- Study Guide (Course-wide Content)
A. Population Growth and Development
- Malthus's theory of population rests on the law of diminishing returns. He contended that population, if unchecked, would tend to grow at a geometric (or exponential) rate, doubling every generation or so. But each member of the growing population would have less land and natural resources to work with. Because of diminishing returns, income could grow at an arithmetic rate at best; output per person would tend to fall so low as to stabilize population at a subsistence level of near-starvation.
- Over the last two centuries, Malthus and his followers have been criticized on several grounds. Among the major criticisms are that Malthusians ignored the possibility of technological advance and overlooked the significance of birth control as a force in lowering population growth. The neo-Malthusians see limits to growth from environmental constraints, particularly global warming, where markets provide distorted signals.
- Most of the world's population lives in developing countries, which have relatively low per capita incomes. Such countries often exhibit rapid population growth, a low level of literacy, poor health, and a high proportion of their population living and working on farms.
- The key to development lies in four fundamental factors: human resources, natural resources, capital, and technology. Explosive population causes problems as the Malthusian prediction of diminishing returns haunts the poorest countries. On the constructive agenda, improving the population's health, education, and technical training has high priority.
- Investment and saving rates in poor countries are low because incomes are so depressed that little can be saved for the future. International financing of investment in poor countries has witnessed many crises over the last two centuries.
- Technological change is often associated with investment and new machinery. It offers much hope to the developing nations because they can adopt the more productive technologies of advanced nations. This requires entrepreneurship. One task of development is to spur internal growth of the scarce entrepreneurial spirit.
- Numerous theories of economic development help explain why the four fundamental factors are present or absent at a particular time. Development economists today emphasize the growth advantage of relative backwardness, the need to respect the role of agriculture, and the art of finding the proper boundary between state and market. The most recent consensus is on the advantages of openness.
- Countries should be concerned about falling into the poverty trap, in which a vicious cycle of poverty leads to poor performance and locks a country into continued poverty.
- Recall our summary judgment on the role of government policies: (a) Foster the rule of law. (b) Make the critical investments in human and social overhead capital. (c) Limit the public sector to clear areas of comparative advantage. (d) Maintain an economy open to trade and foreign investment.
- Many "isms" have competed with the mixed market economy as models for economic development. Alternative strategies include the managed-market approach of the East Asian countries, socialism, and the Soviet-style command economy.
- The managed-market approach of Japan and the Asian dragons, such as South Korea, Hong Kong, Taiwan, and Singapore, proved remarkably successful over the last quarter-century. Among the key ingredients were macroeconomic stability, high investment rates, a sound financial system, rapid improvements in education, and an outward orientation in trade and technology policies.
- Socialism is a middle ground between capitalism and communism, stressing government ownership of the means of production, planning by the state, income redistribution, and peaceful transition to a more egalitarian world.
- Historically, Marxism took its deepest economic roots in semi-feudal Russia and was then imposed on the rest of the Soviet Union and Eastern Europe. Studies of resource allocation in these countries show that resources were allocated by central planning with severe distortions of prices and outputs. The Soviet economy depended primarily on energy-intensive heavy industry and the military in its early decades. Stagnation and poor incentives for innovation left Russia and other centrally planned countries at income levels far below those of North America, Japan, and Western Europe. These countries have all rejected the centralized command economy for some variant of the mixed market economy.