invention, see, notably, Jacob Schmookler, Invention and Economic Growth (Cambridge : Harvar d Universit y Press , 1966) , an d Natha n Rosenberg' s comments, i n Perspectives o n Technology (Cambridge : at the Universit y Press, 1976) , Chapte r 7 ("Karl Mar x o n th e Economi c Rol e o f Science") ; an d Chapte r 1 5 ("Science , Inventio n an d Economic Growth") . Th e latte r is , i n part, a critique of Schmookler' s study . M y ow n view s ar e incorporated i n the references previousl y given to The Process o f Economic Growth (Oxford: at the Clarendon Press , 1953 ) and Ho w I t Al l Began a s wel l a s i n Chapte r 4 o f Wh y th e Poor ("Technology an d the Price System") . 13. Fo r a n importan t critiqu e o f Schumpete r an d hi s influenc e i n thes e terms , se e Natha n Rosenberg, Perspectives o n Technology, pp . 66-68 . 14. Ibid., p . 166. 15. Ibid., p . 192. 16. Th e Britis h an d Frenc h method s for encouragin g invention s are discussed an d compare d i n my Ho w It All Began, pp . 173-189 . 17. See , fo r example , Edwar d Denison , Trends i n American Economic Growth 1929-1982 (Washington, D.C.: The Brookings Institution, 1985), pp. 40-44, includin g footnote references. In addition t o hi s Invention an d Economic Growth, cite d i n not e 12 , se e als o Jaco b Schmookler , Patents, Invention, an d Economic Change, especiall y "Technologica l Chang e an d th e La w o f Industrial Growth, " pp . 70-84 . 18. For discussion of the debate on this matter, see How It All Began, pp. 148-150 . In his rather sympathetic essay o n Marx' s vie w of science , Rosenber g sum s up usefully : There are severa l possibl e meaning s whic h can be attache d to the statement tha t "the origi n and developmen t o f th e science s ha s bee n determine d b y production." 1. Scienc e depend s upo n industr y for financia l support. 2. Th e expectatio n o f hig h financia l returns i s wha t motivates individual s (and society) t o pursue a particula r scientifi c problem . 3. Th e need s o f industr y serve a s a powerfu l agen t i n callin g attentio n t o certai n problem s (Pasteur's studie s o f fermentatio n and silkwor m epidemics) . 4. Th e norma l pursui t of productiv e activitie s throw s up physica l evidence o f grea t impor tance t o certai n discipline s (metallurg y and chemistry, cana l building and geology) . A s a result, industria l activities have, as a byproduct of their operation, provided the flow of raw observations upo n whic h science s hav e built and generalized. 5. Th e history of individual sciences, including an account of their varying rates of progress at different period s i n history, ca n be adequately provide d b y an understanding of the changing economi c need s o f society . I believe tha t Marx and Engels subscribe d t o propositions 1- 4 withou t qualification. I believe they ofte n sounde d a s i f the y subscribe d t o th e fift h proposition . However , I thin k . . . the y subscribed t o th e fift h propositio n onl y subjec t t o certai n qualifications—qualification s which strike m e a s being , collectively, more interestin g than th e origina l proposition.

The qualification s to which Rosenberg refers relate to th e emergence o f complex, highl y differ entiated machiner y and th e applicatio n to it s design and manufactur e o f scientifi c principles .

Notes t o Pages 456-459 67

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19. For discussions o f the role of the capacity to measure in the early days of the modern physical sciences an d mor e currently , se e m y How I t All Began, p . 154 , an d Getting from Here t o There (New York : McGraw-Hill , 1978) , pp . 160-162 . 20. Perspectives o n Technology, Chapte r 6 ("Th e Directio n o f Technological Change : Induce ment Mechanism s an d Focusin g Devices"). 21. Mensch' s hypothesi s is incorporated in his Stalemate i n Technology: Innovations Overcome the Depression (Ne w York : Ballinger , 1979) , Englis h translatio n o f th e 197 5 Germa n edition . Freeman's view s ar e full y elaborate d i n C . Freeman , Joh n Clark , an d Luc Soete , Unemployment and Technical Innovation (Westport , Conn. : Greenwoo d Press, 1982) . Th e references i n the latter (pp. 203-210 ) list the principal recent work on long cycles a s well as the older literature, although work on lon g cycles ha s continued to swarm in the 1980s . M y evaluation of the Mensch-Freeman debate i s in my review of the latter's study in The Journal o f Economic Literature, Vol . XX (March 1983), pp . 129-131 . See also Alfred Kleinknecht , foreword by Jan Tinbergen, Innovation Patterns in Crisis and Prosperity; Schumpeter's Long Cycle Reconsidered (Ne w York: St. Martin's , 1987) , and m y revie w i n Th e Journal o f Economic Literature, Vol . XXV I (March 1988) , pp . 111-113 . 22. J . Jewke s e t al., Th e Sources o f Invention (London : Macmillan , 1958 , 1969) . 23. C . Freema n e t al., Unemployment an d Technical Innovation, p . 63 . 24. Ibid., pp . 64-65 . 25. Ibid., pp . 67-68 . 26. On e intellectua l issu e exist s betwee n Freeman' s analysi s and mine : Where doe s th e worl d economy stan d i n term s o f th e rhyth m o f innovation—if , indeed , ther e i s a rhythm ? Acceptin g Schumpeter's thre e pre-191 4 technologica l revolutions , Christophe r Freema n an d hi s colleague s identify a post-1945 "Fourt h Lon g Wave " (Chapter s 6-8) . I t peaks ou t in the mid-1960 s an d is linked t o plastics , syntheti c fibers , an d premicrochi p electronics , includin g television—sector s analyzed b y Freeman i n an original an d fruitful way . He is quite aware of the extremely important role of motor vehicle s an d durable consumer s good s i n the grea t postwa r boom; an d these sector s were (exceptin g television ) evidently fa r beyond a n innovational stage, clearl y belongin g wit h th e Third Industria l Revolution . Bu t Freema n choose s t o dramatiz e th e ris e an d deceleratio n o f a batch o f technologies , lon g germinating , tha t clearl y di d emerg e int o large-scale productio n afte r 1945. I a m incline d t o regar d th e leadin g sector s o f th e postwa r boo m (includin g plastics, syntheti c fibers, an d television) a s the rounding out of the Third Industrial Revolution, placing more emphasis than Freema n o n th e diffusio n i n th e 1950 s an d 1960 s o f th e automobil e and durabl e consumers ' goods revolutio n t o Wester n Europ e an d Japan , sector s that , incidentally , absorbe d significan t proportions o f th e outpu t o f syntheti c material s an d ligh t electronics . I woul d identif y micro electronics, geneti c engineering , ne w syntheti c materials, an d the laser a s the Fourth Wave , date d from th e mid-1970s . The poin t I would mak e her e is not that m y view i s correct and Freeman's incorrect : it is that, while the phenomenon o f bunching is a real feature of modern economi c history , our groupings and dating ar e inherentl y arbitrary . The y shoul d b e take n seriousl y but no t too seriously, a s w e recal l that many important innovations occurred outsid e the intervals of cluster and that the clusters can be grouped i n differen t ways . A quit e differen t approac h t o innovationa l bunching is take n by Wilhel m Krell e ("Long-Ter m Fluctuation o f Technical Progres s an d Growth," Journal o f Institutional an d Theoretical Economics, Vol . 143 , No . 3 [September 1987] , pp. 379-401.) He adduces a cycle in "entrepreneurship, " defined a s a "laten t variable—that measures the degree o f economic activit y in the population," to explain the waning of innovation in the United States, th e Federal Republi c of Germany, an d Japan in, roughly , th e decad e 1965-197 5 an d th e subsequen t revival . Whil e I woul d take a les s gener alized approach t o the phenomenon, Krelle is one of the few who has recognized the deceleration of innovation i n tha t decade an d subsequen t revival. 27. World Economy, p . 379 .

6

Notes

t o Pages 462-465

28. Getting fro m Here t o There, Chapter s 8 an d 9 . 29. J . M . Clark , Economics o f Overhead Costs (Chicago : Universit y of Chicago Press , 1923) , p. 120 . This splendid affirmation i s affixed t o the wall of the Old Regents Room at the University of Texas a t Austin. My colleague, Michae l Kennedy, points out, however, that Clark's us e of diminishing returns in this context is a bit colloquial or, even , suspect. He argues that it is unlikely that a doubling of outlays on R & D would double the annual increment to the stock of usable knowledge, somehow measured . For a thoughtfu l examinatio n of th e Kuznets-Burns-Salte r hypothesi s (diminishin g returns to invention and innovation in a given sector) versu s the Schmookler hypothesis (enlarged demand and production increas e th e volum e of inventions and innovations in a given sector), se e Michael Ger t and Richard A . Wall , "Th e Evolutio n of Technologies an d Investment in Innovation," Economic Journal, Vol . 96, No . 38 3 (September 1986) , pp. 741-747. The authors conclude indecisively that both force s ar e a t work an d th e outcom e canno t be predicte d a priori. 30. This point, made in Getting from Here to There, pp . 161-162 , is elaborated by W. O. Bake r in "Computer s a s Information-Processin g Machine s i n Modern Science," i n The Making o f Modern Science: Biographical Studies, (Fall , 1970) , Vol . 99, No . 4, Daedalus, pp . 1088-1120 . 31. Fo r genera l reflection s o n this subjec t se e Natha n Rosenberg, Perspectives o n Technology, Chapter 1 3 ("Technological Innovation and Natural Resources: Th e Niggardlines s o f Nature Reconsidered"). Se e also , fo r historica l an d polic y review , m y World Economy, Par t Si x (especiall y Chapters 49-53 ) an d Getting from Here t o There, Chapter s 4-7 . As o f th e 1980 s th e IC 2 Institut e a t Th e Universit y of Texa s a t Austi n has evolve d a s a major center for the exploration o f technological innovation and diffusion. A few of its many monographs in thi s terrai n are : Abetti, Pie r A. , Christophe r W . LeMaistre , Raymon d W . Smilor , an d Willia m A . Wallac e (eds.), Technological Innovation an d Economic Growth (Austin: IC2 Institute, The University of Texa s a t Austin , 1987) . Abetti, Pie r A. , Christophe r W . LeMaistre , an d Raymond W. Smilo r (eds.) , Industrial Innovation, Productivity, an d Employment (Austin : IC 2 Institute, The University of Texas a t Austin, 1987). Konecci, Eugen e B. , Georg e Kozmetsky , Raymond W. Smilor , and Michael D. Gill , Jr. (eds.) , Commercializing Technology Resources for Competitive Advantages (Austin : IC 2 Institute , The Universit y of Texas a t Austin, 1986) . Konecci, Eugene B. , Georg e Kozmetsky , Raymond W. Smilor , an d Michael D. Gill, Jr. (eds.) , Technology Venturing: Making and Securing the Future (Austin : IC2 Institute, The University of Texa s a t Austin , 1985) . Konecci, Eugen e B. , an d Lawrenc e Kuh n (eds.), Technology Venturing: American Innovation and Risk-Taking (Ne w York: Praege r Publishers , 1985) . Kozmetsky, George , Transformational Management (Cambridge , Mass. : Ballinge r Publishin g Company, 1985) . Mahajan, Vijay , an d Yora m Win d (eds.) , Innovation Diffusion Models o f New Product Acceptance (Cambridge , Mass. : Ballinge r Publishin g Company, 1986) . 32. I n a bold but thoughtful essay Aaro n Segal has not only set out criteria for the institutionaliza tion of a capacity to absorb modern technologies i n a developing country but also arrayed thirty-two countries i n th e following tabl e ("From Technolog y Transfe r to Scienc e an d Technology Institu tionalization," Chapte r 6 i n Joh n R . Mclntyr e an d Danie l S . Pap p [eds.] , Th e Political Economy o f International Technology Transfer [Westport , Conn. : Greenwood , Press , 1986] , pp . 95-115). Segal's essa y conclude s wit h a usefu l se t o f reference s t o technology-transfe r problem s an d initiatives i n variou s part s o f th e developin g world (pp . 114-115) .

Notes t o Pages 466-467 67

5

N.6 Developin g Countr y Scienc e an d Technology Capabilities , 198 4 /. Fully institutionalized India //. Semi-institutionalized Brazil Singapor e China Sout h Kore a Hong Kon g Taiwa n ///. Partly institutionalized Argentina Pakista n Malaysia Sout h Afric a Mexico IV. Partly institutionalized petroleum dependent Algeria Saud i Arabi a Iran Trinida d an d Tobag o Iraq Venezuel a Kuwait V. Longshots Barbados Sr i Lanka Colombia Thailan d Costa Ric a Turke y Jamaica VI. Apparent failures Chile Nigeri a Cuba Philippine s Egypt Vietna m Indonesia VII. Others SOURCE: Aaro n Segal , "Fro m Technolog y Transfe r t o Scienc e an d Technolog y Institu tionalization," Chapte r 6 i n Joh n R . Mclntyr e an d Danie l S . Pap p (eds.) , Th e Political Economy o f International Technology Transfer (Westport , Conn.: Greenwood Press), pp. 95 115.

33. See , fo r example, Serge i P. Dobrovolsky, The Economics of Corporate Finance (New York: McGraw Hill , 1971) , pp . 329-333 . Se e also hi s earlier Corporate Income Retention, 1915-1943 (New York : Nationa l Burea u o f Economi c Research , 1951) , whic h found (p . 97) : "Th e relativ e importance o f retaine d incom e an d externa l financin g absorbe d b y manufacturin g corporations during th e year s o f 1915-194 3 varie d wit h the rate of thei r asset growth. " 34. See , fo r example , W . E . G . Salter , Productivity an d Technical Change (2 d ed . wit h a n addendum b y W. B . Reddawa y [Cambridge: a t the University press, 1966] , especiall y Chapte r X I ["Productivity an d Technical Change"], pp. 147-155) . On the pattern of capital in U.S. manufacturing industries , 1880-1948 , se e notabl y Danie l Creamer , Serge i P . Dobrovolsky , an d Israe l Berenstein, Capital in Manufacturing and Mining: Its Formation and Financing (Princeton: Princeton Universit y Press , 1960) . Fo r a summar y o f recen t U.S . dat a confirmin g Sailer' s an d Dobrovolsky's earlie r findings , see Donal d L . Losma n an d Shu-Ja n Liang, Th e Industrial Sector (Washington, D.C. : Nationa l Defense University , 1987), especiall y pp . 43-54. 35. Economics o f Corporate Finance, pp . 331-332 . Direc t quotatio n may b e helpfu l o n thi s important point : It i s also possible to compare [fo r manufacturing an d mining] gross internal financing (retained profit plus depreciation allowances) with gross plant and equipment expenditures. The ratio of the former t o th e latte r is foun d t o b e a s follows :

676 Notes

t o Pages 467-470 N.7. Retaine d profit plu s depreciation as percentag e of gros s plan t and equipmen t expenditur e

1900-1914 1919-1929 1936-1940 1946-1958

87.1' 107.8 92.2 109.9

One i s tempte d t o conclud e fro m th e abov e tha t plan t an d equipmen t expenditure s were essentially finance d wit h interna l fund s an d tha t externa l fund s wer e require d only t o financ e relatively smal l investment s in other assets: inventories, receivables , and marketable securities . On th e basi s of aggregat e data, however , on e canno t justifiably matc h individual source s with individual uses of funds. Som e corporations that were engaged in substantial plant modernization or expansion programs doubtless required large amounts of external funds i n addition to the fund s generated internally. At the same time, other companies generated internal funds well in excess of their own expenditures on plant and equipment. Nevertheless, it is interesting to observe that, for the industr y a s a whole, the amoun t obtained from th e internal sources was approximately equa l to th e amoun t required t o financ e th e mos t important type o f expenditures .

36. See , fo r example , m y "Worl d Econom y Sinc e 1945 : A Stylize d Historica l Analysis, " Economic History Review, Vol . XXXVIII, No . 2 (May 1985) , especiall y pp. 256-257. Also World Economy, especiall y pp . 561-563 . 37. An Economic History o f Western Europe, 1945-1964 (London: Metheun , 1967) , p . 128 . Th e argument, whic h i s close to the central thesi s of Postan's study, is extended o n pp. 129-132 , 163 166, an d p. 36 4 (Not e 7) . 38. Th e reference s i n th e tex t ar e draw n fro m W . E . G . Salter , Productivity an d Technical Change, pp . 147-151 . For an extended grou p of references o n this point, se e The World Economy, pp. 762-763 , not e 198 . O n Japan , fo r th e perio d 1960-1971 , se e Miyohei Shinohara , Industrial Growth, Trade, an d Dynamic Patterns i n th e Japanese Economy (Tokyo : Universit y o f Toky o Press, 1982) , "Technica l Progres s an d Productio n Functio n b y Industry, " pp . 203-237 . Thi s supplementary chapte r relates , fo r twenty-on e Japanes e industries , th e rat e o f growt h o f output , capital, th e labo r force , an d productivit y over th e perio d 1960-1971 . Th e annua l averag e growt h rates tabl e indicates th e extraordinary rang e of increase s i n output, capital , labor , and , b y implica tion, productivit y a s between , say , automobile s an d cotto n spinnin g (see p . 677) . 39. Simo n Kuznets , Economic Growth o f Nations (Cambridge : The Belknap Press o f the Harvard University Press, 1971) , p . 319 . Kuznets' s full discussio n is on pp. 314-343 . Kuznet s uses for this exercise dat a fro m Danie l Creamer , Serge i P . Dobrovolsky , an d Israe l Borenstein , Capital i n Manufacturing and Mining. 40. Ally n Young , "Economi c Returns an d Economic Progress " Economic Journal, Vol . XXX VIII, No. 15 2 (December 1928) , p . 539. Fo r background t o Young's address, se e Charles P . Blitch , "Allyn A . Young : A Curious Cas e o f Professiona l Neglect, " History o f Political Economy, Vol . 15, No . 1 (Spring 1983) . Blitch' s essa y provide s a usefu l biographica l sketc h of Young' s lif e an d work. 41. See , fo r example , Th e World Economy, pp . 611-612 . 42. Arthu r Lewi s an d I ar e th e majo r advocate s o f thi s interpretatio n o f th e Kondratief f cycle . Lewis's vie w i s mos t full y develope d i n hi s Growth an d Fluctuations, 1870-1913; min e i n Th e World Economy an d th e firs t tw o chapter s o f Wh y th e Poor Ge t Richer. 43. On e aspec t o f Kuznets' s Secular Movements wa s th e measuremen t o f th e lag s betwee n changes i n basi c commodity price s an d output by calculatin g and smoothin g deviations fro m tren d lines. Fo r discussio n an d specifi c reference s se e my Wh y th e Poor Ge t Richer, pp . 21-25 . 44. Mathematica l model s o f thi s proces s ar e presente d an d relate d t o th e cours e o f histor y in Chapter 2 o f Wh y th e Poor Ge t Richer. The mathematica l portions of tha t chapter are th e wor k of Michael Kennedy . W e jointly designe d th e chapte r a s a whole.

Notes t o Pages 471-476 67

7

45. Process o f Economic Growth, pp . 134-136 . 46. I cal l thes e movement s classi c becaus e Kondratief f cycles di d no t unfol d i n history i n th e smooth, stylized sine curves evoked by Schumpeter (Business Cycles, Vol. 1, p. 213). There were three typical irregularities: first, on the downswing, basic commodities initiall y fell rapidl y relativ e to price s of manufactures , the n decelerate d or , a s i n the lat e 1960s , levele d off ; second, a s Tabl e 20.b indicates , a high proportio n o f th e total—and relative—pric e increas e tende d t o b e concen trated i n the early stag e of the upswing; and third, the second Jugla r (to use Schumpeter's designa tion) ofte n exhibite d countertren d movement s o f th e kind to b e observed i n th e mid-1980s . N.8. Annua l Averag e Growt h Rate s o f Output , Capita l an d Labor: Japan, 1960-197 1 Output (Y ) Capita Flour millin g Edible oil Cotton spinnin g Synthetic textile s Paper an d pulp Chemicals Drugs an d medicine s Glass Cement Petroleum refinin g Blast furnac e Open an d electri c furnace s Special stee l Non-ferrous metal s Electric wir e an d cable Machine tool s Bearings Automobiles Heavy electric equipmen t Light electrica l appliance s Optical instrument s Total

l (K ) Labo

11.3 9.1

12.0 12.7

15.2

12.6

14.2 17.9 14.9 8.8 9.5 12.7 10.6 10.8 7.6 11.0

7.6

9.0

7.6

r (L )

1.4

2.2 -1.0

0.0

9.4

14.8 22.8 15.3 22.0 23.3

14.5 15.8 13.2 10.7 14.0 15.2 17.0 12.9 11.9 14.3 12.3 15.4 24.3 11.8 17.2 21.1

-0.9 -1.3 5.5 3.0 -0.9 1.1 2.0 2.6 1.0 -5.6 1.5 1.8 0.7 10.0 4.5 5.0 7.1

14.1

14.2

2.2

9.2

NOTES: K an d L ar e adjuste d b y th e utilizatio n rat e o f equipmen t an d manhours , respectively. Annual averag e growth rate s ar e compute d from mer e comparison o f 196 0 an d 197 1 by compound interes t calculation . "Blas t furnance " an d "ope n and electri c furnaces " designat e types i n th e iro n an d stee l industry. SOURCE: Miyohei Shinohara , Industrial Growth, Trade, an d Dynamic Patterns in the Japanese Economy (Tokyo: University o f Tokyo Press, 1982) , p . 206.

47. See , for example, B P Statistical Review o f World Energy (London : Britis h Petroleum Company, Jun e 1984) , pp . 28-30 . 48. Se e th e excellen t discussio n b y Edwar d C . Wolf , "Raisin g Agricultura l Productivity, " Chapter 8 in Lester R . Brow n et al, State o f th e World, 1987 (New York: W. W . Norto n for th e World Watc h Institute) , pp . 139-156 . 49. See , for example , Sandr a Postel , "Stabilizin g Chemica l Cycles, " Chapte r 9 i n Leste r R . Brown e t al., State o f th e World, 1987. 50. See , for example, Process o f Economic Growth, pp . 197-20 1 an d 358-359. 51. Fo r data and discussion see World Economy: History andProspect, pp . 586-588 (grain), pp. 594-598 (energy) .

678 Notes

t o Pages 477-482

52. Angu s Maddison , Phases o f Capitalist Development (Oxford : Oxfor d Universit y Press , 1982), p . 44 . 53. Se e Why the Poor, pp . 259-28 8 ("Growth Rates at Different Level s o f Income and Stage of Growth). Se e also Moses Abramovitz , "Rapi d Growt h Potential an d Its Realization: The Experi ence o f Capitalis t Economie s i n th e Post-Wa r World " i n Edmon d Malinvau d (ed.), Economic Growth andResources, Volume One: The Major Issues (London: Macmillan, 1979), pp. 1—51 , also available as Reprint No. 221 , Center for Research in Economic Growth, Department of Economics, Stanford University . Abramovitz extends his analysis in "Catching Up, Forging Ahead, and Falling Behind," Journal o f Economic History, Vol . XLVI, No. 2 (lune 1986) , pp. 1-22 . I n a similar vein, see Willia m J. Baumol , "Productivit y Growth , Convergence, an d Welfare : What th e Long-Run Data Show," Research Repor t #85-27 (August 1985), C . V . Star r Center for Applied Economics, New Yor k University. 54. Reader s o f Th e Stages o f Economic Growth may recall that , i n this context, I distinguished traditional societies from thos e "bor n free," tha t is, offshoot s of a Great Britain already well along in the modernization process . Intermediat e case s (e.g. , Lati n America, Quebec ) ar e also identified (pp. 17-18) . 55. Kuznet s use d a n acceleratio n i n urbanizatio n t o dat e th e beginning s o f moder n growth ; Chenery begin s hi s transformatio n wit h countries a t the lowes t level s o f pe r capit a rea l GN P i n a 1960s' cross-section. One would expect a tendency for Kuznets's dates to be somewhat earlier than mine, sinc e an acceleratio n o f urbanization normally begins i n the preconditions fo r takeoff . An d when his date s an d mine are compared fo r the eight cases wher e comparison i s possible, hi s initial date is slightly earlier i n five case s (se e World Economy, pp . 778-779) . Chenery' s cross-sectiona l analysis does not permit th e dating of stages. But there were no national societies in the 1960 s that could properl y b e calle d traditiona l i n that decade, eve n if , fo r some, modernizatio n wa s limited, proceeding slowly , an d take-of f a distant prospec t a t best . 56. Pp . vii-viii . Chapte r 1 4 i n th e secon d editio n o f Th e Process o f Economic Growth i s a reasonably ful l expositio n o f thi s perspective . On th e genera l inadequac y an d misleading consequences o f the assumptio n of profit maximiza tion see Barry Schwartz, The Battle for Human Nature, Science, Morality, an d Modern Life, (Ne w York: W . W . Norton , 1986) . Fo r a narrower examinatio n o f th e impenetrabl e complexit y o f th e motives o f entrepreneur s an d a positive proposa l for bypassin g that complexity operationally , se e William J. Baumol , "Entrepreneurshi p an d Economic Theory," American Economic Review, Vol. 58, No . 2 (Ma y 1968) . The distinctio n betwee n neo-Newtonia n an d biological approache s t o economic analysi s can be traced back , a t least , t o th e protracte d effor t o f Malthu s an d Ricard o t o identif y th e sourc e an d character of their fundamenta l disagreement. I t is paralleled a t the present tim e b y the tw o funda mental approache s t o artificia l intelligenc e an d th e dialogu e betwee n thei r practicioner s (plu s comments fro m friendl y observers o f their dilemma) . See , fo r example, th e Winter 198 8 issu e of Daedalus, devote d wholl y to Artificial Intelligence (Vol . 117 , No . 1 , Proceedings o f the American Academy o f Art s an d Sciences , Cambridge , Mass. ) Th e ninetee n author s characteriz e th e ap proaches in different but roughly harmonious ways. For example, logic versus biology; information processing versu s connectionism ; relianc e o n algorithm s versu s networ k modeling ; rationalis t re ductionism versu s holistic neuroscience; solvin g puzzles versus classifying patterns; symbol manipulation versu s modelin g o f th e brain . Als o lik e economics , artificia l intelligenc e run s int o tw o fundamental an d inescapable problems . First , huma n intelligence cannot be usefully separate d fro m the backgroun d cultura l worl d withi n whic h individua l huma n being s hav e evolved . Intelligen t human calculatio n i s intimatel y linke d t o th e evolutio n o f th e social , political , an d economi c concepts an d institution s that surround them, suffus e thei r thought, and throug h which the y must act. Thus, like Plato's "state within us," one of the major figures in artificial intelligence (Marvin Minsky) evoke s th e concep t o f th e societ y of min d an d use s i t a s th e titl e of a boo k (Ne w York: Simon and Schuster , 1986). I n less elevated language, this dimension of reality leaves the artificial intelligence exper t wit h the proble m o f modelin g "commo n sense"— a fac t ofte n acknowledge d

Notes t o Pages 482-497 67

9

and a challenge ye t unmet. Second, lik e a serious economist who does no t blindly accept profi t or utility maximizatio n a s adequat e assumptions , th e exper t o n artificia l intelligenc e confront s a closely relate d but distinguishable puzzlement: the human being is a mightily complex unit who acts in terms of desires and goals—and internalized constraints as well—that transcend rational thought and behavior as conventionally defined. Put another way, human intelligence is much more than an abstract information-processin g system . An awarenes s o f these problem s ha s le d som e experts t o despair o f achieving their goa l of full y replicating huma n intelligenc e b y eithe r approac h o r b y som e synthesi s o f approaches . The ultimat e question the y confron t i s tha t whic h August e Comt e pose d an d whic h Alfre d Marshall addressed bluntl y (preceding, p . 190) . Th e question is: Since the behavior of an economy reflects force s derive d fro m a whol e society , shoul d w e not concentrat e o n developin g a genera l theory o f societ y befor e refinin g economic s o n a n evidentl y flawed, excessivel y narro w basis ? Marshall replied: "I t i s vain to speak of the higher authority of a unified socia l science. No doubt if that existed Economic s woul d gladly find shelte r under its wing. Bu t it does no t exist; i t shows no sign of coming int o existence. Ther e i s no use waiting idly for it; we must do what we can with our present resources. " And a great deal o f practical an d theoretical wor k in artificial intelligence goes forward i n a Marshallia n spirit . Bu t th e mythi c adventure o f understandin g an d reproducin g th e whole proces s of human intelligence stil l beckons t o a good many . 57. Stages o f Economic Growth, p . 165 .

Chapter 21 1. Fo r a more forma l model o f this case se e Appendix, pp . 561-562 . 2. Thi s i s th e centra l them e o f Ho w I t Al l Began (Ne w York : McGraw-Hill , 1975) . See , especially, Chapter s 1 and 4 . 3. A . N . Whitehead , Science an d th e Modern World (Ne w York: Macmillan, 1925) , p . 3 . 4. For continued debate on this matter, see, fo r example, N. F. R. Crafts, "Industria l Revolutio n in Englan d an d France: Som e Thought s o n the Question 'Wh y Wa s England First?' " Economic History Review, Vol . XX X (1977) , pp . 429-441 , an d W . W . Rosto w "N o Rando m Walk : A Comment o n 'Wh y Wa s England First?' " ibid., Vol . XXX I (1978), pp . 610-612. 5. Fo r an extended analysi s of this stage, goin g beyond earlier expositions, se e m y "Reflection s on the Drive to Technological Maturity, " Banca Nazionale de l Lavoro Quarterly Review, No . 16 1 (June 1987) , pp . 115-146 . 6. Th e Stages o f Economic Growth, (Cambridge : a t th e Universit y Press, 1960 , 1971) , p . 9 . 7. Se e fo r exampl e Tabl e 3 (pp . 206-207 ) i n World Development Report 1987 (Ne w York : Oxford Universit y Pres s fo r th e World Bank , 1987) . 8. Ibid., p . 175 . 9. Ibid., p . 202 . 10. MyT. Vu , World Population Projections 1984 (Washington, D.C.: Th e World Bank, 1984), Tables 2 an d 3 , pp . xvii i and xix . Th e method s use d b y V u t o generat e thes e projection s ar e se t out o n pp . ix-xvii . A goo d dea l o f th e basi c dat a i s draw n fro m Unite d Nation s sources . See , for example , World Population Prospects (a s assesse d i n 1984) , (Ne w York : Unite d Nations , 1986). 11. Donal d J . Bogue , Principles o f Demography (Ne w York: Wiley, 1969) , p . 49 . 12. Th e argumen t summarize d i n th e paragraph s tha t follo w i s elaborate d i n "O n Endin g th e Cold War, " Foreign Affairs (Sprin g 1987) , pp . 831-851 . 13. The relation between war and stages of growth is explored at some length in Chapters 8 and 9 of m y Stages o f Economic Growth. 14. The American Diplomatic Revolution, A n Inaugural Lecture delivered before the University at Oxford , 1 2 November 194 6 (Oxford : at the Clarendo n Press , 1946) , p . 8 .

Notes t o Pages 497-509

680

15. Th e United States an d th e Regional Organization o f Asia an d th e Pacific, 1965-1985, (Austin: University of Texas Press , 1986) , pp . 158-161 . 16. Davi d Hume , i n Eugen e Rotwei n (ed.) , Writings o n Economics (Madison : Universit y of Wisconsin Press, 1955) , p . 80 . Fo r a post-1945 discussio n of the rich-country-poor-country prob lem see Albert O. Hirschman, "Effect s o f Industrialization on the Markets of Industrial Countries," in B . F . Hoselit z (ed.) , Th e Progress o f Underdeveloped Areas (Chicago : Universit y of Chicag o Press, 1952) , pp . 270-283 . Writing in the wake of the success of the Marshall plan, Hirschman is full o f prais e fo r th e "carefre e attitude " o f U.S . polic y i n revivin g potential competitor s an d extending th e proces s vi a th e Poin t Fou r program . H e contrast s thi s polic y wit h pre-191 4 an d interwar German policy. Although his argument as of the late 1980 s would probably not be quite so optimistic, h e enunciates what I woul d regard a s the correct principl e (p. 283) : " . . . [T]h e onl y way in which any nation can hope to maintain industrial leadership is through a continuous process of economi c growt h and technologica l improvement. " 17. The case for regional organization s a s a supplement to inevitably cumbersome globa l institutions i s argue d i n m y Th e United States an d th e Regional Organization o f Asia an d th e Pacific: 1965-1985 especiall y Chapter s 3 and 7 and Appendices D and E. 18. For a critique of the original Limits t o Growth analysis, see my The World Economy: History and Prospect, (Austin : University of Texas Press , 1978) , pp . 571-578 . 19. This estimat e is , distinctly , not one for the number of poor people i n the world. I t excludes, for example , Chin a an d India, but includes quite arbitrarily other lower- an d middle-income coun tries u p to $790 GNP pe r capita , 1985 . Fo r an imaginative effort t o estimate th e proportion o f the world's populatio n livin g in povert y i n 1975 , se e Hollis Chenery, wit h Montek S . Ahlowali a and Nicholas G . Carter , "Growt h an d Poverty i n Developing Countries, " Chapte r 1 1 in Hollis Chen ery, Structural Change in Development Policy, pp . 456-495. The authors found that, depending on method o f calculation , 35%-38 % o f th e populatio n live d i n povert y i n a sampl e o f thirty-si x developing countrie s a t different income levels . 20. Her e i s a typica l statemen t o f the issu e a t stake : The economi c legac y of th e firs t hal f o f the 1980 s threaten s to create enormou s disruptio n i n the shor t ru n an d wil l produce a fundamentall y differen t globa l structur e fo r th e 1990s . Thes e developments ma y hav e significant effects o n internationa l political an d securit y arrangements, and could erode today's allianc e system s much as they are eroding the trade regime and interna tional finance .

The quotatio n i s from C . Fre d Bergsten , "Economi c Imbalances and World Politics," i n Foreign Affairs (Sprin g 1987) , p . 793 . 21. Fo r a usefu l analysi s of th e majo r options se e th e testimon y o f Barr y Boswort h befor e th e Budget Committe e o f th e United State s Senate , Marc h 24 , 1988 , an d Henr y J . Aaron , Barr y P . Bosworth, an d Gary Burtless , Ca n America Afford t o Grow Old? (Washington, D.C.: Th e Brook ings Institution, 1989) . 22. The phrase is from th e welcoming address on July 20, 1987 , of the Prime Minister of Western Samoa, Va'a i Kolone , a t the Global Communit y Forum 1987 , Apia , Wester n Samoa .

Appendix 1. A s become s clea r i n th e followin g formal exposition o f th e model , ou r assumptio n o f fixe d land suppl y leads t o diminishing returns in the application of the factors labor an d capital, an d this leads ultimately to a steady state, given our factor growt h assumptions. In the multisectoral version of th e Smit h mode l presente d later , th e relation s among land, othe r factors, an d basi c an d othe r commodities ar e mad e mor e precise . 2. The Smithian model developed in this subsection is of a closed economy. The expansion of the market in The Wealth of Nations evidently embraces both domestic and foreign trade . The third part

Notes to Pages 521-549

681

of this Appendix, focuse d o n the rich-country-poor-country problem , permit s analysi s of an ope n economy. 3. Euler's Law implies that any function tha t is homogeneous of degree one (i.e., which exhibits constant return s t o scale ) ca n b e writte n a s th e summatio n o f it s argument s time s it s partia l derivatives wit h respect t o those arguments . In particular, i f F(L,K,N) exhibit s constant returns to scale, Euler' s La w implie s 4. Th e reade r wil l not e tha t i n th e industria l sector o f th e Smithia n model ther e i s a region o f increasing returns . A s discusse d i n Part I of thi s Appendix, w e assume tha t producers ignor e thi s economywide effec t i n their production decisions, s o the unit cost function (AH . 13) still exists. Th e increasing-returns factor , calle d p(... ) i n Par t I , i s incorporate d int o th e A(i) ter m i n th e cos t function. 5. Some major aspects of this economy were based on the "Income Level I" econom y presente d in Tabl e 3- 4 o f Holli s Chenery , Sherma n Robinson , an d Mosh e Syrquin , Industrialization an d Growth, A Comparative Study (Oxfor d Universit y Press, 1986) , p. 49. Severa l modification s wer e made to that economy t o derive the economy o f Table AII. 1 (such as introducing land as an explicit factor), s o we are not attempting t o replicate it . W e do acknowledge it as our original data source . 6. Th e particular value s o f the parameters o f equation all.24 ) that lead t o the Engel curve s of Figure AII. 2 ar e

7. Th e tim e path o f th e retur n t o capita l coul d hav e been stabilize d i n th e model b y modifying saving rates in an analagous manner to the way land supply was modified to stabilize the time path of rent. I t was decided tha t a constant saving rate was more i n the neoclassical spirit than a constant return t o capital. Give n changin g proportions o f the individual sectors i n total output, and different capital shares i n these sectors, on e cannot construct a model that displays both a constant saving rate and a constan t retur n t o capital . 8. The reader should recall tha t in all simulations using this model, the time path of the supply of land wil l b e hel d constan t a t level s tha t lea d t o unit y lan d ren t i n th e bas e neoclassica l model . 9. Conventionall y measured , R & D i s muc h les s tha n 5 % o f GN P i n advance d industria l countries. W e have chosen a higher figure to take roughly into account two components o f R & D, as w e hav e define d it , fo r whic h w e currentl y have n o measure : (1 ) labo r an d capita l devote d t o incremental technologica l chang e outsid e th e forma l R & D sector , an d (2 ) tha t elemen t i n th e education proces s tha t more o r les s directl y contribute s to enlargin g o r maintainin g technologica l absorptive capacity . 10. Sinc e th e production o f technical progres s i s assumed to use onl y labor an d capital, an d th e proportions o f labor , capital , an d lan d chang e durin g th e growt h process , ther e wil l b e mino r adjustments i n th e relativ e sectora l price s i n th e mode l tha t include s th e R & D sector . Thes e differences mak e negligibl e change s i n the aggregat e growt h picture . 11. Thi s phenomenon ha s been describe d by economic historian s and analyze d by Schumpeter , the youn g Kuznets , Fabricant , Salter , Freeman , an d others . 12. These intervals measur e roughly the period betwee n the time a sector became a leading secto r and the time it ceased to lead; tha t is, th e time whe n its growth rate approximated o r fell belo w th e average industria l growt h rat e o f the economy a s a whole. 13. Railroad s cease d t o b e a leadin g secto r i n Britain by the 1860s , bu t stee l i n al l it s multipl e uses, notabl y shipbuilding, carried forwar d with hig h momentum . The peakin g out of the railroad boom come s late r i n som e othe r advance d industria l countries ; e.g., th e 1870 s fo r Germany , th e 1880s fo r th e Unite d States, an d th e 1890 s fo r Russia . 14. Straightforward evidence fo r thi s dating of the cycles can b e seen i n the marked deceleration in economic growth in Britain in the late 1830 s and early 1840s; in the decade before the First World

682 Notes

t o Pages 549-566

War; and i n the decade 1965-1975 . (Se e World Economy, pp . 375-377) . O f course, man y othe r forces affec t aggregat e growt h rates. 15. Fo r th e momen t w e ignor e th e issu e o f whethe r Z represent s gross , net , o r intermediat e output. Th e aggregatio n procedur e describe d her e applie s t o al l measures of output. 16. This relation is based on Figure 20.1 i n Chapter 20. Th e wage rate of unity in Figure AII. 14 corresponds t o $100 o f real GNP per capita (1964 prices) in Figure 20.1. Thi s correspond s to $360 in 198 7 prices . 198 7 U.S . GN P per capit a was $18,000, equivalen t to a real wag e of 50 in Figure AII. 14. 17. Se e referenc e i n Chapte r 19 , not e 2 . 18. The sens e o f incrementa l chang e i n the Smithia n system, by contrast , i s that it i s relatively small, accountin g fo r littl e o f the tota l improvemen t i n the overal l state o f technology. 19. Thi s backlog , a s discusse d above , migh t b e define d a s th e differenc e (fo r eac h secto r ;') between th e A(i) o f th e mos t technicall y advance d countr y i n th e worl d an d th e A(i) o f th e countr y in question . 20. O f course, i f saving is only 25% of profits, the initial state of the system is not quite as shown in Table All. 1. Given the saving pattern of 25% of profits, final demand for the output of sector 2 is lower than in Table All. 1 (19.1 vs. 30) . Thi s is because investment is a lower proportion o f GNP in the steady state than in the 5% growth base neoclassical case . Thus , the relative price of sector 2 is somewhat lower in this case, and the steady state actually comes t o rest at a GNP of about 106 . Fo r the purpos e o f th e argumen t here, thi s i s negligible . 21. Thi s the n lead s u s to precisel y th e first-year situatio n shown in Table AII.l . 22. Th e reader shoul d recall onc e again that "land " in this analysis means all natural resources ; so fixit y o f suppl y means literally a finit e amoun t with no substitute s available. 23. Th e reade r wil l not e tha t th e consumptio n equation s (AIII.7 ) an d (AIII.8 ) (preceding) , derived fro m a Cobb-Douglas utilit y function , assum e unitary income elasticitie s an d thus canno t represent Enge l curve phenomena. This decision was made for simplicity, and all the points we wish to mak e ar e no t affecte d b y it .

Name Inde x

Abs, Herman , 37 7 Acheson, Dean , 37 6 Adams, Henry , 246-47 Adelman, Irma , 6 , 103 , 357 , 363 , 368-69 , 588/1.117 Adenauer, Konrad , 43 8 Aftalion, Albert , 249 , 263 , 26 7 Ahlowalia, Monte k S. , 680rc.l 9 Akerman, Johan , 157 , 633n.l 8 Aleman, Lucas , 646«. 2 Allen, Loring , 10 , 233, 625«.4 6 Anstey, Vera , 4, 206-7 , 315 Arndt, H . W. , 373 , 603n. l Arrow, Kennet h J., 350 , 409 , 666n.l2 6 Ashton, T . S., 20 , 21 , 36 , 573n.2 4 Atwood, Thomas , 590» . 151 Auden, W . H., 593n.2 8 Ayres, Clarence , 15 7 Babbage, Charles , 9 , 92-93, 104-6 , 108 , 135 , 210, 594n.71 , 595n.8 2 Bacon, Francis , 162 , 331 , 38 9 Bagehot, Walter , 7 , 33 , 17 5 Bain, Jo e S., 29 8 Baines, Edward , 105 , 10 6 Bakunin, M . A. , 143-4 4 Baldwin, George , 43 6 Balzac, Honor e de , 14 9 Barton, John , 8 3 Bator, Francis , 43 6 Bauer, Pete r T. , 49 , 377 , 384 , 385-87 , 425 , 42 6 Baumol, William , 578«.7 5 Becker, Carl , 13 , 1 6 Belassa, Bel a A., 412 , 591n. 4 Bell, P . R, 138 , 601/U8 7 Ben-Gurion, David , 43 8 Bentham, George , 592n . 10 Bentham, Jeremy , 9 4 Bentham, Si r Samuel , 592n.lO Bergsten, C . Fred , 680/U 9 Berlin, Isaiah , 124 , 138-39 , 597«.140, 601n.l8 6 Beveridge, William , 304 , 30 5 Bhagwati, Jagdis h N. , 40 7 Bickerdike, C . F. , 248-54 , 629nn.l07 , 11 0 Bismarck, 148 , 156 , 49 8 Black, Eugene , 667«.15 8 Blackmer, Donald , 436 Blaug, Mark , 603n. 1

Bohm-Bawerk, Euge n von , 106 , 157 , 158 , 224-25 , 234 Bonaparte, Louis , 14 5 Borenstein, Israel , 46 8 Bouniatian, Mentor , 26 3 Bowley, Arthu r L., 182 , 196 , 212 , 216 , 30 2 Brown, Leste r R. , 471 , 474 , 47 5 Bruno, Michael , 41 4 Burmeister, Edwin , 650n.35 Burns, Arthu r F. , 288-92 , 343 , 349 , 431 , 639n.55 , 640n.60 Burrell, Si r William, 630n.l2 0 Cagan, Philip , 60 Cairncross, Alexande r K. , 223 , 232-33 , 623n.3 1 Cannan, Edwin , 24 9 Carey, H . C. , 11 2 Carlile, Mar y Ann , 76, 588n.ll O Carlile, Richard , 58 8 n.110 Carr-Saunders, A . M. , 196 , 20 1 Carson, Carol , 22 0 Carter, Nichola s G., 680n.1 9 Gary, Joyce , 31 8 Cassel, Gustav , 157 , 204-5 , 224 , 249 , 251 , 252 , 253, 263 , 415 , 632n. 7 Castelot, E. , 19 5 Castro, Fidel , 37 8 Chand, Gyan , 20 6 Chandrasekaran, C. , 615n.4 5 Chenery, Holli s B. , 202 , 314 , 354 , 355-59 , 360 , 362-68, 422 , 450 , 654nn.8 , 9 , 656nn.39 , 40 , 662, 663 , 668n.l72 , 678n.55 , 680n.l9 Churchill, Winston , 239 , 49 9 Cicero, 1 7 Clark, Colin , 4 , 26 , 68 , 173 , 212-14 , 216 , 218 , 222, 223 , 302 , 308 , 311 , 313-14 , 353 , 362 , 363, 365 , 367 , 375 , 384 , 385 , 387-89 , 394 , 434, 450 , 645n.l 8 Clark, G . N. , 600n.17 5 Clark, J . B. , 157-58 , 203-4, 253 , 615n.3 9 Clark, Joh n Maurice, 292-94 , 431 , 462 , 674n.2 9 Clayton, Will , 581n.ll 2 Cleaver, Harry , 138 , 601n,18 7 Coats, A . W. , 606n. 8 Cockerill, John , 43 1 Cole, W . A., 53 , 54 , 574n.2 7 Colquhoun, Patrick , 21 1 Commons, Joh n R., 157 , 620n.41

684 Comte, Auguste , 190 , 481, 596n.108, 679n.56 Confucius, 7 , 571n. 5 Cooper, Joh n Sherman , 377 , 410 Cort, Henry , 462 , 464 Costabile, L. , 585n.5 2 Cournot, A . A. , 162 , 163 Cowgill, Donal d O., 20 1 Crafts, N.F.R. , 574n.2 9 Creamer, Daniel , 46 8 Croce, Benedetto , 44 1 Cross, Jame s E. , 43 6 Crouzet, Francois , 43 5 Crowther, Geoffrey , 13 3 Cumberland, George , 7 6 Cumberland, Sydney , 75-7 6 Cuyvers, Ludo , 618n.3 1 Davenport, Herber t J. , 157 , 263 David, Paul A., 671n. 8 Davidson, David , 22 8 Deane, Phyllis , 20 , 53 , 54 , 304 , 472, 574n.27, 604n.l Denison, Edwar d F. , 369-71 , 55 8 Dewey, John , 24 2 Dewhurst, J . Frederick , 22 0 Diaz-Alejandro, Carlos , 35 7 Dobb, M . H. , 74 , 575n.3 9 Dobell, A . Rodney , 650n.3 5 Dobrovolsky, Serge i P. , 466 , 468, 675nn.33, 3 5 Domar, Evsey , 256 , 332, 333, 334-35 Douglas, Paul , 215-16 , 415 Dublin, Loui s I. , 19 6 Duesenberry, James , 346-4 7 Duncan, O . D. , 20 1 Eatwell, John , 588n.ll 7 Echersall, Harriet , 7 2 Eckaus, Richard , 43 6 Edgeworth, Francis , 4 , 162 , 249, 263, 634n.24 Edgeworth, Maria , 74 , 582n. 7 Eisenhower, Dwigh t D., 426 , 670n1.23 Eliot, T . S. , 593n.2 8 Elkington, Hazel , 20 2 Eltis, Walter , 13 7 Engels, Friedrich , 125 , 127, 128, 138, 139, 143, 145, 149 , 597n.156, 601n.186 , 672n.1 8 England, Minni e T., 287 , 639n.50 Enthoven, Alain , 519n.7 7 Euler, Leonhard , 19 6 Fabricant, Solomon, 218, 220, 294, 295, 619n.41

Feinstein, C . H. , 31 0 Felix, David , 644n, 5 Fellner, William , 12 9 Ferenzi, Imre , 19 5 Fisher, Irving , 158 , 224, 225-27, 236 , 263, 621n.lO Fishlow, Albert , 407 Flux, A . W. , 634n.1.2 4 Forster, E . M. , 31 8 Frank, Isaiah , 55 Franks, Oliver , 377 , 378

Name Index Freeman, Christopher , 457 , 458-59, 461 , 462, 673n.126 Freud, Sigmund , 32 , 3 3 Frickey, Edwin , 34 7 Friday, David , 22 0 Friedenthal, Ricard , 600n.1171 Friedman, Milton , 49, 226 , 285 Frisch, Ragnar , 299 , 301 Galbraith, J . Kenneth , 621n.15 5 Gandhi, Mahatma , 38 8 Gaunt, John , 194 , 450 Gay, Edwi n F., 620n.4 1 Gay, Peter , 14-1 7 Gayer, A . D. , 54 , 55 , 110 , 296 George, Henry , 15 5 Gesell, Arnold , 359 , 367 Giffen, Robert , 21 1 Ginzburg, David , 621n.15 5 Gladstone, W . E., 9 1 Godwin, William , 69 , 7 0 Goethe, J . W . von, 136 Goldin, Claudia , 657n. 7 Gorbachev, Mikhail , 440, 466 Gray, Gordon , 37 6 Griffith, G . Talbot , 583n.1 0 Griliches, Zvi , 456 Guillard, Achille , 196 Haberler, Gottfried , 262-63 , 270, 425, 629n.l07, 634n.119 Hagen, Everett , 389 , 436 Hahn, F . H. , 332 , 350, 351 Halley, Edmund , 1 7 Hamilton, Alexander, 426 , 429 Hamilton, Walton , 15 7 Hansen, Alvin , 133 , 200, 201, 241, 261, 283 , 296-99, 321-23 , 346 , 614n.132, 632n.17 , 642«.8 5 Hansen, Bent , 41 7 Harrison, Catherine , 75-7 6 Harrod, Ro y F., 4 , 157 , 205, 248, 254-57, 278, 282, 297 , 303, 332, 333, 334, 628n,106, 631n. 132, 637nn.l, 1 7 Hatch, Richard , 43 6 Hauser, P . M., 20 1 Hawtrey, R. G., 263 , 634n.124 Hayek, Fredric h von , 157, 224 Hay ward, Abraham , 10 3 Hegel, G . W . F., 122 , 145, 162 Heilbroner, Robert , 156 , 604n.1 1 Hicks, Joh n R., 84 , 117 , 157, 343-46, 384, 588n.117, 595nn.84 , 91 , 604n.l Higgins, Benjamin , 43 6 Hilgerdt, Folke , 302 , 308-10, 311 , 319-20, 374, 508

Himes, Norma n E. , 102 , 103, 594/1.53 Hirschman, Alber t O., 367 , 373, 378, 380, 384, 390-92, 573n.18 , 578n.75 , 659n.50 , 680n.l6 Hobson, C . K. , 21 5 Hobson, J . A. , 26 3 Hoffmann, Walther , 4 , 223 , 318-19, 356 , 415, 433 Hollander, Samuel , 34, 579n.78 , 588« . 117, 595n.81, 596n.112 0

685

Name Index Hont, Istvan , 28 , 47, 117 , 572n.ll, 575n.5 2 Hueckel, Glenn , 6 6 Hull, C. , 27 4 Hume, David , 3 , 4, 6 , 8 , 13-33 , 41 , 42, 49 , 50, 51, 72 , 76 , 93 , 108 , 121, 188, 230, 278, 305, 428-29, 454 , 463, 481, 482, 483, 497, 504, 508, 573n.23 , 574n.25 , 576n.68 , 577n.69 , 71 Hutchison, T . W., 263, 264, 285, 606n.l, 634n.2 5 Ignatieff, Michael , 28 , 11 7 Jackson, R . V. , 574n.27 James, Patricia , 587n.8 9 James, William , 24 2 Jevons, W . Stanley , 153 , 162, 321 Jewkes, J. , 45 8 Johansen, Lief , 361 , 668n.172 Johnson, Alvin , 12 5 Johnson, Lyndo n B. , 670n.2 3 Jones, G . T. , 387 Jones, HywelG. , 332 , 333 Joplin, Thomas , 590n.15 1 Juglar, Clement , 259-61 , 632n.l l Kahn, Richar d F. , 214 , 269, 278, 584n.38, 635n.25, 636n.3 4 Kaldor, Nicholas , 282 , 335, 336, 337-39, 350, 652n,66 Kalecki, Michael , 28 2 Kant, I. , 1 4 Keita o f Mali , President , 42 6 Kemmerer, Edwi n W. , 27 0 Kendrick, David , 361 , 362, 655n.2 4 Kennedy, Charles , 342-4 3 Kennedy, Joh n F., 377 , 378, 410, 426, 505, 606n.3 Kennedy, Michael , 448 , 454, 480, 486, 507, 674n.29 Kerr, Clark , 16 3 Keynes, Joh n Maynard, 4 , 7 , 58 , 60 , 65 , 102 , 156, 157, 158 , 163, 178, 179, 180, 182, 183, 184, 189-90, 197-98 , 210 , 212, 214-15, 216 , 225 , 228-29, 232 , 236, 249, 254, 266, 268, 272-82, 299, 302-5 , 306 , 311, 321, 389, 448, 505, 573n.21, 593n.29 , 610n.73 , 618n.31 , 635nn.25 , 30, 636n.34 , 637nn.l , 17 , 643n.3, 644n.5 , 646/T.3 Keynes, Joh n Neville , 7 Khrushchev, Nikita , 424 , 505 Kindleberger, Charles , 43 6 King, Gregory , 211 , 389, 450 King, Willford , I. , 217 , 218, 286 Klein, Burto n H., 671n. 8 Kleinknecht, Alfred , 45 7 Knauth, Oswald , 21 8 Knowles, Lillian , 208, 317-18 Kolb, Frederic , 70 , 89 , 586n.8 4 Kondratieff, N . D. , 306-8 , 311 , 470, 644n.1 3 Krelle, Wilhelm , 673n.2 6 Kristensen, Thorkil , 363-6 5 Kuznets, Simon , 4, 26 , 173 , 214, 218-22, 223, 242-46, 286 , 287, 288, 314, 352-55, 356-59 , 362, 363 , 365, 394, 415, 433, 434, 435, 455 ,

459, 469 , 626n.78, 627nn.89 , 90 , 628n.95 , 652n.l, 653n.4 , 656n.40 , 676n.43 , 678n.5 5 Labordere, Marcel , 265 , 267, 635n.30 Lafargue, Paul , 14 9 La Follette , Robert , 219-2 0 Laidler, Harry , 620n.4 1 Lai, Deepak , 37 3 Land, Edwin , 454 Lange, Oskar , 6 4 Langley, Samuel , 246 , 247 Larson, Bruc e Dean , 248-49 , 629nn.l07 , 110 Laughlin, J . Laurence , 592n.2 5 Layton, Walte r T. , 13 3 Leibenstein, Harvey , 196 , 197, 201 Leontief, Wassily , 157 , 299, 361, 600n.l78 Lerner, Dan , 436 Lewis, W . Arthur, 308 , 373, 384, 385, 392-99, 412, 481 , 659n.57, 660nn,66 , 72 , 676n.42 Lhomme, Jean , 13 3 Lindahl, Erik , 157 , 228 Lindert, Pete r H. , 131 , 132 Little, I.M.D. , 373 , 419, 421, 422, 465 Loeb, Louis , 1 5 Lotka, Alfre d J. , 19 6 Loveday, A. , 634n . 19 Lowell, Franci s Cabot , 46 5 Lubin, Isador , 22 0 Lundberg, Erik , 29 8 Macaulay, Frederick , 21 8 McCulloch, J . R. , 7 1 MacEwan, Arthur , 36 1 MacKenzie, Donald , 600n.l7 2 McNamara, Robert , 37 8 Mahalanobis, P . C., 386 , 388, 419 Malenbaum, Wilfred , 43 6 Malthus, T . R., 8 , 9 , 51-72 , 76 , 80 , 83 , 84 , 117, 128, 138 , 139, 146, 154, 170, 194-95, 197 , 198, 210 , 321, 428, 454, 469, 481, 482-83, 582n.7, 583n.lO , 584n.38 , 585nn.2 , 51 , 586nn.61, 84 , 587n.89, 588n.122 Mandelbaum, Kurt , 374 , 375 Mann, Thomas , 172 , 440, 609n.49 Mansfield, Edwin , 342 , 369, 456 Mao Tse-Tung , 376 , 377, 378, 402, 424, 439 Marks, Richard , 630n.l2 0 Marmontel, J . F., 9 5 Marshall, Alfred , 4 , 7 , 9-10 , 53 , 113 , 129, 15393, 203 , 212, 234, 302, 306, 330, 353, 389, 454, 481 , 607n.22, 608n.39 , 610n.71 , 611n.79 , 88, 612n . 117, 126, 679n.56 Marx, Heinrich , 597n . 140 Marx, Karl , 3 , 8 , 42 , 65 , 81 , 91-94, 102 , 121-49, 157, 192 , 234, 454, 469, 481, 483, 484, 573n.21, 597nn.l35 , 140 , 156, 598nn.l47, 148 , 162, 600n.l76 , 601nn.l87 , 189 , 603n,221, 672n.l8 Mason, Edwar d S. , 356 , 358 Massie, Joseph , 21 1 Matthews, R.C.O. , 332 , 347-49, 350 , 351 Meade, James , 215 , 216

686 Medawar, Si r Peter , 9 , 1 0 Meier, Gerald , 373 , 419 , 426 , 657n. 6 Menger, Carl , 153 , 157 , 23 4 Mensch, Gerhard , 141 , 457 , 45 8 Mill, Harrie t Taylor , 596n.l0 8 Mill, James , 58-59 , 71 , 94 , 97 Mill, Joh n Stuart , 3 , 4 , 8 , 58 , 91-122 , 123 , 124 , 143, 154 , 164 , 167 , 173 , 174 , 178 , 199 , 269 , 384, 397 , 423 , 454 , 481 , 483 , 485 , 495 , 588n.110, 5 9 1 n n , 4 , 592nn.lO , 13 , 25, 593n.29, 594n.53 , 596n.l2 0 Miller, Adolp h C. , 21 7 Millikan, Ma x F., 410 , 43 6 Mills, Frederic k C. , 286 , 34 9 Mirabeau, Cont e d e Honore , 19 5 Mirrlees, Jame s A. , 35 0 Mises, Ludwi g von, 157 , 224 , 26 3 Mitchell, B . R. , 159 , 304 , 47 2 Mitchell, Wesle y C., 157 , 218 , 240 , 242 , 260 , 263 , 282-88, 291 , 296 , 343 , 349 , 620n.41 , 639n.54 Monnet, Jean , 22 1 Montesquieu, 195 , 573n.1 8 Moore, G . E. , 644n. 5 Morris, Cynthi a Taft , 357 , 363 , 368-6 9 Mukerjee, Radhakamal , 20 6 Mulhall, Michae l G. , 211-12 , 217 , 617n.ll , 618n.38 Mullineux, A . W. , 34 9 Musgrave, Richar d A. , 15 7 Myint, Hla , 382-8 4 Myrdal, Alva , 200 Myrdal, Gunnar , 157 , 199-200 , 228 , 234 , 384 , 399-403, 426 , 429 , 451 , 481 , 614n.29 , 622n.l5 , 624n.44, 664n.9 3 Nasser, Gama l Abdel , 43 8 Nathan, Rober t R. , 220 , 221 , 621n.5 5 Hearing, Scott , 217 , 619n.4 1 Nehru, Pandi t Jawaharlal , 206, 402 , 43 8 Newcomen, Thomas , 46 3 Newton, Isaac , 17 , 600n . 175 Nixon, Richard , 37 7 Nkrumah, Kwame , 38 6 Nordhaus, Willia m D., 671n.8 , 672n.l O Notestein, Frank , 20 1 Nurkse, Ragnar , 38 4 Nyerere, Julius , 38 6 O'Brien, D . P. , 65 , 581n,08 , 588n.ll 7 Ohlin, Bertil , 157 , 22 8 Oppenheimer, Fran z M., 600n . 171 Ostwald, Wilhelm , 571n. 5 Oswald, James , 3 0 Overbeek, Johannes , 614n.2 5 Pareto, Wilfred , 15 7 Parker, Willia m N., 671n. 8 Peach, Terry , 588n.ll 7 Pearl, Raymond , 19 6 Peel, Si r Robert , 10 5 Perkins, Dwight , 355, 357-5 8 Perry, Commodor e M . C. , 49 8

Name Index Petersen, William , 10 3 Petty, Si r William, 194 , 211 , 314 , 389 , 420 , 450 , 616nn.6 Phillipson, Nichola s T , 1 7 Pierce, Charles , 24 2 Pierson, N . G. , 16 1 Pigou, Arthu r C., 71 , 129 , 157 , 212 , 216 , 249 , 250, 263 , 267 , 269-71 , 325-26 , 387 , 389 , 617n.18, 636n.47, 638n.2 0 Pinkney, Davi d H. , 669n . 14 Plato, 32 , 3 3 Pocock, Joh n G. A. , 15-16 , 572n. 8 Pope, Alexander , 1 7 Porter, G . R. , 21 1 Postan, M . M. , 46 7 Power, Eileen , 20 7 Prebisch, Raul , 312 , 377 , 384 , 402 , 403-7 , 425 , 427, 664n.ll4 , 665n.l2 2 Presley, Joh n R., 636n.4 7 Pribram, Karl , 604n . 1 Price, Joh n Vladimir , 577n.7 1 Prigogine, Ilya , 429 Puey Ungphakorn , 419-20 Pufendorf, Samuel , 572n.l l Pye, Lucian , 43 6 Quesnay, Frangois , 7 , 9 , 138 , 146 , 249 , 601n.18 2 Rae, John , 9 , 104 , 106 , 224 , 22 6 Ramsey, F . P. , 628n.l0 6 Rao, V.K.R.V. , 314 , 38 7 Ravenstein, Erns t Georg , 17 0 Reddaway, W . B., 198 , 19 9 Ricardo, David , 8 , 9 , 51 , 52 , 58-59, 64 , 68 , 69, 73-90, 91 , 92 , 94 , 100-101 , 107 , 146 , 197 , 321, 389 , 428 , 454 , 469 , 481 , 482-83 , 575n.39 , 582n.7, 586n.84 , 588nn.ll7 , 122 , 589n.137 , 612n.ll7 Robbins, Lionel , 157 , 164 , 19 9 Robertson, Dennis , H. , 157 , 184 , 227 , 232 , 250 , 257, 259 , 263-69 , 271 , 278 , 289 , 302 , 303 , 305-6, 308 , 311 , 321 , 322 , 428 , 454 , 631n.l , 634nn.24, 25 , 636n.47 , 644n.9 , 645n.18 , 651n.64 Robertson, Willia m Bell , 573n.2 3 Robinson, E . A . G. , 313-14 , 342-43 , 387 , 646n.5 Robinson, Joan , 121 , 129 , 139 , 157 , 313-14 , 339 41, 387 , 573n.21 . 646n. 5 Robinson, Sherman , 36 0 Robson, Joh n M., 591n. l Rockefeller, Nelson , 37 6 Rodan, Paul . Se e Rosenstein-Rodan , Pau l N . Rodbertus, Johan n Karl , 14 0 Roll, Eric , 593H.41 , 605n.l Rorty, Malcol m C. , 217 , 218 , 619n.4 1 Roscher, Wilhelm , 162 , 18 6 Rosen, George , 43 6 Rosenberg, Nathan , 457 , 672n.l 8 Rosenstein-Rodan, Pau l N. , 50 , 341 , 369 , 374 , 384, 387 , 391 , 393 , 408-11 , 436 , 656n.49 , 660n.66, 68 , 66 1

Name Index Rostow, W . W., 5 , 55 , 66 , 428-41 , 446 , 447 , 459 , 460, 526-28 , 541-55 , 610/1.73 , 638n.32 , 656n.39, 668n.166 Rothbarth, Erwin , 618n.3 1 Rothschild, Nathan , 575n.39 Rotwein, E. , 24 , 32 , 3 3 Rowthorn, R . E. , 585n.5 2 Roychowdhury, Krishn a Chandra , 590n . 162 Sadler, Michael , 19 5 Salter, W . E. G. , 340 , 46 7 Samuelson, Paul , 129 , 133 , 137 , 138 , 248 , 256 , 282, 296-99 , 330 , 331 , 342-43 , 642n.101 , 648n.6 Santamaria, Carlo s San z de , 666n.13 0 Santayana, George , 603n.21 9 Sarit Thanarat , 41 9 Sato, R. , 648n. 2 Sauvy, Alfred , 19 5 Say, Jea n Baptiste , 58-59 , 6 4 Schmoller, Gustav , 632n . 11 Schmookler, Jacob , 45 6 Schumacher, E . F. , 41 9 Schumpeter, Joseph , 4 , 7-10 , 41 , 52 , 76 , 93 , 96, 97, 107-8 , 141 , 144 , 157 , 158 , 173 , 178 , 180 , 191, 223 , 224 , 233-46 , 259 , 260 , 262 , 263 , 274, 282-83 , 287 , 291 , 307-8 , 323-25 , 336 , 337-38, 345 , 346 , 348 , 433 , 455 , 456 , 457-58 , 465, 481 , 571n.5 , 583n.8 , 597n.138 , 605n.l , 609n.69, 612n.117 , 624n.44 , 625nn.45 , 46, 626nn.63, 72 , 78 , 627n.90, 632n.7 , 637n.8 , 666n.136, 677n.4 6 Schwartz, Ann a Jacobson, 5 5 Schwartz, Barry , 572« . 17 Seers, Dudley , 37 3 Segal, Aaron , 674n.3 2 Sen, A . K. , 332 , 35 0 Shaw, G . B. , 104 , 15 5 Shell, Karl , 34 2 Shishido, Shuntaro , 35 6 Silberschlag, Eisig , 571n. 5 Simmonds, P . L. , 595n.7 2 Sinclair, Upton , 15 5 Singer, Han s W. , 384 , 411-14 , 426 , 666/1.13 6 Skidelsky, Robert , 270 , 303 , 644n. 5 Smith, Adam , 3 , 4, 6 , 8 , 9 , 13-18 , 23 , 27-29, 33-50, 51 , 52 , 55 , 57, 58 , 60 , 63, 72 , 73, 76, 78, 80 , 87 , 93 , 97 , 117 , 119 , 121 , 136 , 146 , 154, 196 , 197 , 207 , 234 , 389 , 446 , 454 , 455 , 481, 482 , 483 , 486 , 507 , 508-25 , 555-63, 572n.11, 574n.25 , 577n.69 , 578n.75 , 579n.78 , 86, 580n.l01 , 581n.111 , 582n.120 , 596n.12 1 Smout, T . C. , 27 , 2 8 Snoh Unakul , 420 Snyder, Carl , 415 Sola Pool , Ithie l de , 43 6 Solow, Rober t M. , 279 , 332 , 335 , 337 , 341-42 , 343, 650n.3 5 Somervell, Breho n B. , 22 1 Spahr, Charle s B. , 21 7 Spengler, Joseph , 196 , 578n.7 7 Spiegel, Henry , 64 , 605n. 1

687 Spiethoff, A. , 240 , 261-62 , 263 , 267 , 271 , 632n.11, 633n.13 Spraos, J. , 41 2 Sproul, Alan , 37 7 Sraffa, Piero , 74 , 78 , 575n.39 , 588n.117 Staley, Eugene , 374 , 50 8 Stamp, Si r Josiah, 209-10 , 21 6 Steightoff, Fran k H. , 21 7 Stigler, George , 64 , 65 , 585n.5 1 Stone, Nahu m I., 217 , 218 , 619n.4 1 Stone, Richard , 215 , 21 6 Stoneman, Paul , 671n. 8 Streeten, Paul , 418-19 Suharto, 42 6 Sukarno, 42 6 Sumner, Willia m Graham , 15 8 Siissmilch, Johann , 194 , 19 6 Svennilson, Ingvar , 32 9 Swan, T . W., 332 , 33 5 Sweezy, Paul , 129 , 142 , 24 9 Syrquin, Moshe , 202 , 356 , 360 , 363 , 367 , 45 0 Taussig, Frank , 158 , 224 , 23 0 Tawney, R . H. , 4 , 155 , 207-8 , 315-1 7 Taylor, Harriet , 9 6 Taylor, Lance , 356 , 36 6 Thomas, D . A. , 634n.2 4 Thompson, Warre n S. , 20 1 Thorp, Willar d L. , 220 , 28 6 Tinbergen, Jan , 298 , 299-301 , 384 , 414-17 , 643«.102, 667nn.l52 , 158 , 15 9 Tito, Marshall , 43 9 Tobin, James , 33 2 Tocqueville, Alexi s de , 9 6 Tooke, Thomas , 60 , 65 , 92 , 108 , 181 , 227-28 , 584n.34, 590n.15 1 Trower, Hutches , 77 , 88 , 8 9 Truman, Harry , 37 6 Tucker, George , 21 7 Tucker, Josiah , 3 0 Tucker, R . S. , 133 , 13 4 Tugan-Baranowsky, Michael , 261 , 274 , 632nn.7 , 1 1 Ure, Andrew , 105 , 594n.7 1 Vance, Ruper t B. , 613n.1 7 Veblen, Thorstein , 125 , 155 , 157 , 242 , 247-48 , 263, 283-84 , 286 Viner, Jacob , 223 , 382 , 42 5 Virgil, 1 7 Von Thiinen , Johann , 16 2 Vu, M y T, 491 , 679n.1 0 Wagemann, Ernst , 41 5 Wagner, Adolph , 632n.1 1 Walker, Francis , 19 5 Walras, Leon , 153 , 154 , 157 , 162 , 234 , 24 2 Walsh, V , 46 1 Wan, Henr y Y. , Jr. , 332 , 649n.2 3 Ward, Barbara , 37 7 Watanabe, Tsunehiko , 35 6 Watt, James , 186 , 455 , 462 , 46 3 Weaver, Warren , 7

Name Index

688

Webbink, Paul , 22 0 Weiser, Frederic k von , 157, 224, 234 Westphalen, Freiher r Ludwi g von, 124 Whitaker, J . K. , 161 , 162, 164, 607n.22 Whitehead, A . N. , 48 7 Whitney, Eli , 464 Wicksell, Knut , .157, 198-99, 205 , 224-29, 399, 589n.l37, 614n.25 , 622n.l 5 Wilberforce, Lord , 7 4 Wilkinson, Priscilla , 7 3 Wilcox, Walte r F. , 195 , 196, 201

Willetts, Joseph , 35 3 Williams, John , 154 , 223, 229-32 Williamson, Jeffre y G. , 131 , 132 Wood, G . H. , 13 3 Yamada, K. , 46 2 Young, Ally n A. , 292 , 454, 470, 628n.l06 Young, Arthur , 21 1 Zhang Ruizhuang , 571n. 5

Subject Inde x

Absorptive capacity , technological . Se e Technological absorptiv e capacit y Accelerator Bickerdike on , 250-5 1 Hatred's analysi s linking multiplier and, 254-5 6 Hicks's elaboratio n o f multiplier-accelerato r model, 343-4 6 Samuelson an d Hanse n o n relatio n between multiplier and , 296-9 9 Accumulation, capital . Se e Capita l accumulatio n Act o f Unio n (1707) , 15 , 19 , 2 7 Advanced industria l countries . Se e also specific countries anxiety an d analysi s o f populatio n decline , 45 1 applying Kaldor' s growt h model to , 652n.6 6 confrontational strateg y o f developin g countrie s toward, 40 7 GDP pe r capit a 1950-197 3 in , 42 5 methods fo r remainin g "industriou s an d civilized" i n future , 497—9 9 population an d growth theor y in , 196-20 5 rejection o f Columbi a Declaratio n an d Pearso n Commission repor t i n 1970s , 379-8 0 Staley's prescriptio n for , 37 5 Affluence, transformatio n towar d universal , 490-95 Afghanistan, 50 0 African Developmen t Bank , 50 1 Aggregation vs . disaggregation , 43 5 Aggression, stage s o f growth and , 396 , 438-4 0 Agricultural protection , Ricard o on , 78-7 9 Agriculture. Se e also Diminishin g returns; Relative prices balance betwee n commerc e and , 7 0 changing patter n o f worl d grai n trad e (1934 — 1973), 47 1 in China , 381 , 388 , 47 6 critical rol e i n modernization , realizatio n of , 38 1 development polic y fo r citie s a t expens e of , 42 5 in eighteent h century , Britis h economy and , 574n.27 in Hume' s basi c growt h equation , 22—2 3 index o f worl d foo d securit y (1960-1986), 47 4 in India , 381 , 47 6 industry and , in economi c development , 388 Lewis's emphasi s on productivit y of , 39 3 Marx's myopi a about, 598n. 149 prediction fo r futur e problem s an d policie s for, 473-74, 47 6

Ricardo o n type s o f improvemen t in , 86-8 7 Schumpeter's treatmen t o f development s in, 24 1 Smith's emphasi s o f importanc e of , 44-4 5 wheat prices i n Britain (1695-1805, 1812-1815) , 53-54, 7 8 wheat trad e (1750-1789) , 3 6 world whea t an d rice prices (1960-1973) , 47 4 AIDS, 490 , 493 , 50 0 Alliance fo r Progress, 378 , 410-11 , 498 , 666n.3 0 American Civi l War, 44 7 American Dilemma, An (Myrdal) , 199 , 228 , 400 , 482 American Economi c Association , 321 , 373 , 606n. 8 American Institutionalists , 15 7 American Socia l Securit y system , 50 4 Anstey, Vera , 4 studies o f India , 206-7 , 31 5 Appendix to the Theological Works of Thomas Paine, An, 7 6 Argentina economic developmen t (1880-1900 , 231-3 2 import substitutio n takeoff of , 31 2 Prebisch's experienc e in , 404 , 40 5 Armed force s i n England (1700-1800) , 20 , 573n.2 4 Arms control , 43 9 Arms race , nuclear , 495-9 6 Artificial intelligence , approache s to , 678n.5 6 Asian Drama (Myrdal) , 400 , 40 2 Austrian School , 157 , 224 , 236 , 238 , 242 . Se e also specific economists Austrian Successio n (1740-1748) , 1 9 Autobiography (Mill) , 93, 97-9 8 Autonomous investment , 343-46 , 347 Babbage, Charles , 9 , 108 , 594n.71 , 595n.8 2 influence o n Mil l and Marx, 92-93 , 104- 6 Backlog, technological , 464-66 , 479 , 527 , 547 , 548, 558 , 568 , 56 9 Backward slopin g suppl y curv e fo r labor, 37 , 57 58, 5 9 Balance, J . M . Clark' s analysi s o f concept of , 292 94, 641n.7 4 Balance amon g alternatives , notion of , 147-4 8 Balanced-growth pat h i n neoclassica l growt h model , 534-35, 536 , 53 7 Balance o f powe r diplomacy , 446-4 7 Bangladesh, 50 0

690 Banking Policy an d th e Price Level (Robertson) , 266, 267 , 27 4 Banking syste m development banks , 380 , 397 , 501 , 50 5 international, 50 2 Bank o f England , 27 5 Baring crisi s of 1890-1891 , 23 1 Base Ada m Smit h growth mode l case , 559-6 3 Base neoclassical case, 537 , 538 , 54 5 Basic growt h equation . Se e Growt h equation , basi c "Basic-human-needs" strategy , 378 , 37 9 Bauer, P . T. , 377 , 425 , 42 6 as developmen t pioneer , 384 , 385-8 7 Belgrade Conferenc e (1961) , 42 6 Berlin Blockade , 37 6 Beveridge, William , 304 , 30 5 Bickerdike, C . F . bibliography o f publishe d work , 24 9 formal growt h mode l of , 248-5 4 Larson's evaluatio n of , 629wi.l07 , 11 0 personal backgroun d of , 24 9 Big Push , Rosenstein-Rodan's , 50 , 341 , 40 9 Bimetallists, 321 Biological vs . neo-Newtonia n approache s t o economic analysis , 678/J.5 6 Biology o f Population Growth, Th e (Pearl) , 19 6 "Birth, Life , an d Deat h o f Developmen t Economics, The " (Seers) , 37 3 Birth contro l Mill on , 102-3 , 594n.5 3 Nehru on , 20 6 Wicksell's advocac y of , 19 9 Bohm-Bawerk, Euge n von , 106 , 157 , 158 , 23 4 defense o f legitimac y of interest , 224-2 5 Bourgeoisie, Mar x o n destructio n of, 14 3 Brandt Commission , 40 1 Brazil, 312 , 37 8 Bretton Wood s regim e (1945-1971) , 375 , 380 , 478 , 503 Britain industrial revolution , 22 , 54 , 131-3 2 interwar discontinuity i n (1914-1939), 158-5 9 Marshall's analysi s o f industria l leadershi p of , 186-88 national incom e accountin g in , 210-16 population i n eighteenth century , 20 , 5 3 rise o f Labour Movemen t in , 604n . 1 world industria l production accounte d fo r by , 44 7 British Economi c Advisor y Council , 21 2 British econom y in aftermat h o f Napoleoni c Wars , 59-6 2 agriculture i n 18t h centur y and , 574n.2 7 approximate timin g of leading sector s (1783 1972), 45 9 average rea l an d nomina l wage s i n (1844—1891) , 183 business cycle s in , 54-55, 85-86 , 274-7 6 commodity pric e movement s (1823-1826) , 11 0 depressions o f 1815-181 6 and 1819 , 5 9 dynamic impac t of innovatio n on structur e and performance o f (1924-1950), 467-6 9 during Hume' s formativ e years, 19-2 1 indexes of agricultura l and industria l prices (1790-1820), 6 6

Subject Index inventory cycl e i n foreign trad e (1701-1801) , 4 2 investment a s proportio n o f GN P i n eighteent h century, 2 5 in Malthus' s time , 53-5 5 during Mill' s an d Marx's lives , 91-9 2 railroad boo m o f 1840s , 92 , 107 , 46 4 real wage s (1755-1880) , 131-32 , 13 3 relative growt h rate s o f majo r sectors an d industrial productio n (1700-1972) , 460 return t o gol d standar d (1925) , 275-7 6 Ricardo's progra m fo r postwa r Britain , 8 5 in Ricardo' s time , 53-55 , 7 3 during Smith' s formativ e years , 34-3 5 social servic e expenditure s a s percent o f GN P (1890-1932), 15 7 terms o f trade , relatio n betwee n U.S . far m parit y ratio and , 31 0 terms o f trade (1903-1939) , 302-6 wheat price s (1695-1805) , 53-5 4 wheat price s (1812-1815) , 7 8 wheat trad e (1750-1789) , 3 6 British Economy of the Nineteenth Century (Rostow), 43 0 British Empire , economi c developmen t of , 317-1 8 British Roya l Society , 45 7 Brookings Institution , 369 Buddenbrooks (Mann) , 172 , 440 , 609n.4 9 Bureaucracy, 593n.2 9 Bureau o f Foreig n an d Domesti c Commerce , Research Divisio n of, 220 Bureau o f Nationa l Economi c Research , 22 0 Burma, 50 0 Burns, Arthu r F. , 43 1 on growt h an d business cycles , 288-92 , 349 , 639n.55, 640n.6 0 Business cycles , 258-301 basic weaknes s o f pre-1939 analysis, 31 1 in Britain , 54-55 , 85-86 , 274-7 6 Burns on , 288-92 , 349 , 639n.55 , 640n.6 0 Cambridge economist s on , 263-7 1 Cassel's theor y of , 632n. 7 Clark, Colin , on , 21 4 Clark, J . M., on , 292-94, 640n.63 , 641n.6 4 Duesenberry on , 346-4 7 Frisch's introductio n o f rando m shocks , 30 1 Gayer on , 29 6 growth and , 343-4 9 Hansen on , 261 , 296-99 , 346 , 642n.8 5 Hicks on, 343-4 6 Hume on , 41 , 4 2 interacting multipl e cycles, 239-4 0 investment and , 110-12 , 265-6 6 Juglar an d other Continental s on , 259-6 3 Keynes on , 272-8 2 Kondratieffs long-ru n cycles , 306-8 , 311 Lewis on , 39 5 Malthus on , 63-6 5 Marshall on , 173-80 , 610n.7 1 Marx on , 127 , 138-41 , 601nn.187 , 18 9 Matthews on , 347-4 9 from mid-1890 s t o 1914 , 15 6 Mill on , 108-12 , 173 , 17 4 Mitchell on , 282-88 , 34 9 phases of , 174-7 5

Subject Index Pigou on , 269-7 1 Ricardo on , 84-8 6 Robertson on , 259 , 263-69, 634nn.24 , 2 5 in Rostovia n growt h model , 52 7 Samuelson on , 296-9 9 scale an d diversit y o f pre-1914 analyse s of , 631n.l Schumpeter on , 237-42 , 262 , 282-83, 626nn.63, 66, 627n.84, 632n.7 Smith on , 41-42 Spiethoff on , 261-6 2 structural growt h analysi s and analysi s of, 36 5 Tinbergen on , 299-301 , 415 trend-cycles and, 291, 640n.60 trends vs. , 429-30 uncertainties fo r futur e about , 477-79 underconsumptionist theor y of , 138 , 139-40 Business Cycles (Mitchell) , 282 , 283 Business Cycles (Schumpeter) , 223 , 239-41, 244, 245, 262 , 307-8, 323 , 456, 458, 626/m.63 , 72, 78 , 627n.90 Business Cycles and Economic Growth (Duesenberry), 346-4 7 Business Cycles an d National Income (Hansen), 34 6 Business Cycles: The Problem and Its Setting (Mitchell), 283 , 284-88

Cairncross, Alexande r K. , 22 3 on technology , 624n.3 1 on transfe r problem , 232-33 , 623n.3 1 Calculating Engin e o f Babbage , 10 5 Cambridge economists , 157 . See also Keynes , J. M.; Marshall , Alfred ; Pigou , A . C. ; Robertson, Denni s H. ; Robinson , Joan on busines s cycles , 263-7 1 response t o neoclassica l growt h models , 335-3 6 Capital. Se e also Investmen t circulating an d fixed , 80 , 10 7 Hilgerdt o n industrializatio n and, 320 human, Marshal l o n investmen t in, 169 , 172, 173 in Hume' s growt h equation , 23-24, 3 5 Lewis on , 393-95 , 660n.72 marginal efficienc y under capitalism, Keyne s on , 281-82 in Mill' s dynami c analysis o f stationar y state , 115-16 in Smith' s basi c growt h equation , 3 5 supply of , Dougla s o n effect s of , 215-1 6 Capital accumulation , 12 6 Cairncross's studie s in, 232-3 3 Clark, Colin , on , 213-1 4 Kaldor o n sourc e of , 33 9 Marx on , 599n.l6 2 Mulhall's estimat e o f U.S. (1850-1880), 618n.3 8 in one-secto r Ada m Smit h growth model , 511 , 512-13 relation i n growt h models, 53 0 Capital an d Interest (Bohm-Bawerk) , 224 Capital Consumption an d Adjustment (Fabricant) , 220 Capital exports , 215 , 611n.88

691 Capital facto r pricing , 52 1 Capital investment . Se e Investment Capitalism attitudes i n 1950 s toward , 42 4 development of , 92-93, 235-3 6 Marx on , 127 , 137, 140, 142-43, 146-4 7 Capitalism, Socialism, and Democracy (Schumpeter), 245 , 323 Capitalist accumulation, Marx' s concept of, 126 , 130 Capital-labor space , 511-12 Capital (Marx) , 124 , 125, 130, 134, 135, 136, 137, 139, 141-42 , 145 , 148, 149, 153, 598n56, 599n.l62 Capital stoc k in multisectora l Ada m Smith growt h model , 55 6 in neoclassica l growt h model , 55 6 in Rostovia n growt h model, 55 6 Capital-stock-adjustment model , 6 5 Capital transfe r problem. Se e Transfe r proble m Caribbean, Lewis' s experienc e in , 392 , 659n.57 Caribbean Developmen t Bank , 39 7 "Cash nexus " (Marx) , 14 7 Cassel, Gustav , 157 , 224, 267 Bickerdike's expansio n o n mode l of , 249 , 251 , 252, 25 3 business-cycle theory , 632n. 7 on populatio n an d growth theory , 204- 5 "Causes of labour, " Hum e on , 31 , 3 2 Center fo r Internationa l Studies , M.I.T . (CENIS) , 377, 410 , 436-38 Challenge o f World Poverty, Th e (Myrdal) , 400 401

Chaos theory , 23 5 Chartists, 32 1 "Checks to Population," Malthus on , 69, 70, 71 72 Chenery, Holli s B. , 202 , 314, 354, 360, 362, 422, 656n,40, 662 , 663, 680n.l9 on computabl e genera l equilibriu m (CGE ) models, 668n . 172 on demographic transition , 45 0 principal publications , 654nn.8 , 9 on stage s o f an d limit s to growth , 363 , 365-68 , 678n.43 statistical analysi s of structur e of growth , 355 — 59, 363 , 364-6 5 on takeoff , 656n.3 9 on technology , 363 , 364-67 China, 4 6 accession t o power o f Communists (1949) , 37 6 agriculture an d agricultura l policy in , 381 , 388, 476

Cultural Revolutio n in , 48 9 future relation s betwee n Indi a and , 497 GDP generate d i n industry an d manufacturing in, 489 Great Lea p Forwar d o f 1958 , 388, 402-3, 42 4 Marshall o n industria l leadership in, 18 8 Myrdal on , 402- 3 period o f precondition s for takeof f in , 47 9 population an d development in, 207- 8 Taiping Rebellion , 44 7 Tawney's stud y of , 315-17

692 Christianity, philosophie s o f Enlightenmen t and , 16-17 Chronic exces s capacity , Mil l o n problem of , 109 — 10 CIAP (Inter-America n Committee o n th e Alliance for Progress) , 666n.l3 0 Circular flo w equilibriu m model o f Schumpeter , 234-36, 242-4 3 Circulating capital , 80 , 10 7 Civic virtu e and Christia n morality, tension between concepts of , 572n. 8 Civilization an d It s Discontents (Freud) , 3 2 Claims of Labor: An Essay on the Duties of the Employers t o the Employed, The, Mill review of, 9 4 Clark, Colin , 4 , 26 , 173 , 216, 222, 223, 302, 311 , 353, 363 , 367, 375, 394, 434, 645n.l 8 on busines s cycles , 21 4 on capita l accumulation , 213—1 4 "capital-hungry" an d "capital-sated " periods , 6 8 on condition s o f economic progress , 313-1 4 as development pioneer , 384 , 385, 387-89 Doctrine o f Economi c Indigestion , 30 8 intellectual ancestr y of , 45 0 on investmen t an d technology , 213-1 4 on nationa l income , 212—14 , 21 8 on population , 38 9 on relativ e prices , 308 , 311 statistical approac h t o structura l change, 36 2 Clark, J . B., 157-58 , 25 3 on population , 203-4 , 615n.3 9 Clark, Joh n Maurice , 431 , 641n.74, 674n.2 9 business cycl e analysis , 292-94, 640n.63 , 641n.64 on diminishin g returns, 462, 674n.29 Classical economists . Se e Hume , David ; Malthus, Thomas R. ; Marx , Karl ; Mill, John Stuart; Ricardo, David ; Smith , Ada m Classic theor y of international trade , English , 229 30 Clusters, innovational , 457-63, 527 , 673n.2 6 Coefficient o f utilit y (Jevons) , 15 3 Cold War , 438-40, 447 , 495-96, 499 , 501 Colombia, Hirschman' s experienc e in , 39 0 Colombo Plan , 37 6 Colonialism, developmen t under , 317-1 8 Colonial wars , 43 8 Columbia Declaration , 379-8 0 Combination Acts , 5 9 Commerce, balanc e betwee n agricultur e and, 70. See also Trad e Commercial Revolution , 48 6 "Committee o f Nine " i n Allianc e for Progress , 410-11, 666n.l3 0 Committee o n India n Currency (1899) , 18 2 Committee o n Recen t Economi c Changes , 292, 640n.63 Commodities, interaction s between industrial innovation an d suppl y of basic , 463-6 4 Commodity deflation , 274-7 5 Commodity Flow an d Capital Formation (Kuznets) , 220 Commodity inflation , 273 , 275

Subject Index Commodity pric e agreements , 40 5 Commodity price s British, 1820-1826 , 110 cycles betwee n 1789-192 0 in, 30 7 relative t o manufactures . See Relativ e price s Communism. Se e also Socialis m an d socialist s Marx on , 12 3 Mill on , 119-2 1 Communist Manifesto (Mar x an d Engels) , 93 , 124 — 25, 127 , 128, 130, 137, 139, 142 , 143, 146 47, 148 , 15 3 Comparative advantag e

dynamics of , 2 3

exploitation of , 25 , 29 , 30 , 31 , 3 3 Comparative advantag e in international trade theory , model of , 564-65 , 56 6 Comparative dynamics , 331 , 648n. 6 Comparative statistics , 27 , 331 , 648n.6 Comparative structura l analysis , 352-55 , 358-59 , 367-68, 36 9 Competition Lewis on , 39 3 Mill's defens e of , 12 0 resurgent recognitio n o f virtue s of , 50 5 Complex vie w o f huma n beings, 147-48 , 42 9 Computable genera l equilibriu m (CGE) models, 361, 422-23 , 668n.l7 2 Comte, Auguste , 190 , 481 Condition of the Labouring Classes of Society (Barton), 8 3 Conditions o f Economic Progress, Th e (Clark) , 223, 313-14, 353 , 375, 387, 389 Conference o n Research i n Nationa l Income an d

Wealth, 22 1

"Constant returns " model , 511-1 4 Consumer goods , 250-51 , 29 5 durable vs . nondurable , 4 0 Continentals, the, 283 analysis o f busines s cycle s an d growth , 259-63 Contraception. Se e Birt h contro l Contracting economy , steadily , 513 , 515 Conventional economi c theory , fou r weaknesse s of , 429-30 Cooperation betwee n new and old industria l nations, nee d for , 498-99 Corn Laws , repea l of , 107 , 112 Corn mode l of Ricardo , 588n.ll 7 of Smith , 38 , 7 8 Correspondence principle , 331 , 648n.6 Cotton industry , 22 , 62 , 464 , 594n.82 Council o f Economi c Advisers , 21 7 Country studie s of China , 315-1 7 of India , 206-7 , 31 5 Credit cycle , 272-7 7 Credit process , Smit h o n tim e lag s in , 580n.l0 1 Crises Periodiques De Surproduction, Les (Aftalion), 26 7 Crisis(es) of 1797 , 85 of 1825 , 92, 10 8 of 1836 , 595«.91

Subject Index of 1847-1848 , 595n.9 1 of 1857 , 601n.l86 Cross-country model , standar d solutio n to , 662 , 663 Cultural Revolutio n i n China, 48 9 Cycles. Se e Busines s cycle s Daedalus, 669n . 181 Debt burde n o f developin g regions , 50 2 "Decreasing returns" model , 513-1 9 Deflation, commodity , 274-7 5 Demand income elasticit y of , 6 3 price elasticit y of, 6 2 Demand an d supply , theory o f stabl e equilibriu m of normal, 16 0 Demand relation s i n neoclassical growt h model , 53 3 Democracy, economi c growt h an d political, 437-38 Democracy i n America (Tocqueville) , 96 Democratic welfar e state , Marshall' s cas e for, 19293. Se e also Welfar e economic s Demographic transition , 543 . See also Population ; Working forc e Chenery an d Syrqui n on , 45 0 concept of , 201- 2 Kuznets on , 35 4 Lewis's analysi s of, 39 3 Malthus' foreshadowin g of , 56-57 , 5 8 Mill's foreshadowin g of , 11 7 in Rostovia n growt h model , 526 , 553 scatter fo r birt h rat e i n seventy-si x countrie s (1965), 452-5 3 Solow's incorporatio n of , 341-4 2 Demography. Se e also Populatio n invention o f term , 19 6 in U.S. , 613n.l7 Denison, Edwar d F. , 55 8 growth accountin g and , 369-71 Department o f Commerce , U.S. , 220, 222, 374 Dependency theorists , 38 0 Depreciated pape r mone y standard , Williams' s test of classi c internationa l trade theor y under , 230-31 Depression. Se e also Busines s cycle s of 1815-1816 , 5 9 of 1819 , 59 of 1826 , 108 of 1890s , 274-7 5 Marshall on , 174-7 5 of 1930s , 292-94 , 425 , 478, 503, 613n.ll of 1979-1982 , 401 Schumpeter's vie w of , 23 8 Des Crises Commerciales (Juglar) , 26 0 Design o f Development, Th e (Tinbergen) , 414, 415 , 417 Developing countrie s average performanc e o f (1965-1985), 381 change i n trade i n (1965-1985), 383 complexity o f heritag e an d nationalis m in, 40 3 debt burde n of, 50 2 first Worl d Ban k loans to , 37 6 governments in, Myrdal's disappointment with, 401-2 growth o f GD P pe r capit a (1965-1985) , 38 2

693 heterogeneous problem s of , 40 7 income distributio n in , 40 5 need fo r enlarge d lendin g to , 50 2 public-sector rol e in , 387-88 , 417 , 424 real GN P growt h in , 50 2 secondary an d highe r education i n (1960-1982), 382 shift towar d scienc e i n advanced , 488-8 9 terms of trade for, Singer on, 412-1 3 Tinbergen o n rol e o f publi c an d privat e sector s in, 467 , 667nn.l58, 159 trade preference s for , 405 Development assistance , 505 . See also Foreig n ai d Development banks , 380 , 397, 501, 505 Development economics , 373-427 , 484. See also Stages o f an d limit s to growt h Bauer and, 384, 385-87 central issue s i n analysi s of development , 35 6 Clark, Colin , an d 384, 385, 387-89 colonialism and , 317-18 development orthodox y o f 1950s , 385-8 6 greatest weaknes s i n 1950 s an d 1960s , 425-2 6 Hirschman and , 384, 390-92 Lewis and , 384, 385, 392-99 low-level equilibriu m tra p in, 522 , 523 Myrdal and , 384, 399-403, 664n . 9 3 pioneers in , 381-41 7 population an d development, 205- 8 Prebisch and , 384, 403-7 Rosenstein-Rodan and , 384, 408-11 Schumpeter o n development , 23 5 Singer and , 384, 411-14 Streeten and , 418-19 time an d politic s and , 419-27, 669n, 181 Tinbergen and , 384, 414-17 Development polic y CENIS wor k on , 436-3 8 Chenery's structura l analysi s o f growt h patterns to guide , 356-5 9 proximate objectiv e o f international , 41 4 six phases i n development and , 374-8] "Development: Th e Politica l Econom y o f th e Marshallian Lon g Period " (Rostow) , 16 0 Development theory , 378 , 418 Diffusion o f power, 438-40 , 446-4 7 Diminishing relativ e margina l utility , laws of, 1 9 Diminishing return s Clark, J . M. , on , 462 , 674n.2 9 intervals o f greates t anxiet y about, 32 1 Keynes on , 30 3 Marshall on , 166-67 , 171 , 184, 189 Marx's rejectio n of , 127 , 128, 141-42 Mill on , 99 , 100 , 112-1 3 Ricardo on , 78-79, 80 , 81, 86 , 87 , 88-8 9 Smith on , 44 , 508-9 , 51 0 Diplomacy balance o f power , 446-4 7 future, 49 9 Disaggregated theor y o f production , dynamic, 429 31, 527-28 . See also Rostovia n growth model Disaggregation approac h t o industria l revolutions, 549-53 Disaggregation vs . aggregation , 43 5

694 Discontinuity, post-1914 , 47 8 Discontinuous vs. incrementa l innovation , 455-56, 527, 54 3 Dispersion rates , growt h trends and, 289-90 Distribution of Incomes in the United States, The (Steightoff), 21 7 Distribution o f Wealth, Th e (Clark) , 20 3 Distributive justice , Singer' s interes t in , 41 2 Divison o f labo r education and , 37 "increasing returns " mode l and , 519 Mill on , 11 0 Smith on , 35 , 37 , 509 , 579n.8 6 Dollar, devaluatio n of , 47 6 Domar, Evsey , 256 , 332, 333, 334-35. Se e also Harrod-Domar growt h mode l Douglas, Paul , 415 on effect s o f capita l supply , 215-16 Drive t o technologica l maturity , 381, 385, 432 , 467, 48 0 completion of , a s dangerous stage , 447-48 , 496 defined, 487-8 8 wars relate d to , 43 8 Drought o f 1988 , 473, 475 Duesenberry, James , o n growt h and busines s cycles, 346-47 Durable good s vs. nondurabl e consume r goods, 4 0 percentage change in output (1899-1937) , 29 5 production, accelerator-multiplie r interactio n in , 250-51 Dynamic disaggregate d theor y o f production, 42931, 527-28 . Se e also Rostovia n growth model "Dynamo an d the Virgin, The" (Adams), 246-47 Eastern Europea n economy , 312 , 375, 408—9, 49 6 East Europea n Investmen t Trust, 665n.l2 3 East Indi a College a t Hailebury, 52 , 7 2 East Indi a Company , 52 , 9 4 Econometrica (journal) , 299, 333, 542n.95 Econometrics, 299-301 , 542n.95 , 101 , 643n.l02 Econometric sectora l planners , 359-62 , 365 , 374 Econometric Society , 29 9 Economic Analysis of Technological Change, The (Stoneman), 671n. 8 Economic Commissio n fo r Europ e (ECE) , 329, 664n.93 Economic Commissio n fo r Lati n America (ECLA), 377, 40 4 Economic Commissio n fo r th e Fa r East (ECAFE), 664n.93 Economic Consequences of the Peace, The (Keynes), 229 , 302, 303 Economic Development and Cultural Change (journal), 35 2 Economic Development o f India, Th e (Anstey) , 206-7 Economic Development of Latin America and Its Principal Problems (Prebisch) , 377 Economic Development of the British Overseas Empire (Knowles) , 208, 317-18 Economic Development: Theory, Policy, and International Relations (Little) , 37 3

Subject Index "Economic Developmen t wit h Unlimited Supplies of Labour " (Lewis) , 39 2 Economic Growth of Nations (Kuznets) , 355, 656n.40 Economic Indigestion , Doctrin e of , 30 8 Economic Journal, The, 249, 254, 299, 303, 352 "Economic Pla n fo r Jamaica, An " (Lewis) , 39 2 "Economic Possibilitie s fo r Ou r Grandchildren " (Keynes), 10 2 Economics emergence a s academi c profession , 153 , 156, 604/U, 605n. 1 major schoold s o f 1870-1939 , 156-5 9 post-1870 mainstrea m vs . dissiden t propositions , 154-55 Economics of a Declining Population, The (Reddaway), 19 8 Economics o f Industry, Th e (Marshall) , 166 , 173, 176, 178 , 185, 187, 203, 610n.71 "Economics o f Transition and Adaptation , The" (Staley), 37 4 Economics o f Welfare, Th e (Pigou) , 212, 269, 270 Economics (Samuelson) , 33 0 Economic systems , debat e about , 48 3 Economic Theory and Underdeveloped Regions (Myrdal), 664n.9 3 Economies o f scale , 522 , 524 Economist, The, 433, 473 Economist Annual Reviews, The, 264 Economists, Keyne s on qualities of, 189-9 0 Education in developin g countrie s (1960-1982) , 38 2 divison o f labo r and, 37 Lewis's vie w of, 39 3 Malthus on , 5 8 Marshall on, 169-70 , 172 , 187 school enrollment s b y stag e o f growth , 489 Smith on, 37-3 8 technology absorptio n an d transfe r and, 466 EEIT (Eas t Europea n Investmen t Trust) , 665/1.123 Egyptian economy , 423-2 4 Eighteenth century . See Hume , David ; Smith, Adam Eisenhower administration , 377, 405, 440 Elasticity price elasticit y of demand , 6 2 of substitution , 516-18, 55 1 of technica l chang e wit h respec t t o input , 547 Emerging from Poverty (Meier) , 419 , 426 Employment. Se e also Workin g force nonfarm, maximu m raate o f increas e in , 38 9 technology and , 54, 82-84 , 469-7 0 Employment Act o f 1946 , 217 Encyclopedia o f th e Social Sciences, 22 2 Engel curves , 681n. 6 Engel's Law , 362 Engineering, shift i n advanced developing countries toward, 488-8 9 Enlightenment, 14-1 7 Entrepreneurs Kaldor on , 33 8 Keynes o n investmen t and, 274 Krelle o n cycles o f entrepreneurship , 673n.26 Pigou on , 27 1 Schumpetcr on , 236 , 237, 246

Subject Index Environment influence o n huma n perspectives, Marshall' s doctrine of , 16 4 uncertainties fo r future about , 475 , 499-50 0 Environmental markets , 47 6 Equilibrium. Se e also Steady-stat e equilibriu m Burn's busines s cycl e analysi s an d dynamic theory of , 291-9 2 Clark's (J.M. ) criteri a fo r balance an d dynamic, 292-94 computable genera l equilibriu m models, 361 , 422-23, 668«.17 2 Equilibrium facto r levels , increas e i n technica l efficiency and , 516 , 517 , 52 0 "Essay i n Dynami c Theory , An " (Harrod) , 254 , 332 Essay o n Manufactures (Hamilton) , 42 6 Essay o n Population (Malthus) , 64 , 69 , 70 , 71 , 80 , 128 Essay o n Profits (Ricardo) , 78-79 , 8 4 Essay o n th e Principle o f Population (Malthus) , 55 , 56

Essays i n Trespassing (Hirschman) , 37 3 Essays on Some Unsettled Questions of Political Economy (Mill) , 95 , 108 , 11 0 Essentials o f Economic Theory (Clark) , 20 3 "Estimate o f th e Growt h o f Capita l i n the Unite d Kingdom, 1865-1909 , An " (Douglas) , 215 Eugenics Review, The, 19 7 Euler'sLaw, 521 , 681«. 3 Eurasian powe r balance, struggle s for , 43 8 Europe, post-Worl d Wa r II focu s o n recovery of , 375. Se e also specific countries Expectations irrational, theor y of , 109 , 111-1 2 Keynes on , 28 0 Pigou's vie w o f business cycle s and , 27 0 Export o f Capital, Th e (Hobson) , 21 5 Export pessimism , post-Worl d War II, 42 5 Export-promotion strategies , 422-23 , 424 , 42 5 Exports, capital , 215 , 611n. 8 Fabians, 15 5 Fabricant, Solomon , 218 , 220 , 294 , 295 , 619n.4 1 Factors o f productio n i n one-secto r Ada m Smit h growth model , 508- 9 Factor substitution , stability via , 33 5 Family size . Se e also Populatio n Malthus o n force s determinin g attitude s toward, 57 Mill on , 10 1 "Feasibility dispute , The, " 22 1 Federal Republi c o f Germany , nee d fo r impor t liberalization measure s in , 50 2 Fertility, determinant s of, 450 , 451 . Se e also Population Fertility studies , 195 . Se e also Population Fifth Graduatin g Class, 50 0 Fifth Kondratief f upswin g o f 1972-1974 , 47 1 First International , 139 First Kondratief f Downswin g (1815-1848), 66 , 7 1 First Kondratief f Upswin g (1790-1815), 6 6 First Worl d War, 158 , 217 , 229 , 27 5

695 "Fiscal Polic y o f International Trade" (Marshall) , 306 Fisher, Irving , 158 , 236 , 263 , 621«.1 0 on interes t rate s an d price levels , 224 , 225-2 7 Fixed capital , 80 , 10 7 Fletcher Schoo l o f La w an d Diplomacy , 37 4 Fluctuations, cyclical . Se e Business cycle s Food Planning for Four Hundred Millions (Mukerjee), 20 6 Foreign aid . Se e also Developmen t economic s correct criterio n for , 41 4 Myrdal on, 401 Foreign trad e dynamics of ric h country-poo r countr y proble m and, 3 0 in Hume's basi c growt h equation, 22-2 3 inventory cycl e i n British (1701-1801) , 4 2 Smith on , 44-45 , 46 Formal growt h models . Se e Growt h model s Foundations of Economic Analysis (Samuelson) , 330, 33 1 Fourth Graduatin g Class , 441 , 446 , 447-48 , 487 90, 495 , 50 1 absorption int o worl d syste m withou t major war , 496-97 countries in , 48 7 process o f civilize d mutua l suppor t an d adjustment for , 497-9 8 technological absorptiv e capacit y in , 488-9 0 Fourth Industria l Revolution, 454 , 455 , 456 , 457 , 469, 47 7 Fourth Internationa l Conferenc e o n Hygien e (1882) , 196 Fourth Kondratief f downswin g o f 1951-1972 , 47 1 France anxieties ove r populatio n in , 19 5 real an d nomina l wage s i n nineteenth century, 132, 133 , 18 3 takeoff in , 435 , 669«.1 4 world industria l productio n accounte d fo r by , 44 7 Freeman, Christopher , 457 , 458-59 , 461 , 462 , 673n.26 Free Trade , 85 , 86 , 92 , 94 , 27 6 Free Traders , Malthus' s argumen t against, 69-70 French Academy , 45 7 Friedman, Milton , 49 , 226 , 28 5 Frisch, Ragna r definition o f missio n o f econometrics , 29 9 substitution o f "rando m shocks " fo r endogenou s forces i n busines s cycles, 30 1 Full Recovery an d Stagnation (Hansen) , 24 1 GDP, proportion s of , i n industry and manufacturing by stages , 488 , 48 9 GDP per capit a in advance d industria l countries 1950-1973 , 42 5 in developin g countrie s (1965-1985) , growt h of , 382 General glut , Malthu s on , 5 8 General Theory of Employment, Interest, and Money, Th e (Keynes) , 7, 65 , 182 , 197 , 198 , 210, 214 , 228 , 254 , 266 , 268 , 27 2 factors influencin g writin g of, 277-7 9 growth an d cycles in , 279-8 2

696 General Theory of Employment (cont.) narrow focu s o n shor t perio d of , 27 9 trade cycl e analysi s in , 279-8 2 German Empire , 139 , 447 German historica l school , 24 2 Germany reparations afte r Firs t Worl d War, 22 9 social insuranc e in , 15 6 social servic e expenditure s a s percen t o f GN P (1890-1932), 15 7 world industria l productio n accounte d fo r by , 44 7 Gesell problem , 35 9 Getting from Here t o There (Rostow) , 46 2 Gibson Paradox , 276-7 7 Glasgow, Scotland , 2 7 Global welfar e state , 41 3 Glorious Revolutio n (1688) , 1 9 GNP annual growt h rates ove r tim e i n neoclassical , Rostovian an d Smithia n systems , 43 5 effect o f resource s devote d t o R& D o n non-R&D , 548-49 in growt h models , 53 1 investment a s proportion of , i n 18t h century, 2 5 real growt h i n developin g countries , 50 2 social servic e expenditure s a s percent o f (1890 1932), 15 7 GNP per capita , prospect s for , 493, 494 Gold standard , Britis h retur n t o (1925), 275-76 Gompertz curves , 24 4 Good an d Ba d Trade (Hawtrey) , 26 3 Government intervention . Se e also Publi c polic y appropriate rol e of , 483-8 4 in developin g countries , 401-2 , 41 7 Hansen on , 32 3 Hume o n governmen t rol e an d functions , 49, 50 , 483 Malthus on , 48 3 Marx on , 48 3 Mill on, 118-19 , 483 Ricardo on , 48 3 Schumpeter on , 323 , 324-25 Smith on , 48-50, 483 , 582n.120 Grangers, 15 3 Great Britain . Se e Britai n Great Depression , 292-94 , 425, 478, 503, 6l3n.l7 Great Lea p Forward , Chinese , 388 , 402-3, 42 4 Greenhouse effect , 49 9 Growth accounting , 369-7 1 Growth analysi s areas of , 1945-1988 , 329-3 1 shift o f focu s t o socia l refor m (1870-1939) , 15359, 603«.l, 604n.l Growth and Fluctuation of the British Economy, 1790-1850 (Gaye r et al.), 296, 641n.83 Growth and Stagnation in the European Economy (Svennilson), 32 9 Growth equation , basi c of Hoffmann , 31 8 Hume's versio n of, 21-24 , 35 Keyncs's versio n of , 19 8 Kuznets on , 21 9 Malthus on , 55-5 6

Subject Index Marshall on , 164-68 , 203 , 607n.22 Marx on , 125-2 7 Mill's versio n of , 98-10 0 Ricardo on , 77-7 9 Smith's versio n of , 35-3 6 statistical analysis o f structur e o f growt h and, 362 Tinbergen's versio n of , 415-1 6 Growth models , 507-69 . Se e also Neoclassica l growth model ; Rostovia n growt h mode l bibliographical reference s t o (1936-1973), 332, 333 of Bickerdike , 248-5 4 comparison o f neoclassical , Rostovia n an d Smithian models , 526-6 4 Harrod-Domar, 57 , 334 , 337, 350, 526, 648/1.2 invention, innovatio n an d technolog y in , 33 6 of Kaldor , 337-39 , 652n.6 6 Kennedy-Samuelson exchang e o n investmen t and technology in , 342-4 3 multisectoral Ada m Smit h model , 555-6 3 necessary condition s fo r sustaine d growth , 563 64 one-sector Ada m Smit h model , 435 , 508-25 policy-oriented, 356-59 , 36 1 of post-194 5 period , 322-5 0 retrospective malais e i n literature on , 350-5 1 rich-country-poor-country model , 564-6 9 Robinson on , 339-4 1 Solow's incorporation o f demographic transition, 341-42 in thre e phase s o f post-194 5 worl d economy , 333-34 two-sector, pr o forma introductio n o f rate of population increas e in , 201- 5 variations o n Harrod-Domar , 334-3 7 Growth o f Industrial Economies, Th e (Hoffmann) , 223, 31 8 Growth rate , natural , 255-56, 257 Growth theor y 1870-1929 , 223-57 Adams's vie w o f technology , 246-4 7 assumption o f expandin g economi c syste m in , 155 Bohm-Bawerk o n legitimac y o f interest, 224-2 5 Fisher an d Wicksel l o n interes t rat e an d pric e trends, 224 , 225-29 formal model s o f Bickerdike an d Harrod, 248-5 7 Schumpeter an d Kuznet s o n technolog y an d growth, 219 , 233-46, 455 , 456, 625/1.45 Veblen's vie w o f technology, 247-48 Williams an d Cairncros s o n transfe r problem , 229-33, 623n.3 1 Grundrisse (Marx) , 141 , 603n.221 Haberler, Gottfried , 270 , 425, 629/1.107, 634n.1 9 on busines s cycles, 262-6 3 Hague Club , The , 426 Hailebury, Eas t Indi a College at , 52 , 7 2 Haiti, 50 0 Hansen, Alvi n H. , 200 , 241, 614/1.3 2 on busines s cycles, 261 , 296-99, 346, 642«.85 on Cassel' s cyclica l analysis, 632n. 7 on limit s t o growth , 321-23 on Mitchell , 28 3

Subject Index Harrod, R . F. , 4 , 157 , 248 , 303 , 628n.106 , 631n.l32 growth analysi s of , 254-5 7 influence o f worl d econom y on , 33 3 on investment , 25 5 onKeynes, 278 , 637n.l , 1 7 on populatio n an d growt h theory, 20 5 Harrod-Domar growt h model , 254-57 , 334 , 337 , 350, 526 , 648rc. 2 variations on , 334-3 7 Hart, Schaffner , an d Mar x Committee , 219 , 620n.46 Hegelian philosophy , 12 2 Hicks, J . R. , 84 , 157 , 384 , 594nn.84 , 9 1 on growt h and business cycles , 343-4 6 on stationar y state , 11 7 High mas s consumptio n stage , 371 , 432 , 49 9 Hilgerdt, Folke , 302 , 374 , 508 , 56 4 relative pric e analysis , 308-10 , 31 1 on stage s o f an d limit s t o growth, 319-2 0 Hirschman, Alber t O. , 367 , 373 , 378 , 380 , 578n.75, 659n.50 , 680n.l 6 as developmen t pioneer , 384 , 390-9 2 on rationa l economi c interest , 573«.1 8 Historical materialism , 122 , 12 8 Historical settin g 1870-1939, 153-5 9 eighteenth century , 13-1 8 History o f Economic Analysis (Schumpeter) , 23 4 History o f England (Hume) , 46 3 History o f th e Cotton Manufacture (Baine) , 10 5 History o f th e Greenbacks, A (Mitchell) , 28 3 Hoarding, Malthus' s concep t of , 64 , 585nn.51 , 52 Hoffmann, Walther , 4 , 223 , 415 , 43 3 basic growt h equatio n of, 31 8 on stage s o f an d limit s to growth , 318-1 9 Holland, econom y of , 46 , 5 8 In. 114 Home and Foreign Investment, 1870-1913 (Cairncross), 232 , 623«.3 1 "Home Investmen t an d Unemployment " (Kahn) , 278 Housing, volatilit y of investmen t in, 39 5 How t o Pay for th e Wa r (Keynes) , 21 4 Human capital , Marshal l o n investmen t in , 169 , 172, 17 3 Human conditio n Hume on , 32-33, 428-2 9 Lewis's sens e of , 398-9 9 Smith's vie w of , 3 4 Hume, David , 3 , 4 , 6 , 18-33 , 76 , 108 , 187 , 230 , 277, 454 , 463 , 50 8 on basi c growt h equation, 21-24 , 3 5 on benefit s o f prosperou s mercantil e an d manufacturing economi c system , 576n.6 8 on busines s cycles , 41 , 4 2 campaign agains t religion , 14-1 5 character an d styl e of , 577nn.69 , 7 1 close huma n ties betwee n Smit h and, 5 1 concept o f sympathy , 32-33, 50 4 economic ma n of , 1 9 English econom y durin g formative years of, 19— 21

697 four problem s whic h concerned, 1 8 Gay on , 1 7 on governmen t functions , 49, 5 0 historical settin g influencing , 13-1 8 on huma n nature, 32-33 , 428-2 9 on investmen t an d technology , 24—2 5 on manufactures , 22-23, 29-3 0 moral philosoph y of , 17-1 8 on noneconomic factors , 31-33 , 481, 48 2 period o f crystallizatio n for , 573n.23 personality of , 33 , 7 2 physiocratic doctrin e and , 573n.2 5 on populatio n an d workin g force, 2 4 on productivity , 23 , 2 4 on relativ e prices, 25-2 6 rich-country-poor-country problem , 26-27 , 29 31, 497 , 575n.5 2 on role an d functions of government , 49 , 50 , 48 3 similarities betwee n Mar x and , 31-3 2 specie flow-pric e leve l hypothesi s of , 30-3 1 on stage s o f an d limit s t o growth, 26-3 1 view o f individual , 12 1 view o f society , 48 2 year whe n majo r doctrin e se t dow n by , 8 1C2 Institute a t Universit y of Texas , 674n.3 1 Idle capacity , Mil l on , 110-1 1 Immigration Clark, J . B. , on , 20 4 impact o n populatio n of , 19 5 Imperialism, analysi s of, 15 6 Import liberalizatio n i n Japa n an d Germany, 50 2 Import-substitution strategies , 422-23 , 424 , 425 , 646«.2 industrialization mode l o f Prebisch , 404 , 40 5 Import-substitution takeoffs , 22 , 31 2 Income, national . Se e Nationa l incom e accountin g Income distributio n American nationa l incom e accountin g an d concern over , 216-1 8 growth stabilit y vi a changes in , 335-3 6 in developin g regions , 40 5 impact o f industria l revolutio n machiner y on, 5 4 Mill o n uneven , 11 9 Myrdal o n incom e equalization , 199 , 400-40 1 Ricardo's theor y of , 7 7 Smith o n uneven , 117 , 11 9 Income elasticit y o f demand , 6 3 Income inflation , 27 3 Income pe r capita , Smit h on limit s of real, 46 , 581n.Hl Income tax , 21 7 Increasing Return (Jones) , 38 7 Increasing return s Clark o n public-secto r rol e i n development and , 387-88 Marshall on , 166-67 , 171-7 3 Smith on , 43 , 509 , 51 0 "Increasing returns " model , 519-2 3 Incremental inventio n and innovation , 455-56, 527 , 543 India agriculture an d agricultura l polic y in , 381 , 476

698 India (cont.) Anstey's studie s of, 206-7 , 315 censuses in , 615n.4 5 Colin Clark' s experienc e in , 38 7 future relation s betwee n China and, 497 GDP generate d i n industr y and manufacturin g in, 489 Marshall o n industria l leadership in , 18 8 Marx on , 14 5 Myrdal on , 400, 402 population an d development in , 205- 7 Second Five-Yea r Plan in , 38 6 Tinbergen's experienc e in , 41 4 Indian cotto n textil e imports , impac t o n Europ e of , 22 Indian Currency an d Finance (Keynes) , 64 4 India's Teeming Millions (Chand) , 206 Individual, relatio n betwee n societ y and, 121-22, 146, 484-85 , 603n.22 1 "Individual an d Socia l Interest s i n Relation to Saving" (Bickerdike) , 251-5 2 Indonesia, economi c developmen t in , 42 6 Industrial countries . Se e also Advance d industrial countries average performanc e o f (1965-1985), 381 growth o f GDP pe r capit a (1965-1985) , 38 2 Industrial Fluctuations (Pigou) , 27 0 Industrial Fluctuations and Unemployment in England, 1815-1850 (Gayer) , 296 Industrialisation of Backward Areas, The (Mandelbaum), 37 4 Industrialization. Se e also Developmen t economics ; Stages o f an d limit s to growth Hilgerdt on , 319-2 0 Hoffmann o n patter n of, 31 9 Industrialization an d Foreign Trade (Hilgerdt) , 302, 319, 37 4 Industrialization an d Growth (Chenery) , 357, 359 , 366-67, 42 2 Industrial leadershi p i n worl d economy , Marshal l on, 186-8 8 Industrial Revolution , 186 , 614n.32 British, 22 , 54 , 131-3 2 Fourth, 454, 455, 456, 457, 469, 477 innovations definin g First , 3 5 Lewis on , 394-9 5 profits an d investmen t in leadin g secto r over period of, 551-5 3 role of, i n Rostovian growt h model, 549-5 3 Schumpeter's characterizatio n o f three, 45 6 Second, 20 1 Industry agriculture and , in economi c development , 38 8 Hume on , 29-3 0 Industry an d Trade (Marshall) , 186 , 187 Inflation, 40 6 commodity, 273 , 275 income, 27 3 Innovation, incrementa l vs. discontinuous , 455-56, 527, 543 . See also Technology Instinct o f workmanship , Veblen's concept of, 24 7 Instinct o f Workmanship (Veblen) , 24 8 Institute o f Pacifi c Relations , 31 6

Subject Index Institutionalism, 157 , 242, 283 Insurance, Germa n social , 15 6 Intellectual revol t agains t orthodox developmen t position o f 1960s , 378-8 0 "Interactions betwee n Multiplie r Analysis an d the Principle o f Acceleration" (Samuelson) , 296 99 Inter-Amerian Committe e o n the Allianc e for Progress (CIAP) , 666n.130 Inter-American Developmen t Bank , 377, 498 Interdependence, recognitio n o f sympathy demanded by , 50 5 Interest Bohm-Bawerk's defens e o f legitimac y of , 224-25 in Hume' s basi c growt h equation, 23—2 4 Schumpeter's theor y of , 23 6 Interest rat e Fisher on , 224 , 225-27 Marshall on , 165 , 167, 611n.79 Mill o n cyclica l behavio r of , 11 1 natural an d money, 227-28 normal, 622n.l 5 price trend s and , 225-2 9 Wickseli on , 225 , 226, 227-29, 622».15 Internal financin g a s percentag e o f gros s plan t and equipment expenditures , 675«.3 5 International bankin g system, 50 2 International Developmen t Associatio n (IDA) , 377, 413 International Economi c Associatio n Conferences : o n Science an d Technology , 342 ; on Take-off , 43 4 International Economy: Problems and Prospects, An (Myrdal) , 664n.93 International Labo r Office , 374 , 376 International Monetar y Fun d (IMF) , 50 5 International rule s o f th e game , definitio n of , 50 3 International Standar d Industria l Classification, 469-70 International taxation , Myrda l on , 40 1 International trade , Englis h classica l theory of , 229-30. Se e also Foreig n trad e International unit (I.U.), Clark's us e of , 31 4 Intersectoral term s o f trade , 6 6 Interwar perio d (1919-1939 ) discontinuity i n Britain, 158-5 9 Schumpeter's extende d analysi s of, 241-42 technological backlog s i n Japan in , 46 6 terms o f trad e i n Britain, 304- 6 Inventions, incrementa l an d discontinuous, 455-56, 527. Se e also Technolog y Investment. Se e also Nationa l income accounting; Technology autonomous, 343-46 , 347 business cycle s and , 110-12, 265-66 Clark's (Colin ) analysi s of, 213-1 4 distribution i n underdevelope d an d develope d countries, 66 1 endogenous accelerato r vs. exogenou s investment, 25 5 factors determinin g unsteadiness of, 660«.7 2 as functio n o f profit , 544-46 Harrod on , 25 5 in huma n capital , Marshal l on, 169 , 172, 173

Subject Index Hume on , 24-2 5

Kennedy-Samuelson debate over technolog y and,

342-43 Keynes on , 228-29, 274, 278-79, 573n.2 1 in leadin g secto r ove r "industria l revolution" period, 551-5 3 Lewis on , 394-95 , 395 , 660n.72 Malthus on, 58-62 , 83 , 84 markets, psycholog y of , 280-8 1 Marshall on , 167 , 170-73 Marx on , 134-38 , 573n.2 1 Mill's treatmen t of , 103-8 , 11 5 in one-secto r Ada m Smith growth model, 508, 509 pace o f technologica l absorptio n an d rat e of , 466-69 rate o f chang e o f profit s and , 542 R & D as forms of, 456-5 7 Ricardo on , 80-8 1 Robinson o n motive s for, 573«.21 Smith on, 35 , 39-41 , 455 in statistica l analysi s of structur e o f growth , 363 — 65 uncertainties fo r futur e about , 451-7 0 volatility of , 39 5 Investment multiplier , 21 4 Invisible hand, 34, 390-91, 578n.7 5 Iranian revolution , oi l shoc k o f 1979-1980 stemming from , 380-8 1 Irish famin e (1845-1847), 92, 9 6 Iron industry , 463-64 Irrational expectations , theor y of, 109 , 111-12 "Irregularity," analysi s of, Bickerdik e and , 252 , 253 Jamaica, Lewis' s experienc e in , 39 7 Japan, 35 6 Marshall o n industria l leadershi p in , 18 8 methods o f remainin g industriou s i n future , 498 99 need fo r impor t liberalizatio n measures in , 50 2 period o f precondition s fo r takeof f in , 47 9 polymer chemistr y industry , life cycl e of , 461—6 2 shift t o privatization in 1880 s in , 425-2 6 technological backlog s i n interwa r years in , 46 6 world industria l production accounte d fo r by , 44 7 Johnson administration , 44 0 Juglar, Clement , 632n.l 7 on busines s cycles , 259-6 3 Juglar cycle , 239, 240, 244, 262, 324 Kaldor, N. , 335 , 336, 350 growth mode l of , 337-39 , 652«.6 6 on Schumpeter' s innovatio n theory o f growt h an d cycles, 337-3 8 Kennedy, Michael , 448 , 454, 480, 486, 507, 674«.29 Kennedy administration , 405 , 440 Kennedy-Cooper Resolutio n (1958-1959), 377-78 Keynes, J . M. , 4 , 58 , 60 , 65 , 102 , 157, 158, 163 , 180, 182 , 183, 184, 212, 232, 236, 249, 254 , 266, 321 , 389, 448, 505

699

basic growt h equation , 19 8 on bureaucracy , 593n.29

business cycl e analysis , 272-8 2 definitions i n A Treatise, 637n . 1 on diminishin g returns , 30 3

on econometri c modeling , 29 9

on economics o f war , 214—15, 618n.3 1 efforts t o mak e sens e o f Quantit y Theory o f Money, 180 , 610n.73 Harrodon, 278 , 637nn.l, 17 on investment , 228-29 , 274, 278-79, 573n.21 Kahn's evaluatio n of, 635n.2 5 Labordere's influenc e on , 635n.3 0 on Malthus , 198 , 582n.7 on Marshall , 156 , 178, 179, 189-90, 646n. 3 national incom e accounting , an d 214-15, 21 6 Pigou on , 638n.2 0 on population , 166 , 168-70, 197-9 8 as probability theorist , 304 , 644«.5 Robertson and , 268, 635n.25, 636n.34 , 644n. 9 on Schumpeter , 27 4 on term s o f trade, 302-5 , 306 , 311, 643n. 3 tribute t o Ricardo , 582«. 7 Keynesian incom e analysis , 64, 21 0 Keynesian Revolution , 256, 272, 479 Kitchin cycle , 239 , 240 Knowledge, Lewi s o n stage s o f growt h of, 393, 396 Kondratieff, N . D. , 302 , 470, 644n.l3 definition an d discussion of lon g waves , 306-8, 311 Kondratieff cycles , 66 , 68 , 70 , 239 , 244, 321, 323 , 527, 585«.59 , 676n.42 , 677«.4 6 availability o f lan d over , 554 , 555 Fifth upswin g of 1972-1974 , 471 First downswin g of 1815-1848 , 66 , 7 1 First upswin g of, 1790-1815 , 66 Fourth downswin g o f 1951-1972 , 471 in Rostovia n growt h model , 554 , 555 uncertainties fo r futur e about , 470-7 6 Konstanz, debat e o n takeof f organize d at , 434 , 435 Korea, Republi c of, econom y of , 420-21 Korean War , 376-78 Kuznets, Simon , 4 , 26 , 173 , 214, 223, 286, 287 , 314, 363 , 394, 415, 433, 434, 469, 656n.40 , 676n.43 on basi c growt h equation, 21 9 dating o f beginning s o f mode m growth , 678n.55 debate o n takeoff , 43 5

on demographi c transition, 35 4

differences betwee n Schumpete r and , 244-46 national incom e analysi s and, 218-22 review o f Schumpeter' s Business Cycles, 626n . 78 Social Scienc e Researc h Counci l and , 653n.4 statement o f grand objective , 628n.95 statistical approac h t o structura l change , 352-57 , 362 on technolog y an d growth , 219, 242-46, 355, 358, 45 5 titles o f monograph s of, 6 5 2n. 1 Labor. Se e Workin g force Labor, divisio n of . Se e Divisio n o f labor

700 Labor forc e growt h in "constan t returns " model , 512, 513 in multisectora l Ada m Smith growt h model , 55 6 in neoclassica l growt h model , 537—39 , 540 , 556 in Rostovia n growt h model, 55 6 Labor market , socia l welfar e movement and asymmetry in , 15 5 Labor theor y o f value , 129 , 192, 612n.l26 Labour Movemen t (Britain) , 604n. 1 Labour Part y (Britain) , 15 3 La Follett e Resolution , 219-2 0 Laissez-faire, 603n . 1. Se e also Governmen t intervention Mill's exception s to , 118-1 9 L'ami des hommes ou traite de la population (Mirabeau), 19 5 Land availability ove r Kondratief f cycle, 554 , 555 decreasing return s mode l wit h increas e i n supply of, 518-1 9 in multisectora l Ada m Smith growt h model , 55 6 in neoclassica l growt h model , 533 , 541, 542, 556 in one-secto r Adam Smit h growt h model, 513-1 4 "Ricardian" cas e o f n o growt h i n suppl y of , 541, 542 in Rostovia n growt h model , 543 , 556 Land an d Labour i n China (Tawney) , 207-8 , 315 17 Lateral spreadin g effects , 6 2 Latin America , 665n . 122 Committee o f Nine , 410-11 , 666n.13 0 politics of , 426-2 7 Prebisch's developmen t economic s base d on , 404-7 terms o f trade , 40 4 U.S. aid to, 378 Lausanne School, 15 7 Leadership i n worl d economy , Marshal l on industrial, 186-8 8 Leading-sector complexes , 459-62 , 469-70 , 527, 549, 551-53 , 681nn.l2 , 1 3 League o f Nations , 376 , 634n. 19 Leakage, 3 5 Lectures (Smith) , 37, 4 1 Less develope d countrie s (LDCs) . Se e also Developing countrie s in Kuznets' s comparative analysi s o f structur e of growth, 353 , 354 Lewis's vie w of recen t progres s in , 39 9 Lewis, W . Arthur, 308, 373, 412, 482, 659n.57, 676n,42 on busines s cycles , 39 5 on capita l an d technology, 393-95 , 660n.7 2 on competition , 39 3 as developmen t pioneer , 384 , 385, 392-99 emphasis o n productivit y of agriculture , 39 3 experience i n Caribbean, 392 , 659n.57 on investment , 394-95, 660n.7 2 on knowledge , 393 , 396 on noneconomi c factors , 397-99 on populatio n and workin g force, 39 3 on relativ e prices, 39 5 on stage s of an d limit s t o growth , 395-9 7

Subject Index Liberalism, Prebisch o n synthesi s of socialis m an d economic, 40 6 Liberal Part y (Britain) , 15 4 Liberal trad e policy , 3 0 Libertarianism o f Mill , 11 8 Limits t o growth . Se e Stage s o f an d limit s t o growth Logic (Mill) , 9 5 Lombard Street (Bagehot) , 17 5 London Schoo l o f Economics , 22 4 London Times, 10 3 Long ru n an d shor t run , analysis of, 501—4 , 680n.80 Luxuries Hume on , 22 , 23 , 2 9 Smith, on , 3 4 M.I.T., CENI S at , 377 , 410, 436-38 Macaulay, Frederick , 21 8 Machiavellian Moment, Th e (Pocock) , 1 5 Machinery. Se e Technolog y Macmillan Committe e o n Financ e an d Industry, 277, 308 , 645n.l8 McNamara, Robert , 37 9 Maekawa Report s o f 5«1986-1987, 498, 504 Making o f Keynes' General Theory, Th e (Kahn) , 269n. Malaya, Bauer' s formativ e experienc e in , 385 , 386 Malthus, Thomas R., 9, 51-72, 80, 117, 154, 321, 428, 454 , 469, 583n.lO, 584n.38 , 586n.8 4 approach t o political economy, 5 3 on basi c growt h equation , 55-5 6 British econom y i n time of , 53-5 5 on busines s cycles, 63-6 5 distinction betwee n foo d an d "wrough t commodities," 586n,6 1 on hoarding, 64 , 5 8 n . 5 1 , 5 2 influence of , 194-9 5 on investmen t and technology , 58-63 , 83 , 8 4 James o n moder n reader' s difficultie s with , 587/1.89 Keynes on , 198 , 582n.7 Marx's vie w of , 128 , 146 on noneconomi c factors , 55 , 71-72 , 481 , 482 as personality , 7 2 on population , 56-58 , 69 , 70 , 71-72, 197 , 48283 proportionality, concep t of , 61 , 138 , 139 on relative s prices , 65-6 9 rent theor y of , 588n,12 2 Ricardo and , 51, 52 , 58-59 , 76 , 582n. 7 on rol e o f government , 48 3 Smith and , 55, 57 , 5 8 on stage s o f an d limit s to growth, 69-7 1 on workin g force, 56-58 , 17 0 year whe n majo r doctrin e se t dow n by, 8 Manufactures Hume on , 22-23, 29-30 innovations in , effec t o n basi c commodity production, 463-64 prices relativ e t o commodities . See Relativ e prices Smith on , 44-45

Subject Index Manufacturing Marshall o n emergenc e o f modern , 186-8 7 percentage chang e i n physical output (18991937), 294-9 5 stages o f industrializatio n in , 31 9 Mao Tse-Tung , 376 , 377, 378, 402, 424, 439 Marginal analysis , formulatio n of, 45 4 Marginal efficienc y of capita l unde r capitalism, Keynes on , 281-8 2 Marginal productivit y relations , 51 1 Marginal revolution , 153 , 604n. 1, 605n.l Market failure , Rosenstein-Rodan' s definitio n of, 409 Market process , generatio n o f technologica l chang e in, 45 7 Markets environmental, 47 6 investment, psycholog y of , 280-8 1 Marriage Problem, Th e (pamphlet) , 10 3 Marshall, Alfred , 4, 7 , 9-10 , 53 , 113 , 129, 157 , 160-93, 234 , 302, 353, 389, 454, 679n.56 approach t o economic analysis , 189-9 1 attitude towar d us e o f mathematic s i n economics , 162-63 basic growt h equation , 164-68 , 203 , 607n.2 2 on busines s cycles , 173-80 , 610n.7 1 on capita l investmen t an d technology , 167 , 17073, 608n.39 denial o f labo r theor y o f value , 612n. 126 on diminishin g returns , 166-67 , 171 , 184, 189 on effec t o f capita l export s o n rea l wages , 611n.88 historical settin g of , 153-5 9 on increasin g returns , 166-67 , 171-7 3 on interactio n betwee n ma n an d his environment, 164 on interest , 165 , 167, 611n.7 9 Keynes on , 156 , 178, 179, 189-90, 646n. 3 long historica l perspectiv e of , 30 6 on mai n concer n o f economics , 16 2 on nationa l income, 21 2 on noneconomi c factors , 189-93 , 481, 482 on populatio n an d workin g force, 166 , 168-70, 173, 197-9 8 on relativ e prices , 181-8 4 on Ricard o an d parochialism , 612n.11 7 Samuelson's critiqu e of , 33 0 Schumpeter on , 178 , 180, 191, 609n.69 ,

612n.ll7

socialism and , 154, 191-93 on stage s o f an d limit s to growth , 184-8 9 systematic emphasi s o n continuit y of chang e i n life o f societies , 163-6 4 use o f economi c history , 185—8 7 on working classes , 16 3 Marshall Plan , 37 6 Marx, Karl , 3 , 42 , 65 , 102 , 121-49, 157 , 234, 454, 46 9 on basi c growth equation, 125-27 British econom y durin g time of, 91—9 2 on busines s cycles, 127 , 138-41, 601n.187 , 189 on capita l accumulation, 599n.16 2

701 on capitalism , 127 , 137, 140, 142-43, 146-4 7 on communism , 12 3 Communist Manifesto, 93 , 124-25 , 127 , 128, 130, 137 , 139, 142, 143, 146-47, 148 , 153 error i n analysi s of , 146—4 9 fascination wit h machinery , 600n.17 6 on individua l and society , 121-22 , 146 , 147, 484, 603n.22 1 on investmen t an d technology , 134-38 , 573n.2 1 on Malthus , 128 , 146 Marshall on , 19 2 Mill and , 91-94, 124 , 591nn.l, 4 myopia abou t agriculture , 598n . 149 on noneconomi c factors , 127 , 146-49, 481, 482 personal background , 597n . 140 personality of , 123-2 4 on populatio n and working force, 125-26 , 128-34 on profits, 126 , 5 9 8 n 47 rejection o f diminishing returns, 127 , 128, 14142 on relative prices , 141-4 2 on reserv e arm y o f unemploye d unde r capitalism , 81, 13 5 Ricardo's influenc e on, 91 , 92 , 100-101 , 107 on rol e o f government , 48 3 Schumpeter on , 144 , 597n.13 8 similarities betwee n Hum e and, 31-32 on socialism , 93 , 143-46 , 597n.135 on stage s o f an d limit s t o growth , 123 , 142-46 transformation proble m o f 128-29 , 598n. 156 view o f science , Rosenber g on , 672n . 18 year whe n major doctrin e se t down by , 8 Marxists, 629n.10 7 Materialism, historical , 122 , 128 Mathematical economic s Marshall's attitud e toward , 162-6 3 of Samuelson , 296-99 , 330-3 1 Matthews, R . C . O. , o n growt h an d business cycles, 347-4 9 Measures for International Economic Stability (U.N.), 37 7 Measures for the Economic Development of UnderDeveloped Countries (U.N.) , 377, 392 Measuring Business Cycles (Burn s and Mitchell) , 343, 34 9 Memoires (Marmontel) , 9 5 "Memorandum o n Fisca l Polic y o f Internationa l Trade" (Marshall) , 18 4 Mercantilism, 18 , 19 , 48 6 Merchants Hume o n creativ e functio n of, 22-2 3 Smith on , 47-4 8 Metallic case s o f Robinson , 34 0 Mexico, econom y of , 312 , 479 Middle East , futur e of , 49 6 Migration studies , 195 . See also Populatio n Military policy , future , 49 9 Mill, Joh n Stuart, 3, 4 , 58 , 91-121 , 123 , 153, 154 , 199, 384 , 454, 485, 495, 588/1.110 on basi c growth equation, 98-100 on birt h control, 102-3 , 594n1.5 3 British econom y durin g tim e of, 91-9 2 on busines s cycles, 108-12 , 173, 174

702 Mill, Joh n Stuar t (cont.) case fo r transien t tariff, 42 3 on chroni c exces s an d idle capacity, 109-1 1 on diminishin g returns, 99 , 100 , 112-13 on divisio n o f labor , 11 0 Hollander on , 596n.l20 influence o n Marshall's growt h theory , 164-6 5 on investmen t and technology , 103-8 , 11 5 Lewis's similarity to, 39 7 Marx and , 91-94, 124 , 591nn.l, 4 on noneconomi c factors , 117-21 , 481 , 482 personal backgroun d of , 94-9 8 on populatio n and workin g force , 92 , 100-103 , 115-16 reflections o n discipline s o f bureaucracy, 593n.2 9 on relativ e prices , 112-1 3 on Ricardo, 5 9 2 n 3 Ricardo's influenc e on, 91 , 92 , 100-101 , 107 on rol e o f government, 118-19 , 483 Schumpeter on , 93 , 96 , 97 , 107- 8 on socialism , 93 , 96 , 119-21 , 143 on stage s o f an d limit s to growth, 113-1 7 on stationar y state , 101-2 , 111 , 115-17, 12 3 view o f individual , 121-2 2 year i n Franc e durin g youth, 592n . 10 year whe n majo r doctrin e se t down by, 8 Mitchell, Wesle y C., 157 , 218, 240, 242, 260, 263, 296, 620n.41 , 639n.5 4 business-cycle analysis , 282-88 , 349 progeny of , 288-9 6 Schumpeter on , 29 1 "Modern economi c growth, " Kuznet s on, 353 , 354 Modernization. Se e also Developmen t economics ; Stages o f an d limit s t o growth in China , 315-1 7 colonialism and , 317-18 critical rol e o f agricultur e in , 38 1 in India , 31 5 value syste m of , 40 3 Monetarists, 22 7 Monetary Equilibrium (Myrdal) , 228, 234 Monetary policy , Robertso n o n ai m of , 26 8 Monetary standard , post-181 5 debat e on , 85 , 8 6 Money quantity theor y of , 26 , 178 , 180, 227, 228, 277 , 278, 610n.7 3 Ricardo's vie w of , 7 5 Money, Credit, an d Commerce (Marshall) , 163, 178, 186 , 187 Money an d Prices (Kemmerer) , 27 0 Money interes t rate , 227-2 8 Moral philosoph y o f Smith , 17-1 8 Moral value s o f Enlightenment , 1 6 Morphology o f growth . Se e Structur e o f growth, statistical analyse s o f Mortality studies , 195 . See also Populatio n Motivation Lewis's awarenes s of complexit y of human , 397 98 noneconomic motives , 481-82 , 678n.5 6 "Moving fixe d proportions " utilit y function , 53 5 Mr. Johnson (Gary) , 31 8 Multiplier, 27 8 accelerator and , 254-56, 296-99

Subject Index Bickerdike on, 250-5 1 investment, 21 4 Multiplier-accelerator model , Hick s elaboratio n of , 343-46 Multisectoral Ada m Smit h growth model , 555-6 3 Myrdal, Gunnar , 157 , 228, 234, 426, 429, 450 , 481 criticism o f Britis h economi c tradition , 624n.4 4 as development pioneer, 384 , 399-403, 664n.93 on population , 199-200 , 614n.2 9 on Wicksell' s norma l rat e of interest , 622n . 15 Napoleonic Wars , Britis h econom y i n aftermat h of , 59-62 National and International Measures for Full Employment U.N. , 37 7 National Burea u of Economi c Researc h (NBER) , 195, 217-18 , 219 , 220-21, 283, 349, 353, 469, 619n.41 , 639n.54 , 640n.63 studies o f business cycles , 286 , 288, 292-96 National Income, A Summary of Findings (Kuznets), 35 2 National incom e accounting , 159 , 209-22, 257, 617n.11, 618n.3 8 in Britain , 210-1 6 statisticians and , 209-10 in Unite d States, 216-2 2 National Income an d Capital Formation (Kuznets) , 220, 22 2 National Income and Its Purchasing Power, The (King), 21 8 National Income an d Outlay (Clark) , 213-14, 30 8 National Income of British India, (1931-1932), The (Rao), 31 4 National Industria l Conference Boar d (NICE) , 218 Nationalism, 403 , 42 6 National Product i n Wartime (Kuznets) , 221 National Produce Since 1869 (Kuznets), 352 NATO, nee d fo r reorganization of , 49 6 Natural and Political Observations.. .Made Upon the Bills o f Mortality (Gaunt) , 19 4 Natural growt h rate , 255-56 , 25 7 Natural interes t rate , 227-2 8 Navigation Acts , 4 8 Neoclassical economi c theory , 572n.1 7 Neoclassical economist s vs . structuralists , 419, 421-27 Neoclassical growt h model, 6 , 334 , 350, 434, 53241, 648n. 2 annual growt h rate ove r tim e in , 43 5 assumed savin g rat e variatio n in , 539-4 1 assumptions of , 532-3 3 balanced-growth pat h in , 534-35 , 536 , 537 base neoclassica l case , 537 , 538, 545 Cambridge (England ) response to , 335-3 6 capital stoc k in , 55 6 Duesenberry's versio n of , 346-4 7 economic framewor k of , 528-3 2 exposition of , 533-41 labor suppl y change s in, 533 , 537-39, 540, 556 land in , 533 , 541, 542 , 556 purpose of , 52 6 similarity betwee n Rostovian model and, 528 technical progres s in , 533 , 557-58

Subject Index Neo-Malthusianism, 102 , 103, 594n.53 Neo-Newtonian vs . biologica l approache s t o economic analysis , 678n.5 6 Net product , socia l vs . private , 617n . 18 Net reproductio n rat e (NRR) , 200, 451, 670n.4 New Deal , 32 3 New Internationa l Economic Orde r (NIEO) , 380, 386, 401-2 , 407 New York Tribune, 14 5 No-capital-accumulation lin e in "constan t returns " model , 512-1 3 in "decreasin g returns " model , 514 , 515 increase i n technica l efficiency an d shif t in , 51 6 for increasin g return s economy , 521 , 522, 523 No-labor-growth lin e in "constan t returns " model , 512 , 513 in "decreasin g returns " model , 514 , 515 for diminishin g returns economies, 520 , 521 for increasin g return s economy, 521 , 522, 523 Nondurable consume r goods , durabl e vs., 40 Noneconomic factors , 6 , 7 , 9 economic chang e an d noneconomi c dimension s of society, 482-8 3 failure o f conventional theor y t o introduce , 42 9 Hume on, 31-33 , 481 , 482 Lewis on , 397-9 9 Malthus on , 55 , 71-72, 481 , 482 Marshall on , 189-93 , 481, 482 Marx on , 127 , 146-49, 481 , 482 Mill on , 117-21 , 481, 482 noneconomic motive s an d objectives, 481-82 , 678n.56 Ricardo on , 90 , 481, 482 Rosenstein-Rodan on , 41 1 Rostow on , 42 9 Schumpeter on , 481 , 482 Smith on , 47-50, 481 , 482 in statistica l analysi s o f structur e of growth , 368 69 uncertainties fo r futur e about , 480-83 Nonfarm employment , maximu m rat e o f increas e in, 38 9 "Non-Monetary Caus e o f Fluctuation s i n Employment, A " (Bickerdike) , 249 , 250 Nonproliferation Treaty , 49 6 "Normal" growth , tren d divergenc e and , 290-91 Normal rat e o f interest , Wicksel l on , 622n . 15 Normal Value , concep t of , 610n.7 1 North-South diplomacy , 38 0 Norway, Malthu s o n populatio n check s in , 6 9 Nuclear weapon s arms race , 495—9 6 diffusion o f power and , 438-39 stabilizing rol e of , 496-9 7 Objectives, noneconomic , 481-8 2 OECD, 378 , 380, 665n.122 "Of Commerce " (Hume) , 26 "Of Interest " (Hume) , 23 "Of th e Balanc e of Trade" (Hume) , 21-22 "Of th e Populousnes s o f Ancien t Nations " (Hume), 19, 20 , 3 1 Oil prices , 471, 472-73, 475 oil shock s i n 1970s , 380-81 , 405

703 One-sector Ada m Smit h growth model , 508-2 5 annual growth rat e ove r tim e in , 43 5 "constant returns " model , 511-1 4 "decreasing returns " model , 513-1 9 development o f factor s o f production in, 508- 9 economic framewor k of , 528—3 2 formal expositio n of , 511-2 5 illustration o f transitio n from on e steady-stat e equilibrium t o another , 523-2 5 "increasing returns " model , 519-2 3 technology in , 509 , 510 verbal accoun t of , 508-1 1 On Liberty (Mitt), 91 , 118 , 120 On the Economy of Machinery and Manufactures (Babbage), 92-93 , 10 4 On the Principles of Political Economy and Taxation (Ricardo) , 77 , 7 9 OPEC, 380 , 472 Opportunity, Fisher' s concep t of , 226-27 Optimum level s o f output , sectoral , 267-6 8 Optimum population , concep t of , 196-201 , 614n.29 Optimum propensit y t o consume, Malthus' s anticipation o f notion of , 64-6 5 Optimum sectora l patter n of development, 416, 430-31 Organization o f America n State s (OAS) , 49 8 Output of Manufacturing Industries, 1899—1937 (Fabricant), 294 , 295 Overinvestment i n boom, Keyne s on , 28 1 Overproduction doctrin e o f Spiethoff , 262 , 633n. 13 Pacific Basin , 498, 501 Pacific islands , 50 0 Paper mone y Malthus o n issuanc e of , 60-6 1 standard, depreciated , 230-3 1 Paris Commune , 13 9 Paris Exhibitio n of 1900 , 246 Parochialism o f economics , 87 , 612n . 117 Partners in Development: Report of the Commission on International Development (Pearso n Commission), 378-7 9 Passage t o India (Forster) , 31 8 Patents i n eighteent h century , English , 574n.3 1 Patterns o f Development, 1950-1970 (Chener y an d Syrquin), 35 6 Peace o f Amien s (1802) , 8 5 Pearson commission , 378-8 0 Per capit a growth rate s (takeof f t o 1967) , 44 7 Personality, impac t of , 9-10 , 72 . Se e also specific economists Petrodollars, 38 0 Philosophes o f Enlightenment , 14 , 16-1 7 Philosophy o f Manufactures, Th e (Ure) , 10 5 Philosophy o f Wealth, Th e (J . B . Clark) , 20 3 Physiocratic doctrines , 573n.2 5 Pigou, A . C. , 129 , 157, 212, 216, 249, 250, 263 , 267, 387 , 389 on busines s cycles, 269-71 influence o n Robertson , 636n.4 7 on Keynes , 638n.2 0 on socia l vs . privat e net product, 617n.l8 on stage s o f an d limit s t o growth , 325—2 6

704

Pioneers i n Development (Coli n Clark) , 313 , 431 Plant an d equipmen t expenditures , internal financing a s percentag e of , 675n.3 5 Plantation agricultur e i n Malay a an d Wes t Africa , 386 Plastics industry , life histor y o f U.S., 459, 461 Point Fou r program , 376 , 680n. 16 Policy-oriented growt h modeling , 356-59 , 361 . See also Governmen t intervention ; Public polic y "Political Arithmetick " (Petty) , 194 Political economy , 1 6 description o f Malthus ' approac h to , 5 3 in pre-191 4 era , 153-5 9 shift i n 184 8 of focu s of , 93-9 4 Political Econom y Clu b of London , 25 3 Political Economy (Mill) , 9 6 Political Element in the Development of Economic Theory, Th e (Myrdal) , 399 Political indicators , 36 8 Politics, critica l rol e i n developmen t of , 423—27 , 669n.l81. Se e also Governmen t intervention; Public polic y Politics an d th e Stages o f Growth (Rostow) , 43 3 Polymer chemistr y industry , life cycl e o f Japanese , 461-62 Poor Laws , 7 2 Population British vie w o f economi c consequence s o f declin e in, 198 , 199 Cassel on , 204- 5 Clark, Colin , on , 38 9 Clark, J . B., on , 203-4, 615n.3 9 development and , 205-8 of eighteent h centur y England, 20 , 5 3 of eighteent h centur y Scotland , 2 8 estimate o f increas e an d growt h rate s b y regio n and incom e grou p (1980-2100), 492 evolution o f statistica l analysis of (1870-1939) , 194-96 geometric potentia l of , 2 4 growth theor y and , 196-205 Harrod on , 20 5 Hume on , 2 4 Keynes on, 166 , 168-70, 197-9 8 Lewis on , 39 3 Malthus on , 56-58, 69 , 70 , 71-72, 197 , 482-83 Marshall on , 166 , 168-70, 197-9 8 Marx on , 125-26 , 128-3 4 Mill on , 92 , 100-103 , 115-1 6 Myrdal on , 199-200 , 614n.2 9 optimum, concep t of , 196-201 , 614n.2 9 proximity t o stationary global , 490-9 3 Ricardo on , 79-80 , 88 , 197 , 482-83 Smith on , 36-39 , 19 7 in statistica l analysi s of structur e of growth , 362 63 uncertainties fo r futur e about , 450-5 1 of Wale s (1740-1800), 5 3 Population density , Hilgerdt on industrialization and, 32 0 Populists, 15 3 Positive Theory o f Capital, Th e (Bohm-Bawerk) , 224

Subject Index Poverty estimates o f populatio n livin g in , 680n.19 Marshall's concer n about , 191-9 2 Viner on , 38 2 Poverty o f Development Economics, Th e (Lai) , 37 3 Power, diffusio n of , 438-40 , 446-4 7 Prebisch, Raul , 312, 377, 402, 425, 427 , 664n.ll4, 665n.l2 2 as development pioneer , 384 , 403-7 Preconditions fo r takeoff, 315 , 479, 487, 500-501, 575n,52 Present Distribution of Wealth in the United States, The (Spahr) , 21 7 Price elasticit y o f demand , 6 2 Prices decline i n lat e 1800s , 15 3 reductions cause d b y innovation , 245 relation betwee n profits , output , real wage s and, during busines s cycle , 175-7 6 relative. Se e Relativ e price s Price trend s 1873-mid-1890s, 155-5 6 interest rat e and , 225-29 after mid-1890s , 15 6 Principes Mathematiques de la Theorie des Richesses (Cournot) , 16 3 Principia (Newton) , 1 7 Principles (Marshall) , 154 , 161, 163, 167, 178, 183, 185-86 , 19 3 Principles (Mill) , 93, 94 , 96 , 107 , 111, 113, 115 , 116, 118 , 153, 154 , 164, 592n.25 Principles of Political Economy and Taxation (Ricardo), 51 , 83 , 84 , 87 , 9 4 Principles o f Political Economy (Malthus) , 51 , 55 , 56, 59 , 63 , 64 , 67 , 8 3 Problem o f Monopoly, th e (J . B . Clark) , 20 3 "Problems o f Industrializatio n o f Easter n an d Southeastern Europe " (Rosenstein-Rodan) , 37 4 Process o f Economic Growth, Th e (Rostow) , 5 , 6 , 429-30, 440 , 471, 482, 625n.45 Production factors of , i n one-secto r Ada m Smit h growth model, 508- 9 Kuznets on , 24 5 Rostow's dynami c disaggregated thero y of , 429 31, 527-2 8 Production functio n in "decreasin g returns" model , 51 3 dual functio n to , 53 1 in "increasin g returns " model , 51 9 two-factor, i n "constan t returns " model , 51 1 Production isoquants , 51 2 Production Trends in the United States Since 1870 (Burns), 288-92 , 29 3 Productive an d unproductiv e labor , Smith' s distinction between , 38-39, 4 0 Productivity Hume on , 23 , 2 4 Malthus on , 56-5 7 marginal productivit y relations , 511 Mill on , 10 3 of resource s devoted to technology , 543 Smith on , 35 , 41 , 4 7

Subject Index Profits investment a s functio n of, 544-4 6 in leadin g secto r ove r "industria l revolution " period, 551-5 3 Malthus on , 67 , 68-69 Marx on , 126 , 598n.l47 Mill on , 107- 8 reinvestment of , 54 2 relation betwee n prices , output , real wage s and , during busines s cycle , 175—7 6 retained, a s percentage o f gros s plan t and equipment expenditures , 675n.3 5 in Schumpeter' s circula r flo w system , 23 6 as sourc e o f savings , Lewi s on , 39 4 Profits (Foste r an d Catchings) , 25 3 Progressives, 15 3 "Progress o f the Nation , The " (Porter), 21 1 Project appraisal , 41 6 Promotion o f Industria l Investment Ac t (Thailand), 420 Propensities, human , 5, 6 Propensity t o consume, 64-65 , 28 0 Proportionality, Malthus' s concep t of , 61 , 138 , 139 Proposal: Key to an Effective Foreign Policy, A (CENIS), 377 , 410, 436 Prosperity and Depression, A Theoretical Analysis of Cyclical Movements (Haberler) , 262-6 3 Protectionism Marshall's respons e to , 18 4 Ricardo o n agricultural , 78-7 9 Psychology o f investmen t markets , 280-81 Public La w 480, 425 Public policy . Se e also Governmen t intervention anxiety ove r diminishin g returns and, 321 appropriate rol e of , 483-8 4 five-point globa l agenda , 495-50 1 Hatred's growt h mode l and , 256 mainstream economi c theor y 1914-193 9 and , 158-59 Ricardo's concer n with , 76 , 8 5 Smith's recommendation s fo r economi c policy , 48-50 Public-sector rol e i n developin g countries , 387-88 , 417, 42 4 Public works , Malthus' s cal l for, 61, 6 2 Puerto Rico , Lewis' s experienc e in , 39 7 Purchasing Power o f Money (Fisher) , 226 , 263 Pursuit curve , 369 , 656n.49 Quantitative Aspects of the Economic Growth of Nations (Kuznets) , 35 2 Quantity theor y o f money , 26 , 178 , 180, 227, 228 , 277, 278 , 610n.73 Quarterly Journal o f Economics, 34 1 Railroad boo m o f 1840s , 92 , 107 , 464 R & D . Se e Researc h an d development Rate o f retur n isoquants, 512 Rational economi c interest , 573n.l 8 Raw materials , futur e problem s an d policie s for , 473. Se e also Relativ e prices Reagan Administration , 324

705 Real nationa l income pe r perso n employed , factor s influencing, 19 9 Real wage s average Britis h (1844-1891) , 18 3 effect o f capita l exports on , Marshal l on , 6 1 In.8 in Grea t Britain , Franc e an d U.S. (1840-1880) , 132, 13 3 Marshall on , 182 , 611n.88 Marx on , 130-3 4 in one-secto r Ada m Smit h growth model, 508, 509 relation betwee n prices , output , profits and, during busines s cycle , 175-7 6 trends i n (1755-1851) , 131 Recession o f 1948-1949 , 376 Reform, shif t o f focu s from growt h to socia l (1870 1939), 153-59 , 603n.l , 605n.l Reform Bill s of 1867 , 148 of 1832 , 92 Regional aggression , 43 8 Regional conflict s with cold-war dimension, settlement of , 49 6 Regional developmen t banks , 505 Regional structure s o f worl d economy , strengthening of , 50 1 Reinvestment o f profits , 54 2 Relative prices . Se e also Term s o f trad e Colin Clar k on , 308 , 311 1870-1939, 302-1 1 Hilgerdt on , 308-10 , 31 1 Hume on , 25-26 Kondratieff on , 306-8 , 31 1 Lewis on , 39 5 longer perspective s on , 306-1 0 Malthus on , 65-69 Marshall on , 181-8 4 Marx on , 141-4 2 Mill on , 112-1 3 1951-1982, 171-7 2 Ricardo on , 86-8 7 in Rostovia n growt h model , 52 7 Singer's focu s on , 41 2 Smith on, 42-4 4 in structura l growt h analysis , 365 uncertainties fo r futur e about , 470-76 world trad e an d movements in , 309 , 645n.22, 6460.22 Religion, Hume' s protracte d campaig n against , 14 15 Renaissance, 48 6 Rent under condition s of industria l capitalism , Marx on, 141-4 2 Malthus's theor y of , 588n . 122 Ricardo's theor y of, 89-90 , 588n.12 2 Reparations transfe r problem, 22 9 Research an d developmen t (R & D) . Se e also Technology as form s o f investment , 456-57 measuring, 681n. 9 resources employe d in , 55 8 in Rostovia n growth model, 527, 546, 547-49

706 Research an d developmen t (cont.) sector, GN P accountin g for , 548 spectrum, 454-5 5 Reserve arm y o f unemployed , Mar x on , 81 , 13 5 Resources cost o f technica l advanc e in , 546—4 9 devoted t o technology , productivit y of 543 employed i n R & D sector, 55 8 future issue s on , 499-50 0 to improv e technologica l absorptiv e capacity , 546-47 Responsibility fo r viabilit y of internationa l system, assumption of , 499 , 501 Retardation, Burns' s stud y o f sectoral , 28 8 Retardation o f growth , Kuznet s on, 24 4 Review o f Economic Statistics, The, 410 Ricardo, David , 9 , 64 , 68 , 70, 73-90 , 321 , 389 , 428, 454 , 469, 586n.84 on basi c growt h equation, 77-7 9 British economy durin g lifetim e of, 53-55 , 7 3 on busines s cycles, 84-8 6 corn model , debate on , 588/1.11 7 on diminishin g returns, 78-79 , 80 , 81 , 86 , 87 , 88-89 income distributio n theory , 7 7 influence o n Mill an d Marx, 91 , 92 , 100-101 , 107 Keynes's tribut e to, 582n. 7 on machinery , discussion s of , 589n . 137 Malthus and , 51, 52 , 58-59 , 76 , 582n. 7 Marx's us e of , 14 6 Mill on , 5 9 2 n 3 on noneconomi c factors , 90 , 481 , 482 parochialism of , 87 , 6l2n.ll! personal background , 73—7 7 on population , 79-80 , 88 , 197 , 482-83 on publi c policy, 76 , 8 5 on relativ e prices , 86-8 7 rent theor y of , 89-90 , 588/1.12 2 on role o f government , 48 3 Rothschild i n contrast to , 575n.3 9 Schumpeter on , 52 , 583n. 8 on stage s o f an d limit s to growth , 87—9 0 on stationar y state , 70-71, 88 , 8 9 on technolog y an d investment, 80-8 4 view o f money , 7 5 on workin g force, 79-8 0 year whe n majo r doctrin e se t dow n by , 8 Rich-country-poor-country model , 564-6 9 framework for , 564-66 static solution , 566-6 8 three dynami c solutions, 568-6 9 Rich-country-poor-country problem , 465 . See also Stages o f an d limit s to growth Hirschman on , 680n.l 6 Hume's analysi s of, 26-27 , 29-31 , 497 , 575/1.52 Malthus on , 69-7 0 Smith's positio n on , 45-4 7 Rise an d Fall o f Economic Growth, Th e (Arndt) , 373 Robertson, Denni s H., 157 , 184, 227, 232, 250 , 257, 274 , 278, 289, 321, 322, 631n.l , 651n.64

Subject Index on busines s cycles , 259 , 263-69, 634n.24 , 2 5 Keynes and, 268, 635n1.25, 636«.34, 644n.9, Pigou's influenc e on , 636n1.4 7 on term s o f trade, 302 , 303, 305-6, 31 1 testimony befor e Macmilla n Committee , 308, 645n.l8 Robinson, Joan , 157 , 313-14, 387 , 646n1.5 on growt h models , 339-4 1 metallic case s of , 34 0 on motive s fo r investment , 573n.21 origins o f growt h syste m of , 649n.2 3 Rockefeller Foundation , 35 3 Rodan, Paul . Se e Rosenstein-Rodan , Pau l N . Rosenstein-Rodan, Pau l N. , 50 , 374 , 387, 391 , 393, 436 , 660n.66, 68 , 661 Big Pus h of , 50 , 341 , 409 as developmen t pioneer , 384 , 408-11 on pursui t curve, 369 , 656n,4 9 Rostovian growt h model , 486-87 , 526-28 , 541-55 annual growt h rat e ove r tim e in , 43 5 business cycle s in , 52 7 capital stoc k in , 55 6 characteristics of , 526-27 , 541-44 demographic transitio n in , 526 , 553 economic framewor k of , 528-3 2 integration of features in, 553-5 5 investment a s functio n o f profi t in , 544-46 Kondratieff cycle s adde d to , 554 , 555 labor growt h in , 55 6 land in , 543 , 556 relative price s in , 52 7 R & D in , 527 , 546, 547-49 resource cos t o f technica l advanc e in , 546-4 9 role o f Industria l (Technological ) Revolution in , 549-53 similarity betwee n neoclassica l model s and , 528 Rostovian theor y o f economi c growth , 428-41 application i n 1950s , 436-4 0 development policy , 436-3 8 dynamic disaggregate d theor y o f production , 429-31, 527-2 8 five application s fo r 1980 s an d beyond , 440-4 1 presuppositions of , 42 8 Stages o f Economic Growth, The, 431-36, 440 41, 487-88 , 656n1.39 , 668n.166 in wa r an d peace , 438—4 0 Royal Commissio n o n Gol d an d Silve r (18871888), 155 , 176, 180, 181 Royal Commissio n o n th e Depressio n i n Trade an d Industry (1886) , 155 , 180, 181-82 Royal Economi c Association , 32 5 Royal Statistica l Society , 210 , 263, 264 Rules o f th e game , definitio n o f ne w international , 503 Russia. Se e also Sovie t Unio n Marshall o n industria l leadership in , 18 8 Marx on , 14 5 St. Peter' s Fiel d inciden t (1819), 5 9 Samuelson, Paul , 129 , 133, 137, 138, 248, 256 , 282 on busines s cycles, 296-99

Subject Index on comparativ e static s an d comparativ e dynamics, 648n. 6 critique o f Marshall , 33 0 debate wit h Kennedy over investmen t and technology, 342-4 3 on econometrics , 642n. 101 mathematics a s language of , 296-99 , 330-3 1 operational principle s of, 33 1 "Saving an d th e Monetary System " (Bickerdike) , 253 Saving-consumption ratio , stabilit y via changes in , 335-36 Saving rat e in Marshall' s growt h model, 16 5 in neoclassica l growt h model , effec t o f variation s in assumed , 539-4 1 Savings Bickerdike on , 251-5 3 Marshall on , 171-7 2 sources of , 394-95 , 55 3 Say's Law , 384 Scale economies , 522 , 524 School o f Advanced Internationa l Studie s (SAIS) , Myrdal's lecture s at, 400-40 1 Schumpeter, Joseph , 4 , 7 , 8 , 10 , 41, 76 , 141 , 157, 158, 173 , 223, 224, 263, 287, 345, 348, 433, 624n.44, 637n1.8 , 666n1.136 , 676n1.43, 677n.4 6 on agricultura l developments, 24 1 on busines s cycles , 237-42 , 262 , 282-83 , 626nn.63, 66, 627n1.84 , 632n. 7 character of , 233-3 4 circular flo w equilibriu m model, 234-36 , 242-43 on clustering o f innovations, 457-58 on development , 23 5 differences betwee n earl y Kuznet s and, 244-4 6 on entrepreneurs , 236 , 237, 246 influences on , 23 4 innovational theor y o f growth an d cycles, 336, 337-38, 346 , 465 interest theor y of , 23 6 on Juglar , 259 , 260 Keynes on , 27 4 on limit s t o growth, 323-2 5 on Marshall , 178 , 180, 191, 609n1.69, 612nn1 7 on Marx , 144 , 597n1.138 on Mill , 93 , 96 , 97 , 107- 8 on Mitchell , 29 1 on noneconomi c factors , 481 , 482 on Ostwald , 571n1. 5 on Quesnay , 9 on R & D process, 45 6 on Ricardo , 52 , 583n1. 8 on shif t o f focus to socia l reform, 605n . 1 on Spiethoff , 26 2 on static s an d dynamics , 625n1.4 6 on technolog y an d growth, 233-42, 455, 456, 625n1.45 Science. Se e also Technolog y basic vs . applied , 456-57 Marx's vie w of, 672n.1 8 Mill o n linkag e to econom y of , 114-1 5 shift i n advance d developing countries toward, 488-89

707

Scientific Revolution , 486, 487 Scientific socialism , 122-2 3 Scottish economy , i n eighteenth century , 27-29 Scottish Enlightenment , 1 5 Search fo r Quality , 43 3 Second Graduatin g Class , 48 7 Second Industria l Revolution, 20 1 Second Worl d War, 221-22, 447, 499, 503 Sectoral analysis , linkin g of nationa l incom e to , 221-22 Sectoral investmen t planning, Smith' s dictu m on, 49 Sectoral optimu m levels o f output , Robertson an d notion of , 267-6 8 Sectoral patter n o f development , optimum , 416, 430-31 Sectoral planners , econometric , 359-62 , 36 5 Sectors J. M . Clark' s basi c disaggregatio n i n terms of , 314 dynamic interactio n betwee n manufactures and commodities, 463-6 4 of society , interactio n of , 14 8 technology effec t between , 52 7 Secularism o f Enlightenment, 14-1 5 Secular Movements in Production and Prices, Their Nature and Their Bearing Upon Cyclical Fluctuations (Kuznets) , 219, 223, 242-46, 288, 352 , 358, 459, 627nn.89, 90 , 676n1.4 3 Secular stagnation , 200-201 , 256. See also Population Hansen o n concern with , 321-2 3 Keynes's vie w of , 197-9 8 Schumpeter on , 323-2 5 variety o f force s tha t ma y brin g about, 48 0 Secular trends , Mitchel l on , 287-8 8 Self-interest impulse to pursue , 47 , 4 8 social interes t and, convergence of , 630n1.12 0 Short ru n an d lon g run , analysis of , 501—4 , 680n1.80 Singer, Han s W., 426, 6 6 6 n 3 6 as development pioneer , 384 , 411-14 Six Act s (1819), 5 9 Size o f economy, tota l facto r productivit y and, 519 , 520 Smith, Adam , 3 , 4, 6 , 9 , 23 , 33-50, 52 , 60 , 63 , 73, 76 , 78 , 80 , 87 , 93 , 136 , 154, 196, 207, 234, 389 , 407, 446, 454, 486, 572n1.11. Se e also One-secto r Ada m Smith growt h model on agriculture' s importance , 44-4 5 awareness o f process o f technological change , 579n.78 on basic growt h equation, 35-3 6 British econom y durin g formative year s of, 34 35 on busines s cycles , 41-4 2 close huma n tie s betwee n Hume and, 51 concept o f sympath y in relation s among nation states, 50 4 corn mode l of, 38 , 7 8 on diminishin g returns , 44, 508-9 , 51 0 on divisio n o f labor , 35 , 37 , 509 , 579n1.86

708

Smith, Ada m (cont.) four problem s whic h concerned , 1 8 on government , 48-50 , 483 , 582n.120 history settin g influencing , 13-1 8 on Hume' s characte r an d style , 577n.6 9 on increasin g returns , 43 , 509 , 510 Malthus and , 55, 57 , 5 8 on manufactures , 44-45 Marx's use of , 14 6 moral philosoph y of , 17-1 8 on noneconomi c factors , 47-50 , 481 , 482 personality of , 7 2 on populatio n an d workin g force, 36-39 , 40 , 19 7 on productivity , 35 , 41 , 4 7 on rea l incom e pe r capit a i n relatio n t o rate s of growth, 46 , 581n.11 1 on relative s prices , 42-4 4 Scottish econom y o f eighteenth century and , 2729 on stage s o f an d limit s to growth , 44-47 on technolog y an d investment , 35 , 39-41 , 45 5 on tim e lag s i n credit process, 580n.l0 1 on uneve n distributio n of wealth , 117 , 119 use o f invisibl e hand , 34, 578n.7 5 view o f huma n condition, 3 4 view o f individual , 12 1 view o f society , 482, 596n.l21 year whe n majo r doctrin e se t dow n by , 8 Social behavior , dynami c interplay between materia l circumstances and , 57 "Social-cultural milieu " variabl e (Adelman) , 6, 10 3 Socialism an d socialists , 155 , 321 attitudes i n 1950 s toward , 42 4 future of , 49 5 Marshall and , 154, 191-93

Marx on, 93, 143-46 , 597n3 5

Mill on , 93 , 96 , 119-21 , 143 Prebisch o n synthesi s o f economi c liberalis m and, 406 scientific, 122-2 3 "Social Possibilitie s o f Economi c Chivalry " (Marshall), 192-9 3 Social Scienc e Researc h Council , 653n. 4 Committee o n Economic Growt h of the, 352, 353 Social Securit y system , American , 50 4 Social servic e expenditure s a s percent of GN P (1890-1932), 15 7 Social welfar e movement , 153-5 9 Societal organization , Mar x on stage s of , 12 7 Society economic chang e an d noneconomi c dimension s of, 482-8 3 interaction o f sector s of , 14 8 Petty o n trad e an d "heterodox " of , 616n. 6 relation betwee n individua l and, 121-22, 146, 484-85, 603n.22 1 Smith on , 482 , 596n.12 1 Society fo r th e Suppressio n o f Vice , 7 6 Sociocultural indicators , 36 8 Solow, Rober t M., 332 , 335, 337, 349 incorporation o f demographi c transition by , 34142 Sources o f Invention, Th e (Jewkes) , 45 8

Subject Index Southeastern Europea n development , 37 5 South Korea , 465 , 488 Soviet Unio n Cold Wa r and, 438-40, 447, 495-96, 499, 501 diffusion o f powe r i n worl d and, 439-40 Great Ac t o f Persuasio n and , 439-40 incentives fo r adoptio n o f ne w technique s in, 54 8 technological backlog s in , 46 6 Spanish treasure, inflow t o Europe of, 27 4 Special Unite d Nations Fund for Economi c Development (SUNFED) , 41 3 Specie flow-pric e leve l hypothesi s o f Hume, 30-3 1 Spiethoff, A. , 240 , 263, 274 background histor y of , 632n . 11 on busines s cycles, 261-6 2 overproduction doctrine , 262 , 633n.13 St. Peter' s Fiel d inciden t (1819) , 5 9 Stability via change s i n incom e distributio n an d saving consumption ratio , 335-3 6 via facto r substitution , 335 Stable equilibriu m o f norma l deman d an d supply, theory of , 16 0 Stages o f an d limit s to growth . Se e also Development economic s acceptance b y CENI S of , 43 7 aggression and , 396, 438-40 Anstey's interwa r stud y of India , 31 5 Chenery on , 363 , 365-68, 678n.4 3 conditions o f economic progress , 313-1 4 conventional sequenc e o f stages , 14 2 in 1870-193 9 period, 312-2 6 Hansen vs . Schumpete r on , 321-2 5 Hilgerdt on , 319-2 0 Hoffmann on , 318-1 9 Hume on , 26-3 1 Knowles's stud y o f Britis h Empire, 317-1 8 lack o f analyti c literatur e on, 312-1 3 Lewis on , 395-9 7 Malthus on , 69-7 1 Marshall on , 184-8 9 Marx on , 123 , 142-46 Mill on , 113-1 7 Pigou's perspectiv e o n 1870-193 9 period, 325 26 Ricardo on , 87-9 0 school enrollment s b y stage o f growth , 48 9 Smith on , 44-4 7 in structura l growth analysis, 365-6 8 Tawney's stud y of China , 315—1 7 uncertainties o f futur e about , 479-8 0 war an d peace and , 438-40 Stages o f Economic Growth, Th e (Rostow) , 431 36, 656n.39 , 668n.16 6 application t o 1950s , 438-4 0 debate on , 434-36 definition o f driv e t o technologica l maturit y in, 487-88 five application s fo r 1980 s an d beyond , 440-41 as see n b y th e author , 433-3 4 Stagflation, 38 0 Stagnation, secular . Se e Secula r stagnatio n Statehood an d Anarchy (Bakunin) , 143-4 4

Subject Index Statement of Some New Principles on the Subject of Political Economy (Rae) , 10 4 "State o f Developmen t Theory , The " (Lewis), 373 Stationary globa l population , proximit y to, 490-9 3 Stationary stat e Hicks on , 11 7 Malthus' us e of, 70-7 1 Marshall on , 16 7 Mill on, 101-2 , 111 , 115-17, 123 Ricardoon, 70-71 , 88 , 89 variety o f force s tha t may brin g about , 48 0 Statistical analysis . Se e also Econometric s national incom e accounting , 159 , 209-22, 257, 617n.ll, 618n.3 8 of population , evolutio n o f (1870-1939) , 194-9 6 of structur e o f growth . Se e Structur e of growth , statistical analyse s o f systematic amassin g o f reliabl e dat a for, 159 Statistical Societ y o f London , 21 0 Statistical Testing of Business Cycle Theories (Tinbergen), 299-30 1 Steadily contractin g economy , 513 , 515 Steady growt h economy , 512 , 513 Steady stat e in Ada m Smit h growt h models , 510 , 558-59, 560 Smith's analysi s of, 46 , 4 7 Steady-state equilibriu m illustration o f transitio n fro m low-leve l t o new, 523-25 for increasin g return s economy , 521 , 522, 523 in one-secto r Ada m Smit h growt h model , 514, 516, 517 , 518 Steam engine , 46 3 Steel industry , development of , 46 4 Stock-adjustment model , 65 Stockholm School , 15 7 Strategic Defens e Initiative , 49 6 Strategic Factors i n Business Cycles (J . M . Clark) , 292 Streeten, Paul , 37 3 on development economics , 418-1 9 Structuralists vs . neoclassica l economists , 419, 421-27 Structure o f growth, statistica l analyse s of , 352-7 2 basic growt h equatio n and , 362 business cycle s in , 36 5 by Chener y e t al., 355-59, 363 , 364-65 comparative structura l analysis , 352-55 , 358-59 , 367-68, 36 9 Denison's disaggregatio n method , 369-7 1 development economic s and , 374 investment an d technolog y in , 363—6 5 by Kuznets , 352-57 , 36 2 noneconomic factor s in , 368-6 9 population an d working force in , 362-6 3 relative price s in , 36 5 sectoral planner s and, 359—62, 36 5 stages o f an d limit s t o growt h in , 365-6 8 Study o f Industrial Fluctuations, A (Robertson), 259, 264 , 266, 303, 631n.l Sub-Saharan Africa , developmen t problems of , 500-501

709 Subsistence wage , 508 , 509, 513 Substitution elasticity of , 516-18 , 55 1 stability vi a factor , 33 5 Supply, Priorities , an d Allocatio n Board (SPAB) , 221 Supply curv e fo r labor , backwar d sloping , 37 , 57 58, 5 9 Surplus countries, responsibility of, 50 2 Surplus i n developing countries , dispositio n of, 40 6 Surplus value , 126 , 192 Sustained growth , necessary condition s for, 563-64 Sweden anxiety abou t stagnan t o r fallin g populatio n in , 198-200 Myrdal's experienc e in , 399 , 400 Sympathy, 32-33 , 121 , 504-5 Tableau Economique (Quesnay) , 13 8 Taiping Rebellion , 44 7 Taiwan, 465 , 499, 501 Takeoff, 341 , 479, 669n.l4. Se e also Industrial revolutions acceptance a s legitimate operationa l goal , 43 7 Chenery on , 656n.3 9 circumstances forestallin g entrance into , 50 0 concept of , 638».3 2 debate on , 434-3 6 defined, 43 4 emergence of , 431-3 2 first, 486-8 7 Fourth Graduatin g Class , 441 , 446, 447-48, 487-90, 495 , 496-98, 501 Hoffmann o n periods of , 31 9 import-substitution, 22 , 31 2 poor countrie s no t yet into , 500-50 1 preconditions for , 315, 479, 487, 500-501, 575n.52 stages beyond , 432-3 3 wars related to , 43 8 "Take-Off int o Self-Sustaine d Growth , The" (Rostow), 43 2 Tariff, Mill' s cas e fo r transient , 42 3 Tawney, R . H. , 4 , 207- 8 study o f China , 315-1 7 Taxation, 217 , 401 Technical efficienc y increas e i n one-secto r Ada m Smith growt h model , 515-2 0 Technological absorptiv e capacity , 351 , 361, 432, 433-34, 465 , 479-80, 527 , 543. See also Drive t o technologica l maturit y effective technica l improvements , 54 8 in Fourt h Graduatin g Class, 488-9 0 index of , 48 9 institutionalization of , 674n.3 2 investment rat e an d pac e o f absorption , 466—6 9 use o f resource s t o improve , 546-4 7 Technological backlog , 464-66 , 479 , 527. 547 , 548, 558 , 568, 569 Technology Adams on , 246-4 7 Cairncross o n rol e of , 624«.3 1

710

Technology (cont.) Chenery's linkin g of expansio n o f manufactures and, 363 , 364-67 Clark, Colin , on , 213-14 clustering of innovation , 457-63, 527 , 673n.2 6 comparative structura l analyses and treatmen t of , 358-59, 367-6 8 directions o f analyti c work o n economics o f change in , 671n. 8 effect betwee n sectors , 52 7 in eighteent h centur y England , 20-2 1 employment and, 54, 82-84, 469-7 0 growth and , 233-46 in growt h modeling, 33 6 Hansen o n limit s of growt h and, 322 Hume on, 24-2 5 incremental vs . discontinuou s innovation , 455 56, 527 , 543 innovational clusters, 457-63 , 527, 673n.26 invention i n relation to interest rates, Fishe r on , 226-27 Kennedy-Samuelson debate ove r investmen t and, 342-43 Kuznets on , 219 , 242-46, 355, 358, 455 Lewis on , 393-95 , 660n.7 2 Malthus on, 62-63 , 83 , 84 Marshall's treatmen t of , 170-73 , 608n.3 9 Marx on , 134-38 , 573n.21 Mill's treatmen t of, 103-8 , 115-1 6 in neoclassica l growt h model , 533 , 557-58 in one-secto r Ada m Smit h growt h model, 509, 510 Pigou o n invention vs . innovation , 270-71 productivity o f resource s devote d to , 54 3 progress of , i n multisectora l Ada m Smith growth model, 556-5 8 resource cos t o f technica l advance, 546-4 9 Ricardo on , 80-8 4 in Rostovia n growt h model , 54 3 Schumpeter on , 233-42, 455, 456, 625n.45 Smith on , 35 , 41 , 579n.7 8 in statistica l analysi s of structur e of growth , 363 65 takeoff a s consequence o f absorptio n of , 431-3 2 uncertainties fo r futur e about , 451-70 Veblen on , 247-4 8 Technology transfer , 465-6 6 Ten Great Economists (Schumpeter) , 609n.69 , 624n.44 Ten-Hour Bil l (1847) , 9 4 Terms o f trad e British, relatio n between U.S . farm parit y ratio and, 31 0 British anxiet y ove r (1903-1919), 302-4 Clark on , 30 8 for developin g countries , Singe r on , 412-1 3 intersectoral, 6 6 in interwa r years (1919-1939) , 304-6 , 31 1 Keynes on , 302-5 , 306 , 311, 643n. 3 Latin America , 40 4 Robertson on , 302 , 303, 305-6, 311 Textile industry , 22, 62 , 46 4 Thai economy , 419-20, 421

Subject Index Theories of Economic Growth and Development (Adelman), 6 Theory o f Business Enterprise (Veblen) , 263, 284 Theory of Economic-Demographic Development (Leibenstein), 19 6 Theory of Economic Development, The (Schumpeter), 234-39 , 244, 245, 263 , 625nn.46, 52 , 626n.63 , 632n. 7 Theory o f Economic Growth (Lewis) , 392, 393 Theory o f Economic History, A (Hicks) , 38 4 "Theory of Induce d Innovation , A " (Samuelson) , 342 Theory o f Interest, Th e (Fisher) , 224 , 225-27 Theory o f Money an d Credit (Mises) , 26 3 Theory o f Moral Sentiments (Smith) , 8 , 33 , 34 , 504, 505 , 578 Theory o f Social Economy, Th e (Cassel) , 204 , 267 Theory o f Tariffs, Th e (Bickerdike) , 24 9 Third Industria l Revolution, 201, 673n.26 Thirteenth century , climat e o f opinio n in , 1 3 Thorp, Willard , 28 6 Time lag s in credi t process , Smith' s sensitivit y to importance of , 580n.lO l in economi c process , Malthu s on, 67-6 8 Tinbergen, Jan , 298, 653n.l02, 667n.15 2 basic growt h equation of, 415-1 6 on busines s cycles , 299-301 , 415 as developmen t pioneer , 384 , 414-17 econometric analysi s of , 299-301 , 643n. 102 on rol e o f publi c an d privat e sector s i n developing countries , 467 , 667nn.l58, 15 9 Tobacco trade , Scottish , 2 7 Total facto r productivity Chenery's blac k bo x approac h to , 36 7 as functio n o f overall siz e o f economy , 519 , 520 Hicks-neutral increas e in , 51 3 Total fertilit y rate , 451 , 671n.4 Towards a Dynamic Economics (Harrod) , 256 , 333 Towns, Smit h o n favorabl e impac t o f rise of , 47-4 8 Trade. Se e also Foreig n trade ; Term s of trad e changing patter n o f worl d grai n (1934-1973), 471 classic theor y o f international , 229-30 in developin g countrie s (1965-1985), change in , 383 in highl y industrialized vs. othe r countrie s (1935), 309 , 310 Hume o n balanc e of , 2 1 model o f comparativ e advantag e and, 564—65, 566 preferences fo r developin g countries , 40 5 relative price s and, 309, 645n.22, 646n.2 2 Trade cycle , Keynes' s treatmen t of , 272-77 Trade Cycle, Th e (Harrod) , 254-55 , 282 , 296, 334 Trade Cycle, Th e (Matthews) , 347-48 Trade Cycles (Hicks) , 34 3 Transfer problem , 229-3 3 Cairncross on , 232-33 , 6233n.3 1 Great Depressio n and , 503 of 1980s , 503- 4 Transfer process , historica l studies of, 623n.2 5 Transformation problem , 128-29 , 598n . 156

Subject Index Transformation towar d universa l affluence , 490-9 5 Transport, Marshal l o n effec t o f change s in , 183-8 4 Treatise o f Human Nature, A (Hume) , 19 , 49, 93 , 278 Treatise o n Money, A (Keynes) , 225, 266 , 272-79 , 280 Treatise o n Probability (Keynes) , 64 4 Trends. Se e also Price trend s business cycles vs., 429-3 0 dispersion rate s an d growth, 289-90 Tinbergen on , 41 5

trend-cycles an d business cycles , 291 , 640n.60

trend divergenc e an d "normal " growth , 290-91 Tripartite approac h t o government, 48-50 , 582n.l20 Turkey, takeof f of , 31 2 Turning poin t of 1870s , 153 , 603n. l Twentieth Centur y Fund , 37 3 Underconsumptionist theor y o f th e busines s cycle , 138, 139-4 0 Unemployed, Th e (Hobson) , 26 3 Unemployment. Se e also Workin g force Malthus's cal l fo r public work s t o ease, 61 , 6 2 Marshall on , 176-7 8 Marx's reserv e arm y o f unemployed, 81 , 13 5 Schumpeter's vie w of , 23 8 Unemployment insurance , Bickerdik e on, 25 0 Unit cos t function , 531 United Kingdom . Se e Britai n United Nations , 355 , 377 , 41 2 Economic Commissio n fo r Europ e (ECE) , 329 , 664«.93 Economic Commissio n fo r Lati n Americ a (ECLA), 377 , 404 , 664n.9 3 Economic Commission for th e Far East (ECAFE) , 664n.93 General Assembly , 376 , 38 0 sovereignty of , 413-14 United Nation s Charter , 41 3 United Nation s Conference o n Trad e an d Development (UNCTAD) , 405 , 407 , 665n.12 2 United Nation s Decad e o f Development , 37 8 United State s aid t o Lati n America, 37 8 anxiety ove r populatio n in, 200-20 1 average rea l an d nominal wages i n (1844-1891) , 183 boom an d crash (1925-1930 ) in , Keyne s on, 27 6 CENIS developmen t proposa l and , 436-37 changes i n share s o f outpu t an d capital i n manufacturing (1880-1948) , 468 , 46 9 Cold Wa r and, 438-40, 447 , 495-96 , 499 , 50 1 contributions t o 1929-198 2 growth rate s in , 37 0 conversion t o ne t debtor position , 47 7 debate o n developmen t polic y i n 1950s , 376 , 377-78 demography in , 613n . 17 estimates o f capita l accumulatio n 1850-1880 , 618n.38 farm parit y ratio, British terms o f trad e and, 31 0 methods o f remainin g industrious in future , 498 99

711 national incom e estimatio n in , 216-2 2 plastics industry , lif e histor y of , 459 , 46 1 policies t o recaptur e import-expor t balance , 50 3 population increas e (1900-1949) , 201 real wage s i n (1840-1880), 132 , 13 3 recession o f 1948-1949 , 37 6 social servic e expenditure s a s percent o f GN P (1890-1932), 15 7 world industria l production accounte d fo r by , 447 United State s Departmen t o f Commerce, 220 , 222 , 374 United State s Developmen t Loa n Fund , 37 7 United States i n th e World Arena, Th e (Rostow) , 432 Universal affluence , transformatio n toward , 490—9 5

"Unknown Masterpiece , The " (Balzac), 14 9

Utilitarian doctrine , 9 4 Utilitarian Society , 9 4 Utility coefficient of , 15 3 diminishing relativ e marginal , law s of, 1 9 Utility function , "movin g fixe d proportions, " 53 5 Value, labo r theor y of , 129 , 192 , 612n.l2 6

Value, surplus , 126 , 192

Value syste m o f modernization , 40 3 Veblen, Thorstein , 125 , 155 , 157 , 242 , 263 , 28 6

influence o n Mitchell's business-cycle analysis, 283-84

on technology , 247—4 8 Victory Program , 22 1 Vietnam, 50 0

Wages Marx's growt h theor y and , 12 6 Mill on , 99 , 10 0 real. Se e Rea l wage s Ricardo on , 79 , 8 0 Smith o n population and , 36-3 7 subsistence, 508 , 509 , 51 3 Wages and Income in the United Kingdom since

1860 (Bowley) , 21 2 War, economic s of Keynes on, 214-15 , 618/1.31 Kuznets on , 22 1

national incom e accountin g as tool fo r wa r production planning , 221-2 2 wartime planning for th e postwar, 374-7 5 War an d peac e Ricardo's attributio n of fluctuation s to , 84—85 , 8 6 stages concept applie d to , 438-40 War o f Jenkins' Ea r (1739) , 1 9 War of Spanis h Successio n (1701-1713) , 19 , 2 6 Warsaw Pact , nee d fo r reorganizatio n of, 49 6 Wealth and Income of the People of the United States, Th e (King) , 21 7 Wealth an d Welfare (Pigou) , 263 , 269 , 27 1 Wealth o f Nations, Th e (Smith) , 6 , 28 , 33 , 34 , 37 , 39, 40-41, 43 , 45 , 47 , 51 , 73 , 87 , 97 , 117 , 119, 507 , 50 9 Welfare, shif t o f focu s fro m growt h to (1870 1939), 153-59 , 25 8 Welfare economics , 483-8 4

712 Welfare state , 400-401 , 41 3 West Africa , Bauer' s formativ e experienc e in , 385, 386 Western Europ e high mass-consumptio n i n (1950-1962), 371 investment an d technolog y i n postwa r boo m o f 1950s an d 1960s , 46 7 methods o f remainin g industriou s i n future , 498 99 technological backlog s i n interwa r years in , 46 6 unpredicted reviva l afte r Secon d Worl d War, 429 "Where Ha d th e Scottis h Econom y Go t t o by th e Third Quarte r o f th e Eighteent h Century? " (Smout), 27 , 2 8 Wicksell, Knut , 157 , 198-99, 205, 224, 399 , 614n.25 advocacy o f birt h control , 19 9 on interes t rate an d price trends , 225 , 226, 22729, 622n.1 5 on Ricardo' s vie w o f machinery , 589n.l3 7 Williams, Joh n H. , 22 3 on transfe r problem, 229-32 Women, Mil l on , 100 , 101 Working classes , Marshal l on , 16 3 Working force . Se e also Demographi c transition ; Population; Productivit y backward slopin g suppl y curv e fo r labor, 37 , 57 58, 5 9 growth an d shif t i n distributio n of, 2 6 Hume on , 2 4 Lewis on , 39 3 Malthus on , 56-58 , 17 0 Marshall on , 166 , 168-70, 173 , 197-98 Marx on , 125-26 , 128-3 4 Mill's treatmen t of , 100-10 3 in neoclassica l growt h model , 533 , 537-39, 540, 556

Subject Index in one-secto r Ada m Smit h growt h model , 508, 509 productive vs . unproductiv e labor , 38-39 , 4 0 rate o f increas e i n siz e an d efficienc y i n Marshall's growt h model , 16 5 Ricardo on , 79-8 0 Smith on , 36-39 , 4 0 statistical analysi s o f structur e o f growt h and analysis of , 362-6 3 uncertainties fo r futur e about , 450-5 1 World Bank , 315 , 355, 373, 375, 378, 379, 381, 390, 401 , 437, 451, 488, 489, 501, 505, 665n.l23 definitions o f ne t reproductio n rat e an d total fertility rate , 670n. 4 first loan s t o developin g countries , 37 6 International Developmen t Associatio n (IDA) , 377, 41 3 Rosenstein-Rodan's wor k at , 40 9 World Economic Development: Effects on Advanced Industrial Countries (Staley) , 37 4 World econom y adjustments require d in , 503- 4 evolution o f forma l growth model s i n three phases of , 333-3 4 industrial leadershi p in , Marshal l on , 186-8 8 internationalizing o f fluctuation s in , 595n.9 1 linkage mechanism s i n pre-1914, 47 8 post-World Wa r I phases, 47 7 regional structure s of , strengthenin g of , 50 1 transformation movin g towar d universa l affluence, 490-9 5 traumatic event s i n 1970 s in , 38 0 World Economy: History and Prospect, The (Rostow), 372 , 430, 459, 499, 549, 668n.l66 Yemen, 50 0