An Alternative Framework for Understanding the Performance of Nations
Chapter 1: Growth Theory in the History of Thought
Growth and development theory is at least as old as Adam Smith’s famous book published in 1776 entitled An Inquiry into the Nature and Causes of the Wealth of Nations. The macro issues of growth, and the distribution of income between wages and profits, were the major preoccupation of all the great classical economists including Adam Smith, Thomas Malthus, John Stuart Mill, David Ricardo and Karl Marx. One of Smith’s most important contributions was to introduce into economics the notion of increasing returns – a concept that ‘new’ growth theory (or endogenous growth theory) has recently rediscovered (see chapter 2). In Smith, increasing returns is based on the division of labour. He saw the division of labour, or gains from specialization, as the very basis of a social economy, otherwise everybody might as well be their own Robinson Crusoe doing everything for themselves. And it is the notion of increasing returns, based on the division of labour, that lay at the heart of Smith’s optimistic vision of economic progress as a selfgenerating process, in contrast to the later classical 1 Thirlwall 02 chaps rprnt 1 28/6/07 15:01:58 2 The nature of economic growth economists, such as Ricardo and Mill, who believed that economies would end up in a stationary state due to diminishing returns in agriculture; and also in contrast to Marx who believed that capitalism would collapse through its own ‘inner contradictions’ (competition between capitalists reducing the rate of profit; a failure of effective demand as capital is...
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