Module 1: Entrepreneurship

Lesson 3: Role of Entrepreneurship in Economic

Development
FOUR THEORIES THAT EXPLAIN
ECONOMIC GROWTH

Theory 1: Theory of Mercantilism

The theory of Mercantilism was the first major
economic theory known in the world. It drove the
economic system during the 16th to 18th centuries in the
known world. It was based on the idea that a nation’s
wealth will increase only if government regulated all
the nation’s commercial interests. The government,
according to mercantilism, should take care of all the
economic activities of a country.
FOUR THEORIES THAT EXPLAIN
ECONOMIC GROWTH

Theory 1: Theory of Mercantilism

 Mercantilism is an economic theory and practice
where the government seeks to regulate the economy
and trade in order to promote domestic industry – often
at the expense of other countries. Mercantilism is
associated with policies which restrict imports, increase
stocks of gold and protects domestic industries.
FOUR THEORIES THAT EXPLAIN
ECONOMIC GROWTH

Theory 1: Theory of Mercantilism

Mercantilism involves:
•Restrictions on imports – tariff barriers, quotas or non-
tariff barriers.
•Accumulation of foreign currency reserves, plus gold
and silver reserves. (also known as bullionism) In the
sixteenth/seventeenth century, it was believed that the
accumulation of gold reserves (at the expense of other
countries) was the best way to increase the prosperity
of a country.
FOUR THEORIES THAT EXPLAIN
ECONOMIC GROWTH

Theory 1: Theory of Mercantilism

Mercantilism involves:
•Granting of state monopolies to particular firms
especially those associated with trade and shipping.
Subsidies of export industries to give competitive
advantage in global markets.
•Government investment in research and development
to maximize efficiency and capacity of the domestic
industry.
Allowing copyright/intellectual theft from foreign
companies.
FOUR THEORIES THAT EXPLAIN
ECONOMIC GROWTH

Theory 1: Theory of Mercantilism

Mercantilism involves:
•Limiting wages and consumption of the working
classes to enable greater profits to stay with the
merchant class.
•Control of colonies, e.g. making colonies buy from
Empire country and taking control of colonies wealth.
FOUR THEORIES THAT EXPLAIN
ECONOMIC GROWTH
Theory 1: Theory of Mercantilism
Mercantilism: Examples
• England Navigation Act of 1651 prohibited foreign
vessels engaging in coastal trade.
•All colonial exports to Europe had to pass through
England first and then be re-exported to Europe.
•Under the British Empire, India was restricted in
buying from domestic industries and were forced to
import salt from the UK. Protests against this salt tax
led to the ‘Salt tax revolt’ led by Gandhi.
•In seventeenth-century France, the state promoted a
controlled economy with strict regulations about the
economy and labour markets
FOUR THEORIES THAT EXPLAIN
ECONOMIC GROWTH
Theory 1: Theory of Mercantilism
Mercantilism: Examples
• Rise of protectionist policies following the great
depression; countries sought to reduce imports and also
reduce the value of the currency by leaving the gold
standard.
•Some have accused China of mercantilism due to
industrial policies which have led to an oversupply of
industrial production – combined with a policy of
undervaluing the currency.
FOUR THEORIES THAT EXPLAIN
ECONOMIC GROWTH
Theory 1: Theory of Mercantilism
Modern Mercantilism
•Undervaluation of currency. e.g. government buying
foreign currency assets to keep the exchange rate
undervalued and make exports more competitive. A criticism
often levelled at China.
•Government subsidy of industry for unfair advantage.
Again China has been accused of offering state supported
subsidies for industry, leading to oversupply of industries
such as steel – meaning other countries struggle to compete.
•A surge of protectionist sentiment, e.g. US tariffs on
Chinese imports, and US policies to ‘Buy American.’
•Copyright theft
FOUR THEORIES THAT EXPLAIN
ECONOMIC GROWTH
Theory 1: Laissez-Faire Theory
Laissez faire is the belief that economies and
businesses function best when there is no interference
by the government. It comes from the French, meaning
to leave alone or to allow to do. It is one of the guiding
principles of capitalism and a free market economy. It
is the belief that each individual's self-interest to do
better, strong competition from others, and low taxes
will lead to the strongest economy, and therefore,
everyone will benefit as a result.
FOUR THEORIES THAT EXPLAIN
ECONOMIC GROWTH
Theory 1: Laissez-Faire Theory
History:

Laissez faire is often associated with the well-known

economist Adam Smith and his book Wealth of
Nations (1776), which noted that human beings are
naturally motivated by self-interest, and when there is
no interference in their economic activities, a natural
and more efficient balance in society exists.
FOUR THEORIES THAT EXPLAIN
ECONOMIC GROWTH
Theory 1: Laissez-Faire Theory
History:

In the 18th century, French economists became upset

with taxes and subsidies that were being imposed on
their businesses. They believed that governments
should leave the individual businesses alone, except
when social liberties were infringed upon. In the 19th
century, this philosophy became mainstream in the U.S.
It wasn't long after this that the 'free market' approach
started to display problems, such as large gaps in
distribution of wealth, poor treatment of workers, and
lack of safety in the workplace.
FOUR THEORIES THAT EXPLAIN
ECONOMIC GROWTH
Theory 1: Laissez-Faire Theory
History:

By the mid-19th century, governments in most

advanced countries became more involved in
protecting and representing the safety and concerns of
workers and the general population. This was the
beginning of many of the factory laws and consumer
protection laws that are being established and modified
today.
FOUR THEORIES THAT EXPLAIN
ECONOMIC GROWTH
Theory 1: Laissez-Faire Theory
Key Takeaways

•Laissez-faire is an economic philosophy of free

market capitalism.
•The theory of laissez-faire was developed by the
French Physiocrats during the 18th century.
•Later free market economists built on the ideas of
laissez-faire as a path to economic prosperity, though
detractors have criticized it for promoting inequality.
FOUR THEORIES THAT EXPLAIN
ECONOMIC GROWTH
Theory 1: Laissez-Faire Theory
•Laissez-faire is an economic philosophy of free
market capitalism.

•The theory of laissez-faire was developed by the

French Physiocrats during the 18th century.

•Later free market economists built on the ideas of

laissez-faire as a path to economic prosperity, though
detractors have criticized it for promoting inequality.
FOUR THEORIES THAT EXPLAIN
ECONOMIC GROWTH
Theory 3: Socialism
Socialism is a populist economic and political system
based on public ownership (also known as collective or
common ownership) of the means of production. Those
means include the machinery, tools, and factories used
to produce goods that aim to directly satisfy human
needs. Communism and socialism are umbrella terms
referring to two left-wing schools of economic thought;
both oppose capitalism, but socialism predates the
"Communist Manifesto," an 1848 pamphlet by 
Karl Marx and Friedrich Engels, by a few decades.
FOUR THEORIES THAT EXPLAIN
ECONOMIC GROWTH
Theory 3: Socialism
In a purely socialist system, all legal production and 
distribution decisions are made by the government, and
individuals rely on the state for everything from food to
healthcare. The government determines the output and
pricing levels of these goods and services.

Socialists contend that shared ownership of resources

and central planning provide a more equal distribution
of goods and services and a more equitable society.
FOUR THEORIES THAT EXPLAIN
ECONOMIC GROWTH
Theory 3: Socialism
 Common ownership under socialism may take shape
through technocratic, oligarchic, totalitarian,
democratic or even voluntary rule. Prominent historical
examples of socialist countries include the former
Soviet Union and Nazi Germany. Contemporary
examples include Cuba, Venezuela, and China.
FOUR THEORIES THAT EXPLAIN
ECONOMIC GROWTH
Theory 3: Socialism
 Due to its practical challenges and poor track record,
socialism is sometimes referred to as a utopian or
“post-scarcity” system, although modern adherents
believe it could work if only properly implemented.
They argue socialism creates equality and provides
security – a worker’s value comes from the amount of
time he or she works, not in the value of what he or she
produces — while capitalismexploits workers for the
benefit of the wealthy.
FOUR THEORIES THAT EXPLAIN
ECONOMIC GROWTH
Theory 3: Socialism
Socialist ideals include production for use, rather
than for profit; an equitable distribution of wealth and
material resources among all people; no more
competitive buying and selling in the market; and free
access to goods and services. Or, as an old socialist
slogan describes it, “from each according to ability, to
each according to need.”
FOUR THEORIES THAT EXPLAIN
ECONOMIC GROWTH
Theory 4: Entrepreneur-centered theory
In 1934, an economist named Joseph Schumpeter
explained that economic growth is started by people
(whom he called entrepreneurs) who produce goods not
only for personal profit but also for the good of
everyone around them. He called entrepreneurs the
backbone of the economy. Entrepreneurs, according to
him, are people who find joy in creating or producing
goods; who find self fullfilment in getting thigns done;
and who have strong need for achievement. This
entrepreneur-centered theory is widely used to answer
the needs for socio-economic development.