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Chapter 7 Employment Growth Informalisation and Other Issues Class 11 Economics Revision Notes
In this chapter, we shall study in outline the evolution of economic thought, the nature and meaning of the concepts of economic growth and development, the basic characteristics of underdeveloped countries (UDCs), the role of government in economic development and Rostow’s stages of economic growth.
Evolution of Economic Thought
The history of economic thought deals with the origin and development of economic ideas and their interrelations. We find economic ideas in the writings of ancient Hebrews, Indians, Greeks, Romans and the scholars of middle ages. In the words of Prof. Bell, “economic thought is a study of heritage left by writers on economic subjects over a period of about 2500 years ; and it freely draws upon all phases of human knowledge”. If we study ancient economic thought, we can have a proper understanding of the growth of economic theories and institutions.
The Hebrew Economic Thought
The Hebrews had one of the ancient civilizations of the world. The period dates back to 2500 B.C. The Hebrews never studied economic problems separately. In their writings, they gave top priority for religion and ethics. And they gave importance to agriculture. However, the Hebrews had definite ideas on subjects such as usury (interest), just price, property rights and monopoly. The Hebrew thought was against lending of money on interest to fellow Hebrews. But they could lend money to strangers and get interest.
In those days, as money was borrowed by the poor for consumption purposes, they thought that it was unethical to charge high rates of interest. We may note that the Hebrew thought on interest is similar to the ancient Indian thought an interest. The Hebrews had many laws against false weights and adulteration. They wanted businessmen to charge a just price and they imposed ceiling on the profit margin. The Hebrews realized the dignity of labour. The Hebrew civilization was a rural and agrarian civilization. One of their proverbs is : “He that tilleth the soil shall have plenty of bread”. The Hebrews did not cultivate the land every seventh year. They left it fallow. The object was to conserve the fertility of the soil. Another interesting feature of the Hebrew thought was the ‘Jubilee year’. The jubilee year was the 50th year. According to Jubilee year, the land sold to someone was to revert to its owner in the 50th year. Money was used during the Hebrew Period. There are references to different kinds of money in the Old Testament.
The Sabbath : The Sabbath was the weekly day of rest, relaxation and good living. In the words of Spiegel, “ the institution of the weekend was a social invention that has no parallel in the civilizations of Greece, Rome or other ancient cultures”. In short, we find that religion, ethics, law, economics and philosophy were all bound together. Though the economic ideas of ancient Hebrews appear primitive to a modern economist, we should remember that they had a profound influence on men’s minds. Greek thought, Roman law and Christian religion form the basis of
Economic Thought in Ancient India
Life, work and thought in ancient India was not based on a negation of life. It was not based on otherworldliness. As Pandit Jawaharlal Nehru put it, “There is no idolatry in them, no temples for the gods. The vitality and affirmation of life pervading them are extraordinary”.
The caste system was an important institution in ancient India. But we have to keep in mind that in the beginning, the basis of caste was profession and not birth. It was only during the latter period that the caste system became rigid and led to many abuses. The joint family was another important institution in ancient India. Agriculture was an important occupation in ancient India and it was held in high esteem and monarchy was the most popular form of Government. There was a certain amount of decentralization. For example, village assemblies enjoyed a measurement of autonomy; interest rates were regulated and regulations were there against false weights and measures. Kautilya’s Arthasastragives details of the political, social, economic and military organizations of the past. Thiruvalluvar’s Thirukkural is a book of ethics and it deals with Dharma or Aram (ethics), Artha or Porul (Polity) and Kama or Inbam (Love). Valluvar’s economic ideas are found mostly in the second part of the Thirukkural, the Porutpal or the part dealing with wealth. By Porutpal, Valluvar meant all that kautilya meant by Arthasastra.
Valluvar considered freedom from hunger a fundamental freedom. He was against begging. He considered industry as real wealth and labour as the greatest resource. According to Thiruvalluvar, agriculture is the most fundamental activity. He tells that the ploughmen alone live as the freemen of the soil, the rest are mere slaves that follow on their toil. (Kural 1032). For Valluvar, good ethics is good economics.
Medieval Economic Thought : The period from 476 A.D, which marked the fall of the Roman empire to 1453 A.D., the year in which the Turks captured Constantinople is generally regarded as the Middle Ages. The society of the Middle Ages was a feudal society. People in middle ages lived in a natural economy. Men lived largely in small and selfsufficient units. The Church, the Bible and Aristotle exercised a great influence on the life and thought of Middle Ages.
The economic ideas and policies which were followed by European governments from the 15th century until the second half of the 18th century may be described as mercantilism. The mercantilists thought that the wealth of a nation could be increased by trade. And they wanted to have more wealth by increasing the stock of gold and silver.
After feudalism came to an end, strong nation states emerged in England, France, Germany and Spain. And each country considered the other country as its potential rival. So the mercantilists regulated the economic activity of the State in order to create a strong and powerful State. Mercantilism was only economic means for the creation of a strong State.
If a country has mines, it can get gold and silver. Otherwise, it can get gold and silver only by means of trade. They wanted favourable balance of trade. That is, exports should be more than imports. As Alexander Gray put it, “it was thus a primary principle of the typical mercantilist to maximize exports while minimizing imports”.
According to mercantilists, trade was the most important occupation. Industry and manufacture were ranked second in importance. And agriculture was considered the least important occupation.
The State played a very important and powerful role during mercantilism. It encouraged exports and discouraged imports by a number of policies. Sometimes it is said that mercantilists confused money with wealth. But Keynes praised them saying that more money would promote business expansion. If each country wanted maximum exports and almost zero imports, then who would import ? In short, mercantilism was a “policy of power”.
The physiocrats developed a body of economic theory in the 18th century in France. Adam Smith, who is regarded as the Father of Economics was greatly influenced by the physiocrats. The term ‘physiocracy’ means ‘Rule of Nature’. Physiocracy was essentially a revolt by the French against mercantilism.
The physiocrats developed the concept of natural order. According to them, the natural order is an ideal order given by God. They believed that individual interests were identical with the interests of the society. They advocated laissez–faire. It means “let things alone, let them take their own course”. According to this policy, the State will have a minimum role to play. The main functions of government is to protect life, liberty and property. And they believed that agriculture was a productive occupation. It alone produced “net product”. And they considered other occupations as sterile. Quesnay, chief representative of physiocratic school explained how circulation of wealth took place in an economy in his “Tableau Economique” (The Economic Table) among different classes : the productive class (farmers); the proprietory class; and the sterile class (all those engaged in non-agricultural occupations, e.g., merchants, domestic servants).
The physiocrats were great believers in the institution of private property. And they favoured free trade.
The classical school
Adam Smith, David Ricardo, T.R.Malthus and J.S. Mill are the leading economists of the classical school. Like the physiocrats, the classical economists believed in laissez faire, and market economy based on free trade. Adam smith was interested in the nature and causes of the wealth of nations. We can call him the first development economist. Ricardo was interested in the problems of distribution. Malthus,who gave the theory of population was interested in finding out why some countries were prosperous at one time and why they were poor at other times. In other words, he was interested in studying the prosperity and the poverty of nations. J.S. Mill believed in individualism as well as socialism. He advocated socialist reforms in distribution as the laws of distribution were different from the laws of production.
The historical school
The historical school was dominant in Germany during the second half of the 19th century. It was a revolt against the classical school. While the classical economists believed that the laws of economics were of universal application, the economists of the historical school argued that the laws of economics were relative. Thus, while the classical economists advocated free trade, the historical school advocated protection for new industries through tariffs.
Karl Marx (1818-1883) was the founder of scientific socialism. He was a great critic of the capitalist system which was exploitative in nature and predicted that capitalism would give way to socialism. According to Marx, “all history is a history of class struggle”. The teachings of Marx resulted in the birth of a socialist State in Russia and China. Planning which is the gift of former Soviet Russia to the world is based on socialist philosophy.
The Marginal Revolution
The Marginal Revolution that took place in the latter half of the 19th century is important for theory, especially the theory relating to value. Today, we speak of human development. And man is brought to the centre stage. It was Alfred Marshall who pointed out that economics was on one side a study of wealth and on the other and more important side a part of the study of man. The Institutional school
The institutional school is a 20th century phenomenon and it is of American origin. It emphasizes the role of institutions in economic life.The term “institutions” includes customs, social habits, laws, ways of living and modes of thinking. For example, slavery is an institution. We celebrate certain days as festivals. That is also an institution.
J.A. Schumpeter (1883-1993) considered economic life mainly as a process of change and development. According to him, innovating entrepreneurs play a key role in the process of economic development.
The Keynesian Revolution
J.M. Keynes is considered the Father of New Economics. During the 1920s and 1930s, when the capitalist countries were affected by the Great Depression marked by bad trade and mass unemployment, Keynes suggested a greater role for government and a bold fiscal policy to tide over the crisis. The New Deal policy of America was greatly influenced by Keynesian policy.
Since 1950s, economic thought has focused on growth and development. Economic Growth and Development
Economic growth has been defined by Arthur Lewis as “the growth of output per head of population”.
In other words, economic growth refers to an increase in per capita national income. It may be noted that the subject matter is growth and not distribution. For example, during the Industrial Revolution in the U.K., there was economic growth. But there was no improvement in the standard of living of the working classes because they were exploited and made to work for long hours at low wages.
According to Arthur Lewis, economic growth is conditioned by (1) economic activity, (2) increasing knowledge and (3) increasing capital. In other words, these three factors are labour, technical improvements and capital. We may add land or resources to the list.
Economic growth and economic development have received a lot of attention in the 20th century. In an economy there must be balanced economic growth of all sectors – agriculture, manufacturing industry and the service sector. Only then, economic growth will benefit all sectors of the population. Not only that, economic welfare depends not only on the growth of output but on the way it is distributed among different factors of production in the form of rent, wages, interest and profits.
In the past, economic growth and economic development were used more or less with the same meaning. For example, they used rate of growth of income per capita or per capita GNP as index of economic development. And they wanted to see whether the rate of growth of per capita income was greater than the rate of growth of population. We have to note one more thing. The wellbeing of population depends on the rate of growth of ‘real’ per capita GNP. Real per capita GNP refers to the monetary growth of GNP per capita minus the rate of inflation.
In general terms, we may say if there is decline in poverty, unemployment, and inequality, there is economic development in the country. Otherwise, even if per capita income doubled, we cannot say there is economic development. So when we say there is development, there must be improvement in the quality of life. That means, people must have higher incomes, better education, better health care and nutrition, less poverty and more equality of opportunity. So according to Michael P. Todaro and Stephen C. Smith, “development must be conceived of as a multidimensional process involving major changes in social structures, popular attitudes and national institutions, as well as the acceleration of economic growth, the reduction of inequality, and the eradication of poverty”.
Characteristics of underdeveloped countries
The terms “underdeveloped”, “less developed”, “backward”, and “poor” and “developing” are generally used to refer to low income countries. The countries which have low standard of living because of their low per capita incomes are known as underdeveloped countries. Countries are classified into developed and underdeveloped countries according to their per capita income. For example, in 1949, high income countries with 18% of world population enjoyed 67% of world income, whereas low income countries which had 67% of world population got only 15% of world income. The rich countries include United States, Canada, Western Europe and Australia. The poor counties cover most of Asia, Africa, south eastern Europe and Latin America. And there were middle income countries with a population of 15% which got 18% of world income. They consisted of countries such as Argentina, South Africa, Israel and former soviet Russia. The poor countries are collectively referred to as the Third World.
Even in 1973, the Third World with 77 percent of the world population subsisted on only 22 per cent of the world income. Even the meagre income is maldistributed within these countries and the bulk of the population live in abject poverty. According to Meier and Baldwin, an underdeveloped country has six basic economic characteristics. They are : (1) it is primary producing ; 2) it faces population pressures ; 3) it has underdeveloped natural resources ; 4) it has an economically backward population ; 5) it is capital deficient and 6) it is foreign trade oriented.
1) Primary production: The UDCs produce mostly raw materials and foodstuffs. A majority of the population will be engaged in agriculture. Some poor countries depend upon non – agricultural primary production (eg. minerals like tin, copper, aluminium and petroleum). And agricultural productivity is low. So rural incomes are low. There is pressure of population on land.
2) Population pressures: Generally, there is over – population in many poor countries. Population pressures take many forms. First, for example, they have rural underemployment. This is sometimes referred to as disguised unemployment. That is, there will be more number of people working on the farm that what is really necessary. The marginal productivity of the extra hands will be almost zero. Second, high birth rates create a large number of dependent children and lastly falling death rates with high birth rates will bring about a large increase in population.
3) Underemployment: Natural resources in poor countries are underdeveloped. They are unutilized, underutilized or misutilized.
4) Economic Backwardness : The economic backwardness of the population in the poor countries is reflected in low labour efficiency, factor immobility, lack of entrepreneurship, economic ignorance and so on. The population is ruled by customs and traditions. And people are not 10 “economically motivated”. The tax system is marked by inefficiency in collection and there is tax evasion. The governments in these countries are generally “weak, incompetent and corrupt”.
5) Capital Deficiency : Capital deficiency is an important characteristic of poor countries. Capital formation or investment is low in these countries. According to Ragnar Nurkse, low capital formation is one of the basic causes of poverty in these countries. Low capital formation leads to low productivity. Low productivity results in low incomes and low incomes result in low savings and low savings lead to low capital formation. Thus, it forms a vicious circle of poverty.
6) Foreign Trade Orientation : Some of the poor countries depend heavily upon foreign trade. For example, in 1952, cotton contributed about 90 percent of foreign exchange earnings of Egypt. A risk involved here is if there is some serious economic problem in the importing nation, the country which depends on export of one or two commodities will be affected badly. And in the early stages of development, UDCs depended upon imports.
India as UDC : India, has most of the typical characteristics of anunderdeveloped country. Nearly 65 to 70 percent of its population depends upon agriculture. And agricultural productivity is low. There are population pressures. There is underdevelopment of natural resources and economic backwardness. Until recently, there was capital deficiency.
That is why, we had to borrow heavily from foreign countries and international institutions like I.M.F. and World Bank. So we may describe India as a typical underdeveloped country. Nowadays, they call it a developing economy.
Role of the State in Economic Development
The State plays an important role in the economic development of nations. Japan, after 1870 and soviet Russia after world war I are good examples. But the economic development of the U.K. and the U.S.A. took place under a system of market economy and laissez faire policy.
For underdeveloped countries, laissez faire policy is a luxury. The State has to play the role of an entrepreneur in the underdeveloped countries. Nowadays, it is agreed that the governments in these countries have to play a dominant role in implementing plans for economic government. In fact, government is regarded as a factor of production in poor countries. For example, India is a mixed economy with a public sector and private sector. Until recently, the public sector played a major role in economic planning.
Through Five Year Plans, the State has been making attempts to achieve the goals of increasing economic growth, rapid industrialization, expansion of employment opportunities and reduction of inequalities of income and wealth.
The government plays a very big role in the field of social services like education and health. Investment in education and health promote human capital formation, which is as important as physical capital formation. Education and health increase productivity of labour.
These are the days of globalization, liberalization and privatization. We invite foreign investment on a large–scale. But they want good physical infrastructure like good transportation, postal and telecommunications, power facilities, and water supply. All these things are referred to as social overhead capital. The government has to make huge investment in these things. Not only that, there is shortage of entrepreneurs in these countries. So the government has to encourage them.
There is shortage of foreign exchange in UDCs. The government has to take steps such as promotion of exports, making investment attractive for foreigners through fiscal measures.
If development is left to market forces, there will be not be balanced regional development. So the government formulates policies and programmes in such a way that there is a balanced regional development. And the State has to regulate and control monopolies. Thus,the State has to play a dominant role in economic development.
Rostow’s Stages of Economic Growth
W.W. Rostow, American economic historian described the transformation of countries from underdevelopment to development in terms of stages of growth. He is of the view that all countries must pass through the following stages.
1) The traditional society ;
2) The transitional society ;
3)The take- off stage ;
4) The mature stage and ;
5) The age of high mass consumption
The traditional society will be custom-bound and tradition-oriented. There will be economic backwardness. The poor countries of today are good examples of traditional society. In short, the factors which are essential for economic growth will be missing from such a society.
In the transitional society, the conditions for take-off stage will be established. During this stage, the force of customs and traditions will become less ; there will be economic motivation, and there will be improvements in physical and social infrastructure. When once an economy attains the take–off stage, there will be self – sustaining growth. The take-off stage refers to a situation where an economy transforms itself from a predominantly agricultural to a predominantly industrial society. For an economy to attain the take-off stage, it must make an annual investment equal to 20 – 25 percent of GDP mobilized from its own savings. The take-off stage was made possible in some countries by leading sectors like railways and defence. After the take- off stage,when the economy attains self sustaining growth, it enters the mature stage. During this stage, the government has to make some basic decisions.
As there will be abundant resources and goods, it has to divide whether it has to use them for strengthening the nation into a strong and powerful state militarily or to use the resources for improving the welfare of the people. The final stage is the age of high mass consumption. During this period, people will consume all kinds of goods especially durable goods like cars on a mass scale.
Rostow’s stages of economic growth are only broadly true. All nations have not gone through the order in which he has described the stages.
Choose the correct answer
Question: The author of Arthasastra is
D. Mahatma Gandhi
Question: The Sabbath (weak end) was introduced by
Question: The physiocrats considered only the following as productive occupation
A. Manufacturing industry
C. Service sector
Question: The Mecantilists gave utmost importance to
Question: The father of New Economics is
A. Adam Smith
D. J.M. Keynes
Fill in the blanks
Question: The Mercantilists believed in maximum ………. and minimum imports.
Question: The economic ideas of Thiruvalluvar are found in the ………. Part of Thirukkural.
Question: The classical economists believed in …………… policy.
Question: The physiocrats belonged to ………
Question: The author of stages of growth theory is …………… .W.W.
Match the Following
|1. Historical school||a) Karl Marx|
|2. Scientific Socialism||b) U.S.A|
|3. Institutional School||c) Germany|
|4. Low capital formation||d) Value Theory|
|5. Marginal School||e) Underdeveloped country|
Answer each one of the questions in a word or two
Question: Did mercantilism encourages exports or imports ?
Question: What is the basis of European culture ?
Answer: Greek thought
Question: Was Ricardo interested in the problems of production or distribution ?
Question: Who was the author of Tableau Economique ?
Question: What is the annual investment that must be made for an economy to take off ?