Economic Growth in History

Survey and Analysis

J.D. Gould

• Publisher: Routledge
• Year: 2013
• ISBN:
  9781134560868
• Edition: 1
• Topic: Business
• Subtopic: Business generale
• Index: Business

This book breaks fresh ground in the most challenging aspect of economics and economic history – the nature of economic growth.

Professor Gould considers a wide range of theories about growth and its causes, and examines these theories in the light of modern economic history. The first chapter sketches the historical experience of growth in its broad contours. There follow discussions of the contribution made by agriculture, savings and investment, foreign trade, industrialization, technological change and a number of 'residual' elements. A final chapter offers a critical survey of several leading theories of economic development, judged in the light of actual historical experience.

Throughout, the author has chosen to test theories rather than to deploy data of historical change and then induce theory from it. Often the result is somewhat discouraging, either because historical reality proves to be too complex to be adequately explained by even a sophisticated 'theory', or because practical difficulties make it impossible to subject the theory in question to a satisfactory test. Yet economists no less than economic historians will value the exercise for removing so many confusions from the study of development economics. Professor Gould's highly readable style and avoidance of unnecessary jargon ensure that his book will be readily accessible to all those interested in problems of global poverty and economic development. This book was first published in 1972.

1 Growth and Development in History

This book is about economic growth. Some of the facts – or more accurately, some of our beliefs – about modern economic growth are presented visually in fig. 1.1, which plots rates of growth for fourteen advanced countries over a period of about 100 years. It is tempting to jump straight into our subject by commenting at once on some of the main features of this diagram and of Table 1.1 (pp. 22–3), in which the data on which it is based, and some others which are relevant, are more precisely presented. Unfortunately, the derivation, the meaning and the limitations of these data call for discussion, both urgent and extended, and it would be as irresponsible as it is tempting to launch into descriptions and explanations based on these data before subjecting them to the required exegesis. So we had better begin again.

Economic growth and economic development

This book is about economic growth. By ‘growth’ is intended, primarily, a sustained increase in real per capita incomes. Sustained, because short-lived and reversible improvements due to (e.g.) a run of good harvests or a temporary improvement in the terms of trade do not greatly interest us. Real, because we wish to focus on a society’s power to produce increasing quantities of goods and services, and this is not correctly portrayed by a measure of the money value of such goods and services unadjusted for changes in their average prices. Per capita, because on the whole it is an increasing enjoyment of goods and services by the individual member of a society which (in the view taken here) is the chief justification for being concerned about economic growth and considering it a ‘good thing’. But we shall relax our insistence on the ‘per capita’ part of the definition from time to time to cast sidelong glances at the growth of total real income – not only because there are points of view from which this is an object of interest in its own right (e.g. if we are interested in a country’s capacity to wage war or to finance a national museum or library or symphony orchestra of outstanding calibre), but because there are circumstances in which the rate of growth of per capita product might be regarded as in part a ‘passive’ outcome of an economically-determined rate of increase of aggregate real product and an exogenously-determined rate of population increase.

While ‘sustained increase in real per capita incomes’, or something like it, is the most widely accepted definition of economic growth, there are those who would prefer to envisage this, alternatively or in a complementary sense, in terms of structural changes such as a persistent decline in the proportion of the labour force employed, or national product generated, by the agricultural sector, and corresponding increases in manufacturing. This view of growth is one which appeals particularly to some economists in low-income countries oriented to agriculture or mining, especially if they are also small or if there has been a history of economic dependence on foreign capital. There is a temptation to view true economic development in such societies as involving not merely rising per capita incomes but also diversification of economic structure away from primary activity, towards the industrial and services sectors, perhaps by way of import substitution and a reduced dependence on trade. Such ‘development’ may be desired for economic reasons – as providing a greater safeguard against fluctuating terms of trade or to reduce dependence on a non-reproducible resource such as oil; or for reasons of national prestige or military security; or simply for its own sake – as offering greater variety of employment and scope for differing talents and styles of living. Thus William Demas summarized the first of his four brilliant lectures on The Economics of Development in Small Countries by proposing, firstly, that ‘The criterion of development or underdevelopment of a country is the extent to which it has achieved structural transformation’. Secondly, but only secondly, ‘Structural transformation is usually associated with an increase in real output and real income per head’; and we are reminded, thirdly, that ‘A country can have a high per capita income without having undergone structural transformation, if it is an enclave economy or a small economy relying on exports of valuable natural-resource products’.¹

It is understandable that Mr Demas should espouse such views, for at the time of writing he was Head of the Economic Planning Division of the Government of Trinidad and Tobago, a country whose relative prosperity was heavily dependent on oil wells then expected to run dry in ten to fifteen years. History confirms the need to make a distinction between growth of income and structural change; for there are undoubtedly instances of countries which have enjoyed a high level of, and sustained increases in, per capita incomes, while continuing to be characterized by somewhat ‘undeveloped’ and unchanging structures – Australia and New Zealand between, say, 1870 and 1938 are cases in point. Even more dramatically, possession of a valuable resource like oil can ensure a high level of per capita income even to a country of highly unbalanced, and largely backward, structure: not the U.S.A. but Kuwait has enjoyed the highest average per capita income in the world in recent years.

It would undoubtedly be convenient to have separate words to denote these two differing concepts, say growth (for sustained increase in real per capita incomes) and development (for sustained structural change). Such a linguistic usage would not of course imply any denial that the two processes are usually intimately linked, but it would accord well with the historical fact that substantial ‘growth’ can occur without substantial ‘development’, and (less certainly) vice versa, and that even in so far as the two are but opposite sides of the same coin, our interest at a particular time may legitimately focus on one side only, and be served by having terminology capable of reflecting this preference.

Unfortunately, the English language has been debased and impoverished in this, as in so many similar ways. Later economists have not followed the example of Schumpeter, who drew a sharp distinction – similar to, though not identical with, that suggested here – between ‘development’ and ‘Growth’,² which in Business Cycles is always referred to, curiously, with a capital ‘G’. (Growth in this sense, incidentally, was of quite minor concern in Schumpeter’s scheme.) Today, one must agree with Meier and Baldwin that the terms are used as synonyms.³ Thus, the first chapter of an excellent introductory text with the title Economic Development, Past and Present begins with the sentence: ‘The meaning and implications of rapid economic growth have become increasingly clear . . .’⁴ It is clear from the context that the author uses the two words indifferently, for the sake of stylistic variety. Again, the best-selling of all modern texts on the subject, Walt W. Rostow’s well-known The Stages of Economic Growth, ought certainly to be titled The Stages of Economic Development if the linguistic usage envisaged here were current.

Nor is it only the English language whose power to discriminate between concepts has been eroded in this way. The French use their words croissance and développement as indiscriminately as the English use ‘growth’ and ‘development’; Perroux’ famous pôles de croissance would be pôles de développement in the more discriminating usage. The Germans are less worried by repetition: Wachstum (growth) normally does service for both concepts, and few have followed Schumpeter in using Entwicklung (development) in an economic context. The same is true of Italy, but there it is the word for development (sviluppo) which serves both purposes. Only the Latin Americans display any wish to preserve shades of meaning, doubtless because of all major groupings of economists it is they who place most emphasis on the structural change aspect of growth/development, regarding this as the key not only to long-run growth but to the preservation of economic and indeed cultural and political national identity and self-respect. (In many respects West Indian economists share the outlook of Latin Americans, for obvious reasons of history and geography.) Accordingly, though even here usage is not uniformly precise, crecimiento is usually used for ‘growth’ and desarrollo for ‘development’ as defined in the preceding paragraphs.

But it is too much to hope that a textbook should succeed in inducing a change in language. Such works more often contribute to the further debasement than to the refinement of terminology, and having made one’s point there is no sense in labouring it. We do need to be clear, however, that though this is predominantly a book about growth it will not ignore development, where that seems the more relevant concept; and the degree of attention to the first would be less and to the second more, were it not that as yet there are fewer satisfactory historical data on development than on growth.

Growth and welfare

The desire not to rely too exclusively on changes in real per capita incomes as one’s measure of historical change can only be strengthened when we consider both that strong exception has been taken to the use of per capita income as an index of welfare, and that grave difficulties impede its historical measurement. This is not the place for an exhaustive discussion of the first of these problems, but three criticisms of the use of real per capita income as a welfare measure must receive more than cursory notice. It has been claimed that measures of real income pay regard only to material enjoyments, neglecting (for example) spiritual values and other nonmaterial benefits. It is suggested that even in so far as material satisfactions are concerned, the volume of goods and services consumed by two societies cannot be regarded as a measure of the respective degrees of satisfaction derived unless it can be assumed that ‘wants’ are identical, which need not be and usually is not the case. And it is pointed out that the measure of changing real income derived from orthodox national accounting totals may be deficient in failing to allow for offsetting ‘social costs’ (such as pollution) which are not charged against production in the accounts of constituent units, and by counting as part of output certain items such as travelling to work, which from a welfare point of view ought to be reckoned as costs and subtracted from the value of final product rather than added to it.

The first of these issues is one which involves value judgments as well as questions of fact lying outside the province of either the economic historian or the economist. The point to be made, however, is that economic development may be systematically related to cultural and religious change, as it certainly is to social change. A complete balance sheet of a period of economic growth would in that event call for the inclusion of measures not only of changes in real income but also of development in the spiritual and other areas which may have been either the consequence of, or necessary conditions for, the economic improvement in question. Thus J. L. Hammond, when his original assertion that the industrial revolution had led to a decline in the standard of living in Britain was challenged and (as it seemed) disproved by statistics, fell back on the argument that industrialization had wrought social dislocation and spiritual and aesthetic impoverishment which offset any material improvement there may have been.⁵ Our purpose here is not to adjudicate in this or any similar debate, but simply to point out that if there is, indeed, a systematic relationship between the material and non-material aspects of life, Hammond’s insistence on counting spiritual losses (or conceivably gains) as well as material improvement is logically compelling.

Even within the material area, however, the question of the possible inconstancy of wants raises doubts about the propriety of translating real values of aggregate consumption into terms of ‘satisfactions’. Here, more than with the first point, it seems probable that the issue is particularly acute in historical as opposed to cross-country comparisons. In respect of the latter it has sometimes been claimed that cross-country estimates of income elasticities of demand for various classes of consumer goods prove that international differences in tastes and needs are not as great as commonly supposed,⁶ This may be so – inference from such estimates poses conceptual problems, especially those concerning levels and distribution of disposable income and the width of the commodity categories to which the elasticities relate – but in any event it is more difficult to believe in the constancy of wants over time. Indeed, unless exceedingly broad classifications of types of expenditure are employed, the mere appearance of new commodities over time must ensure inconstancy. It is possible (though it does not seem likely) that in these days of developed communications and the ‘demonstration factor’ the Brazilian peasant may feel exactly the same intensity of desire for a direct-dial telephone as a middle-class American suburbanite, and that if he got one it would be appropriate to add as much to the measure of his welfare as we would subtract from that of the suburbanite whose instrument was removed for nonpayment of the rental. But it is surely absurd to consider the whole world deficient in satisfaction by a similar amount per head throughout the centuries in which no such instrument as the telephone was conceived, and in which no one was capable of experiencing a ‘want’ for it.

Historical (and anthropological) evidence abounds of the mutability of wants over time. The deliberate stimulation of new ‘wants’ in order to induce effort, a tactic repeatedly employed in situations of interaction between two cultures, is predicated upon this mutability. Ragnar Nurkse voiced a widespread belief when he surmised that too ready a capacity to learn new wants, and too complete and rapid an exposure to new forms of expenditure, might maintain the propensity to consume at so high a level, even with rising incomes, as to frustrate efforts to increase the savings rate in low income countries to a level capable of sustaining self-financed growth.⁷ At the same time, societies seem to have differed – for sociological reasons which are little understood – in their capacity to resist or absorb new wants: American society has always been characterized by the rapidity and relative thoroughness with which the desire to acquire new consumption goods has spread, whereas some economic historians have explained Japan’s characteristically high savings rates as arising from the relative willingness of her consumers to perpetuate a pattern of traditional consumption.

As we move back in time, it is surely evident that we approximate the Japanese, rather than the American, experience of cultural diffusion. Before the late nineteenth century the whole apparatus of mass communications and the advertising specialists who exploit it did not exist; and before the coming of the railway and of cheap sea travel personal mobility was also far more restricted than at the present day. In such circumstances Nurkse’s ‘demonstration factor’ was severely circumscribed by the mere lack of the technology required to permit its operation, not to mention the possibility of greater resistance to it from internalized habits of tradition. As against this, how...