As people across the world are struggling to understand the rise of Trumpism, anti-establishment and anti-free trade movements, Erik Reinert (Tallinn University of Technology), Jayati Ghosh (Jawaharlal Nehru University) and Rainer Kattel (Tallinn University of Technology) have put together an impressive Handbook of Alternative Theories of Economic Development that can help make sense of what’s going on. As the field of Economics has become increasingly narrow since the 1970s, many important scholars and theories have been excluded from the field, and since forgotten. This Handbook presents rich historical accounts and ideas that can help explain economic and social development, and is a much needed attempt to correct for the existing biases in the field of Economics.
The Biases in Economics
In addition to the strong bias towards Neoclassical Economics, the editors also identify Eurocentric and Anglophone biases in the field. The linguistic bias can also be found in the history of thought, as scholars who did not originally write in English tend to be squeezed out of historical accounts of economic ideas. For example, while only 18 out of 62 (29%) influential economic development books (books that reached more than 10 editions) in 1850 were written by scholars from the United Kingdom, in the history of economic thought chapter of the Handbook of Development Economics (1988) published by two World Bank economists, all the references are to works originally written in English by people living in the UK, with the exception of Irish born Richard Cantillion, who wrote in French.
The linguistic and geographic dominance that economists wrongly attribute to the past is unfortunately very much the case today. According to Google Scholar, the top ten most cited economists are based in just a handful of US schools, with the exception of Jean Tirole at Toulouse, France. Paradoxically, the Economics field has become more geographically and linguistically concentrated, despite globalization. The chapters in the Handbook address this bias by including authors from across the world, as well as chapters dedicated to schools of thought with non-Western origins, including China, India, Latin America and Africa.
Putting Development Back Into Development Economics
While Neoclassical Economics started absorbing Development Economics in the 1970s, in the 1980s there was a related shift from the study of development processes to the study of poverty (see figure 1). Unfortunately, even the focus on poverty alleviation takes a very limited view of poverty and how it is generated, as it abstracts from basic economic processes and systemic features that determine poverty. For example, class is usually absent from the discussion, except for in the form of “social discrimination” (with the economic content of class removed). Furthermore, the symptoms of poverty are addressed, such as lack of income, poor nutrition, bad housing, lack of access to basic services, etc, rather than the structural causes of poverty. Finally, the role of the rich in society is not usually considered in the analysis of the poor, as if they are not interconnected. The editors call the current discourse that promises free trade and measures against the poverty that results from free trade a form of “welfare colonialism” (see e.g. Reinert 2006 and Paine 1977).
Figure 1: The Decline of Development in Development Economics
The editors also emphasize the increasing focus on methods in the field of development economics, rather than theory and history (in line with my own observation). The editors argue that the field has developed into a tool-driven profession, where the tools determine the types of questions that are possible to ask as well as the type of analysis possible to carry out. For example, as pointed out by Viner (1937), increasing returns was removed from international trade theory because it was not compatible with equilibrium. As Paul Krugman (1991) puts it: Economics came to “follow the line of least mathematical resistance”.
The editors also find that the basic fact of uneven development tends to be reduced to models of “dualism,” which implies less attention to the differentiation internal to sectors, and patterns of interaction of different groups of classes within and across sectors. Furthermore, when it is discovered that certain institutions are different from “the norm” in developing countries, they are highlighted and explained using the same basic analytical tools developed for the norm. This type of Economics is what the editors call a National Geographic view of the broader process of development, as only snapshots of particular institutions or economic activities are separated for the analysis.
This handbook is an effort to reverse these trends by putting development back into development economics and by not letting a limited mathematical toolkit dictate which theoretical frameworks are acceptable.
What can we learn from alternative theories?
So, what can we actually learn from these theories? Perhaps the most important lesson to draw is the importance of considering historical and political context when analyzing development issues. The book is rich with examples and historical studies of development processes that we can learn from. For example, alternative ways of viewing the role of rent-seeking in development are discussed. While mainstream development economists tend to present rent-seeking as a drain on wealth and economic efficiency (see e.g. Anne Krueger 1974), chapters in this Handbook suggest that rent-seeking historically has gone hand in hand with economic development.
Furthermore, the alternative theories acknowledge that development is related to structural transformation, rather than just poverty alleviation. Many chapters discuss how moving into higher value-added activities has been a core element in successful development experiences, often through targeted policies aimed at stimulating innovation and technological development.
You can also learn a lot about specific issues from the chapters in the Handbook, such as effective demand, development planning, competitiveness, late development, the developmental state, knowledge governance, legal structures, deindustrialization, terrorism, technological retrogression, and more. The volume also takes historical development processes seriously and has devoted the first part of the book to the study of historical development, including Chinese, Indian, Muslim, Ottoman, Nordic, and African perspectives. Finally, seminal development economists such as Giovanni Botero, Friedrich List, Karl Marx, Albert Hirchman and Michal Kalecki are discussed in depth, as well as broader traditions such as feminist approaches, Schumpeterian and Keynesian approaches, the dependency school, regulation theory, classical economists, and evolutionary economists. This book will be interesting for anyone seeking to expand and deepen their understanding of economic development beyond what is taught in mainstream courses.
Cyclicality in Economic Thinking: A Reason for Optimism?
The editors also study the development of economic theory and argue that there is a cyclical pattern in the level of economic abstraction: When things go well in the core economies of the world where economic theory is generally produced, economic theory tends to become very abstract. As a result of this high level of abstraction, the role of policy is minimized.
You find many highly abstract assumptions in neoclassical economic theory, such as the assumption that economic activities are qualitatively equal (see Reinert 2009 for a longer discussion on this and James Buchanan on the equality assumption). However, to take the example presented by the editors: a shoe-shining business of a child in Lima and Bill Gates’ business in the US are qualitatively different, and that difference is crucial for understanding development processes. To understand why Microsoft’s profits are higher than that of the shoe-shiner, real-world “imperfect” issues such as barriers to entry, technological change, and oligopoly power become key. Consequentially, the editors argue that neoclassical economics operates at a level of abstraction that is too high to grasp the relevant variables for development. Equality and harmony in the models produce equality and harmony in the results. However, anyone observing the real world can see that it isn’t harmonious, let alone equal.
Interestingly, the editors argue that we are currently witnessing a new cycle of economic fashion in the form of a new revolt against formalism. As there has been a recent revolt against mainstream macroeconomics from within (e.g. Paul Romer and Olivier Blanchard) and a growing student movement demanding a more pluralist Economics education, we can only hope that some room is opening up for alternative economic theories.
This blog post was originally published on Developing Economics.