Macroeconomic Theory for Development

Macroeconomics:
Macroeconomics is a branch of economics that studies how an overall economy—the markets,
businesses, consumers, and governments—behave. Macroeconomics examines economy-wide
phenomena such as inflation, price levels, rate of economic growth/Development, national
income, gross domestic product (GDP), and changes in unemployment.
Some of the key questions addressed by macroeconomics include: What causes
unemployment? What causes inflation? What creates or stimulates economic growth?
Macroeconomics attempts to measure how well an economy is performing, understand what
forces drive it, and project how performance can improve.
Macroeconomics is often defined as starting with John Maynard Keynes and his book The
General Theory of Employment, Interest, and Money in 1936. Keynes explained the fallout
from the Great Depression when goods remained unsold, and workers were unemployed.

Macroeconomic Indicators: Macroeconomics is a rather broad field, but two specific research
areas represent this discipline. The first area is the factors that determine long-term  economic
growth and Development, or increases in the national income and standard of living of people.
The other involves the causes and consequences of short-term fluctuations in national income
and employment, also known as the business cycle.
Macroeconomists try to understand the factors that either promote or retard economic
growth to support economic policies that will support development, progress, and rising living
standards. Economists can use many indicators to measure economic performance.
 Gross Domestic Product Indicators
 Consumer Spending Indicators
 Income and Saving Indicators
 Industry Performance Indicators
 International Trade and Investment Indicators
 Price and Inflation Indicators
 Employment Indicators
 Government Indicators (Spending/Revenue/Debt)
 Special Indicators (Distribution/Healthcare/Small Business etc.,)

Business Cycle: Superimposed over long-term macroeconomic growth trends, the levels and
rates of change of significant macroeconomic variables such as employment and national
output go through fluctuations. These fluctuations are called expansions, peaks, recessions,
and troughs—they also occur in that order. When charted on a graph, these fluctuations show
that businesses perform in cycles; thus, it is called the business cycle.

Government/Policymakers use different stabilization policies to control abrupt changes in

macroeconomic variables caused by a business cycle.

Macroeconomic Theories of Development:

1. Marxian Theory: Karl Marx contributed to the theory of economic development in three
respects, namely, in broad respect of providing an economic interpretation of history, in
the narrower respect of specifying the motivating forces of capitalist development, and
in the final respect of suggesting an alternative path of planned economic
development.”
According to Marx, every society’s class structure consists of the propertied and the
non-propertied classes. Since the mode of production is subject to change, a stage
comes in the evolution of a society when the forces of production come into clash with
the society’s class structure. The existing property relations “turn into fetters” on the
 forces of production. Then comes the period of ‘social revolution.’ This leads to the class
struggle—the struggle between the have and the have-nots—which ultimately
overthrows the whole social system.

2. Schumpeter’s Theory: Joseph Schumpeter assumes a perfectly competitive economy

which is in stationary equilibrium. In such a stationary state, there is perfect competitive
equilibrium: no profits, no interest rates, no savings, no investments and no involuntary
unemployment. This equilibrium is characterized by what Schumpeter terms the
“circular flow” which continues to repeat itself in the same manner year after year,
similar to the circulation of the blood in an animal organism. In the circular flow, the
same products are produced every year in the same manner. “For every supply there
awaits somewhere in the economic system a corresponding demand. For every demand
the corresponding supply.”
Development, according to him, “is spontaneous and discontinuous change in the
channels of the circular flow, disturbance of equilibrium, which for ever alters and
displaces the equilibrium state previously existing. New disturbances/combinations
come about in the form of innovations.
An innovation may consist of: (1) the introduction of a new product; (2) the introduction
of a new method of production; (3) the opening up of a new market; (4) the conquest of
a new source of supply of raw materials or semi-manufactured goods; and (5) the
carrying out of the new organisation of any industry like the creation of a monopoly.
According to Schumpeter, it is the introduction of a new product and the continual
improvements in the existing ones that lead to development.

3. The Keynesian Theory: The Keynesian theory does not analyze the problems of
underdeveloped economies. It has relevance to advanced capitalist countries. Keynes
did not develop any systematic model of economic development in his General Theory.
This was left to his predecessors like Harrod, Domar, Joan Robinson and others who
made full use of the Keynesian tools to construct models of economic growth. It is only
in an essay entitled Economic Possibilities for Our Grand Children that Keynes suggested
an outline of the fundamental conditions of economic progress. “They are:
 Our power to control population;
 Our determination to avoid civil war and dissension;
 Our willingness to entrust to science, the direction of those matters which are
properly the concern of science; and
 The rate of accumulation as fixed by the margin between our production and our
consumption
 4. Rostow’s Stages of Economic Growth: Prof. W.W. Rostow has sought an historical
approach to the process of economic development. He distinguishes five stages of
economic growth, viz., (i) the traditional society; (ii) the pre-conditions for take-off; (iii)
the take-off; (iv) the drive to maturity; and (v) the age of high mass-consumption.
 Traditional society, dominated by agriculture and barter exchange, and where
science and technology are not understood or exploited.
 Pre-take-off stage, with the development of education and an understating of
science, the application of science to technology and transport, and the
emergence of entrepreneurs and a simple banking system, and hence rising
savings.
 Take-off, with positive growth rates in particular sectors and where organised
systems of production and reward replace traditional methods and norms.
 The drive to maturity, with an ongoing movement towards a diverse economy,
with growth in many sectors.
 The stage of mass consumption, where citizens enjoy high and rising
consumption per head, and where rewards are spread more evenly.
Rostow’s work, like many other accounts of growth, points to the significance of the
accumulation of savings to achieve take-off – in this case as a necessary condition for
the movement from traditional to developed societies.
5. Gerschenkron’s Great Spurt Theory: Alexander Gerschenkron , an economic historian,
examined the traditional economies of Europe as they attempted to achieve
industrialisation. He looked for similar characteristics and differences among countries
and analysed the process of change in each. Consequently, he described some common
stages through which underdeveloped countries must pass on the way to economic
development.

According to Gerschenkron, all nations were backward once. To move from the
traditional levels of economic backwardness to a modern industrial economy required a
sharp break with the past, or a ‘great spurt’ of industrialisation. Many western countries
like the United States, Germany, Great Britain and France experienced changes at
roughly the same time and achieved partial industrialisation during the first half of the
19th century.

Given a country’s degree of economic backwardness on the eve of its industrialisation, the
course and character of its industrial development tended to change in a number of respects.
Gerschenkron summed up these changes into the following six generalisations:
i. The more backward a country’s economy, the more likely was its
industrialisation to start discontinuously as a sudden great spurt proceeding at a
relatively high rate of growth of manufacturing output.
 ii. The more backward a country’s economy, the more pronounced was the stress
in its industrialisation on bigness of both plant and enterprise.
iii. The more backward a country’s economy, the greater was the stress upon
producers’ goods as against consumers’ goods.
iv. The more backward a country’s economy, the heavier was the pressure upon the
levels of consumption of the population.
v. The more backward a country’s economy, the greater was the part played by
special institutional factors designed to increase supply of capital to the nascent
industries, and in addition, to provide themwith less decentralised and better
informed entrepreneurial guidance; the more backward the country, the more
pronounced was the coerciveness and comprehen-siveness of these factors.
vi. The more backward a country, the less likely was its agriculture to play an active
role by offering to the growing industries the advantages of an expanding
industrial market based in turn on the rising productivity of agricultural labour.”
According to Gerschenkron, the differences in the levels of economic development among
European countries in the 19th century were sufficiently large so as to arrange them along a
scale of increasing degrees of backwardness. By marking off two points on that scale, three
groups of countries could be traced: advanced, moderately backward, and very backward.