wpd 17 November 2001 Economic Factors Necessary for Development: The Kindleberger Scheme Donald Von Eschen

In his book, Economic Development, Charles Kindleberger distinguishes six economic factors he believes important for economic growth. One way to analyse the impact of a society's economic institutions, state structure, and system of social stratification on its economic development is to ask how these affect each of Kindleberger's six factors. Thus, this paper gives a brief exposition of Kindleberger's scheme. Kindleberger's six factors are: Resources Capital Labor Organization Technology Scale Their meaning and the reasons he believes them to be important are described below. (In many cases, I have elaborated on Kindleberger's arguments and supplemented them, so Kindleberger should not be held responsible for all the arguments in this exposition.) 1. Resources By resources, Kindleberger means largely land (for agriculture) and minerals (for industry and export). The reference here, then, is to natural resources. A society, he argues, will be more wealthy to the degree to which it fully exploits its natural resources. This requires two things: the creation and maintenance of resources, and the full employment of resources. (a) Creation and maintenance. Here, Kindleberger argues that natural resources are not something just given by nature; to a large degree they have to be created and maintained. A simple example is land: The soil in tropical areas can be improved through wet-rice agriculture; the soil on mountain sides can be improved through terracing; arid land can be brought into cultivation through irrigation. Conversely, land can be exhausted through over-cropping and the failure to use rotation crops; irrigation works can be allowed to deteriorate; and the like. (b) Full employment. Land again offers a convenient example. Land can be underutilised by failing to farm it, or to farm it intensively, as when large landowners leave part of their land idle, or use much of it only to pasture a few animals. 2. Capital By capital is meant two interlinked things: (a) Saving and investment. (b) The creation of

Investment in human capital is investment that raises the skill level of the work force and its energy (that is. In recent years. Labor In keeping with the new concern with human capital. sanitation facilities such as effective sewer systems. and the like. that are used jointly by several firms or enterprises. This type of physical capital is sometimes referred to in the literature as social overhead. The argument here is that a society will be more wealthy to the degree that it creates and fully employs a high quality labor force that is efficiently distributed among jobs. (a) Quantity. The rationale is that a society will become more wealthy to the degree that it saves part of its current income and invests it in the creation of physical items that can be used in future production. roads. The two traditional ones are plant and equipment. roads and railway lines. physical capital had been destroyed. and the like. economists have begun to argue that too much emphasis has been placed on physical capital. and its distribution. such as factory buildings. Here. the country benefitted from the immigration of highly skilled persons from Europe. as when a bank subscribes to a stock issue to build an automobile assembly plant. with very little physical capital. the fees of doctors and nurses. particularly the rapid post-war recovery of Europe. telephone systems. and the rapid growth of the economy of Israel. items which. In the case of Israel. more wealth will be produced the higher the proportion of the potential work force that is actually set to work and the longer the hours this . businessmen. What is important is that the rate of saving be fairly high. agricultural implements. The necessary saving can be done either by private individuals and firms. And it can be done on both a large scale. increase the productive capacity of the society. or by governments (who can tax. machines. steel mills. as when an individual farmer decides to invest in additional farm buildings. agricultural implements. high enough to replace physical items used up in past production and to add additional items so that productive capacity will be expanded. according to one image. is investment in physical items. this factor focuses on the labor force of the society. These latter will be dealt with later under other headings. Physical capital can be divided into several categories. the assertion is that. and the like. Much of the investment necessary to raise the level of human capital is not investment in physical items. Plant and equipment are such items as factory buildings. power plants. This argument points to three major characteristics of a labor force: its quantity. which started. however. that investment in human capital is also of great importance. 3. that is. irrigation facilities. The argument is that these areas were able to grow so rapidly in part because of the high level of human capital. textile machines. where physical capital had been severely damaged by the war. In the case of Europe. all other things being equal. and so forth. and then invest the revenue in roads. scientists and top engineers engaged in technical research. which are used by individual firms or enterprises. but in such things as paying the salaries of teachers. and economic overhead. school and hospital buildings. housing (for shelter). and the like. irrigation works. thus. for instance. physical items used in production.2 physical capital. Some of the necessary investment. Economic overhead consists of such items as power plants. The focus is on the bulk of the labor force. but the skills of the population remained. water filtration plants. and the like. and the like). This dual meaning is the one traditionally used in economics. not on managerial personnel. This shift toward emphasizing human capital is partially a result of certain postwar experiences. its health). and the like. or on a small scale. its quality.

Some of the factors that may affect the quality of the work force are the following: Presumably workers will work harder when they are given a positive material or moral incentive for doing so. for instance. workers could elect workers' councils which could make the necessary managerial decisions. The former will be high when unemployment is low. managers in private or public corporations. These tasks of allocation and coordination are tasks of organization. and when women participate in the work force. it is not enough that a firm hires high quality labor. electronics) which will contribute most to the wealth of the society. its commitment to work). Organization The argument here is that it is not enough for a society to create and fully employ resources. In agriculture. and its health (that is. eliminate duplication. In a private enterprise economy. aluminum. machine tools vs. These factors must be allocated among alternative uses. to take another example. rather than when they are coerced to work. it is generally managers who decide how a firm is to be organized internally. those that maximize output for a given level of inputs. steel vs. and to have a high quality labor force. heavy industry vs. talent. And workers could similarly elect representatives to state planning boards that would decide on how resources should be allocated between sectors and industries. Thus. it has been argued that the Soviet Union attained such rapid rates of growth up to 1960 in part due to the full employment policies of the government and the widespread employment of women outside the home. 4.3 work force works. these tasks of organization could be performed by the workers themselves. Thus. In this view.. it is largely bureaucrats in planning agencies who decide how resources are to be allocated between sectors and industries. and the like). and the like. the health of the work force will presumably be higher when it has sufficient income to purchase health care. In state run economies. knowledge of literary classics. when adequate public health measures are undertaken. This requires. and.g. Or. (b) Quality. second. for instance. for instance. that talented individuals from the lower social strata be permitted to rise to jobs equal to their abilities. and they must be combined and coordinated in the most effective manner. the skills of the farmers may depend in part on the existence of agricultural extension services. it requires both social and geographical mobility. a society will be more wealthy to the degree to which it efficiently organizes its productive activities. to have high rates of savings and investments in physical capital. and the relevance of the education given in those schools to work skills (as opposed to education that emphasizes. its level of skill. however. when the society provides sufficient numbers of doctors. In both private enterprise and state run economies. In practice. supervise it. Here the argument is that greater wealth will be created if those with the most motivation. and within industries. light) and industries (e. its physical ability to work hard). agriculture. Within factories. Quality refers to the industriousness of the work force (that is. and when society provides adequate educational facilities. both in terms of the availability of schools. and bureaucrats in planning agencies. In principle. (c) Distribution. it is not enough that a society has a high rate of saving and investment. Their skills will presumably be higher when they have sufficient income to invest in their own training or that of their children. and coordinate its efforts in order to ensure that it is used in the most efficient manner. it must allocate this labor to particular tasks. It is to be noted that this task of . investment must be allocated to those sectors (industry vs. it is largely businessmen--often bankers--who decide where investment should be allocated. in most societies these tasks of organization are performed primarily by businessmen. and skills get those jobs where these traits are most important. classical philosophy. first. Finally. In short. it requires that workers are willing and able to move from one part of the country to another where their talents and skills are most needed. it must be allocated to the most efficient firms--that is.

then. For the private businessmen and managers. is that a society will be more wealthy to the degree it attains an adequate scale. 5. and public managers and bureaucrats. which permit more output on a given amount of land. will be more wealthy to the degree to which it has the capacity to invent new technologies. which experiment in the development of hybrid seeds. motivation. It depends on the existence of research institutes. adoption requires an extensive search process. the cost per unit of production decreases. which permit greater production with a given amount of labor. and skill are likely to be greater if persons from the lower social orders with these characteristics are permitted to rise to these positions. talented. scientists. If these persons are to do a good job of organizing productive activities--that is. it generally needs to be modified (that is. for some inventions can be made by the workers themselves. engineers in an underdeveloped country have to determine which of the steel technologies used in the economically advanced countries are appropriate to their own local sources of energy. and of combining and coordinating them--they presumably need to be motivated. for instance. As the scale of production increases. or to adopt and adapt. Second. The ability of a society to invent. adapted) to be fully effective. For businessmen. only rarely can a technology be located which is perfectly fitted to local circumstances. . the invention of new types of agricultural implements. and the like. which permit the production of higher quality steel in a shorter period of time with less labor. talent. the development of synthetic materials using waste products from the production of other products. Technology Many writers regard improvements in technology as the chief factor responsible for the increased wealth of humankind. This is true for at least two reasons: First. with the same resources as before. And skill is likely to be greater if persons in these positions have had formal training in schools of management. and the like. and so forth. It is to be stressed that even adoption and adaption require considerable effort. the type of iron ore deposits they have. in effect. therefore. By improvements in technology is meant inventions which permit. more. Scale Most economists believe there are important economies of scale in production. the family farmer) who generally decides how to organize production. in which the individuals doing the searching have to have the training and knowledge to recognize when a technique developed elsewhere is roughly appropriate for local circumstances. unskilled labor. Thus. or at least to adopt them from abroad and adapt them to local circumstances. in agriculture. and skill. it is argued. in part. a good job of allocating the factors of production. is dependent on many factors. 6. The argument. talent. for instance. the production of new. In the agricultural sector. Examples are: the development of hybrid seeds in agriculture. requires invention. the amount of output for a given level of inputs increases. on the quality of higher education available in the society--that is. and others can only be adopted if the skill and motivation of the workers is sufficiently high. Thus. and skilled. on the degree of investment in agricultural research stations. on the skill and motivation of the work force. they believe that as production increases. the hacendado. the invention of new techniques of making steel. or better products. It depends. and this modification. the quality of the education given to engineers. it is the farm operator (the planter. It depends. A society.4 organization exists in the agricultural sector as well as the non-agricultural one. being motivated means in part being oriented principally toward maximizing profit rather than leading the leisurely life of the cultured rich. thus increasing the amount of output for a given amount of raw materials. That is. It depends. the relative availability of skilled vs.

If no domestic supplier exists capable of supplying an important input. for then the supplier can sell at a lower cost. they are as capable of producing a large number of units of output as a few. thus. If income distribution.5 Economies of scale can be divided into two types: Internal. (b) External.000. Internal economies of scale are economies that arise within a firm when it increases output. income being concentrated in the hands of only a small part of the population. In short. but even labor. in part. As the firm obtains these external economies. the greater the variety of these firms. It will also ensure that there is a variety of firms so that any particular firm can purchase its inputs at lower cost. this increase in production will lead to a greater demand for inputs.. themselves arrive at internal economies of scale. External economies of scale are economies that a firm obtains when other firms are established and/or attain internal economies of scale. thus making the cost of each yard considerably higher. High demand will permit firms to expand their operations sufficiently to attain internal economies of scale. So. Machines are not the only inputs that may be "lumpy". there will be substantial demand for the products of a wide range of industries in a society. permitting the firm to buy its inputs more cheaply. for the consumers will not have to pay high transportation costs. then economies of scale will be attained. Such economies arise. These inputs are largely purchased or in other ways obtained from other firms. machines. a firm can benefit when such a supplier is established. will allow it to attain additional internal economies of scale. To take an example. however.e.000 yards of cloth in a day as 100 yards. and thus help it in attaining sufficient size to obtain economies of scale. and so forth. thus permitting it to sell more of its products. it will. in turn. parts. (a) Internal. and thus lowers its cost of production. be under-utilized. A firm must buy inputs in order to produce. If the machine is used to produce only 100 yards. . rather than for the broad range of products produced by mass consumption industries. A good transportation and communication system will lower the price of the firm's products to its consumers. the more firms in a particular firm's environment. rather than 1.000. and the like). What factors determine scale? Two important ones are the following: (a) The distribution of income. When income is widely distributed. It will benefit even more if that supplier can attain internal economies of scale. many of which may be produced abroad (such as Mercedes). for the other firms will have trained labor that the firm in question may be able to entice to work for it. too. and the cost of the machine will have to be spread over only 100 yards rather than 1. thus helping the firms that supply its inputs to increase their production and. This will increase the demand for the firm's products. If. is very skewed. the establishment of research and design departments. (b) The character of the transportation and communication system. demand will tend to be principally for luxury goods. and external.. a textile machine of minimum size might be as capable of producing 1. thus. the lower the cost at which the firm in question can get its inputs. to attain external economies). And so forth.e. This increase in production. on the other hand. inputs of skilled labor. it can then sell its products to its consumers more cheaply. Furthermore. may managerial inputs. because many inputs are "lumpy": that is. and the greater the degree to which these firms have attained internal economies of scale. A good transportation and communications system will also permit it to buy its inputs from other firms more cheaply (i. the textile operation can grow in size so that the machine can be fully utilized. The existence of other firms may help the firm in question not only purchase raw materials and physical inputs (i.

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