Ideas and Theories of

Economic Development
Chapter 2 – Part Two
Promotion of Human Values

• Jean Sismondi, a noted Italian writer,

disagreed in many ways with Adam Smith:
1. He stated that wealth should not be
measured in terms of material things
but in terms of human welfare.
2. He rejected the laissez faire theory
which provided freedoms to individuals
to seek their own self-interests for their
own welfare and that of society.
Promotion of Human Values

• The main contention of Sismondi is focused on the welfare of the

poor.
• The economic ideas of Sismondi were the products of his
observations of capitalism.
Factors of Economic Development

• Friedrich List was a German professor of

economics and political science.
• He also did not agree with the ideas of the
classical economists about production, free
trade, and free competition.
• According to List, the progress of a nation
is great not in proportion to the
accumulation of wealth, but in proportion
to the development of the productive
forces.
Factors of Economic Development

• Such forces refer to natural resources, science, arts, government

laws, education, peace and order, morality, and the harmonious
relationships of the various industries and occupations.
• Another disagreement of List with the classical economists was
free trade based on the law of comparative advantage.
• Nevertheless, List was in favor of free trade among nations if they
are all developed.
Theory on Progress and Poverty

• The book Progress and Poverty made its

American author Henry George famous.
• In his analysis, he concluded that rent is
the root cause of poverty.
• George argued that increase in the value of
land is not due to its fertility, but due to
the growth of population in the community
and the progress of society.
Theory on Progress and Poverty

• To Henry George, rent is an unearned income.

• Thus, the landowners are the beneficiaries of unearned incomes.
• Businessmen pay the rents. If rents increase, they have to pay
more. This means the cost of production or business gets higher.
But such cost is paid ultimately by the consumers when they buy
the goods of the businessmen.
Theory on Progress and Poverty: Keys To
Progress

• Henry George proposed that increase in rent and value of land

should be taken by the government in the form of tax.
• According to George, all taxes should be abolished, except tax on
land. Thus, the Theory of Single Tax.
• The crusade of George for a single tax scheme did not succeed.
Modern Theory of Employment

• For many years, the classical theory of employment was accepted.

The main point of the theory is that the cause of unemployment is
high wages.
• But during the Great Depression in the United States in the 1930’s,
there was widespread unemployment.
• Even if people were willing to accept low wages, there was no
demand for jobs.
Modern Theory of Employment

• It was John Maynard Keynes, an English

economist, who found the answer to the
American problem.
• He claimed that high wages could not be
the cause of the unemployment.
Keynesian Theory of Employment

• Based on the Keynesian theory of employment, which is a modern

theory, employment determines the necessity of equating the
aggregate supply of goods with the aggregate demand for goods.
• Keynes proposed to the Unites States government to spend more
money in order to solve their depression.
• So, many public works were constructed which created massive
employment. The situation generated income for the people. They
started buying more goods and services. This encouraged the
private business to meet the growing demand of the people. As a
result, employment was also created by the private sector.
Keynesian Theory of Employment

• Such favorable conditions accelerated

further economic activities, and the
Great Depression disappeared.
• John Maynard Keynes became the “Father
of Modern Economics.”
Innovation Theory

• John Schumpeter is the author of the

Innovation Theory.
• He placed emphasis on the role of the
innovator in economic development.
• The innovator is the economic leader or the
entrepreneur who has the courage and
imagination to handle old systems, and be
able to transform theory into practice.
Innovation Theory

• An innovation can be any change initiated by the entrepreneur

which leads to a faster and better development of an industry.
• Because of innovations introduced by few daring entrepreneurs,
the industry concerned became profitable.
• Evidently, in the Innovation Theory of Schumpeter, the key factor
in economic development is the innovator or the entrepreneur.
Economic Growth Models

• Economic models can be simple or sophisticated. It all depends on

the architect or the situation which the model tries to improve.
• Such models show the relationships of inputs and outputs.
• Most economic models were made by the United States and
Western Europe.
• Here are some of the more popular modern growth models.
Economic Growth Models

A. The Ricardian Growth Model

• This was derived from the Law of
Diminishing Returns of David Ricardo.
• He stressed the limits of economics
growth brought about by the scarcity of
land, it being a fixed input, and its
diminishing productivity.
• The key factor in the growth model is
land. This means the agricultural sector
assumes a very vital role in economic
development.
Economic Growth Models

B. The Harrod-Domar model

• This model was developed by Sir Roy
Harrod of England and Professor Evsey
Domar of America.
• The key factor is physical capital like
machinery, buildings, equipment, etc.
• The model shows the relationship
between the input and the output.
The efficiency of capital in relation to
economic growth depends on several
factors such as values of the workers,
skills, technology, and the like.
Economic Growth Models

C. The Kaldor Model

• The author of this economic growth is
Nicholas Kaldor.
• The key factor is technology.
• He pointed out that technology is
embodied in physical capital.
• He further stated that technical progress
comes from investment.
Economic Growth Models

• A very good example of

economic growth due to
technical progress is Japan. It
has invested a big slice of its
national budget for research
and technology. As a result, it
has become very progressive
as a nation.
 Ideas and Theories of
Economic Development
Chapter 2 – Part Two