In his book ‘Development as Freedom’ the Nobel prize winning economist, Amartya Sen, defines development as: “enlarging people’s choices, capabilities and freedoms, so that they can live a long and healthy life, have access to knowledge, a decent standard of living, and participate in the life of their community.” There is now widespread acceptance of Sen’s view that development should be judged not only on the basis of increases in average incomes, but on whether it creates the circumstances for people like this young woman to exercise their choices, capabilities and freedoms. But judging development by its effects on people does not mean that development is the sum of improvements in the well being of people or the output of firms. In this talk I argue that we should think of development as a property of the economy.
This is a famous comparison of what happened to people’s incomes in two countries which had roughly the same income per person in 1960. For most of the 1960s, South Korea, shown here in blue, had lower income per person than Ghana, shown in pink. But in the late 1970s incomes in South Korea really began to take off; while in Ghana, at least until recently, they have stayed roughly the same. It is important to say that average income per person is not a complete measure of well‐being. Amartya Sen has played a key role in helping us understand the multi‐ dimensional nature of poverty and development, and we are concerned about distribution and not just averages. But even so, this difference in economic growth has resulted in a complete transformation in the lives of the people of South Korea.
Three years ago, a British design student called Thomas Thwaites decided that he was going to try to make an electric toaster entirely from scratch, finding the raw materials and turning them into parts. First he needed a model to work from so he went to Argos, which is a high street chain in Britain. Argos currently stocks 101 different toasters. Not wanting to make things harder than necessary, Thomas Thwaites bought the cheapest, simplest toaster in the store. It cost £3.94, which is less than five euros or about six US dollars. Turns out there are a total of 400 pieces, due to the misunderstanding and lack of materials, he almost gave up. Until he discovered on the internet that you can smelt steel by putting it in a microwave for half an hour. And that is what he did. Success. The economy has to be sufficiently sophisticated and rich to be able to supply all these different materials and parts – and of course if you are going to make a business making toasters you are going to need electricity, a workforce, some way of transporting your goods, a legal system to enforce contracts, a functioning financial system to provide capital, and so on. What this points towards is the idea that development is not an increase in output by an individual firm; it is the emergence of a system of economic, financial, legal, social and political institutions, firms, products and technologies, which together provide the citizens with the capabilities to live happy, health and fulfilling lives.
According to this simple model, a firm increases its output if it can increase the amount of capital it uses and the amount of labour it uses. Output and labour are two important variables in HD model, and since the economy as a whole is assumed to be the sum of the firms within it, to increase the output of the whole economy, you similarly need either more capital or more labour. Since developing countries did not seem to be short of surplus labour, it seemed to be capital that was constraining them. Walter Rostow claimed that development is a virtuous circle: when investment rises, that means that the capital stock rises, so output rises, leading to higher incomes, more savings, and so more investment. Rostow calculated that for most poor countries, if you could increase investment by 5 or 10 percent of national income this would trigger this virtuous circle and launch the country into ‘self‐sustained growth’. Rostow’s model was hugely influential, not least as a rationale for foreign aid in much of the 1960s and 1970s.
Robert Solow introduced the neoclassical growth model, combined with labour and capital, increasing the output of each firm. His model fits better than the HD model, but it isn’t a model at all, just a form of accounting. The main problem is that it turns out that the interesting part is nearly all in this ‘unexplained’ bucket.
Ajaoukuta is one of the largest ever investments in steel production anywhere in the world, however, because of the poor management and endemic corruption, the development of business decided that the problem was not policies but institutions. Including huge aid spending on technical cooperation, institutional strengthening and various kinds of capacity building.
Barder believes that the economy has grown rapidly over the past 50 years. Due to the lack of components, economic models constantly modify the missing components, and shift the focus to endogenous, but they still can not explain the differences in economic growth among countries.
Schumpeter pointed out an idea of creative destruction, for example Nokia began as a manufacturer of tyres and rubber boots. It later got into the telecommunications business and it did so very successfully. So it is a good example of how a firm can adapt to new opportunities. But more recently Nokia has not really made the transition yet from phones to smartphones, and so it has been overtaken by Samsung as the world’s largest manufacturer of mobile phones. It is not clear today if Nokia will be able to repeat its earlier success of adapting to a changed environment, or whether it will end up going out of business. 80% of productivity improvement does not come from within firms, but from the creative destruction process in which old firms go bust, and then they are replaced by new firms which are better adapted to today’s environment.
We think of the economy and society as being composed of a rich set of interactions between a very large number of adaptive agents, all of which are co‐ evolving. These are the classic circumstances which create what physicists and biologists call Complex Adaptive Systems. It is a nonlinear system. There are five important features. First, they are all difficult or impossible to predict in detail. Second, you can make broad brush predictions about the system as a whole. Third, complex adaptive systems have emergent properties. Fourth, complex adaptive systems tend towards greater complexity. And fifth, these systems do not tend towards an equilibrium.
Haile Selassie is the Emperor of Ethiopia, the reason why the emperor is meaningful is that he pointed out the logic behind the Ethiopian regime, that is, extracting value from the people and preventing society from moving forward. The emperor of Ethiopia used his power to maintain his power, which led to the stagnation of development. I agree with this analysis because it is in line with the nature of human greed.
Because many problems are difficult to solve in technology, but they are easier to solve by adapting to and changing the specific environment. Isomorphic imitation refers to well functioning institutions and policies that may be useless if they work well in one country and are not linked to the environment in another.
Resisting fatalism means we don’t need to accept any of the results of evolution, but we can choose the direction of evolution. Norman Borlaug is a man who has actively selected high-yield seeds to cultivate high-yield and resistant wheat, known as the green revolution.
Promoting innovation means that we should provide a safer and more supportive environment for enterprises to take risks and innovate. Effective feedback systems are needed to make better choices. In addition, it is also important to pay attention to the direction of society.
Nicholas Georgescu-Roegen is a mathematician, statistician and economist. He believes that creative destruction and adaptation are crucial to the economic system, and every factor must be taken into account.