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Different theories of growth and development

What are the different theories of growth and development that have been proposed? How do the modern growth theory based models differ from these?
There are many growth and development theories explaining how countries grow, why they grow and how growth can be encouraged. These theories can be split into two distinct categories, classical or traditional theories and modern theories. When we talk about growth or development here, we mean the economic growth in a country’s GDP, and not just developing countries but also how highly developed countries can maintain growth at a sustainable rate. This essay will discuss the four classical areas of growth and development theories that exist, how they differ, and how they have been improved in contrast to new growth theory.
The first area of classical theory is the linear stages-of-growth model, pioneered by Rostow who observed a pattern of growth from which he developed a five stage theory, throughout which capital, savings and investment are essential for growth. Rostow. His five stages were as follows, focusing on developing countries with large agricultural sectors:
The traditional society: characterised by pre-Newtonian science and technology, labour intensive agricultural methods. A ceiling to growth exists as there is no technological innovation.
The preconditions for take-off, is the transitional stage of development characterized by an intrusion by more advanced economies and movement towards a centralized state and specialisation techniques.
The take-off: the beginning of steady growth, in the UK this was born out of continued technological innovation. Savings and investment are very important to ensure technological progression, new industries expand and agricultural methods are developed, the structure of the economy is completely altered, and changes in productivity are highly influential.
The drive to maturity is reached after around sixty years; characterized by an ‘ability to move beyond the original industries which powered its take-off’ (Rostow: 1960) and investment runs at around 10-20
Stage of high mass consumption: industries focus on durable consumer goods and services; there is a considerable degree of urban migration, and living standards rise as the welfare state takes shape.
Sir Roy Harrod and Evsey Domar built on Rostow’s assumption that savings and investment are essential for a country to experience sustained growth. In the Harrod-Domar model they stated that some revenue is needed to replace old capital, but this doesn’t allow for growth, as production will be at the same level. In order to grow, further investment is needed to add to the capital stock. Firstly, it is assumed that total capital stock, K, is directly related to GDP, Y, via the capital-output-ratio (k) [i] . Secondly, the net savings ratio (s) is assumed to be a fixed percentage of GDP. We can now mathematically construct the model:
Net savings = net savings ratio x GDP
Net investment (I) = change in capital stock
Due to the capital output ratio:
K/Y=k or ∆K/∆Y=k
This rearranges to:
Assuming a closed economy and ignoring the government:
Y=C S [ii]
Or alternatively:
This means:
Now we can put all these elements together:
S=sY= k∆Y=∆K=I
sY= k∆Y
Dividing by Y and then through by K, we can rearrange,
Which states that the rate of growth in GDP is determined by both the capital-output ratio and the net savings ratio, the higher the savings rate, the more GDP will grow. If we now take the depreciation of capital into account:
s/k = g δ
This final equation shows that, as the depreciation of capital (δ) is negative, not all revenue can be reinvested. It is unlikely that workers receiving low incomes in developing countries will save enough to ensure economic development, therefore foreign aid or private foreign investment may be necessary. For example, if an open economy was now assumed, and k is 3:1, if a country wishes to grow at a rate of 7% a year a savings rate of 21% would be needed, which is inconceivable. Foreign aid or investment could replace savings, and help the country to develop.
Secondly, structural change theory, as developed by W. Arthur Lewis in his Dual Sector theory of development, explained that there are two sectors in any underdeveloped economy, a traditional, predominantly rural subsistence sector and a modern industrial sector. In the traditional sector there is zero marginal labour productivity, which Lewis called ‘surplus labour’, deducing that labour could be transferred from the traditional to the modern sector without a loss of output. The high-productivity modern sector creates profits over the cost of wages, to reinvest which induces growth and development of the industrial sector. Lewis believed that employment expansion in the modern sector would continue until all the surplus labour was used, and the marginal product of agricultural labour was no longer zero.
Thirdly, the international dependence theory discusses the damaging effects of dominating rich countries, on which developing countries are dependent. The theory can be split into three subcategories:
Neo-colonial dependence model: developed out of Marxist theory which blamed the capitalist system of exploitation for the existence of underdeveloped countries (periphery), which cannot be self-reliant due to exploitation by developed countries (centre) which are interested in maintaining inequality.
False paradigm model: the advice from developed countries is biased, ethnocentric, uninformed and over-complicated. As many politically influential figures are educated in the developed countries, they absorb these inappropriate models and therefore problems cannot be dealt with properly.
Dualistic-Development Thesis: This model shows the continually diverging dual societies of rich and poor nations and can be further split into four arguments:
There are superior and inferior conditions, meaning highly educated and illiterate people coexist in the international economy,
This coexistence is persistent, it cannot just solve itself,
Inequalities are growing,
The superior elements do nothing to help the inferior elements catch up; they may even make the inequality worse.
Finally, the last area of classical theory is the more modern Neoclassical Counterrevolution which called for freer markets and expanding the private sector, it condemned developing country governments for poor resource allocation leading to inefficiencies and a lack of economic incentives for development. There are three approaches of neoclassical theory which vary in their opinion of the government and its usefulness:
Free market approach; argued that the markets alone are efficient and induce effective resource allocation, and government interference is distortionary.
Public-choice theory further condemns the government, insisting all agents act out of selfish motives, which restricts growth, resource allocation and individual freedom.
Finally the market-friendly approach recognises the importance of the government’s role, as the product and factor markets in developing countries are generally underdeveloped, and market failures are more apparent.
Furthermore the famous Solow neoclassical growth theory fits into this category, and is transitional into modern theories of development. The theory builds on the Harrod-Domar model discussed earlier, by adding labour as a second factor, which can be substituted for capital, and allowing for technological change. The Solow model implies that economies will converge to the same level of income [iii] , and that technological progress is an exogenous factor which explains long-term growth; the model is therefore referred to as an exogenous growth model.
Y=F (K, L) [iv]
(Where Y is output (GDP),
K is capital and L is labour)
And due to constant returns to scale:
γY=F (γK,γL)
(Where γ is a positive constant)
Using the Cobb-Douglas production function:
(Where A is the productivity
of labour)
If γ=1/L then generally speaking, we can write:
Y/L=f (K/L,1) or y=f(k)
(Where k is K/L and lower-
case means per worker)
Or specifically:
This shows that output per worker is dependent on the amount of capital per worker, so the more capital per worker, the more output that worker can produce. If we now consider the rate of growth of the labour force per year (n) and of labour productivity, i.e. the rate at which A increases (λ). Providing savings are greater than depreciation (δ), the total capital stock grows, but capital per worker only grows when total capital stock is greater than the amount needed to equip new workers with the previous level of capital per worker.The full Solow equation:
∆k=sf(k) – (δ n)k
Shows that the growth of the capital labour ratio (k) depends on savings (sf(k)) after depreciation and the amount of capital per new worker is taken into account. If we assume that A is constant, output and capital per worker are no longer growing, to show this ∆k=0 and k* is the level of capital per worker:
sf(k*)= (δ n)k*
If A is increasing then capital per worker is not changing, but workers become more productive and produce output as if there were extra workers. The model can also be shown graphically:
The above graph [v] shows the movement towards a stable equilibrium, if k is above or below k*, as capital per worker increases or decreases towards the equilibrium, k*. To compare this model to the Harrod-Domar model, we can see what happens if the rate of savings, s, is raised. A temporary increase in the rate of output growth is realised, returning to the steady state of growth later on, which separates it from the Harrod-Domar mode. In the Solow model, an increase in the savings rate does not ensure long term growth, it only increases the equilibrium, meaning both the capital-labour ratio and output-labour ratio rise, but not the rate of growth. Shown graphically below, savings increase to s’:
As this happens the equilibrium output per person also increases, so despite the fact that the increase in the rate of growth is temporary, it still will be a very beneficial to the developing economy.
In juxtaposition to the Solow model, another modern growth theory, namely the Endogenous growth theory regards technology as endogenous: technological change is an outcome of public and private investments in human capital and knowledge intensive industries, such as ICT and telecommunications. Endogenous growth theories can be explained using a basic equation from the Harrod-Domar model: Y=AK, where A is any factor which affects technology and K now includes physical and human capital, taking investments in education into account. Investments in human and physical capital can produce positive externalities for external economies and improve labour productivity which in turn will offset any diminishing returns, resulting in sustained long-term growth. This simplification is similar to traditional theories as it still emphasises the importance of savings and investments for economic growth, but also different as it refutes that there is convergence of growth rates across closed economies, due to savings rates and levels of technology differing from country to country. Unlike the Solow model, there is no natural convergence of per capita incomes catching up to those of developing countries even with similar savings and population growth rates. Furthermore the ‘high’ rates of return offered to foreign private investors by developing countries with low capital-labour ratios are broken down as there little or no complementary investment in human capital such as education, without human capital investments the positive externalities of such investments cannot be realised, and so a level of complementary capital which is less than socially optimal is reached.
Romer’s model illustrates endogenous growth theory, by assuming that growth is stimulated at the firm or industry level as it is positively affected by the country’s total capital stock (K’) which could lead to increasing returns at the overall, despite constant returns being assumed in each industry. In this model human capital is included (A) which is a positive externality and benefits the other firms in the economy. Algebraically:
Assuming each industry uses the same level of capital and labour:
Y=AKα βL1-α
If we assume A=0, the resulting growth rate for per capita income is:
Where g and n are output and population growth rates respectively. Without allowing for spill-overs like in the Solow model and with constant returns to scale, β=0 and per capita growth would consequently be zero. But if, like Romer, we assume a positive capital externality (β>0) then g-n>0 and Y/L grows, if we also allowed for technological progress growth would be increased to the extent of the technological advancement, denoted by λ in Solow’s model.
Here we have shown that modern models such as the endogenous growth theory and possibly even Solow’s growth model, hold some very different assumptions to those of the traditional theories, which is natural as time progresses and more is learned about what methods are effective and what really motivates economic growth. No one theory is conclusive, and some are only explanatory, such as the structural change models. What is clear is that one factor such as technology or the savings rate, alone cannot explain why developed countries are developed and developing countries are not, or how to reach a happy medium. A number of factors must be taken into consideration, and as we moved into the more modern models, this became clear, as the old models were not discarded, but added to and built on.

Grotius and Locke’s Theories

Compare and contrasts the ways in which Grotius and Locke theorise common property in the state of nature. How do their discussions of common property shape their accounts of the rights of the poor?
This essay sets out to look at the ways in which Hugo Grotius and John Locke theorise common property in the state of nature and to compare and contrast them where appropriate. Although Grotius’ views in general were perhaps somewhat conservative, his ideas were admired and expanded by Locke – a more liberal philosopher. This essay will first look individually at Grotius’ and Locke’s theories on common property, including how they came about. Of course it would be undesirable to discuss common property on its own without looking at its transition into private property and so this will be considered too. The theories will then be compared and contrasted and their accounts of the rights of the poor will be discussed. Both Grotius and Locke set out from the initial viewpoint that God gave the Earth to all men “in common” and this provided the foundation for their theories. They both also agreed in using the state of nature (a world that exists before civil government) as an analytical device and that common property can be used by all to fulfill people’s needs.
Natural rights are rights, freedoms and privileges which are a basic part of human nature and cannot be taken away. Grotius’ idea of natural rights of individuals came about in the early 17th century from the thought that reason and rationality are what separates man from beast. Man therefore seeks society with others and is inclined to behave justly, with justice being a virtue. According to Grotius, people have rights because everyone accepts that each person is entitled to try to preserve themselves and therefore shouldn’t try and harm others or interfere with them. They should also punish any breach of someone else’s rights that arises – allowing property to exist in the state of nature. According to Grotius, God gave the earth as a gift to all men in common. However, how then did individuals come to use and ‘own’ this common land? Grotius used the example of a public theatre to illustrate how the common land can be used by individuals: “Although the theatre is a public place, yet it is correct to say that the seat a man has taken belongs to him”. In this state of nature, it seems that the act of occupying, or simply taking something, creates a right to it. Things became subject to private ownership, “by a kind of agreement, either expressed, as by a division, or implied, as by occupation” which seems to adopt the theory that property of all sorts exists by social contract. However, property regarding the sea is another matter. Grotius (1608) argued that the sea was the common property of all nations and that it must remain so in the same way that everything was common in the state of nature. This theory of property seems to depend on the idea of enclosure – Grotius argued that since the seas cannot be enclosed, they are open to all and no person or national government can restrict the access of another nation to any part of them.
Unlike Grotius, who believed property was gained through agreement, Locke contended that property was appropriated through ‘mixing’ ones labour with it. He provided an account of how material property could arise in the absence of government. Since every man owns his own body and therefore, by extension, his labour,
“[w]hatsoever then he removes out of the state that nature hath provided, and left it in, he hath mixed his labour with, and joined to it something that is his own, and thereby makes it his property … [that] … no man but he can have a right to what that is once joined to, at least where there is enough, and as good, left in common for others”.
However this does not say why an individual is allowed to take from the common. Clearly someone must necessarily be allowed to do so in order to eat and preserve themselves but why would someone else respect that person’s right to that property without a law stating they must? Locke (1690) asserts that there are plenty of resources in the state of nature and so one can take all that they can use without taking anything from someone else. He uses the phrase that one must leave “enough and as good” for others. Additionally, someone can only take as much as they can use before it spoils – but this can be avoided simply by selling everything before it does so with the existence of money; thereby effectively removing this limit. Locke seems to be arguing that a full economic system could, in principle, exist within the state of nature. Property could therefore exist before government, and thus society can be dedicated to the protection of property. In the Second Treatise (1690), Locke claims that civil society was created for the protection of property. He argued that individuals would actually agree to form a state that would provide a “neutral judge”, and that could therefore protect the ‘lives, liberty, and property’ of those who lived within it. Clearly there is a potential for a problem with regards to the idea of “enough and as good” with an increasing population and a constant sized earth. This will be looked at later.
We can now consider the relationship between these two theories of Grotius’ and Locke’s. One important point to note is that both Locke and Grotius held that God had given all things on earth to men “in common” without any special right to anybody. This means that both were working from the same initial starting point; using God as the basis for their theory of property. Like Grotius, Locke sees this as conferring a positive right of ownership to mankind – in other word everyone has a right to everything. Both of their theories differ from the claim that the first man on earth i.e. Adam was in fact given private property by God himself (known as the ‘Adamite’ theory) – Locke states that, “it is impossible that any man, but one universal monarch, should have any property upon a supposition, that God gave the world to Adam”. Believing that God gave the world to everyone as equals places great importance on all men having property – both rich and poor – and perhaps held more influence with society than a purely secular theory. Grotius even uses his ideas of natural rights to try and find a natural law that everyone could potentially accept that would hold even in the face of no God. Like Grotius, Locke views natural law as a universal concept which provides the basis for all human social orders.
While the reasoning behind their theories is similar, Locke’s theory (1690) that property is acquired by application of labour upon resources is in great contrast to that of Grotius (1625), who contended that property emerges out of social consent and basic moral principle through consumption or occupation. For Locke, something becomes private property through expended labour, removing it from the common state of nature. Locke is very clear in pointing out that no one is allowed to take more than his share, and that nothing may be spoilt or destroyed – the amount of resources that can be appropriated are relatively small in relation to the total amount available – at least in theory. However this idea of ‘mixing’ labour with resources in order to own property it is not a very strong one according to Waldron (1990). Nozick also criticized this argument with his famous example of mixing tomato juice that one rightfully owns with the sea. When we mix what we own with what we do not, why should we think we gain property instead of losing it? While this argument is a bit extreme, it is not difficult to see his point – and thus Grotius’ idea of social consent may be a more convincing one. Locke of course disagrees, arguing that a social contract holding in the state of nature is ridiculous. In addition Locke (1690) states that land necessarily needs to become private property to be of use, but this correlation is not necessarily true. Keeping the land as common ground may still be sufficient, albeit not as efficient. Clearly Locke’s theory rests on questionable ground. But what happens when there are not enough resources to go around or someone simply cannot afford the necessary resources to preserve themselves?
With regards to the rights of the poor, Grotius, like Locke did not believe that the state should redistribute property to the poor. In fact this was not really a concept which drew much serious thought until many years later. However both address the issue of preservation. Grotius says that, “in a case of absolute Necessity that ancient Right of using Things, as if they still remained common must revive, and be in full Force”. This ‘right of necessity’ causes the ‘universal use-right’ to be reactivated just as if common ownership had remained. Without the right of necessity as an exception to the laws of private property that forbade theft, Duffel states that the theory would be inconsistent and therefore property rights are not absolute. Thus, Grotius had invoked the ‘principle of interpretative charity’ (which implied an absolute right) to defend the political resistance and common ownership property claims in some extreme circumstance to preserve human life. Locke employed Grotius’ private property arguments to support a far more radical political philosophy. He held that the right to property, even as defined by governmental law, “cannot exclude the natural right every man hath to his own preservation and the means thereof. . . .”. In extreme need the industrious poor were entitled, by the same natural law which bound property, to take ‘the superfluous necessities of life’ from the more fortunate. “God established property to sustain human life, and men in each age must consent to property distributions only if they fulfil their natural function”. We can see that both Locke and Grotius agree that in a situation of need we cannot simply leave the poor or unfortunate to suffer or die – however neither endorses positive duties to help such people.
Further, Locke’s right of charity is a different kind of right from Grotius’s right of necessity. In Grotius’s theory, there are no natural entitlements to preservation whereas Locke’s theory is grounded in a natural right. Grotius admitted that men in “direst necessity” may take what they need from the private property of others, but not because they have any natural right – but because their ancestors could not reasonably be understood to have consented to arrangements that entirely abolish the original use-right in such circumstances. By contrast, Locke simply maintained that each person retained a natural right against others to be provided with the necessities of life. As pointed out by Salter (2001) if Grotius were to say, like Locke, that the acquisition of property merely required the performance of labour of some kind, then those excluded have no claim at all to the means of their preservation. They merely have a right to use a common that no longer exists. As Grotius says, the right of private ownership would have completely “absorbed every right that sprung from a state of things held in common”. Grotius is therefore able to say that a safety net should exist for those in direst need because he understands private property to be conventional – and because he thinks we must consider the intentions of those who first introduced it. Grotius’ reliance on consent and intensions is essential to his theory. Despite this, neither Grotius nor Locke seem to go far enough in regards to the rights of the poor. It would perhaps be desirable for others to have a positive duty to help those without a means of preservation. However this is clearly not plausible in a state of nature as a government would be needed to enforce such a duty.
Haankonssen (1985) argues that although Grotius’s subjective rights theory gave Locke the basis for his theory of property, Grotius would have rejected the consequences that Locke drew from it. While it is true that they both operated with the idea that the law of nature tells us to live socially with others in exercising our natural rights, just what ‘living socially’ means differs between the two, and thus the limits of acquisition are unclear. For Grotius (1625) private property was not limited by any obligations other than those entered into by voluntarily contract as well as not harming others. For Locke (1690), the extent of the obligations carried under natural law by the owners of private property are not clear cut either, other than to say property was not allowed to ‘spoil’. However with increasing populations and wealth comes a disappearance of the common property and potentially unlimited acquisition. As Locke supposes, there will no longer be “enough and as good” left for everyone (as not everyone lives a frugal life), and there could easily be an increase in the number of property disputes in which the title to property is not immediately obvious to everyone. Grotius would likely not have agreed with such a large acquisition of property as seems to be allowed by Locke and as such Grotius’ theory, although not including a natural right to preservation, may be more favourable to the poor.
This essay set out to compare and contrast the ways in which Grotius and Locke theorise common property in the state of nature. Both Grotius and Locke set out from the initial viewpoint that God gave the Earth to all men “in common” and this provided the foundation for their theories from which they both tried to produce a just theory of property. The main differences between the two theories are the rules of property appropriation – Locke’s theory of ‘mixing’ labour with property compared to Grotius’ social agreement – but both allowed some private property in a state of nature where most land was common. Neither Locke nor Grotius had particularly strong rights for the poor as neither endorsed positive duties of charity obliging others to help those who need it (however this is likely not possible in the state of nature). While neither theory is perfect both provided invaluable discussion and progress in the field of justice and distribution of property.
Duffel, Siegfried Van and Yap, Dennis. 2009. Distributive Justice Before the Eighteenth Century: The Right of Necessity. [Online] October 8, 2009. [Cited: March 10, 2010.]
Grotius, Hugo. 1608. Freedom of the Seas (Mare Liberum). 1608.
-. 1625. The Laws of War and Peace. 1625.
Haakonssen, Knud. 1985. Hugo Grotius and the History of Political Thought. Political Theory. 1985, Vol. 13, 2.
Liggio, Leonard P. 1980. Grotius, Locke, and Property. Literature of Liberty. 1980, Vol. 3, 1.
Locke, J. 1690. Two Treatises of Government. Cambridge: Cambridge University Press (1988), 1690.
Salter, John. 2001. Hugo Grotius: Property and Consent. Political Theory. 2001, Vol. 29, 4.
Waldron, James. 1990. The Right to Private Property. Oxford: Clarendon Press, 1990.