Theories and Strategies of Development

Classical growth theory

The synchronization of the ideas of classical economists regarding economic development and growth is termed to classical theory development. The theory is developed by integrating the views classical economists in their writing.

Classical economists considered economic development race between technological progress and capital accumulation on the one hand and growing population and diminishing return from land on the other.

In broad outline the classical theory of economic development may be stated as suppose on expected increase in profits brings of capital and to the steady flow of improvement techniques. This increase capital accumulation raises the wage funds. As a result, wages rise. Higher wages induce accelerated population growth which causes demand for food to rise. Food production can be raised by employing additional cost i.e. diminishing returns holds in land. Consequently the price of food goes up and in turn returns increase, wages rise, thereby reducing profits. Reduction in profits implies reduction in investment, retarded technological progress, diminution of wages fund slowing down the population growth rate and capital accumulation and the economic activities come to halt. In the classical model end result of capitalist development is stagnation.

The views of classical school on economic development have put in the form of few important propositions in terms of mathematical equations by Benjamin Higgins as it makes the model brief, simple and easy to understand.

Proposition I

The total output of an economy depends up on (a) size of labor (L) (b) the stock of capital (K), (c) the amount of available natural resources (N) and (d) available technology(T).

i.e. Q=f(K,L,N,T)……….(1)

where Q= total output

N is constant because it cannot be increased quantitatively but quality can be improved by advanced technology the total output ultimately depends upon the labor force (L), stock of capital (K), and technology (T). They did not make entrepreneurship a strategic part of their system.

Proposition II

The technological progress depends upon investment that is why classical economists stressed on capital accumulation and saving rather than technological progress as an independent factor. So, to them, level of technique depends on the level of investment.

            i.e. T=f(I)…………..2

where, I is investment(net)

Proposition III

Investment depends on the level of profits: I =f(R). The argument is based on their premises that the capital make investment only if it is profitable, i.e. investors make investment only if they  expect to earn profits on them. And investment the net addition to the existing stock of capital, i.e. I=ΛK,

R is the return on fixed factors of production (land and capital), or profit. And by definition, net investment, I equal the increase in stock of capital, i.e. ΛK .

So,  I= ΛK=f(R)………..(3)

Proposition IV

Profits further depend on the labor supply and the level of technique, i.e.

R=f(L,T)………….4

Profits are partly determined by the level of technology and labor force. The application of improved technology in agriculture raises productivity and hence profit. Similar to the Marxian interpretations, classical economists too argue that level of profits depend upon labor. Both factors have positive relationship with profit.

To the classist the level of technique depends on the level of investment, investments depends on profits and profits depend partly on the level of technique as illustrated in previous propositions. We can express this circularity by substituting equation 3 and 4 in equation 2 which gives us

T=f(I)=F[f(R)]

=F[f{φ(L,T)}]…………..(4a)

Proposition V

The size of labor force depends on the size of wage bill.

L=f(W)…………(5)

This proposition explains the classical iron law of wages that there is constant tendency for real wage rate of return to the subsistence level. If the wage fund is raised the size of labor force will be large and vice versa. They visualized that population growth depends upon the availability of working capital- if total wage fund increases, this contributes to the growth of population and thus labor force, .i.e. labor supply increases again decreasing wage rate. This all eventually has tendency for real wage rate [W/P] to return to subsistence level.

Proposition VI

The wage bill depends on the level of investment.

W=f(I)

Wage fund depends on the saving of the capitalists and these saving find their way in investments automatically. So, wage fund is the function of investment or net investment determines the size of wage fund. Except for Malthus, who showed a high degree of sophistication in this respect, the classical tended to think that savings found their way into investment more or less automatically. Thus the wage bill could be increased only by net  investment.