What about Convergence: The Solow Model and Alternatives

In his textbook on “The Process of Development,” James Cypher outlines multiple models on how to look at development when you move from the classical standpoint to the more mathed up neoclassical framework. The first model he introduces is the Solow growth model where total output is a function of technology, capital, and labor, with diminishing returns to capital and labor. In the model, technology comes from outside, and “it is this exogeneous technology which is basic to higher levels of income per capita over time” (150). The model predicts two important things. The first is that there is a steady state equilibrium that can be attained, and that there is a convergence between similar countries. Opposed the classical models, in the Solow model focusing on building capital goods will not increase the rate of growth, and there is a ceiling on levels of income per the rate of savings (which equals the rate of investment) (151), so the model intuits that the way to growth is the increase the savings rate of the nation to raise that ceiling. 

Winding Roads Ahead

The Solow model was created in response to the Harrod-Domar growth model, a more Keynesian approach. Unlike the Solow model which looked at the savings rate, the Harrod-Domar model sees the rate of growth as a function of both the savings ratio as well as the capital / output ratio (152). The Keynesian view is that investment drives saving, so that the prescription here is to increase the investment. Cypher notes that all the theories lead to the same basic idea: “an expansion of total physical capital goods as a share of total output, that is higher levels of investment, that create higher income levels” (153).  One thing about this model is that instead of a steady state, there’s a real chance in the model for instability, so that the country can grow more quickly, spiraling off inflation, or not quickly enough, lagging.

What the debate between the two models really shows is that we can make these models on paper, but ultimately, what we want to see is what these models look like when we take them from paper to the real world – what maps more to reality, is there convergence or instability? The Solow model is the most attractive because it assumes that if the model is correct, then there are not that many levers we need to be able to pull to make less developed countries meet their peers so that the people in these countries have better lives. But the Harrod-Domar growth model give policy-makes a much harder bullseye to hit. 

More contemporary researchers have explored which of these models is more reflective of reality, such as Michelle Baddeley in her paper “Convergence or Divergence?” Baddeley’s examination sheds doubt on the validity of the Solow model. What she finds is that the data does not fully bear out Solow and suggest that something closer to Harrod-Domar is right – the targets are not as easy to hit as suggested, and if you miss them, there are negative consequences: “there has been limited convergence and limited equalization in the distribution of international income and / or that population growth has been too high” (396). The world has become more open, and globalization has allowed technology to be exogenous to other countries in that they have access to technology in unprecedented ways, but there is still a lack of convergence (406-7). Considering findings that trade and globalization heighten volatility and do not lead to convergence, what do we do? Baddeley suggest that the answer is if we “more carefully regulated and monitored” the financial system as to “moderate the impacts of adverse selection and moral hazard on effective financial decision making” (407). There is a lot of heaving lifting built into that line, as it would include boarder global coordination, an outcome that feels much less likely now than when she was writing. 

What are the implications if the Solow model is not correct and the evidence Michelle Baddeley marshals to her argument is right? As I wrote elsewhere in this class from a purely mathematical standpoint it illustrates the impossibility of convergence because the absolute level of growth needed for less developed countries to meet the output levels of currently developed countries is seemingly impossible. That locks in the current levels of development and the international division of labor and gifts the residents of the developed countries with incredible unearned rents that instead of being recognized by the residents of those countries, turns into the accepted birthright in the heads of so many and serves as a justification for supremacy and racism. 

Works Cited

Baddeley, M. (2006) Convergence or Divergence? The Impacts of Globalisation on Growth and Inequality in Less Developed Countries, International Review of Applied Economics, 20:3, 391-410, DOI: 10.1080/02692170600736250

Cypher, J. M. (2014). The process of economic development. London: Routledge, Taylor & Francis Group.

Geography and Resources in the Development of Industrial Capitalism

 Many factors that were internal and important to the rise of industrial capitalism in western Europe. When asked why capitalism as we know it started in England and not somewhere else, on can handwave about the English Genius, but there were historical and geographical reasons that capitalism started in England. 

One of the geographical reasons was that there are several rivers that are short and spread to the sea. This is important because the moving force for a lot of factories was a waterwheel that was driven by consistent water flows, and there was a huge belt that ran around this central axel that drove the machinery that was needed to make the division of labor work. The other geographic reason is that there was a lot of coal, and it was easy to get to. This was important because even though there were a lot of rivers, the development of the steam engine made coal resources necessary, but if you wanted to build a factory you were not limited to riverfront property.

Photo by Artem Bali from Pexels

One historical reason that Capitalism as we know it started in England was that there was a class of people who were available to work these machines. The enclosure acts helped push people off the land. So that there was a reciprocal relationship between industrialization and enclosure. Machines made people less necessary, and with enclosures there were more people available to build and work machines. 

How does one take these historical precedents as a guide-post for how to organize your economy then? Well, for one, geography is huge. One of the reasons that Singapore is now lauded as an example to emulate (see England wanting to be the “Singapore of Europe” post-Brexit) is not just because it has free-market tendencies, but because it is strategically located, with up to a quarter of global trade passing through the Straits of Malacca (Fessenden). Though geography and access to resources is important, they are not necessary – for example, Switzerland has been able to build its manufacturing base despite being a landlocked nation in the alps, with its own cultural barriers, being a meeting point for French, German, and Italian cultures. But resources are not the secret either, since the resource course and Dutch disease are both well documented, where focusing on one resource limits your economy and makes your currency vulnerable to outside forces. It is also, on its own, not something any country can change. How would it be possible to take South Sudan and put it in a more convenient place?

The more salient issue is the one about industrialization. As we have seen in Engels writing on the Manchester of his day, the housing for internal immigrants was poor, in that it was not built for people, but as for animals. We can see the same thing when we read about the conditions of the working class in Lagos of today or the smog of old Mumbai. One thing that a developing nation could do is to look at its urban planning and infrastructure, so that as the economy developed in some sort of big push as Rosenstein-Rosen’s idea of development (168) the people who were drawn from the unproductive rural subsistence agriculture into the industrializing urban center, they would have the mental and physical capacity to work productively and add to the nation’s wealth instead of magnets for do-gooder NGOs to come and lament their plight without making any real structural change. This planning is something that has worked for the Chinese state. Though the western press periodically sees writing about the “Ghost Cities” of China and hand-wringing about overdevelopment, the Chinese party has done a good job in moving the urban population from worrying about developing country problems to worrying about industrializing country problems.

Works Cited

Cypher, J. M. (2014). The process of economic development. London: Routledge, Taylor & Francis Group.

Fessenden, M. (2015, February 24). See Shipping Traffic Move Through Straits Around the World. Retrieved from https://www.smithsonianmag.com/smart-news/see-shipping-traffic-move-through-straits-around-world-180954399/

Colonialism, Development and the Emergence of Industrial Capitalism

It is hard to separate the very idea of capitalism in any of its forms from the emergence of colonialism and imperialism in what are now the lesser developed countries.  

To really think about this, it goes back to Smith. In looking at the output of the pin factory, he celebrates the division of labor in which “This great increase of the quantity of work which, in consequence of the division of labour, the same number of people are capable of performing, is owing to three different circumstances; first, to the increase of dexterity in every particular workman; secondly, to the saving of the time which is commonly lost in passing from one species of work to another; and lastly, to the invention of a great number of machines which facilitate and abridge labour, and enable one man to do the work of many.” (Wealth of Nations, Book 1, Chapter 1). The Smithian framework that he looks at is a right and just celebration of the increase in output. But there is a potential problem there where there is so much history interwoven in the celebration of the increase in output. It makes me think of Ellen Wood’s description of capitalism not as an inevitable, teleological continuation of the path of history, but instead as a separate thing that happened in one small corner of the world. Once can easily imagine a million small capitalisms developing but then dying in their crib. It was not until increased output was able to be a twin with the military might of the British Navy that these pins would be able to go everywhere. If you just had the output and tried to market it in the single nation, the market for pins would soon be saturated unless you were able to grow the market. You can do that internally, by making pins more fashionable, and making the output less durable, but you can also do that by looking outside your borders, in which you take your innovation and you undercut local producers in your market. Wealth from your near abroad and is funneled to the owners of capital.

Markets get exhausted, and your near abroad seeks to emulate you. You must look further afield for potential markets. At the same time, your own resources are limited. Manchester, Liverpool, and Birmingham can become the workshops to the world, but they are hungry. They need cotton from the subcontinent and Egypt and the American south. They need rubber from the south pacific. How best to proceed? Do you buy the goods you need on the open market from local producers, or is there a better, cheaper way? I read a story recently about the South Pacific Company was always in need of rope for its ships. Instead of buying from the local producers, they created concessions on the islands, and they bought from the companies that they controlled, and formerly free entrepreneurs became workmen, with start and end times and wages set not by their need and their clocks, but by the company.

Colonialism and imperialism are just the capitalistic division of labor writ large, why Lenin called it the highest stage of capitalism. The colonial subjects were deliberately kept down so that they could be cheap labor for the developed west and a cheap source of resources, while being a captive market for the colonial power. This deliberate decision was reinforced up until the point it was no longer in the best financial interests of the parasite colonializer to be directly involved in the affairs of the less developed world (though they often still try to exert their influence). The legacy of colonialism is that capitalism is entrenched throughout the world, but there are certain winners and losers, of whom most did nothing to earn their relative well-being. I sit in my home and enjoy all creature comforts, while someone with equal mental and physical endowments born elsewhere may struggle to survive because the East India Company was the boss of the county for years and the infrastructure and institutions development was deliberately slowed.

Works Cited

Baddeley, M. (2006) Convergence or Divergence? The Impacts of Globalisation on Growth and Inequality in Less Developed Countries, International Review of Applied Economics, 20:3, 391-410, DOI: 10.1080/02692170600736250

Cypher, J. M. (2014). The process of economic development. London: Routledge, Taylor & Francis Group.

Engels, F., & McLellan, D. (2009). The condition of the working class in England. Oxford: Oxford University Press.

Fessenden, M. (2015, February 24). See Shipping Traffic Move Through Straits Around the World. Retrieved from https://www.smithsonianmag.com/smart-news/see-shipping-traffic-move-through-straits-around-world-180954399/

Lenin, V. (n.d.). Imperialism, the Highest Stage of Capitalism. Retrieved from https://www.marxists.org/archive/lenin/works/1916/imp-hsc/

Smith, A. (2003). The wealth of nations. New York, NY: Bantam Classic.

Wood, E. M. (2017). The origin of capitalism: A longer view. London: Verso.