05-09-2023

What is a Theory?
• For the economist, a theory is a systematic explanation of
interrelationships among economic variables, and its purpose
is to explain causal relationships among these variables.
• Usually a theory is used not only to understand the world
better but also to provide a basis for policy. In any event,
theorists cannot consider all the factors influencing economic
growth in a single theory. They must determine which variables
are crucial and which are irrelevant. However, reality is so
complicated that a simple model may omit critical variables in
the real world (Kindleberger and Herrick 1977:40).
• And although complex mathematical models can handle a
large number of variables, they have their limitations
Growth v/s Development
 What is Economic Development?
• Economic development refers to the problems of under
developed countries. It is the process by which per capita
income and economic welfare of the UDC increases over time.
• It is a wider concept than economic growth.
• According to Paul Albert, “Economic Development is the
exploitation of all productive resources by a country in order
to expand real income”.
• According to Salvatore, “It defined as the process whereby a
country’s real per capita, GNP or income increases over a
sustained period of time through continuing in per capita
productivity”
 Theories of Economic Development
• The Classical School of economic thought was
formalised by Adam Smith, Malthus, Ricardo,
Mill and Say, who developed the classical
theory of development. However, there are
distinctions in terms of the emphasis laid by
each thinker to the classical theory of
development.
 Adam Smith’s Theory of Economic
Development
• Adam Smith is known as father of economics. He gave his ideas
about economic development in his well-known book, “An Enquiry
into the Nature and Causes of Wealth of Nations” (1976).
• He advocated the policy of laissez faire, that is, non-intervention of
government in economic activities of the individuals.
• He laid stress on individual freedom in conducting their economic
affairs without any obstructions and restrictions by the
government.
• He advocated free trade among nations of the world and urged
that all restrictions on foreign trade should be removed to
promote international specialization so as to increase the incomes
of the nations. The crucial aspects of Adam Smith’s development
theory are – division of labour and capital accumulation.
 Adam Smith’s Theory of Development –
Main Features
• Natural law – lassiez-faire and self interest leads to
Development.– Adam Smith believed in the doctrine of
‘Natural law’ in economics affairs. He regarded every person
as the best judge of his own interest who should be left to
pursue it to her own advantage. Since every individual if left
free will seek to maximise his own wealth, therefore all
individuals, if left free, will maximise aggregate wealth.
Smith was naturally opposed to any government
interventions in industry and commerce. The “invisible
hand” – the automatic equilibrating mechanism of the
perfectly competitive market tended to maximise national
wealth.
 Adam Smith’s Theory of Development –
Main Features
• Division of Labour – Division of labour increases productivity
which depends upon the size of the market. – Division of
labour is the starting point of Smith’s theory of economic
growth. It is division of labour that results in the greatest
improvement in the productive powers of labour. The
attributes of this increase in productivity are (i) the increase in
the dexterity of every worker; (ii) the saving in time to produce
goods; and (iii) to the inventions of large number of labour
saving machines. The last cause to increase in productivity
stems not from labour but from capital. Therefore in Smith’s
scheme; it is improved technology that leads to division of
labour which, however, depends on the size of the market.
 How Division of Labor increases labor
productivity?
• Extension of the markets provides
opportunities for an increase in the division of
labour and division of labour raises labour
productivity for following reasons:
• (a) workers become more efficient in the
performance of particular tasks;
• (b) job specialisation also increases the scope
for designing improved tools and machines to
raise labour productivity.
 Adam Smith’s Theory of Development –
Main Features
• Process of Capital Accumulation – Division of
labour leads to capital accumulation and capital
accumulation leads to economics of
development. Like the modern economists, the
classical economists regarded capital
accumulation as a necessary condition for
economics of development. Hence the problem
of economics of development was largely the
ability of the people to save more and invest
more in a country.
 Adam Smith’s Theory of Development –
Main Features
• Process of Capital Accumulation: As Smith said, “that portion
which a person annually saves is immediately employed as a
capital.” But since almost all saving resulted from capital
investments or the renting of land; only capitalists and landlords
were held to be capable of saving.
• The labouring classes were considered to be incapable of saving.
This belief was based on the ‘Iron Law of Wages”. The classical
economists also believed in the existence of ‘wages fund’. The idea
was that ‘wages’ tend to equal the amount necessary for the
subsistence of the labourers. If the total wages fund at any time
becomes higher than the subsistence level, the labour force will
increase, competitions for employment will become keener and
wages will come down to the subsistence level.
 Adam Smith’s Theory of Development –
Main Features
• Besides, capital accumulation, according to Smith,
facilitates a greater degree of division of labour which
causes productivity of labour to rise. Without capital
accumulation the extent of division of labour cannot be
increased much. Increase in capital formation leads to
the production of different types of specialized
equipment which are operated by different classes of
workers who are skilled and specialized in various tasks.
Thus, capital accumulation along with division of labour
leads to the increase in industrial output and
employment.
 What is Capital Accumulatiion?

Definition of Capital accumulation

• This is the process of acquiring additional capital
stock which is used in the productive process.
Capital accumulation can involve
- Investment in physical fixed capital (e.g. factories,
machines)
- Portfolio investment – purchase of bonds, shares etc.
- Investment in assets, such as housing.
How Capital Accumulation Occurs?
• Profit from business can be reinvested
• Foreign direct investment (important for developing
economies with low capital basis)
• Technological innovation which increases the productivity
of capital.
• Increase in human capital – e.g. better educated workforce
enables an increase in production possibility frontier.
• Discovering new sources of raw materials, e.g. oil reserves.
• Increased level of savings.
 Capital Accumulation
• Capital accumulation often occurs from the
profit or dividends from previous investment.
Therefore capital accumulation can become a
self-reinforcing cycle – with the wealthy able
to increase their capital assets, enabling more
profit/rent/dividends to finance further capital
accumulation.
08-09-2023
 David Ricardo
• He presented his views on economic
development in the famous book titled as,
“The principles of Political Economy and
Taxation”, written by him in the year 1817.
• He predicted that capitalist economies would
end up in a stationery state where there
would be no growth and diminishing returns
would occur in the agricultural sector of these
economies
 Assumptions
• All land is used for the production of one crop say,
corn. (foodgrains – oats + barley)
• Land is subject to diminishing returns to a factor
• Supply of land is fixed
• Labour and capital both are variable inputs
• Technology is given and remains unchanged
• Wage rate is equal to subsistence level
• Demand for labour is a function of accumulations
• Capital accumulations occur from profits - smith
 David Ricardo’s Theory of Income
Distribution and Growth
• “The produce of the earth—all that is derived
from its surface by the united application of
labour, machinery, and capital, is divided
among three classes of the community;
namely, the proprietor of the land, the owner
of the stock or capital necessary for its
cultivation, and the labourers by whose
industry it is cultivated.”
 David Ricardo’s Theory of Income
Distribution and Growth
• Ricardo took the case of an economy that produced
only “corn”, which was distributed as rent to
landlords, profit to capitalists and wages to workers.
• In Ricardo’s analysis, output grows by the application
of labour and machinery to additional land in fixed
proportion (i.e., ten labours and five ploughs per
hectare). The capitalist farmers begin with the most
fertile land and progress onto less and less productive
land as the demand for food increases. As a result,
output per hectare falls on the newly cultivated land
 David Ricardo’s Theory of Income
Distribution and Growth
• All farmers want the best land and their
competition for it means that the rent paid on the
best land rises and determines the rent on all land.
If wages are constant (Ricardo’s assumption) and
output per hectare falls, profit of farmers must fall.
This line of analysis led Ricardo to conclude that
over time profit would disappear and growth
would cease. This analysis failed to anticipate the
impact of technical change on the productivity of
land, most importantly fertilizers and machinery.
Smith’s Stationary State
 David Ricardo’s Theory of Income
Distribution and Growth
• Ricardo’s analysis of growth and distribution had an
extremely important political implication. The conclusion
that rising agricultural rents would arrest economic
growth provided the analytical basis for his advocacy of
free trade. At the time he published his Principles the
debate over the “Corn Laws” dominated British politics.
Protective legislation severely restricted import of grains,
maintaining high prices and in some years severe
shortages. Ricardo’s theoretical warning that rising rents,
enhanced by trade protection, would end economic
expansion carried considerable influence.
 David Ricardo’s Theory of Income
Distribution and Growth
• Despite the fundamental mistake in his logic,
Ricardo’s treatment of aggregate distribution
provided the basis for macroeconomic analysis
and created a clear link between
macroeconomic theory and public policy.
 Ricardo’s Theory – Key Takeaways
• Rents drive the prices or Price drives the rent?
• Law of diminishing Returns
• Importance of Capital Accumulation
• Importance of Free Trade
• Economic Theory Out of Observations? YES!!!
• Whether rent is driving the prices or prices are
driving the rent?

• Corn is getting produced. Population

increases. Increase the production of corn.
(Diminishing returns). Most fertile land is
already in use. You take in to account less
fertile land.
 Marxian Theory
• Karl Marx provided the materialistic or
economic interpretation of history. He brought
out the driving forces of capitalism and also
predicted the end of capitalism. He also
suggested Socialism or planned economic
development as an alternative to capitalism.

• For India, Capitalism is a NECESSARY EVIL.

 Marxian Theory
• Karl Marx was a German Philosopher,
Economist, Historian, Political Theorist,
Sociologist, Journalist and Revolutionary
Socialist
 Marxian Theory
• MAJOR ASSUMPTIONS:
– There are two principal classes in the society
» Bourgeoisie
» Proletariat
– Wages of the workers are determined at subsistence level
of living (PESSIMISTIC)
– Labor is the main source of value generation
– Factors of Production are owned by the capitalist
– Capitalist exploit the workers
– Labor is homogeneous and Perfectly mobile
– National Income is distributed in terms of wages and profit
Marx’s Industrial Age Social Pyramid
 Marxian Theory
• PROCESS OF ECONOMIC DEVELOPMENT :
According to Karl Marx (1818-1883), “the
history of hitherto existing societies has been
the history of class struggles… ”. Marx
believed that all historical events are the
result of a continuous struggle between
different classes in the society. The main cause
of this struggle is the conflict between the
mode and relations of production.
 Marxian Theory
• The mode of production relates to a particular arrangement of
production in a society that determines entire social, political and
economic way of living. People use the mode of production by
entering into mutual relations.
• Marx described these relations as the relations of production which
are continually changing. According to Marx, historically society has
passed through five different stages:
• Primitive communism,
• Slavery,
• Feudalism,
• Capitalism
• Socialism
• Communism
Capitalist Mode of Production
 Main Concepts
• Materialistic Interpretation of history
• Modes of Production, Relations of Production
• Surplus Value
• Capital Accumulation
• Downfall of Capitalism
• Reserved Army
MODE OF PRODUCTION, RELATIONS OF
PRODUCTION
 SURPLUS VALUE
• Surplus value, Marxian economic concept that professed to
explain the instability of the capitalist system. Adhering to
David Ricardo’s labour theory of value, Karl Marx held that
human labour was the source of economic value. The capitalist
pays his workers less than the value their labour has added to
the goods, usually only enough to maintain the worker at a
subsistence level. Of the total worth of the worker’s labour,
however, this compensation, in Marxian theory, accounts for
only a mere portion, equivalent to the worker’s means of
subsistence. The remainder is “surplus labour,” and the value it
produces is “surplus value.” To make a profit, Marx argued, the
capitalist appropriates this surplus value, thereby exploiting the
labourer.
 Capital Accumulation
• Surplus Value leads to capital accumulation
• The capitalist is always trying to increase their
profit in following ways:
– By increasing working hours
– Increasing the productivity of labor
 Reserved Army
• For wages to stay at the subsistence level, Karl Marx held that
workers must be in a weak bargaining position in relation to
their employers. A worker’s source of bargaining power is his
or her ability to leave the employer and to go get a new job
with someone else. To Marx, under capitalism, the weak
bargaining position of the workers would be maintained by a
large supply of unemployed workers. Workers would have to
“obey” their employers because they would know that there
were many other workers willing to take their jobs. And they
could not quit their jobs because their chances of getting
other jobs would be low. This supply of unemployed workers
was called “the reserve army of the unemployed”.
 Downfall of Capitalism
• Replaces the workers by machines which leads to the
reduction in surplus value
• Poverty and limited purchasing power
• Marx claimed that capitalism sows the seeds of its own
downfall
• Polarisation brings workers together through
impoverishment, which will lead to an awareness of
their political and economic interests
• Marx predicted that because of this, the workers will
break free from their chains and overthrow capitalism
 Quotes to Ponder Upon
• “Capitalists are as much victims of the capitalist
relations of production as are the workers” De-
humanizing capitalists?
• “The history of all hitherto existing society is the
history of class struggles”
• “Capital is dead labor, which, vampire like, lives
only by sucking living labor, and lives the more, the
more labor it sucks”
 Keynesian Economics
• John Maynard Keynes (1883-1946)
• A macroeconomic theory of total spending in
the economy and its effects on output,
employment and inflation
• John Maynard Keynes was the most influential economist of
the 20th century His analysis of the Great Depression altered the
views of the economics profession.

• Keynes developed a theory that provided both an explanation

for the prolonged unemployment of the 1930s and a recipe for
how to generate a recovery.

• Keynesian analysis indicated that fiscal policy could be used to

maintain a high level of output and employment. [What is Fiscal
Policy? Increased government Spending on Public Works and
Providing the residents of the economy with tax cuts to increase
their purchasing power.]
 Keynesian Economics
• Keynesians believe that free markets are
volatile and not always self-correcting in the
event of an external shock
• The free market system is prone to lengthy
periods of recessions and depression
• Economies can remain stuck in an
underemployment equilibrium
 Keynesian Economics
• In a world of stagnation or depression, direct
state intervention may be essential to restore
confidence and lift demand
• Keynes was one of the first economists to
criticise the profession for adhering to
unrealistic assumptions.
 Keynesian Economics
• Keynesian economics is a macroeconomics theory that describes total
economic spending and its effects on output, employment, and inflation.
• Keynesians believe that since prices are somewhat rigid, changes in any
aspect of spending, whether government, investment, or consumer
spending, affects the output.
• For example, the output will increase if government expenditure rises
while all other spending factors stay the same.
• Keynes' theory was the first to distinguish between the study of individual
economic behaviour and markets and the study of broad national
economic aggregate variables and constructs.
• Based on his theory, Keynes advocated for increased government
spending and lower taxes in order to stimulate demand and lift the global
economy out of depression.
Lewis Theory of Unlimited supplies of Labor

• The Theory of Unlimited Supply of Labor

(1954) by Sir William Arthur Lewis is a greatly
acclaimed widely commented and extensively
quoted theory that provides a theoretical
description of how an agrarian society gets
transformed in a developed and industrialized
economy
Lewis Theory of Unlimited supplies of Labor

• Lewis believed that unlimited supply of labour

is available at subsistence wage rate in
underdeveloped countries. Economic
development is result of capital accumulation.
On the other hand capital accumulation is
result of withdrawal of surplus labour from
subsistence sector and their employment in
capitalist sector.
Lewis Theory of Unlimited supplies of Labor

• Lewis believed that classical assumption of perfectly

elastic supply of labour holds true in number of
underdeveloped countries. [What is the shape for
perfectly elastic supply of labor?]
• Marginal productivity of labour in these countries is
negligible, zero or even negative due to availability of
excess labour. Since supply of labour is unlimited it
provides opportunity for industrial sector to grow and
establish new industries by withdrawing labour from
subsistence sector at prevailing wage rate in subsistence
sector. [Why MPL is negligible?]
Lewis Theory of Unlimited supplies of Labor

• Capital formation depends on capitalist

surplus. As the capitalists aim at profit
maximization, it is they who save and invest.
The surplus generated is reinvested by
capitalist in new capitalist assets. The labour is
transferred from subsistence sector to
capitalist sector till supply of labour become
inelastic and all surplus labour disappears.
 Features of Lewis Model
• Prevalence of unlimited supply of labor at the
subsistence wage rate in the traditional sector
i.e. a perfectly elastic supply curve of labor
(horizontal to the x-axis) at the subsistence
wage rate.
• Capital and other natural resources are
assumed to be highly scarce in relation to the
predominance of LF.
 Features of Lewis Model
• Skill-formation is only a quasi-bottleneck i.e. it is a
temporary phenomenon that can be outweighed by
incurring some cost of imparting skills
• He assumed that wages in the expanding capitalist
sector are determined by the wage earnings in the
subsistence sector [Which wage rate is expected to
be higher?]
• Lewis assumed that profits are the only source of
capital accumulation which means the entire
amount of wage money is consumed.
 Features of Lewis Model
• In the Lewis model, the underdeveloped economy
consists of two sectors: a traditional,
overpopulated rural subsistence sector
characterized by zero marginal labor productivity—
a situation that permits Lewis to classify this as
surplus labor in the sense that it can be withdrawn
from the traditional agricultural sector without any
loss of output—and a high productivity modern
urban industrial sector into which labor from the
subsistence sector is gradually transferred.
 Lewis Model
• This process of modern-sector self-sustaining growth and
employment expansion is assumed to continue until all surplus
rural labor is absorbed in the new industrial sector. Thereafter,
additional workers can be withdrawn from the agricultural sector
only at a higher cost of lost food production because the declining
labor-to-land ratio means that the marginal product of rural labor
is no longer zero. This is known as the “Lewis turning point.”
• Thus the labor supply curve becomes positively sloped as modern
sector wages and employment continue to grow.
• The structural transformation of the economy will have taken
place, with the balance of economic activity shifting from
traditional rural agriculture to modern urban industry.
# The process of expansion and capital
accumulation in the modern sector and the
absorption of labour by it is explained by this
figure.

# OS represents the wages which a worker

would be getting in the subsistence sector

# OW is the wage rate fixed in the modern

sector which is greater than OS (i.e., average
product in agriculture) by 30%.

# So long as surplus labour exists in the

economy any amount of labour will be
available to the modern sector at the given
wage rate OW, which will remain constant.
# With a given initial amount of industrial
capital, the demand for labour is given by the
marginal productivity curve MP1 .

# On the basis of the principle of profit

maximisation, at the wage rate OW, the
modern sector will employ OL1 labour at which
marginal product of labour equals the given
wage rate OW.

# With this the total share of labour, i.e., wage

in the modern sector, will be OWQ1L1 and
WQ1D will be the capitalists’ surplus. Now,
Lewis assumes that all wages are consumed
and all profits saved and invested.
# When the capitalists will reinvest their profits
for setting up new factories or expanding the
old ones, the stock of capital assets in the
modern sector will increase.

# As a result of the increase in the stock of

industrial capital, the demand for labour or
marginal productivity curve of labour will shift
outward, for instance from MP1 to MP2 in our
diagram.

# With MP2 as the new demand curve for

labour and the wage rate remaining constant
at OW, amount of labour OL2 will be employed
in the modern sector.
# In this new equilibrium situation profit or
surplus accruing to the capitalist class will rise
to WQ2E which is larger than the previous
WQ1D.

# The new surplus or profits of WQ2E will be

further invested with the result that capital
stock will increase and the demand or marginal
productivity curve for labour will further shift
upward, say to MP3 position.

# When the demand curve for labour is

MP3 employment of labour will rise to OL3 .In
this way, the profits earned will go on being
reinvested and the expansion of the modern
sector will go on absorbing surplus labour from
the subsistence sector
Why MRPL is the Labor Demand Curve?
• Derived demand is the demand for a factor of
production that results from the demand for
another intermediate good. In the case of
labour demand, it is derived from the demand
for a product or a service that labour
produces.
Why MRPL is the Labor Demand Curve?
• A firm will demand further labour only if an
increase in the labour force will guarantee to
bring in more profits. Essentially, if the
demand for a firm’s product increases, the
firm will demand more labour to sell the
additional units of goods or services. The
assumption here is that the markets will
demand the goods produced by labour, which
in turn will be employed by firms.
Why MRPL is the Labor Demand Curve?
• The marginal productivity theory of demand
for labour states that firms or employers will
hire workers of a particular type until the
contribution made by the marginal worker is
equal to the cost incurred by having hired this
new worker.
Why MRPL is the Labor Demand Curve?
• However, the theory of diminishing marginal
returns assumes that the marginal worker
provides less contribution to the work than
that of their predecessor. The theory assumes
that the workers are relatively the same,
meaning they are interchangeable. Based on
this assumption, many workers that are hired
receive the same wage rate.
Why MRPL is the Labor Demand curve?
• “The addition to the firm’s total revenue
accruing from the sale of the extra units
produced when the firm employs one more
unit of labour is equal to the addition to the
firm’s total costs incurred by the employment
of one extra unit of labour.” I.e., “The marginal
value product of labour equals the marginal
cost of labour.”
 Fei-Ranis Model of Dual Economy
• The two economists John Fei and Gustav Ranis
presented their dual economy model
• There was a flaw in Lewis Model that it did not pay
enough attention to the importance of agriculture
sector in promoting industrial growth
• But Fei-Ranis Model of dual economy explains how
the increased productivity in agricultural sector would
become helpful in promoting industrial sector
• Thus, this model is treated as an improvement over
Lewis Model of unlimited supply of labor
 Balanced and Unbalanced Growth
• “In order to get rid of vicious circle of poverty,
underdeveloped countries need investment on a large
scale”
• There are two theories concerning strategy of
economic development:
– Theory of Balanced Growth : According to Rodan, Nurkse
and Lewis, these economies should make simultaneous
investment in all sectors to achieve balance growth.
– Theory of Unbalanced Growth : According to Hirschman,
Singer, Fleming, these economies should create a situation
of unbalance by making large investment in any ONE sector.
Balanced and Unbalanced Growth
• Fredrick List was first to put forward the
theory of balanced growth. According to him,
a balance could be established among
agriculture, industries and trade.
• In the year 1928, Arthur Young gave the
concept of different industries being mutually
interdependent, then all of them should be
developed simultaneously.
Balanced and Unbalanced Growth
• According to Lewis, “Balance growth means
that all sectors of economy should grow
simultaneously so as to keep a proper balance
between industry and agriculture and
between production for home consumption
and production for exports. The truth is that
all sectors should be expanded
simultaneously.”
 Balanced and Unbalanced Growth
• A broad choice of development strategy is between
Ragnar Nurkse’s theory of balanced growth (BG) and A.
O. Hirschman’s theory of unbalanced growth (UG). The
doctrine of BG is based on the economic rationale for a
‘big push’.
• By contrast, UG is based on the hypothesis that a ‘big
push’ or a ‘critical minimum effort’ is not feasible. So the
best way to stimulate development in LDCs is to
deliberately create an imbalance.
• So, there are two opposite issues on development
strategy.
 Balanced and Unbalanced Growth
• The origin of the idea of balanced growth can be
traced back to the 200-year old Say’s Law of
Markets (1803)
• Every increase in production, if distributed in the
correct proportion among the factors of
production on the basis of their respective
contributions to society’s output, creates its own
demand. Say made an insightful analysis that all
productive activity creates demand along with
supply.
 Balanced and unbalanced Growth
• A. O. Hirschman and his followers showed more faith in market forces
but stressed the virtual impossibility of BG in the narrow sense of the
simultaneous establishment of many industries all at a time.
• He pointed out that most poor countries lack the resources for
investing in more than one or very few modern projects at any given
time and, therefore, can aim at BG only in the long run, through a
sequential process of building first one, then another plant, with each
step correcting the worst imbalance in order to approach a more
balanced structure gradually.
• He called that process ‘unbalanced growth’-and argued that market
forces are likely to aid it, because imbalances create shortages, whose
impact on prices render their relief or elimination more profitable.
 The Big Push Theory
• Those advocating the synchronized application
of capital to all major sectors [Balanced
Growth] support the big push thesis, arguing
that a strategy of gradualism is doomed to
failure. A substantial effort is essential to
overcome the inertia inherent in a stagnant
economy. The situation is analogous to a car
being stuck in the snow: It will not move with a
gradually increasing push; it needs a big push.
 The Big Push Theory v/s Critical Minimum
Effort Theory
• So, The theory of Big Push is based on balanced growth
strategy of development that propagates that the need for
simultaneous investment in a large number of industries to
cater to complimentary of demand as a solution to push the
UDCs to higher trajectories of income.
• Critical minimum effort theory on the other hand emphasize
on the two outcomes of any developmental program- one that
accelerates the process of expansion (stimulant) and the one
that decelerates the process (shocks). Hence the theory
stresses on the importance of a certain minimum level of
investment for the UDCs to move to higher levels of growth
wherein the stimulants are more active than the shocks.
 The Big Push Theory
• A steel mill is profitable if iron and coal mines lie nearby
because both provide inputs to steel making that are costly to
transport long distances. A steel mill is also profitable if a
cement plant lies nearby, for office buildings are made of
concrete and steel. Industries that use steel, skilled
mechanics to repair their equipment, roads and railways to
transport all the above, and consumers with disposable
income to buy final goods, all help make a steel mill
profitable. Complementary industries, infrastructure
industries, public goods, organizations with network
externalities, and consumer demand must all grow in synch or
in sequence, each meeting the other’s needs
 The Big Push Theory
• Therefore, Rodan was of the view that specific
investment must be made in a number of industries
which are technologically and market-wise
interdependent to reap the economies of scale so as
to achieve economic development. He stressed on
three kinds of indivisibilities which are essential for
generating Big Push in an economy:
• 1) Indivisibility of Production function
• 2) Indivisibility of Demand
• 3) Indivisibility of savings
 The Big Push Theory
• Indivisibility of Production function:
Production function explains a technological
way in which inputs can be transformed into
output. This transformation leads to increase
in production, economies of scale and
externalities.
• Rodan regards investment in social overhead
capital (SOC) vital for this transformation
which is lacking in the UDCs.
 The Big Push Theory
• Huge initial amount of investment is necessary
in SOC like irrigation system, power, transport,
communication etc. Investment in SOC will
bring about increasing returns in the
production process. However, SOC require a
"sizeable initial lump" of investment.
 The Big Push Theory
• There are other indivisibilities that characterize
SOC—SOC are irreversible in time and, therefore,
must precede other directly productive
investments. second, development of SOC needs a
long gestation period. Last, it is an irreducible
minimum industry mix of different kinds of public
utilities i.e. investment in one set of infrastructure
is not adequate but investment in multiple services
or other complimentary inputs for SOC to work
effectively.
 The Big Push Theory
• These indivisibilities of supply of social
overhead capital are all of the principal
obstacles to development in underdeveloped
countries and due to these indivisibilities
private players are shy in investing in SOC.
Hence the theory assigns a vital role on the
State to play in promoting economic
development
 The Big Push Theory
• Indivisibility of demand: It refers to small size of the
markets in the UDCs that limit scale of production and
hence under-exploits the capacity of firms. The theory
suggests that investment in a large number of
industries that cater to complementary demands will
help increase the size of the markets and thus, the
industry will be able to reap the advantage of large
amount of production at lower levels of cost. It will
also ensure adoption of practices like division of
labour that save time, tools and promote new
inventions.
 The Big Push Theory
• Indivisibility of Savings: The central problem of
the third world country in the process of
economic growth is that there is dearth of capital
in the form of plant, machinery, equipment etc
due to the low levels of savings in these
economies. Rodan argued that if these countries
are able to accelerate their incremental savings
ratio, then it could be translated into expansion
of large stock of capital.
 Critical Minimum Effort Theory
• Harvey Leibenstein is of the view that UDCs
are characterized by vicious circle of poverty
which keeps them around a low income per
capita equilibrium state. The way out of this
impasse is a certain critical minimum effort
which would raise the per capita to a level at
which sustained development could be
maintained
 Critical Minimum Effort Theory
• Leibenstein says that every economy is subject
to Shocks and Stimulants. A shock has the
impact of reducing the per capita income
while a stimulant tends to increase it.
• Certain countries are poor and backward
because of the reason that the magnitude of
stimulant is small while that of shocks is large
 Critical Minimum Effort Theory
• According to Leibenstein, if the income increasing forces
expand at a higher rate than the income depressing forces,
then the favorable conditions for economic development
will be existing. In the process of development such
conditions are created by the expansion of Growth agents.
• These growth agents comprise of entrepreneurs, investors,
savers and the innovators
• The growth contributing activities result in creation of
entrepreneurship, the increase in stock of knowledge, the
expansion of production and skills of people and increase
in the rate of savings and investment
Time is shown on
horizontal axis and per
capita income on vertical
axis. OE is the
equilibrium per capita
income and OM is the
critical per capita
income.
Suppose the level of per
capita income is OA. This
level is low as compares to
the critical minimum level it
would fail to take the
economy out of stagnation
forced would be strong in
relation to the effect of
income depressing forces
would be strong in relation to
the effect of income-
generating forces.
When level of income is raised to
OB, the growth curve will follow
the path BCR. It is evident that per
capita income is rising up to point
C, and thereafter the per capita
income is declining. It means, OB
level of income is insufficient to
generate the growth momentum in
the economy. If sufficient
investment is infected into the
system to raise per capita income
to OM, sustained growth will occur
and effort of stimulants would be
relatively strong than that of
shocks. There, any level of
investment lower that the critical
cannot ensure stained growth.
The term 'critical' is indicative it the
fact that the investment should at
least be of such a level which could
raise per capita income to OM for
achieving sustained growth.

The initial infection of investment

might be enough to raise per capita
income to OB. Then at time T, the
second dose of investment could
be infected to raise per capita
income to OM, thereby taking the
economy to the critical minimum
level of income required for
sustained growth.
 What is Dualism?
• The concept of economic dualism was first introduced
by J. H. Boeke in 1953 in the context of the dual
economy and dual society of Indonesia. Dualism states
the co-existence of two separate worlds. It is also major
characteristics of developing countries. Hence, the term
was used to refer to various asymmetries of production
and organisation that exist in developing countries.
Boeke first used the term to represent an economy and
a society divided between the traditional sectors and
the modern, capitalist sectors in which the Dutch
colonialists operated.
 Dualism
• Dr. Boeke says that the dual society is a society which has two full
grown social styles which represent pre-capitalism and post-
capitalism. Such a dual society is furnished with the existence of
an advanced imported western system on the one side and
endogenous pre capitalistic agricultural system on the other side.
• The former is under the western influence which uses the
advance techniques and where standard of living is high. The later
is native and it is furnished with the outdated techniques and low
social and economic life. This is called social or sociological
dualism and these two systems are clashing. The imported social
system is highly capitalistic and it may be socialistic as well as
communistic system.